FORM 10-Q/A-1
    
                     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 September 30, 1998

                                       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>

                        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 October 30, 1998,  70,402,163  shares of Common  Stock,  $.01 par
value per share, were outstanding.

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

                                                                   Page 1 of 21

<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 of and for the
year ended December 31, 1997.

         Some of the Company's  medical laser  products are in various stages of
development;  the success of future  operations  is hence subject to a number of
risks  similar to those of other  companies  in similar  stages of  development.
Principal among these risks are the successful  development and marketing of the
Company's  products,   obtaining  regulatory  approval,  the  need  to  maintain
profitable   operations,   competition  from  substitute   products  and  larger
companies,  the need to obtain adequate  financing to fund future operations and
dependence on key individuals. The Company is currently in negotiations with its
distributor,  Coherent,  Inc. ("Coherent"),  regarding the sale of the Company's
Star Medical  Technologies,  Inc. ("Star")  subsidiary,  which  manufactures the
Company's LightSheer(TM) diode laser hair removal and leg vein treatment system.
(See Item 2.  "Management's  Discussion and Analysis of Financial  Condition and
Results of Operations.") If this subsidiary is sold, the successful introduction
and  marketing  of new  products  will  become more  critical  to the  Company's
long-term success.

         The  Company has  incurred  significant  losses  since  inception.  The
Company has  historically  financed  current  operations  and  expansion  of its
business primarily through the private sale of debt and equity securities of the
Company.  The Company may require  additional  financing  throughout the year to
continue to fund operations,  working capital and growth.  The Company may, from
time to time, be required to raise funds through additional private sales of the
Company's debt or equity securities. Securities are sold to private investors at
market or a discount to the public  market for similar  securities.  It has been
the Company's  experience that private  investors  require that the Company make
its best  effort to  register  its  securities  for resale to the public at some
future time.

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:

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

                                                                    December 31,        September 30,
                                                                        1997                1998
                                                                   ----------------    ----------------
                           Raw materials                              $2,928,350          $1,320,712
                           Work-in-process and finished goods          1,783,124           2,796,714
                                                                   ----------------    ----------------
                                                                      $4,711,474          $4,117,425
                                                                   ================    ================
</TABLE>

                                       2
<PAGE>


3.       PROPERTY AND EQUIPMENT

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

                                                                    December 31,        September 30,
                                                                        1997                1998
                                                                   ----------------    ---------------
                            Machinery and equipment                   $6,328,442         $6,070,637
                            Furniture and fixtures                     1,018,931          1,001,155
                            Leasehold improvements                       480,453            445,613
                                                                   ----------------    ---------------
                                                                       7,827,826          7,517,405
                            Less:  Accumulated depreciation
                                       and amortization                1,372,240          3,999,689
                                                                   ----------------    ---------------
                                                                      $6,455,586         $3,517,716
                                                                   ================    ===============
</TABLE>

4.       NET LOSS PER COMMON SHARE

         In March 1997, the Financial  Accounting  Standards Board (FASB) issued
SFAS No. 128,  Earnings per Share.  This  statement  establishes  standards  for
computing  and  presenting  earnings  per share and  applies  to  entities  with
publicly  traded  common  stock or potential  common  stock.  This  statement is
effective  for fiscal years ending after  December 15, 1997.  Basic net loss per
share was  determined by dividing net income by the weighted  average  shares of
common stock  outstanding  during the period.  Diluted net loss per share is the
same as basic net 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 loss per common share from continuing  operations for
the three and nine months ended September 30, 1997 and 1998 is as follows:

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

                                                    Three Months Ended                 Nine Months Ended
                                                       September 30,                     September 30,
                                                  1997             1998             1997              1998
                                             ----------------  --------------  ----------------  ---------------
Net (loss) income from continuing
operations                                     $(22,039,259)       $539,883      $(43,521,015)    $(10,267,252)
Amortization of value ascribed to
       preferred stock conversion discount         (941,176)             --        (1,882,352)              --
Preferred stock dividends                          (500,754)       (195,000)       (1,227,978)      (1,341,435)
                                             ----------------  --------------  ----------------  ---------------
Adjusted net (loss) income                     $(23,418,189)       $344,883      $(46,631,345)    $(11,608,687)
                                             ================  ==============  ================  ===============

Basic and diluted net (loss) income
       per common share from
       continuing operations                         $(0.68)           $0.01           $(1.43)          $(0.19)
                                             ================  ==============  ================  ===============

Weighted average number of
    common shares outstanding                     34,498,657     67,248,694        32,758,019       60,880,311
                                             ================  ==============  ================  ===============
</TABLE>


         As of September 30, 1997 and 1998,  22,833,270 and 29,394,921  weighted
average common equivalent shares, respectively, were not included in the diluted
weighted average shares outstanding as they were antidilutive.

                                       3
<PAGE>


5.       NOTES PAYABLE

Notes payable consist of the following:
<TABLE>
<S>                                                                                        <C>                <C>

                                                                                             December 31,      September 30,
                                                                                                1997               1998
                                                                                           ----------------   ---------------
Convertible debentures                                                                        $10,683,440      $2,500,000
Note payable issued in connection with guaranty on behalf of discontinued subsidiary            3,233,000       2,290,042
Short-term notes payable to Coherent, Inc.                                                            ---       4,000,000
Advance from Coherent, Inc.                                                                           ---         148,986
Other notes payable                                                                               169,588             ---
                                                                                           ---------------- ---------------
                                                                                               14,086,028       8,939,028
Less - current maturities                                                                      (1,640,465)     (5,765,486)
                                                                                           ---------------  ---------------
                                                                                              $12,445,563      $3,173,542
                                                                                           ================ ===============
</TABLE>

(a)   Convertible Debentures

         During the first quarter of 1998, the Company converted:  the remaining
$100,000 of its 4.5% convertible  debentures due October 21, 1999, 2000 and 2001
into 60,809 shares of the Company's  common stock;  the remaining  $3,084,344 of
its 5% convertible  debentures due December 31, 2001, January 13, 2002 and March
10, 2002 into 3,646,092  shares of the Company's  common stock;  and $160,000 of
its 6%, 7% and 8%  convertible  debentures  due  September 30, 2002 into 103,021
shares of the Company's  common stock.  Accrued interest  totaling  $158,685 was
included in the above  conversions.  The Company  amortized  deferred  financing
costs  totaling  $245,878  to  additional   paid-in  capital  related  to  these
conversions.

