FORM 10-Q


                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                   (Mark one)


          [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934


                    For quarterly period ended March 31, 1999


                                       OR


          [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934


               For the transition period from ________ to ________


                         Commission file number: 0-22340


                       PALOMAR MEDICAL TECHNOLOGIES, INC.
               (Exact name of issuer as specified in its charter)

<TABLE>
<S>                         <C>                                         <C>             <C>

                            Delaware                                                    04-3128178
------------------------------------------------------------------      --------------------------------------------
(State or other jurisdiction of incorporation or organization)             (I.R.S. Employer Identification No.)
</TABLE>


               45 Hartwell Avenue, Lexington, Massachusetts 02421
               --------------------------------------------------
                    (Address of principal executive offices)

                                 (781) 676-7300
                 -----------------------------------------------
                (Issuer's telephone number, including area code)


         Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past 12 months (or for such
shorter period that the  registrant was required to file such reports),  and (2)
has been subject to such filing requirements for the past 90 days. Yes X  No
                                                                       --    --

         As of April 30, 1999, 10,308,351 shares of common stock, $.01 par value
per share, were outstanding.

         Transitional Small Business Disclosure Format (check one): Yes   No X
                                                                       --    --

<PAGE>

               PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES

                                      INDEX

<TABLE>
<S>      <C>      <C>                                                                                     <C>

PART I - FINANCIAL INFORMATION

         ITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

                  Consolidated Condensed Balance Sheets                                                   1

                  Consolidated Statements of Operations                                                   2

                  Consolidated Statement of Stockholders' Deficit                                         3

                  Consolidated Statements of Cash Flows                                                   4

                  Notes to Consolidated Financial Statements                                              5

         ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                     FINANCIAL CONDITION AND RESULTS OF OPERATIONS                                        9

         RISK FACTORS                                                                                     14

         ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES
                     ABOUT MARKET RISK                                                                    18

PART II - OTHER INFORMATION

         ITEM 1.  LEGAL PROCEEDINGS                                                                       19

         ITEM 2.  CHANGES IN SECURITIES                                                                   20

         ITEM 3.  DEFAULTS UPON SENIOR SECURITIES                                                         21

         ITEM 4.  SUBMISSION OF MATTERS TO A VOTE
                    OF SECURITY HOLDERS                                                                   21

         ITEM 5.  OTHER INFORMATION                                                                       21

         ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K                                                        21

SIGNATURES                                                                                                22
</TABLE>

                                      -i-

<PAGE>

ITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

               PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
                      CONSOLIDATED CONDENSED BALANCE SHEETS
                                   (Unaudited)


<TABLE>
<S>  <C>                                                                    <C>                <C>

                                                                             December 31,         March 31,
                                                                                  1998              1999
                                                                            ---------------    ---------------
     ASSETS

     Current Assets:
           Cash and cash equivalents                                             $1,874,718        $1,975,049
           Accounts receivable, net                                               9,938,121        10,650,593
           Inventories                                                            5,416,342         6,180,973
           Other current assets                                                   1,056,388           669,639
                                                                             ---------------   ---------------
                Total current assets                                             18,285,569        19,476,254
                                                                             ---------------   ---------------

     Property and Equipment, at Cost, Net                                         3,314,087         2,553,800
                                                                             ---------------   ---------------

     Other Assets:
           Cost in excess of net assets acquired, net                             1,699,983         1,549,392
           Deferred financing costs                                                  58,923            31,148
           Other noncurrent assets                                                  167,352           143,122
                                                                             ---------------   ---------------
                Total other assets                                                1,926,258         1,723,662
                                                                             ---------------   ---------------

                                                                                $23,525,914       $23,753,716
                                                                             ===============   ===============

     LIABILITIES AND STOCKHOLDERS' DEFICIT

     Current Liabilities:

           Current portion of long-term debt                                     $6,290,041        $6,770,625
           Accounts payable                                                       6,553,745         6,070,593
           Accrued liabilities                                                   10,301,624        10,914,851
           Current portion of deferred revenue                                    1,143,796         1,203,162
                                                                             ---------------   ---------------
                Total current liabilities                                        24,289,206        24,959,231
                                                                             ---------------   ---------------

     Net Liabilities of Discontinued Operations                                   1,680,171         1,680,171
                                                                             ---------------   ---------------

     Long-Term Debt, Net of Current Portion                                       3,150,000         2,200,000
                                                                             ---------------   ---------------

     Deferred Revenue, Net of Current Portion                                       870,000           368,339
                                                                             ---------------   ---------------

     Stockholders' Deficit:
           Preferred stock, $.01 par value-
                Authorized - 1,500,000 shares
                Issued and outstanding -
                6,993 shares and 6,653 shares
                at December 31, 1998 and March 31, 1999, respectively                    69                66
           Common stock, $.01 par value-
                Authorized - 45,000,000 shares
                Issued - 10,074,864 shares and 10,355,790 shares
                at December 31, 1998 and March 31, 1999, respectively               100,747           103,556
           Additional paid-in capital                                           161,337,926       161,972,714
           Accumulated deficit                                                 (166,263,346)     (165,891,502)
           Less: Treasury stock - (49,285 shares at cost)                        (1,638,859)       (1,638,859)
                                                                             ---------------   ---------------
                Total stockholders' deficit                                      (6,463,463)       (5,454,025)
                                                                             ---------------   ---------------

                                                                                $23,525,914       $23,753,716
                                                                             ===============   ===============
</TABLE>

                                      -1-

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

<PAGE>


                       PALOMAR MEDICAL TECHNOLOGIES, INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (Unaudited)

<TABLE>
<S>       <C>                                                            <C>                   <C>

                                                                                     Three Months Ended
                                                                                         March 31,
                                                                                1998                   1999
                                                                         -------------------   ---------------------

Revenues                                                                         $7,067,405             $13,478,609

Cost of Revenues                                                                  6,336,245               4,969,976
                                                                         -------------------   ---------------------

          Gross profit                                                              731,160               8,508,633
                                                                         -------------------   ---------------------

Operating Expenses

          Research and development                                                2,165,000               2,125,983
          Sales and marketing                                                     2,503,115               4,098,422
          General and administrative                                              2,843,859               1,672,254
                                                                         -------------------   ---------------------

                  Total operating expenses                                        7,511,974               7,896,659
                                                                         -------------------   ---------------------

                  (Loss) income from operations                                  (6,780,814)                611,974

Interest Expense, net                                                              (392,833)               (165,250)

Other Income                                                                        334,965                  22,346
                                                                         -------------------   ---------------------

          Net (Loss) Income from Continuing Operations                          $(6,838,682)               $469,070
                                                                         ===================   =====================

Basic and Diluted Net (Loss) Income Per Common Share                                 $(1.02)                  $0.04
                                                                         ===================   =====================

Weighted Average Number of
         Common Shares Outstanding                                                7,413,316              10,194,145
                                                                         ===================   =====================
</TABLE>

                                      -2-

                  The accompanying notes are in integral part
                   of these consolidated financial statements
<PAGE>


                       PALOMAR MEDICAL TECHNOLOGIES, INC.

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
                                   (Unaudited)





<TABLE>
<S>   <C>                                                  <C>        <C>        <C>         <C>         <C>         <C>

                                                              Preferred Stock        Common Stock           Treasury Stock
                                                           -------------------------------------------------------------------
                                                             Number     $0.01      Number     $0.01        Number
                                                           of Shares  Par Value   of Shares  Par Value   of Shares      Cost
                                                           -------------------------------------------------------------------

Balance, December 31, 1998                                    6,993         $69  10,074,864   100,747     (49,285)   ($1,638,859)

      Issuance of common stock for 1998 employer 401(k)
               matching contribution                              -           -      32,561       326           -              -
      Conversion of preferred stock                            (340)         (3)     74,905       749           -              -
      Conversion of convertible debentures                        -           -     170,723     1,707           -              -
      Redemption of preferred stock                               -           -           -         -           -              -
      Issuance of common stock for  Employee
               Stock Purchase Plan                                -           -       2,737        27           -              -
      Costs incurred related to the issuance of common
               stock                                              -           -           -         -           -              -
      Preferred stock dividends                                   -           -           -         -           -              -
      Net  income                                                 -           -           -         -           -              -
                                                           =======================================================================
Balance, March 31, 1999                                       6,653         $66  10,355,790  $103,556     (49,285)    ($1,638,859)
                                                           =======================================================================
</TABLE>

