CANDELA CORP /DE/, S-1, 1999-05-12

CANDELA CORP /DE/
S-1, 1999-05-12
ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS

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<PAGE>

As filed with the Securities and Exchange Commission on May 12, 1999.

Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933

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CANDELA CORPORATION
(Exact Name of Registrant as Specified in its Charter)

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<CAPTION>
Delaware 3845 04-2477008
<S> <C> <C>
(State or other (Primary Standard (I.R.S. Employer
Jurisdiction of Industrial Identification Number)
Incorporation or Classification Code
Organization) Number)
</TABLE>

530 Boston Post Road
Wayland, Massachusetts 01778
(508) 358-7400
(Address, including zip code and telephone number, including area code, of
registrant's principal executive offices and principal place of business)

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Gerard E. Puorro
Chief Executive Officer and President
Candela Corporation
530 Boston Post Road
Wayland, Massachusetts 01778
(508) 358-7400
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)

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Copies to:
Gordon H. Hayes, Jr. William C. Rogers
TESTA, HURWITZ & THIBEAULT, LLP CHOATE, HALL & STEWART
125 High Street Exchange Place
High Street Tower 53 State Street
Boston, Massachusetts 02110 Boston, Massachusetts 02109
(617) 248-7000 (617) 248-5000
(617) 248-7100 (Fax) (617) 248-4000 (Fax)

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Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement is declared effective.

If any of the securities being registered on this Form are offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended please check the following box. [_]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]

CALCULATION OF REGISTRATION FEE
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<CAPTION>
Amount Proposed maximum Proposed maximum Amount of
Title of each class of securities to be offering price per aggregate offering registration
to be registered registered(1) share(2) price(2) fee
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<S> <C> <C> <C> <C>
Common Stock, $.01 par
value per share....... 3,260,250 $15.188 $49,516,677 $14,566.81
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(1) Includes 425,250 shares subject to the Underwriters' over-allotment option.
(2) Computed in accordance with Rule 457(c) solely for the purpose of
calculating the registration fee, based upon the average of the high and
low prices reported on May 6, 1999, as reported on the Nasdaq Stock Market.

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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.

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<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MAY 12, 1999

PROSPECTUS

2,835,000 Shares

Candela Corporation Logo

Common Stock

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Of the 2,835,000 shares of common stock offered, we are offering 1,500,000
shares and certain shareholders are offering 1,335,000 shares. We will not
receive any of the proceeds from the shares sold by the selling shareholders.

Our common stock is traded on The Nasdaq National Market under the symbol
"CLZR." On May 11, 1999, the last reported sale price for the common stock on
The Nasdaq National Market was $18.75 per share.

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Investing in the common stock involves certain risks. See "Risk Factors"
beginning on page 6.

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<CAPTION>
Per
Share Total
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<S> <C> <C>
Public Price........................................................ $ $
Underwriting Discount............................................... $ $
Proceeds, before expenses, to Candela............................... $ $
Proceeds to Selling Shareholders.................................... $ $
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</TABLE>
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The underwriters may also purchase up to an additional 425,250 shares from us
and certain selling shareholders at the public offering price, less the
underwriting discounts, within 30 days from the date of this prospectus, to
cover over-allotments.

The Securities and Exchange Commission and state securities regulators have
not approved or disapproved of these securities or determined if this
prospectus is truthful or complete. It is illegal for any person to tell you
otherwise.

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Needham & Company, Inc. Tucker Anthony Cleary Gull

The date of this Prospectus is , 1999
<PAGE>

Candela's lasers deliver superior performance and price for aesthetic
procedures

Faster Smaller Affordable

Faster, easier Compact, highly reliable Reduced costs bring
treatments that are safe devices are well suited aesthetic procedures to
and efficacious, satisfy for the physician's a broader range of
patients and benefit office. practitioners and
physicians. consumers.

[photo of male [photo of female
practitioner] practitioner]
<PAGE>

Candela is expanding the range of aesthetic laser procedures through its
comprehensive and growing product line.

Dynamic Cooling Device (DCD)

Candela's proprietary DCD technology improves speed, safety and
efficacy for hair removal (GentleLASE) and vascular procedures (ScleroPLUS).

GentleLASE ScleroPLUS ALEXlazr and YAGlazr

GentleLASE is rapidly The versatility of The ALEXlazr and YAGlazr
capturing a leading ScleroPLUS provides provide permanent
position in the emerging optimized treatments for removal of pigmented
laser solution for the a broad range of lesions, such as age
large hair removal vascular conditions, spots, and multi-colored
market. such as stretch marks, tatoos.
varicose veins, facial
veins and birthmarks.

[Photo of GentleLASE] [Photo of ScleroPLUS] [Photo of ALEXlazr]

[Photo of DCD handpiece]
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TABLE OF CONTENTS

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Page
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Prospectus Summary....................................................... 3
Special Note Regarding Forward-Looking Statements........................ 6
Risk Factors............................................................. 6
Use of Proceeds.......................................................... 12
Capitalization........................................................... 12
Price Range of Common Stock.............................................. 13
Dividend Policy.......................................................... 13
Selected Consolidated Financial Data..................................... 14
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 15
Business................................................................. 24
Management............................................................... 39
Principal and Selling Shareholders....................................... 48
Underwriting............................................................. 53
Legal Matters............................................................ 54
Experts.................................................................. 54
Where You Can Find More Information...................................... 54
Index to Consolidated Financial Statements............................... F-1
</TABLE>

You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. The information in this
document may only be accurate on the date of this document.

The information in this prospectus may not contain all of the information
that may be important to you. You should read the entire prospectus before
making an investment decision. All references to "we," "us," "our," "Candela"
or "the Company" in this prospectus mean Candela Corporation and all entities
owned or controlled by Candela Corporation. Candela, the Candela Corporation
logo, GentleLASE and Sclerolaser are registered trademarks of Candela. This
prospectus also include trademarks, service marks and trade names of other
companies.

2
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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus.
It is not complete and may not contain all the information that you should
consider before investing in the common stock. You should read the entire
prospectus carefully, including the "Risk Factors" section and the financial
statements and the notes to those statements.

Candela

We develop, manufacture, market and service lasers for a broad variety of
aesthetic and cosmetic procedures, including:

. hair removal;

. non-invasive treatment of varicose veins and other benign vascular lesions;

. removal of benign pigmented lesions such as age spots and tattoos;

. treatment of scars and stretch marks; and

. skin resurfacing.

The aesthetic and cosmetic laser industry has only recently developed
technology that successfully addresses hair removal, which is the largest
cosmetic application to date. In addition, the aesthetic and cosmetic laser
industry appears to be entering an era of broader based growth. The most
important factors contributing to this growth are:

. the challenging medical reimbursement environment resulting in
practitioners seeking more procedures on a direct-pay basis;

. the rising discretionary income of aging baby boomers; and

. the development of technology that allows for new, safe and efficacious
procedures for conditions that have large patient populations.

Our customer base for aesthetic and cosmetic lasers has been primarily
dermatologists and plastic and cosmetic surgeons. In the U.S. alone there are
approximately 10,000 dermatologists and 7,000 plastic and cosmetic surgeons.
Additionally there are 70,000 general and family practitioners and 35,000
obstetricians and gynecologists as well as many other specialists who are
outside our traditional customer base. Recently, we signed an exclusive
distribution agreement with Physicians Sales and Service (PSS) which gives PSS
the right to distribute our hair removal and vascular lesion lasers to their
customer base of family and general practice physicians, obstetricians,
gynecologists and general and vascular surgeons.

Aesthetic and cosmetic laser vendors who are able to develop lasers that are
more affordable, faster, smaller and easier to use will be well positioned to
take advantage of the industry's growth. Our strategy is to:

.reduce product costs;
.expand sales beyond our traditional base;
.increase penetration of our traditional customer base;
.expand our domestic and international marketing and distribution channels;
and
.continue to invest in research and development.

Our principal offices are located at 530 Boston Post Road, Wayland,
Massachusetts 01778, and our telephone number is (508) 358-7400. Our website
can be found at www.clzr.com. Information contained on our website does not
constitute part of this prospectus.

3
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The Offering

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<C> <S>
Common stock offered by Candela.................... 1,500,000 shares
Common stock offered by selling shareholders....... 1,335,000 shares
Common stock to be outstanding after the offering.. 7,039,976 shares(1)
Use of proceeds.................................... General corporate
purposes, including
working capital and
potential acquisitions.
Risk factors....................................... An investment in the
common stock involves
risks. See "Risk Factors"
beginning on page 6 to
read about the risks you
should consider before
buying shares of the
common stock.
Nasdaq National Market symbol...................... CLZR
</TABLE>
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(1) Based on 5,539,976 shares outstanding at May 1, 1999. The total number of
shares excludes up to 1,398,730 shares of common stock issuable upon
exercise of previously issued stock options or options which may be awarded
in the future, and excludes 591,129 shares of common stock issuable upon
exercise of outstanding warrants. At May 1, 1999 options to purchase
995,730 shares (exercisable at a weighted average exercise price of $4.57)
and warrants to purchase 591,129 shares (281,129 of which are exercisable
at $6.875 per share and 370,000 of which are presently exercisable at $4.00
per share) are outstanding.

4
<PAGE>

Summary Consolidated Financial Data
(in thousands, except per share data)

The following Summary Consolidated Financial Data should be read in
conjunction with our financial statements and related notes and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus. "As Adjusted" balance sheet
data at March 27, 1999, is adjusted to reflect the sale by Candela of 1,500,000
shares of common stock offered by us in this prospectus at an assumed public
offering price of $17.00 per share and the receipt of the estimated net
proceeds therefrom.

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Consolidated Statement of Nine Months Ended Fiscal Year Ended
Operations Data: ------------------- --------------------------------------------
March 27, March 28, June 27, June 28, June 29, July 1, July 2,
1999 1998 1998 1997 1996 1995 1994
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<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Lasers and other
products.............. $31,254 $16,735 $25,917 $25,601 $20,403 $18,018 $20,187
Product related
service............... 6,373 6,192 8,405 7,660 7,861 8,449 9,424
Skin care centers...... 2,254 2,035 2,703 2,244 2,149 1,777 209
------- ------- ------- ------- ------- ------- -------
Total revenue........ 39,881 24,962 37,025 35,505 30,413 28,244 29,820
Gross profit............. 20,888 10,862 16,318 16,855 13,580 12,376 13,765
Income (loss) from
operations.............. 6,376 (5,147) (3,961) 687 1,889 (1,603) 714
Net income (loss)........ 4,210 (5,486) (4,452) 238 1,245 (1,536) 655
======= ======= ======= ======= ======= ======= =======
Basic earnings (loss) per
share................... .77 (1.01) (.81) .04 .23 (.29) .13
======= ======= ======= ======= ======= ======= =======
Diluted earnings (loss)
per share............... $ .72 $ (1.01) $ (.81) $ .04 $ .22 $ (.29) $ .13
======= ======= ======= ======= ======= ======= =======
Shares used in computing
historical diluted net
income per share:
Weighted average shares
outstanding........... 5,486 5,446 5,479 5,398 5,321 5,288 5,206
======= ======= ======= ======= ======= ======= =======
Adjusted weighted
average shares
outstanding........... 5,841 5,446 5,479 5,673 5,652 5,288 5,208
======= ======= ======= ======= ======= ======= =======
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<CAPTION>
March 27, 1999
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Actual As Adjusted
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Consolidated Balance Sheet Data:
Working capital............................................. $10,978 $32,915
Total assets................................................ 30,448 52,386
Long-term debt, excluding current maturities................ 2,971 2,971
Total liabilities........................................... 19,538 19,538
Stockholders' equity........................................ 10,910 32,848
</TABLE>

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Unless otherwise indicated, the information in this prospectus assumes the
underwriters do not exercise their over-allotment option.

5
<PAGE>

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements including, without
limitation, statements concerning the future of the industry, product
development, business strategy (including the possibility of future
acquisitions), continued acceptance and growth of our products and dependence
on significant customers and suppliers. This prospectus contains forward-
looking statements that we have made based on our current expectations,
estimates and projections about our industry, operations and prospects, not
historical facts. We have made these forward-looking statements pursuant to the
provisions of the Private Securities Litigation Reform Act of 1995. These
statements can be identified by the use of forward-looking terminology such as
"may," "will," "believe," "expect," "anticipate," "estimate," "continue" or
other similar words. These statements discuss future expectations, and may
contain projections of results of operations or of financial condition or state
other forward-looking information. When considering forward-looking statements,
you should keep in mind the risk factors and other cautionary statements in
this prospectus. The risk factors noted below and other factors noted
throughout this prospectus could cause our actual results to differ
significantly from those contained in any forward-looking statement. We may not
update or publicly release the results of these forward-looking statements to
reflect events or circumstances after the date hereof.

RISK FACTORS

Before you invest in our common stock, you should be aware that there are
risks, including those described below. You should consider carefully these
risk factors together with all of the other information included in this
prospectus before you decide to purchase shares of our common stock.

We Depend Heavily on One Product

We introduced our GentleLASE in March 1998. GentleLASE's sales have grown
rapidly and account for more than half of our total revenue in the most recent
fiscal quarter, ended March 27, 1999. Heavy dependence on GentleLASE sales
increases our susceptibility to changes in the marketplace, such as
competitors' reducing prices or adding new features to their products, or
customers ordering fewer of our products. Such changes in the marketplace could
hurt our financial results.

We Could Lose Our Exclusivity to Key Technology

We developed our Dynamic Cooling Device (DCD), which is used to selectively
cool the subject's outermost layer of skin during cosmetic laser treatments,
under an exclusive license to patent rights owned by the Regents of the
University of California. The DCD is an integral component of our biggest-
selling device, the GentleLASE, and is also currently sold as an attachment to
our other principal laser device, the ScleroPLUS. We believe the efficacy of
the DCD has been a key element in the recent growth in sales of our laser
devices. In October 1998, we entered into an amendment of the license agreement
which now gives us an exclusive right under the Regents' patent to make, use
and sell the dynamic cooling technology in all fields of use. However, this
amendment also imposes on us an obligation to negotiate in good faith and make
commercially reasonable efforts to conclude sublicensing agreements with third
parties, subject to certain stipulated minimum terms and conditions. If we fail
to negotiate in good faith or enter into sublicenses with third parties within
certain time periods, the Regents may then grant license rights to such third
parties directly, provided that Candela will receive 50% of all revenues
received under such licenses. While no such sublicenses or further licenses
have been granted by us or the Regents to date, principal competitors of ours,
or new entrants into the medical laser industry, may successfully conclude
licensing arrangements providing them with access to the dynamic cooling
technology. While our agreement with the Regents provides that we would receive
50% from all such licenses, the loss of exclusivity to this technology could
hurt our financial results. In addition, another laser company has filed suit
challenging the validity of the patent rights held by the Regents. While we
believe this suit is without merit, we can't be certain that the Regents'
patent rights will not be reduced or invalidated, which could also hurt our
business and financial results.

6
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Our Dependence upon International Sales Involves Significant Risk

We sell a significant portion of our products and services outside the U.S.
International sales accounted for 54% and 53% of our revenue for the nine
months ended March 27, 1999 and the fiscal year ended June 27, 1998,
respectively, and we expect that they will continue to be significant. As a
result, a major part of our revenues and operating results is subject to risks
associated with international sales, including:

. failure to obtain necessary import or foreign regulatory approvals for
our products;

. policy changes or changes in applicable U.S. or foreign laws which result
in burdensome government controls, tariffs, restrictions, embargos or
import or export license requirements;

. difficulties of staffing and managing our foreign operations;

. political and economic instability in our target international markets;

. potential additional U.S. and foreign taxes which increase the amount of
taxes we have to pay;

. longer payment cycles common in foreign markets;

. difficulties collecting our accounts receivable because of the distance
and different legal rules; and

. significant fluctuations in the exchange rates between the U.S. dollar
and foreign currencies which could cause us to lower our prices and our
profitability.

Economic Problems in Japan and The Asia-Pacific Marketplace May Hurt Our Sales

Recently, Japan and the Asia-Pacific economies have experienced serious
problems. For the Asia-Pacific market these include debt defaults and, along
with Japan, currency devaluation, lack of liquidity and recessions. Since
approximately a third of our sales in recent periods were derived from this
region, changes in this area's economic growth rate would impact our ability to
sell our products in those markets. While we don't know the actual magnitude of
the business at risk, if capital spending in these markets remains flat or
decreases further, our sales and results of operations could be hurt.

We Are Dependent Upon a Sole Supplier for Alexandrite Rods

We use Alexandrite rods to manufacture the GentleLASE and the ALEXlazer,
which account for a significant portion of our total revenues. We depend
exclusively on Litton Airtron Synoptics Group to supply these rods, for which
no alternative supplier meeting our quality standards exists. We cannot be
certain that Litton will be able to meet our future requirements at current
prices or at all. To date we have been able to obtain adequate supplies of
Alexandrite rods in a timely manner, but any extended interruption in our
supplies could hurt our results.

Our Quarterly Operating Results May Fluctuate Significantly

Our quarterly revenue and operating results are difficult to predict and may
swing sharply from quarter to quarter. If our quarterly revenue or operating
results fall below the expectations of investors or public market analysts, the
price of our common stock could fall substantially. Our quarterly revenue is
difficult to forecast for many reasons, some of which are outside of our
control, including the following:

. absence of backlog;

. delays in market acceptance of our new products;

. decrease in demand for our products;

. timing of product sales including customers' order deferrals in
anticipation of new product introductions or enhancements by us or our
competitors;

. increase in the level and intensity of price competition by our
competitors;

. changes in or a stretching out of customers' budgeting and purchasing
cycles;

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. our effectiveness in managing the manufacturing process;

. unsatisfactory performance of our distribution channels and services and
customer support organizations; and

. timing of any acquisitions and related costs.

We May Incur Additional Costs in Closing Our Skin Care Centers

We have renewed our commitment to expand and diversify our core cosmetic and
surgical laser equipment business. As part of this refocus, we decided to
discontinue our effort to own and operate centers which would offer cosmetic
laser treatments utilizing our equipment, along with providing other cosmetic
services traditionally offered by high-end spas. Although we are actively
seeking buyers for the two skin care centers we opened which are located in
Scottsdale, Arizona and Boston, Massachusetts, we can't be certain that a sale
or sublease of either facility will be completed on favorable terms or at all.
We have established a reserve to cover the anticipated costs of terminating the
Scottsdale facility, but we can't be sure that such reserve will be adequate.
To date, we have not established a reserve in connection with the Boston
facility, which we are continuing to operate as a spa without providing
cosmetic laser services.

Our Growth Depends Upon Our Ability to Develop Sales Channels

We sell our products primarily through our direct sales force and we support
our customers with our internal technical and customer support staff. Our
ability to achieve significant revenue growth in the future will greatly depend
on our ability to recruit and train sufficient technical, customer and direct
sales personnel. We have in the past and may in the future experience
difficulty in recruiting qualified sales, technical and support personnel. We
also rely on our network of distributors and our relationship with PSS for
sales of our products. Our inability to rapidly and effectively expand our
direct sales force and our technical and support staff or our failure to
maintain effective distribution relationships with PSS and other distributors
could hurt our business.

Our Industry is Subject to Rapid Technology Change and Intense Competition

The aesthetic and cosmetic laser equipment industry is subject to rapid and
substantial technological development and product innovations. To be
successful, we must be responsive to new developments in laser technology and
new applications of existing technology. Our financial condition and operating
results could be hurt if our products fail to compete favorably in response to
such technological developments, or we are not agile in responding to
competitors' new product introductions or product price reductions. In
addition, we compete against numerous companies offering products similar to
ours, some of which have greater financial, marketing and technical resources
than we do. We can't be sure that we will be able to compete successfully with
these companies and our failure to do so could hurt our business, financial
condition and results of operations.

Any FDA Enforcement Action Could Hurt Our Business

Unless an exemption applies, each medical device that we wish to market in
the U.S. must receive either "510(k) clearance" or "PMA approval" in advance
from the U.S. Food and Drug Administration (FDA) pursuant to the Federal Food,
Drug, and Cosmetic Act. The FDA's 510(k) clearance process usually takes from
four to 12 months, but it can last longer. The process of obtaining PMA
approval is much more costly, lengthy and uncertain and generally takes from
one to three years or even longer. To date, the FDA has deemed our products
eligible for the 510(k) clearance process. We believe that most of our products
in development will receive similar treatment. However, we can't be sure that
FDA will not impose the more burdensome PMA approval process upon one or more
of our future products or that 510(k) clearance or PMA approval will ever be
obtained for any product we propose to market.

Any modification to one of our 510(k) cleared devices that could
significantly affect its safety or effectiveness, or that would constitute a
major change in its intended use, requires a new 510(k) clearance. The

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FDA requires every manufacturer to make this determination in the first
instance, but the FDA can review any such decision. We have modified some of
our marketed devices, but we believe that new 510(k) clearances are not
required. We can't be certain that the FDA would agree with any of our
decisions not to seek 510(k) clearance. If the FDA requires us to seek 510(k)
clearance for any modification, we also may be required to cease marketing
and/or recall the modified device until we obtain a new 510(k) clearance.

A host of regulatory requirements apply to the manufacture and commercial
distribution of our devices after the FDA has cleared them for marketing.
Unanticipated changes in existing regulatory requirements or adoption of new
requirements could hurt our business, results of operations and financial
condition.

We are subject to inspection and market surveillance by the FDA to determine
compliance with regulatory requirements. If the FDA finds that we have failed
to comply with applicable requirements, the agency can institute a wide variety
of enforcement actions such as a public warning letter. The FDA also may pursue
more drastic remedies, such as:

. fines, injunctions, and civil penalties against us;

. recall or seizure of our products;

. operating restrictions, partial suspension or total shutdown of our
production;

. refusing our requests for 510(k) clearance or PMA approval of new
products;

. withdrawing product approvals already granted; and

. criminal prosecution.

Our Products are Subject to Extensive Domestic and Foreign Governmental
Regulation

We also must comply with numerous federal, state and local laws relating to
such matters as safe working conditions, manufacturing practices, environmental
protection, fire hazard control and hazardous substance disposal. We may incur
significant costs to comply with such laws and regulations in the future and we
cannot be sure that such laws or regulations will not hurt our business,
results of operations and financial condition.

Many foreign countries in which we market or may market our products have
regulatory bodies and restrictions similar to those of the FDA. In particular
we are awaiting Ministry of Health approval in Brazil for the sale of
GentleLASE, ScleroPLUS and ALEXlazer and in Japan for the sale of ScleroPLUS.
We can't be certain that we will be able to obtain (or continue to obtain) any
such government approvals or successfully comply with any such foreign
regulations in a timely and cost-effective manner, if at all, and our failure
to do so could hurt our business, results of operations and financial
condition.

We Could be Hurt by Third Parties Enforcing Their Patent Rights

Our industry has been characterized by frequent litigation regarding patent
and other intellectual property rights. Patent applications are maintained in
secrecy in the U.S. until such patents are issued and are maintained in secrecy
for a period of time outside the U.S. We can conduct only limited searches to
determine whether our technology infringes any patents or patent applications
of others. Any claims of patent infringement would be time-consuming, and
could:

. result in costly litigation;

. divert our technical and management personnel;

. cause shipment delays;

. require us to develop non-infringing technology; or

. require us to enter into royalty or licensing agreements.

Although patent and intellectual property disputes in the laser industry
have often been settled through licensing or similar arrangements, costs
associated with such arrangements may be substantial and often require

9
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the payment of ongoing royalties, which could hurt our gross margins. In
addition, we can't be sure that necessary licenses would be available to us on
satisfactory terms, or that we could redesign our products or processes to
avoid infringement, if necessary. Accordingly, an adverse determination in a
judicial or administrative proceeding or failure to obtain necessary licenses
could prevent us from manufacturing and selling some of our products, which
could hurt our business, results of operations and financial condition. On the
other hand, we may have to start costly and time consuming litigation in order
to enforce our patents, to protect trade secrets and know-how owned by us or to
determine the enforceability, scope and validity of the proprietary rights of
others.

We Could be Hurt by Product Liability Claims

There are various risks of physical injury to the patient when using our
lasers for aesthetic and cosmetic treatments. Injuries often result in product
liability or other claims being brought against the practitioner utilizing the
device and us. The costs and management time we would have to spend in
defending or settling any such claims, or the payment of any award in
connection with such claims, could hurt our business, results of operations and
financial condition. Although we maintain product liability insurance, we can't
be certain that our policy will provide sufficient coverage for any claim or
claims that may arise, or that we will be able to maintain such insurance
coverage on favorable economic terms.

We May Be Unable To Attract and Retain Management and Other Personnel

The loss of any of our senior management or other key research, development,
sales and marketing personnel, particularly if lost to competitors, could hurt
our future operating results. Our future success will depend in large part upon
our ability to attract, retain and motivate highly skilled employees. We cannot
be certain that we will attract, retain and motivate sufficient numbers of such
personnel.

Year 2000 Issues May Increase Our Costs or Disrupt Our Operations

Many companies, including ours, rely heavily on computers to perform their
normal business activities. Some computer systems cannot distinguish 21st
century dates from 20th century dates. These systems may malfunction or fail
outright. Therefore, companies must assess their systems and upgrade them
accordingly in order to reduce the risk of disruption and potential liability.

We have assessed our products and systems, including our financial and
information systems. We have completed approximately 80% of the implementation
and testing of the required upgrades which we identified to our financial and
information systems. We identified no required upgrades to our products and
other systems. We have also surveyed our significant suppliers about their Year
2000 readiness. However, we have not devoted substantial financial and employee
resources to Year 2000 readiness and have not yet developed a formal
contingency plan. Although we believe that Year 2000 issues will not materially
hurt our business, we cannot be certain that all of our systems and our
suppliers' systems will function in the Year 2000 or when processing 21st
century dates.

We may incur unanticipated costs to make our systems Year 2000 compliant. If
our suppliers are not Year 2000 ready and we do not establish alternative
suppliers, we could lose our ability to procure the same materials at the same
costs, or at all. If that happened, it could hurt our financial results.

Future Acquisitions May Involve Financial and Management Risk

We may acquire businesses, products and technologies that complement or
expand our business. We may also consider joint ventures and other
collaborative projects. We may not be able to (i) identify appropriate
acquisition or joint venture candidates, (ii) successfully negotiate, finance
or integrate any businesses, products or technologies that we acquire, or (iii)
successfully manage any joint ventures or collaborations. Furthermore, the
integration of any acquisition or joint venture may divert management time and
resources. If we fail to manage these acquisitions or joint ventures
effectively we may incur debts or other liabilities or costs which could harm
our operating results or financial condition.

