|FORM 10-Q


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



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


For quarterly period
ended March 31, 2002


OR


[   ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THESECURITIES 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(State or other jurisdiction of incorporation or organization) | 04-3128178(I.R.S. Employer Identification No.)
|---------------------------------------------------------------------- | ----------------------------------------------

|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
March 31, 2002, 11,489,504 shares of common stock, $.01 par value per share, were
outstanding.


Transitional
Small Business Disclosure Format (check one): Yes [_] No [X]
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|PALOMAR
MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES


INDEX


PART I 
FINANCIAL INFORMATION
|--------------------------------------------------------------------------------------------

|        |  |                                                  
|------- |  | -------------------------------------------------
|ITEM 1. |  | CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)    
|        | 
|        |  | Consolidated Condensed Balance Sheets            
|        | 
|        |  | Consolidated Statements of Operations            
|        | 
|        |  | Consolidated Statements of Stockholders Equity  
|        | 
|        |  | Consolidated Statements of Cash Flows            
|        | 
|        |  | Notes to Consolidated Financial Statements       
|        | 
|ITEM 2. |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
|        |  | CONDITION AND RESULTS OF OPERATIONS              
|        | 
|        |  | RISK FACTORS                                     
|        | 
|ITEM 3. |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES         
|        |  | ABOUT MARKET RISK                                

|                            |    |         |  |                                  |  |    | 
|--------------------------- | -- | ------- |  | -------------------------------- |  | -- | 
|PART II  OTHER INFORMATION | 16
|                           
|                            |    | ITEM 1. |  | LEGAL PROCEEDINGS                |  | 16 | 
|                            |   
|                            |    | ITEM 2. |  | CHANGES IN SECURITIES            |  | 16 | 
|                            |   
|                            |    | ITEM 3. |  | DEFAULTS UPON SENIOR SECURITIES  |  | 16 | 
|                            |   
|                            |    | ITEM 4. |  | SUBMISSION OF MATTERS TO A VOTE  |  | 16 | 
|                            |    |         |  | OF SECURITY HOLDERS              | 
|                           
|                            |    | ITEM 5. |  | OTHER INFORMATION                |  | 16 | 
|                           
|                            |    | ITEM 6. |  | EXHIBITS AND REPORTS ON FORM 8-K |  | 16 | 

|           |  |  |    |  |  |  | 
|---------- |  |  | -- |  |  |  | 
|SIGNATURES |  |  | 19 | 

|-i-
|---

|PALOMAR MEDICAL
TECHNOLOGIES, INC. AND SUBSIDIARIES



CONSOLIDATED CONDENSED
BALANCE SHEETS
|--------------------------------------------------------------------------------------------

|                                                                   | December 31,2001 | March 31,2002   
|------------------------------------------------------------------ | ---------------- | ----------------
|                                                                   |                  |                 
|                                                                   |                  |                 
|ASSETS                                                             |                 
|Current Assets:                                                    |                 
|Cash and cash equivalents                                          |                  | $     5,825,270 
|Accounts receivable, net                                           |                  | 2,250,278       
|Inventories                                                        |                  | 3,706,828       
|Other current assets                                               |                  | 436,752         
|                                                                   |                  |                 
|Total current assets                                               |                  | 12,219,128      
|                                                                   |                  |                 
|Property and Equipment, Net                                        |                  | 649,691         
|Other Assets                                                       |                  | 302,024         
|                                                                   |                  |                 
|                                                                   |                  | $   13,170,843  
|                                                                   |                  |                 
|LIABILITIES AND STOCKHOLDERS EQUITY                               |                 
|                                                                  
|Current Liabilities:                                               |                 
|Convertible debentures                                             |                  | $        500,000
|Note payable to related party                                      |                  | 1,000,000       
|Accounts payable                                                   |                  | 1,846,155       
|Accrued liabilities                                                |                  | 4,173,989       
|Accrued income taxes                                               |                  | 1,400,146       
|Deferred revenue                                                   |                  | 354,684         
|                                                                   |                  |                 
|Total current liabilities                                          |                  | 9,274,974       
|                                                                   |                  |                 
|Stockholders Equity:                                              |                 
|Preferred stock, $.01 par value-                                   |                 
|Authorized - 1,500,000 shares                                      |                 
|Issued and outstanding -                                           |                 
|6,000 shares at December 31, 2001                                  |                 
|(Liquidation preference of $8,177,717 as of December 31, 2001)     |                  | 60              
|Common stock, $.01 par value-                                      |                 
|Authorized - 45,000,000 shares                                     |                 
|Issued - 11,074,393 and 11,489,504 shares at December 31, 2001     |                 
|and March 31, 2002, respectively                                   |                  | 110,744         
|Additional paid-in capital                                         |                  | 163,252,616     
|Accumulated deficit                                                |                  | (157,368,178    
|Less: Treasury stock - 573,031 shares at cost at December 31, 2001 |                  | (2,099,373      
|                                                                   |                  |                 
|Total stockholders equity                                         |                  | 3,895,869       
|                                                                   |                  |                 
|                                                                   |                  | $   13,170,843  
|                                                                   |                  |                 