<TABLE>
<S>   <C>                                                  <C>             <C>            <C>

                                                                                               Total
                                                                Paid-in      Accumulated    Stockholders'
                                                               Capital        Deficit         Deficit
                                                           -----------------------------------------------


Balance, December 31, 1998                                  161,337,926    ($166,263,346)    (6,463,463)

      Issuance of common stock for 1998 employer 401(k)
               matching contribution                            206,333                -        206,659
      Conversion of preferred stock                              62,665                -         63,411
      Conversion of convertible debentures                    1,017,021                -      1,018,728
      Redemption of preferred stock                            (557,417)               -       (557,417)
      Issuance of common stock for  Employee
               Stock Purchase Plan                               12,186                -         12,213
      Costs incurred related to the issuance of common
               stock                                           (106,000)               -       (106,000)
      Preferred stock dividends                                       -          (97,226)       (97,226)
      Net  income                                                     -          469,070        469,070
                                                           ===============================================
Balance, March 31, 1999                                    $161,972,714    ($165,891,502)   ($5,454,025)
                                                           ===============================================
</TABLE>




                                       -3-

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

<PAGE>

                       PALOMAR MEDICAL TECHNOLOGIES, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)

<TABLE>
<S>  <C>                                                                              <C>               <C>

                                                                                        Three Months Ended March 31,
                                                                                           1998             1999
                                                                                      ---------------   -------------
Cash Flows from Operating Activities
     Net loss                                                                           $(6,838,682)        $469,070
        Less: net loss from discontinued operations                                               -                -
                                                                                      ---------------   -------------
     Net loss from continuing operations                                                 (6,838,682)         469,070

     Adjustments to reconcile net loss from continuing operations to net cash
        used in operating activities-
        Depreciation and amortization                                                       672,352          444,772
        Unrealized gain on marketable securities                                           (332,965)               -
        Changes in assets and liabilities,
           Net sale of marketable trading securities                                        485,479                -
           Accounts receivable                                                           (1,630,322)        (712,472)
           Inventories                                                                    2,478,141         (764,631)
           Other current assets                                                            (119,145)         386,749
           Accounts payable                                                                (367,120)        (483,152)
           Accrued expenses                                                               1,460,185          982,914
           Deferred revenue                                                                (250,000)        (442,295)
                                                                                      ---------------   -------------
                 Net cash used in operating activities                                   (4,442,077)        (119,045)
                                                                                      ---------------   -------------

Cash Flows from Investing Activities
     Purchases of property and equipment                                                   (180,656)        (191,651)
     Increase in other assets                                                              (492,227)          24,230
     Increase in notes receivable                                                           (86,818)               -
                                                                                      ---------------   -------------
                 Net cash used in investing activities                                     (759,701)        (167,421)
                                                                                      ---------------   -------------

Cash Flows from Financing Activities
     Redemption of convertible debentures                                                (2,196,667)               -
     Net proceeds from the issuance of notes payable and advances from                    2,753,341          480,584
     distributor
     Proceeds from issuance of common stock                                               6,840,000                -
     Proceeds from exercise of warrants, stock options
        and Employee Stock Purchase Plan                                                     18,609           12,213
     Costs incurred related to issuance of common stock                                                     (106,000)
     Redemption of preferred stock, including accrued dividends of $437,850 in           (2,673,850)              -
                                                                                      ---------------   -------------
                 Net cash provided by financing activities                                4,741,433          386,797
                                                                                      ---------------   -------------
Net (decrease) in cash and cash equivalents                                                (460,345)         100,331
Net cash (used in) provided by discontinued operations                                    1,315,073                -
Cash and cash equivalents, beginning of the period                                        3,003,300        1,874,718
                                                                                      ---------------   -------------

Cash and cash equivalents, end of the period                                             $3,858,028       $1,975,049
                                                                                      ===============   =============

Supplemental Disclosure of Cash Flow Information
     Cash paid for interest                                                                $687,984         $148,149
                                                                                      ===============   =============

Supplemental Disclosure of Noncash Financing and Investing Activities:
     Conversion of convertible debentures and related accrued
        interest, net of financing fees                                                  $3,257,151       $1,018,728
                                                                                      ===============   =============

     Conversion of preferred stock                                                         $390,062          $63,411
                                                                                      ===============   =============

     Issuance of common stock for 1997 and 1998 employer 401(k)
        matching contribution                                                               $166,674        $206,659
                                                                                      ===============   =============

     Redemption of preferred stock                                                           $     -        $557,417
                                                                                      ===============   =============
</TABLE>

                                      -4-

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


<PAGE>

                       PALOMAR MEDICAL TECHNOLOGIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.       BASIS OF PRESENTATION

         The accompanying  unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
information.  Accordingly,  they  do not  include  all of  the  information  and
footnotes  required by generally  accepted  accounting  principles  for complete
financial statements. The results of operations for the interim periods shown in
this report are not  necessarily  indicative of expected  results for any future
interim period or for the entire fiscal year. Palomar Medical Technologies, Inc.
and its  subsidiaries  (the "Company" or "Palomar")  believes that the quarterly
information presented includes all adjustments (consisting of normal,  recurring
adjustments)  necessary for a fair  presentation  in accordance  with  generally
accepted accounting principles.  The accompanying financial statements and notes
should be read in conjunction with the Company's Form 10-K as amended, as of and
for the year ended December 31, 1998.

         On December 7, 1998,  the Company  entered into a Agreement and Plan of
Reorganization (the "Agreement") with Coherent, Inc. ("Coherent") to sell all of
the issued and outstanding common stock of Palomar's Star Medical  Technologies,
Inc.  subsidiary  ("Star").  This  sale  was  approved  by  a  majority  of  the
stockholders  of Palomar on April 21,  1999 and on April 27,  1999,  the Company
completed the sale of Star to Coherent.  The total purchase price for all of the
issued and outstanding capital stock of Star was $65 million,  paid in cash. The
purchase  price  was paid to the  shareholders  of Star in  proportion  to their
holdings of Star capital  stock.  On the date of sale,  Palomar  owned 82.46% of
Star. Palomar received net proceeds of $49,686,070,  of which $3,254,908 will be
held in escrow for one year as security for any claims  which  Coherent may have
under the Agreement. In addition,  under the terms of the Agreement, the Company
will  receive  an  ongoing  royalty  of 7.5%  from  Coherent  on the sale of any
products by Coherent that incorporate certain patented technology or use certain
patented  methods  currently  licensed by the Company on an exclusive basis from
Massachusetts General Hospital.

         On April 21, 1999, a majority of the Company's  stockholders'  approved
an amendment to the Company's  Certificate of  Incorporation to effect a plan of
recapitalization that resulted in a one-for-seven reverse split of the Company's
common  stock  and  that  reduced  the  Company's  authorized  capital  stock to
45,000,000  shares of common stock and 1,500,000  shares of preferred stock. All
share and per share amounts of common stock for all periods  presented have been
retroactively adjusted to reflect the reverse stock split.

         2.       INVENTORIES

                  Inventories are stated at lower of cost (first-in,  first-out)
or market.  Work in process and finished goods inventories  consist of material,
labor and manufacturing overhead and consist of the following:


                                        December 31,          March 31,
                                           1998                1999
                                      ----------------    ----------------
        Raw materials                   $2,478,289          $2,097,311
        Work-in-process                  1,330,822           1,960,169
        Finished goods                   1,607,231           2,123,493
                                      ----------------    ----------------
                                        $5,416,342          $6,180,973
                                      ================   =================

                                      -5-

<PAGE>
                       PALOMAR MEDICAL TECHNOLOGIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3.       PROPERTY AND EQUIPMENT

         Property and equipment consist of the following:
<TABLE>
<S>                         <C>                                     <C>                <C>

                                                                     December 31,         March 31,
                                                                         1998               1999
                                                                    ---------------    ----------------
                            Machinery and equipment                     $6,022,320          $6,066,509
                            Furniture and fixtures                       1,120,450           1,252,722
                            Leasehold improvements                         567,216             582,406
                                                                    ---------------    ----------------
                                                                         7,709,986           7,901,637
                            Less:  Accumulated depreciation
                                       and amortization                  4,395,899           5,347,837
                                                                    ---------------    ----------------
                                                                        $3,314,087          $2,553,800
                                                                    ===============    ================
</TABLE>

4.       NET INCOME (LOSS) PER COMMON SHARE

         Basic net income (loss) per share was determined by dividing net income
(loss) by the weighted  average  shares of common stock  outstanding  during the
year. Diluted net income (loss) per share is the same as basic net income (loss)
per share because the Company's potentially dilutive securities, primarily stock
options,  warrants,  redeemable  preferred stock and convertible  debentures are
antidilutive.

