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 June 30, 2000

                                       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)

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


              82 Cambridge Street, Burlington, Massachusetts 01803
              ----------------------------------------------------
                    (Address of principal executive offices)

                                 (781) 993-2300
               ---------------------------------------------------
                (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 July 31, 2000,  10,209,656 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

PART I  - FINANCIAL INFORMATION
<TABLE>
<S>      <C>        <C>                                                                              <C>
         ITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

                           Consolidated Condensed Balance Sheets                                     1

                           Consolidated Statements of Operations                                     2

                           Consolidated Statements of Stockholders' Equity                           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                                                11

                  RISK FACTORS                                                                       16

         ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES
                  ABOUT MARKET RISK                                                                  19

PART II - OTHER INFORMATION                                                                          20

         ITEM 1.  LEGAL PROCEEDINGS                                                                  20

         ITEM 2.  CHANGES IN SECURITIES                                                              20

         ITEM 3.  DEFAULTS UPON SENIOR SECURITIES                                                    20

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

         ITEM 5.  OTHER INFORMATION                                                                  21

         ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K                                                   22

SIGNATURES                                                                                           24


</TABLE>






<PAGE>

PART I - FINANCIAL INFORMATION
Item 1.  Consolidated Financial Statements (Unaudited)
         ---------------------------------------------

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

<TABLE>
<S>                                                                                            <C>                     <C>
                                                                                               December 31,             June 30,
                                                                                                   1999                   2000
                                                                                               ------------            -----------
                                                                                                                       (Unaudited)
                                        ASSETS

Current Assets:

        Cash and cash equivalents                                                                $2,712,466            $13,528,404
        Available-for-sale investments, at market value                                          22,505,996              6,979,100
        Accounts receivable, net                                                                  1,879,612              1,197,737
        Inventories                                                                               1,899,591                997,182
        Receivable from sale of subsidiary                                                        3,330,976                      -
        Other current assets                                                                        729,301                362,004
                                                                                               ------------            -----------
             Total current assets                                                                33,057,942             23,064,427
                                                                                               ------------            -----------
Property and Equipment, Net                                                                         991,432                933,022
                                                                                               ------------            -----------

        Cost in excess of net assets acquired, net                                                  631,026                      -
        Other non-current assets                                                                    162,468                122,025
                                                                                               ------------            -----------
             Total other assets                                                                     793,494                122,025
                                                                                               ------------            -----------
                                                                                                $34,842,868            $24,119,474
                                                                                               ============            ===========
                        LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:

        Current portion of long-term debt                                                        $1,122,008            $ 2,244,016
        Accounts payable                                                                            659,280                392,666
        Accrued liabilities                                                                       6,371,553              5,719,707
        Accrued income taxes                                                                      2,500,000                395,675
        Deferred revenue                                                                            918,642                448,861
        Deferred gain from sale of subsidiary                                                     3,139,556                      -
                                                                                               ------------            -----------
             Total current liabilities                                                           14,711,039              9,200,925
                                                                                               ------------            -----------
Long-Term Debt, Net of Current Portion                                                            1,622,008                500,000
                                                                                               ------------            -----------
Accrued Dividends and Interest on Preferred Stock                                                 1,417,184              1,598,317
                                                                                               ------------            -----------
Stockholders' Equity:
        Preferred stock, $.01 par value-
             Authorized - 1,500,000 shares
             Issued and outstanding -
             6,000 shares
             at December 31, 1999 and June 30, 2000                                                     60                     60
        Common stock, $.01 par value-
             Authorized - 45,000,000 shares
             Issued - 11,034,493 shares and 11,074,393 shares
             at December 31, 1999 and June 30, 2000, respectively                                   110,345                110,744
        Additional paid-in capital                                                              162,275,613            161,964,523
        Accumulated deficit                                                                    (141,550,040)          (146,033,695)
        Unrealized loss on available-for-sale investments                                           (67,943)               (18,830)
        Less: Treasury stock - 1,002,615 and 873,779 shares at cost
        at December 31, 1999 and June 30, 2000, respectively                                     (3,675,398)            (3,202,570)
                                                                                               ------------            -----------
             Total stockholders' equity                                                          17,092,637             12,820,232
                                                                                               ------------            ------------
                                                                                                $34,842,868            $24,119,474
                                                                                               ============            ============
  The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
                                       1
<PAGE>
               PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
                  CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (Unaudited)
<TABLE>
<S>     <C>                                                <C>               <C>                <C>              <C>
                                                                 Three Months Ended                   Six Months Ended
                                                                      June 30,                             June 30,
                                                               1999              2000               1999             2000
                                                           ------------      ------------       ------------     ------------
Product revenues                                            $ 4,879,177       $ 1,481,603      $ 18,357,786      $ 3,095,123
Royalty revenues                                                650,000         1,113,147           650,000        2,352,677
                                                           ------------      ------------       ------------     ------------
        Total Revenues                                        5,529,177         2,594,750        19,007,786        5,447,800

Cost of product revenues                                      3,977,045         2,117,864         8,947,021        4,172,077
Cost of royalty revenues                                        260,000           445,259           260,000          941,071
                                                           ------------      ------------       ------------     ------------
        Total Cost of Revenues                                4,237,045         2,563,123         9,207,021        5,113,148
                                                           ------------      ------------       ------------     ------------
        Gross Margin                                          1,292,132            31,627         9,800,765          334,652
                                                           ------------      ------------       ------------     ------------
Operating Expenses (Income)
        Research and development                              2,504,746         1,890,553         4,630,729        3,968,524
        Sales and marketing                                   1,618,800           671,142         5,717,222        1,152,897
        General and administrative                            1,485,378           834,860         3,157,632        2,092,814
        Goodwill and asset write-off (Note 11)                        -           745,804                 -          745,804
        Costs incurred for proxy contest                        624,627                 -           624,627                -
        Settlement costs                                       750,000                 -           750,000                -
        Gain from sale of subsidiary                        (47,090,876)       (3,139,556)      (47,090,876)      (3,139,556)
                                                           ------------      ------------       ------------     ------------
              Total operating expenses (income)             (40,107,325)        1,002,803       (32,210,666)       4,820,483
                                                           ------------      ------------       ------------     ------------
              Income (loss) from operations                  41,399,457          (971,176)       42,011,431       (4,485,831)

Swiss Franc Redemption                                       (6,167,369)                -        (6,167,369)               -
Interest Income                                                 401,937           275,976           407,634          689,612
Interest Expense                                               (192,969)          (36,792)         (363,916)         (87,260)
Other Income, net                                               257,291            48,728           279,637          293,418
                                                           ------------      ------------       ------------     ------------
        Income (Loss) from Continuing Operations
        Before Provision for Income Taxes                    35,698,347          (683,264)       36,167,417       (3,590,061)

Provision for Income Taxes                                    2,500,000                 -         2,500,000                -
                                                           ------------      ------------       ------------     ------------
        Income (Loss) from Continuing Operations Before
        Cumulative Effect of Change in Accounting Method     33,198,347          (683,264)       33,667,417       (3,590,061)