10
<PAGE>

Our Anti-Takeover Measures May Affect the Value of our Stock

We, as a Delaware corporation, are subject to Section 203 of the General
Corporation Law of the State of Delaware. In general, Section 203 restricts the
ability of a public Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder. As a result of the application of Section 203 and certain other
corporate documents, potential acquirors may be discouraged from attempting to
acquire us, thereby possibly depriving our stockholders of acquisition
opportunities to sell or otherwise dispose of our stock at above-market prices
typical of such acquisitions.

We have also adopted a shareholder rights plan which gives holders of common
stock the right to purchase additional shares of our common stock if a
potential acquiror purchases or announces a tender offer to purchase 25% or
more of our outstanding common stock. The existence of this plan may make it
more difficult for a third party to acquire control of Candela.

Our Stock Price is Volatile

Our market segment has been vulnerable to abrupt changes in investor
sentiment, and stock prices of companies in the medical laser equipment
industry, including ours, can swing dramatically. Certain objective factors
some of which are outside our control could significantly affect our stock
price. Such factors include:

. our operating results may fluctuate from quarter to quarter;

. we may not meet research analysts' expectations, or research analysts may
announce changes in those expectations;

. investor confidence may rise or fall in response to developments in our
industry or in the economy generally;

. we or our competitors may announce technological innovations or new or
enhanced products;

. we or our competitors may gain or lose certain intellectual property
rights; and

. stock prices generally may fluctuate because of world events unrelated to
our industry's operating performance.

11
<PAGE>

USE OF PROCEEDS

The net proceeds to Candela from the sale of the 1,500,000 shares of common
stock offered hereby are estimated to be approximately $21,938,000 million,
assuming a public offering price of $17.00 per share and after deducting
estimated underwriting discounts and expenses payable by us in connection with
the offering.

We expect to use the net proceeds of the offering for general corporate
purposes, including working capital. A portion of the net proceeds may also be
used to acquire or invest in complementary businesses or products or to obtain
the right to use complementary technologies. Although we from time to time
evaluate potential acquisitions of such businesses, products or technologies,
and anticipate continuing to make these evaluations, we have no present
understandings, commitments or agreements with respect to any acquisitions.
Pending such uses, the proceeds will be invested in short-term interest-bearing
securities and debt instruments in compliance with our investment policy. We
will not receive any proceeds from the sale of shares by the selling
shareholders.

CAPITALIZATION

The following table sets forth at March 27, 1999, the capitalization of
Candela on an actual basis, and as adjusted to give effect to our sale of
1,500,000 shares of common stock, assuming a public offering price of $17.00
per share and after deducting the estimated underwriting discount and offering
expenses. You should read this table in conjunction with our Consolidated
Financial Statements and related notes thereto, appearing elsewhere in this
prospectus.

<TABLE>
<CAPTION>
March 27, 1999
-----------------------
Actual As Adjusted(1)
------- --------------
(in thousands)
<S> <C> <C>
Long-term debt:
Capital lease obligations............................ 299 299
Subordinated term notes.............................. 2,672 2,672
------- -------
Total long-term debt............................... 2,971 2,971
Stockholders' equity:
Common stock, $.01 par value; 30,000,000 shares
authorized actual and as adjusted; 5,516,296 shares
issued and outstanding actual and 7,016,296 shares
issued and outstanding as adjusted(1)............... 55 70
Additional paid-in capital........................... 18,577 40,500
Accumulated deficit.................................. (7,127) (7,127)
Cummulative translation adjustment................... (595) (595)
------- -------
Total stockholders' equity......................... $10,910 $32,848
------- -------
Total capitalization............................. $13,881 $35,819
======= =======
</TABLE>
- --------
(1) This total excludes up to 1,398,730 shares of common stock issuable upon
exercise of previously issued stock options or options which may be awarded
in the future, and excludes 591,129 shares of common stock issuable upon
exercise of outstanding warrants. At May 1, 1999, options to purchase
995,730 shares (exercisable at a weighted average exercise price of $4.57)
and warrants to purchase 591,129 shares (281,129 of which are exercisable
at $6.875 per share and 370,000 of which are presently exercisable at $4
per share) are outstanding.

12
<PAGE>

PRICE RANGE OF COMMON STOCK

Our common stock is traded on the NASDAQ National Market under the symbol
"CLZR." The following table sets forth the high and low closing sale prices of
the common stock as reported by the NASDAQ National Market.

<TABLE>
<CAPTION>
High Low
------- ------
<S> <C> <C>
Fiscal 1997
First Quarter................................................. $ 8.625 $4.625
Second Quarter................................................ 7.375 4.625
Third Quarter................................................. 9.063 5.750
Fourth Quarter................................................ 7.750 5.000
Fiscal 1998
First Quarter................................................. $ 6.375 $4.188
Second Quarter................................................ 7.438 4.000
Third Quarter................................................. 5.875 2.875
Fourth Quarter................................................ 4.313 2.812
Fiscal 1999
First Quarter................................................. $ 6.375 $2.688
Second Quarter................................................ 6.031 3.000
Third Quarter................................................. 10.000 5.625
Fourth Quarter (through May 11, 1999)......................... 18.875 8.125
</TABLE>

On May 11, 1999, the last reported sale of the common stock on the NASDAQ
National Market was $18.875 per share. As of May 1, 1999, there were
approximately 367 holders of record of our common stock.

DIVIDEND POLICY

We do not intend to declare or pay cash dividends in the foreseeable future.
Our management anticipates that all of our earnings and other cash resources,
if any, will be retained by us for investment in our business. We are prevented
by our line of credit agreement from paying cash dividends without the consent
of our commercial lender.

13
<PAGE>

SELECTED CONSOLIDATED FINANCIAL DATA

You should read the following selected consolidated financial data in
conjunction with the Company's Consolidated Financial Statements and related
notes and with "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this prospectus. The statement of
operations data for the years ended June 27, 1998, June 28, 1997 and June 29,
1996, and the balance sheet data as of June 27, 1998 and June 28, 1997, are
derived from, and are qualified by reference to, the audited financial
statements included elsewhere in this prospectus. The results for the nine
months ended March 27, 1999 may not be indicative of future results. "As
Adjusted" balance sheet data at March 27, 1999, is adjusted to reflect the sale
by Candela of 1,500,000 shares of common stock offered by us in this prospectus
at an assumed public offering price of $17.00 per share and the receipt of the
estimated net proceeds therefrom.

<TABLE>
<CAPTION>
Nine Months Year Ended
--------------------- ----------------------------------------------
March 27, March 28, June 27, June 28, June 29, July 1, July 2,
1999 1998 1998 1997 1996 1995 1994
--------- ----------- -------- -------- -------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Revenue:
Lasers and other
products.............. $31,254 $16,735 $25,917 $25,601 $20,403 $18,018 $20,187
Product related
service............... 6,373 6,193 8,405 7,660 7,861 8,449 9,424
Skin care centers...... 2,254 2,034 2,703 2,244 2,149 1,777 209
------- ------- ------- ------- ------- ------- -------
Total revenue......... 39,881 24,962 37,025 35,505 30,413 28,244 29,820
Cost of revenue:
Laser and other
products.............. 13,213 7,447 11,272 11,195 9,159 7,952 8,240
Product related
service............... 4,213 4,758 6,955 5,587 6,560 6,976 7,721
Skin care centers...... 1,567 1,895 2,480 1,868 1,114 940 94
------- ------- ------- ------- ------- ------- -------
Total cost of
revenue.............. 18,993 14,100 20,707 18,650 16,833 15,868 16,055
Gross profit:
Lasers and other
products.............. 18,041 9,288 14,645 14,406 11,244 10,066 11,947
Product related
service............... 2,160 1,435 1,450 2,073 1,301 1,473 1,703
Skin care centers...... 687 139 223 376 1,035 837 115
------- ------- ------- ------- ------- ------- -------
Gross profit.......... 20,888 10,862 16,318 16,855 13,580 12,376 13,765
Operating expenses:
Selling, general, and
administrative........ 12,131 11,421 15,271 13,680 9,873 10,246 9,168
Research and
development........... 2,381 1,979 2,399 2,488 1,818 3,733 3,810
Restructuring
charge(1)............. 0 2,609 2,609 0 0 0 0
------- ------- ------- ------- ------- ------- -------
Total operating
expenses............. 14,512 16,009 20,279 16,168 11,691 13,979 12,978
------- ------- ------- ------- ------- ------- -------
Income (loss) from
operations............ 6,376 (5,147) (3,961) 687 1,889 (1,603) 673
Other income (expense)
Interest income........ 60 29 42 84 93 70 97
Interest expense....... (377) (181) (235) (107) (49) (47) (47)
Other.................. 91 (109) (123) (26) (207) 544 291
------- ------- ------- ------- ------- ------- -------
Total other income
(expense)............ (226) (261) (316) (49) (163) 567 341
------- ------- ------- ------- ------- ------- -------
Income (loss) before
income taxes........... 6,150 (5,408) (4,277) 638 1,726 (1,036) 1,014
Provision for income
taxes.................. 1,940 78 175 400 481 500 400
------- ------- ------- ------- ------- ------- -------
Net income (loss)....... $ 4,210 $(5,486) $(4,452) $ 238 $ 1,245 $(1,536) $ 614
======= ======= ======= ======= ======= ======= =======
Basic earnings (loss)
per share.............. $ 0.77 $ (1.01) $ (0.81) $ 0.04 $ 0.23 $ (0.29) $ 0.13
======= ======= ======= ======= ======= ======= =======
Diluted earnings (loss)
per share.............. $ 0.72 $ (1.01) $ (0.81) $ 0.04 $ 0.22 $ (0.29) $ 0.13
======= ======= ======= ======= ======= ======= =======
Weighted average shares
outstanding............ 5,486 5,446 5,479 5,398 5,321 5,288 5,206
======= ======= ======= ======= ======= ======= =======
Adjusted weighted
average shares
outstanding............ 5,841 5,446 5,479 5,673 5,652 5,288 5,208
======= ======= ======= ======= ======= ======= =======
<CAPTION>
March 27, 1999
---------------------
June 27, June 28, June 29, July 1, July 2,
Actual As Adjusted 1998 1997 1996 1995 1994
--------- ----------- -------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Balance
Sheet Data:
Cash and cash
equivalents............ $ 8,059 $29,997 $ 1,615 $ 2,674 $ 3,041 $ 2,565 $ 3,790
Working capital......... 10,978 32,916 2,639 7,032 8,608 8,033 9,109
Total assets............ 30,448 52,386 22,604 24,837 19,334 16,832 20,447
Long-term debt.......... 2,971 2,971 887 1,519 557 476 223
Total stockholders'
equity................. 10,910 32,848 5,395 10,246 9,965 9,086 10,566
Total liabilities and
stockholders' equity... 30,448 52,386 22,604 24,837 19,334 16,832 20,447
</TABLE>
- --------
(1) During the quarter ended December 27, 1997, a restructuring charge was
recorded and a reserve established in the amount of $2.6 million resulting
from the closure of the skin care center located in Scottsdale, Arizona.

14
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

All statements, trend analysis and other information contained in the
following discussion relative to markets for our products and trends in
revenue, gross margins and anticipated expense levels, as well as other
statements including words such as "anticipate," "believe," "plan," "estimate,"
"expect," and "intend" and other similar expressions constitute forward-looking
statements. These forward-looking statements are subject to business and
economic risks and uncertainties, and our actual results of operations may
differ materially from those contained in the forward-looking statements.
Factors that could cause or contribute to such differences include, but are not
limited to those discussed in "Risk Factors" as well as other risks and
uncertainties referenced in this prospectus.

Overview

We research, develop, manufacture, market and service lasers used to perform
aesthetic and cosmetic procedures. We sell our lasers principally to medical
practitioners. Candela markets its products directly and through a network of
distributors to end users. Our traditional customer base includes plastic and
cosmetic surgeons and dermatologists. More recently we have expanded our sales
to a broader group of practitioners consisting of general practitioners and
certain specialists including obstetricians, gynecologists and general and
vascular surgeons. Over half of our revenue in recent periods have come from
international sales.

We derive our revenue from:

.the sale of lasers and other products;

.the provision of product related services; and

.the operations of our remaining skin care center.

Domestic and international product sales are generated principally through
our direct sales force based in the U.S. and three international offices.
Historically, a relatively small portion of our sales have come through our
network of independent distributors. In December 1998 we entered into an
exclusive distributorship arrangement with Physicians Sales and Service (PSS)
whose 700 representatives target general practice physicians and certain
specialists in the U.S. Sales through distributors for the quarter ended March
27, 1999 increased as a result of this arrangement.

Since we began marketing the GentleLASE in 1998, sales of this product have
accounted for an increasing percentage of our total revenue. In the quarter
ended March 27, 1999, sales of GentleLASE accounted for more than half of our
total revenue. We typically assemble products in our Wayland, Massachusetts
facility in the quarter in which they are shipped, and backlog has not been
significant. We experience some seasonal reduction of our product sales in the
quarter ending in September due to the summer holiday schedule of physicians
and their patients.

All product shipments include a 12-month parts and service warranty. The
anticipated cost associated with the warranty coverage is accrued at the time
of shipment and amortized over the warranty period as a cost of sales charged
to service revenue. Costs associated with product installation are also
recognized as costs of product related service revenue. Both such anticipated
and actual costs have no associated revenue and therefore reduce the gross
profit from product related service revenue.

Product related service revenue consists of revenue from maintenance and
repair services and the sale of spare parts and consumables. We derive revenue
from extended warranty contracts, which are typically for a 12 to 24-month
period. In addition, we provide on-site service worldwide on a time-and-
materials basis directly or through our distributors.

In June 1996, we began an effort to own and operate skin care centers
offering cosmetic laser treatments utilizing our equipment, along with
providing other cosmetic services traditionally offered by high-end spas.

15
<PAGE>

We pursued this strategy by purchasing an existing spa in Boston in 1996. In
March 1997 we opened a new skin care center in Scottsdale, Arizona with no
pre-existing client base. We subsequently decided to discontinue our skin care
center effort and to renew our commitment to our core aesthetic and cosmetic
laser business. In the quarter ending December 27, 1997, we closed our
Scottsdale facility which had not generated any material revenue from its
inception and recorded a restructuring charge and established a reserve in the
amount of $2.6 million which represented the anticipated cost associated with
this closure. In January 1999, we ceased to offer aesthetic laser procedures
at our Boston skin care center, but continue to provide personal care and
health and beauty services from this location. We are actively seeking buyers
to assume the leases and purchase the assets of both the Scottsdale and Boston
facilities.

International revenue during the first nine month period ended March 27,
1999, and for the fiscal year ended June 27, 1998, represented 54% and 53%,
respectively. Sales of our products are denominated in U.S. dollars with the
exception of product sales in Japan, and currently Japan is the only country
in which our sales are subject to currency risk. We enter into foreign
currency forward contracts to substantially reduce the impact of any currency
fluctuations.

Our fiscal year consists of the 52 or 53 week period ending on the Saturday
closest to June 30 of each year.

Results of Operations

The following tables set forth selected financial data for the periods
indicated expressed as percentages.

<TABLE>
<CAPTION>
Nine Months Ended Year Ended
------------------- ---------------------------
March 27, March 28, June 27, June 28, June 29,
1999 1998 1998 1997 1996
Revenue Mix: --------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(percentage of total revenue)
Lasers and other products... 78.4% 67.0% 70.0% 72.1% 67.1%
Product related service .... 16.0 24.8 22.7 21.6 25.8
Skin care centers........... 5.6 8.2 7.3 6.3 7.1
----- ----- ----- ----- -----
Total..................... 100.0% 100.0% 100.0% 100.0% 100.0%
<CAPTION>
Nine Months Ended Year Ended
------------------- ---------------------------
March 27, March 28, June 27, June 28, June 29,
1999 1998 1998 1997 1996
Operating Ratios: --------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Gross profit
(Percentage of Each Revenue
Item)
Laser and other products.... 57.7% 55.5% 56.5% 56.3% 55.1%
Product related service .... 33.9 23.2 17.3 27.1 16.6
Skin care centers........... 30.4 6.8 8.3 16.8 48.2
----- ----- ----- ----- -----
Consolidated Gross
Profit................... 52.4 43.5 44.1 47.5 44.7
Operating expense
(Percentage of Total Revenue)
Selling, general and
administrative............. 30.4 45.8 41.2 38.5 32.5
Research and development.... 6.0 7.9 6.5 7.1 6.0
Restructuring charge........ 0.0 10.4 7.1 0.0 0.0
----- ----- ----- ----- -----
Total..................... 36.4 64.1 54.8 45.5 38.5
----- ----- ----- ----- -----
Income (loss) from
operations................... 16.0 (20.6) (10.7) 1.9 6.2
Other income (expense)........ (0.6) (1.1) (0.9) (0.1) (0.5)
----- ----- ----- ----- -----
Net income (loss) before
income taxes................. 15.4 (21.7) (11.6) 1.8 5.7
Provision for income taxes.. 4.8 0.3 0.4 1.1 1.6
----- ----- ----- ----- -----
Net income (loss)............. 10.6% (22.0%) (12.0%) 0.7% 4.1%
===== ===== ===== ===== =====
</TABLE>

16
<PAGE>

First Nine Months of Fiscal 1999 Compared to First Nine Months of Fiscal 1998

Revenue. Total revenue for the first nine months in fiscal 1999 increased
60% over the same period one year earlier. Laser and product revenue increased
87% for the nine months of 1999 compared to the same period in 1998. This was
due mainly to a significant increase in shipments of the GentleLASE which we
began shipping in March 1998. International product revenue was 62% of total
revenue for the first nine months of 1999 compared to 71% for the same period
in 1998. Product-related service revenue increased 3% for the first nine months
of 1999 compared to the same period in 1998. This increase was attributable to
shipments of consumables used with the GentleLASE and Sclero products. Skin
care centers revenue in the first nine months of 1999 increased 11% compared to
the same period of 1998 due mainly to the introduction of laser and other
medical procedures performed at our Boston facility. These procedures were
initially introduced in April 1998 and were subsequently discontinued in
January 1999.

Gross Profit. In the first nine months of fiscal 1999 our gross profit
increased to $20.9 million or 52% from $10.9 million or 44% over the same
period one year earlier as the result of increased sales of higher margin
GentleLASE and higher absorption of fixed portions of manufacturing overhead.
In the first nine months of 1999, gross profit on products increased to $18.0
million or 58% compared to $9.3 million or 56% in 1998. Gross profit for
service revenue in the first nine months of fiscal 1999 increased to $2.2
million or 34% compared to $1.4 million or 23% for the same period in fiscal
1998. Gross profit for the nine months ended March 27, 1999 was favorably
impacted by a reduction of the accrued warranty expense associated with the
GentleLASE. This reduction was based on our actual experience with first year
warranty cost relating to GentleLASE shipments. Skin care center gross profit
for the nine months ended March 27, 1999 was positively impacted by the closure
of the Scottsdale facility in the second quarter of fiscal 1998.

Selling, General and Administrative Expense. For the nine month period ended
March 27, 1999, selling, general and administrative expense increased 6%, from
$11.4 million to $12.1 million in comparison to the same nine month period a
year earlier. This increase reflects increased staffing levels in the sales and
marketing departments incurred to support revenue growth, partially offset by
savings realized from operating one skin care center rather than two during the
first six months of the fiscal year. Also impacting selling, general and
administrative expense for the first nine months of fiscal 1999 was the accrual
of approximately $600,000 for the payment of management bonuses which are tied
to pre-tax profits derived from product and service revenue. In the first nine
months of fiscal 1998, pre-tax profit targets had not yet been achieved, and no
accrual was taken until the fourth quarter. We currently expect to accrue an
additional $600,000 in management bonuses for the fourth quarter of fiscal
1999. In relation to revenue, selling, general and administrative expenses for
the nine month period ended March 27, 1999, was 30% of revenue in fiscal 1999
compared to 46% for the same period a year earlier.

Research and Development Expense. Research and development spending for the
nine month period in 1999 increased 20% to $2.4 million, from $2.0 million for
the same period a year earlier. The increase in research and development
expense reflects efforts to develop products and product improvements designed
to enhance, augment, and expand existing product lines.

Restructuring Charge. During the quarter ended December 27, 1997, a
restructuring charge was recorded and a reserve established in the amount of
$2.6 million resulting from the closure of the skin care center located in
Scottsdale, Arizona. During the nine months ended March 27, 1999, a total of
$356,000 was charged against this reserve, representing costs associated with
the closure of the Scottsdale facility leaving a reserve balance of $1.6
million. Candela continues to pursue a sublease of the Scottsdale facility, but
if this effort is not successful, we could incur additional costs in excess of
our existing reserve. Management believes that the reserve established to date
will be sufficiently adequate so that no additional material charges will need
to be recognized for at least the next 18 months.

Operating Income. Income from operations for the nine month period ended
March 27, 1999 increased by $11.5 million, from a loss of $5.1 million to a
profit of $6.4 million, in comparison to the same nine month

17
<PAGE>

period a year ago. The improved performance was a result of both increased
revenue from product sales and reduced expenses in connection with operations
of the skin care centers.

Other Income/Expense. For the nine month period ended March 27, 1999, total
other expense was $226,000 in comparison to $261,000 for the same period a year
earlier. The improvement resulted from exchange gains realized at our foreign
subsidiaries, compared to exchange losses in the same period a year earlier
that were partially offset by increased interest costs.

Income Taxes. The provision for income taxes results from a combination of
activities of both the domestic and foreign subsidiaries. Provision for income
taxes for the nine months ended March 27, 1999 reflects the utilization of a
portion of the domestic net operating loss carryforwards and minimum tax
provisions calculated in Japan at a rate in excess of the U.S. statutory tax
rate. We had a net operating loss carryforward of approximately $1.9 million
and tax credit carryforwards of approximately $1.6 million at June 28, 1998,
the beginning of the current fiscal year. Based on current year operating
results we anticipate utilizing all of the net operating loss carryforward and
the tax credit carryforwards. Due to the availability of net operating loss
carryforwards, income tax expense has been reduced by $1.3 million thus far in
the current fiscal year. The effective tax rate for the year is expected to be
approximately 36.5% assuming that the remaining tax benefit of $600,000 is
utilized in the fourth quarter.

Fiscal Year Ended June 27, 1998 Compared to Fiscal Year Ended June 28, 1997

Revenue. Total revenue for fiscal 1998 increased 4% over fiscal 1997 to
$37.0 million from $35.5 million. International revenue as a percentage of
total revenue represented 53% of revenue in fiscal 1998, compared to 52% in
fiscal 1997. Product revenue increased slightly to $25.9 million for fiscal
1998 compared to $25.6 million for fiscal 1997. Increased shipments of
GentleLase and increased volume in our Spanish subsidiary were partially offset
by an 8% sales decline in our Japanese subsidiary as the result of the
devaluation of the Japanese Yen. Product related service revenue increased 10%
in fiscal 1998 over fiscal 1997 to $8.4 million from $7.7 million. This
increase was primarily the result of increased service in our Spanish
subsidiary. Skin care centers revenue for fiscal 1998 increased 20% over fiscal
1997 to $2.7 million from $2.2 million primarily as a result of operating two
skin care centers in fiscal 1998 compared to fiscal 1997 when only the Boston
skin care center was operating.

Gross Profit. Gross profit decreased to $16.3 million or 44% of total
revenue in fiscal 1998 from $16.9 million or 47% of total revenue in fiscal
1997. This decline was primarily due to the negative effect of currency
devaluation on Japanese sales and a decrease in gross margins from the skin
care centers resulting from increased medical procedure costs. Gross profit
from product revenue for fiscal 1998 was $14.6 million, basically unchanged
from $14.4 million for fiscal 1997. Gross profit from product related service
revenue decreased from $1.5 million or 17% in fiscal 1998 compared to $2.1
million or 27% in fiscal 1997. This decline in product related service gross
profit is attributable to warranty expenses associated with the initial
shipments of the GentleLASE which were estimated to be higher than our
historical experience. Skin care centers gross profit declined to $223,000, or
8.2% of total revenue, from $376,000, or 16.8% of total revenue, due to the
higher operating costs and minimal revenue associated with the Scottsdale
facility.

Selling, General and Administrative Expense. Selling, general and
administrative expense increased 12% to $15.3 million in fiscal 1998 from $13.7
million in fiscal 1997, as a result of charges incurred in the second quarter
for legal and consulting fees and taking a full reserve for potentially
uncollectible accounts and notes receivable from a domestic distributor.
Selling, general and administrative expense was 41% of total revenue in fiscal
1998 compared to 39% in fiscal 1997.

Research and Development Expense. Research and development spending for
fiscal 1998 decreased 4% to $2.4 million in fiscal 1998 from $2.5 million in
fiscal 1997.

18
<PAGE>

Operating Income (Loss) We experienced an operating loss in fiscal 1998 of
$4.0 million compared to an operating profit of $687,000 in fiscal 1997. This
decline was a result of the restructuring charge, higher selling, general and
administrative expenses and declining margins from product related service
revenue and the skin care centers.

Other Income and Expense. For fiscal 1998, other income and expense
reflected $316,000 in expense in comparison to $49,000 in expense for fiscal
1997. Interest income decreased in fiscal 1998 as a result of a decrease in
average cash balances, while interest expense increased in fiscal 1998 as a
result of the increased level of debt and lease financing. Other expenses in
fiscal 1998 included an increase in expense from foreign currency transactions.

Income Taxes. The provision for income taxes in fiscal 1998 was established
due to taxable income from our subsidiaries in Spain and Japan.

Fiscal Year Ended June 27, 1997 Compared to Fiscal Year Ended June 29, 1996

Revenue. Total revenue for fiscal 1997 increased 17% over fiscal 1996 to
$35.5 million from $30.4 million. International revenue as a percentage of
total revenue represented 52% of revenue in 1997 and in fiscal 1996. Product
revenue increased 18% to $25.6 million for fiscal 1997 compared to $20.4
million for fiscal 1996 reflecting significant shipments of Sclerolaser,
AlexLAZR, and Er/YAG laser. Product related service revenue decreased 3% from
1996 to $7.7 million from $7.9 million, resulting mainly from a reduced level
of grant revenue in fiscal 1997. Skin care centers revenue increased by 4% in
fiscal 1997 to $2.2 million compared to $2.1 million in fiscal 1996 resulting
from the opening of our Scottsdale skin care center and a slight increase from
our Boston skin care center.