         During the second quarter of 1998, the Company converted  $2,840,000 of
6%, 7% and 8%  convertible  debentures  due  September  30, 2002 into  2,702,519
shares of the Company's  common stock.  Accrued interest  totaling  $107,999 was
included in the above  conversions.  The Company  amortized  deferred  financing
costs  totaling   $128,156  to  additional   paid-in  capital  related  to  this
conversion.

         During the first  quarter of 1998,  the  Company  redeemed  $2,000,000,
including  interest and premium,  of 6%, 7% and 8%  convertible  debentures  due
September 30, 2002 for $2,196,667.  Deferred financing cost totaling $95,000 was
charged to interest expense upon this redemption.

(b)   Short-Term Notes Payable

         On May 22 and  June 22,  1998,  the  Company  borrowed  $3,000,000  and
$1,000,000,  respectively,  from the Company's worldwide distributor,  Coherent.
These notes accrue  interest at 8.5% per annum.  The notes are secured by all of
the inventory owned by the Company's Star subsidiary.

         Under the terms of the Loan Agreement between Coherent and the Company,
the Company agreed to enter into good faith negotiations with Coherent regarding
the sale of Star for a price of no less than $42 million,  on terms to be agreed
upon  between  the Company and  Coherent.  The  negotiations  are  ongoing,  and
Coherent and the Company have announced that, if the parties are able to reach a
definitive agreement,  the sale price for Star is expected to be in the range of
$60 to $65 million, payable in cash. However, at this time, the parties have not
agreed to all of the terms of the  transaction.  Because a number of significant
issues regarding the terms of the transaction remain unresolved, there can be no
assurance that the parties will reach agreement.  Due to the uncertain nature of
transaction  negotiations,  the likelihood  that an agreement will be reached is
indeterminable.  If an agreement  is reached,  consummation  of the  transaction
would be subject to the  approval of the  stockholders  of  Palomar,  as well as
certain regulatory approvals and other standard closing conditions. In the event
that the parties are unable to agree on the terms and conditions for the sale of
Star,  the  $4,000,000 of funds borrowed by the Company from Coherent are due 90
days from the termination of negotiations regarding the proposed sale.

                                       4
<PAGE>



(c)      Advance from Coherent

         Coherent  advanced  funds to the Company  during 1998. The advances are
secured by specific accounts receivable  outstanding at the time of the advance.
Payments against this advance are made as Coherent collects receivables from the
end users of the Company's products.
   
(d)      Revolving Line of Credit

On September 23, 1998 the Company received a commitment letter from a bank for a
$10,000,000  revolving line of credit.  The commitment  letter  provides,  among
other things, that:

          -    The line of credit will mature on March 31, 2000;

          -    The line of credit will bear  interest  at the bank's  prime rate
               (8.00% at September 30, 1998);

          -    Borrowings will be limited to 80% of domestic accounts receivable
               under 90 days from invoice; and

          -    A director of the Company  will  personally  guaranty  borrowings
               under the line of credit.
    

6.       STOCKHOLDERS' DEFICIT

(a)      Issuance of Common Stock

         During 1998 the Company  sold  10,200,000  shares of common  stock to a
group of investors for  $10,200,000.  In addition,  the Company issued  callable
warrants to the  investors to purchase  10,200,000  shares of common stock at an
exercise price of $3.00 per share. The callable warrants are not exercisable for
the first six months after issuance and, thereafter, are callable by the Company
if the closing price of the  Company's  common stock equals or exceeds $5.00 for
ten consecutive  trading days.  Under the terms of this private  placement,  the
Company  is  obligated  to pay  the  investors  a fee of 5% per  annum  (payable
quarterly) of the dollar value  invested in the Company as long as the investors
continue to hold their common stock in their name.  Through  September 30, 1998,
the  Company  has paid  $190,000  related  to this fee.  The  Company  paid a 5%
commission of $360,000  related to this issuance  which has been netted  against
the proceeds through a reduction in additional paid-in capital.

(b)      Convertible Preferred Stock

         During the first quarter of 1998,  the Company  converted 268 shares of
Series G Preferred  Stock and accrued  dividends  and  interest of $30,255  into
283,507 shares of the Company's common stock.  Also, during the first quarter of
1998,  the Company  converted  3,840 shares of its Series H Preferred  Stock and
accrued  dividends of $359,807 into  4,103,650  shares of the  Company's  common
stock.

         During the first quarter of 1998, the Company  redeemed 2,200 shares of
Series H Preferred  Stock including  related accrued  dividends and premiums for
$2,673,850.

         During the second quarter of 1998, the Company  converted 536 shares of
Series G Preferred  Stock and accrued  dividends  and  interest of $66,485  into
616,378 shares of the Company's common stock. During the second quarter of 1998,
the  Company  converted  84  shares  of Series H  Preferred  Stock  and  accrued
dividends of $24,112 into 85,000 shares of the Company's common stock.