Cumulative Effect of Change in Accounting Method (Note 12)            -                 -                 -         (712,359)
Loss from Discontinued Operations                              (435,000)                -          (435,000)               -
                                                           ------------      ------------       ------------     ------------
        Net Income (Loss)                                  $ 32,763,347        $ (683,264)     $ 33,232,417     $ (4,302,420)
                                                           ============      ============       ============     ============
Basic Net Income (Loss) per Share:

        Continuing operations                                    $ 3.22           $ (0.08)           $ 3.27          $ (0.37)
        Cumulative effect of change in accounting method              -                 -                 -            (0.07)
        Discontinued operations                                   (0.04)                -             (0.04)               -
                                                           ------------      ------------       ------------     ------------
        Total Basic Net Income (Loss) Per Share                  $ 3.18           $ (0.08)           $ 3.23          $ (0.44)
                                                           ============      ============       ============     ============
Basic Weighted Average Number of Shares Outstanding          10,284,035        10,189,401        10,239,338       10,118,294
                                                           ============      ============       ============     ============
Diluted Net Income (Loss) Per Share:

        Continuing operations                                    $ 3.02           $ (0.08)           $ 3.03          $ (0.37)
        Cumulative effect of change in accounting method              -                 -                 -            (0.07)
        Discontinued operations                                   (0.04)                -             (0.04)               -
                                                           ------------      ------------       ------------     ------------
        Total Diluted Net Income (Loss) Per Share                $ 2.98           $ (0.08)           $ 2.99          $ (0.44)
                                                           ============      ============       ============     ============

Diluted Weighted Average Number of Shares Outstanding        11,033,819        10,189,401        11,183,627       10,118,294
                                                           ============      ============       ============     ============

The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
                                       2
<PAGE>






               PALOMAR MEDICAL TECHNOLOGIES, INC AND SUBSIDIARIES
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

                                   (Unaudited)
<TABLE>
<S>                                                        <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, 1999                                    6,000       $ 60    11,034,493    $ 110,345  (1,002,615)  $(3,675,398)

    Costs incurred related to the issuance of common stock        -          -            -             -           -             -
    Issuance of stock for  Employee Stock Purchase Plan           -          -            -             -       9,993        36,674
    Issuance of stock for  401K plan                              -          -            -             -      99,843       366,424
    Exercise of stock options                                     -          -       39,900           399      19,000        69,730
    Unrealized gain on available-for-sale investments             -          -            -             -           -             -
    Preferred stock dividends                                     -          -            -             -           -             -
    Net loss                                                      -          -            -             -           -             -
                                                            -----------------------------------------------------------------------
Balance, June 30, 2000                                         6,000       $ 60    11,074,393    $ 110,744   (873,779)  $(3,202,570)
                                                            =======================================================================
</TABLE>







<TABLE>
<S>                                                        <C>                   <C>               <C>                     <C>
                                                             Additional                           Unrealized Loss         Total
                                                               Paid-in          Accumulated      on Available-for-    Stockholders'
                                                               Capital            Deficit        Sale Investments        Equity
                                                          -------------------------------------------------------------------------



Balance, December 31, 1999                                $ 162,275,613      $ (141,550,040)          $ (67,943)     $ 17,092,637

    Costs incurred related to the issuance of common stock     (156,425)                  -                   -          (156,425)
    Issuance of stock for  Employee Stock Purchase Plan         (25,420)                  -                   -            11,254
    Issuance of stock for  401K plan                           (247,860)                  -                   -           118,564
    Exercise of stock options                                   118,615                   -                   -           188,744
    Unrealized gain on available-for-sale investments                 -                   -              49,113            49,113
    Preferred stock dividends                                         -            (181,235)                  -          (181,235)
    Net loss                                                          -          (4,302,420)                  -        (4,302,420)
                                                          -------------------------------------------------------------------------
Balance, June 30, 2000                                     $ 161,964,523      $ (146,033,695)         $ (18,830)     $ 12,820,232
                                                          =========================================================================



The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>






                                       3
<PAGE>



               PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)
<TABLE>
<S>                                                                             <C>              <C>
                                                                                  Six Months Ended June 30,
                                                                                    1999            2000
Cash Flows from Operating Activities:                                           ------------     ------------
     Net Income (Loss)                                                         $ 33,232,417     $ (4,302,420)
        Add:  Net Loss from discontinued operations                                 435,000                -
                                                                                ------------     ------------
     Net Income (Loss) from continuing operations                                33,667,417       (4,302,420)
                                                                                ------------     ------------
     Adjustments to reconcile net income (loss) from continuing operations
        to net cash used in operating activities-
        Depreciation and amortization                                               873,603           335,845
        Gain from sale of subsidiary                                            (47,090,876)                -
        Goodwill and asset write-off                                                      -           745,804
        Inventory write-off                                                               -           597,000
        Redemption of common stock held by Swiss Franc debenture holders          6,167,369                 -
        Changes in assets and liabilities, net of effects from sale of subsidiary
            Accounts receivable                                                   2,367,166           681,875
            Inventories                                                          (1,067,763)          305,409
            Receivable from sale of subsidiary                                            -           191,420
            Other current assets                                                 (2,456,403)          367,297
            Accounts payable                                                     (4,119,523)         (266,614)
            Accrued expenses                                                       (910,798)         (563,840)
            Accrued income taxes                                                  2,500,000        (2,073,869)
            Other current liabilities                                             3,239,556                 -
            Deferred revenue                                                       (799,714)         (469,781)
                                                                                ------------     ------------
                  Net cash used in operating activities                          (7,629,966)       (4,451,874)
                                                                                ------------     ------------
Cash Flows from Investing Activities:
     Purchases of property and equipment                                           (249,691)         (392,213)
     Proceeds of available-for-sale investments                                 (17,850,248)       15,576,009
     Proceeds from the sale of subsidiary, net of cash on hand $288,000          49,448,023                 -
     Decrease in other assets                                                        10,925            40,443
                                                                                ------------     ------------
                  Net cash provided by investing activities                      31,359,009        15,224,239
                                                                                ------------     ------------
Cash Flows from Financing Activities:
     Net proceeds from the issuance of notes payable and advances from distributor  750,000                 -
     Proceeds from exercise of warrants, stock options
        and Employee Stock Purchase Plan                                             18,087           199,998
     Costs incurred related to issuance of common stock                            (198,500)         (156,425)
     Payments on line of credit                                                  (1,000,000)                -
     Payment on Swiss Franc convertible debentures                               (1,365,931)                -
     Purchase of treasury stock                                                  (1,102,084)                -
     Payment on note payable                                                     (2,290,041)                -
     Redemption of preferred stock                                                 (781,387)                -
                                                                                ------------     ------------
                  Net cash provided by (used in) financing activities            (5,969,856)           43,573
                                                                                ------------     ------------
Net increase in cash and cash equivalents                                        17,759,187        10,815,938
Net cash used in discontinued operations                                         (2,115,171)                -
Cash and cash equivalents, beginning of the period                                1,874,718         2,712,466
                                                                                ------------     ------------
Cash and cash equivalents, end of the period                                    $17,518,734       $13,528,404
                                                                                ============     ============
Supplemental Disclosure of Cash Flow Information:
      Cash paid for interest                                                      $ 264,934         $ 122,404
                                                                                ============     ============
 Supplemental Disclosure of Noncash Financing and Investing Activities:
      Conversion of convertible debentures and related accrued
         interest, net of financing fees                                        $ 1,806,074               $ -
                                                                                ============     ============
      Conversion of preferred stock                                                $ 63,411               $ -
                                                                                ============     ============
     Issuance of common stock for 1999 and 2000 employer 401(k)
         matching contribution                                                    $ 206,659         $ 118,564
                                                                                ============     ============
      Unrealized gain (loss) on available-for-sale investments                    $ (53,964)         $ 49,113
                                                                                ============     ============
     Accrued dividends and interest on preferred stock                            $ 177,452         $ 181,235
                                                                                ============     ============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
                                       4
<PAGE>






               PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLDIATED FINANCIAL STATEMENTS




1.       BASIS OF PRESENTATION
         ---------------------
         The accompanying  unaudited consolidated financial statements have been
prepared in accordance  with  accounting  principles  generally  accepted in the
United States for interim information.  Accordingly,  they do not include all of
the  information  and  footnotes  required by  accounting  principles  generally
accepted in the United States 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  accounting  principles  generally
accepted in the United States. The accompanying  financial  statements and notes
should be read in  conjunction  with the Company's  Form 10-K for the year ended
December 31, 1999.

2.       CASH AND CASH EQUIVALENTS
         -------------------------
         Cash  equivalents   consist   principally  of  corporate  notes,   U.S.
government-agency  securities,  commercial paper,  money market funds, and other
marketable  securities  purchased  with an original  maturity of three months or
less. These investments are carried at cost, which approximates market value.

3.       INVESTMENTS
         -----------
         The Company  accounts for  marketable  securities  in  accordance  with
Statement of Financial  Accounting  Standards  ("SFAS") No. 115,  Accounting for
Certain  Investments  in Debt and Equity  Securities.  The Company's  marketable
equity   securities  with  maturities   greater  than  90  days  are  considered
available-for-sale investments in the accompanying balance sheet and are carried
at market  value,  with the  difference  between cost and market  value,  net of
related tax effects,  recorded as a separate component of stockholders'  equity.
The  aggregate  market  value,  cost  basis,  and  gross  unrealized  losses  of
available-for-sale investments are as follows:

                                           December 31,             June 30,
                                               1999                   2000
                                         -----------------      ----------------

      Market Value                            $22,505,996            $6,979,100
                                         =================      ================

      Cost Basis                              $22,573,939            $6,997,930
                                         =================      ================

      Gross Unrealized Loss                     $(67,943)             $(18,830)
                                         =================      ================


         Available-for-sale  investments  in the  accompanying  balance sheet at
June 30, 2000 include debt  securities  of  $6,979,100.  Actual  maturities  may
differ from  contractual  maturities as a result of the Company's intent to sell
these  securities  prior to  maturity  and as a result of call  features  of the
securities that enable either the Company,  the issuer,  or both to redeem these
securities at an earlier date. Unrealized holding gains totaling $49,113 on such
debt  securities  were  recorded in  stockholders'  equity during the six months
ended June 30, 2000.


                                       5
<PAGE>


              PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLDIATED FINANCIAL STATEMENTS


4.       INVENTORIES
         -----------
         Inventories are stated at lower of cost (first-in, first-out) or market
and consist of the following:
<TABLE>
<S>                        <C>                                    <C>                  <C>
                                                                    December 31,           June 30,
                                                                        1999                 2000
                                                                  ------------------   -----------------
                           Raw materials                               $1,403,001             $735,802
                           Work-in-process                                496,590              195,867
                           Finished goods                                       -               65,513
                                                                   -----------------    ----------------
                                                                       $1,899,591             $997,182
                                                                   =================   =================
</TABLE>

             During the quarter ended June 30, 2000, the Company determined that
certain  inventory  related to past  generation  products  being  phased out was
obsolete.  Accordingly,  the Company wrote-off  $597,000 of such inventory which
was included in cost of sales.

5.       PROPERTY AND EQUIPMENT
         ----------------------
         Property and equipment consist of the following:
<TABLE>
<S>                         <C>                                    <C>                 <C>
                                                                      December 31,        June 30,
                                                                         1999               2000
                                                                   ------------------  ---------------
                            Machinery and equipment                      $1,062,774       $1,209,724
                            Furniture and fixtures                        1,006,125        1,202,295
                            Leasehold improvements                          139,046          188,139
                                                                   ------------------  ----------------
                                                                          2,207,945        2,600,158
                            Less:  Accumulated depreciation
                                    and amortization                      1,216,513        1,667,136
                                                                   ------------------  ----------------
                                                                           $991,432         $933,022
                                                                    =================  ================
</TABLE>

        During the quarter  ended June 30,  2000,  the Company  determined  that
carrying value of certain  equipment  related to past generation  products being
phased  out had been  impaired  and,  accordingly,  wrote-off  $223,715  of such
equipment.

6.       NOTES PAYABLE
         -------------
         Notes payable consist of the following:
<TABLE>
<S>                                                                              <C>                 <C>
                                                                                   December 31,          June 30,
                                                                                       1999                2000
                                                                                 -----------------   ------------------
  Dollar denominated convertible debentures                                            $500,000             $500,000
  Swiss franc denominated convertible debentures                                      2,244,016            2,244,016
                                                                                 -----------------   ------------------
                                                                                      2,744,016            2,744,016
  Less - current maturities                                                          (1,122,008)          (2,244,016)
                                                                                 -----------------   ------------------
                                                                                     $1,622,008             $500,000
                                                                                 =================   ==================


</TABLE>
                                      6
<PAGE>


              PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLDIATED FINANCIAL STATEMENTS



7.      SEGMENT AND GEOGRAPHIC INFORMATION
        ----------------------------------
         Product revenue from  international  sources were $1.0 million and $0.3
million for the three  months  ended June 30, 1999 and 2000,  respectively,  and
$7.4  million and $1.1  million for the six months ended June 30, 1999 and 2000,
respectively.  The Company's  revenue from  international  sources was primarily
generated from customers located in Japan, Asia/Pacific and Europe/Middle East.

         The following  table  represents the  percentage of product  revenue by
geographic  region from  customers  for the three and six months  ended June 30,
1999 and 2000:
<TABLE>
<S>                                  <C>                                     <C>
                                              Three Months Ended                       Six Months Ended
                                                   June 30,                                June 30,
                                     --------------------------------------  --------------------------------------
                                            1999               2000                 1999               2000
                                     --------------------------------------  --------------------------------------


         United States                            79.9%              78.1%                60.0%              65.3%
         Japan                                     6.9%               0.6%                13.2%              21.7%
         Asia/Pacific                              6.1%               9.7%                 3.7%               7.1%
         Canada/Australia                          3.3%              11.0%                 1.6%               5.5%
         Europe/Middle East                        3.8%               0.5%                19.9%               0.3%
         Latin America                             0.0%               0.1%                 1.6%               0.1%

                                     --------------------------------------  --------------------------------------
         Total                                   100.0%             100.0%               100.0%             100.0%
                                     ======================================  ======================================
</TABLE>

8.       STOCKHOLDERS' EQUITY
         --------------------
(a)      Options to Purchase Common Stock

         During the six months ended June 30, 2000, the Company  granted options
to purchase  948,500  shares of the  Company's  common stock at exercise  prices
ranging  from  $1.38 to $5.06 per share.  During  the six months  ended June 30,
2000,  58,900 options were exercised at $3.19.  During the six months ended June
30, 2000,  options to purchase  176,541 shares of the Company's  common stock at
exercise prices ranging from $1.97 to $10.50 per share expired.