Gross Profit. Gross profit increased to $16.9 million or 47% of total
revenue in fiscal 1997 from $13.6 million or 45% of total revenue in fiscal
1996, reflecting volume increases in product sales and increases in service
revenues offset in part by greater costs associated with the skin care centers.
Gross profit for product revenue for fiscal 1997 increased to $14.4 million, or
56%, from $11.2 million, or 55%, for fiscal 1996. Gross profit for product
related service revenue for fiscal 1997 increased to $2.0 million, or 27%, from
$1.3 million, or 17% for fiscal 1996. Skin care centers gross profit decreased
to $376,000, or 17%, from $1.0 million, or 48%, due to the costs associated
with opening the Scottsdale skin care center.

Selling, General and Administrative Expense. Selling, general and
administrative expense increased 39% to $13.7 million in fiscal 1997 from $9.9
million in fiscal 1996, as a result of increased spending associated with the
opening of the skin care centers and increased marketing expenses. Selling,
general and administrative expense was 39% of total revenue in fiscal 1997
compared to 32% in fiscal 1996.

Research and Development Expense. Research and development expense for
fiscal 1997 increased 37% to $2.5 million from $1.8 million in fiscal 1996
relating to increased product development efforts.

Operating Income. Income from operations for fiscal 1997 decreased to
$687,000 from $1.9 million for fiscal 1996. Although we achieved higher revenue
from product sales and higher gross profit from product related service
revenue, these increases were more than offset by losses from skin care centers
and higher selling, general and administrative expense and higher research and
development expense.

Other Income and Expense. For fiscal 1997, other income and expense
reflected $49,000 in expense compared to $163,000 in expense for fiscal 1996.
Interest income in fiscal 1997 decreased slightly and was

19
<PAGE>

more than offset by an increase in interest expense in fiscal 1996. Other
expense in fiscal 1997 of $26,000 and other expense in fiscal 1996 of $207,000
resulted primarily from foreign currency transactions.

Income Taxes. The provision for income taxes in fiscal 1997 was established
due to taxable income in our subsidiary in Japan. The provision for income tax
in fiscal 1997 results in an effective tax rate of 63%. This tax rate reflects
the higher applicable tax rates in Japan and our inability to use net operating
loss carry-forwards in the U.S. to offset income in Japan.

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. We will adopt SFAS
No. 131 for its fiscal year ending July 3, 1999. We believe that we operate in
two segments, laser and other products and related services, and skin care
centers.

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. Candela
plans to implement SFAS 133 for its fiscal year 2000. Had we implemented the
policy at March 27, 1999 it would have increased assets and liabilities equal
to the notional amount of forward currency contracts held by us in the amount
of $1.9 million and there would have been no material impact on the statements
of operations.

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<PAGE>

Quarterly Results of Operations

The following tables set forth selected unaudited quarterly statement of
operations data for the eleven quarters ended March 27, 1999, as well as such
expressed as a percentage of our total revenue for the periods indicated. We
believe this unaudited information has been prepared substantially on the same
basis as the annual audited financial statements and all necessary adjustments,
consisting of only normal recurring adjustments, except for the restructuring
charge in the second quarter of fiscal 1998, have been included in the amounts
stated below to present fairly our unaudited financial statements. The
operating results for any quarter are not necessarily indicative of the
operating results for any future period.

Consolidated Statement of Operations Data
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------------------------------------------------------
Mar 27 Dec 26 Sep 26 Jun 27 Mar 28 Dec 27 Sep 27 Jun 28 Mar 29 Dec 28 Sep 28
1999 1998 1998 1998 1998 1997 1997 1997 1997 1996 1996
------- ------- ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue
Lasers and other
products.............. $12,847 $10,385 $8,022 $9,182 $5,789 $5,682 $5,264 $6,994 $6,341 $6,948 $5,319
Product related
service............... 2,276 2,098 2,000 2,213 2,152 2,105 1,935 2,131 1,884 1,860 1,785
Skin care centers...... 721 816 716 669 676 735 623 546 565 598 535
------- ------- ------ ------ ------ ------ ------ ------ ------ ------ ------
Total revenue......... 15,844 13,299 10,738 12,064 8,617 8,522 7,822 9,671 8,790 9,406 7,639
Cost of Revenue
Lasers and other
products.............. 4,908 4,505 3,801 3,826 2,555 2,576 2,315 3,265 2,920 2,809 2,201
Product related
service............... 1,394 1,466 1,352 2,196 1,723 1,511 1,524 1,938 725 1,544 1,379
Skin care centers...... 518 528 521 585 496 737 663 700 467 397 305
------- ------- ------ ------ ------ ------ ------ ------ ------ ------ ------
Total cost of
revenue.............. 6,820 6,499 5,674 6,607 4,774 4,824 4,502 5,903 4,112 4,750 3,885
Gross profit
Lasers and other
products.............. $ 7,939 $ 5,880 $4,221 $5,356 $3,234 $3,106 $2,949 $3,729 $3,421 $4,139 $3,118
Product related
Service............... 882 632 648 17 429 594 411 193 1,159 316 406
Skin care centers...... 203 288 195 84 180 (2) (40) (154) 98 201 230
------- ------- ------ ------ ------ ------ ------ ------ ------ ------ ------
Total................. 9,024 6,800 5,064 5,457 3,843 3,698 3,320 3,768 4,678 4,656 3,754
Operating expense
Selling, general and
administrative........ 4,586 4,213 3,333 3,851 3,331 4,695 3,394 751 609 555 573
Research and
development........... 933 760 688 420 659 742 578 4,477 3,667 3,031 2,505
Restructuring charge... -- -- -- -- -- 2,609 -- -- -- -- --
------- ------- ------ ------ ------ ------ ------ ------ ------ ------ ------
Total................. 5,519 4,973 4,021 4,271 3,990 8,046 3,972 5,228 4,276 3,586 3,078
======= ======= ====== ====== ====== ====== ====== ====== ====== ====== ======
Income (loss) from
operations............. 3,505 1,827 1,043 1,186 (147) (4,348) (652) (1,460) 402 1,070 676
Other income (expense).. (128) (64) (33) (55) (47) (93) (121) 187 (269) (19) 52
------- ------- ------ ------ ------ ------ ------ ------ ------ ------ ------
Net income (loss) before
income taxes........... 3,377 1,763 1,010 1,131 (194) (4,441) (773) (1,273) 133 1,051 728
Provision for income
taxes.................. 1,470 370 100 97 -- -- 78 37 (170) 315 218
------- ------- ------ ------ ------ ------ ------ ------ ------ ------ ------
Net income (loss)....... 1,907 1,393 910 1,034 (194) (4,441) (851) (1,310) 303 736 510
Basic earnings (loss)
per share.............. $ 0.35 $ (.04) $ .17 $ 0.19 $(0.04) $(0.82) ($0.16) $(0.24) $ 0.06 $ 0.14 $ 0.09
======= ======= ====== ====== ====== ====== ====== ====== ====== ====== ======
Diluted earnings (loss)
per share.............. $ 0.31 $ (.04) $ .16 $ 0.19 $(0.04) $(0.82) $(0.16) $(0.24) $ 0.05 $ 0.13 $ 0.09
======= ======= ====== ====== ====== ====== ====== ====== ====== ====== ======
Weighted average shares
outstanding............ 5,498 5,448 5,479 5,479 5,448 5,443 5,426 5,409 5,406 5,394 5,655
======= ======= ====== ====== ====== ====== ====== ====== ====== ====== ======
Adjusted weighted
average shares
outstanding............ 6,168 5,448 5,566 5,488 5,448 5,443 5,426 5,409 5,791 5,658 5,655
======= ======= ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>

21
<PAGE>

<TABLE>
<CAPTION>
Percentage of Total Revenue
Quarter Ended
------------------------------------------------------------------------------------------
Mar 27 Dec 26 Sep 26 Jun 27 Mar 28 Dec 27 Sep 27 Jun 28 Mar 29 Dec 28 Sep 28
1999 1998 1998 1998 1998 1997 1997 1997 1997 1996 1996
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue Mix
Lasers and other
products.............. 81.1% 78.1% 74.7% 76.1% 67.2% 66.7% 67.3% 72.3% 72.1% 73.9% 69.6%
Product related
service............... 14.4 15.8 18.6 18.3 25.0 24.7 24.7 22.0 21.4 19.8 23.4
Skin care centers...... 4.5 6.1 6.7 5.6 7.8 8.6 8.0 5.7 6.5 6.3 7.0
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total.................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit
Lasers and other
products.............. 61.8 56.6 52.6 58.3 55.9 54.7 56.0 53.3 54.0 59.6 58.6
Product related
service............... 38.8 30.1 32.4 0.8 19.9 28.2 21.2 9.0 61.5 17.0 22.7
Skin care centers...... 28.2 35.3 27.2 12.6 26.7 (0.3) (6.4) (28.2) 17.3 33.6 43.0
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total.................. 57.0% 51.1% 47.2% 45.2% 44.6% 43.4% 42.4% 39.0% 53.2% 49.5% 49.1%
Operating expense
Selling, general and
administrative........ 28.9 31.7 31.1 31.9 38.7 55.1 43.4 7.8 6.9 5.9 7.5
Research and
development........... 6.0 5.7 6.4 3.5 7.6 8.7 7.5 46.3 41.7 32.2 32.8
Restructuring charge... 0.0 0.0 0.0 0.0 0.0 30.6 0.0 0.0 0.0 0.0 0.0
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total.................. 34.9 37.4 37.5 35.4 46.3 94.4 50.9 54.1 48.6 38.1 40.3
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Income (loss) from
operations............. 22.1 13.7 9.7 9.8 (1.7) (51.0) (8.3) (15.1) 4.6 11.4 8.8
Other income (expense).. (0.8) (0.4) (0.3) (0.4) (0.6) (1.1) (1.4) (1.9) (3.1) (0.2) (0.7)
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Net income (loss) before
income taxes........... 21.3 13.3 9.4 9.4 (2.3) (52.1) (9.9) (13.2) 1.5 11.2 9.5
Provision for income
taxes.................. 9.3 2.8 0.9 0.8 0.0 0.0 1.0 0.3 (2.1) 3.4 2.8
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Net income (loss)....... 12.0% 10.5% 8.5% 8.6% (2.3%) (52.1%) (10.9%) (13.5%) 3.4% 7.8% 6.7%
===== ===== ===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>

Liquidity and Capital Resources

Cash provided by operating activities amounted to $6.5 million for the nine
months ended March 27, 1999, compared to cash used for operating activities of
$1.7 million for the same period a year earlier, reflecting increased operating
profit. Cash used for investing activities totalled $13,000 for the nine months
ended March 27, 1999, compared to cash used for investing activities of
$170,000 for the same period a year earlier. Cash provided from financing
activities amounted to $117,000 in comparison to cash provided from financing
activities of $446,000 for the same period a year earlier. We issued $3.7
million eight-year, 9.75% subordinated term notes with warrants in October 1998
and used the proceeds of this financing in part to pay $2.7 million on our line
of credit and make payments on short term notes of our Japanese subsidiary for
$627,000. We borrowed $950,000 on our line of credit during the same period a
year ago.

Cash and cash equivalents at March 27, 1999, increased by $6.4 million to
$8.1 million from $1.6 million at June 27, 1998, due primarily to higher cash
receipts resulting from increased shipments of GentleLASE.

On October 15, 1998, we issued eight-year, 9.75% subordinated term notes to
three investors in the aggregate amount of $3.7 million. The notes become due
in October, 2006, and require quarterly interest payments. In addition, we
issued warrants to purchase 370,000 shares of common stock to the note holders
which have an exercise price of $4.00 per share. The relative fair value
ascribed to the warrants is $1.1 million and has been recorded as a component
of Additional Paid-In Capital. The relative fair value of the debt was recorded
as $2.6 million. Interest expense of $1.1 million will be accreted to debt over
the eight-year life of the debt to bring the value of that debt to its $3.7
million face value.

We also maintain a $3.5 million line of credit with a major bank which
expires December 1, 1999. The line of credit bears interest at the bank's prime
lending rate and is collateralized by total domestic accounts receivable,
inventories, and a pledge of subsidiary stock. We currently have no borrowings
outstanding on this line of credit.

22
<PAGE>

Our Japanese subsidiary has borrowed funds to be used for payment of
equipment purchases made from us. At March 27, 1999, this liability was
$139,000. Our remaining short-term and long-term debt is comprised of capital
lease obligations in the amount of $350,000 and $299,000, respectively, at
March 27, 1999, compared to $362,000 and $828,000, respectively, at June 27,
1998.

Year 2000 Readiness Disclosure Statement

We have completed our initial assessment of the implications of Year 2000
issues on operations, from information and financial systems to our products
and manufacturing processes, in order to determine the extent to which we may
be adversely affected by Year 2000 issues. Our internal assessment identified a
small number of items in our information and financial systems for further
action and correction, but revealed minimal impact of Year 2000 issues. We have
completed approximately 80% of our implementation and testing of these
identified items. We may conduct further testing following the conclusion of
this process. To date, we have expended approximately $30,000 relating to Year
2000 issues.

We estimate that future expenses for both employee time and system upgrades
to address Year 2000 issues will be approximately $15,000. We will expense such
costs when incurred, and we do not expect such costs to hurt our financial
results. We have also assessed the Year 2000 issues facing our major customers
and suppliers, and do not believe that such issues will have a material effect
on our business. However, we have not adopted a formal contingency plan for
Year 2000 issues, and any unanticipated costs or disruption could hurt our
financial results.

23
<PAGE>

BUSINESS

We develop, manufacture, market and service lasers for a broad variety of
aesthetic and cosmetic procedures, including:

. hair removal;

. non-invasive treatment of varicose veins and other benign vascular lesions;

. removal of benign pigmented lesions such as age spots and tattoos;

. treatment of scars and stretch marks; and

. skin resurfacing.

Since our founding nearly 30 years ago, we have continuously developed and
enhanced applications of laser technology. In the mid-1980's we began
developing laser technology for medical applications and since that time have
shipped approximately 3,000 lasers to 40 countries. Today, all of our products
are for aesthetic and cosmetic applications and we offer one of the broadest
product lines in the aesthetic and cosmetic laser industry. Our current
products include the GentleLASE for performing hair removal and treating leg
veins, the ScleroPLUS for vascular lesions, the ALEXLazr and the YAGLazr for
pigmented lesions and tattoos, and the SkinPLUS 2J system for skin resurfacing
and treating fine facial veins, all of which are marketed both in the U.S. and
internationally.

The aesthetic and cosmetic laser industry appears to be entering an era of
broader based growth. The most important factors contributing to this growth
are changing practitioner economics, positive demographic trends with America's
baby boomer population and its higher discretionary income, and the
introduction of more effective and affordable products offering a broader range
of treatments. The challenging managed care medical reimbursement environment
has resulted in many practitioners seeking to offer more procedures on a direct
pay basis. In addition the aesthetic and cosmetic laser industry has only
recently developed technology that successfully addresses hair removal which is
the largest cosmetic application to date.

Aesthetic and cosmetic laser vendors who are able to develop lasers that are
more affordable, fast, small and easy to use will be well positioned to take
advantage of the industry's growth. We believe that we have the technological
expertise, product offerings and necessary infrastructure to execute our
business strategy and to capitalize on this market opportunity, as evidenced by
the successful introduction of our newest laser, the GentleLASE.

Industry Overview

Medical lasers use the unique characteristics of laser light to achieve
precise and efficacious therapeutic effects, often in a non-invasive manner.
The precise color, concentration and controllability of different types of
laser light provide for the delivery of a wide range of specialized treatments.
First introduced in the 1960's, the use of lasers for medical applications grew
rapidly in the 1990's as technical advances made medical lasers more effective
and reliable. Medical lasers today are used for numerous types of procedures
falling into four broad categories: ophthalmic surgery, aesthetic and cosmetic
procedures, general surgery and dental procedures. Candela competes solely
within the growing market for lasers performing aesthetic and cosmetic
procedures, including:

. removal of unwanted facial hair;

. removal of hair from legs, back and other body areas;

. treatment of varicose, spider and other veins;

. treatment of birthmarks;

. removal of wrinkles, scars, and stretch marks; and

. removal of pigmented lesions and tattoos.

24
<PAGE>

Lasers produce intense bursts of highly-focused light to treat skin tissues.
A laser's wavelength (color), energy level, spot size and pulse width (exposure
time) are optimized for the specific treatment. Hair removal and the treatment
of various leg vein malformations require the deepest laser penetration for
successful treatment while scars, stretch marks and red birth marks (port wine
stains and hemangiomas) require less laser penetration. Pigmented lesions such
as sunspots, liverspots and tattoos are typically surface conditions which
require the least amount of penetration. Different conditions may require the
use of different types of lasers, and an active aesthetic and cosmetic practice
addressing a broad range of laser procedures requires multiple lasers.

In the pioneering years of the cosmetic and aesthetic laser industry from
the late 1980's to the mid 1990's, the market for laser procedures was focused
on vascular conditions such as port wine stains and hemangiomas and the
development of treatments for pigmented lesions, such as tattoos. Equipment
available in this period tended to be expensive, slow and bulky. In addition,
laser applications addressed the needs of relatively small patient populations,
served by a narrow group of specialists.

In the last half of the 1990's, the development of computer driven beam
delivery systems called scanners increased the interest of a growing number of
physicians in providing procedures to new, larger market segments such as
wrinkle removal. During this period, the complexity and cost of equipment from
many vendors still inhibited sales. However, clinical experience was
broadening, leading to better development efforts for new applications which
are now resulting in the next generation of aesthetic and cosmetic lasers.

The aesthetic and cosmetic laser industry appears to be entering an era of
broader based growth. The major factors converging to drive this growth are:

. the economics of practitioners in a tough medical reimbursement
environment;

. the rising discretionary income of aging baby boomers; and

. the development of technology that allows for new, effective procedures
for conditions that have large patient populations.

Aesthetic and cosmetic laser vendors who are able to deliver lasers that are
cost effective, reliable and easy to use will be well positioned to take
advantage of such broader based industry growth.

Managed care and reimbursement restrictions in the U.S. and similar
constraints, such as socialized medicine, outside the U.S. are motivating
practitioners to emphasize aesthetic and cosmetic procedures that are delivered
on a private, fee-for-services basis. While cosmetic procedures were once the
domain of plastic surgeons and dermatologists, reimbursement reductions coupled
with the reliable revenue stream from private-pay procedures have piqued the
interest of other specialties, including general practice physicians.

Key technical developments required for the broader cosmetic laser markets
relate to ease-of-use, speed, lower costs, safety and effective elimination of
undesirable side effects. These factors are critical for broader segments of
practitioners that wish to build aesthetic and cosmetic laser practices. These
factors are also important for minimizing disruption of a patient's normal
routine and for building demand for procedures addressing very large patient
populations.

25
<PAGE>

[CHART APPEARS HERE]

[Graphic describing the factors that comprise the Candela solution including:
technology, consumers and patients and practitioners. Under each factor are
several descriptive comments that provide further definition of the Candela
solution.]

Business Strategy

Candela believes that a convergence of price and performance is occurring in
the aesthetic and cosmetic laser industry driving the expansion of the market.
We believe we have the necessary infrastructure in place to capitalize on this
expansion. Candela's objective is to establish itself as the leading provider
of aesthetic and cosmetic lasers by using its proprietary technology and
expertise in light and tissue interaction, as well as by developing market-
oriented products that utilize related technologies. Our business strategy is
focused on the following goals:

. reduce product costs;

. increase penetration of our traditional customer base;

. expand sales beyond our traditional customer base;

. expand our domestic marketing and distribution channels;

. expand our international marketing and distribution channels;

. continue investing in research and development; and

. broaden additional applications for our Dynamic Cooling Device.

Reduce Product Costs. We apply bottom-up engineering, focusing on each
component to improve the performance of each device while reducing its size,
complexity and cost. We believe our approach leads to lasers with fewer parts
and greater manufacturing efficiency resulting in lower production costs which
enables us to offer more reliable products at more affordable prices.

Increase Penetration of Our Traditional Customer Base. Our traditional
customer base consists of dermatologists and plastic and cosmetic surgeons. We
believe that the affordability of our products will enable us to penetrate
further into the dermatologist and plastic and cosmetic surgeon markets. We
have conducted surveys that indicate that only approximately one-third of the
17,000 dermatologists and plastic and cosmetic surgeons in the U.S. presently
have lasers. We believe that affordability has been a major obstacle preventing
the remaining practitioners from purchasing a laser. As competition for
patients among practitioners increases, those practitioners with aesthetic and
cosmetic lasers will be able to differentiate themselves.

26
<PAGE>

Expand Sales Beyond Our Traditional Customer Base. We seek collaborative
relationships that expand upon our traditional customer base, such as our
recent relationship with PSS. We believe that specialist practitioners outside
our traditional customer base are a market with a large growth potential. In
addition, we have recently begun an innovative leasing program to target the
estimated 6,000 electrologists in the U.S. as potential customers of the
GentleLASE for hair removal.

Expand Our Domestic Marketing and Distribution Channels. The U.S. presently
represents approximately 50% of our sales and is the largest single geographic
market for our products. Over the past year we have doubled the size of our
U.S. direct sales force to better address the needs of our traditional core
markets. To further expand our presence in the U.S., in December 1998, we
entered into a three year distribution arrangement with PSS that gives PSS the
exclusive right to distribute the GentleLASE and ScleroPLUS to specific office-
based specialists. The agreement with PSS specifies that our products will be
the exclusive aesthetic and cosmetic lasers sold by PSS.

Expand Our International Marketing and Distribution Channels. Outside of the
U.S. we continue to strengthen our long-standing positions in Europe and Japan
and are seeking to expand our market in Asia and Latin America. We currently
have direct sales offices in Madrid, Frankfurt and Tokyo and are anticipating
opening additional sales offices in Hong Kong and Osaka within the next 12
months. Over the past year we increased the number and improved the quality of
our international independent distributor channel. We currently utilize 32
independent distributors in 46 countries.

Continue Investing in R&D. We believe that investment in research and
development is necessary to remain a leader in the aesthetic and cosmetic laser
market. Our research and development approach is to develop high-quality,
reliable and affordable products that continue to address existing markets and
allow us to enter into and expand new markets. Our research and development
staff works closely with our marketing and operations groups to ensure our
goals are met. Our strategy has been to drive technology that is market
applicable and addresses voids in the marketplace. To that end, Candela will
continue to apply technologies to reduce the size and complexity of its
technology and products, increase the speed and ease with which therapeutic
applications can be delivered, improve its ability to build and deliver lasers
at affordable prices and address expanding therapeutic applications and
markets. Candela has numerous research and development arrangements with
leading hospitals and medical laboratories in the U.S.

Broaden Additional Applications for Our Dynamic Cooling Device. In recent
months the aesthetic and cosmetic laser market has recognized the importance of
effective cooling delivery systems for laser treatment, especially in such
large market segments as hair removal and treatment of leg veins. Currently,
DCD is an integral component of our GentleLASE and is sold as an attachment to
our ScleroPLUS. We intend to broaden the incorporation of DCD into all of our
lasers and believe by doing so we can address major new market opportunities.

The Market for Aesthetic and Cosmetic Lasers

Our traditional customer base for aesthetic and cosmetic lasers consists of
dermatologists and plastic and cosmetic surgeons. In addition, other
practitioner groups are emerging as potential customers, including general
practitioners, obstetricians, gynecologists, general and vascular surgeons. In
the U.S., according to the American Medical Association and various societies,
there are approximately 10,000 dermatologists, and 7,000 plastic and cosmetic
surgeons. Practitioners in other specialties that are beginning to buy
aesthetic and cosmetic lasers include 70,000 general and family practitioners,
35,000 obstetricians and gynecologists, 28,000 general and vascular surgeons.
In addition, the aesthetic and cosmetic laser market includes non-medical
practitioners, notably electrologists, of which there are an estimated 6,000 in
the U.S.

The end markets for cosmetic laser procedures encompass broad and growing
patient groups, including aging baby boomers as well as younger age groups.
According to the U.S. Census Bureau, at the end of 1998 the number of baby
boomers in the 35 to 54 age range was approximately 80 million, representing
more than

27
<PAGE>

29% of the total U.S. population. This large population group generally has a
high level of disposable income and has exhibited a strong demand for aesthetic
and cosmetic procedures. We believe that as the cost of treatments decreases
and the popularity of laser cosmetic procedures such as hair removal increases,
the target market for these procedures is expanding beyond the baby boomers to
include a broad range of women and men aged 17 to 65. Demographic factors
similar to the U.S. underlie the growth of the aesthetic and cosmetic laser
market outside of the U.S.

Hair Removal. We believe that the great majority of the 108 million women
over the age of 16 in the U.S. employ one or more techniques for temporary hair
removal from various parts of the body. Also, a growing number of men are
removing hair by means other than their daily shaving routine. A number of
techniques are used to pull hair from the follicle including waxing,
depilatories and tweezing. In the waxing process, a lotion, generally beeswax-
based, is spread on the area to be treated and is then rapidly peeled off,
pulling out the entrapped hairs. Depilatories employ rotating spring coils or
slotted rubber rolls to trap and pull out the hairs. Tweezing involves removing
individual hairs with a pair of tweezers. Pulling hair from the follicle
produces temporary results, but is often painful and may cause skin irritation.
Depilatory creams, which contain chemicals to dissolve hair, frequently leave a
temporary unpleasant odor and may also cause skin irritation. Shaving is the
most widely used method of hair removal, especially for legs and underarms, but
produces the shortest-term results. Hair bleaches do not remove hair, but
instead lighten the color of hair so that it is less visible. A principle
drawback of all of these methods is that they require frequent treatment.

Before the advent of laser hair removal, electrolysis was the only method
available for the long-term removal of body hair. Electrolysis is a process in
which an electrologist inserts a needle directly into a hair follicle and
activates an electric current in the needle, which disables the hair follicle.
The tiny blood vessels in each hair follicle are heated and coagulated,
presumably cutting off the blood supply to the hair matrix, or are destroyed by
chemical action depending upon modality used. The success rate for electrolysis
is variable depending upon the skill of the electrologist and always requires a
series of treatments. Electrolysis is time-consuming, expensive and sometimes
painful. There is also some risk of skin blemishes and a rising concern
relating to needle infection. Because electrolysis requires that each hair
follicle be treated separately and can only treat visible hair follicles, the
treatment of an area as small as an upper lip may require numerous visits at an
aggregate cost of up to $1,000. The American Electrology Association estimates
that approximately one million people per year undergo electrology procedures.
Although we believe the large majority of all electrolysis treatments are for
facial hair, the neck, breasts and bikini line are also treated. Because hair
follicles are disabled one at a time, electrolysis is rarely used to remove
hair from large areas such as the back, chest, abdomen and legs. We believe
lasers enable the practitioner to address a potentially larger market than
electrolysis by treating a larger area of the body more quickly and with better
results.