|-1-
|---

|PALOMAR MEDICAL
TECHNOLOGIES, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS
OF OPERATIONS (Unaudited)
|-------------------------------------------------------------------------------------------------------

|                                                                | Three Months EndedMarch 31,
|--------------------------------------------------------------- | ---------------------------
|
|                                                                |                            
|Product revenues                                                |                            
|Royalty revenues                                                |                            
|                                                                |                            
|Total Revenues                                                  |                            
|                                                               
|Cost of product revenues                                        |                            
|Cost of royalty revenues                                        |                            
|                                                                |                            
|Total Cost of Revenues                                          |                            
|                                                                |                            
|Gross Margin                                                    |                            
|                                                                |                            
|                                                               
|Operating Expenses                                              |                            
|Research and development                                        |                            
|Sales and marketing                                             |                            
|General and administrative                                      |                            
|                                                                |                            
|Total operating expenses                                        |                            
|                                                                |                            
|                                                               
|Loss from operations                                            |                            
|                                                               
|Interest Income                                                 |                            
|Interest Expense                                                |                            
|Other Income                                                    |                            
|                                                                |                            
|                                                               
|Net Loss                                                        |                            
|                                                                |                            
|                                                               
|Basic and Diluted Net Loss Per Share                            |                            
|                                                                |                            
|                                                               
|Basic and Diluted Weighted Average Number of Shares Outstanding |                            
|                                                                |                            

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



-2-
|----------------------------------------------------------------------------------------------

|PALOMAR MEDICAL
TECHNOLOGIES, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENT
OF STOCKHOLDERS' EQUITY
(Unaudited)
|----------------------------------------------------------------------------------------------------------------

|                                                                            | Preferred Stock | Common Stock | Treasury Stock |      |   |           
|--------------------------------------------------------------------------- | --------------- | ------------ | -------------- | ---- | - | ----------
|
|                                                                            |                 |              |                |      |   |           
|Balance, December 31, 2001                                                  |                 | 6,000        |                | $ 60 |   | 11,074,393
|Costs incurred related to the issuance of 
                    common stock |                 |             |                |     |   |          
|Issuance of stock for settlement                                            |                 |             |                |     |   | 358,547   
|Issuance of stock for  Employee Stock Purchase Plan                         |                 |             |                |     |   |          
|Issuance of stock for 2001 employer 401K matching 
           contribution  |                 |             |                |     |   |          
|Conversion of convertible preferred stock                                   |                 | (6,000       | )              | (60  | ) | 56,564    
|Preferred stock dividends                                                   |                 |             |                |     |   |          
|Net loss                                                                    |                 |             |                |     |   |          
|                                                                            |                 |              |                |      |   |           
|Balance, March 31, 2002                                                     |                 |             |                | $   |   | 11,489,504
|                                                                            |                 |              |                |      |   |           