(b)       Warrants to Purchase Common Stock

         During the six months ended June 30, 2000, the Company granted warrants
to purchase 60,000 shares of the Company's  common stock at an exercise price of
$1.97 per share.  No warrants  were  exercised or expired  during the six months
ended June 30, 2000.




                                       7
<PAGE>

              PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLDIATED FINANCIAL STATEMENTS




9.       NET INCOME (LOSS) PER COMMON SHARE
         ----------------------------------
         Basic net income (loss) per share was determined by dividing net income
(loss) by the weighted  average  common  shares  outstanding  during the period.
Diluted net income (loss) per share was determined by dividing net income (loss)
by diluted weighted average shares outstanding.  Diluted weighted average shares
reflect the  dilutive  effect,  if any,  of common  stock  options  based on the
treasury  stock method and the assumed  conversion of all debt  obligations  and
convertible  preferred stock and the elimination of related interest expense and
preferred  stock  dividends.  The  calculations  of basic and  diluted  weighted
average shares outstanding are as follows:
<TABLE>
<S>                                                    <C>                          <C>
                                                           Three Months Ended             Six Months Ended
                                                                June 30,                      June 30,
                                                       ---------------------------- -----------------------------
                                                           1999           2000          1999           2000
                                                       -------------  ------------- -------------- --------------
  Basic weighted average common
     Shares outstanding                                  10,284,035     10,189,401     10,239,338     10,118,294
  Potential common shares pursuant to:
     Stock options and warrants                             110,086        -               83,514        -
    Convertible preferred stock                             415,529        -              468,288        -
    Convertible debentures                                  224,169        -              392,487        -
                                                       -------------  ------------- -------------- --------------
  Diluted weighted average common
    Shares outstanding                                   11,033,819     10,189,401     11,183,627     10,118,294
                                                       =============  ============= ============== ==============
</TABLE>
         The  Company's net income (loss) per share for the three and six months
ended June 30, 1999 and 2000 is as follows:
<TABLE>
<S>                                                   <C>               <C>               <C>                 <C>
                                                              Three Months Ended                    Six Months Ended
                                                                   June 30,                             June 30,
                                                      ------------------------------------ ------------------------------------
                                                            1999               2000              1999              2000
                                                      ------------------ ----------------- ------------------ -----------------
  Net income (loss) from continuing operations              $33,198,347        $(683,264)        $33,667,417       $(4,302,420)
  Preferred stock dividends                                     (80,226)         (91,317)           (177,452)         (181,235)
                                                      ------------------ ----------------- ------------------ ------------------
  Income (loss) attributable to common stockholders         $33,118,121        $(774,581)        $33,489,965       $(4,483,655)
                                                      ================== ================= ================== =================

  Basic net income (loss) per common share from
  continuing operations                                           $3.22           $(0.08)              $3.27            $(0.44)
                                                      ================== ================= ================== =================

  Basic weighted average number of shares
        Outstanding                                          10,284,035       10,189,401          10,239,338        10,118,294
                                                      ================== ================= ================== =================

  Diluted net income (loss) per common share from
  continuing operations                                           $3.02           $(0.08)              $3.03            $(0.44)
                                                      ================== ================= ================== ================

  Diluted weighted average number of shares
        outstanding                                          11,033,819        10,189,401         11,183,627        10,118,294
                                                      ================== ================= ================== ================

</TABLE>
         For the  three  months  ended  June 30, 1999  and  2000,  3,204,859
and 5,079,403 shares,  respectively,  and for the six months ended June 30, 1999
and 2000,  3,010,354  and  5,079,403  shares,  respectively,  of  outstanding
stock options,  stock  warrants  and  convertible  debt and  preferred  stock
were not included  in the  diluted  weighted  average  shares  outstanding  as
they were antidilutive.

                                       8
<PAGE>

              PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLDIATED FINANCIAL STATEMENTS



10.     COMPREHENSIVE INCOME (LOSS)
        ---------------------------
         A reconciliation of comprehensive income (loss) is as follows:
<TABLE>
<S>                                    <C>                                   <C>
                                                Three Months Ended                   Six Months Ended
                                                     June 30,                             June 30,
                                       ------------------------------------- ------------------------------------
                                             1999               2000               1999              2000
                                       ----------------- ------------------- ----------------- ------------------
Net income (loss)                           $33,198,347          $(683,264)       $33,667,417       $(4,302,420)
Unrealized gain (loss) on
available-for-sale investments                  (53,964)            27,396            (53,964)           49,113
                                       ----------------- ------------------- ----------------- ------------------

Comprehensive income (loss)                 $33,144,383          $(655,868)       $33,613,453       $(4,253,307)
                                       ================= =================== ================= ==================
</TABLE>

11.      INTANGIBLE ASSETS
         -----------------
         The  Company  assesses  the   realizability  of  intangible  assets  in
accordance with SFAS No. 121, Accounting for the Impairment Of Long-Lived Assets
And For Long-Lived  Assets To Be Disposed Of. Under SFAS No. 121, the Company is
required to assess the valuation of its long-lived assets,  including intangible
assets,  based on the estimated  undiscounted cash flows to be generated by such
assets. During the quarter ended June 30, 2000, the Company made a determination
that goodwill  related to certain past generation  products being phased out had
been impaired and, accordingly, wrote-off $522,089 of such goodwill.

12.      CHANGE IN ACCOUNTING METHOD - REVENUE RECOGNITION
         -------------------------------------------------
         During the quarter ended June 30, 2000, the Company adopted  Securities
and Exchange Commission (SEC) Staff Accounting Bulletin ("SAB") No. 101, Revenue
Recognition.  As a result of adopting SAB 101,  the Company now records  royalty
income when received  rather than when earned.  In accordance  with SAB No. 101,
the Company recorded the impact of adopting SAB No. 101 as a cumulative catch-up
adjustment to income in the current year's  statement of  operations,  effective
January 1, 2000.  The  impact of  adopting  SAB 101 for the three and six months
ended June 30, 2000 was to increase net income by  approximately  $95,000 ($0.01
per share) and $140,000  ($0.01 per share),  respectively.  Restated  results of
operations  for the quarter ended March 31, 2000 as a result of adopting SAB No.
101 are as follows:

                                                         Three Months Ended
                                                          March 31, 2000
                                                      -----------------------
          Revenues                                            $2,853,050
          Gross Margin                                          $288,201
          Operating Loss                                     $(3,514,655)
          Net Loss                                           $(3,619,156)
          Net Loss Per Share                                      $(0.37)






                                       9
<PAGE>



              PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLDIATED FINANCIAL STATEMENTS