We believe the market for laser-based hair removal is in its early stages
and that this market will grow as the customer compares laser treatments to
other hair removal methods that are currently available. The benefits include:

. significant longer term cosmetic improvement;

. treatment of larger areas in each treatment session;

. less discomfort during and immediately after procedures;

. reduced procedure time and number of treatments;

. reduced risk of scarring and infection;

. non-invasive procedures; and

. no risk of cross-contamination.

Vascular Lesions: Benign vascular lesions are generally enlarged and
proliferating blood vessels that appear on the surface of the skin as
splotches, dots, bulges and spider shapes in a variety of colors ranging from
red to purple. Different types of benign vascular lesions include the
following: (i) varicose veins, which

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are large veins greater than 1mm in diameter and often bulge above the skin
surface; (ii) leg telangiectasias, which are smaller spider veins, up to 1mm in
diameter in size, appearing as single strands; (iii) facial and truncal
telangiectasias, which are spider veins and other dilated veins that appear on
the face and other parts of the body; (iv) port wine stains, which are vascular
birthmarks characterized by a red or purple discoloration of the skin; and (v)
hemangiomas, which are protuberances that consist of dilated vessels, which
often appear on newborns within one month of birth. Other benign vascular
lesions include stretch marks and scars.

Varicose leg veins typically result when damaged valves cause blood to
stagnate rather than be pumped back to the heart, causing the vein walls to
stretch and bulge. Varicose veins affect a significant portion of the U.S.
adult population and increase in prevalence with age. Among U.S. women aged 40
to 50, an estimated 41% have varicose leg veins, increasing to an estimated 72%
between 60 and 70 years of age. An estimated 24% of men aged 30 to 40 have
varicose veins, increasing to 43% among 70 year olds. To date, treatment for
varicose veins has been predominantly performed on women. Other benign vascular
lesions such as port wine stains, hemangiomas, and facial and truncal
telangiectasias or spider veins have a combined prevalence rate of up to 10% of
the U.S. population. It is estimated that in 1997 there were approximately
661,000 procedures performed in the U.S. to remove vascular lesions.

Pigmented Lesions/Tattoos: Benign pigmented lesions can be both epidermal
and dermal, natural or man-made (tattoos) and can constitute a significant
cosmetic problem to those who have them. Pigmented lesions occur in an
estimated 83 million people in the U.S.

Skin Resurfacing: A significant percentage of the population suffers from
wrinkles or older looking skin as a result of the normal aging process, which
is often exacerbated by the effects of sun damage and smoking. This is the
primary group of candidates for skin resurfacing procedures. While there are a
variety of techniques used for smoothing skin including botox and collagen
injections, chemical peels and dermabrasion, laser technology has become an
accepted alternative for efficacious treatment of moderate and deep wrinkles.
Developed in the mid 1990's, laser skin resurfacing experienced explosive
growth fueled by improved technology and patient acceptance of the procedure.
Recent advances enabling lasers to treat other body parts and different skin
types effectively have further expanded the market. These advances in laser
technology continue to improve efficiency and reduce patient recovery time.
Estimates based on aging population demographics indicate continuous growth in
the number of procedures on an annual basis.

Candela's Products

We develop, manufacture, market and service lasers used to perform
procedures addressing patients' aesthetic and cosmetic concerns. We offer a
comprehensive range of products based on proprietary technologies. Our products
focus on the major aesthetic and cosmetic laser applications including:

. hair removal;

. non-invasive treatment of varicose veins and other benign vascular
lesions;

. removal of benign pigmented lesions such as age spots and tattoos;

. treatment of scars and stretch marks; and

. skin resurfacing.

Intense light technology forms the basis for most of our products. Our
patented technology uses thermal energy generated by an intense pulsed laser
light source to selectively eliminate unwanted skin blemishes without damaging
the surrounding healthy tissue, and to remove facial or other unwanted hair
throughout the body. Candela's objective is to establish itself as the leading
provider of aesthetic and cosmetic lasers by continually striving to develop
smaller, faster and less expensive devices.

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<PAGE>

Candela has been a pioneer in the laser industry. From the start, our
mission has been to lead the way in the development of innovative laser
products. Significant innovations include:

. the first laser system to treat vascular lesions with minimal skin
injury;

. the first vascular lesion treatment laser approved for use on children;

. the first Er/YAG resurfacing laser with a microprocessor-driven scanner;
and

. the first and only hair removal laser with integrated DCD.

Each of our laser products and its current list price are shown in the
following table.

<TABLE>
<CAPTION>
Current U.S.
Product Application List Price
<S> <C> <C>
GentleLASE Hair removal and treatment of leg veins greater $ 69,500
than 1mm; integrated with the Dynamic Cooling
Device
- ---------------------------------------------------------------------------------------
ScleroPLUS Treatment of benign vascular lesions, scars, $139,500*
stretch marks, rosacea, leg veins, warts and
hemangioma in adults, children and infants; used
in conjunction with the Dynamic Cooling Device
- ---------------------------------------------------------------------------------------
SP TL-1b Treatment of vascular lesions of the skin; $129,500**
available with the Dynamic Cooling Device
- ---------------------------------------------------------------------------------------
ALEXlazr Treatment of multi-colored tattoos and a broad $ 84,500
range of pigmented lesions such as age spots,
freckles and Nevus of Ota
- ---------------------------------------------------------------------------------------
YAGlazr Treatment of red tattoo pigments and brown $ 78,500
pigmented lesions
- ---------------------------------------------------------------------------------------
SkinPLUS Erbium YAG Treatment of facial vascular lesions and skin $ 69,900
KPT/532 Laser rejuvenation
- ---------------------------------------------------------------------------------------
Dynamic Cooling Device Selectively cools the top layer of skin during $ 19,500
laser treatment
</TABLE>

- --------------------------------------------------------------------------------
* List price does not include DCD. Currently all ScleroPLUS devices are sold
only with DCD.
** List price does not include DCD.

GentleLASE. The GentleLASE, integrated with DCD, is a high-energy, long-
pulse solid-state laser that generates laser light in the near infrared
wavelength range. It is used for both hair removal and the treatment of large
(1mm or larger) leg veins. The technology incorporated in the GentleLASE uses
high energy directed through an Alexandrite rod, which achieves selective
heating while keeping the temperature of the skin below its damage threshold.
The longer Alexandrite laser wavelength enables GentleLASE to penetrate skin
surfaces deeper than traditional Ruby lasers, and the large spot size (15mm)
allows the practitioner to treat a larger area more quickly.

The DCD is integrated into the design of GentleLASE and delivers a short
burst of cryogen coolant onto targeted areas of the skin undergoing treatment.
DCD selectively cools the top layer only of the skin, while leaving the
targeted underlying hair follicle, vein or other structure at normal
temperature. As a result, higher levels of laser energy can be delivered during
treatment, while minimizing thermal injury, pain and the inconvenience
associated with anesthetics. The design of the hand-held DCD enables the
practitioner to clearly see the area being treated, and the combined efficiency
of GentleLASE and DCD reduces the risks of overtreatment, which can result in
white spots on the skin, or undertreatment which can result in brown spots.

GentleLASE was initially cleared for marketing by the FDA in December 1997
for treating facial veins and vascular lesions and we commenced sales in March
1998. Candela began selling GentleLASE for hair

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<PAGE>

removal in the U.S. in July 1998, when it received FDA marketing clearance for
hair removal. In August 1998, we were issued a CE Mark on GentleLASE clearing
it for sale in 15 European countries.

Hair removal typically requires three to five treatments to achieve
efficacious results due to the growth cycle of hair follicles. A typical
treatment can range from approximately $200 for an upper lip and chin procedure
to as much as $1,000 per treatment for the back or chest.

ScleroPLUS. The ScleroPLUS is a versatile laser combining multiple
wavelengths and long pulse duration for the treatment of a broad range of
benign vascular lesions and is typically sold with a DCD attachment. ScleroPLUS
provides treatment of facial spider veins, port wine stains, leg
telangiectasia, hemangiomas, poikiloderma, rosacea, scars, warts, stretch
marks, vulvodynia and other vascular abnormalities in adults, children and
infants. The practitioner selects the wavelength and energy density that are
most appropriate for each patient, delivering a longer or shorter pulse
duration to treat veins and lesions of different sizes, shapes, locations and
depth. Most treatments of vascular lesions cost between $300 and $800 depending
on the length of and type of procedure. The combination of ScleroPLUS and
GentleLASE offers the capability to treat a majority of leg veins in patients
seeking treatment. A predecessor product to ScleroPLUS, the SP TL-1b, is
currently marketed in Japan, pending Ministry of Health approval of ScleroPLUS.
The ScleroPLUS was initially cleared for marketing by the FDA in the U.S. in
1995.

ALEXlazr and YAGlazr. We offer two types of lasers to address removal of a
broad range of pigmented lesions and most tattoos.

The ALEXlazr is a short-pulsed solid-state laser, which emits near-infrared
light for the non-invasive removal of tattoo pigments and pigmented lesions
such as freckles and Nevus of Ota, a bluish colored, non-vascular, pigmented
lesion, generally found among the Asian population. The ALEXlazr was cleared by
the FDA for marketing for these uses in the U.S. in 1994. The ALEXlazr has a
fiber optic delivery system that produces an even beam distribution without hot
spots. Its wavelength maximizes beam penetration, providing positive results
with deeper pigments and is effective in the removal of most tattoo pigments
except red.

The YAGlazr is a short-pulsed Nd/YAG laser, which is able to emit both near
infrared and green light, for the non-invasive removal of red tattoos and the
treatment of brown benign pigmented lesions, such as age spots and sunspots.
The YAGlazr was cleared for marketing by the FDA for these uses in the U.S. in
1994. The YAGlazr has variable pulse repetition frequency to optimize treatment
time, and dual wavelengths that broaden treatment options, allowing for removal
of tattoos which have red pigments as well as tattoos in darker skin types.

SkinPLUS system with optional SkinScan. The SkinPLUS system provides skin
resurfacing of the face, hands, neck and eye areas with an Er/YAG laser, an
erbium laser which emits a mid-infrared light, and the treatment of fine facial
veins with an optional KTP/532, Nd/YAG laser. The characteristic shallow
penetration of the Er/YAG energy into the skin allows precise removal of tissue
without heating adjacent tissue and also permits the treatment of delicate skin
on neck and hands, as well as darker pigmented skin. Healing time following a
SkinPLUS treatment is relatively rapid so that patients can return to their
daily routines quickly. The SkinPLUS system was approved for marketing by the
FDA in the U.S. in 1996.

The SkinScan Computerized Pattern Scanner is an optional add-on device for
the SkinPLUS system that enables the user to have a high degree of flexibility
and precision when performing skin resurfacing procedures. The SkinScan was
cleared for marketing by the FDA in the U.S. in 1996.

Dynamic Cooling Device. Currently, DCD is integrated into GentleLASE, as
described above, and is offered as an attachment to the ScleroPLUS. In
addition, owners of earlier models of the Sclero product line can purchase DCD
separately as an accessory.

Skintonic. The Skintonic is a massage device for body and face manufactured
by CFK Concepts of Valence, France. The system utilizes a variety of massage
heads and varying vacuum pressure to deeply

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<PAGE>

massage and stimulate local blood circulation, which helps patients look and
feel better. Current regulatory claims restrict promotion for cellulite
reduction. However, we are working to obtain additional marketing claims for
promotion in the second half of 1999.

Marketing, Sales and Distribution

We pursue a global marketing, sales and distribution strategy which is
centrally managed out of our Wayland, Massachusetts headquarters. Separate
regional managers for the Americas, Europe and the Middle East, and Asia ensure
that the differing needs of each region are identified and satisfied.
International sales are an important contributor to our revenue. In the first
nine months of our current fiscal year, the U.S. comprised 43% of our revenue,
Japan 24%, Europe and the Middle East 24%, and the rest of the world 9%.

We have stepped up our marketing efforts to increase both brand and specific
product awareness. Expenditures on marketing our products and services in the
first nine months of fiscal 1999 were approximately $3 million, an increase of
approximately 66% over the same period in fiscal 1998. Most of this increase
was used to support the growth of our sales force and new promotional
activities. Our traditional marketing has concentrated on practitioners through
trade shows, trade journals and workshops. Recently, we have increased our
marketing directly to consumers including practice enhancement programs for
practitioners, regional consumer print advertising and other media aimed at the
consumer. In addition, we have allocated resources to support our new
distribution relationship with PSS. We intend to increase resources dedicated
to marketing to further expand support of PSS and ancillary markets as well as
developing greater brand awareness by both the practitioner and the consumer.

We sell our products through our direct sales force and a network of
independent distributors. The particular mix of direct sales and distributors
varies by region. Generally, our distributors enter into a two to three year
exclusive agreement during which they typically agree not to sell our
competitors' products. Our sales strategy is to choose the most productive and
practicable distribution channel within each of our geographic markets.

We sell products in the U.S. primarily through our direct sales force to our
traditional customer base of dermatologists and plastic and cosmetic surgeons.
In addition, several independent distributors enhance our coverage of this
traditional customer base. In order to expand outside our traditional customer
base in the U.S., we entered into a three year distribution arrangement with
PSS in December 1998 that gives PSS the exclusive right to distribute the
GentleLASE and ScleroPLUS to specific office-based specialists. PSS is a
division of PSS World Medical, Inc., and is the largest distributor of medical
supplies, equipment and pharmaceuticals to office-based physicians in the U.S.
Through its nationwide sales force of 700 representatives, PSS will offer the
GentleLASE and ScleroPLUS to approximately 100,000 family practice and general
practice physicians, ob/gyn specialists and general and vascular surgeons. The
agreement with PSS specifies that our products will be the only aesthetic and
cosmetic lasers sold by PSS.

Outside the U.S., we sell our products in Western Europe, Japan, Latin
America, the Middle East and the Pacific Rim through direct sales offices and
distribution relationships. We have 24 employees in our direct sales offices in
Madrid, Frankfurt and Tokyo. We plan to open additional direct sales offices in
Hong Kong and Osaka. We have established distribution relationships throughout
Europe, Japan, Africa, Latin America and the Middle East. Outside the U.S. we
currently utilize 22 distributors in 46 countries.

Service and Support

We believe that quick and effective delivery of service is important to our
customers. We strive to respond to service calls within 48 hours to minimize
practitioner disruption. Our principal service center and parts depot is
located at our Wayland, Massachusetts, headquarters. Parts depots are also
located at our sales offices in Japan, Spain and Germany. Independent
distributors maintain parts depots and service representatives adequate

32
<PAGE>

to cover their installed systems and have primary responsibility to service
such systems. In addition, we have service representatives in each of our
markets worldwide.

Product maintenance and repair following the warranty period provides an
additional recurring source of revenue. Customers may elect to purchase an
extended warranty or to purchase service on a time and materials basis. Our
extended warranties vary by the type of system and the level of service desired
by the customer and are typically for a 12 to 24 month period after the initial
warranty period expires. Initial warranties on all laser products cover parts
and service for twelve months.

Candela emphasizes education and support of its customers. Our recommended
preventive maintenance, coupled with continuing technical education for service
representatives, help to ensure product reliability. After a sale, the system
is installed and supported by a Candela qualified service engineer. After
installation of a system at the customer's location, a nurse clinician provides
the practitioner with training and technical support.

Manufacturing

We design, manufacture, assemble and test our branded products other than
the SkinPLUS system at our Wayland, Massachusetts facility. Ensuring adequate
and flexible production capacity, continuous cost reduction and superior
product quality are top priorities of our manufacturing organization. We
achieve our goals by:

. working closely with the research and development organization, including
significant early involvement in product design;

. continually improving our just-in-time manufacturing and inventory
processes; and

. effectively managing a limited number of the most qualified suppliers.

In March 1999, our facility was awarded the ISO 9001 certification and EN
46001 registration. ISO 9001 certification provides guidelines for the quality
of company systems associated with the design, manufacturing, installation and
servicing of company products. EN 46001 standards are European quality
requirements specifically relating to the design of medical devices.

Our products are manufactured with standard components and subassemblies
supplied by subcontractors to our specifications. We purchase certain
components and subassemblies from a limited number of suppliers, or in the case
of the Alexandrite rods used in our GentleLASE and ALEXlazr products, a sole
supplier.

If our suppliers are unable to meet our requirements on a timely basis, our
production could be interrupted until we obtain an alternative source of
supply. To date, we have not experienced significant delays in obtaining dyes,
optical and electro-optical components, electronic components and raw materials
for our products.

Research and Development

We believe that our advanced research and engineering activities are crucial
to maintaining and enhancing our business and we are currently conducting
research on a number of applications. We believe that our in-house research and
development staff has demonstrated its ability to develop innovative new
products that meet evolving market needs. Our core competencies include:
applied laser physics and technology; new imaging methods; tissue optics;
photochemistry; and laser-tissue interaction. As we discover new technologies
or applications with commercial potential, we assemble a team to develop the
new product or application in cooperation with leading physicians and medical
and research institutions. In most instances, we must receive FDA clearance
before marketing new products or applications.

Our research and development team works with our operations group to design
our products for ease of manufacturing and assembly and with our marketing
group to respond to market opportunities. We believe that this interaction
between functional groups facilitates the introduction of new products with the
right balance of

33
<PAGE>

features, performance, quality and cost. To date our research and development
effort has relied primarily on internal development building on our core
technologies, rather than through acquisition.

In addition, Candela conducts joint research with physicians affiliated
with various medical and research institutions. One example of technology
developed through joint research is our DCD which was developed in conjunction
with the Beckman Laser Institute at the University of California, Irvine. We
anticipate continuing joint research and licensing arrangements with medical
research institutions.

As of May 1, 1999, our research and development staff consisted of 27
people, six of whom have advanced degrees including three Ph.Ds. The core
members of our research and development team have been with us for an average
of ten years. The significant continuity of the research and development staff
has been a major factor in enabling Candela to expand. We believe our research
and development staff is one of the most experienced teams in the industry.

Customers

We currently sell our products primarily to physicians. A majority of our
sales in the U.S. are financed through leasing companies. Although our sales
are not dependent on any single customer or distributor, our sales to PSS have
increased and we expect sales to PSS to begin to represent a significant
portion of sales. Our customers are located in more than 40 countries. We have
recently begun an innovative program to target the estimated 6,000
electrologists in the U.S. as potential customers for GentleLASE for hair
removal, positioning GentleLASE as an adjunct to traditional electrolysis
methods.

Competition

Competition in the aesthetic and cosmetic laser industry is intense and
technological developments are expected to continue at a rapid pace. Although
there are over 20 manufacturers of aesthetic and cosmetic lasers, we believe
that only Candela and a few others offer a broad range of products able to
address multiple applications. Unlike Candela, few, if any, of our competitors
focus exclusively on the cosmetic and aesthetic laser market. We believe that
our principal competitors are currently Coherent and ESC Medical Systems. We
compete on the basis of proprietary technology, product features, performance,
service, price and reputation. Some of our competitors have greater financial,
marketing and technical resources than we do. In addition, some competitors
have developed, and others may attempt to develop, products with applications
similar to ours.

We believe that many factors will affect our competitive position in the
future, including our ability to:

. develop and manufacture new products that meet the needs of our markets;

. respond to competitive developments and technological changes;

. manufacture our products at lower cost;

. retain a highly qualified research and engineering staff; and

. provide sales and service to a worldwide customer base.

Proprietary Rights

We own several U.S. and foreign patents and have four U.S. and one foreign
patent applications pending to protect our rights in certain technical aspects
of our hair removal, benign vascular lesion, pigmented lesion and other laser
systems.

In addition to our portfolio of patents issued and pending, we license
patented technology from third parties. We use DCD under an exclusive license
agreement to patent rights owned by the Regents of the University of
California. In October 1998, we entered into an amendment of the license
agreement which now gives us an exclusive right under the Regents' patent to
make, use and sell the dynamic cooling technology in

34
<PAGE>

all fields of use. However, this amendment also imposes an obligation to
negotiate sublicensing agreements with third parties, subject to certain
minimum terms and conditions. If we do not enter into sublicenses with such
third parties within certain time periods, the Regents may then grant license
rights to them directly, provided that Candela will receive 50% of all revenues
received under such licenses. To date, no such sublicenses or further licenses
have been granted by us or the Regents.

We rely primarily on a combination of patent, copyright and trademark laws
to establish and protect our proprietary rights. We also rely on trade secret
laws, confidentiality procedures and licensing arrangements to establish and
protect our technology rights. In addition, we seek to protect our proprietary
rights by using confidentiality agreements with employees, consultants,
advisors and others. We can't be certain that these agreements will adequately
protect our proprietary rights in the event of any unauthorized use or
disclosure, that our employees, consultants, advisors or others will maintain
the confidentiality of such proprietary information, or that our competitors
will not otherwise learn about or independently develop such proprietary
information.

Despite our efforts to protect our intellectual property, unauthorized third
parties may attempt to copy aspects of our products, to violate our patents or
to obtain and use our proprietary information. In addition, the laws of some
foreign countries do not protect our intellectual property to the same extent
as do the laws of the U.S. The loss of any material trademark, trade name,
trade secret or copyright could hurt our business, results of operations and
financial condition.

We believe that our products do not infringe the rights of third parties.
However, we can't be certain that third parties will not assert infringement
claims against us in the future or that any such assertion will not result in
costly litigation or require us to obtain a license to third party intellectual
property. In addition, we can't be certain that such licenses will be available
on reasonable terms or at all, which could hurt our business, results of
operations and financial condition.

Government Regulation

FDA's Premarket Clearance and Approval Requirements. Unless an exemption
applies, each medical device that we wish to market in the U.S. must receive
either "510(k) clearance" or "PMA approval" in advance from the U.S. Food and
Drug Administration pursuant to the Federal Food, Drug, and Cosmetic Act. The
FDA's 510(k) clearance process usually takes from four to 12 months, but it can
last longer. The process of obtaining PMA approval is much more costly, lengthy
and uncertain and generally takes from one to three years or even longer. We
can't be sure that 510(k) clearance or PMA approval will ever be obtained for
any product we propose to market.

The FDA decides whether a device must undergo either the 510(k) clearance or
PMA approval process based upon statutory criteria. These criteria include the
level of risk that the agency perceives is associated with the device and a
determination whether the product is a type of device that is similar to
devices that are already legally marketed. Devices deemed to pose relatively
less risk are placed in either class I or II, which requires the manufacturer
to submit a premarket notification requesting 510(k) clearance, unless an
exemption applies. The premarket notification must demonstrate that the
proposed device is "substantially equivalent" in intended use and in safety and
effectiveness to a legally marketed "predicate device" that is either in class
I, class II, or is a "preamendment" class III device (i.e., one that was in
commercial distribution before May 28, 1976) for which the FDA has not yet
decided to require PMA approval.

After a device receives 510(k) clearance, any modification that could
significantly affect its safety or effectiveness, or that would constitute a
major change in its intended use, requires a new 510(k) clearance. The FDA
requires each manufacturer to make this determination in the first instance,
but the FDA can review any such decision. If the FDA disagrees with a
manufacturer's decision not to seek a new 510(k) clearance, the agency may
retroactively require the manufacturer to submit a premarket notification
requiring 510(k) clearance. The FDA also can require the manufacturer to cease
marketing and/or recall the modified device

35
<PAGE>

until 510(k) clearance is obtained. We have modified some of our 510(k) cleared
devices but have determined that, in our view, new 510(k) clearances are not
required. We can't be certain that the FDA would agree with any of our
decisions not to seek 510(k) clearance. If the FDA requires us to seek 510(k)
clearance for any modification, we also may be required to cease marketing
and/or recall the modified device until we obtain a new 510(k) clearance.

Devices deemed by the FDA to pose the greatest risk such as life-sustaining,
life-supporting or implantable devices, or deemed not substantially equivalent
to a legally marketed predicate device, are placed in class III. Such devices
are required to undergo the PMA approval process in which the manufacturer must
prove the safety and effectiveness of the device to the FDA's satisfaction. A
PMA application must provide extensive preclinical and clinical trial data and
also information about the device and its components regarding, among other
things, manufacturing, labeling and promotion. After approval of a PMA, a new
PMA or PMA supplement is required in the event of a modification to the device,
its labeling or its manufacturing process.

A clinical trial may be required in support of a 510(k) submission or PMA
application. Such trials generally require an Investigational Device Exemption
application approved in advance by the FDA for a limited number of patients,
unless the product is deemed a nonsignificant risk device eligible for more
abbreviated IDE requirements. The IDE application must be supported by
appropriate data, such as animal and laboratory testing results. Clinical
trials may begin if the IDE application is approved by the FDA and the
appropriate institutional review boards at the clinical trial sites.

To date, the FDA has deemed our products to be class II devices eligible for
the 510(k) clearance process. We believe that most of our products in
development will receive similar treatment. However, we can't be certain that
FDA will not deem one or more of our future products to be a class III device
and impose the more burdensome PMA approval process.

Pervasive and Continuing FDA Regulation. A host of regulatory requirements
apply to marketed devices such as our laser products, including labeling
regulations, the Quality System Regulation (which requires manufacturers to
follow elaborate design, testing, control, documentation and other quality
assurance procedures), the Medical Device Reporting regulation (which requires
that manufacturers report to the FDA certain types of adverse events involving
their products), and the FDA's general prohibition against promoting products
for unapproved or "off label" uses. Class II devices such as ours also can have
special controls such as performance standards, postmarket surveillance,
patient registries, and FDA guidelines that do not apply to class I devices.
Unanticipated changes in existing regulatory requirements or adoption of new
requirements could hurt our business, financial condition and results of
operations.

We are subject to inspection and market surveillance by the FDA for
compliance with regulatory requirements. If the FDA finds that we have failed
to comply with applicable requirements, the agency can institute a wide variety
of enforcement actions. The FDA sometimes issues a public warning letter, but
also may pursue more drastic remedies, such as refusing our requests for 510(k)
clearance or PMA approval of new products, withdrawing product approvals
already granted to us, requiring us to recall products or asking a court to
require us to pay civil penalties or criminal fines, adhere to operating
restrictions or close down our operations. Ultimately, criminal prosecution is
available to FDA as punishment for egregious offenses. Any FDA enforcement
action against us could hurt our business, financial condition and results of
operation.

Other U.S. Regulation. We also must comply with numerous federal, state and
local laws relating to such matters as safe working conditions, manufacturing
practices, environmental protection, fire hazard control and hazardous
substance disposal. We can't be sure that we will not be required to incur
significant costs to comply with such laws and regulations in the future or
that such laws or regulations will not hurt our business, financial condition
and results of operations.