         The  Company's  net  income  (loss) per  common  share from  continuing
operations for the three months ended March 31, 1998 and 1999 is as follows:
<TABLE>
<S>                                                       <C>                 <C>

                                                                 Three Months Ended
                                                                     March 31,
                                                               1998               1999
                                                          ---------------     -------------
Net (loss) income                                           $(6,838,682)          $469,070
Preferred stock dividends                                      (744,821)           (97,226)
                                                          ---------------     -------------
Adjusted net (loss) income                                  $(7,583,503)          $371,844
                                                          ===============     =============

Basic and diluted net (loss) income
     per common share                                            $(1.02)             $0.04
                                                          ===============     =============

Weighted average number of
     common shares outstanding                                7,413,316         10,194,145
                                                          ===============     =============
</TABLE>


         As of March 31, 1998 and 1999, 3,275,514 and 3,868,613 weighted average
common  equivalent  shares,  respectively,  were  not  included  in the  diluted
weighted average shares outstanding as they were antidilutive.

                                      -6-

<PAGE>
                       PALOMAR MEDICAL TECHNOLOGIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


5.       NOTES PAYABLE 

Notes payable consist of the following:

<TABLE>
<S>                                                                                          <C>              <C>

                                                                                              December 31,       March 31,
                                                                                                 1998              1999
                                                                                            ---------------   ----------------
Convertible debentures                                                                          $2,150,000       $1,200,000
Note payable issued in connection with guaranty on behalf of discontinued subsidiary             2,290,041        2,020,625
Revolving line of credit with a bank                                                             1,000,000        1,000,000
Short-term notes payable to Coherent                                                             4,000,000        4,750,000
                                                                                            ---------------   ----------------
                                                                                                 9,440,041        8,970,625
Less - current maturities                                                                        6,290,041        6,770,625
                                                                                            ---------------   ----------------
                                                                                                $3,150,000       $2,200,000
                                                                                            ===============   ================
</TABLE>

(a)      Convertible Debentures

         During the first quarter of 1999, the Company  converted  $1,018,728 of
its 6%, 7% and 8% convertible  debentures due March 31, 2002 , including $89,139
of accrued interest, into 170,723 shares of the Company's common stock.

(b)      Short-Term Notes Payable

         Through March 31, 1999, the Company's Star subsidiary  borrowed a total
of $4,750,000  from Coherent in the form of notes  payable.  These notes accrued
interest at 8.5% per annum andwere  collaterlized by Star's inventory.  Coherent
assumed  this debt in  connection  with its  purchase  of all of the  issued and
outstanding common stock of Star on April 27, 1999. See Note 1.

(c)      Revolving Line of Credit

         The Company  has a  $10,000,000  revolving  line of credit with a bank.
This line of credit  matures on March 31, 2000 and bears  interest at the bank's
prime rate (7.75% at March 31, 1999).  Borrowings  under this line of credit are
secured by  substantially  all assets of the  Company  and are limited to 80% of
qualified accounts receivable.  A director of Palomar has personally  guaranteed
all  borrowings  under this line of credit.  The Company  borrowed an additional
$500,000  in April 1999 and repaid all  amounts  outstanding  under this line of
credit on April 27, 1999.

(d)      Note  Payable   Issued  In  Connection   With  Guaranty  On  Behalf  Of
         Discontinued Subsidiary

         In  connection  with  the  divestiture  of  one  of  its   discontinued
operations,  the Company entered into a Loan and  Subscription  Agreement with a
bank for  $3,233,000.  This promissory note represents the settlement of amounts
owed to the bank by Palomar's former Comtel,  Inc.  subsidiary and by Palomar in
connection  with a guarantee  from Palomar in favor of the bank.  Principal  and
interest payments were being made over twenty-four  months,  beginning  December
31, 1997,  with  interest  accruing at the bank's prime rate (7.75% at March 31,
1999) plus 2.25%.  This promissory note was  collateralized by 464,286 shares of
the Company's common stock,  which was held in escrow,  not entitled to vote and
not considered outstanding.  On May 3, 1999, the Company paid off the balance of
this note (totaling  $1,364,379),  and the shares of the Company's  common stock
are being released from escrow and returned to the Company.

                                      -7-

<PAGE>

                       PALOMAR MEDICAL TECHNOLOGIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


6.       STOCKHOLDERS' DEFICIT

(a)      Convertible Preferred Stock

         During the first quarter of 1999,  the Company  converted 340 shares of
Series G Preferred  Stock and accrued  dividends  and  interest of $63,411  into
74,905 shares of the Company's  common stock.  The Company also agreed to redeem
403 shares of Series G  Preferred  Stock for  $557,417,  including  $154,838  of
accrued  dividends and interest,  five days after the  completion of the sale of
Star to Coherent.  The Company paid this  obligation on May 3, 1999. The Company
has accrued this amount on the  accompanying  consolidated  balance  sheet as of
March 31, 1999.

(b)      Options to Purchase Common Stock

         During the three  months  ended March 31,  1999,  the  Company  granted
options to purchase  2,143 shares of the  Company's  common stock at an exercise
price of $10.50 per share.  No options  were  exercised  during the three months
ended March 31,  1999.  During the three  months ended March 31, 1999 options to
purchase  21,057  shares  of the  Company's  common  stock at  $10.50  per share
expired.

(c)      Warrants to Purchase Common Stock

         During the three  months  ended  March 31,  1999,  warrants to purchase
88,917  shares of the  Company's  common stock at exercise  prices  ranging from
$10.00 to $72.625 per share  expired.  No  warrants  were  granted or  exercised
during the three months ended March 31, 1999.

(d)      Reserved Shares

         As of March 31,  1999,  the Company had  reserved  shares of its common
stock for the following:

<TABLE>
<S>           <C>                                                <C> 
                                                                      March 31, 1999
                                                                   -------------------
              Convertible debentures                                      288,805
              Stock option plans                                          958,236
              Warrants                                                  2,715,308
              Employee 401(k) plan                                         46,694
              Employee stock purchase plan                                 57,179
              Convertible preferred stock                                 400,651
                                                                   ===================
                                   Total                                4,466,873
                                                                   ===================
</TABLE>

         Substantially   all  of  the  reserved   shares   reflected  above  are
exercisable  at prices in excess of the current  market  price of the  Company's
common stock.

7.       NET LIABILITIES OF DISCONTINUED OPERATIONS

         On December 31, 1997 the Company entered into an Exchange Agreement and
sold 500,000 shares of the common stock of Nexar Technologies, Inc. ("Nexar") to
GFL  Advantage  Fund  Limited  ("GFL")  for  $2,000,000.  Under the terms of the
Exchange  Agreement,  Palomar  guaranteed GFL a minimum selling price of $5.00 a
share with  respect to 400,000  shares of the Nexar common stock over a two year
time  period.  The Company  therefore  would have been  obligated  to pay GFL on
January 1, 2000 the difference between $5.00 and the price at which GFL sold the
shares of Nexar  common  stock.  As of March 31, 1999,  the  deferred  liability
related to this transaction  totaled $1,680,171 and represented the total amount
due to GFL after GFL sold all of its 400,000  shares of Nexar common stock.  The
Company paid this obligation on May 3, 1999.


                                      -8-

<PAGE>

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

(a)      Overview

         On  December 7, 1998,  the  Company  entered  into the  Agreement  with
Coherent to sell all of the issued and  outstanding  common  stock of Star.  The
total purchase price for all of the issued and outstanding capital stock of Star
was $65 million,  paid in cash. The purchase price was paid to the  shareholders
of Star in proportion  to their  holdings of Star capital  stock.  This sale was
approved by a majority of the  stockholders of Palomar on April 21, 1999, and on
April 27, 1999,  Palomar completed the sale of Star to Coherent.  On the date of
the sale,  Palomar  owned  82.46% of Star.  Palomar  received  net  proceeds  of
$49,686,070, of which $3,254,908 will be held in escrow for one year as security
for any claims which Coherent may have under the Agreement.  In addition,  under
the terms of the Agreement,  the Company will receive an ongoing royalty of 7.5%
from Coherent on the sale of any products by Coherent that  incorporate  certain
patented  technology or use certain patented methods  currently  licensed by the
Company on an exclusive basis from Massachusetts General Hospital.