         If SAB 101 had been  adopted  effective  January 1, 1999,  the  Company
would have reported the following pro forma results:
<TABLE>
<S>            <C>                                      <C>
                                                          Three Months Ended     Six Months Ended
                                                            June 30, 1999          June 30, 1999
                                                        --------------------------------------------
                                                                  (Pro forma - Unaudited)
                                                        --------------------------------------------
               Revenues                                             $4,879,177          $18,357,786
               Income from continuing operations
               before extraordinary items                          $32,808,347          $33,277,417
               Net income                                          $32,763,347          $32,842,417
               Net income per share - basic                              $3.14                $3.19
               Net income per share - diluted                            $2.94                $2.96
</TABLE>

13.      GAIN ON SALE OF SUBSIDIARY
         --------------------------
         In connection  with the sale of the  Company's  subsidiary on April 27,
1999,  the Company had deferred gain  recognition  of $3.1 million.  This amount
represented  funds held in escrow  until April 27,  2000 as security  for claims
made. On April 27, 2000, the Company received all funds held in escrow for which
no claims had been made and recorded the  deferred  gain in operating  income in
the accompanying Consolidated Statements of Operations.






















                                       10
<PAGE>

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

(a)      Overview

         We are a researcher and developer of proprietary laser systems for hair
removal and other  cosmetic  laser  systems and are the first  company to obtain
clearance  using laser  systems  from the FDA for  "permanent  hair  reduction."
Hundreds of Palomar laser hair removal  systems have been installed in physician
practices  worldwide.  Through Palomar's research partnership with Massachusetts
General  Hospital's  Wellman  Laboratories,  new indications are being tested to
further  advance  the  laser  hair  removal  market  and  other  cosmetic  laser
applications including fat reduction and acne treatment.

On April 27,  1999,  the Company sold all of the issued and  outstanding  common
stock of Palomar's  Star  Medical  Technologies,  Inc.  ("Star")  subsidiary  to
Coherent  for $65  million,  paid in cash.  The  purchase  price was paid to the
stockholders  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
$49,736,023. As a result of the above transaction,  the Company believes it will
be able to fund its operations for the short-term.  However, for the years ended
December 31, 1998 and 1999,  gross revenues  associated  with Star's  LightSheer
diode laser system comprised 80% and 60%,  respectively,  of the Company's total
revenues.  Consequently, the Company's revenues have declined significantly over
the last  four-quarters.  The Company  believes the successful  introduction and
marketing  of new  products  will  become  critical to the  Company's  long-term
success.  Broad market acceptance of laser hair removal and specific  acceptance
of the  Company's new hair removal  laser,  the Palomar  SLP1000(TM)  diode hair
removal  laser system is critical to the Company's  success.  During the quarter
ended June 30, 2000,  the Company  began  shipment of the Palomar  SLP1000.  The
Company  has  traditionally  spent a  significant  amount  of its  resources  in
developing  new  technology  and products.  The Company  expects this trend will
continue for the foreseeable future.

(b)      Results of Operations

         (i)      REVENUES AND GROSS PROFIT: Three Months Ended June 30, 2000,
                  Compared to Three Months Ended June 30, 1999

         For the three  months  ended  June 30,  2000,  the  Company's  revenues
decreased  to $2.6  million,  as compared to $5.5  million for the three  months
ended June 30, 1999. The decrease in the Company's revenues of $2.9 million,  or
53% from the three months ended June 30, 1999,  was mainly due to the  reduction
in sales  volume of $3.4  million  associated  with the  LightSheer  diode laser
system manufactured by Star. This decrease was offset by an increase of $463,000
in royalties received by the Company.

                  Gross  profit for the three  months  ended  June 30,  2000 was
$32,000,  1% of revenues,  compared to $1.3  million,  23% of revenues,  for the
three months ended June 30, 1999.  The decrease in gross profit and gross profit
percentage was mainly due to the reduction in sales volume  associated  with the
LightSheer diode laser system manufactured by Star.  Additionally,  gross margin
was negatively  affected in the quarter ended June 30, 2000 as the Company wrote
off $597,000 of the remaining inventory  associated with past generation product
lines being phased out.

         (ii)     OPERATING AND OTHER EXPENSES: Three Months Ended June 30,
                  2000, Compared to Three Months Ended June 30, 1999

         Research and development  costs decreased to $1.9 million for the three
months  ended June 30,  2000,  as compared to $2.5  million for the three months
ended June 30,  1999.  Research  and  development  expenses as a  percentage  of
revenue  totaled  73% for the three  months  ended June 30, 2000 and 45% for the
three  months ended June 30,  1999.  The  increase as a  percentage  of sales is
directly  attributable  to the  reduction  in sales volume  associated  with the
LightSheer diode laser system manufactured by Star while the Company continued
to spend on research  and  development.  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 laser platforms.  The research and development  goals
in the field of laser hair removal  are to design  systems  that (1) permit
more rapid
                                       11
<PAGE>

treatment  of large areas, (2) have high gross margins, and (3) are
manufactured at a lower cost, thus  addressing  broader  markets.  Further,
the  Company is aiming to address dermatology and cosmetic procedure markets
other than hair, including the fields of fat reduction and acne treatment
covered in its expanded research  agreement with Massachusetts General
Hospital.

         Selling and marketing  expenses were  $671,000,  or 26% of revenues for
the three  months  ended June 30,  2000,  compared  to $1.6  million,  or 29% of
revenues for the three  months ended June 30, 1999.  The decrease in selling and
marketing  expenses is directly  attributable  to the reduction in sales volumes
due to the sale of Star to Coherent and related  commissions paid to Coherent as
the  former  exclusive   distributor  for  the  LightSheer  diode  laser  system
manufactured by Star

         General and administrative  expenses  decreased to $835,000,  or 32% of
revenues for the three months ended June 30, 2000,  as compared to $1.5 million,
or 27% of revenues for the three months  ended June 30, 1999.  This  decrease in
general and administrative expenses is attributable to the sale of the Company's
Star  subsidiary and due to the Company's  restructuring  and  consolidation  of
administrative functions at the end of 1999.

         During  the  quarter   ended  June  30,   2000,   the  Company  made  a
determination  that  goodwill and equipment  related to certain past  generation
products being phased out had been impaired and, accordingly, wrote-off $522,000
of goodwill and $224,000 of equipment.

         Costs  related  to  solicitation  of  proxies  in  connection  with the
Company's 1999 Annual Meeting of Stockholders were $625,000 for the three months
ended  June  30,  1999 as a result  of proxy  contest  launched  by a  dissident
stockholder group.

         Settlement costs were $750,000 for the three months ended June 30, 1999
and are attributable to various lawsuits and other claims against the Company.

         Gain  from the sale of a  subsidiary  was $47.1  million  for the three
months  ended June 30,  1999 due to the Company  completing  the sale of Star on
April 27,  1999.  Gain from sale of  subsidiary  was $3.1 million in the quarter
ended June 30, 2000, as the one-year  escrow was settled in connection  with the
sale of Star.