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


-3-
|---------------------------------------------------------------------------------------------

|PALOMAR MEDICAL
TECHNOLOGIES, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS 
(Unaudited)
|--------------------------------------------------------------------------------------------------------

|                                                                       | Three Months Ended March 31,
|---------------------------------------------------------------------- | ----------------------------
|
|                                                                       |                             
|Cash Flows from Operating Activities:                                  |                             
|Net loss                                                               |                             
|                                                                      
|Adjustments to reconcile net loss from continuing operations           |                             
|to net cash used in operating activities-                              |                             
|Depreciation and amortization                                          |                             
|Changes in assets and liabilities,                                     |                             
|Accounts receivable                                                    |                             
|Inventories                                                            |                             
|Other current assets                                                   |                             
|Accounts payable                                                       |                             
|Accrued liabilities                                                    |                             
|Deferred revenue                                                       |                             
|                                                                       |                             
|Net cash used in operating activities                                  |                             
|                                                                       |                             
|                                                                      
|Cash Flows from Investing Activities:                                  |                             
|Purchases of property and equipment                                    |                             
|Purchases of available-for-sale investments                            |                             
|Proceeds from sale of available-for-sale investments                   |                             
|Increase in other assets                                               |                             
|                                                                       |                             
|Net cash (used in) provided by investing activities                    |                             
|                                                                       |                             
|                                                                      
|Cash Flows from Financing Activities:                                  |                             
|Proceeds from employee stock purchase plan                             |                             
|Costs incurred related to issuance of common stock                     |                             
|Payment on Swiss Franc convertible debentures                          |                             
|                                                                       |                             
|Net cash used in Financing Activities                                  |                             
|                                                                       |                             
|                                                                      
|Net decrease in cash and cash equivalents                              |                             
|Cash and cash equivalents, beginning of the period                     |                             
|                                                                       |                             
|Cash and cash equivalents, end of the period                           |                             
|                                                                       |                             
|Supplemental Disclosure of Cash Flow Information:                      |                             
|                                                                      
|Cash paid for interest                                                 |                             
|                                                                       |                             
|                                                                      
|Supplemental Disclosure of Noncash Financing and Investing Activities: |                             
|                                                                      
|Unrealized gain on available-for-sale investments                      |                             
|                                                                       |                             
|                                                                      
|Preferred stock accrued dividends and interest                         |                             
|                                                                       |                             
|                                                                      
|Issuance of stock for 2000 and 2001 employer 401 (k)                   |                             
|matching contribution                                                  |                             
|                                                                       |                             
|                                                                      
|Issuance of stock for settlement                                       |                             
|                                                                       |                             

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


-4-
|---------------------------------------------------------------------------------------------

|PALOMAR MEDICAL
TECHNOLOGIES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCAL 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, 2001.


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. INVENTORIES


Inventories
are stated at lower of cost (first-in, first-out) or market and consist of the following:
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                | December 31,2001 |            | March 31,2002
|--------------- | ---------------- | ---------- | -------------
|                |                  |            |              
|Raw materials   |                  | $1,489,330 |              
|Work-in-process |                  | 292,404    |              
|Finished goods  |                  | 1,925,094  |              
|                |                  |            |              
|                |                  | $3,706,828 |              
|                |                  |            |              

|4. PROPERTY
AND EQUIPMENT


Property
and equipment consist of the following:
|----------------------------------------------------------------------------

|                                | December 31,2001 |             | March 31,2002
|------------------------------- | ---------------- | ----------- | -------------
|                                |                  |             |              
|Machinery and equipment         |                  | $   984,883 |              
|Furniture and fixtures          |                  | 1,352,932   |              
|Leasehold improvements          |                  | 251,106     |              
|                                |                  |             |              
|                                |                  | 2,588,921   |              
|Less:  accumulated depreciation |                 
|and amortization                |                  | 1,939,230   |              
|                                |                  |             |              
|                                |                  | $   649,691 |              
|                                |                  |             |              

|5. CONVERTIBLE DEBENTURES


On
March 13, 1997, the Company issued $500,000 of 6% convertible debentures due March 13,
2002. The convertible debentures have a conversion price of $11.00. The debentureholder
may convert no more than one-third of the debenture in any 30-day period. The Company has
accounted for these debentures at face value.