         During the second quarter of 1998,  the Company  redeemed 866 shares of
Series H Preferred  Stock including  related accrued  dividends and premiums for
$1,118,039.  During the second quarter of 1998, the Company  converted 84 shares
of Series H Preferred Stock and accrued  dividends of $24,112 into 85,000 shares
of the Company's common stock.

                                       5
<PAGE>


         During the third quarter of 1998,  the Company  converted 804 shares of
Series G Preferred  Stock and accrued  dividends  and interest of $117,451  into
1,181,410 shares of the Company's common stock.

         During the third  quarter of 1998,  the Company  redeemed 250 shares of
Series H Preferred  Stock including  related accrued  dividends and premiums for
$328,784.

(c)      Options to Purchase Common Stock

         During the nine months ended September 30, 1998, the Company  cancelled
options to purchase  2,892,400  shares of the Company's common stock at exercise
prices ranging from $1.50 to $8.00 per share.  In addition,  the Company granted
2,234,900  options at above market prices.  No options were exercised during the
nine months ended September 30, 1998.

(d)      Warrants to Purchase Common Stock

         During the nine months ended September 30, 1998, the Company  cancelled
warrants to purchase  2,508,452 shares of the Company's common stock at exercise
prices  ranging  from $2.25 to $6.75 per share and issued  warrants  to purchase
12,385,000  shares of the Company's common stock at exercise prices ranging from
$.01 to $3.25 per share.  During the nine months  ended  September  30,  1998, a
warrant for 125,000 shares was exercised for $1,250.
This warrant was held by an investor.

(e)      Reserved Shares

         As of September 30, 1998, the Company had reserved shares of its common
stock for the following:
<TABLE>
<S>          <C>                                                            <C>

                                                                            September 30,
                                                                                 1998
                                                                            ---------------
             Convertible debentures                                              3,739,915
             Stock option plans                                                  6,707,655
             Warrants                                                           19,749,578
             Employee 401(k) plan                                                  554,787
             Employee stock purchase plan                                          439,272
             Convertible preferred stock                                         3,950,631
             Common stock reserved in
               connection with guarantee of note
               payable on behalf of discontinued
               subsidiary                                                        3,250,000
                                                                            ---------------
                                   Total                                        38,391,838
                                                                            ===============
</TABLE>

7.       DISCONTINUED OPERATIONS

         During the fourth  quarter of 1997,  the  Company's  Board of Directors
approved a plan to dispose of the Company's electronics business segment. During
the second quarter of 1998,  the Company sold all of the issued and  outstanding
common stock of its wholly owned  subsidiary  Dynaco  Corp.  ("Dynaco")  for net
proceeds of  approximately  $2,381,000.  Due to the delay in the sale of Dynaco,
the Company  recognized a loss from  discontinued  operations  of  approximately
$1,091,000  for the nine months ended  September 30, 1998.  This  represents the
amount in excess of the losses  accrued for at December  31, 1997 related to the
operations of Dynaco  through the date of  disposition.  The Company  recorded a
charge to discontinued  operations of $1,525,000 due to management's decision to
write down the carrying  value of its  investment  in Nexar  Technologies,  Inc.
("Nexar")  during the nine months ended September 30, 1998. For the three months
ended September 30, 1998 there was no effect from discontinued operations.

         Pursuant  to  Accounting  Principles  Board  ("APB")  Opinion  No.  30,
Reporting  the  Results of  Operations  Reporting  the  Effects of Disposal of a
Segment of a Business  and  Extraordinary,  Unusual and  Infrequently  Occurring
Events and Transactions,  the consolidated  financial  statements of the Company
have been  reclassified to reflect the  disposition of the electronics  segment.
Accordingly,  the assets and liabilities,  revenues and expenses, and



                                       6
<PAGE>



cash flows of the  electronics  segment have been excluded  from the  respective
captions in the Consolidated Condensed Balance Sheets,  Consolidated  Statements
of  Operations  and  Consolidated  Statements  of Cash  Flows.  The net assets /
liabilities of these entities have been reported as "Net Assets / Liabilities of
Discontinued  Operations" in the  accompanying  Consolidated  Condensed  Balance
Sheets;  the net operating  losses of these  entities have been reported as "Net
Loss from Discontinued  Operations" in the accompanying  Consolidated Statements
of  Operations;  the net cash flows of these entities have been reported as "Net
Cash  (Used  In)  Provided  by  Discontinued  Operations"  in  the  accompanying
Consolidated Statements of Cash Flows.

         Summarized financial  information for the discontinued  operations were
as follows:
<TABLE>
<S>  <C>                                    <C>                   <C>                <C>                  <C>

                                              Three Months Ended September 30,            Nine Months Ended September 30,
                                                  1997                 1998               1997                    1998
                                            ------------------    ----------------   ----------------     ----------------------
     Revenues                                    $12,460,000            --              $47,507,978                 $5,745,750
     Net Loss from Discontinued
            Operations                          $(14,950,310)           --             $(23,646,687)               $(2,624,180)
</TABLE>

8.       RESTRUCTURING

         In the third quarter of 1997,  the Company  recognized a  restructuring
charge of  $2,700,000  based on the  decision  to  discontinue  and/or  downsize
certain medical product and service business units and consolidate  others.  The
majority of these amounts related to severance benefits.  All expenses accounted
for as  restructuring  charges were in accordance with the criteria set forth in
Emerging  Task Force  Issue 94-3,  Liability  Recognition  for Certain  Employee
Termination  Benefits  and Other  Costs to Exit an Activity  (Including  Certain
Costs Incurred in a Restructuring),  and are exclusive of the charges related to
discontinued  operations.  During the nine months ended  September 30, 1998, the
Company paid out approximately $1,365,000 of severance,  leaving a restructuring
liability of  approximately  $617,000 at  September  30,  1998.  This  remaining
restructuring  liability is principally  associated with severance and equipment
due to the Company's former Medical Director.