         As a result of the consummation of the transaction discussed above, the
Company  anticipates  that revenues will decline  significantly in the near term
because  Palomar  will no longer  be  selling  the  LightSheer(TM)  diode  laser
manufactured  by Star.  For the three months ended March 31, 1999 and 1998 gross
revenues associated with Star's  LightSheer(TM)  diode laser comprised 85.5% and
12.4% of the Company's total revenues,  respectively.  Accordingly,  the Company
expects to incur net losses  from  operations  over the next few  quarters.  The
successful  introduction  and  marketing of new products will be critical to the
Company's  long-term  success,  since a  significant  portion  of the  Company's
revenue base previously generated from Star's  LightSheer(TM) laser will need to
be replaced  with  revenues  from other laser  products,  including  the Palomar
E2000TM  hair  removal  laser  introduced  in March of 1999 and  other  products
currently in development.  There can be no assurance that the Palomar E2000TM or
the  Company's  future  products  will  achieve  market  acceptance  or generate
sufficient  margins.  Broad  market  acceptance  of laser  hair  removal is also
critical to the Company's  success.  The Company recognizes the need and intends
to broaden its product line by developing  cosmetic  laser  products  other than
hair removal lasers.

         The accompanying pro forma  consolidated  condensed balance sheet as of
March 31, 1999 assumes  that Palomar sold Star to Coherent on the last  reported
balance sheet date,  March 31, 1999.  The  accompanying  pro forma  consolidated
condensed  statement  of  operations  for the three  months ended March 31, 1999
assumes  the sale of Star took  place on  January  1,  1999,  the  beginning  of
Palomar's  fiscal  year ended  December  31,  1999.  The pro forma  consolidated
condensed  statement of operations  does not include the effect of the gain from
Palomar's sale of Star to Coherent.

         The  accompanying  pro forma  condensed  information  is presented  for
illustrative  purposes only and is not  necessarily  indicative of the financial
position or results of  operations  which would  actually have been reported had
the sale of Star occurred during the periods presented, or which may be reported
in the future.

                                      -9-

<PAGE>


         The accompanying pro forma consolidated  condensed financial statements
should be read in  conjunction  with the  historical  financial  statements  and
related notes thereto for Palomar.

<TABLE>
<S>                <C>                                                        <C>

                                                                                Three Months Ended
                                                                                  March 31, 1999
                                                                                     Pro Forma
                          Pro Forma Condensed Statement of Operations:               Unaudited
                                                                              ------------------------
                   Revenues                                                               $ 2,357,048
                   Cost of revenues                                                         1,662,817
                                                                              ------------------------
                        Gross profit                                                          694,231
                   Operating expenses                                                       2,752,278
                                                                              ------------------------
                        Loss from operations                                               (2,058,047)
                   Interest expense, net                                                      (82,625)
                   Other income                                                                22,346
                                                                              ------------------------
                        Net loss                                                          $(2,118,326)

                   Basic and diluted net loss per common share:                                $(0.22)
                                                                              ========================

                   Weighted average number of
                       common shares outstanding                                           10,194,145
                                                                              ========================


                                                                                    March 31,1999
                                                                                      Pro Forma
                                   Pro Forma Condensed Balance Sheet                  Unaudited
                                                                              ------------------------

                   Assets:
                        Cash and cash equivalents                                        $48,046,595
                        Other current assets                                               9,100,596
                        Property and equipment, net                                        1,652,382
                        Other assets                                                         962,190
                                                                              -----------------------
                        Total assets                                                     $59,761,763
                                                                              =======================


                   Liabilities and Stockholders' Equity:
                        Current liabilities                                              $16,182,028
                        Other liabilities                                                  4,248,510
                        Total stockholders' equity                                        39,331,225
                                                                              -----------------------
                        Total liabilities and stockholders' equity                       $59,761,763
                                                                              =======================
</TABLE>

                                      -10-


<PAGE>

(b)      Results of Operations.

         (i)      REVENUES AND GROSS PROFIT:  Three Months Ended March 31, 1999,
                  Compared to the Three Months Ended March 31, 1998

         For the three  months  ended March 31,  1999,  the  Company's  revenues
increased  to $13.5  million,  as compared to $7.1  million for the three months
ended March 31, 1998. The increase in the Company's revenues of $6.4 million, or
91% from the three  months ended March 31,  1998,  was mainly due to  additional
sales  volume  of  $10.2  million   associated  with  the  introduction  of  the
LightSheer(TM)  diode  laser,  partially  offset by a  decrease  in  revenue  of
approximately $3.8 million in other cosmetic laser product revenue.  The Company
obtained  FDA  clearance  to market and sell its  LightSheer(TM)  laser for hair
removal  and leg vein  treatment  in the United  States at the end of 1997.  The
decrease in sales volume  associated  with other cosmetic laser product  revenue
was principally due to declining sales of the Company's  EpiLaser(R) ruby laser.
The Company focused on bringing the LightSheer(TM) laser to market while further
developing a new  generation of ruby hair removal  lasers  during 1998.  Palomar
introduced  its second  generation  long pulse ruby laser for hair removal,  the
Palomar E2000TM, during the first quarter of 1999 to permit more rapid treatment
of large areas of the body. In March of 1999, the Company obtained FDA clearance
to market and sell its Palomar  E2000TM  laser  system in the United  States for
"permanent hair reduction." The Company generated revenues of approximately $1.3
million from the initial  shipments of the Palomar  E2000TM in the first quarter
of 1999.

         Gross   profit  for  the  three   months   ended  March  31,  1999  was
approximately  $8.5  million  (63% of  revenues)  compared to  $731,000  (10% of
revenues)  for the three  months  ended March 31,  1998.  The  increase in gross
profit and gross profit percentage was due to sales of the LightSheer(TM)  diode
laser system.  This laser system  provided a  significantly  higher gross profit
than the Company's  EpiLaser(R) laser and other cosmetic  products.  The Company
anticipates  that its gross profit  percentage from sales of the Palomar E2000TM
will be less than the  gross  profit  from its  former  LightSheer(TM)  product,
unless  and  until  the  Palomar   E2000TM   achieves   volume   production  and
manufacturing efficiencies.

         (ii)     OPERATING  AND OTHER  EXPENSES:  Three  Months Ended March 31,
                  1999, Compared to Three Months Ended March 31, 1998

         Research and development  costs decreased to $2.1 million for the three
months ended March 31, 1999,  from $2.2 million for the three months ended March
31, 1998.  Research and development  expenses as a percentage of revenue totaled
16% for the three months ended March 31, 1999 and 31% for the three months ended
March 31, 1998. The continued spending on research and development  reflects the
Company's  commitment  to research  and  development  for  devices and  delivery
systems for cosmetic and medical  applications using a variety of lasers,  while
continuing  dermatology  research utilizing the Company's ruby and diode lasers.
Among the Company's  research and development goals in hair removal is to design
systems  permitting more rapid treatment of large areas,  and to produce systems
with high gross  margins.  Management  believes  that  research and  development
expenditures  will remain  constant over the next year as the Company  continues
product  development  and clinical  trials for additional  applications  for its
lasers and delivery systems in the cosmetic and dermatological markets. However,
research and  development  as a percentage of revenues  will increase  until the
Company  achieves  higher  sales  volume from its  recently  introduced  Palomar
E2000TM laser system.

         Selling  and  marketing  expenses  increased  to $4.1  million  (30% of
revenues)  for the three months ended March 31, 1999,  from  approximately  $2.5
million  (35% of  revenues)  for the three  months  ended  March 31,  1998.  The
increase in selling and marketing  expenses is  attributable  to higher  revenue
volumes attained and  corresponding  higher selling expenses paid to Coherent in
the first quarter of 1999 as compared to the first quarter of 1998. The decrease
in selling and marketing expenses as a percentage of revenues is a result of the
Company's  introduction  of its Palomar  E2000TM  laser system  during the first
quarter of 1999,  which is being sold through new distribution  channels.  These
new  distribution  channels include direct sales by the Company and distribution
through  Continuum  Biomedical,  a  distributor  of  medical  products,  and the
associated  selling  and  marketing  expenses  have to date  been  less than the
commissions earned by Coherent, the Company's previous distributor.  The Company
also will consider  establishing  its own direct sales force to compliment these
sales channels.  The Company  anticipates that, in comparison to the commissions
previously paid to Coherent as a percentage of net revenues,  its future selling
and 

                                      -11-

<PAGE>

marketing costs as a percentage of net revenues will decrease.  The Company will
also consider  selling entire product lines and/or  technology to others,  as in
the case of the sale of Star to Coherent.