         Redemption expense was $6.2 million for the three months ended June 30,
1999.  This amount  reflects a  redemption  expense as a result of a  settlement
agreement  between  Palomar and certain  European banks that had held 4.5% Swiss
franc denominated  subordinated  convertible debentures originally totaling $7.7
million and due in 2003.  Under the terms of this  agreement,  which  resolved a
lawsuit,  Palomar  agreed to rescind its  conversion  notices issued in November
1997.  Through these  conversion  notices,  Palomar  converted the  subordinated
debentures  into  130,576  shares  of the  Company's  common  stock.  Since  the
conversion date, the Company had treated these shares as issued and outstanding.
Under the terms of this  compromise,  the Company  agreed to pay a total of $6.7
million to the European  banks, of which $4.5 million has been paid. The balance
of $2.2  million is due through  2001.  Accordingly,  the Company has recorded a
charge to operations of $6.2 million.  This amount  represents  the total amount
due to the European  banks less the fair market value of the  redemption  of the
common shares previously considered outstanding by the Company

         Interest  income  decreased to $276,000 for the three months ended June
30, 2000,  compared to $402,000  for the three months ended June 30, 1999.  This
decrease  in  interest  income  was the  result  of a  decrease  in  cash,  cash
equivalents and  available-for-sale  investments for the three months ended June
30, 2000 as compared to the three months ended June 30, 1999.

         Interest  expense  decreased to $37,000 for the three months ended June
30, 2000,  compared to $193,000  for the three months ended June 30, 1999.  As a
result of the sale of Star,  which  generated $49.7 million in cash, the Company
paid  substantially  all of its  outstanding  debt  resulting  in a decrease  of
interest expense.

         Other  income,  net  decreased to  approximately  $49,000 for the three
months  ended June 30,  2000.  This amount  compares  to $257,000  for the three
months ended June 30, 1999.

                                       12
<PAGE>

         The Company had a provision  for income  taxes of $2.5  million for the
three  months  ended June 30, 1999 as a result of the sale of Star.  The Company
was not able to fully offset the gain with its net operating loss carryforwards.

         During  the three  months  ended June 30,  2000,  the  Company  adopted
Securities and Exchange  Commission (SEC) Staff Accounting  Bulletin ("SAB") No.
101,  Revenue  Recognition.  As a result of  adopting  SAB 101,  the Company now
records royalty income when received rather than when earned. In accordance with
SAB No.  101,  the  Company  recorded  the impact of  adopting  SAB No. 101 as a
cumulative  catch-up  adjustment  to income in the current  year's  statement of
operations, effective January 1, 2000.

         The loss from  discontinued  operations for the three months ended June
30, 1999 was  $435,000 and due to a settlement  related to the  operations  of a
former subsidiary.

(iii)    REVENUES AND GROSS PROFIT: Six Months Ended June 30, 2000, Compared to
         the Six Months Ended June 30, 1999

         For the six months ended June 30, 2000,  the  Company's  revenues  were
$5.4  million,  as compared to $19.0  million for the six months  ended June 30,
1999. The decrease in the Company's  revenues of $13.6 million,  or 71% from the
six months ended June 30, 1999,  was mainly due to the reduction in sales volume
of $14.5 million associated with the LightSheer diode laser system  manufactured
by Star.  This  decrease is offset by an increase of $1.7  million in  royalties
received by the Company and decrease of $0.8 million in other product revenues.

         Gross profit for the six months ended June 30, 2000 was $335,000, 6% of
revenues,  as compared to $9.8  million,  or 52% of revenues  for the six months
ended June 30, 1999. The decrease in the Company's gross profit of $9.5 million,
or 97% from the six months ended June 30, 1999,  was mainly due to the reduction
in sales volume  associated with the LightSheer diode laser system  manufactured
by Star.  Additionally,  gross margin was negatively  affected in the six months
ended June 30, 2000 as the Company wrote off $597,000 of the remaining inventory
associated with past generation product lines being phased out.

         (iv)     OPERATING AND OTHER EXPENSES: Six Months Ended June 30, 1999,
                  Compared to Six Months Ended June 30, 1998

         Research and  development  costs  decreased to $4.0 million for the six
months ended June 30, 2000,  from $4.6 million for the six months ended June 30,
1999.  Research and development  expenses as a percentage of revenue totaled 73%
for the six months ended June 30, 2000 and 24% for the six months ended June 30,
1999. 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 laser platforms.  The research and
development  goals in the field of laser hair removal are to design systems that
(1) permit more rapid treatment of large areas, (2) have high gross margins, and
(3) are manufactured at a lower cost, thus addressing broader markets.  Further,
the Company is aiming to address  dermatology  and  cosmetic  procedure  markets
other  than  hair,  including  the fields of fat  reduction  and acne  treatment
covered in its expanded research agreement with Massachusetts General Hospital.

         Selling  and  marketing  expenses  decreased  to $1.2  million  (21% of
revenues)  for the six months  ended June 30,  2000,  from $5.7  million (30% of
revenues)  for the six months ended June 30,  1999.  The decrease in selling and
marketing expenses as a percentage of revenues is a result of the Company's sale
of Star.

         General and  administrative  expenses decreased to $2.1 million (38% of
revenues)  for the six months ended June 30,  2000,  as compared to $3.2 million
(17% of  revenues)  for the six months  ended June 30,  1999.  This  decrease in
general and administrative expenses is attributable to the sale of the Company's
Star  subsidiary and due to the Company's  restructuring  and  consolidation  of
administrative functions at the end of 1999.

                                       13
<PAGE>

         During  the  quarter   ended  June  30,   2000,   the  Company  made  a
determination  that  goodwill and equipment  related to certain past  generation
products being phased out had been impaired and, accordingly, wrote-off $522,000
of goodwill and $224,000 of equipment.

         Costs  related  to  solicitation  of  proxies  in  connection  with the
Company's 1999 Annual Meeting of  Stockholders  were $625,000 for the six months
ended  June  30,  1999 as a result  of proxy  contest  launched  by a  dissident
stockholder group.

         Settlement  costs were  $750,000 for the six months ended June 30, 1999
and are attributable to various lawsuits and other claims against the Company.

         Gain from the sale of a subsidiary was $47.1 million for the six months
ended June 30, 1999 due to the Company  completing the sale of Star on April 27,
1999

         Redemption  expense was $6.2  million for the six months ended June 30,
1999.  This amount  reflects a  redemption  expense as a result of a  settlement
agreement  between  Palomar and certain  European banks that had held 4.5% Swiss
franc denominated  subordinated  convertible debentures originally totaling $7.7
million and due in 2003.  Under the terms of this  agreement,  which  resolved a
lawsuit,  Palomar  agreed to rescind its  conversion  notices issued in November
1997.  Through these  conversion  notices,  Palomar  converted the  subordinated
debentures  into  130,576  shares  of the  Company's  common  stock.  Since  the
conversion date, the Company had treated these shares as issued and outstanding.
Under the terms of this  compromise,  the Company  agreed to pay a total of $6.7
million to the European  banks, of which $4.5 million has been paid. The balance
of $2.2  million is due through  2001.  Accordingly,  the Company has recorded a
charge to operations of $6.2 million.  This amount  represents  the total amount
due to the European  banks less the fair market value of the  redemption  of the
common shares previously considered outstanding by the Company.