During
the three months ended, March 31, 2002, the Company has entered into an agreement with
the debentureholder to pay the $500,000 convertible debentures originally due March 13,
2002 in five equal monthly installments, beginning April 2002.


-5-
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|PALOMAR MEDICAL
TECHNOLOGIES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCAL STATEMENTS
|-----------------------------------------------------------------------------------------------

|6. SEGMENT AND
GEOGRAPHIC INFORMATION


Product
revenue from international sources were $1.3 million and $1.4 million for the three
months ended March 31, 2001 and 2002, respectively. The following table represents the
percentage of product revenue by geographic region from customers for the three-month
periods ended March 31, 2001 and 2002:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                   | Three Months EndedMarch 31,
|------------------ | ---------------------------
|
|                   |                            
|United States      |                            
|Japan              |                            
|Asia/Pacific       |                            
|Canada             |                            
|Australia          |                            
|Europe/Middle East |                            
|Latin America      |                            
|                   |                            
|Total              |                            
|                   |                            

|7.
STOCKHOLDERS EQUITY


(a)
Options to Purchase Common Stock


During
the three months ended March 31, 2002, the Company granted options to purchase 187,500
shares of the Companys common stock at exercise prices ranging from $0.91 to $0.92.
During the three months ended March 31, 2002, options to purchase 92,751 shares of the
Companys common stock expired and no options were exercised.


(b) Warrants to
Purchase Common Stock


During
the three months ended March 31, 2002, no warrants were granted, exercised or cancelled.


(c) Convertible
Preferred Stock


During
the three months ended March 31, 2002, the Company converted 6,000 shares of its Series F
Preferred Stock including $2,267,553 of accrued dividends and interest into 467,123
shares of the Companys common stock of which 410,559 shares were issued from treasury
stock.



(d) Issuance of Stock
for Settlement of Litigation


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. The court entered a final judgement of dismissal with prejudice on
November 6, 2000. All cash payments required by Palomar under the settlement agreement
have been previously made. During the three months ended March 31, 2002, the Company
delivered the balance owed under the settlement agreement and issued 358,547 shares of
the Companys common stock.


(e) Issuance of Stock
for 401K Match


During
the three months ended March 31, 2002, the Company issued 148,855 shares of its common
stock held in treasury to the 401(k) Plan in satisfaction of the Companys employer match
for 2001 employee contributions.



-6-
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|PALOMAR MEDICAL
TECHNOLOGIES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCAL STATEMENTS
|-----------------------------------------------------------------------------------------------

|8. NET LOSS
PER COMMON SHARE


Basic
net loss per share was determined by dividing net loss by the weighted
average common shares outstanding during the period. Diluted net loss per share
was determined by dividing the net 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
Companys net loss per share for the three months ended March 31, 2001 and 2002 is as
follows:
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                             | Three Months EndedMarch 31,
|-------------------------------------------- | ---------------------------
|
|                                             |                            
|Net loss                                     |                            
|Preferred stock dividends                    |                            
|                                             |                            
|Net loss attributable to common stockholders |                            
|                                             |                            
|Basic and diluted net loss per common share  |                            
|                                             |                            
|Basic and diluted weighted average number of |                            
|shares outstanding                           |                            
|                                             |                            

|For
the three months ended March 31, 2001 and 2002, 4,470,859 and 6,052,244, respectively, of
potential common shares related to outstanding stock options, stock warrants and
convertible securities were not included in the diluted weighted average shares
outstanding as they were antidilutive.