         General and  administrative  expenses decreased to $1.7 million (12% of
revenues) for the three months ended March 31, 1999, as compared to $2.8 million
(40% of revenues)  for the three months end ended March 31, 1998.  This decrease
for the three  months  ended March 31,  1999 is  attributable  to the  Company's
restructuring  and  consolidation  of  administrative  functions  related to the
Company's Esthetica Partners, Inc. (formerly Cosmetic Technology  International,
Inc.) and Palomar Medical  Products,  Inc.  subsidiaries  and general  corporate
costs that resulted in respective reductions of approximately $500,000, $300,000
and $450,000 compared to the three months ended March 31, 1998. These reductions
were offset by an increase of $150,000 for general and  administrative  expenses
incurred at the Company's Star subsidiary to support its successful introduction
of the LightSheer(TM)  laser. The Company anticipates general and administrative
expense  will  decrease  slightly  in the  future as a result of the Star  sale,
although it expects  such  expenses to increase as a  percentage  of revenues as
revenues decline in the near term as the result of the Star sale.

         Interest expense decreased to $165,000 for the three months ended March
31, 1999,  from  $393,000  for the three  months ended March 31, 1998.  This 58%
decrease  is  primarily  the  result  of a  decrease  in  convertible  debenture
financings  and the Company's  increased use of  conventional  financing.  Also,
operations  did not require as much  financing in 1999 as compared to 1998. As a
result of the sale of Star,  which  generated $49.6 million in cash, the Company
anticipates that interest expense will decline significantly because it utilized
a portion of the  proceeds to pay down debt  during the second  quarter of 1999.
The balance of the funds will be invested in high-grade corporate and government
notes and bonds to fund future operations and research and development  efforts.
Accordingly,  the  Company  will  generate  additional  interest  income for the
foreseeable future.

         Other income  decreased to $22,000 for the three months ended March 31,
1999.  This amount  compares to $335,000  for the three  months  ended March 31,
1998. Other income for the three months ended March 31, 1998 consisted primarily
of trading  gains  associated  with  selling  the  Company's  investment  in The
American Materials & Technologies Corporation.

(c)      Liquidity and Capital Resources

         On  December 7, 1998,  the  Company  entered  into the  Agreement  with
Coherent to sell all of the issued and  outstanding  common  stock of Star.  The
total purchase price for all of the issued and outstanding capital stock of Star
was $65 million,  paid in cash. The purchase price was paid to the  shareholders
of Star in proportion to their holdings of capital stock of Star.  This sale was
approved by a majority of the  stockholders of Palomar on April 21, 1999, and on
April 27, 1999,  Palomar completed the sale of Star to Coherent.  On the date of
the sale,  Palomar  owned  82.46% of Star.  Palomar  received  net  proceeds  of
$49,686,070, of which $3,254,908 will be held in escrow for one year as security
for any claims which Coherent may have under the Agreement.  In addition,  under
the terms of the Agreement,  the Company will receive an ongoing royalty of 7.5%
from Coherent on the sale of any products by Coherent that  incorporate  certain
patented  technology or use certain patented methods  currently  licensed by the
Company on an exclusive basis from Massachusetts General Hospital.

         The Company  utilized a portion of the proceeds of the Star sale to pay
down debt  during the second  quarter of 1999.  The balance of the funds will be
invested in high-grade corporate and governmental notes and bonds to fund future
operations and research and development efforts.  Accordingly,  the Company will
generate additional interest income for the foreseeable future.

         The  Company  is a  holding  company  with no  significant  operations.
Operations  are carried out at the  subsidiary  level.  To date,  the  Company's
operating  subsidiaries  have  required  cash  advances from the Company to fund
their operations. As of March 31, 1999, the Company had $2.0 million in cash and
cash equivalents. With the proceeds from the Star sale, the Company has a strong
financial  position to meet its ongoing cash flow requirements and fund expected
operating losses at its subsidiaries in the near term.

         As of March 31, 1999, the Company's  accounts  receivable totaled $10.7
million,  as compared to $9.9  million as of December  31,  1998.  The amount at
March 31,  1999  includes  approximately  $2.0  million of  accounts  receivable
generated  from  cosmetic  laser  product  revenues  other  than sales of Star's
LightSheer(TM)  diode laser.  The  

                                      -12-


<PAGE>

Company's allowance for doubtful accounts totaled  approximately  $385,000 as of
March 31, 1999, compared to $364,000 as of December 31, 1998.

         As of March 31,  1999,  accounts  payable  totaled  approximately  $6.1
million as compared to $6.6 million as of December 31,  1998.  This  decrease of
$500,000 is principally  due to the timing of additional  purchases of inventory
for the manufacture of the LightSheer and Palomar E2000(TM) laser systems.

         The Company anticipates that capital  expenditures for the remainder of
1999 will total  approximately  $750,000,  consisting  primarily  of  machinery,
equipment and computers and  peripherals.  The Company  expects to finance these
expenditures with cash on hand and equipment leasing lines.

         The Company  has a  $10,000,000  revolving  line of credit from a bank.
This  revolving  line of credit  matures on March 31, 2000 and bears interest at
the bank's prime rate (7.75% at March 31, 1999).  Borrowings  are limited to 80%
of domestic  accounts  receivable under 90 days from invoice.  A director of the
Company  has  personally  guaranteed  borrowings  under the line of credit.  The
Company borrowed an additional $500,000 during April of 1999. The Company repaid
all  amounts  outstanding  under this line of credit  ($1,500,000)  on April 27,
1999.

         The Company  entered into a Loan  Agreement  with Coherent  pursuant to
which  Coherent  agreed to loan the Company  money to help finance the Company's
working  capital  requirements.   These  loans  were  collateralized  by  Star's
inventory.  As of March 31, 1999, the total amount  outstanding  under this loan
agreement was $4.8 million.  Coherent  assumed this debt in connection  with its
purchase of all of the issued and outstanding  common stock of Star on April 27,
1999. See Note 5(b).

(d)      Material Uncertainties.

         (i)      Year 2000 Issues

         During  1998  and  1999  the  Company  has  been  actively  engaged  in
addressing  Year 2000 (Y2K)  issues,  which  result  from the use of  two-digit,
rather than  four-digit,  year dates in software,  a practice  which could cause
date-sensitive  systems to malfunction or fail because they may not recognize or
process date information correctly.

                  State of Readiness:

         To manage its Y2K  program,  the Company  has divided its efforts  into
four program areas:

         o        Information Technology (computer hardware and software)

         o        Physical Plant (manufacturing equipment and facilities)

         o        Products (including product development)

         o        Extended Enterprise (suppliers and customers)

         For each of these  program  areas,  the  Company  is using a  four-step
approach:

         o        Ownership (creating awareness, assigning tasks)

         o        Inventory (listing items to be assessed for Y2K readiness)

         o        Assessment  (prioritizing  the  inventoried  items,  assessing
                  their Y2K readiness,  planning corrective actions,  developing
                  initial contingency plans)

         o        Corrective Action Deployment (implementing corrective actions,
                  verifying implementation, finalizing and executing contingency
                  plans)

                                      -13-
<PAGE>

         At March 31, 1999, the Ownership,  Inventory and Assessment  steps were
essentially  complete  for all program  areas.  The Company  expects to complete
Corrective Action Deployment by June 1999.

                  Costs to Address Y2K Issues:

         The Company's  estimated  aggregate  costs for its Y2K activities  from
1998 through 2000 are expected to be less than $100,000.  Through March 31, 1999
the Company has spent approximately $40,000.

                  Risks of Y2K Issues and Contingency Plans:

         The Company  continues  to assess the Year 2000 issues  relating to its
physical  plant,  products  and  suppliers.  The  Company  intends  to develop a
contingency planning process to mitigate worst-case business  disruptions,  such
as delays in product  delivery,  which  could  result from events such as supply
chain  disruptions.  The Company expects its contingency plans to be complete by
June 1999.

         (ii)     Nasdaq Stock Market Listing

         The Company was notified by the Nasdaq Stock Market ("Nasdaq") that for
continued listing on The Nasdaq SmallCap Market the Company had to meet Nasdaq's
minimum bid price  requirement of $1.00 per share.  Because the Company's  stock
price fell below $1.00 for a 30 day trading period between August 28 and October
9, 1998, it became subject to delisting. The Company met with representatives of
Nasdaq on March 18, 1999 and presented arguments  supporting  continued listing.
At the  hearing,  the Company  volunteered  to delist  from the Nasdaq  SmallCap
Market on May 18, 1999 if it were not in  compliance  with the minimum bid price
requirement by that date. As a result of the one-for-seven  reverse split of its
common stock  implemented on May 10, 1999, the Company is now in compliance with
the minimum bid price requirement.