Foreign Regulation. International sales are subject to foreign government
regulation, the requirements of which vary substantially from country to
country. The time required to obtain approval by a foreign country may be
longer or shorter than that required for FDA approval, and the requirements may
differ. Companies are now required to obtain the CE Mark prior to sale of
certain medical devices within the EU. During this process,

36
<PAGE>

the sponsor must demonstrate compliance with ISO manufacturing and quality
requirements. In addition, Candela is currently awaiting Ministry of Health
approval in Brazil to market the GentleLASE, ScleroPLUS and ALEXlazr and in
Japan to market the ScleroPLUS.

Candela and its products may also be subject to other federal, state, local
or foreign regulations relating to health and safety, environmental matters,
quality assurance and the like. Candela's compliance with laws that regulate
the discharge of materials into the environment or otherwise relate to the
protection of the environment does not have a material effect on its ongoing
operations. Candela has not made any material expenditures for environmental
control facilities.

Product Liability and Warranties

Our products are generally warranted for a period of one year. We set aside
a reserve based on anticipated warranty claims. We believe such reserves to be
adequate, but in the event of a major product problem or recall, such reserve
may be inadequate to cover all costs, and such an event could have a material
adverse effect on our business, financial condition and results of operations.

Our business involves the inherent risk of product liability claims. We
maintain appropriate product liability insurance with respect to its products
with a coverage limit of $13 million in the aggregate. We cannot be certain
that with respect to our current or future products, such insurance coverage
will continue to be available on terms acceptable to us or that such coverage
will be adequate for liabilities that may actually be incurred.

The Skin Care Centers

In June 1996, we began an effort to own and operate skin care centers
offering cosmetic laser treatments utilizing our equipment along with other
cosmetic services traditionally offered by high-end spas. We pursued this
strategy by purchasing an operating spa in Boston in 1996. In March 1997 we
opened a new facility in Scottsdale, Arizona with no pre-existing customer
base. We subsequently decided to discontinue our skin care center effort.

Employees

As of May 1, 1999, we employed 275 people of whom 27 were in research,
development and engineering, 51 were in manufacturing and quality assurance, 23
were in service, 30 were in sales and marketing, 16 were in finance and
administrative positions, 106 full and part-time people were in the clinic and
health spa subsidiary and 22 were in the international sales/service
subsidiaries. None of our employees are represented by a union, and we believe
our relationship with our employees is good.

Properties

We lease a facility totaling approximately 35,000 square feet for our
operations in Wayland, Massachusetts, which is located approximately 20 miles
west of Boston. The lease on this facility was amended in April 1998 extending
the expiration date to March 2003. We believe that our current facilities are
suitable for our near-term needs.

The Company's subsidiary, Candela Skin Care Centers, Inc., currently leases
the following facilities:

(1) Candela Skin Care Center of Scottsdale, Inc., 7,555 square feet
located at 6939 E. Main Street, Scottsdale, AZ. The lease on this facility
is for a period of ten years, expiring on June 30, 2006, with a provision
for two five-year extensions; and

(2) Candela Skin Care Center of Boston, Inc., 20,728 square feet located
at 28 Arlington Street, Boston, MA. The lease on this facility is for a
period of 15 years, and commenced on June 1, 1994.

37
<PAGE>

Legal Proceedings

On March 5, 1999, New Star Lasers, Inc. and its subsidiary Laser Aesthetics,
Inc. filed a complaint in the U.S. District Court for the Eastern District of
California against The Regents of the University of California (the "Regents"),
the Beckman Laser Institute and Medical Clinic ("Beckman") and Candela. In the
complaint, New Star Lasers is seeking a declaration that its technology does
not infringe the Regents' patent pertaining to dynamic cooling technology to
which we are a licensee, or in the alternative that the patent is invalid and
not infringed by the plaintiff's technology. The complaint also includes
various tort claims against us and contract-related claims against the Regents
and Beckman. The complaint asserts that we interfered with the licensing of the
dynamic cooling technology to the plaintiffs. We intend to defend this matter
vigorously and have filed a motion to dismiss the case on jurisdictional
grounds. That motion is pending. The Regents have requested that we indemnify
them in connection with this litigation pursuant to the license agreement
between the Regents and Candela. We have rejected this request.

From time to time, we are a party to various legal proceedings incidental to
our business. We believe that none of the other presently pending legal
proceedings will have a material adverse effect upon our financial position,
results of operation, or liquidity.

38
<PAGE>

MANAGEMENT

The current directors and executive officers of Candela are as follows:

<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Gerard E. Puorro.......... 52 President, Chief Executive Officer and Director

F. Paul Broyer............ 50 Senior Vice President, Finance and
Administration, Chief Financial Officer and
Treasurer

James C. Hsia, Ph.D....... 52 Senior Vice President, Research

William D. Spies.......... 48 Senior Vice President, Marketing Sales and
Service

Jay D. Caplan............. 36 Vice President, Operations

Timothy P. Costello....... 39 Vice President, Marketing

William B. Kelley......... 43 Vice President, North American and Latin
American Sales

William McGrail........... 37 Vice President, Development Engineering

Toshio Mori............... 46 Vice President, President of Candela K.K.

Robert Wilber............. 40 Vice President, Worldwide Service

Kenneth D. Roberts........ 66 Chairman of the Board of Directors

Theodore G. Johnson....... 66 Director

Douglas W. Scott.......... 52 Director

Richard J. Cleveland, 67 Director
M.D......................

Robert E. Dornbush........ 51 Director

Nancy Nager, R.N., B.S.N, 48 Director
M.S.N....................
</TABLE>

Mr. Gerard E. Puorro was appointed a Director of Candela in September 1991.
Mr. Puorro has been President and Chief Executive Officer of Candela since
April 1993. From April 1989 until April 1993, Mr. Puorro was Senior Vice
President and Chief Financial Officer of Candela. Mr. Puorro was elected
Treasurer in April 1991 and Chief Operating Officer in December 1992. Prior to
joining Candela and since 1982, he was Vice President and Controller at
Massachusetts Computer Corporation, a manufacturer of micro-supercomputers.

Mr. F. Paul Broyer was appointed Senior Vice President, Finance and
Administration, Chief Financial Officer and Treasurer in July 1998. Mr. Broyer
joined Candela in October 1996 as Vice President and Chief Financial Officer.
Prior to joining Candela, Mr. Broyer held the position of Vice President
Finance at Integrated Genetics from 1994 to 1996. From 1987 until 1994 Mr.
Broyer was Corporate Controller for Laserdata, Inc. and held earlier positions
with Avatar Technologies and Data General Corporation.

James C. Hsia, Ph.D. has been Senior Vice President, Research of Candela
since July 1991. He has been with Candela since October 1985, and was
previously Vice President, Research and Development. Prior to joining Candela,
and since 1982, he was Vice President, Research and Development at Laser
Science, Inc.

Mr. William D. Spies joined Candela in July 1998, as Senior Vice President,
Marketing, Sales and Service. Prior to joining Candela, and since 1996, Mr.
Spies held the position of Director, Business Development with the Cordis
medical device unit of Johnson & Johnson. From 1988 to 1996 Mr. Spies held the
positions of Executive Vice President/General Manager and Vice President Sales
and Marketing with Seiko Optical Products. Previously Mr. Spies held a position
with Corning, Inc.

39
<PAGE>

Mr. Jay D. Caplan was appointed Vice President, Operations in February 1997,
after serving as Vice President, Manufacturing since December 1995. He has been
with Candela since September 1988 and was previously Senior Director, Corporate
Planning/Business Development. From 1988 to 1993, Mr. Caplan held the positions
of Product Director, International Controller, Manager, Financial Planning and
Analysis and Planning Associate. Prior to joining Candela, Mr. Caplan held
positions at Xerox Corporation and the United States Air Force.

Mr. Timothy P. Costello joined Candela in December 1998 as Vice President,
Worldwide Marketing. Prior to joining Candela, and since 1996, Mr. Costello
held the position of Vice President, Marketing with ESC Medical Systems, Inc.
From 1989 until 1996, Mr. Costello held a number of product and marketing
manager positions at Mentor Corporation.

Mr. William B. Kelley was named Vice President of North American and Latin
American Sales in July 1998. Mr. Kelley was previously Vice President, North
American Sales and Service from April 1993 through June 1998. From January 1993
until April 1993 he was Vice President, Domestic Sales. He has been with
Candela since 1987 and previously held the positions of National Sales Manager
and Eastern Regional Sales Manger. Prior to joining Candela, Mr. Kelley held a
number of sales and sales management positions in the medical industry.

Mr. William McGrail was named Vice President, Development Engineering in
July 1998. Previously, Mr. McGrail served in the position of Director of
Engineering since August 1994. From 1987 to 1992, he held the positions of
Senior Software Engineer and Software Design Engineer. Prior to joining
Candela, Mr. McGrail was employed by Raytheon Corporation.

Mr. Toshio Mori was named Vice President, President of Candela K.K. in July
1998, after serving as President and Representative Director of Candela K.K.
since September 1996. Previously Mr. Mori held the positions of Director of
Candela K.K. from September 1992 to September 1996, and General Manager from
September 1989 to September 1992. From 1976 to 1989, he was employed by Sansui
Electric Co. Ltd. in Tokyo.

Mr. Robert Wilber was appointed Vice President, Worldwide Service in August
1997, after serving as Director of Worldwide Service since October 1993. He has
been with Candela since September of 1989 and was previously a Finance Group
Director. From 1989 to 1992 Mr. Wilber held the positions of International
Accounting Manager, Customer Service Manager and Director of Financial Planning
and Analysis. Prior to joining Candela, Mr. Wilber held positions at Sony
Corporation of America, Massachusetts Computer Corporation and National
Semiconductor/Data Terminal Systems.

Mr. Kenneth D. Roberts has been a Director of Candela since August 1989 and
Chairman of the Board of Directors since November 1991. From November 1992 to
June 1995, Mr. Roberts was employed on a part-time basis as Vice President and
Chief Financial Officer of Foster-Miller, Inc., an engineering services
company. Since December 1988, he has been an independent management and
financial consultant. From July 1986 to December 1988, Mr. Roberts was Vice
President, Treasurer and Chief Financial Officer of Massachusetts Computer
Corporation, a manufacturer of micro-supercomputers. Prior to that time and for
many years, he was Senior Vice President and Treasurer of Dynatech Corporation,
a provider of diversified high technology products and services.

Mr. Theodore G. Johnson has been a Director of Candela since February 1988.
From 1983 until 1991, he managed his own venture capital and consulting
business, Prelude Management, Inc. Since that time, he has been an active
venture investor and director of a number of companies. Prior to that and for
25 years, he was a Vice President at Digital Equipment Company. Mr. Johnson is
currently a Director of Kronos, Inc., Gensym, Inc. and a number of private
companies including Enrollment Collaborative, Inc., a computer-based college
application service.

40
<PAGE>

Mr. Douglas W. Scott has been a Director of Candela since September 1991.
Since 1985, Mr. Scott has been a partner with Phildius, Kenyon & Scott, a
health care consulting and investment firm. Mr. Scott is currently President,
Chief Operating Officer and Director of Avitar, Inc., a publicly held health
care company. Mr. Scott also served as Chief Executive Officer of Avitar from
December 1989 through April 1991.

Richard A. Cleveland, M.D. was appointed a Director of Candela in April
1994. He has been Professor of Surgery at Tufts University School of Medicine
since 1972. In 1986, he was appointed the Andrews Professor of Surgery at the
same institution. From 1975 to 1993, Dr. Cleveland was Chairman of the
Department of Surgery and Surgeon-in-Chief at the New England Medical Center
and a member of the staff of several hospitals in the Boston area. He is
presently Secretary-Treasurer of the American Board of Thoracic Surgery and has
held numerous positions in a variety of other professional associations.

Mr. Robert E. Dornbush was appointed a Director of Candela in January 1995.
He has been a principal in Dorn Associates, Ltd., a health care consulting
firm, since 1992. In that capacity, he served as a materials management
consultant for Kaiser Permanente from 1994 through 1995. Prior to that time,
Mr. Dornbush was President of UNIT Consulting Group. From 1978 through 1991,
Mr. Dornbush held the positions of President and Chief Executive Officer at
Itel Distribution Systems, Inc. and The Dornbush Group, Inc. Mr. Dornbush also
is currently a partner in five real estate entities: Pratezk Partners, Double M
Investments, Dom Associates, Westside Development and Lewis, Wolcott and
Dornbush Real Estate, Inc. Mr. Dornbush has informed Candela that he will
retire from Candela's Board of Directors upon the effectiveness of this
prospectus.

Nancy Nager, R.N., B.S.N., M.S.N. was appointed a Director of Candela in
February 1999. From 1990 until the present, Ms. Nager has been the Principal
and CEO of Specialized Health Management, Inc., a privately held behavioral
heath care corporation. Ms. Nager also founded and directs Specialized
HomeCare, Inc., Specialized Billing Services, Inc. and Seniorlink, an
information, referral and resource corporation. Prior to that, Ms. Nager was
the Chief Operating Officer of Charles River Hospital, a private psychiatric
facility in Wellesley, where she previously held a number of positions in
nursing and administration from 1976 through 1990. Ms. Nager also provided
corporate consulting to the hospital's parent company Community Care Systems,
Inc. from 1990 through 1992.

AUDIT COMMITTEE

Currently, our Audit Committee consists of Robert E. Dornbush and Kenneth D.
Roberts. The Audit Committee meets with management and our independent
accountants to determine the adequacy of our internal controls and financial
reporting, recommends to the full Board of Directors the appointment of
independent accountants and reviews our long-term financial plans and makes
recommendations to the full Board of Directors for approval and to authorize
action.

COMPENSATION COMMITTEE

Currently our Compensation Committee consists of Richard J. Cleveland, M.D.
and Douglas W. Scott. The Compensation Committee reviews and makes decisions
regarding our compensation policies, and the amounts and forms of compensation
to be provided to executive officers, which generally include annual salaries
and bonuses, equity awards and other incentive compensation arrangements. As
part of the foregoing, the Compensation Committee administers our various
employee equity compensation plans.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

None of our executive officers serves as a member of the board of directors
or the Compensation Committee of any other company that has one or more
executive officers serving as a member of our Board of Directors or
Compensation Committee. None of our employees or current or former officers are
members of our Compensation Committee.

41
<PAGE>

DIRECTOR COMPENSATION

Directors who are not employees of Candela receive a fee of $750 per meeting
of the Board of Directors or committee meeting thereof if held separately.
Directors are also reimbursed for out-of-pocket expenses incurred in connection
with the performance of their duties as a director.

On May 10, 1990, the Board of Directors adopted the 1990 Non-Employee
Director Stock Option Plan, which the shareholders approved on November 13,
1990. This plan, which was superseded by the 1993 Non-Employee Director Stock
Option Plan, provided for the issuance of options to purchase up to 60,000
shares of our common stock. Under this plan, each director who is neither an
employee nor officer of Candela received a one-time grant of an option to
purchase 10,000 shares of common stock at an exercise price equal to the fair
market value on the date of grant. The options generally vest in equal amounts
over a period of four years, expire after seven years and are nontransferable.
Including cancellations, options for the purchase of 66,500 shares were granted
at exercise prices ranging from $3.25 to $14.50 per share.

On June 2, 1993, the Board of Directors adopted the 1993 Non-Employee
Director Stock Option Plan, which the shareholders approved on November 18,
1993. This plan provides for the issuance of options to purchase up to 80,000
shares of common stock. Under this plan, each director who is neither an
employee nor an officer of Candela receives a one-time grant of an option to
purchase 10,000 shares of common stock at an exercise price equal to the fair
market value on the date of grant. The options generally vest in equal amounts
over a period of two years, expire after ten years and are nontransferable. We
have granted options for the purchase of 60,000 shares at exercise prices
ranging from $1.625 to $8.00 per share.

On December 24, 1996, Richard J. Cleveland, M.D., a director of Candela, was
granted non-statutory options to purchase 20,000 shares of the common stock of
Candela Skin Care Centers, Inc., at an exercise price of $1.00. On August 21,
1997, we converted these options, along with all options granted under the CSCC
Plan at the rate of 0.21053 Candela options for each CSCC option. Dr. Cleveland
realized options to purchase 4,211 shares of the Candela's common stock at an
exercise price of $4.75 per share as a result of this conversion.

On August 14, 1997, Non-Qualified Options to purchase 10,000 shares of our
common stock were granted to each of Theodore G. Johnson, Kenneth D. Roberts,
Richard J. Cleveland, Douglas W. Scott and Robert E. Dornbush, at an exercise
price of $4.688 per share, such price being the market price of the common
stock on the date of the grant. These Non-Qualified Options were granted
pursuant to our 1989 Stock Plan and vest in equal 25% amounts over four years,
provided that each such optionee continues to serve as a director of the
Company.

On August 21, 1997, Candela granted Richard J. Cleveland options to purchase
4,000 shares at $7.00 per share. These options are fully vested and have a term
of ten years.

On September 30, 1998, Non-Qualified Options to purchase 5,000 shares of our
common stock were granted to each of Theodore G. Johnson, Kenneth D. Roberts,
Richard J. Cleveland, Douglas W. Scott and Robert E. Dornbush, at an exercise
price of $3.63 per share, such price being the market price of the common stock
on the date of the grant. These Non-Qualified Options were granted pursuant to
our 1989 Stock Plan and vest in equal 50% amounts on each of the first and
second anniversaries of the date of the grant, provided that each such optionee
continues to serve as a director of Candela on such anniversary date.

On January 12, 1999, Non-Qualified Options to purchase 5,000 shares of our
common stock were granted to each of Theodore G. Johnson, Kenneth D. Roberts,
Richard J. Cleveland, Douglas W. Scott and Robert E. Dornbush, at an exercise
price of $7.00 per share, such price being the market price of the common stock
on the date of the grant. These Non-Qualified Options were granted pursuant to
our 1998 Stock Plan and are fully vested.

42
<PAGE>

EXECUTIVE COMPENSATION

The following table sets forth certain information with respect to the
compensation paid or accrued by us for services rendered to Candela, in all
capacities, for the year ended June 27, 1998 by our Chief Executive Officer
(the "CEO") and our four other most highly paid executive officers, in each
case whose total salary and bonus exceeded $100,000 during the year ended June
27, 1998 (collectively, the "Named Executive Officers").

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
Long-term
Annual Compensation(1) Compensation
------------------------- ---------------
Name And Principal Fiscal Other Annual Awards(2) All Other
Position Year Salary($) Compensation($) Options/SARS(#) Compensation($)
------------------ ------ --------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Gerard E. Puorro....... 1998 237,500 114,885(3) 10,527(4) 4,972(5)
Chief Executive Offi-
cer, 1997 209,792 15,000(3) 100,000(4) 3,046(5)
President and Director 1996 207,615 15,000(3) 50,000(4) 2,376(5)

James C. Hsia, Ph.D.... 1998 155,000 105,188(6) 33,000(7) 2,942(8)
Senior Vice President,
Research 1997 141,686 -- 20,000(7) 2,935(8)
1996 131,019 -- 40,000(7) 2,470(8)

William B. Kelley...... 1998 163,942 65,188(9) -- 2,443(10)
Vice President, North 1997 156,988 -- 25,000 2,401(10)
American Sales and
Service 1996 135,520 -- -- 1,934(10)

Jay D. Caplan.......... 1998 130,000 54,674(9) 5,000 2,100(12)
Vice President, Opera-
tions 1997 120,000 -- 20,000(11) 1,920(12)
1996 102,500 -- 12,525(11) --

Robert Wilber.......... 1998 108,844 46,772(9) 15,000 8,009(13)
Vice President, World-
wide Service 1997 93,301 5,000 -- 12,433(13)
1996 86,554 -- 3,250 8,956(13)
</TABLE>
- --------
(1) Excludes perquisites and other personal benefits, the aggregate annual
amount of which for each officer was less than the lesser of $50,000 or
10% of the total salary and bonus reported for the named executive
officer.
(2) We did not grant any restricted stock awards or stock appreciation rights
("SARs") or make any long-term incentive plan pay-outs during the fiscal
years 1998, 1997 or 1996.
(3) Fiscal years 1998, 1997 and 1996, each includes $15,000 for debt
forgiveness. Fiscal 1998 also includes incentive bonus of $99,885.
(4) Options granted in fiscal 1996 for the purchase of 50,000 shares in
Candela Skin Care Centers, Inc., a subsidiary, were converted to 10,527
during fiscal 1998. All rights and interests in options granted in fiscal
1997 to purchase 100,000 shares at $7.50 per share were forfeited during
fiscal 1998.
(5) For fiscal 1998, includes $2,375 in matching contributions by us pursuant
to our 401(k) Plan, $766 in life insurance premiums paid by us for the
benefit of Mr. Puorro, and $1,831 for an automobile we provided. For
fiscal 1997, includes $2,320 in matching contributions by us pursuant to
our 401(k) Plan and $726 in life insurance premiums paid by us for the
benefit of Mr. Puorro. For fiscal 1996, includes $1,717 in matching
contributions by us pursuant to our 401(k) Plan and $659 in life insurance
premiums paid by us for the benefit of Mr. Puorro.
(6) Includes $65,188 incentive bonus approved by Board of Directors, based on
our results for second half of fiscal 1998. Additionally, includes an
Inventor's Bonus of $40,000 which was awarded to Dr. Hsia in fiscal 1998
for recognition of his involvement with the GentleLase.
(7) During fiscal 1998 options granted in fiscal 1991 to purchase 8,000 shares
of stock at $8.75 and options granted in fiscal 1992 to purchase 25,000
shares of stock were repriced at $3.25 per share. All rights and interests
in options granted in fiscal 1996 to purchase 15,000 shares at $9.875 per
share and options granted in fiscal 1997 to purchase 20,000 shares at
$7.50 were forfeited during fiscal 1998.

43
<PAGE>

(8) For fiscal 1998, includes $2,144 in matching contributions by us pursuant
to our 401(k) Plan and $798 in life insurance premiums paid by us for the
benefit of Dr. Hsia. For fiscal 1997, includes $2,175 in matching
contributions by us pursuant to our 401(k) Plan and $760 in life insurance
premiums paid by us for the benefit of Dr. Hsia. For fiscal 1996, includes
$1,773 in matching contributions by us pursuant to our 401(k) Plan and
$697 in life insurance premiums paid by us for the benefit of Dr. Hsia.
(9) Incentive bonus approved by Board of Directors, based on our results for
second half of fiscal 1998.
(10) For fiscal 1998, includes $2,325 in matching contributions by us pursuant
to our 401(k) Plan and $118 in life insurance premiums paid by us for the
benefit of Mr. Kelley. For fiscal 1997, includes $2,291 in matching
contributions by us pursuant to our 401(k) Plan and $110 in life insurance
premiums paid by us for the benefit of Mr. Kelley. For fiscal 1996,
includes $1,837 in matching contributions by us pursuant to our 401(k)
Plan and $97 in life insurance premiums paid by us for the benefit of Mr.
Kelley.
(11) All rights and interests in options granted in fiscal 1996 to purchase
10,000 shares at $9.875 per share and options granted in fiscal 1997 to
purchase 20,000 shares at $7.50 were forfeited during fiscal 1998.
(12) For fiscal 1998, includes $1,950 in matching contributions by us pursuant
to our 401(k) Plan and $150 in life insurance premiums paid by us for the
benefit of Mr. Caplan. For fiscal 1997, includes $1,771 in matching
contributions by us pursuant to our 401(k) Plan and $149 in life insurance
premiums paid by us for the benefit of Mr. Caplan.
(13) For fiscal 1998, includes $1,533 in matching contributions by us pursuant
to our 401(k) Plan and $6,476 in commissions paid on service contracts
sold to customers. For fiscal 1997, includes $1,639 in matching
contributions by us pursuant to our 401(k) Plan and $10,794 in commissions
paid on service contracts sold to customers. For fiscal 1996, includes
$1,406 in matching contributions by us pursuant to our 401(k) Plan and
$7,550 in commissions paid on service contracts sold to customers.

44
<PAGE>

OPTION GRANTS IN THE LAST FISCAL YEAR

The following table sets forth grants of stock options pursuant to our 1989
Stock Plan during the fiscal year ended June 27, 1998 to the Named Executive
Officers listed in the Summary Compensation Table above.
<TABLE>
<CAPTION>
Potential
Realizable
Value at
Assumed Annual
Rates of Stock
Price
Appreciation
Individual Grants for Options(1)
----------------------------------------- --------------
Percent of
Total
Options/
Granted
to Exercise
Option Employees of Base
Granted in Fiscal Price Expiration
Name (#) Year ($/Share) Date 5% 10%
- ---- -------- ---------- --------- ---------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Gerard E. Puorro...... 10,527(2) 5.43% 4.75 8/21/07 31,447 79,692
James C. Hsia, Ph.D... 33,000(3) 17.03% 3.25 4/24/08 67,449 170,929
William B. Kelley..... -- -- -- -- -- --
Jay D. Caplan......... 5,000 2.58% 4.688 8/14/07 14,741 37,357
Robert Wilber......... 15,000 7.74% 4.688 8/14/07 44,224 112,072
</TABLE>

OPTION/SAR GRANTS IN LAST FISCAL YEAR

- --------
(1) Amounts reported in these columns represent amounts that may be realized
upon exercise of the options immediately prior to the expiration of their
term assuming the specified compounded rates of appreciation (5% and 10%)
on our common stock, as the case may be, over the term of the options.
These numbers are calculated based on rules promulgated by the Securities
and Exchange Commission and do not reflect our estimate of future stock
price growth. Actual gains, if any, on stock option exercises and common
stock holdings are dependent on the timing of such exercise and the future
performance of our common stock. There can be no assurance that the rates
of appreciation assumed in this table can be achieved or that the amounts
reflected will be received by the individuals.
(2) These options were granted in fiscal 1996 for the purchase of 50,000 shares
in Candela Skin Care Centers, Inc., a subsidiary of Candela, and converted
to 10,527 options in Candela on August 21, 1997. These options have a term
of ten years from the date of conversion, become exercisable one year from
the date of conversion, and qualify as incentive stock options under
Section 422 of the Internal Revenue Code.
(3) Options for 8,000 shares, granted in fiscal 1991 at $8.75 per share were
repriced on April 27, 1998, have a term of 10 years from the date of
repricing, and are 100% vested at the date of repricing. Options for 25,000
shares, granted in fiscal 1992 at $8.125 per share were repriced on April
27, 1998, have a term of 10 years from the date of repricing, and are 100%
vested at the date of repricing.