   
9.        NET LIABILITIES OF DISCONTINUED OPERATIONS

         On December 31, 1997 the Company entered into an Exchange Agreement and
sold 500,000 share of Nexar's common stock 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
Nexar's  common stock over a two year time  period.  The Company is obligated to
pay GFL on January 1, 2000 the  difference  between $5.00 and the price at which
GFL sells the shares of common  stock.  As of September  30, 1998,  the deferred
gain related to this  transaction  totaled  $1,687,079  and represents the total
amount due to GFL after GFL sold their 400,000 common shares of Nexar stock.

         As of November 13, 1998, the Company owns  2,000,000  shares of Nexar's
common stock and 45,684 shares of Nexar Convertible  Preferred Stock convertible
into 406,080 shares of Nexar's common stock. The Company  estimates that it owns
approximately  18.99% of Nexar. The Company has been actively trying to sell the
remaining  shares  of  Nexar  common  stock;  however,  the  Company  may not be
successful  since Nexar filed in the United States  Bankruptcy  Court a petition
for  reorganization  under  Chapter 11 of title 11 of the United  States Code on
December 17, 1998.  Furthermore,  Nexar has been  delisted from The Nasdaq Stock
Market due to Nexar's failure to satisfy Nasdaq listing requirements.
    


                     [This space intentionally left blank.]

                                       7
<PAGE>



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

REVENUE AND GROSS MARGIN:  Three Months Ended  September  30, 1998,  Compared to
Three Months Ended September 30, 1997

         For the three months ended September 30, 1998, the Company had revenues
of $13.8  million  as  compared  to $5.8  million  for the  three  months  ended
September  30, 1997.  The increase in the  Company's  revenue of $8.0 million or
136% from the quarter  ended  September  30,  1997 was mainly due to  additional
sales  volume  of  $13.0  million   associated  with  the  introduction  of  the
LightSheer(TM)  diode laser hair removal and leg vein treatment  system combined
with a decrease  in  revenue of  approximately  $5.0  million in other  cosmetic
product revenue principally related to the Company's EpiLaser(R) ruby laser hair
removal  system.  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 the
Company's  EpiLaser(R)  laser was due to the  Company's  focus on  bringing  the
LightSheer(TM)  laser to market while  developing a new  generation of ruby hair
removal laser.  Using its core ruby laser technology,  originally  developed for
tattoo  and  pigmented  lesion  removal,   Palomar   developed  its  long  pulse
EpiLaser(R) ruby laser that is specifically  configured to allow the appropriate
wavelength,  energy level and pulse  duration to be absorbed  effectively by the
hair follicle without being absorbed by the surrounding  tissue.  That, combined
with  Company's  patented  cooling  handpiece,  allows safe and  effective  hair
removal.  Palomar's  new  generation  long pulse ruby laser is expected  both to
permit more rapid treatment of large areas of the body such as the back,  chest,
abdomen,  legs and arms and to be manufactured at a higher gross margin than the
Company's  current  EpiLaser(R)  laser.  In July 1998 the Company  obtained  FDA
clearance  to market and sell its  EpiLaser(R)  laser in the  United  States for
"permanent hair reduction."

         The Company is in negotiations  with its  distributor,  Coherent,  Inc.
("Coherent") regarding the sale of the Company's Star Medical Technologies, Inc.
("Star") subsidiary.  This subsidiary manufactures the Company's  LightSheer(TM)
diode laser. The parties have announced that, if the transaction is consummated,
the sale price for Star is  expected  to be in the range of $60 to $65  million,
payable in cash.  However,  at this time,  the parties have not agreed to all of
the terms of the transaction.  Because a number of significant  issues regarding
the terms of the transaction remain  unresolved,  there can be no assurance that
the parties will reach  agreement.  Due to the uncertain  nature of  transaction
negotiations,   the   likelihood   that  an   agreement   will  be   reached  is
indeterminable.  If an agreement  is reached,  consummation  of the  transaction
would be subject to the  approval of the  stockholders  of  Palomar,  as well as
certain  regulatory  approvals and other  standard  closing  conditions.  If the
transaction is consummated, revenue would decline significantly in the near term
and the successful  introduction  and marketing of new products will become more
critical to the Company's long-term success.

         Gross  margin  for the  three  months  ended  September  30,  1998  was
approximately  $8.1 million (59% of revenues)  versus $918,000 (16% of revenues)
for the three months  ended  September  30,  1997.  The increase in gross margin
dollars  and gross  margin  percentage  was  caused by the  introduction  of the
LightSheer(TM)  laser.  This new laser system has a  significantly  higher gross
margin than the Company's EpiLaser(R) laser.

OPERATING AND OTHER EXPENSES: Three Months Ended September 30, 1998, Compared to
Three Months Ended September 30, 1997

         Research and  development  costs were $1.5 million for the three months
ended  September 30, 1998 and $2.9 million for the three months ended  September
30, 1997. Research and development  expenses as a percent of revenue totaled 11%
for the three months ended September 30, 1998 and 50% for the three months ended
September  30,  1997.  The decline in spending  is  primarily  the result of the
Company receiving FDA clearance for the LightSheer(TM) diode laser system at the
end of 1997.  The continued  spending on research and  development  reflects the
Company's  commitment  to  research  and  development  for  medical  devices and
delivery systems for cosmetic laser applications and other 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.