         In  addition,  prior to the  completion  of the Star sale,  the Company
received  another  letter  from  Nasdaq on April 9, 1999  asking the  Company to
address  Nasdaq's  concern  about the  Company's  receipt  of a report  from its
auditors in connection with the Company's Report on Form 10-K for the year ended
December 31, 1998 that contained a "going  concern"  qualification.  The Company
informed  Nasdaq that the Company's  auditors would reissue their report without
this qualification  following the sale of Star, and subsequently provided Nasdaq
with a copy of the Company's  amended Report on Form 10-K/A-1 for the year ended
December 31, 1998  containing the reissued  unqualified  auditor's  report.  The
Company  believes  that it has  obviated  Nasdaq's  concerns,  and that it is in
compliance with all of Nasdaq's requirements for continued listing on The Nasdaq
SmallCap Market.

                                  RISK FACTORS

         In addition to the other  information in this Quarterly  Report on Form
10-Q,  the following  cautionary  statements  should be considered  carefully in
evaluating the Company and its business.  Statements contained in this Form 10-Q
that  are  not  historical  facts  (including,  without  limitation,  statements
concerning  financial  projections,  the financing of future operations,  use of
proceeds  of the Star sale,  maintenance  of Nasdaq  listing  for the  Company's
common stock,  product gross margins,  product  developments  and  improvements,
research  and  development  plans and  expenditures,  and ^2K  issues) and other
information  provided  by the Company  and its  employees  from time to time may
contain  certain  forward-looking  information,  as defined  by (i) the  Private
Securities Litigation Reform Act of 1995 (the "Reform Act") and (ii) releases by
the SEC. The risk factors  identified  below,  among other factors,  could cause
actual results to differ materially from those suggested in such forward-looking
statements.  Readers  are  cautioned  not  to  place  undue  reliance  on  these
forward-looking statements,  which speak only as of the date hereof. The Company
undertakes  no  obligation  to release  publicly the results of any revisions to
these  forward-looking  statements  that  may  be  made  to  reflect  events  or
circumstances   after  the  date  hereof  or  to  reflect  the   occurrence   of
unanticipated events. The cautionary statements below are being made pursuant to
the  provisions  of the  Reform  Act and with the  intention  of  obtaining  the
benefits of safe harbor provisions of the Reform Act.


Our future revenue depends on our developing new products.
--------------------------------------------------------------------------------

         We face rapidly  changing  technology  and continuing  improvements  in
cosmetic laser technology.  In order to be successful,  we must continue to make
significant  investments  in research and  development  in order to develop in a

                                      -14-
<PAGE>

timely and cost-effective manner new products that meet changing market demands,
enhance existing products,  and achieve market acceptance for such products.  We
have in the past  experienced  delays in  developing  new products and enhancing
existing  products.  As a result  of the sale of Star to  Coherent,  our  future
revenue  will be  entirely  dependent  on sales of  newly  introduced  products.
Although  we have  recently  introduced  a new hair  removal  laser,  it may not
achieve  market  acceptance or generate  sufficient  margins.  In addition,  the
market for this type of hair removal laser may already be saturated. At present,
broad market  acceptance  of laser hair  removal is critical to our success.  We
need to diversify our product line by developing  cosmetic  laser products other
than hair removal lasers.


We face intense  competition from companies with superior  financial,  marketing
and other resources.
--------------------------------------------------------------------------------

         The laser hair removal  industry is highly  competitive,  and companies
frequently introduce new products.  We compete in the development,  manufacture,
marketing and servicing of hair removal  lasers with numerous  other  companies,
many  of  which  have  substantially  greater  financial,  marketing  and  other
resources than we do. As a result, some of our competitors are able to sell hair
removal  lasers at prices  significantly  below the  prices at which we sell our
hair removal lasers. In addition,  as a result of the Star sale,  Coherent,  our
former  exclusive  distributor  and one of the largest and best  financed  laser
companies,  is now our competitor and we have to find new ways to distribute our
products.  Our laser products also face  competition  from  alternative  medical
products and procedures,  such as electrolysis and waxing,  among others. We may
not be able to differentiate  our products from the products of our competitors,
and customers may not consider our products to be superior to competing products
or medical  procedures,  especially if  competitive  products and procedures are
offered  at  lower  prices.   Our  competitors  may  develop   products  or  new
technologies that make our products obsolete or less competitive.


Our quarterly  operating results will decrease as a result of the Star sale, and
that may hurt the price of our common stock.
--------------------------------------------------------------------------------

         Almost  all of our  revenues  in our  most  recent  two  quarters  were
attributable to sales of the  LightSheer(TM)  diode laser  manufactured by Star.
Therefore,   as  a  result  of  the  Star  sale,   our  revenues   will  decline
significantly. If our operating results fall below the expectations of investors
or  public  market   analysts,   the  price  of  our  common  stock  could  fall
dramatically.


We could be delisted from Nasdaq.
--------------------------------------------------------------------------------

         On March 18,  1999,  Nasdaq  held a  hearing  regarding  our  continued
listing on The Nasdaq SmallCap Market in light of the fact that our common stock
had traded below Nasdaq's $1.00 minimum bid price requirement for longer than 30
trading days. At the hearing,  we  volunteered  to delist from Nasdaq if we were
not in compliance  with the minimum bid price  requirement by May 18, 1999. As a
result of our reverse stock split,  we regained  compliance with the minimum bid
price requirement before that date. In addition,  on April 9, 1999, Nasdaq asked
us to  address  its  concern  about our  receipt of a report  from our  auditors
containing  a "going  concern"  qualification.  Following  the Star  sale,  that
auditor's report was reissued without the qualification.  Hence, we believe that
we have  obviated  Nasdaq's  concerns,  and are now in  compliance  with  all of
Nasdaq's  requirements  for  continued  listing on The Nasdaq  SmallCap  Market.
However,  there can be no assurance  that we will remain  listed on Nasdaq.  The
delisting of our common stock would  likely  reduce the  liquidity of our common
stock and our ability to raise capital. If our common stock is delisted from The
Nasdaq SmallCap Market, it will likely be quoted on the "pink sheets" maintained
by the National  Quotation  Bureau,  Inc. or Nasdaq's OTC Bulletin Board.  These
listings  can make trading  more  difficult  for  stockholders.  


Our lasers are subject to numerous FDA regulations.  Compliance is expensive and
time-consuming.  Our  products  may not be  able to  obtain  the  necessary  FDA
clearances before we can sell them.
--------------------------------------------------------------------------------

         All of our products are laser medical  devices.  Laser medical  devices
are  subject  to  FDA  regulations  regulating  clinical  testing,  manufacture,
labeling,  sale,  distribution  and promotion of medical  devices.  Before a new
device can be introduced into the market, we must obtain clearance from the FDA.
Compliance with the FDA clearance process is expensive and  time-consuming,  and
we may not be able to obtain such clearances in a timely fashion or at all.

                                      -15-
<PAGE>


We are dependent on third party researchers.
--------------------------------------------------------------------------------

         We are substantially dependent upon third party researchers,  over whom
we do not have absolute control, to satisfactorily conduct and complete research
on our behalf and to grant us favorable  licensing terms for products which they
may develop.  At present,  our principal research partner is the Wellman Labs at
Massachusetts  General Hospital.  We provide research funding,  laser technology
and optics know-how in return for licensing  agreements with respect to specific
medical  applications and patents. Our success will be highly dependent upon the
results of this research.  We cannot be sure that such research  agreements will
provide us with  marketable  products in the future or that any of the  products
developed under these agreements will be profitable for us.


Our  common  stock  could  be  further  diluted  as the  result  of outstanding
convertible securities, warrants and options.
--------------------------------------------------------------------------------

         In the past, we have issued convertible securities,  such as debentures
and preferred  stock,  and warrants in order to raise money. We have also issued
options and warrants as compensation for services and incentive compensation for
our employees and  directors.  We have a substantial  number of shares of common
stock   reserved  for  issuance  upon  the  conversion  and  exercise  of  these
securities. These outstanding convertible securities, options and warrants could
affect the rights of our stockholders,  and could reduce the market price of our
common stock.