45
<PAGE>

OPTION EXERCISES AND FISCAL YEAR END VALUES

The following table sets forth information with respect to options to
purchase our common stock granted under the 1987 Stock Option Plan and 1989
Stock Plan including (i) the number of shares purchased upon exercise of
options in the most recent fiscal year, (ii) the net value realized upon such
exercise, (iii) the number of unexercised options outstanding at June 27, 1998,
and (iv) the value of such unexercised options at June 27, 1998:

AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
JUNE 27, 1998 OPTION VALUES

<TABLE>
<CAPTION>
Number of
Unexercised Value of Unexercised
Shares Options at June 27, in-the-Money Options
Acquired Value 1998 (#) at June 27, 1998 ($)(2)
on Realized -------------------------- -------------------------
Name Exercise (#) ($)(1) Exercisable Unexercisable Exercisable Unexercisable
- ---- ------------ -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Gerard E. Puorro........ -- -- 155,000(3) 35,527(3) 4,725 1,575
James C. Hsia, Ph.D..... -- -- 76,796(4) -- (4) -- --
William B. Kelley....... -- -- 60,464 23,750 850 315
Jay Caplan.............. -- -- 4,525(5) 5,000(5) -- --
Robert Wilber........... -- -- 8,750 17,500 2,033 2,033
</TABLE>
- --------
(1) Named Executive Officers will receive cash only if and when they sell the
securities issued upon exercise of the options and the amount of cash
received by such individuals is dependent on the value of such securities
at the time of such sale, if any.
(2) Value is based on the difference between option grant price and the fair
market value at 1998 fiscal year end ($2.813 per share as quoted on the
NASDAQ Stock Market at the close of trading on June 26, 1998) multiplied by
the number of shares underlying the option.
(3) All rights and interests in options granted in fiscal 1997 to purchase
100,000 shares at $7.50 per share were forfeited during fiscal 1998
(4) All rights and interests in options granted in fiscal 1996 to purchase
15,000 shares at $9.875 per share and options granted in fiscal 1997 to
purchase 20,000 shares at $7.50 were forfeited during fiscal 1998.
(5) All rights and interests in options granted in fiscal 1996 to purchase
10,000 shares at $9.875 per share and options granted in fiscal 1997 to
purchase 20,000 shares at $7.50 were forfeited during fiscal 1998.

CERTAIN TRANSACTIONS

In October 1998 we entered into a Note and Warrant Purchase Agreement with
Massachusetts Capital Resource Company, William D. Witter and Michael D. Witter
pursuant to which we issued an aggregate of $3.7 million in notes and granted
warrants to purchase an aggregate of 370,000 shares of our common stock at
$4.00 per share. Of the total, William D. Witter, an affiliate, received a note
in the amount of $500,000 and a warrant to purchase 50,000 shares of our common
stock.

46
<PAGE>

TEN YEAR OPTION REPRICINGS

The following table sets forth information concerning the repricing of stock
options held by certain executive officers of Candela since June 27, 1988, the
date of our initial public offering, including (i) the date of repricing; (ii)
the number of shares subject to repricing; (iii) the market price at the time
of repricing; (iv) the exercise price prior to repricing; (v) the new exercise
price; and (vi) the original option term remaining at the date of repricing.

<TABLE>
<CAPTION>
No. of Length of
Securities Market Price Original term
Underlying of Stock at Exercise Price Remaining at
Options/SAR's Time of at Time of Date of
Date of Repriced or Repricing or Repricing New Exercise Repricing of
Name Repricing Amended (#) Amendment ($) Amendment ($) Price Amendment
- ---- --------- ------------- ------------- -------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Gerard E. Puorro........ 7/21/95 5,000 3.1875 5.625 3.1875 3.7 years
7/21/95 25,000 3.1875 8.750 3.1875 5.9 years
James C. Hsia, Ph.D..... 4/27/98 8,000 3.25 8.75 3.25 3.0 years
4/27/98 25,000 3.25 8.125 3.25 3.75 years
William B. Kelley....... 8/10/89 1,200 7.375 9.625 7.375 9 years
7/21/95 7,000 3.1875 8.50 3.1875 6 years
7/21/95 6,000 3.1875 8.125 3.1875 6 years
7/21/95 1,514 3.1875 5.50 3.1875 8.4 years
Robert Wilber........... 7/21/95 750 3.1875 6.82 3.1875 4.25 years
7/21/95 1,500 3.1875 8.50 3.1875 6.1 years
7/21/95 1,000 3.1875 8.125 3.1875 6.5 years
Jay Caplan.............. 7/21/95 525 3.1875 5.75 3.1875 3.9 years
7/21/95 2,000 3.1875 8.50 3.1875 6 years
</TABLE>

Employment Agreements

Candela has entered into severance agreements with each of Messrs. Puorro,
Hsia, Broyer, Kelley and Caplan. Under our agreements with Messrs. Hsia,
Broyer, Kelley and Caplan, Candela has agreed to continue payment of their
respective base annual salaries over 12 months in the event that their services
for Candela are terminated for any reason except resignation. Under our
agreement with Mr. Puorro, in the event that his employment is terminated for
any reason, at either his election or Candela's election other than for just
cause, he will be entitled to receive severance payments equal to his base
annual salary for 12 months and then 50% of his base annual salary for an
additional 12 months. Mr. Puorro is subject to nonsolicitation and
noncompetition provisions for the period during which he receives severance
payments.

47
<PAGE>

PRINCIPAL AND SELLING SHAREHOLDERS

The following table sets forth certain information with respect to the
beneficial ownership of our common stock as of May 1, 1999, and as adjusted to
reflect the sale by us and selling shareholders of the shares offered hereby
with respect to: (i) each of our directors; (ii) each of the Named Executive
Officers; (iii) each stockholder known by us to be the beneficial owner of more
than 5% of our common stock; (iv) each selling stockholder; and (v) all
executive officers and directors as a group. Except as otherwise noted, the
persons or entities named in the table have sole voting and investment power
with respect to all the shares of common stock beneficially owned by them.

<TABLE>
<CAPTION>
Shares Beneficially Shares Beneficially
Owned Prior Owned After Number of Shares
Name and Address of to Offering Number of Offering Offered in the
Principal and Selling ----------------------Shares ----------------------- Over-Allotment
Shareholders Number Percent Offered Number Percent Option
- --------------------- ----------- ------------------ ------------ ---------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Gerard E. Puorro(2)..... 194,452 3.4% -- 194,452 2.7%
Theodore G. Johnson(3).. 68,349 1.2% -- 68,349 1.0%
Kenneth D. Roberts(4)... 66,500 1.2% -- 66,500 *
Douglas W. Scott(5)..... 28,750 * -- 28,750 *
Richard J. Cleveland,
M.D.(6)................ 33,197 * -- 33,197 *
Robert E. Dornbush(7)... 282,615 5.1% 282,615 -- --
Nancy Nager, R.N.,
B.S.N., M.S.N. ........ -- -- -- -- --
James C. Hsia, PhD.(8).. 104,672 1.9% -- 104,672 1.5%
William B. Kelley(9).... 25,500 * -- 25,500 *
Signatronics Asset
Holdings Private
Limited(10)............ 870,146 15.6% 870,146 -- --
506 Chai Chee Lane
Singapore 469026
William D. Witter,
Inc.(11)............... 1,349,182 24.4% -- 1,349,182 19.2%
153 East 53rd Street
New York, NY 10022
Massachusetts Capital
Resource Company(12)... 300,000 5.1 % 60,000 240,000 3.3%
Other Selling
Shareholders........... 122,239
All Directors and
Executive Officers as a
Group (14
Persons)(13)........... 839,062 13.9% 282,615 556,447 3.3%
</TABLE>
- --------
* Represents less than 1% of our outstanding common stock.
(1) Except as otherwise indicated, the persons named in the table have sole
voting and investment power with respect to all shares of common stock
beneficially owned by them. Pursuant to the rules of the Securities and
Exchange Commission the number of shares of common stock deemed
outstanding includes, for each person or group referred to in the table,
shares issuable pursuant to options held by the respective person or group
which may be exercised within 60 days after May 1, 1999.
(2) Includes 185,527 shares issuable pursuant to stock options exercisable
within the 60 day period following May 1, 1999.
(3) Includes 28,000 shares issuable pursuant to stock options exercisable
within the 60 day period following May 1, 1999.
(4) Includes 37,500 shares issuable pursuant to stock options exercisable
within the 60 day period following . Excludes 3,000 shares held by a trust
for the benefit of one of Mr. Roberts' children as to which Mr. Roberts
disclaims beneficial ownership.
(5) Includes 22,500 shares issuable pursuant to stock options exercisable
within the 60 day period following May 1, 1999.
(6) Includes 25,424 shares issuable pursuant to stock options exercisable
within the 60 day period following May 1, 1999.

48
<PAGE>

(7) Includes 22,500 shares issuable pursuant to stock options exercisable
within the 60 day period following May 1, 1999 and warrants to purchase
2,000 shares of Common Stock. Excludes 119,885 shares held by Kenan Greg
Loomis which, by virtue of their expectation that they are likely to act
in concert with respect to future transactions in our securities, each of
Messrs. Dornbush and Loomis may be deemed to own beneficially. However,
each of Messrs. Dornbush and Loomis disclaims voting power and investment
power over the securities of the Company owned by the other. Information
based on Amendment No. 2 to Schedule 13D, dated September 9, 1992, and
Amendment No. 6 to Schedule 13D, dated December 22, 1994 filed with the
Securities and Exchange Commission. Mr. Darnbush has informed us that he
will retire from our Board of Directors upon effectiveness of this
prospectus.
(8) Includes 73,000 shares issuable pursuant to stock options exercisable
within the 60 day period following May 1, 1999.
(9) Includes 69,000 shares issuable pursuant to stock options exercisable
within the 60 day period following May 1, 1999.
(10) Includes warrants to purchase 39,142 shares of common stock. Information
based on Amendment No. 3 to Schedule 13D, dated June 9, 1992 filed with
the Securities and Exchange Commission.
(11) Information based on Amendment No. 2 to Schedule 13D which was filed with
the Securities and Exchange Commission on January 30, 1998.
(12) Includes warrants to purchase 300,000 shares of common stock.
(13) Includes 505,726 shares subject to stock options exercisable within the 60
day period following May 1, 1999. Also includes warrants to purchase 2,000
shares of common stock.

49
<PAGE>

DESCRIPTION OF CAPITAL STOCK

Authorized Capital Stock

We are authorized by our Certificate of Incorporation, as amended, to issue
30,000,000 shares of common stock, par value $.01 per share. Effective at the
closing of this offering, approximately 7,040,000 shares of common stock will
be issued and outstanding. All of the shares of common stock that will be
outstanding immediately following this offering including the shares of common
stock sold in this offering, will be validly issued, fully paid and
nonassessable.

Common Stock

The holders of common stock are entitled to one vote for each share on all
matters to be voted on by our stockholders, including elections of directors,
and the holders of such shares will possess all voting power. The holders of
common stock will be entitled to such dividends as may be declared from time to
time by the Board from funds legally available therefor. In the event of our
dissolution, liquidation or winding up holders of our shares of common stock
will be entitled to receive, pro rata, all assets available for distribution to
such holders after payment of all liabilities. The holders of our common stock
have no preemptive rights to purchase newly issued securities.

Options

As of May 1, 1999, Candela had outstanding options to purchase up to an
aggregate of 995,730 shares of common stock at exercise prices ranging from
$1.50 to $14.50, of which 579,467 were then exercisable.

Warrants

In March 1992 we entered into a Warrant Agreement as part of a class action
settlement, pursuant to which we granted warrants to purchase an aggregate of
300,000 shares of our common stock, exercisable for $6.875 per share. The
warrants were registered with the SEC pursuant to a Registration Statement on
Form S-3 filed April 8, 1992. As of May 1, 1999 18,871 of these warrants had
been exercised. These warrants will expire if not exercised on or before
November 6, 2000.

In October 1998 Candela entered into a Note and Warrant Purchase Agreement
with Massachusetts Capital Resource Company, William D. Witter and Michael D.
Witter pursuant to which we granted them warrants to purchase an aggregate of
370,000 shares of our common stock at $4.00 per share. As of May 1, 1999 none
of these warrants have been exercised. These warrants will expire if not
exercised on or before October 31, 2006.

Registration Rights

Pursuant to a Stock Purchase Agreement dated November 17, 1988 and a Note
and Warrant Purchase Agreement dated October 15, 1998, certain of our
stockholders have the right to request that their shares be included in our
registration statements filed under the Securities Act of 1933. The managing
underwriter of any offering has the right to limit the number of shares that
stockholders may include in any registration statement. Such stockholders also
have the right, subject to various restrictions, to require us to file a
registration statement under the Securities Act of 1933 in which they may
include their shares. In addition to other limitations on this right,
stockholders may require us to effect no more than two registrations following
this offering.

Certain Provisions in Our Certificate and Bylaws

Our Bylaws provide that special meetings of the stockholders may be called
for any purpose, unless otherwise prescribed by statute or by the Certificate
of Incorporation, by the Chairman of the Board, or the

50
<PAGE>

President, and shall be called by the President or the Secretary at the written
request of a majority of the Board of Directors or of the stockholders owning a
majority of the outstanding shares of capital stock. Written notice of a
special meeting shall be given to each stockholder entitled to vote at such
meeting not less than ten and no more than sixty days prior to the meeting.

Our Bylaws also provide that the stockholders may remove a director by a
majority vote. New directors may be elected by majority of the remaining
directors then in office, by a sole remaining director or, if there are no
directors in office, by the stockholders at a special meeting of stockholders
called in accordance with the Bylaws.

Our Certificate of Incorporation offers our directors certain protections to
the extent permitted by Delaware law. Our directors are not liable to us or our
stockholders for monetary damages for a breach of fiduciary duty, except in
circumstances involving certain wrongful acts, such as the breach of a
director's duty of loyalty or acts or omissions which involve intentional
misconduct or a knowing violation of law. The Certificate obligates us to
indemnify our directors to the fullest extent permitted by the General
Corporation Law of Delaware. We believe that these provisions will assist us in
attracting and retaining qualified individuals to serve as directors.

Rights Plan

Our stockholder rights plan was adopted on September 4, 1992 and amended in
March 1996 and again in November 1998. Under the plan, we declared a dividend
of one common stock purchase right for each share of our common stock
outstanding on September 22, 1992. The rights are not currently exercisable,
but would become exercisable if certain triggering events occur, such as the
initiation of certain tender offers for our common stock. If such an event
occurred, qualifying stockholders would be initially entitled to purchase one
share of our common stock at an exercise price of $48 per share, subject to
adjustment. In the event that the rights were exercised after further
triggering events, each right would entitle holders to purchase, at the
exercise price then in effect, shares of our common stock (or other property,
under certain circumstances) having a value of twice the exercise price. Such
rights would not extend to any stockholder whose action triggered the rights.
We can, in certain circumstances, redeem the rights at $.005 each. The rights
expire on September 22, 2002, unless redeemed earlier by us.

The Rights Plan discourages hostile takeovers by effectively allowing our
stockholders to purchase additional shares of our common stock at a discount
following the hostile acquisition of a large block of our outstanding common
stock and by increasing the value of consideration to be received by
stockholders in specified transactions following such an acquisition.

Delaware Business Combination Statute

Section 203 of the DGCL provides that, subject to certain exceptions
specified therein, an "interested stockholder" of a Delaware corporation shall
not engage in any business combination, including mergers or consolidations or
acquisitions of additional shares of the corporation, with the corporation for
a three-year period following the date that such stockholder becomes an
interested stockholder unless (i) prior to such date, the Board of Directors of
the corporation approved either the business combination or the transaction
which resulted in the stockholder becoming an interested stockholder, (ii) upon
consummation of the transaction which resulted in the stockholder becoming an
"interested stockholder," the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced (excluding certain shares), or (iii) on or subsequent to such date,
the business combination is approved by the Board of Directors of the
corporation and authorized at an annual or special meeting of stockholders by
the affirmative vote of at least 66 2/3% of the outstanding voting stock which
is not owned by the interested stockholder. Except as otherwise specified in
Section 203, an interested stockholder is defined to include (x) any person
that is the owner of 15% or more of the outstanding voting stock of the
corporation, or is an affiliate or associate of the corporation and was the
owner of 15% or more of the outstanding voting stock of the corporation at any

51
<PAGE>

time within three years immediately prior to the date of determination and (y)
the affiliates and associates of any such person.

Under certain circumstances, Section 203 makes it more difficult for a
person who would be an interested stockholder to effect various business
combinations with a corporation for a three-year period. We have not elected to
be exempt from the restrictions imposed under Section 203. The provisions of
Section 203 may encourage persons interested in acquiring us to negotiate in
advance with our Board, since the stockholder approval requirement would be
avoided if a majority of the Directors then in office approves either the
business combination or the transaction which results in any such person
becoming an interested stockholder. Such provisions also may have the effect of
preventing changes in our management. It is possible that such provisions could
make it more difficult to accomplish transactions which our stockholders may
otherwise deem to be in their best interests.

Listing

The common stock is traded on the Nasdaq National Market under the trading
symbol "CLZR."

Transfer Agent and Registrar

The transfer agent for our common stock is BankBoston, N.A.

52
<PAGE>

UNDERWRITING

The underwriters named below, represented by Needham & Company, Inc. and
Tucker Anthony Cleary Gull (the Representatives), have severally agreed,
subject to the terms and conditions set forth in the Underwriting Agreement, to
purchase from us and the selling shareholders the number of shares of common
stock indicated below opposite their respective names at the public offering
price less the underwriting discount set forth on the cover page of this
prospectus. The Underwriting Agreement provides that the obligations of the
underwriters to pay for and accept delivery of such shares are subject to
certain conditions precedent, and that the underwriters are committed to
purchase all of such shares, if any are purchased.

<TABLE>
<CAPTION>
Number of
Underwriter Shares
----------- ---------
<S> <C>
Needham & Company, Inc.
Tucker Anthony Cleary Gull
---------
Total........................................................ 2,835,000
=========
</TABLE>

The Representatives have advised us that the underwriters initially propose
to offer the shares of common stock to the public on the terms set forth on the
cover page of this prospectus. The underwriters may allow to selected dealers
(who may include the underwriters) a concession of not more than $ per share,
and the underwriters may allow, and such dealers may reallow, a concession of
not more than $ per share to certain other dealers. After this offering, the
offering price and other selling terms may be changed by the Representatives.
We estimate that the total offering expenses, other than underwriting discounts
and commissions, will be $ .

Candela and certain selling shareholders have granted an option to the
underwriters, exercisable during the 30-day period after the date of this
prospectus, to purchase up to 425,250 additional shares of common stock at the
same price per share as the initial 2,835,000 shares to be purchased by the
underwriters. To the extent that the underwriters exercise this option, each of
the underwriters will be committed, subject to certain conditions, to purchase
such additional shares in approximately the same proportion as set forth in the
above table, and we and the selling stockholders will be obligated to sell such
shares to the underwriters. The underwriters may purchase such shares only to
cover over-allotments made in connection with this offering. If purchased, the
underwriters will offer such additional shares on the same terms as those on
which the 2,835,000 shares are being offered.

Our directors and officers, beneficially holding in the aggregate 556,447
shares of common stock after this offering, have agreed that, for a period of
days after the date of this prospectus, they will not, without the prior
written consent of Needham & Company, Inc., directly or indirectly sell, offer
to sell or otherwise dispose of any such shares of common stock or any right to
acquire such shares. In addition, we have agreed that, for a period of days
after the date of this prospectus, we will not, without the prior written
consent of Needham & Company, Inc., issue, offer, sell, grant options to
purchase or otherwise dispose of any of our equity securities or any other
securities convertible into or exchangeable for the common stock or other
equity security, other than the grant of options to purchase common stock or
the issuance of shares of common stock under our stock option and stock
purchase plans, and the issuance of shares of common stock pursuant to the
exercise of outstanding options and warrants.

The Underwriting Agreement provides that we indemnify the several
underwriters against certain liabilities, including civil liabilities under the
Securities Act of 1933, or will contribute to payments the underwriters may be
required to make arising from these types of liabilities.

In connection with this offering, certain underwriters and selling group
members (if any) or their respective affiliates who are qualifying registered
market makers on the Nasdaq National Market may engage in passive market making
transactions in our common stock on the Nasdaq National Market in accordance
with Rule M under the Securities Exchange Act of 1934 during the two business
day period before commencement

53
<PAGE>

of offers or sales of the common stock offered hereby. The passive market
making transactions must comply with applicable volume and price limits and be
identified as such. In general, a passive market maker may display its bid at a
price not in excess of the highest independent bid for the security; if all
independent bids are lowered below the passive market maker's bid, however,
such bid must then be lowered when certain purchase limits are exceeded.

The following table summarizes the compensation to be paid to the
underwriters by us and the selling shareholders and the expenses payable by us
and the selling shareholders.

<TABLE>
<CAPTION>
Total
-----------------------------
Without With
Per Share Over-Allotment Over-Allotment
--------- -------------- --------------
<S> <C> <C> <C>
Underwriting Discounts and Commis-
sions paid by us.................. $ $ $
Expenses payable by us............. $ $ $
Underwriting Discounts and Commis-
sions paid by selling sharehold-
ers............................... $ $ $
</TABLE>

LEGAL MATTERS

The validity of the common stock offered hereby will be passed upon for us
by Testa, Hurwitz & Thibeault, LLP, Boston, Massachusetts. Certain legal
matters in connection with this offering will be passed upon for the
underwriters by Choate, Hall & Stewart, Boston, Massachusetts.

EXPERTS

The consolidated financial statements of Candela Corporation as of June 27,
1998 and June 28, 1997 and for each of the three years in the period ended June
27, 1998, included in this Prospectus have been included so in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants given on the
authority of said firm as experts in accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

We are a public company and file annual, quarterly and special reports,
proxy statements and other information with the Securities and Exchange
Commission. You may read and copy any document we file at the SEC's public
reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. You can
request copies of these documents by writing to the SEC and paying a fee for
the copying cost. Please call the SEC at 1-800-SEC-0330 for more information
about the operation of the public reference room. Our SEC filings are also
available to the public at the SEC's website at www.sec.gov. In addition, you
can read and copy our SEC filings at the office of the National Association of
Securities Dealers, Inc. at 1735 K Street, Washington, DC 20006.

This prospectus is only part of a Registration Statement on Form S-1 that we
have filed with the SEC under the Securities Act of 1933 and therefore omits
certain information contained in the Registration Statement. We have also filed
exhibits and schedules with the Registration Statement that are excluded from
this prospectus, and you should refer to the applicable exhibit or schedule for
a complete description of any statement referring to any contract or other
document. You may:

. inspect a copy of the Registration Statement, including the exhibits and
schedules, without charge at the public reference room; or

. obtain a copy from the SEC upon payment of the fees prescribed by the
SEC.

54
<PAGE>

CANDELA CORPORATION

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants........................................ F-2
Consolidated Balance Sheets at March 27, 1999 (unaudited), June 27, 1998
and June 28, 1997....................................................... F-3
Consolidated Statements of Operations for the nine months ended March 27,
1999 (unaudited) and
March 28, 1998 (unaudited) and for the Years Ended June 27, 1998, June
28, 1997 and
June 29, 1996 .......................................................... F-4
Consolidated Statements of Stockholders' Equity for the Years Ended June
27, 1998, June 28, 1997 and June 29, 1996 and for the nine months ended
March 27, 1999 (unaudited) ............................................. F-5
Consolidated Statements of Cash Flows for the nine months ended March 27,
1999 (unaudited) and March 28, 1998 (unaudited) and for the Years Ended
June 27, 1998, June 28, 1997 and
June 29, 1996 .......................................................... F-6
Notes to Consolidated Financial Statements............................... F-7
</TABLE>

F-1
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and
Stockholders of Candela Corporation:

In our opinion, the accompanying consolidated balance sheets and related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of Candela
Corporation and its Subsidiaries at June 27, 1998 and June 28, 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended June 27, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.