                                       8
<PAGE>

   
         Selling  and  marketing  expenses  increased  to $4.4  million  (32% of
revenues) for the three months ended September 30, 1998, from approximately $1.7
million (29% of revenues)  for the three months ended  September  30, 1997.  The
increase  in  selling  and  marketing  expenses  is  attributable  to the  costs
associated with the Company's exclusive  distribution  arrangement with Coherent
which  increase  in direct  proportion  to sales  volume  under the terms of the
Company's  Sales Agency  Agreement with Coherent,  because  Coherent  receives a
commission  for each of the Company's  products that it sells,  to compensate it
for its selling and marketing efforts.
    

         General and  administrative  expenses decreased to $1.8 million (13% of
revenues)  for the three  months  ended  September  30,  1998,  compared to $3.6
million (62% of revenues) for the three months ended  September  30, 1997.  This
decrease  is  attributable  to  the  Company's   successful   restructuring  and
consolidation  of  administrative  functions in the third and fourth quarters of
1997.  In previous  years,  the Company  focused  management  time and allocated
resources to  developing  businesses  outside of the medical and cosmetic  laser
industry and  financing  those  businesses.  Beginning in the fourth  quarter of
1997,  the  Company  focused  its  efforts  on its core  business.  The  Company
anticipates general and administrative  expense will continue to decrease in the
future as the benefits of the third and fourth  quarter 1997  restructuring  are
realized.

         Restructuring and asset write-off costs were approximately $3.3 million
for the three  months  ended  September  30,  1997.  This  non-recurring  charge
reflects  the  write-off  costs for  certain  operating  assets that the Company
believes  were not fully  realizable.  Included in this charge is a $2.7 million
reserve for severance costs associated with  consolidating the selling,  general
and administrative functions, including the closing of certain facilities.

         Asset write-off costs of $9.7 million were incurred in the three months
ended  September 30, 1997.  This one time charge  reflects asset write-off costs
for notes and investments whose value had been permanently impaired.

         Interest  expense  decreased  to $184,000  for the three  months  ended
September 30, 1998, from $728,000 for the three months ended September 30, 1997.
This 75% 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 1998 as compared to 1997.

         Other  (expense)  income was income of  approximately  $396,000 for the
three months ended September 30, 1998. This amount was principally  related to a
realized net gain from the Company's  trading  securities.  The Company incurred
other expenses of  approximately  $375,000 for the three months ended  September
30, 1997.  This amount  reflects  unrealized  losses from the Company's  trading
securities.

         The  Company  had no loss from  discontinued  operations  for the three
months  ended  September  30,  1998  due to the fact  that it has  substantially
completed the divestiture of its  discontinued  operations in the second quarter
of 1998. This compares to losses of $15 million from discontinued operations for
the three months ended  September 30, 1997. (See Note 7 of Notes to Consolidated
Financial Statements.)

REVENUE AND GROSS MARGIN: Nine Months Ended September 30, 1998, Compared to Nine
Months Ended September 30, 1997

         For the nine months ended  September 30, 1998, the Company had revenues
of $30 million as compared to $15.7 million for the nine months ended  September
30, 1997. The increase in the Company's revenue of $14.3 million or 91% from the
nine months ended  September 30, 1997 was mainly due to additional  sales volume
of $22 million  associated  with the  introduction of the  LightSheer(TM)  diode
laser combined with a decrease in revenue of approximately $7.7 million in other
cosmetic 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 the
Company's  EpiLaser(R) ruby laser was due to the Company's focus on bringing the
LightSheer(TM) laser to market while further developing a new generation of ruby
hair removal laser. Using its core ruby laser technology,  originally  developed
for  tattoo and  pigmented  lesion  removal,  Palomar  developed  its long pulse
EpiLaser(R) ruby laser that is specifically  configured to allow the appropriate
wavelength,  energy level and pulse  duration to be absorbed  effectively by the
hair follicle without being absorbed by the surrounding  tissue.  That, combined
with  Company's  patented  cooling  handpiece,  allows safe and  effective  hair
removal.  Palomar's  new  generation  long pulse ruby laser is expected  both to
permit more rapid treatment of large areas of the body such as the back,  chest,
abdomen,  legs and arms and to be manufactured at a higher gross margin


                                       9
<PAGE>

than the Company's current  EpiLaser(R) laser. In July 1998 the Company obtained
FDA clearance to market and sell its EpiLaser(R)  laser in the United States for
"permanent hair reduction."

         The Company is in negotiations with Coherent  regarding the sale of the
Company's Star subsidiary, which manufactures the Company's LightSheer(TM) diode
laser.  The parties have announced that, if the transaction is consummated,  the
sale  price  for Star is  expected  to be in the  range  of $60 to $65  million,
payable in cash.  However,  at this time,  the parties have not agreed to all of
the terms of the transaction.  Because a number of significant  issues regarding
the terms of the transaction remain  unresolved,  there can be no assurance that
the parties will reach  agreement.  Due to the uncertain  nature of  transaction
negotiations,   the   likelihood   that  an   agreement   will  be   reached  is
indeterminable.  If an agreement  is reached,  consummation  of the  transaction
would be subject to the  approval of the  stockholders  of  Palomar,  as well as
certain  regulatory  approvals and other standard  closing  conditions.  If this
transaction is  consummated,  revenues would decline  significantly  in the near
term and the successful  introduction  and marketing of new products will become
more critical to the Company's long-term success.