Our proprietary technology has only limited protections.
--------------------------------------------------------------------------------

         Our business could be materially  and adversely  affected if we are not
able to protect adequately our proprietary intellectual property rights. We rely
on a  combination  of patent,  trademark  and trade  secret  laws,  license  and
confidentiality agreements to protect our proprietary rights. We generally enter
into  non-disclosure  agreements  with our  employees and customers and restrict
access to, and distribution of, our proprietary  information.  Nevertheless,  we
may be unable  to deter  misappropriation  of our  proprietary  information,  to
detect   unauthorized  use  and  to  take  appropriate   steps  to  enforce  our
intellectual  property rights.  Our competitors also may  independently  develop
technologies  that are  substantially  equivalent or superior to our technology.
Although  we believe  that our  services  and  products  do not  infringe on the
intellectual  property  rights of others,  we cannot  prevent  someone else from
asserting  a claim  against us in the future for  violating  their  intellectual
property  rights.  In  addition,  costly  and  time  consuming  lawsuits  may be
necessary to enforce  patents  issued or licensed  exclusively to us, to protect
our trade secrets and/or know-how or to determine the enforceability,  scope and
validity of others' intellectual property rights.

         The medical  laser  industry is  characterized  by frequent  litigation
regarding  patent  and  other  intellectual  property  rights.   Because  patent
applications  are  maintained in secrecy in the United States until such patents
are issued and are maintained in secrecy for a period of time outside the United
States, we can conduct only limited searches to determine whether our technology
infringes any patents or patent applications. Any claims for patent infringement
could be time-consuming, result in costly litigation, diversion of technical and
management   personnel,   cause   shipment   delays,   require   us  to  develop
non-infringing  technology  or 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  the payment of
ongoing  royalties,  which could have a negative impact on gross margins.  There
can  be no  assurance  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.  This could have
a material  adverse effect on our business,  results of operations and financial
condition.


Our  Charter  documents  and  Delaware  law may  discourage  potential  takeover
attempts.
--------------------------------------------------------------------------------

         Our  Second  Restated  Certificate  of  Incorporation  and our  By-laws
contain  provisions  that  could  discourage  takeover  attempts  or  make  more
difficult  the  acquisition  of a  substantial  block of our common  stock.  Our
By-laws require a stockholder to provide to the Secretary of the Company advance
notice of  business  to be  brought  by such  stockholder  before  any annual or
special meeting of stockholders  as well as certain  information  regarding such
stockholder and others known to support such proposal and any material  interest
they may  have in the  proposed  business.  These  provisions  could  delay  any
stockholder  actions  that are  favored  by the  holders  of a  majority  of the

                                      -16-
<PAGE>

outstanding  stock of the  Company  until  the next  stockholders'  meeting.  In
addition,  the Board of Directors is  authorized to issue shares of common stock
and preferred stock which, if issued,  could dilute and adversely affect various
rights of the  holders  of  common  stock  and,  in  addition,  could be used to
discourage an unsolicited attempt to acquire control of the Company.

         The Company is also subject to the anti-takeover  provisions of Section
203 of the Delaware  General  Corporation  Law, which prohibits the Company from
engaging in a "business  combination"  with in  "interested  stockholder"  for a
period of three  years  after the date of the  transaction  in which the  person
becomes an interested  stockholder,  unless the business combination is approved
in a prescribed  manner. The application of Section 203 may limit the ability of
stockholders  to  approve a  transaction  that they may deem to be in their best
interests. These provisions of our Second Restated Certificate of Incorporation,
By-laws and the Delaware General  Corporation Law could deter certain  takeovers
or tender  offers or could  delay or  prevent  certain  changes  in  control  or
management of the Company,  including  transactions in which  stockholders might
otherwise  receive  a premium  for their  shares  over the then  current  market
prices.


As with any new products, there is substantial risk that the marketplace may not
accept or be receptive to the potential benefits of our products.
--------------------------------------------------------------------------------

         Market  acceptance of our current and proposed products will depend, in
large part,  upon our or any marketing  partner's  ability to demonstrate to the
marketplace  the advantages of our products over other types of products.  There
can be no assurance that the  marketplace  will accept  applications or uses for
our  current  and  proposed  products  or that any of our  current  or  proposed
products will be able to compete effectively.


We face risks associated with pending litigation.
--------------------------------------------------------------------------------

         We are involved in disputes  with third  parties.  Such  disputes  have
resulted in litigation  with such  parties.  We have  incurred,  and likely will
continue to incur, legal expenses in connection with such matters.  There can be
no assurance that such litigation  will result in favorable  outcomes for us. An
adverse result in the MEHL patent  litigation,  the action relating to the Swiss
Franc Debentures, or the Varljen litigation (all described in detail in Part II,
Item  1)  could  have a  material  adverse  effect  on our  business,  financial
condition  and  results  of  operations.  We are unable to  determine  the total
expense or  possible  loss,  if any,  that may  ultimately  be  incurred  in the
resolution  of these  proceedings.  These  matters  may result in  diversion  of
management time and effort from the operations of the business.


We may not be able to retain our key  executives  and research  and  development
personnel.
--------------------------------------------------------------------------------

         As a small company with less than 100 employees  after the sale of Star
to Coherent,  our success  depends on the services of key employees in executive
and research and development positions.  The loss of the services of one or more
of these employees could have a material adverse effect on us.


We face a risk of financial  exposure to product  liability  claims in the event
that the use of our products results in personal injury.
--------------------------------------------------------------------------------

         Our products are and will continue to be designed with numerous  safety
features, but it is possible that patients could be adversely affected by use of
one of our products.  Further, in the event that any of our products prove to be
defective, we may be required to recall and redesign such products.  Although we
have not  experienced  any material  losses due to product  liability  claims to
date,  there can be no assurance that we will not experience  such losses in the
future. We maintain general liability  insurance in the amount of $1,000,000 per
occurrence and $2,000,000 in the aggregate and maintain umbrella coverage in the
aggregate  amount of $25,000,000;  however,  there can be no assurance that such
coverage  will  continue to be available on terms  acceptable to us or that such
coverage will be adequate for liabilities actually incurred. In the event we are
found liable for damages in excess of the limits of our insurance  coverage,  or
if any claim or product recall results in significant  adverse publicity against
us,  our  business,  financial  condition  and  results of  operations  could be
materially and adversely affected. In addition,  although our products have been
and will  continue to be designed to operate in a safe  manner,  and although

                                      -17-

<PAGE>

we attempt to educate  medical  personnel  with respect to the proper use of our
products,  misuse of our products by medical personnel over whom we cannot exert
control  may  result in the filing of product  liability  claims or  significant
adverse publicity against us.


Computer  systems on which we rely may not  properly  recognize  date  sensitive
information when the year changes to 2000.
--------------------------------------------------------------------------------

         Systems that do not properly  recognize such information could generate
erroneous data or cause a system to fail. We are at this time utilizing internal
resources to identify,  correct or reprogram, and test our systems for year 2000
compliance.  However,  there  can be no  assurance  that  the  systems  of other
companies on which our systems rely will also be converted in a timely manner or
that any such  failure to convert by another  company  would not have an adverse
effect on our systems.  Management  is in the process of assessing the year 2000
compliance costs; however,  based on information to date (excluding the possible
impact of  vendor  systems),  management  does not  believe  that it will have a
material effect on our earnings.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

         Not applicable.


                                      -18-

<PAGE>

PART II

Item 1.  Legal Proceedings.
         ------------------

         On March 7, 1997, Selvac Acquisition Corp. ("Selvac"),  a subsidiary of
Mehl Biophile  International,  Inc.  ("Mehl"),  filed a complaint for injunctive
relief and damages for patent  infringement  and for unfair  competition  in the
United States District Court for the District of New Jersey against the Company,
two of its  subsidiaries  and a New  Jersey  dermatologist.  Selvac's  complaint
alleged that the Company's  EpiLaser(R) ruby laser hair removal system infringed
a patent licensed to Selvac (the "Selvac  Patent") and that the Company unfairly
competed by promoting the  EpiLaser(R)  ruby laser hair removal  system for hair
removal before it had received FDA clearance for that specific  application.  On
May 18, 1998 the court granted the Company's motion for partial summary judgment
on the ground that the Selvac patent is invalid  because  prior art  anticipated
it. The court later denied  Selvac's motion for  reconsideration  of the summary
judgment  ruling.  On September 25, 1998, the court denied  Selvac's  motion for
reconsideration  of its  prior  order  dismissing  so  much of  Selvac's  unfair
competition  claim as relied on interpreting the Food, Drug and Cosmetics Act or
FDA  regulations,  and  dismissed  without  prejudice the state law remainder of
Selvac's unfair  competition claim. On October 26, 1998, Selvac filed its notice
of appeal with the Court of Appeals for the Federal Circuit. Selvac subsequently
filed its opening brief on appeal; the Company filed its opposition.  Selvac has
filed its reply brief,  but the Federal  Circuit has not yet set a date for oral
argument The Company is unable to express an opinion as to the likely outcome of
Selvac's appeal.