/s/ PricewaterhouseCoopers LLP

Boston, Massachusetts
July 29, 1998, except for the information
in the first paragraph of Note 6,
for which the date is August 7, 1998

F-2
<PAGE>

CANDELA CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(dollars in thousands)

<TABLE>
<CAPTION>
March 27, June 27, June 28,
1999 1998 1997
----------- -------- --------
(unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents (Note 1)............ $ 8,059 $ 1,615 $ 2,674
Accounts receivable (net of allowance of $854
(unaudited), $1,038 and $197 in 1999, 1998
and 1997, respectively) (Notes 1 & 6)........ 9,922 8,419 8,848
Notes receivable.............................. 1,582 1,486 1,284
Inventories (Notes 1 & 3)..................... 6,809 7,241 6,776
Other current assets.......................... 1,174 200 522
------- -------- -------
Total current assets........................ 27,546 18,961 20,104
Property and equipment, net (Note 4)............ 2,533 3,120 3,523
Other assets.................................... 371 523 1,210
------- -------- -------
Total assets................................ $30,450 $ 22,604 $24,837
======= ======== =======
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable.............................. $ 4,574 $ 4,292 $ 5,879
Accrued payroll and related expenses.......... 1,889 1,319 833
Accrued warranty costs........................ 2,356 2,012 1,338
Income taxes payable.......................... 2,254 335 516
Restructuring reserve (Note 12)............... 1,640 1,995 0
Other accrued liabilities..................... 1,680 957 608
Lines of credit and short-term notes (Note
6)........................................... 0 3,052 1,000
Current portion of long-term debt (Note 6).... 489 597 827
Deferred income (Note 5)...................... 1,687 1,763 2,071
------- -------- -------
Total current liabilities................... 16,569 16,322 13,072
Long-term debt (Note 6)......................... 2,971 887 1,519
Commitments and contingencies (Note 6).......... -- -- --
Stockholders' equity (Note 8):
Common stock, $.01 par value: 30,000,000
shares authorized; 5,511,310 (unaudited),
5,479,020 and 5,419,913 shares issued and
outstanding in 1999, 1998 and 1997,
respectively................................. 55 55 54
Additional paid-in capital.................... 18,577 17,407 17,223
Accumulated deficit........................... (7,127) (11,337) (6,885)
Cumulative translation adjustment............. (595) (730) (146)
------- -------- -------
Total stockholders' equity.................. 10,910 5,395 10,246
------- -------- -------
Total liabilities and stockholders' equity.. $30,450 $ 22,604 $24,837
======= ======== =======
</TABLE>

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

F-3
<PAGE>

CANDELA CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)

<TABLE>
<CAPTION>
Nine months ended For the years ended
----------------------- -------------------------
June June June
March 27, March 28, 27, 28, 29,
1999 1998 1998 1997 1996
----------- ----------- ------- ------- -------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Revenue:
Laser and other product.. $31,254 $16,735 $25,917 $25,601 $20,403
Services and other....... 8,627 8,227 11,108 9,904 10,010
------- ------- ------- ------- -------
Total revenue.......... 39,881 24,962 37,025 35,505 30,413
Cost of sales:
Laser and other product.. 13,213 7,447 11,272 11,195 9,159
Services and other....... 5,780 6,653 9,435 7,455 7,674
------- ------- ------- ------- -------
Total cost of sales.... 18,993 14,100 20,707 18,650 16,833
------- ------- ------- ------- -------
Gross profit............... 20,888 10,862 16,318 16,855 13,580
Operating expenses:
Research and
development............. 2,381 1,979 2,399 2,488 1,818
Selling, general and
administrative.......... 12,131 11,421 15,271 13,680 9,873
Restructuring charge..... 0 2,609 2,609 0 0
------- ------- ------- ------- -------
Total operating
expenses.............. 14,512 16,009 20,279 16,168 11,691
------- ------- ------- ------- -------
Income (loss) from opera-
tions..................... 6,376 (5,147) (3,961) 687 1,889
Other income (expense)
Interest income.......... 60 29 42 84 93
Interest expense......... (377) (181) (235) (107) (49)
Other expense............ 91 (109) (123) (26) (207)
------- ------- ------- ------- -------
Total other expense...... (226) (261) (316) (49) (163)
------- ------- ------- ------- -------
Income (loss) before income
taxes..................... 6,150 (5,408) (4,277) 638 1,726
Provision for income tax-
es........................ 1,940 78 175 400 481
------- ------- ------- ------- -------
Net income (loss).......... $ 4,210 $(5,486) $(4,452) $ 238 $ 1,245
======= ======= ======= ======= =======
Basic earnings (loss) per
share..................... $ 0.77 $ (1.01) $ (0.81) $ 0.04 $ 0.23
Diluted earnings (loss) per
share..................... $ 0.72 $ (1.01) $ (0.81) $ 0.04 $ 0.22
======= ======= ======= ======= =======
Weighted average shares
outstanding............... 5,486 5,446 5,479 5,398 5,321
Adjusted weighted average
shares outstanding........ 5,841 5,446 5,479 5,673 5,652
======= ======= ======= ======= =======
</TABLE>

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

F-4
<PAGE>

CANDELA CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)

<TABLE>
<CAPTION>
Treasury
Common Stock Additional Stock Cumulative
-------------- Paid-in Accumulated -------------- Translation
Shares Amount Capital (Deficit) Shares Amount Adjustment Total
------ ------ ---------- ----------- ------ ------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1995... 5,496 $54 $18,349 $ (8,294) (197) $(1,574) $ 551 $ 9,086
Sale of common stock un-
der stock plans........ 86 1 244 245
Dividend paid by Le
Pli.................... (26) (26)
Net income.............. 1,245 1,245
Retirement of Treasury
Stock.................. (197) (2) (1,572) 197 1,574 0
Conversion of Spa
Management, Inc. to a
C-Corporation.......... 48 (48) 0
Currency translation
adjustment............. (585) (585)
----- --- ------- -------- ---- ------- ----- -------
Balance at June 29,
1996................... 5,385 53 17,069 (7,123) 0 0 (34) 9,965
Sale of common stock un-
der stock plans........ 35 1 154 155
Net income.............. 238 238
Currency translation
adjustment............. (112) (112)
----- --- ------- -------- ---- ------- ----- -------
Balance at June 28,
1997................... 5,420 54 17,223 (6,885) 0 0 (146) 10,246
Sale of common stock un-
der stock plans........ 59 1 184 185
Net loss................ (4,452) (4,452)
Currency translation
adjustment............. (584) (584)
----- --- ------- -------- ---- ------- ----- -------
Balance at June 27,
1998................... 5,479 55 17,407 (11,337) 0 0 (730) 5,395
Sale of common stock
under stock plans
(unaudited)............ 32 90 90
Issuance of warrants
(unaudited)............ 1,080 1,080
Net income (unaudited).. 4,210 4,210
Currency translation
adjustment
(unaudited)............ 135 135
----- --- ------- -------- ---- ------- ----- -------
Balance at March 27,
1999 (unaudited)....... 5,511 $55 $18,577 $ (7,127) 0 $ 0 $(595) $10,910
===== === ======= ======== ==== ======= ===== =======
</TABLE>

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

F-5
<PAGE>

CANDELA CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

<TABLE>
<CAPTION>
Nine months ended For the Years ended
----------------------- -------------------------
June June June
March 27, March 28, 27, 28, 29,
1999 1998 1998 1997 1996
----------- ----------- ------- ------- -------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss).......... $4,210 $(5,486) $(4,452) $ 238 $ 1,245
Adjustments to reconcile
net income (loss) to net
cash provided by (used
for) operating activities:
Depreciation and
amortization............. 589 586 815 666 475
Provision for bad debts... 72 790 844 36 36
Provision for
restructuring charges.... -- 2,609 2,609 -- --
Accretion of interest on
debt discount............ 52 -- -- -- --
Gain on disposal of
equipment................ -- -- -- -- (8)
Increase (decrease) in cash
from working capital:
Accounts receivable....... (944) 1,343 (950) (2,628) (1,945)
Notes receivable.......... (175) 79 (434) 620 (545)
Inventories............... 540 (1,550) (810) (1,216) (590)
Other current assets...... (979) 40 314 (188) 74
Other assets.............. (32) 583 664 (529) (171)
Accounts payable.......... (179) (88) (1,046) 2,945 1,552
Accrued payroll and
related expenses......... 511 (60) 491 88 130
Deferred income........... (129) (260) (241) 145 315
Accrued warranty costs.... 340 36 683 445 278
Income taxes payable...... 1,944 (388) (154) 181 (222)
Restructuring reserve..... (356) (484) (501) 0 0
Other accrued
liabilities.............. 996 640 303 (395) 90
------ ------- ------- ------- -------
Net cash provided by
(used for) operating
activities............. 6,460 (1,690) (1,865) 408 714
Cash flows from investing
activities:
Proceeds from sale of
assets................... 99 15 24 50 10
Purchases of property and
equipment................ (112) (185) (401) (1,867) (377)
------ ------- ------- ------- -------
Net cash provided by (used
for) investing activities.. (13) (170) (377) (1,817) (367)
Cash flows from financing
activities:
Net borrowings from lines
of credit................ (2,700) 950 1,700 1,000 --
Proceeds from issuance of
debt..................... 3,700 -- 480 655 479
Principal payments on
debt..................... (627) (468) (441) (422) (225)
Payments of capital lease
obligations.............. (346) (200) (390) (258) (125)
Proceeds from issuance of
common stock............. 90 164 184 155 294
Payment of dividends...... -- -- -- -- (26)
------ ------- ------- ------- -------
Net cash provided by (used
for) financing activities.. (117) 446 1,533 1,130 397
Effect of exchange rate
changes on cash and cash
equivalents................ (120) (120) (350) (88) (268)
------ ------- ------- ------- -------
Net increase (decrease) in
cash and cash equivalents.. 6,444 (1,534) (1,059) (367) 476
Cash and cash equivalents at
beginning of period........ 1,615 2,674 2,674 3,041 2,565
------ ------- ------- ------- -------
Cash and cash equivalents at
end of period.............. $8,059 $ 1,140 $ 1,615 $ 2,674 $ 3,041
====== ======= ======= ======= =======
Cash paid during the period
for:
Interest.................. $ 264 $ 181 $ 235 $ 107 $ 50
Income taxes.............. $ 21 $ 259 $ 356 $ 492 $ 807
</TABLE>

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

F-6
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

Basis of Presentation

The consolidated financial statements include the accounts of Candela
Corporation and its wholly-owned subsidiaries. All intercompany accounts and
transactions have been eliminated. In August 1995, the Company incorporated a
wholly-owned subsidiary, Candela Skin Care Centers, Inc. (CSCC). In June 1996,
the Company acquired all of the outstanding capital stock of Spa Management,
Inc. which was accounted for using the pooling of interests method of
accounting. (See Note 2)

The Company's fiscal year ends on the Saturday nearest June 30.

Use of Estimates

The presentation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. It is the belief of the Company's management that all
necessary adjustments have been made for a proper presentation of results.
Actual results could differ from those estimates and impact future results of
operations and cash flows.

Cash and Cash Equivalents

The Company classifies investments purchased with a maturity at the date of
acquisition of three months or less as cash equivalents. These are valued at
cash plus accrued interest which approximates market value. At March 27, 1999,
June 27, 1998 and June 28, 1997, substantially all cash equivalents were
invested in overnight Repurchase Agreements or U.S. Treasury Bills with a major
bank.

Financial Instruments

The Company operates internationally, with sales offices, customers, and
vendors in several countries outside of the United States. The Company may
reduce its exposure to fluctuations in foreign exchange rates by creating
offsetting positions through the use of foreign currency forward contracts, a
type of derivative financial instrument. Foreign currency exposures are
accounted for on an accrual basis. The Company does not use derivative
financial instruments for trading or speculative purposes, nor is the Company a
party to leveraged derivatives.

At March 27, 1999, the Company held foreign currency forward contracts with
notional value totaling approximately $1,914,000 (228,556,000 Japanese Yen)
(unaudited) compared to forward contracts with a value of $1,352,000
(172,951,000 Japanese Yen) (unaudited) held at March 28, 1998. These contracts
have maturity dates prior to July 22, 1999. The carrying and net fair value of
these contracts at March 27, 1999, was $0 and $14,000 (unaudited),
respectively, compared to $0 and $25,000 respectively (unaudited), at March 28,
1998.

At June 27, 1998 the Company held foreign currency forward contracts with
notional value totaling approximately $1,386,000 (183,687,568 Japanese Yen)
compared to $500,000 (58,625,000 Japanese Yen) at June 28, 1997. These
contracts have maturities prior to October 19, 1998. The carrying and net fair
value of these contracts at June 27, 1998 was $0 and $127,000, respectively,
compared to $0 and $12,000, respectively, at June 28, 1997.

Accounts Receivable and Notes Receivable

The Company's trade accounts receivables and notes receivables are primarily
from sales to end users and distributors servicing the dermatology and urology
markets, and reflect a broad domestic and international customer base. The
Company does not require collateral and has not historically experienced
significant credit losses related to receivables from individual customers or
groups of customers in any particular industry or geographic area.

F-7
<PAGE>

Inventory

Inventory is stated at the lower of cost (first-in, first-out method) or
market, using a standard costing system.

Property and Equipment

Purchased property and equipment is recorded at cost. Property and equipment
purchased under capital lease arrangements is recorded at the lesser of cost or
the present value of the minimum lease payments required during the lease
period. Laser systems used for testing are capitalized at cost. Significant
improvements are capitalized; maintenance and repairs are charged to expense as
incurred. Upon sale or retirement of property and equipment, the costs and
accumulated depreciation are removed from the accounts and any resulting gain
or loss is included in income from operations. Depreciation and amortization
are provided using the straight-line method over estimated useful lives as
follows:

<TABLE>
<CAPTION>
Number of Years
---------------
<S> <C>
Leasehold improvements and assets under capital lease........ 2 to 5
Office furniture and other equipment......................... 3 to 5
Laser systems................................................ 3
</TABLE>

Revenue Recognition

Product sales--Revenue from product sales, except sales to certain
distributors, are recognized at the time of shipment. Shipments made to
distributors, for which payment to the Company is dependent on resale of the
system, are not recognized as revenue unless the distributor demonstrates that
the system is sold.

Grants--Revenue from U.S. government contracts granted under the Small
Business Innovation Research program. Government contracts limit reimbursement
to 100% of allowable direct costs and a negotiated rate for indirect costs. The
revenue is recognized as reimbursable costs are incurred.

Service--Revenue from the sale of service contracts is deferred and
recognized on a straight-line basis over the contract period. Revenue from
service administered through CSCC is recognized as the services are provided.
Amounts received from the sale of gift certificates by CSCC are deferred and
recognized as revenue when the services are provided.

Research and Development

Research and development costs are expensed as incurred.

Foreign Currency Translation

The financial statements of the Company's foreign subsidiaries are
translated into U.S. dollars in accordance with Statement of Financial
Accounting Standards (SFAS) No. 52, "Foreign Currency Translation." Assets and
liabilities are translated into U.S. dollars at current exchange rates, while
income and expense items are translated at average rates of exchange prevailing
during the year. Exchange gains and losses arising from translation of the
Japanese and Spanish subsidiary balance sheets are accumulated as a separate
component of stockholders' equity. Net exchange (gains) losses resulting from
foreign currency transactions amounted to $(58,000) (unaudited), $138,000,
$60,000 and $420,000 for the nine months ended March 27, 1999, and for the
fiscal years 1998, 1997 and 1996, respectively, and are included in other
expense.

Product Warranty Costs

The length of the Company's warranty on end user sales of medical devices is
generally one year on parts and labor. Distributor sales generally include a
parts warranty only. Estimated future costs for initial product warranties are
provided for at the time of sale.

F-8
<PAGE>

Earnings (Loss) Per Share

In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings per
Share" ("SFAS 128"). SFAS 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share exclude any dilutive
effects of options, warrants and convertible securities. Diluted earnings per
share is similar to the previously reported fully diluted earnings per share.
All earnings (loss) per share amounts have been restated to conform with SFAS
128 requirements.

<TABLE>
<CAPTION>
For the nine months ended For the years ended
----------------------------- ---------------------------
March 27, March 28,
1999 1998 June 27, June 28, June 29,
(unaudited) (unaudited) 1998 1997 1996
------------ ------------- -------- -------- --------
(numbers in thousands except per share amounts)
<S> <C> <C> <C> <C> <C>
NUMERATOR
Net income(loss)........ $4,210 $ (5,486) $(4,452) $ 238 $1,245
============ ============= ======= ====== ======
DENOMINATOR
BASIC EARNINGS PER SHARE
Weighted average shares
outstanding............ 5,486 5,446 5,479 5,398 5,321
------------ ------------- ------- ------ ------
Earnings (loss) per
share.................. $ 0.77 $ (1.01) $ (0.81) $ 0.04 $ 0.23
============ ============= ======= ====== ======
DILUTED EARNINGS PER
SHARE
Weighted average shares
outstanding............ 5,486 5,446 5,479 5,398 5,321
Effect of dilutive
warrants............... 103 0 0 0 0
Effect of dilutive
options................ 252 0 0 275 331
------------ ------------- ------- ------ ------
Adjusted weighted
average shares
outstanding............ 5,841 5,446 5,479 5,673 5,652
------------ ------------- ------- ------ ------
Earnings (loss) per
share.................. $ 0.72 $ (1.01) $ (0.81) $ 0.04 $ 0.22
============ ============= ======= ====== ======
Dilutive options under
FAS 128................ 56 9
============= =======
</TABLE>

Accounting for Stock-Based Compensation

The company has elected the disclosure-only alternative permitted under SFAS
123, "Accounting for Stock-Based Compensation" ("SFAS 123"). The Company has
disclosed herein pro forma net income and pro forma earnings per share in the
footnotes using the fair value based method for fiscal 1998, 1997, and 1996.

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 July 3, 1999.

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. Management believes
that the Company operates in two segments, laser and other products and related
services, and skin care centers.

F-9
<PAGE>

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 for the nine months ended March 27, 1999, it would have
increased assets and liabilities equal to the notional amount of forward
currency contracts held by the Company in the amount of $1,914,000 (unaudited),
and there would have been no material impact on the statements of operations.

Unaudited Interim Financial Information

The consolidated financial statements of the Company as of March 27, 1999
and for the nine months ended March 27, 1999 and March 28, 1998 are unaudited.
All adjustments (consisting only of normal recurring adjustments) have been
made, which in the opinion of management, are necessary for a fair
presentation. Results of operations for the nine months ended March 27, 1999
are not necessarily indicative of the results that may be expected for the year
ending July 3, 1999 or for any other future period.

2. Pooling of Interests

On June 27, 1996, the Company acquired all of the outstanding shares of
capital stock of Spa Management, Inc. The acquisition was effected through an
exchange of 60,317 shares of the Company's common stock for all of the
outstanding shares of capital stock of Spa Management, Inc. This transaction
has been accounted for using the pooling of interests method of accounting. Spa
Management, Inc., d/b/a Le Pli at the Heritage (Le Pli) was formed in May 1994,
and is a Boston-based health spa with approximately 60 employees at the time of
acquisition and specializes in personal care and health and beauty services. Le
Pli (currently operating as Candela Skin Care Center of Boston, Inc.) operates
as a wholly-owned subsidiary of CSCC.

The following information presents certain income statement data of Candela
Corporation and Spa Management, Inc. for the periods prior to the acquisition.
The acquisition was substantially coincident with the fiscal year end close.

<TABLE>
<CAPTION>
Candela Spa
Corporation Management, Inc. Total
----------- ---------------- -------
(in thousands)
<S> <C> <C> <C>
Revenue for:
Year ending June 29, 1996............ $28,434 $1,979 $30,413
Net Income (Loss) for:
Year ending June 29, 1996............ $ 1,210 $ 35 $ 1,245
</TABLE>

The accompanying consolidated financial statements of the Company have been
prepared to give retroactive effect to the acquisition of Le Pli. All prior
period historical consolidated financial statements presented herein have been
restated to include the financial position, results of operations, and cash
flows of Le Pli.

F-10
<PAGE>

3. Inventories

Inventories consist of the following (in thousands):

<TABLE>
<CAPTION>
March 27,
1999 June 27, June 28,
(unaudited) 1998 1997
----------- -------- --------
<S> <C> <C> <C>
Raw materials.................................. $2,348 $3,110 $2,429
Work in process................................ 1,833 1,062 1,023
Finished goods................................. 2,628 3,069 3,324
------ ------ ------
$6,809 $7,241 $6,776
====== ====== ======
</TABLE>

4. Property and Equipment

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

<TABLE>
<CAPTION>
March 27,
1999 June 27, June 28,
(unaudited) 1998 1997
----------- -------- --------
<S> <C> <C> <C>
Leasehold improvements....................... $2,067 $2,033 $2,014
Office furniture............................. 888 819 1,064
Laser systems................................ 483 483 483
Computers and other equipment................ 4,169 4,544 4,271
------ ------ ------
7,067 7,879 7,832
Less accumulated depreciation and
amortization................................ 5,074 4,759 4,309
------ ------ ------
Property and equipment, net.................. $2,533 $3,120 $3,523
====== ====== ======
</TABLE>

Depreciation expense was approximately $405,000 (unaudited), $684,000,
$616,000, and $552,000 for the nine months ended March 27, 1999, fiscal 1998,
1997 and 1996, respectively.

Assets under capital lease obligations of $1,156,000 (unaudited), $1,648,000
and $1,747,000 are included in property and equipment at March 27, 1999, June
27, 1998 and June 28, 1997, respectively. Accumulated depreciation on these
assets was $788,000 (unaudited), $818,000 and $769,000 at March 27, 1999, June
27, 1998 and June 28, 1997, respectively.

5. Deferred Income

Deferred income consists of the following (in thousands):

<TABLE>
<CAPTION>
March 27,
1999 June 27, June 28,
(unaudited) 1998 1997
------------ -------- --------
<S> <C> <C> <C>
Service contract revenue......................... $ 712 $1,026 $1,243
Gift certificate revenue......................... 508 343 362
Other............................................ 467 394 466
------ ------ ------
$1,687 $1,763 $2,071
====== ====== ======
</TABLE>

6. Debt and Lease Obligations

Debt (unaudited)

On October 15, 1998, we issued eight-year, 9.75% subordinated term notes to
three investors in the aggregate amount of $3.7 million. The notes become due
in October, 2006, and require quarterly interest payments. In addition, we
issued warrants to purchase 370,000 shares of common stock to the note holders
which have an exercise price of $4.00 per share. The relative fair value
ascribed to the warrants is $1.1 million (measured as of the date of issuance).
The relative fair value of the warrants has been recorded as a component

F-11
<PAGE>

of Additional Paid-In Capital. The relative fair value of the debt was recorded
as $2.6 million. Interest expense of $1.1 million will be accreted to debt over
the eight-year life of the debt to bring the value of that debt to its $3.7
million face value.

On October 22, 1998, $2,700,000 of the note proceeds was used to retire the
full amount then outstanding on the Company's line of credit. In December,
1998, this line of credit was renewed to expire on December 1, 1999, bearing
interest at the bank's prime lending rate and collateralized by domestic
accounts receivable, inventories, and a pledge of subsidiary stock. At March
27, 1999, there were no borrowings outstanding on this line of credit and no
amounts were drawn from the line during the period.

Line of Credit

In February 1997, the Company obtained a renewable $3,500,000 revolving
credit agreement with a bank with interest at 1% over the bank's prime lending
rate (9.5%) at June 27, 1998). This line of credit is collateralized by all
tangible and intangible assets plus international accounts receivable covered
by credit insurance, and the pledge of stock of CSCC. The agreement contains
restrictive covenants establishing maximum leverage, certain minimum ratios and
minimum levels of net income. At June 27, 1998 the Company was in violation of
one of the minimum ratio covenants. On August 7, 1998, the lender waived its
rights under the agreement for the violation for the period ended June 30,
1998. As of June 27, 1998, the Company had utilized $2,700,000 of the line of
credit compared to $1,000,000 as of June 28, 1997. This line of credit expires
on December 1, 1998.

The Company's experience has been to renew its bank financing arrangement
annually, and management believes the Company will be able to renew the above
line of credit on acceptable terms, however there is no assurance that they
will be successful. In addition, the Company continues to evaluate alternative
sources of financing, including both debt and equity arrangements, to ensure
the Company has sufficient liquidity to fund operations throughout the next
year. Should these alternatives not be possible, there could be material
adverse implications for the Company's financial position and operations.

Short-term Debt

In June 1998, the Company obtained a term bank loan denominated in
50,000,000 Japanese Yen($355,467), secured by a customer note receivable,
bearing interest at 1.825% per annum with payment of interest in advance. The
amount due at June 27, 1998, was $352,000, converted at the year-end exchange
rate. The principal became due and was paid in August 1998.

Long-term Debt

The Company's long-term debt consists of the following (dollars in
thousands):

<TABLE>
<CAPTION>
March 27, June 27, June 28,
1999 (unaudited) 1998 1997
---------------- -------- --------
<S> <C> <C> <C>
Unsecured term bank loan denominated in
60,000,000 Japanese Yen; interest at 1.95%
per annum; quarterly payments of principal
and interest through March 1998........... $ 0 $ 0 $ 196
Unsecured term bank loan denominated in
75,000,000 Japanese yen; interest at
1.745% per annum; quarterly payments of
principal and interest through September
1999...................................... 139 294 655
Obligations under capital leases with
options to purchase equipment; interest
from 5.8% to 12.31% per annum; payments of
principal and interest through March
2001...................................... 649 1,190 1,495
Subordinated notes, eight-year term, 9.75%
interest rate, quarterly interest payments
due through December 31, 2006
(unaudited)............................... 2,672 0 0
------ ------ ------
3,460 1,484 2,346
Less current portion....................... 489 597 827
------ ------ ------
Total long-term debt..................... $2,971 $ 887 $1,519
====== ====== ======
</TABLE>

F-12
<PAGE>

Lease Commitments

The Company leases several facilities and automobiles under noncancellable
lease arrangements. The facility leases may be adjusted for increases in
maintenance and insurance costs above specified levels. In addition, certain
facility leases contain escalation provisions based on certain specified
criteria, and one lease calls for the payment of additional rent based on a
percentage of gross revenues above a base gross sales level for that particular
location. These operating leases expire in various years through 2009. These
leases may be renewed for periods ranging from one to five years.

Future minimum lease payments under noncancellable operating leases with
initial terms of one year or more consisted of the following at June 27, 1998:

<TABLE>
<CAPTION>
(in thousands)
<S> <C>
1999.......................................................... $ 788
2000.......................................................... 647
2001.......................................................... 645
2002.......................................................... 489
2003.......................................................... 407
Thereafter.................................................... 894
------
Total minimum lease payments................................ $3,870
======
</TABLE>

Total rent expense was approximately $632,000 (unaudited), $848,000,
$772,000 and $607,000 for the nine months ended March 27, 1999, and for the
fiscal years 1998, 1997 and 1996, respectively.

The Company had additions to capital lease obligations of approximately $0
(unaudited), $84,000, $1,240,000, and $400,000 in the nine months ended March
27, 1999, and for the fiscal years 1998, 1997, and 1996 respectively, for the
acquisition of certain equipment. These obligations are collateralized by the
related equipment.

Cash paid for interest, including interest on capital lease obligations,
totaled approximately $265,000 (unaudited), $235,000, $107,000 and $50,000 for
the nine months ended March 27, 1999, and for the fiscal years 1998, 1997, and
1996 respectively.

As of June 27, 1998, the Company's approximate minimum payment requirements
under debt and capital lease obligations are as follows (in thousands):

<TABLE>
<CAPTION>
Fiscal
------
<S> <C>
1999................................................................. $3,742
2000................................................................. 516
2001................................................................. 333
2002................................................................. 125
------
Total minimum payments............................................... 4,716
Less interest........................................................ 180
------
Present value of minimum payments.................................... 4,536
Less current portion................................................. 3,649
------
Long-term obligations................................................ $ 887
======
</TABLE>

F-13
<PAGE>

7. Stockholders' Equity

Stock Plans

1985, 1987 and 1989 Candela Corporation Stock Option Plans

The 1985, 1987 and 1989 Stock Option Plans (the "Plans") provide for the
granting of incentive stock options to employees for the purchase of common
stock at an exercise price not less than the fair market value of the stock on
the date of grant. The 1987 and 1989 Stock Option Plans also provide for the
granting of non-qualified stock options. The options generally become
exercisable ratably over two or four years from the date of grant and expire
ten years from the date of the grant. The maximum number of shares for which
options may be granted under the 1989 Plan is 1,000,000 shares. The Board of
Directors has terminated the granting of options under the 1985 and 1987 plans.
On July 21, 1995, the Board of Directors approved the repricing of certain
previously outstanding stock options. Options outstanding at prices ranging
from $5.50 to $14.00 were amended to $3.1875, the fair market value of the
stock on that date. In November 1995, the shareholders approved an increase in
the number of shares under the 1989 Plan of 250,000 shares, changing the
maximum number of shares that may be granted to 1,000,000. On April 28, 1998,
the Board of Directors approved the repricing of certain outstanding stock
options priced at $8.75 and $8.125. The exercise price of these options was
amended to $3.25, the fair market value of the stock on that date.