         Gross  margin  for  the  nine  months  ended  September  30,  1998  was
approximately  $13.1  million  (44% of  revenues)  versus  $1.3  million  (8% of
revenues) for the nine months ended  September  30, 1997.  The increase in gross
margin  and  gross  margin  percentage  was  caused by the  introduction  of the
LightSheer(TM)  diode laser  system.  This new laser system has a  significantly
higher gross margin than the Company's EpiLaser(R) laser.

OPERATING AND OTHER EXPENSES:  Nine Months Ended September 30, 1998, Compared to
Nine Months Ended September 30,
1997

         Research  and  development  costs were $5.7 million for the nine months
ended  September 30, 1998 and $7.8 million for September 30, 1997.  Research and
development  expenses  as a percent of revenue  totaled  19% for the nine months
ended  September 30, 1998 and 50% for the nine months ended  September 30, 1997.
The decline in spending is  primarily  the result of the Company  receiving  FDA
approval for the LightSheer(TM) laser at the end of 1997. The continued spending
on research and  development  reflects the Company's  commitment to research and
development  for  medical  devices  and  delivery  systems  for  cosmetic  laser
applications  and other 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.

   
         Selling and  marketing  expenses  increased  to $10.5  million  (35% of
revenues) for the nine months ended September 30, 1998, from  approximately $4.3
million (27% of  revenues)  for the nine months ended  September  30, 1997.  The
increase  in  selling  and  marketing  expenses  is  attributable  to the  costs
associated  with  the  Company's  distribution  agreement  with  Coherent  which
increase in direct  proportion  to sales volume under the terms of the Company's
Sales Agency Agreement with Coherent, because Coherent receives a commission for
each of the Company's  products that it sells,  to compensate it for its selling
and marketing efforts.
    

         General and  administrative  expenses decreased to $7.0 million (23% of
revenues)  for the nine months ended  September  30, 1998,  as compared to $13.3
million (85% of revenues)  for the nine months ended  September  30, 1997.  This
decrease  is  attributable  to  the  Company's   successful   restructuring  and
consolidation  of  administrative  functions in the third and fourth quarters of
1997.  In previous  years,  the Company  used  management's  time and  allocated
resources to  developing  businesses  outside of the medical and cosmetic  laser
industry and financing the non-core businesses.  Beginning in the fourth quarter
of 1997,  the  Company  focused its  efforts on its core  business.  The Company
anticipates general and administrative  expense will continue to decrease in the
future as the benefits of the third and fourth  quarter 1997  restructuring  are
realized.

         For the nine months ended September 30, 1998, the Company did not incur
settlement expenses.  Settlement costs of $3.2 million were incurred in the nine
months ended  September  30, 1997.  These  charges  consisted  mainly of a legal
accrual related to a legal settlement with an investment bank.

         Restructuring and asset write-off costs were approximately $3.3 million
for the nine months ended September 30, 1997. This non-recurring charge reflects
the write-off costs for certain  operating assets that the


                                       10
<PAGE>

Company  believes were not fully  realizable.  Included in this charge is a $2.7
million reserve for severance coasts associated with  consolidating the selling,
general  and  administrative   functions,   including  the  closing  of  certain
facilities.

         Interest  expense  decreased  to $1.0 million for the nine months ended
September  30, 1998,  from $3.3 million for the nine months ended  September 30,
1997.  This 69%  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 1998 as compared to 1997.

         Asset  write-off costs of $9.7 million were incurred in the nine months
ended  September 30, 1997.  This  non-recurring  charge reflects asset write-off
costs for notes and investments whose value had been permanently impaired.

         Other  (expense)  income was  approximately  $751,000 of income for the
nine months ended September 30, 1998. This amount primarily consists of realized
gains from the Company's trading securities.

         The  loss  from  discontinued  operations  for the  nine  months  ended
September 30, 1998 was $2.6 million  compared to a loss of $23.6 million for the
nine months ended September 30, 1997. The loss from  discontinued  operations in
1998 was due to a delay in the  disposition  of Dynaco  resulting  in  operating
expenses of approximately  $1.1 million above the estimated  operating  expenses
accrued for at December 31, 1997. A loss on disposition of discontinued entities
for the nine months ended  September 30, 1998 of $1.5 million was incurred.  The
majority of this  charge  relates to  management's  decision  to  write-off  the
carrying value of its investment in Nexar.

Liquidity and Capital Resources

         As of September  30, 1998,  the Company had $2.7 million in cash,  cash
equivalents and trading  securities.  During the nine months ended September 30,
1998 the Company  generated  $9.9 million and $3.1 million in net proceeds  from
the issuance of common stock and  short-term  notes payable,  respectively.  The
Company's  net cash  used in  operating  activities  for the nine  months  ended
September 30, 1998 was approximately $9.4 million.

         The  Company's  net loss for the nine months ended  September  30, 1998
included  approximately  $2.2 million of non-cash  depreciation and amortization
expense.

   
         As of  September  30 1998,  the  Company's  accounts  receivable  total
approximately  $5,901,000.  This  amount  is  principally  related  to  accounts
receivable due from the sale of Star's  LightSheer(TM)  diode laser. The Company
began shipping this product in the first quarter of 1998.
    

         The Company  anticipates  that capital  expenditures  for the remaining
three months of 1998 will total approximately $250,000. The Company will finance
these  expenditures  with cash on hand,  the line of bank  credit and  equipment
leasing lines. However,  there can be no assurance that the Company will be able
to obtain the necessary financing.

   
         On September 23, 1998, the Company received a commitment  letter from a
bank for a $10,000,000 revolving line of credit. The commitment letter provides,
among other things, that:

     -    The line of credit will mature on March 31, 2000;

     -    The line of credit will bear  interest at the bank's prime rate (8.00%
          at September 30, 1998);

     -    Borrowings  will be limited  to 80% of  domestic  accounts  receivable
          under 90 days from invoice; and

     -    A director of the Company will personally  guaranty  borrowings  under
          the line of credit.
    