         On October 16, 1997, the Company brought a declaratory  judgment action
in U.S. District Court for the District of Massachusetts against the holders and
the indenture trustee of the Company's 4.5% Subordinated  Convertible Debentures
due 2003,  denominated  in Swiss  francs (the  "Swiss  Franc  Debentures").  The
defendants in this action are Banque SCS Alliance SA,  Arbuthnot  Fund Managers,
Ltd.,  Banca  Commerciale  Lugano,  Privatinvest  Bank AG (these four defendants
being referred to  collectively as the "Asserting  Holders"),  CUF Finance S.A.,
Fibi Bank  (Schweiz) AG,  Teawood  Nominees,  Ltd.,  JS Gadd & CIE SA,  Swedbank
(Luxembourg)  SA,  Christiana  Bank  Luxembourg SA (now know as Credit  Agricole
Indosuez),  Landatina  Financiera SA and American Stock Transfer & Trust Co., as
trustee ("Trustee").  Just prior to this suit, the Asserting Holders had alleged
that the  Company  was in  breach  of  certain  protective  covenants  under the
indenture,  and on  October  22,  1997  they  sued  the  Company  and all of its
principal  subsidiaries  in the same court;  the October 16 and October 22 cases
have been  assigned to the same judge,  and the  dispute  between the  Asserting
Holders and the Company is proceeding  under the October 22 case.  The Asserting
Holders  claim  that the  Company  has  breached  certain  protective  indenture
covenants  and that the Asserting  Holders are entitled to immediate  payment of
their  indebtedness  under the  Swiss  Franc  Debentures.  (The  total  disputed
indebtedness  is  approximately  $6.2  million at current  exchange  rates;  the
Asserting  Holders' portion of the total is  approximately  $5.6 million.) As of
November 13, 1997,  acting under  applicable  provisions of the  indenture,  the
Company  notified the holders of the Swiss Franc  Debentures  that it is causing
the conversion of all of the Swiss Franc Debentures into an aggregate of 914,028
shares  of the  Company's  common  stock.  Palomar  filed a motion  for  summary
judgment,  asserting that its  conversion of the debentures  into Palomar common
stock deprives the plaintiffs of standing to bring a claim. That motion has been
denied without  prejudice,  and the court also denied the plaintiffs' motion for
summary  judgment.  By mutual  agreement,  the Asserting Holders and the Company
requested that the case be removed from the Court's October 1998 trial calendar.
The  parties  have  discussed   resolving  this  dispute  by  restructuring  the
debentures (whereby Palomar would prepay  approximately  two-thirds of the total
indebtedness,  or about $4.2 million, withdraw its forced conversion,  and repay
on a  modified  schedule  the  original  debt).  But  there  can be no  absolute
assurance that all of the debentureholders, including the Asserting Holders, and
the Company will execute the proposed settlement. If the case is returned to the
trial  calendar,  the Company  expects   vigorously to contest the claims of the
Asserting  Holders,  as the  Company  believes  its  position  in the lawsuit is
correct and that the disputed debt cannot properly be accelerated.

         On March 11, 1999,  the United States  District  Court for the Southern
District of New York granted  plaintiffs  leave to amend their  complaint in the
action styled Varljen v. H.J.  Meyers,  Inc.,  et. al. to join the Company,  its
former  chief  executive   officer  and  current  chief  financial   officer  as
defendants.  On March 17,  1999,  the  Second  Amended  Class  Action  Complaint
("Complaint")  in Varljen was served  upon the  Company  and its  current  chief
financial  officer.  The  Complaint  alleges that the Company and the former and
current  officer  violated  the  federal   securities  laws  in  various  public
disclosures that the Company made directly and indirectly during the period from
February 1, 1996 to March 26, 1997. In  particular,  the Complaint  alleges that
Palomar and the former and current officer  misrepresented  the Company's future
prospects,  including  earnings  projections  and expected  

                                      -19-

<PAGE>

shares  outstanding,  through their direct  disclosures and through  disclosures
made by securities analysts and other third parties.  The Company and the former
and current officer have filed a motion to dismiss the complaint,  asserting all
claims are barred by the statute of  limitations,  that the  complaint  does not
meet  federal  pleading  requirements,  and that it fails to state a  securities
claim.  The Company and the former and current  officer have also filed a motion
to transfer the case to the District of Massachusetts. Plaintiffs' opposition to
these  motions is at present  expected to be filed in June 1999.  The case is in
its earliest stages, and the Company cannot predict its outcome.

         The Company is involved in other legal and  administrative  proceedings
and  claims of  various  types.  While any  litigation  contains  an  element of
uncertainty,  management, in consultation with the Company's general counsel, at
present  believes that the outcome of each such other  proceeding or claim which
is pending or known to be threatened,  or all of them combined,  will not have a
material adverse effect on the Company.

Item 2.  Changes in Securities.
         ----------------------

         During the quarter ended March 31, 1999, the following  securities were
converted by their accredited  investor  unaffiliated third party holder for the
number of shares of common stock indicated:

<TABLE>
<S>      <C>                                <C>                <C>

                                                                  Number of Shares
         Type of Security                   Number of Shares   of Common Stock Issued
         ----------------                   ----------------   ----------------------

         Preferred Stock Series G                  340                74,905

</TABLE>

                                      -20-

<PAGE>


Item 3.  Defaults upon Senior Securities.
         -------------------------------

         Not applicable.

Item 4.  Submission of Matters to a Vote of Security Holders.
         ---------------------------------------------------

         Not applicable.

Item 5.  Other Information.
         -----------------

         Not applicable.

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

(a)      Exhibits

         4.1      Common Stock Certificate.

         4.2      Certificate  of  Designation,   as  filed  with  the  Delaware
                  Secretary of State on April 21, 1999.

         *4.3     Rights Agreement  Between Palomar Medical  Technologies,  Inc.
                  and American Stock Transfer & Trust Company, dated as of April
                  20, 1999.

         **4.4    Bylaws, as amended.

         **4.5    Second Restated  Certificate of  Incorporation,  as filed with
                  the Delaware Secretary of State on January 8, 1999.

         10.1     Repurchase  Agreement  between Palomar  Medical  Technologies,
                  Inc. and Advantage Fund Limited dated as of April 6, 1999.

         10.2     Mutual  Release,  Consent  and  Settlement  Agreement  between
                  Palomar Medical  Technologies,  Inc. and Electronic  Packaging
                  Interconnect Corporation dated as of April 16, 1999.

         27.1     Financial Data Statement, Restated, for the period ended March
                  31, 1998.

*        Previously filed as an exhibit to Form 8-K, filed on April 21, 1999 and
         incorporated herein by reference.

**       Previously  filed  as an  exhibit  to Form  10-K for the  period  ended
         December 31, 1998, filed on March 30, 1999 and  incorporated  herein by
         reference.

(b)      Reports on Form 8-K.

         None.



                                      -21-

<PAGE>



                                   SIGNATURES

         Pursuant  to the  requirements  of the  Securities  Act  of  1934,  the
Registrant  certifies  that it has caused this Report to be signed on its behalf
by the undersigned,  thereunto duly authorized,  in the Town of Lexington in the
Commonwealth of Massachusetts on May ___, 1999.

                                              PALOMAR MEDICAL TECHNOLOGIES, INC.
                                                           (Registrant)



DATE: May 17, 1999                            By:  /s/ Louis P. Valente
                                                   -----------------------------
                                                        Louis P. Valente
                                                        Chief Executive Officer
                                                        (Principal Executive
                                                         Officer)



DATE: May 17, 1999                            By:  /s/ Joseph P. Caruso
                                                   -----------------------------
                                                       Joseph P. Caruso
                                                       Chief Financial Officer 
                                                       and Treasurer
                                                       (Principal Financial 
                                                        Officer and Principal
                                                        Accounting Officer)