9.
COMPREHENSIVE LOSS


The
Company adopted SFAS 130, Reporting Comprehensive Income, effective January 1, 1998. SFAS
130 established standards for reporting and display of comprehensive loss and
its components in the financial statements. The Companys only item of other
comprehensive loss relates to unrealized gain on its available-for-sale
investments and is presented separately on the balance sheet as required. A
reconciliation of comprehensive loss is as follows:
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                      | Three Months EndedMarch 31,
|------------------------------------- | ---------------------------
|
|                                      |                            
|Net loss                              |                            
|Unrealized gain on available-for-sale |                            
|investments                           |                            
|                                      |                            
|Comprehensive loss                    |                            
|                                      |                            

|10. REVENUE
RECOGNITION


The
Company recognizes product revenues upon shipment and acceptance. Provisions are made at
the time of revenue recognition for any applicable warranty costs expected to be
incurred. Revenues from services are recognized in the period the services are provided.


-7-
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|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 \ light based systems for hair removal
and other cosmetic treatments; as well as, the first company to obtain clearance using
laser systems from the FDA for permanent hair reduction. Palomars laser \ light based
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 hair removal market
and other cosmetic laser \ light based applications including fat reduction, acne
treatment and skin rejuvenation.


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 \ light
based hair removal and specific acceptance of the Palomar SLP1000® diode laser system,
Palomar EsteLux light based system and the Palomar Q-Yag 5 Q-Switched ND: Yag laser
system is critical to the Companys success. The three systems, all of which have FDA
clearance, cover a wide spectrum of cosmetic applications; the Palomar SLP1000® is the
first diode laser system in the marketplace cleared for use on all skin types and has
different hand pieces to be used in a variety of cosmetic applications including hair and
vascular lesion removal; the Palomar EsteLux system is a fast, more compact and
efficient light based system for hair removal and pigmented lesion removal and the
Palomar Q-Yag 5 is a laser system for tattoo and pigmented lesion removal. The
Company has traditionally spent a significant amount of its resources in developing new
technologies and products.

(b) Results of Operations
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

| |  | (i) |  | REVENUES
AND GROSS PROFIT: Three Months Ended March 31, 2002, Compared to Three Months Ended March
31, 2001
| |  | --- |  | -----------------------------------------------------------------------------------------------------------

|For
the three months ended March 31, 2002, the Companys revenues increased to $4.2 million,
as compared to $3.6 million for the three months ended March 31, 2001. The increase in
the Companys revenues of $600,000, or 18% from the three months ended March 31, 2001,
was mainly due to an increase in product sales of $1.6 million from the EsteLux, an
increase of $473,000 in product sales of the Q-Yag 5, an increase in sales of $150,000
associated with the RD1200 offset by a decrease of $1.4 million from shipments associated
with the SLP 1000. Additionally, royalty revenues received by the Company decreased by
$187,000 in 2002 compared to 2001.


Gross
profit for the three months ended March 31, 2002 was $1.7 million, 40% of revenues,
compared to $887,00, 25% of revenues, for the three months ended March 31, 2001. The
EsteLux and Q-Yag 5 are higher margin products. As a result, the EsteLux and Q-Yag 5 have
directly contributed to the increase in gross profit and gross profit percentage for the
three months ended March 31, 2002.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (ii) |  | OPERATING
AND OTHER EXPENSES: Three Months Ended March 31, 2002, Compared to Three Months Ended
March 31, 2001
| |  | ---- |  | --------------------------------------------------------------------------------------------------------------

|Research
and development costs decreased to $1.1 million for the three months ended March 31,
2002, as compared to $1.6 million for the three months ended March 31, 2001. Research and
development expenses as a percentage of revenue totaled 25% for the three months ended
March 31, 2002 and 45% for the three months ended March 31, 2001. This decrease of
$500,000 is a result from the investment that the Company has made over the past quarters
into the development of product platforms. These platforms allow the Company to introduce
new applications by changing the specifications of these platforms rather than developing
entirely new products. 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 and light-based systems,
while continuing dermatology research utilizing the Companys platforms. The research and
development goals in the fields of laser and light-based 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, acne treatment and skin rejuvenation covered in
its expanded research agreement with Massachusetts General Hospital.