1996 Candela Skin Care Center Inc. Stock Option Plan

During fiscal year 1996, CSCC adopted the 1996 Incentive and Non-Statutory
Stock Option Plan under which options may be granted enabling the purchase, at
a price not less than the fair market value, of the common stock on the date of
grant for incentive stock options and at a price of not less than the par value
of the common stock for non-qualified stock options. Options granted under this
plan become exercisable at different rates over one to four years from the date
of grant and expire ten years from the date of grant. As of June 27, 1998,
there were no options to purchase shares of the subsidiary's common stock
outstanding compared to 188,000 at June 28, 1997. All such options were issued
with an exercise price equal to the fair market value of the subsidiary's
common stock on the date of grant. During fiscal year 1998, the Board of
Directors of Candela Corporation approved the conversion of all outstanding
CSCC stock options to Candela Corporation stock options. CSCC options were
converted at the rate of 0.21053 Candela Corporation options for each CSCC
option. At the time of the conversion there were options for 193,000 shares
outstanding which converted to options for 40,634 Candela Corporation shares at
$4.75 per share, the fair market value of Candela Corporation stock on the date
of the conversion.

1990 and 1993 Candela Corporation Non-Employee Director Stock Option Plans

The 1990 and 1993 Non-Employee Director Stock Option Plans provide for the
issuance of options for the purchase of up to 60,000 and 80,000 shares of
common stock, respectively. Under these plans, each director who is neither an
employee nor an officer receives a one-time grant of an option to purchase
10,000 shares of common stock at an exercise price equal to the fair market
value of the common stock on the date of grant. Under the 1990 and 1993 Plans
options become exercisable in equal amounts over a period of four and two
years, respectively. Shares under these Plans expire four and ten years,
respectively, after the date of grant and are nontransferable.

F-14
<PAGE>

The following is a summary of stock option activity under these Plans:

<TABLE>
<CAPTION>
Weighted Average
Number of Exercise Price
Shares Option Price Per Share
--------- --------------- ----------------
<S> <C> <C> <C>
Balance at July 1, 1995........ 752,271 $4.8100
Granted........................ 211,693 $3.1875-$ 9.875 $4.2092
Exercised...................... (72,896) $ 6.50-$ 9.625 $3.2015
Canceled....................... (232,965) $ 2.00-$15.50 $6.6946
--------
Balance at June 29, 1996....... 658,103 $4.1300
Granted........................ 296,500 $ 4.88-$8.63 $6.9343
Exercised...................... (22,591) $ 2.00-$7.25 $3.0484
Canceled....................... (70,755) $ 2.00-$9.875 $6.8645
--------
Balance at June 28, 1997....... 861,257 $4.8800
Granted........................ 243,867 $ 3.25-$4.75 $4.1028
Exercised...................... (43,891) $ 2.75-$3.375 $3.1202
Canceled....................... (269,973) $ 2.75-$9.875 $7.0516
--------
Balance at June 27, 1998....... 791,260
========
Options available for grant at
June 27, 1998................. 163,970
========
</TABLE>

The following table summarizes information about stock options under the
Option Plans outstanding at June 27, 1998:

<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------- -------------------------------
Weighted Average
--------------------------- Weighted Weighted
Number Remaining Average Number Average
Outstanding at Contractual Exercise as of Exercise
Range of Exercise Prices June 27, 1998 Life (years) Price June 27, 1998 Price
------------------------ -------------- ------------ -------- ------------- --------
<S> <C> <C> <C> <C> <C>
$1.50-$ 3.1875.......... 237,796 5.01 $ 2.8315 200,296 $2.8561
$3.25-$ 3.3750.......... 244,330 5.94 $ 3.3249 180,830 $3.3418
$3.4375-$ 5.7500........ 242,434 8.37 $ 4.9382 68,511 $4.8587
$6.1875-$14.5000........ 66,700 6.19 $ 7.2007 47,950 $ 7.083
------- -------
$1.50-$14.5000.......... 791,260 6.50 $ 3.9976 497,587 $3.7157
======= =======
</TABLE>

The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations in accounting for
its option plans. Accordingly, no compensation expense has been recognized for
options granted to employees and directors of the Company. Had compensation
expense for the Company's stock option plans and employee stock purchase plan
been determined based on the fair value at the grant date for awards under
these plans consistent with the methodology prescribed under SFAS No. 123, the
Company's net income and net income per share would have been reduced by
$45,000, or $.01 per share in 1998, $416,000 or $.08 per share in 1997, and
$250,000 or $.04 per share in 1996. The weighted average fair value of the
options granted under the stock option plans and the shares issued under the
employee stock purchase plan for 1998 and 1997, calculated using the Black
Scholes pricing model, was $2.49, $4.93 and $2.77 per share, respectively. The
following assumptions were used in the Black Scholes pricing model for options
granted in 1998, 1997 and 1996, respectively:

<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
risk-free interest rate................ 5.95% 5.93% 5.93%
estimated volatility................... 83% 85% 85%
an expected life for stock options..... six years six years six years
an expected life for stock purchase
plan.................................. six months six months six months
expected dividends..................... none none none
</TABLE>

F-15
<PAGE>

The effects of applying SFAS No. 123 in this pro-forma disclosure are not
indicative of the pro-forma effect on net income in future years because SFAS
No. 123 does not take into consideration pro-forma expenses related to options
granted prior to 1996.

1990 Candela Corporation Employee Stock Purchase Plan

The 1990 Employee Stock Purchase Plan provides for the sale of up to 500,000
shares of common stock to eligible employees. The shares are issuable at the
lesser of 85% of the average market price on the first or last day of
semiannual periods. Substantially all full-time employees are eligible to
participate in the plan.

The following is a summary of shares issued under this plan:

<TABLE>
<CAPTION>
Range of
Shares Price per share
------ ---------------
<S> <C> <C>
1996............................................... 12,594 $1.75--$4.50
1997............................................... 11,483 $ 5.00
1998............................................... 15,216 $2.50--$3.75
</TABLE>

Reserved Shares

The Company has reserved 1,425,186 shares of common stock for issuance under
its stock plans.

Candela Corporation Common Stock Warrants

In connection with a litigation settlement in January 1991, the Company
authorized warrants to purchase 300,000 shares of common stock in March 1992.
The exercise price for the warrants is $6.875 per share, the fair market value
of the Company's common stock on the date of the settlement. These warrants
will expire in November 2000. There were 282,182 warrants issued in December,
1992. During 1997, 199 warrants were exercised. No warrants were exercised
during fiscal 1998, 1996 or 1995. There were 281,983 warrants outstanding at
June 27, 1998.

Candela Corporation Stockholder Rights Plan

On September 4, 1992, the Company adopted a Stockholder Rights Plan under
which it declared a dividend of one common stock purchase Right for each share
of the Company's common stock outstanding on September 22, 1992. The Rights are
not currently exercisable, but would become exercisable if certain triggering
events occur, such as the initiation of certain tender offers for the Company's
common stock. If such an event occurs, each Right would initially entitle
shareholders to purchase one share of the Company's common stock at an exercise
price of $48 per share, subject to adjustment. In the event that the Rights are
exercised after further triggering events, each Right would entitle holders to
purchase, for the exercise price then in effect, shares of the Company's common
stock (or other property, under certain circumstances) having a value of twice
the exercise price.

Such Rights do not extend to any shareholders whose action triggered the
Rights. The Company can in certain circumstances redeem the Rights at $.005 per
Right. The Rights expire on September 22, 2002, unless redeemed earlier by the
Company.

Authorized Shares

The total authorized shares is 30,000,000 as authorized at the 1995 annual
meeting.

Dividends

Dividend distributions made by Le Pli prior to the acquisition, were
principally for reimbursement of income tax liabilities of its former
stockholders due to Le Pli's S-Corporation tax status. The Company currently
intends to retain future earnings for use in its business and, therefore, does
not expect to pay dividends in the foreseeable future.

F-16
<PAGE>

8. Income Taxes

The components of income before income taxes and the related provision for
income taxes consists of the following for fiscal 1998, 1997 and 1996 (in
thousands):

<TABLE>
<CAPTION>
1998 1997 1996
------- ---- ------
<S> <C> <C> <C>
Income (loss) before income taxes:
Domestic............................................ $(4,686) $(46) $ 698
Foreign............................................. 409 684 1,028
------- ---- ------
$(4,277) $638 $1,726
======= ==== ======
Provision for income taxes:
Current provision:
Federal........................................... $ -- $-- $ 75
State............................................. 26 19 10
Foreign........................................... 149 381 396
------- ---- ------
Total provision for income taxes................ $ 175 $400 $ 481
======= ==== ======
</TABLE>

The components of the Company's deferred tax assets consist of the
following at June 27, 1998 and June 28, 1997 (in thousands):

<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Federal and state net operating loss carryforwards......... $ 607 $ 660
Federal and state tax credit carryforwards................. 1,816 1,630
Inventory valuation reserves............................... 787 736
Warranty reserve........................................... 771 498
Deferred revenue........................................... 352 174
Intercompany profit........................................ 265 335
Bad debt reserve........................................... 393 59
Restructuring reserve...................................... 798 --
Pre-opening expense........................................ 349 --
Other...................................................... 89 21
------- -------
Gross deferred tax asset................................... 6,227 4,113
Valuation allowance........................................ (6,227) (4,113)
------- -------
Net deferred tax assets.................................... $ 0 $ 0
======= =======
</TABLE>

A reconciliation from the federal statutory tax rate to the effective tax
rate is as follows:

<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Statutory rate............................................ 34% 34% 34%
State taxes............................................... -- 3 1
Differences between foreign and U.S. tax rates............ -- 21 5
Utilization of deferred tax assets........................ -- -- (15)
Unbenefitted losses....................................... (35) (2) --
Other..................................................... (3) 7 3
--- --- ---
Effective tax rate........................................ (4)% 63% 28%
--- --- ---
</TABLE>

Income taxes paid were $356,000, $492,000 and $807,000 in fiscal 1998, 1997
and 1996, respectively.

At June 27, 1998, the Company had net operating loss carryforwards
available for federal income tax purposes of approximately $1,786,000 which
expire from 2008 to 2012. In addition, the Company has approximately
$1,595,000 of credit carryforwards for federal income tax purposes expiring at
various dates through 2012.

F-17
<PAGE>

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 27, 1999, reflects the utilization 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.

The Company had a net operating loss carryforward of approximately
$2,174,000 (unaudited) and tax credit carryforwards of approximately $1,595,000
(unaudited) at June 28, 1998, the beginning of the current fiscal year. Based
on current year operating results, the Company anticipates utilizing all of the
net operating loss carryforward and tax credit carryforwards.

The Company had provided valuation allowances for 100% of the deferred tax
assets resulting from the net operating loss and tax credit carryforwards.
Income tax expense for the nine month period ended March 27, 1999 has been
reduced by $1,274,000 (unaudited) through a reduction in the valuation
allowance. The Company expects the effective tax rate for the year to be
approximately 36.5% (unaudited) which assumes the utilization of the remaining
$662,000 (unaudited) of the deferred tax asset through a reduction in the
valuation allowance during the last quarter of the current fiscal year.
F-18
<PAGE>

9. Segment, Geographic and Major Customer Information

The Company operates principally in two industry segments; the design,
manufacture sale and service of medical devices and related equipment, and the
performance of services in the skin care/health spa industry.

Geographic data

Geographic information for fiscal 1998, 1997 and 1996 is as follows (in
thousands):

<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Revenue:
United States................................... $ 24,943 $25,185 $20,886
Intercompany.................................... 8,342 6,303 6,043
-------- ------- -------
33,285 31,488 26,929
Europe.......................................... 3,333 818 296
Japan........................................... 8,749 9,502 9,231
-------- ------- -------
45,367 41,808 36,456
Elimination..................................... (8,342) (6,303) (6,043)
-------- ------- -------
$ 37,025 $35,505 $30,413
======== ======= =======
Operating income (loss):
United States................................... $ (4,315) $ (12) $ 833
Europe.......................................... 364 86 (67)
Japan........................................... 174 616 1,006
Elimination..................................... (184) (3) 117
-------- ------- -------
$ (3,961) $ 687 $ 1,889
======== ======= =======
Geographic identification of assets
United States................................... $ 28,911 $27,139 $17,135
Europe.......................................... 2,575 852 532
Japan........................................... 4,372 5,901 5,401
Elimination..................................... (13,254) (9,055) (3,734)
-------- ------- -------
$ 22,604 $24,837 $19,334
======== ======= =======
Line of Business Data
Revenue
Product sales and service....................... $ 34,322 $33,262 $28,264
Skin care/health spa services................... 2,703 2,243 2,149
-------- ------- -------
Total Revenue.................................. $ 37,025 $35,505 $30,413
======== ======= =======
Operating income (loss)
Product sales and service....................... $ 1,550 $ 4,073 $ 2,583
Skin care/health spa services................... (5,511) (3,386) (694)
-------- ------- -------
Total operating income (loss).................. $ (3,961) $ 687 $ 1,889
======== ======= =======
Depreciation and Amortization
Product sales and service....................... $ 308 $ 281 $ 369
Skin care/health spa services................... 507 385 106
-------- ------- -------
Total Depreciation and Amortization............ $ 815 $ 666 $ 475
======== ======= =======
Capital Expenditures
Product sales and service....................... $ 241 $ 243 $ 238
Skin care/health spa services................... 160 1,624 139
-------- ------- -------
Total Amortization............................. $ 401 $ 1,867 $ 377
======== ======= =======
</TABLE>

F-19
<PAGE>

United States revenue includes export sales to unaffiliated companies
located principally in Western Europe, the Middle East, and in the Asia-Pacific
region, which approximated $7,695,000, $8,188,000 and $6,245,000 for fiscal
1998, 1997 and 1996, respectively. One distributor customer accounted for 12%
and 6% of total gross receivables at June 27, 1998 and June 28, 1997,
respectively.

10.Comprehensive Income (unaudited)

Effective the first quarter of 1999, the Company adopted Statement of
Financial Accounting Standard No. 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 For the nine months ended
----------------------------- -----------------------------
March 27, 1999 March 28, 1998 March 27, 1999 March 28, 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net income.............. $1,907 $ (194) $4,210 $(5,486)
Foreign currency
translation adjustment,
net.................... (142) 23 135 (331)
------ ------ ------ -------
$1,765 $ (171) $4,345 $(5,817)
====== ====== ====== =======
</TABLE>

11.Employee Benefit Plans

The Company offers a savings plan which allows eligible U.S. employees to
make tax-deferred contributions, a portion of which are matched by the Company.
Company contributions vest ratably with three years of employment and amounted
to $58,000, $84,000 and $57,000 in fiscal 1998, 1997 and 1996, respectively.

12.Restructuring Costs and Other Charges

During the second quarter ended December 27, 1997, the Company recorded a
restructuring charge 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 loss upon liquidation of the
equipment at the site. Charges against the reserve for the nine months ended
March 27, 1999 and the year ended June 27, 1998 total $356,000 (unaudited) and
$614,000, respectively leaving a reserve balance of $1,995,000 and $1,639,000
at March 27, 1999 and June 27, 1998, respectively.

13.Legal Proceedings (unaudited)

On March 5, 1999, New Star Lasers, Inc., and its subsidiary Laser
Aesthetics, Inc., filed a complaint in the U.S. District Court for the Eastern
District of California against The Regents of the University of California (the
"Regents"), the Beckman Laser Institute and Medical Clinic ("Beckman") and
Candela. In the complaint New Star Lasers is seeking a declaration that its
technology does not infringe the U.S. Patent No. 5,814,040 issued to the
Regents and pertaining to dynamic cooling technology to which we are a
licensee, or in the alternative that the patent is invalid. The complaint also
includes various tort claims against us and contract-related claims against the
Regents and Beckman. The complaint asserts that we interfered with the
licensing of the dynamic cooling technology to the plaintiffs. We intend to
defend this matter vigorously. The Regents has orally requested that we
indemnify it in connection with this litigation pursuant to the license
agreement between the Regents and Candela. We have rejected this request.

F-20
<PAGE>

14.Quarterly Results of Operations (unaudited)

<TABLE>
<CAPTION>
Quarter
--------------------------------
1998 First Second Third Fourth
---- ------ ------- ------ -------
<S> <C> <C> <C> <C>
Net Revenues.............................. $7,822 $ 8,522 $8,617 $12,063
Gross Profit.............................. 3,320 3,698 3,843 5,455
Restructuring charge...................... -- 2,609 -- --
Net Income (Loss)......................... (851) (4,441) (194) 1,034
Earnings (Loss) per common share
Basic..................................... $(0.16) $ (0.82) $(0.04) $ 0.19
Diluted................................... $(0.16) $ (0.82) $(0.04) $ 0.18

<CAPTION>
Quarter
--------------------------------
1997 First Second Third Fourth
---- ------ ------- ------ -------
<S> <C> <C> <C> <C>
Net Revenues.............................. $7,639 $ 9,406 $8,790 $ 9,671
Gross Profit.............................. 3,754 4,656 4,678 3,768
Net Income (Loss)......................... 510 736 303 (1,310)
Earnings (Loss) per common share
Basic................................... $ 0.09 $ 0.14 $ 0.06 $ (0.24)
Diluted................................ $ 0.09 $ 0.13 $ 0.05 $ (0.24)
</TABLE>

F-21
<PAGE>

Patient satisfactionthrough safety
and efficacy

GenteLASE

[Graphic [Graphic
depicting depicting
DCD GentleLASE
cryogen treatment
mist on of hair
[Photo of adult female] epidermis] follicle]
Candela's proprietary Dynamic
Cooling Device protects the
epidermis with a jet of cryogen
milliseconds before the laser pulse.
The skin remains
[Photo of adult male and small child]
undamaged while the laser energy
penetrates structures beneath the
skin, such as, in this case, hair
follicles.

ScleroPLUS

[Graphic ScleroPLUS also
depicting utilizes Dynamic
ScleroPLUS Cooling (see
handpiecetreatingabove) and
vascular incorporates
lesion] multiple
[Photo of adult female and young girl] wavelengths and
energy delivery
parameters to
vary depth of
penetration for a
variety of
vascular lesions
while minimizing
recovery time and
adverse effects.
<PAGE>

[CANDELA CORPORATION LOGO]

<PAGE>

PART II

Item 13. Other Expenses of Issuance and Distribution

<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee............. $ 14,566.81
NASD Filing Fee................................................. $ 7,000.00
Nasdaq National Market Additional Listing Fee................... $ 17,500.00
Accountants' Fees and Expenses.................................. $125,000.00
Legal Fees and Expenses......................................... $250,000.00
Blue Sky Fees and Expenses...................................... $ 5,000.00
Transfer Agent's Fees and Expenses.............................. $ 10,000.00
Printing and Engraving Expenses................................. $100,000.00
Miscellaneous................................................... $ 20,933.19
-----------
Total Expenses................................................ $550,000.00
===========
</TABLE>

Item 14. Indemnification of Directors and Officers

Section 6(b) of the Underwriting Agreement filed as Exhibit 1.1 hereto also
contains certain provisions pursuant to which certain of our officers,
directors and controlling persons may be entitled to be indemnified by the
Underwriters named therein.

Item 15. Recent Sales of Unregistered Securities

During the past three years, the Registrant has sold the securities set
forth below which were not registered under the Securities Act.

On October 15, 1998 we entered into a Note and Warrant Purchase Agreement,
pursuant to which we issued common stock purchase warrants for the purchase of
370,000 shares of our common stock at $4.00 per share and notes in the
aggregate principal amount of $3,700,000. Beginning on January 31, 2002, and
quarterly thereafter, Candela will be obligated to redeem $185,000 in principal
amount due on the Notes, or such lesser amount as may then be outstanding,
together with all interest due, until the Notes have been repaid in full.
Candela used the proceeds from the sale of the Notes and Warrants for general
corporate purposes, including repayment of indebtedness, payment of outstanding
payables and working capital.

Item 16. Exhibits and Financial Statement Schedules

a) Exhibits

II-1
<PAGE>

<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
24.1 --Powers of Attorney (included on signature page).
27.1 --Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
(b) Financial Statement Schedules

Schedule II--Valuation and Qualifying Accounts.

Except for the financial statement schedule listed above, all schedules have
been omitted because they are not required or because the required information
is presented in the Consolidated Financial Statements or Notes to those
statements.

Item 17. Undertakings

(a) The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.

(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.

(i) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of the
Registration Statement as of the time it was declared effective.

(ii) For purposes of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.

II-2
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston, Commonwealth of
Massachusetts on the 12th day of May, 1999.

Candela Corporation

/s/ Gerard E. Puorro
By: _________________________________
Gerard E. Puorro
Chief Executive Officer and
President

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Gerard E. Puorro and F. Paul Broyer, and each of
them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-
effective amendments) to this Registration Statement, and any subsequent
registration statements pursuant to Rule 462 of the Securities Act, and to file
the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that each of said
attorney-in-fact or his substitute or substitutes, may lawfully do or cause to
be done by virtue hereof.

Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.

<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----

<S> <C> <C>
/s/ Gerard E. Puorro Chief Executive Officer, May 12, 1999
______________________________________ President (Principal
Gerard E. Puorro Executive Officer) and
Director

/s/ F. Paul Broyer Senior Vice President, May 12, 1999
______________________________________ Chief Financial Officer
F. Paul Broyer and Treasurer (Principal
Financial and Accounting
Officer)

/s/ Kenneth D. Roberts Chairman of the Board of May 12, 1999
______________________________________ Directors
Kenneth D. Roberts

/s/ Richard J. Cleveland, M.D. Director May 12, 1999
______________________________________
Richard J. Cleveland, M.D.
</TABLE>

II-3
<PAGE>

<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----

<S> <C> <C>
/s/ Nancy Nager Director May 12, 1999
______________________________________
Nancy Nager

/s/ Douglas W. Scott Director May 12, 1999
______________________________________
Douglas W. Scott
</TABLE>

II-4
<PAGE>

SCHEDULE II

CANDELA CORPORATION
VALUATION AND QUALIFYING ACCOUNTS

For the nine months ended March 27, 1999 and the years ended June 27, 1998,
June 28, 1997 and June 29, 1996

<TABLE>
<CAPTION>
COLUMN B COLUMN C COLUMN D COLUMN E
Balance at Additions Deductions Balance at
Beginning Charged to from End of
Description of Period Income Reserves Period
----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Reserves deducted from assets to
which they apply (in thousands):
Allowance for doubtful accounts:
Nine months ended March 27,
1999........................... $1,038 $ 72 $256 $854
====== ====== ==== ======
Year ended June 27, 1998........ $ 197 $ 866 $ 25 $1,038
====== ====== ==== ======
Year ended June 28, 1997........ $ 305 $ 42 $150 $ 197
====== ====== ==== ======
Year ended June 29, 1996........ $ 361 $ 36 $ 92 $ 305
====== ====== ==== ======
Restructuring reserve:
Nine months ended March 27,
1999........................... $1,995 $ -- $356 $1,639
====== ====== ==== ======
Year ended June 27, 1998........ $ 0 $2,609 $614 $1,995
====== ====== ==== ======
</TABLE>

S-1
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULES

To the Board of Directors of Candela Corporation:

Our audits of the consolidated financial statements referred to in our
report dated July 29, 1998, except for the information in the first paragraph
of Note 6, for which the date is August 7, 1998 of Candela Corporation, also
included an audit of the financial statement schedules listed in Schedule II(b)
herein. In our opinion, the financial statement schedules present fairly, in
all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.

PricewaterhouseCoopers LLP

Boston, Massachusetts
July 29, 1998

S-2
<PAGE>

EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1* --Form of Underwriting Agreement.
5.1* --Opinion of Testa, Hurwitz & Thibeault, LLP, Counsel to the
Registrant, as to the legality of the shares being registered.
23.1 --Consent of PricewaterhouseCoopers LLP.
23.2 --Consent of Testa, Hurwitz & Thibeault, LLP (included in Exhibit
5.1).
24.1 --Powers of Attorney (included on signature page).
27.1 --Financial Data Schedule.
xx --Index of Other Documents, which were previously filed by the
Registrant pursuant to its filings under the Securities Exchange of
1934, will be filed by amendment.
</TABLE>
- --------
* To be filed by amendment.

<PAGE>

EXHIBIT 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the use in this prospectus of Candela Corporation on
Form S-1 of our report dated July 29, 1998, except for the information in the
first paragraph of Note 6, for which the date is August 7, 1998, relating to
the consolidated financial statements of Candela Corporation and its
Subsidiaries as of June 27, 1998 and June 28, 1997, and for each of the three
years in the period ended June 27, 1998, which appears in such prospectus. We
also consent to the use in this prospectus of our report on the Financial
Statement Schedule, which appears in Schedule II(b) and to the reference to us
under the heading "Experts" in such prospectus.

PricewaterhouseCoopers LLP

Boston, Massachusetts
May 12, 1999

<PAGE>

<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR 9-MOS 9-MOS
<FISCAL-YEAR-END> JUN-27-1998 JUN-28-1997 JUL-03-1999 JUN-27-1998
<PERIOD-START> JUN-29-1997 JUN-30-1996 JUN-27-1998 JUN-28-1997
<PERIOD-END> JUN-27-1998 JUN-28-1997 MAR-27-1999 MAR-28-1998
<CASH> 1,615 2,674 8,059 1,140
<SECURITIES> 0 0 0 0
<RECEIVABLES> 9,456 9,045 10,775 7,357
<ALLOWANCES> 1,037 197 854 965
<INVENTORY> 8,419 6,776 6,809 8,152
<CURRENT-ASSETS> 18,961 20,104 27,545 17,319
<PP&E> 7,879 7,831 7,608 7,765
<DEPRECIATION> 4,759 4,308 5,075 4,588
<TOTAL-ASSETS> 22,604 24,837 30,448 21,136
<CURRENT-LIABILITIES> 16,322 13,072 16,567 15,464
<BONDS> 0 0 0 0
0 0 55 55
0 0 0 0
<COMMON> 55 54 0 0
<OTHER-SE> 5,340 10,192 10,855 4,554
<TOTAL-LIABILITY-AND-EQUITY> 22,604 24,837 30,448 21,136
<SALES> 37,025 35,505 39,881 24,962
<TOTAL-REVENUES> 37,025 35,505 40,032 24,991
<CGS> 20,707 18,650 18,993 14,100
<TOTAL-COSTS> 20,707 18,650 18,993 14,100
<OTHER-EXPENSES> 20,279 16,168 14,512 16,118
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 235 107 377 181
<INCOME-PRETAX> (4,277) 638 6,150 (5,408)
<INCOME-TAX> 175 400 1,940 78
<INCOME-CONTINUING> (4,452) 238 4,210 (5,486)
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> (4,452) 238 4,210 (5,486)
<EPS-PRIMARY> (.812) .042 0.77 (1.00)
<EPS-DILUTED> (.812) .042 0.72 (1.00)

</TABLE>