         Interest income increased to approximately  $690,000 for the six months
ended June 30, 2000 as compared  to $408,000  for the six months  ended June 30,
1999.  This  amount  represents  interest  earned  on the  balance  of the funds
received from the April 27, 1999 sale of Star,  which are invested in high-grade
corporate  and  government  notes  and  bonds  and  will be used to fund  future
operations and research and development efforts.

         Interest expense decreased to $87,000 for the six months ended June 30,
2000,  from  $364,000 for the six months ended June 30, 1999. As a result of the
sale  of  Star,  which  generated  $49.7  million  in  cash,  the  Company  paid
substantially  all of its  outstanding  debt resulting in a decrease of interest
expense.

         Other  income,  net of $293,000 for the six months ended June 30, 2000,
remained  relatively  constant as compared to $280,000  for the six months ended
June 30, 1999.

         The Company had a provision  for income  taxes of $2.5  million for the
six months ended June 30, 1999 as a result of the sale of Star.  The Company was
not able to fully offset the gain with its net operating loss carryforwards.

         During  the six  months  ended  June  30,  2000,  the  Company  adopted
Securities and Exchange  Commission (SEC) Staff Accounting  Bulletin ("SAB") No.
101,  Revenue  Recognition.  As a result of  adopting  SAB 101,  the Company now
records royalty income when received rather than when earned. In accordance with
SAB No.  101,  the  Company  recorded  the impact of  adopting  SAB No. 101 as a
cumulative  catch-up  adjustment  to income in the current  year's  statement of
operations, effective January 1, 2000.

         The loss from discontinued operations for the six months ended June 30,
1999 was $435,000 and due to a settlement  related to the operations of a former
subsidiary.

(c)      Liquidity and Capital Resources

         The Company's  operations are carried out at the  subsidiary  level and
consist primarily of research and development.  To date, the Company's operating
subsidiaries  have  required  cash  advances  from  the  Company  to fund  their
operations.  As of June 30, 2000,  the Company had $20.5  million in cash,  cash
equivalents and available-for-sale  investments. With the proceeds from the Star
sale,  the Company  believes that its  financial  position will meet

                                       14
<PAGE>

its ongoingcash flow requirements and fund expected operating losses of its
subsidiaries in the near  term.  The  successful  introduction  and  marketing
of new  products currently under development will be critical to future
liquidity.

         As of June 30, 2000,  the Company's  accounts  receivable  totaled $1.2
million,  as compared to $1.9  million as of December 31,  1999.  The  Company's
allowance for doubtful  accounts totaled $173,000 as of June 30, 2000,  compared
to $207,000 as of December 31, 1999.

         As of June 30, 2000,  the Company's  accounts  payable has  decreased
to $393,000,  as compared to $659,000 as of December 31, 1999.

         The Company anticipates that capital  expenditures for the remainder of
2000 will total  approximately  $200,000,  consisting  primarily  of  machinery,
equipment,  computers  and  peripherals.  The Company  expects to finance  these
expenditures with cash on hand and equipment leasing lines, if available.

(d)     Material Uncertainties

        Year 2000 Impact

         We have not yet  experienced  any problems  with our  computer  systems
relating to  distinguishing  twenty-first  century dates from twentieth  century
dates,  which  generally are referred to as Year 2000 problems.  We are also not
aware  of  any  material  Year  2000  problems  with  our  clients  or  vendors.
Accordingly,  we do not anticipate  incurring  material expenses or experiencing
any material operational disruptions as a result of any Year 2000 problems.
























                                       15
<PAGE>

                                  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 products under development,  the timing of new product introductions,
financing of future operations, and the Company's research partnership with MGH)
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  successfully  developing  and marketing 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
timely and cost-effective manner new products that meet changing market demands,
to  enhance  existing  products,  and to  achieve  market  acceptance  for  such
products. We have in the past experienced delays in developing and marketing new
products and enhancing existing products.  Furthermore, some of our new products
under development are based on unproven  technology and/or technology with which
the  Company  has no  previous  experience.  As a result  of the sale of Star to
Coherent, our future revenue will be almost entirely dependent on sales of newly
introduced products.  Sales to date for the Company's current products have been
minimal and the Company's  future products 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 intend 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,
some  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.  We  currently  have no  significant  sales force in place for our new
products  under  development.  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 have decreased as a result of the Star sale, and
that may hurt the price of our common stock.

         Almost all of our  revenues in 1999 were  attributable  to sales of the
LightSheer(TM) diode laser system manufactured by Star.  Therefore,  as a result
of the Star sale,  our revenues  have declined  significantly.  If our operating
results fall below the expectations of investors or public market analysts,  the
price of our common stock could fall.

                                       16
<PAGE>
We could be delisted from Nasdaq.

         For continued  listing on The Nasdaq  SmallCap  Market,  a company must
maintain a minimum bid price of $1.00 per share.  In March  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 the $1.00  minimum bid price
requirement  for longer than 30 trading  days.  As a result of our reverse stock
split, we regained compliance with the minimum bid price requirement before that
date, 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 in  compliance  with Nasdaq's  criteria for continued  listing or
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.

We depend on a number of vendors  for  critical  components  in our  current and
future products.

         We develop laser  systems that  incorporate  third-party  components as
part of the overall  systems.  Some of these items are custom made or  otherwise
not readily  available on the market.  We purchase some of these components from
small  specialized  vendors that are not well  capitalized.  A disruption in the
delivery of these key  components  could have an adverse effect on our business.
In 2000, we anticipate  that we will be  substantially  dependent on an overseas
third-party manufacturer over whom we do not have absolute control to provide us
with critical components for a new Super Long Pulse hair removal laser.

Our lasers are subject to numerous  medical  device  regulations.  Compliance is
expensive  and  time-consuming.  Our new  products may not be able to obtain the
necessary clearances in order to sell them.

         All of our current  products are laser medical  devices.  Laser medical
devices   are  subject  to  FDA   regulations   regulating   clinical   testing,
manufacturing,  labeling,  sale,  distribution and promotion of medical devices.
Before a new laser  medical  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.

         Our  products  are  subject  to  similar   regulations   in  our  major
international  markets.  Complying  with these  regulations is necessary for our
strategy  of  expanding  the markets  for and sales of our  products  into these
countries. These approvals may necessitate clinical testing,  limitations on the
number of sales and controls of end user purchase price,  among other things. In
certain  instances,  these  constraints can delay planned shipment  schedules as
design and engineering modifications are made in response to regulatory concerns
an requests.

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
Laboratories of  Photomedicine  at Massachusetts  General  Hospital.  We provide
research  funding,  laser technology and optics know-how in return for licensing
rights 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,
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  adversely  affect the market
price of our common stock.
                                       17
<PAGE>

Our proprietary technology has only limited protections.

         Our business could be materially  and adversely  affected if we are not
able to adequately protect 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,  detect
unauthorized use and 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 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 and 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 Amended
and Restated "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 director  nominations  and business
to be brought by such  stockholder before  any  annual or  special  meeting  of
stockholders,  as well as  certain information  regarding such  nomination
and/or  business,  the  stockholder and others known to support such proposal
and any material interest they may have in the proposed business.  They also
provide that a special meeting of stockholders may be  called  only by the
affirmative  vote of a  majority  of the  Board  of Directors. These provisions
could delay any stockholder actions that are favored by the holders of a
majority of the  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 that, 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 an  "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.