-8-
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Selling
and marketing expenses were $789,000, or 19% of revenues for the three months ended March
31, 2002, compared to $718,000, or 20% of revenues for the three months ended March 31,
2001.


General
and administrative expenses decreased to $619,000 or 15% of revenues for the three months
ended March 31, 2002, as compared to $881,000, or 25% of revenues for the three months
ended March 31, 2001. This decrease in general and administrative expenses is
attributable to improved cost management and a reduction in legal expenses.


Interest
income decreased to $20,000 for the three months ended March 31, 2002, compared to
$298,000 for the three months ended March 31, 2001. This decrease in interest income is
attributable to the reduction in cash available for investment.


Interest
expense increased to $31,000 for the three months ended March 31, 2002, compared to
$24,000 for the three months ended March 31, 2001. This increase in interest expense is
attributable to higher average debt balances as a result of the note payable to related
party.


Other
income decreased to $58,000 for the three months ended March 31, 2002, compared to
$127,000 for the three months ended March 31, 2001.


(c) Liquidity and
Capital Resources


As of
March 31, 2002, the Company had $3.9 million in cash and cash equivalents. The successful
sales and marketing of new products and an on-going royalty stream will be critical to
future liquidity.


The
Companys operating activities used cash of approximately $1.8 million for the three
months ended March 31, 2002 and 2001, respectively. Net cash used during the three months
ended March 31, 2002 consisted primarily of a net loss from operations, offset by
depreciation and amortization, an increase in accounts receivable, deferred revenue and a
decrease in inventories, other current assets, accounts payable and accrued liabilities.
Net cash used during the three months ended March 31, 2001 consisted primarily of a net
loss from operations, an increase in accounts receivable and a decrease in accounts
payable, offset by depreciation and amortization, a decrease in inventories, a decrease
in other current assets, an increase in accrued liabilities and deferred revenue.


Investing
activities used cash of $77,000 and provided cash of $2.0 million during the three months
ended March 31, 2002 and 2001, respectively. During the three months ended March 31,
2002, the principal uses were purchases of property and equipment. During the three
months ended March 31, 2001, the principal uses were purchases of investments offset by
proceeds from the sale of investments.


Financing
activities used cash of $50,000 and $507,000 during the three months ended March 31, 2002
and 2001, respectively. During the three months ended March 31, 2002, the decrease from
financing activities were due to costs incurred related to the issuance of common stock
offset by the proceeds from the issuance of stock pursuant to the employee stock purchase
plan and 401K matching contribution. Financing activities used cash of $507,000 during
the three months ended March 31, 2001 due to costs incurred related to the issuance of
common stock and a payment made on Swiss Franc convertible debentures offset by the
proceeds from the issuance of stock pursuant to the employee stock purchase plan and 401K
matching contribution.


The
Company anticipates that capital expenditures for 2002 will total $200,000, consisting
primarily of machinery, equipment, computers and peripherals. The Company expects to
finance these expenditures with cash on hand and equipment leasing.


-9-
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Statement
under the Private Securities Litigation Reform Act


In
addition to the other information in this 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 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. Our actual results could differ materially
from those suggested in such forward-looking statements due to the risk factors
identified below and other factors including, without limitation, risks concerning the
timing of new product introductions, financing of future operations, the Companys
research partnership with MGH, manufacturing risks, variations in our quarterly results,
enforcement of intellectual property rights by us and our competitors, the occurrence of
unanticipated events and circumstances, and general economic conditions, including stock
market volatility. 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. Forward
looking statements include statements regarding our expectations, beliefs, intentions or
strategies regarding the future and can be identified by forward-looking words such as
anticipate, believe, could, estimate, expect, intend, may, should,
will, and would or similar words.