                                       11
<PAGE>

         The  Company  has also  considered  and expects to continue to consider
intellectual  property licensing  agreements,  the sale of intellectual property
rights  that the  Company  does not  intend to  exploit,  the sale of  operating
subsidiaries,  and  mergers,  acquisitions,  or other  transactions  to  provide
additional financing to fund future products and research and development.

         The Company is in negotiations with Coherent  regarding the sale of the
Company's Star subsidiary, which manufactures the Company's LightSheer(TM) diode
laser  system.   The  parties  have  announced   that,  if  the  transaction  is
consummated,  the sale price for Star is  expected  to be in the range of $60 to
$65 million, payable in cash. However, at this time, the parties have not agreed
to all of the terms of the transaction.  Because a number of significant  issues
regarding  the  terms of the  transaction  remain  unresolved,  there  can be no
assurance that the parties will reach agreement.  Due to the uncertain nature of
transaction  negotiations,  the likelihood  that an agreement will be reached is
indeterminable.  If an agreement  is reached,  consummation  of the  transaction
would be subject to the  approval of the  stockholders  of  Palomar,  as well as
certain regulatory approvals and other standard closing conditions.

         The  Company's  strategic  plan is to  continue  to fund  research  and
development  for its medical and  cosmetic  laser  products.  This  research and
development  effort entails extensive  clinical trials.  These activities are an
important  part of the Company's  business  plan.  Due to the nature of clinical
trials and research and  development  activities,  it is not possible to predict
with any certainty the timetable for completion of these research  activities or
the total amount of funding  required to commercialize  products  developed as a
result of such research and development.  The rate of research and the number of
research  projects  underway are dependent to some extent upon external funding.
While the Company is regularly  reviewing  potential funding sources in relation
to these ongoing and proposed research projects,  there can be no assurance that
the current  levels of funding or additional  funding will be available,  or, if
available, on terms satisfactory to the Company.

   
         The Company will consider a number of alternatives  with respect to its
future products,  including  manufacturing them itself and selling them directly
and/or  through  distributors  or selling the product line and/or  technology to
others.  The Company will in each case choose the alternative  which it believes
best maximizes profitability and long-term shareholder value.
    

         In connection with the disposition of Comtel, Inc. ("Comtel"), a former
wholly-owned  subsidiary  in the  electronics  segment,  the Company  guaranteed
$2,500,000  of a $3,300,000  line of credit  extended by a loan  association  to
Biometric  Technologies Corp. ("BTC"),  the buyer of Comtel. The stockholders of
BTC have personally  guaranteed to the Company payment for any amounts  borrowed
under this line of credit in excess of approximately $1,500,000 in the event the
Company is  obligated  to honor this  guaranty.  The amount BTC has  outstanding
under the line of credit at September 30, 1998 was approximately $2,633,000.

         The Company has historically  incurred  significant  losses.  While the
Company achieved profitable  operations for the three months ended September 30,
1998, there can be no assurance that this will continue.  Therefore, the Company
may need to continue to secure additional financing to complete its research and
development activities,  commercialize its current and proposed medical products
and services, and fund ongoing operations. There can be no assurance that events
in the future will not require the  Company to seek  additional  financing.  The
Company continues to investigate several financing  alternatives,  including the
sale of  intellectual  property  rights  that the  Company  does not  intend  to
exploit,  the  sale  of  operating  subsidiaries,  strategic  partnerships,  and
mergers, acquisitions, or other transactions. Based on its historical ability to
raise  funds as  necessary  and ongoing  discussions  with  potential  financing
sources, the Company believes that it will be successful in obtaining additional
financing, if required, in order to fund future operations. Although the Company
believes it will be successful in obtaining additional  financing,  there can be
no assurance that any such financing will be available on terms  satisfactory to
the Company.  The report of the  Company's  independent  public  accountants  in
connection with the Company's  Consolidated  Balance Sheets at December 31, 1997
and 1996, and the related Consolidated  Statements of Operations,  Stockholders'
Equity  (Deficit)  and Cash Flows for the three  years ended  December  31, 1997
includes an explanatory  paragraph stating that the Company's  recurring losses,
working capital  deficiency and stockholders'  deficit raises  substantial doubt
about the Company's ability to continue as a going concern.

Material Uncertainties

         Year 2000 Issues

         During 1998, 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:

     -    Information Technology (computer hardware, and software)

     -    Physical Plant (manufacturing equipment and facilities)

     -    Products (including product development)

     -    Extended Enterprise (suppliers and customers)

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

     -    Ownership (creating awareness, assigning tasks)

     -    Inventory (listing items to be assessed for Y2K readiness)
                           
     -    Assessment  (prioritizing the inventoried  items,  assessing their Y2K
          readiness, planning corrective actions, developing initial contingency
          plans)
                          
     -    Corrective  Action  Deployment   (implementing   corrective   actions,
          verifying implementation, finalizing and executing contingency plans)

         At September 30, 1998,  the Ownership,  Inventory and Assessment  steps
were essentially complete for all program areas. The Company expects to complete
Corrective Action Deployment by June 1999.

                                       12
<PAGE>

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. To date
the Company has spent approximately $10,000.

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 potentially
result from events such as supply  chain  disruptions.  The Company  expects its
contingency plans to be complete by June 1999.