                                       18
<PAGE>
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 may not be able to successfully collect licensing royalties.

         At present,  a material  portion of our  revenues  consist of royalties
from licensing  both our own patents and patents  licensed to us on an exclusive
basis by Massachusetts General Hospital. However, there can be no assurance that
we will be able to obtain  valuable  patent  rights.  Moreover,  there can be no
assurance  that, even if we do obtain such patent rights and are able to license
them to third  parties,  we will derive a significant  revenue  stream from such
licenses.

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.
Although we have  reached a  settlement  agreement  with the  plaintiffs  in the
Varljen litigation,  the settlement must be approved by the court, and there can
be no assurance  that it will be approved.  An adverse result in that suit could
have a material adverse effect on our business,  financial condition and results
of operations.

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

         As a small company with less than 100 employees, 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 our business.

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 million per
occurrence and $2 million in the aggregate and maintain umbrella coverage in the
aggregate  amount of $25 million;  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 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 in  significant  adverse
publicity against us.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.
         ----------------------------------------------------------
         Not applicable.
                                       19
<PAGE>

PART II - OTHER INFORMATION

Item 1.  Legal Proceedings.
         ------------------
         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  operating   officer  as
defendants.  On March 17, 1999,  the Second  Amended  Class Action  Complaint in
Varljen was served upon the Company  and its current  chief  operating officer
alleging  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.  Palomar and the Varljen plaintiffs have reached an agreement in principle
pursuant to which  Palomar and its  insurance  carrier  would pay  plaintiffs $5
million  in  settlement  of all their  claims.  Of this  amount,  Palomar  would
contribute  up to $1  million  in stock  and  $1.375  million  in cash,  and its
insurance  carrier  the  remaining  $2.625  million  in  cash.  This  settlement
agreement must be approved by the court. There can be no assurance of such court
approval;  however,  management believes that the court approval is probable and
has accrued for its estimated loss.

     The Company is involved in other legal and  administrative  proceedings and
claims  of  various  types.   While  any  litigation   contains  an  element  of
uncertainty, management, 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.
         ----------------------
         Not applicable.

Item 3.  Defaults upon Senior Securities.
         -------------------------------
         Not applicable.
















                                       20
<PAGE>


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


         The following table sets forth a brief description of each matter voted
upon and the  number  of votes  cast for or  against,  as well as the  number of
abstentions  and broker  non-votes,  as to each such  matter,  at the  Company's
Annual Meeting of Stockholders held on June 7, 2000.

<TABLE>
<S>      <C>                                                                     <C>         <C>        <C>
                                                                                 Votes       Votes
                                       Matter                                     For       Against     Abstentions
         ------------------------------------------------------------------------------------------------------------

         Ratification of Selection of Arthur Andersen LLP as the                7,842,625      28,138         32,682
             Company's Auditors

         Election of Directors:

         Management Nominees:

                  Louis P. Valente                                              7,797,865     105,580

                  James G. Martin                                               7,797,921     105,524

                  A. Neil Pappalardo                                            7,797,921     105,538

                  Nicholas P. Economou                                          7,797,921     105,524


</TABLE>

Item 5.  Other Information.
         ------------------
         Not applicable.











                                       21
<PAGE>



Item 6.  Exhibits and Reports on Form 8-K.
         ---------------------------------
<TABLE>
<S>          <C>
(a)          Exhibits

   ^^^3(i).1      Certificate of Designation, as filed with the Delaware Secretary of State on April 21, 1999.

     ^3(i).2      Second Restated  Certificate of  Incorporation,  as filed with
                  the Delaware Secretary of State on January 8, 1999.

      3(ii)       Bylaws, as amended.

      ^4.1        Common Stock Certificate.

     ^^4.2.       Rights Agreement Between Palomar Medical Technologies, Inc. and American Stock Transfer & Trust
                  Company, dated as of April 20, 1999

     ##4.3        Form of 4.5% Convertible Debenture (denominated in Swiss Francs) due July 3, 2003.
   ####4.4        First Allonge and Amendment to 4.5% Subordinated Convertible Debenture
     ##4.5        Form of 6% Convertible Debenture due March 13, 2002.

      <4.6        Second Amended 1991 Stock Option Plan.
      <4.7        Second Amended 1993 Stock Option Plan.
      <4.8        Second Amended 1995 Stock Option Plan.
      <4.9        Second Amended 1996 Stock Option Plan.
     <4.10        Third Amended 1996 Employee Stock Purchase Plan.
     *4.11        Form of Stock Option Grant under the 1991, 1993 and 1995 Amended Stock Option Plans.

    ##4.12        Form of Stock Option Agreement under the 1996 Amended Stock Option Plan.

     #4.13        Form of Company Warrant to Purchase Common Stock

      10          Amendment No. 1 to Key Employment Agreement between the Company and Joseph P. Caruso dated June 8,
                  2000












                                       22
<PAGE>




       27       Financial Data Schedule for the Period Ended June 30, 2000.

    ^           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.

    ^^^         Previously filed as an exhibit to Form 10-Q for the period ended March 31, 1999, filed on May 17, 1999 and
                incorporated herein by reference.

    ^^^^        Previously filed as an exhibit to Form 8-K, filed on December 16, 1999 and incorporated herein by reference.

    *           Previously filed as an exhibit to Amendment No. 4 to Form S-1 Registration Statement No. 33-47479 filed on
                October 5, 1992, and incorporated herein by reference.

    **          Previously filed as an exhibit to the Company's Definitive Proxy Statement for the period ended December 31, 1998
                filed on March 12, 1999, and incorporated herein by reference.

    #           Previously filed as an exhibit to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1995,
                and incorporated herein by reference.

    ##          Previously filed as an exhibit to the Company's Annual Report on Form 10-KSB for the year ended December 31, 1996,
                and incorporated herein by reference.

    ###         Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1998,
                and incorporated herein by reference.

    ####        Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1999,
                and incorporated herein by reference.

    -           Previously filed as an exhibit to Form S-8 Registration Statement No. 33-97710 filed on October 4, 1995, and
                incorporated herein by reference.

    <           Previously filed as an exhibit Form 10-Q for the period ended June 30, 1999, and incorporated herein by reference.

(b)      Reports on Form 8-K

                  None
</TABLE>












                                       23
<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 Burlington in the
Commonwealth of Massachusetts on August 9, 2000.

                                        PALOMAR MEDICAL TECHNOLOGIES, INC.
                                        ----------------------------------
                                        (Registrant)


                                        /S/ Louis P. Valente
DATE:  August 9, 2000              By:  -----------------------------
                                        Louis P. Valente
                                        Chief Executive Officer
                                       (Principal Executive Officer)



                                       /S/ Joseph P. Caruso
DATE:  August 9, 2000             By:  -----------------------------
                                       Joseph P. Caruso
                                       President and Chief Operating Officer
                                      (Principal Financial Officer and Principal
                                       Accounting Officer)


























                                       24
<PAGE>