RISK FACTORS


Our future revenue
depends on our successfully developing and marketing new products.


We
face rapidly changing technology and continuing improvements in cosmetic laser /
light-based 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. Since the
sale of Star to Coherent, our revenues have almost entirely depended on sales of newly
introduced products. In addition, the market for hair removal laser / light-based devices
may already be saturated. At present, broad market acceptance of laser / light-based hair
removal is critical to our success. We intend to continue to diversify our product line
by developing cosmetic laser / light-based products for uses other than hair and tattoo
removal and treatment of pigmented and vascular lesions, but there can be no assurance
that we will be able to successfully implement such strategy in a timely fashion or at
all.


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


The
laser / light-based hair removal industry is highly competitive and companies frequently
introduce new products. We compete in the development, manufacture, marketing and
servicing of hair removal laser / light-based devices 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 laser / light-based
devices at prices significantly below the prices at which we sell our products. In
addition, as a result of the Star sale to Coherent and its subsequent re-sale to Lumenis,
Lumenis is now a stronger competitor and we have had to find new ways to distribute our
products. We currently have no significant direct or indirect sales force in place for
our new products. Our 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.


-10-
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|We may need to secure
additional financing, and our auditors have expressed doubt about our ability to
continue as a going concern.


We
have a history of losses. As a result, the report of our independent public accountants
in connection with our Consolidated Balance Sheets as of December 31, 2000 and 2001, and
the related Consolidated Statements of Operations, Stockholders Equity (Deficit) and
Cash Flows for the three years ended December 31, 2001 includes an explanatory paragraph
stating that our recurring losses, and cash flow from operations raises substantial
doubts about our ability to continue as a going concern. We may have to secure additional
financing to complete our research and development activities, commercialize our current
and proposed cosmetic laser / light-based products, and fund ongoing operations. However,
there can be no assurance that such financing will be obtained. We may also determine,
depending upon the opportunities available, to seek additional debt or equity financing
to fund the costs of operations or expansion. Additionally, if we incur indebtedness to
fund increased levels of accounts receivable, finance the acquisition of capital
equipment, or if we issue debt securities in connection with any acquisition we will be
subject to risks associated with incurring substantial additional indebtedness.



Our quarterly operating
results are and may continue to be volatile, and that may hurt the price of our
common stock.


If our
operating results fall below the expectations of investors or public market analysts, the
price of our common stock could decline.





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. A company must also maintain a minimum requirement of net
tangible assets of $2.5 million or market capitalization of $35 million or net income (in
latest fiscal year or 2 of the last 3 fiscal years) of $500,000. We are currently 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 / light-based systems that incorporate third-party components. 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.





Our products 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 / light-based medical devices which are subject to FDA
regulations for clinical testing, manufacturing, labeling, sale, distribution and
promotion. Before a new product or a new use of or claim for an existing product can be
introduced into the market, we must obtain clearance from the FDA. Our products may also
be subject to state regulations, which are, in many instances, in a state of flux.
Changes in state regulations may enhance or impede sales. 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. Compliance with the regulatory clearance process in any country is
expensive and time-consuming, and we may not be able to obtain such clearances in a
timely fashion or at all. Regulatory clearances may necessitate clinical testing,
limitations on the number of sales and limitations on the type of end user, 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 and
requests.


-11-
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Federal
regulation allows our products to be sold to and used by licensed practitioners as
determined on a state-by-state basis. As a result, non-physicians, including nurse
practitioners and, in some cases, chiropractors and electrologists, may operate our
product. We do not supervise the procedures performed with our products, nor do we
require that direct medical director supervision occur. The lack of required training and
the purchase and use of our products by non-physicians may result in their misuse, which
could harm our reputation and expose us to costly product liability litigation.


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. We are also
substantially dependent upon 3rd party researchers to grant us licensing terms, which may
or may not be favorable for products and technology, 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 dilute our stockholders, and could adversely affect the market
price of our common stock.