         Sale of Star

         Although   Palomar  and  Coherent  have  announced  that  they  are  in
negotiations  regarding the sale of the Company's Star  subsidiary,  the parties
have  not  agreed  to all the  terms of the  transaction.  Because  a number  of
significant  issues  regarding the terms of the transaction  remain  unresolved,
there can be no  assurance  that the parties  will reach  agreement.  Due to the
uncertain nature of transaction  negotiations,  the likelihood that an agreement
will be reached is indeterminable.  If an agreement is reached,  consummation of
the transaction would be subject to the approval of the stockholders of Palomar,
as well as certain regulatory approvals and other standard closing conditions.

         Nasdaq Stock Market Listing

         By letter dated  October 13, 1998,  the Nasdaq Stock Market  ("Nasdaq")
brought to the  Company's  attention  Nasdaq's  concern  regarding the continued
listing of the Company's  common stock on the Nasdaq SmallCap  Market,  based on
the fact that the  Company's  common  stock had failed to maintain a closing bid
price  greater  or equal to $1.00 over the  previous  thirty  consecutive  trade
dates.  Nasdaq  informed the Company that it has ninety calendar days (until the
close of  business  on  January  13,  1998) in which to regain  compliance  with
Nasdaq's  $1.00 minimum bid price  requirement.  Although the  Company's  common
stock may be subject to delisting on January 13, 1998,  the Company may stay the
delisting  by  requesting  a hearing  before  such time.  If the Company has not
regained  compliance with the minimum bid price requirement by January 13, 1998,
the Company  intends to appeal a  potential  delisting  to Nasdaq's  Listing and
Hearing Review  Committee and anticipates that delisting of the Company's common
stock  may be  stayed  during  the  pendency  of such  appeal.  There  can be no
assurance, however, that the Company will be able to maintain Nasdaq listing for
the Company's  common stock  (whether as a result of failure to meet the minimum
bid price  requirement,  the  market  value  requirement  or other  requirements
imposed by Nasdaq). The Company's management anticipates that the absence of the
Nasdaq  listing for the Company's  common stock would have an adverse  effect on
the market for, and potentially the market price of, the Company's common stock.
If the Company's common stock is delisted from Nasdaq,  the Company expects that
brokers would continue to make a market in the Company's common stock on the OTC
Bulletin Board.

Factors That May Affect Future Results

         From time to time,  information  provided by the Company or  statements
made by its employees may contain "forward-looking" information, as that term is
defined in the Private  Securities  Litigation  Reform Act of 1995 (the  "Reform
Act").  This  report  may  also  contain   statements  that  are  deemed  to  be
forward-looking information under the Reform Act, including, without limitation,
statements  relating to sale of the Company's  Star  subsidiary;  products under
development;,  maintenance  of Nasdaq  listing for the  Company's  common stock;
financial  projections;  gross margin,  distribution  and product  improvements;
growing  market  demand;  additional  financings;  increases  in  revenues;  and
research and development,  selling and marketing, general and administrative and
capital expenditures. 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  Company  cautions  investors  that  there can be no
assurance that actual results or business  conditions will not differ materially
from those projected or suggested in such forward-looking statements as a result
of various factors,  including but not limited to the risk factors identified in
the Company's  Annual Report on Form 10-K for the year ended  December 31, 1997,
which  cautionary  statements  are 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.

                                       13
<PAGE>



                           PART II - OTHER INFORMATION

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 approval 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 has since  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 to the Court of Appeals for the Federal Circuit.

         On October 16, 1997, the Company brought a declaratory  judgment action
in United States  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 known 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 is in breach of certain protective  covenants under the
indenture.  The Company  believes that it is not in default under any protective
covenants,  and the Company's  action seeks a declaration from the Court to that
effect.  All payments on the Swiss Franc  Debentures were current to the time of
suit. On October 22, 1997, the Asserting Holders sued the Company and all of its
principal  subsidiaries  in the same court;  the October  16th and October  22nd
cases  have  been  assigned  to the same  judge,  and the  dispute  between  the
Asserting Holders and the Company is proceeding under the October 22nd 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 (which amounts to
about  US$5,000,000 at recent exchange rates).  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
ways to  resolve  their  dispute,  but  there can be no  assurance  that all the
debentureholders,  including the Asserting Holders,  and Palomar will complete a
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 debt
cannot properly be accelerated.

Item 2.  Changes in Securities

   
         On July 22,  1998,  the Company  sold  1,800,000  shares and  1,200,000
shares of the Company's  common stock to Rockside  Foundation and Mark T. Smith,
respectively,  for an aggregate  amount of  $3,000,000.  In addition,  for every
share  purchased  the investor  received a warrant to  purchase one share of the
Company's  common stock for $3.00 per share.  These  warrants  expire five years
from the closing date and are exercisable beginning six months after the closing
date.  This sale was made in reliance on Section 4(2) of the Securities Act. The
sale was made without general solicitation or advertising.  Each purchaser was a
sophisticated  investor  with access to all  relevant  information  necessary to
evaluate the investment in the Company,  and each  purchaser  represented to the
Company that the shares and warrants were being acquired for investment.
    

                                       14
<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 February 12, 1999.

                                              PALOMAR MEDICAL TECHNOLOGIES, INC.
                                                         (Registrant)



DATE:  February 12, 1999                   By:     /s/ Louis P. Valente
                                                   --------------------
                                                   Louis P. Valente
                                                   Chief Executive Officer
                                                   (Principal Executive Officer)

DATE:  February 12, 1999                           /s/ Joseph P. Caruso
                                                   --------------------
                                                   Joseph P. Caruso
                                                   Chief Financial Officer and
                                                   Treasurer
                                                   (Principal Financial Officer
                                                   and Principal Accounting
                                                   Officer)
<PAGE>