Our proprietary
technology has only limited protections.


Our
business could be materially and adversely affected if we are not able to adequately
protect our intellectual property rights. We rely on a combination of patent, copyright,
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 third parties with which we work, including but not limited to consultants and
vendors, to restrict access to, and distribution of, our proprietary information. Despite
our efforts to protect our proprietary rights, unauthorized parties may attempt to copy
or otherwise obtain and use our technology. Monitoring unauthorized use of our technology
is difficult and we cannot be certain that the steps we have taken will prevent
unauthorized use of our technology, particularly in foreign countries where the laws may
not protect our proprietary rights as fully as in the United States. If competitors are
able to use our technology, our ability to compete effectively could be harmed. 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. Our
competitors also may independently develop technologies that are substantially equivalent
or superior to our technology.


We could become subject
to claims by third parties regarding intellectual property rights.


In
recent years, there has been significant litigation in the United States involving
patents and other intellectual property rights. The medical laser / light-based industry
in particular is characterized by the large number of patents and frequent claims and
related litigation regarding patent and other intellectual property rights. Because
patent applications are maintained in secrecy for a period of time, we can conduct only
limited searches to determine whether our technology infringes any patents or patent
applications. Any claims for patent infringement, regardless of merit, 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 / light-based 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.


-12-
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Our charter documents
and Delaware law may discourage potential takeover attempts.


Our
Second Restated Certificate of Incorporation and our By-laws contain provisions that
could discourage takeover attempts or make more difficult the acquisition of a
substantial block of our common stock. Our By-laws require a stockholder to provide to
the Secretary of the Company advance notice of 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.





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, material portions of our revenues consist of royalties from licensing patents
licensed to us on an exclusive basis by Massachusetts General Hospital. However, there
can be no assurance that these royalty amounts will not decrease or that we will be able
to collect all licensing royalties owed by current licensees or increase royalties by
licensing additional third parties.


-13-
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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


We face risks
associated with revenues.


There
can be no certainty as to the severity or duration of the current economic downturn and
its impact on our future revenues.


We face risks associated
with liquidity and capital resources.


There
can be no assurance that we will not require additional financing to fund our operations
or that such additional funding, if needed, will be available on terms acceptable to us
or at all.


We may be unable to
generate sufficient revenues to achieve profitability.


There
can be no assurance that our revenues will increase or that we will generate sufficient
revenues to achieve or sustain profitability. While we strive to minimize the Companys
business expenses, we will continue to have large fixed expenses and we expect to
continue to incur significant sales and marketing, product development, customer support
and service, administrative and other expenses. As a result, we need to generate
significantly higher revenue to achieve and maintain profitability.


Terrorist acts and acts
of war may seriously harm our business and revenues, costs and expenses and
financial condition.


-14-
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Terrorist
acts or acts of war (wherever located around the world) may cause damage or disruption to
Palomar, our employees, facilities, partners, suppliers, distributors, resellers, or
customers, which could significantly impact our revenues, costs and expenses and
financial condition. The terrorist attacks that took place in the United States on
September 11, 2001 were unprecedented events that have created many economic and
political uncertainties, some of which may materially harm our business and results of
operations. The long-term effects on our business of the September 11, 2001 attacks are
unknown. The potential for future terrorist attacks, the national and international
responses to terrorist attacks, and other acts of war or hostility have created many
economic and political uncertainties, which could adversely affect our business and
results of operations in ways that cannot presently be predicted.



Item 3. Quantitative and
Qualitative Disclosures About Market Risk.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (i) |  | Derivative
Financial Instruments, Other Financial Instruments, and Derivative Commodity Instruments.
| |  | --- |  | ----------------------------------------------------------------------------------------------------

|SFAS
No. 107 requires disclosure about fair value of financial instruments. Financial
instruments consist of cash equivalents, accounts receivable, accounts payable and
short-term debt obligations. The fair value of these financial instruments approximates
their carrying amount as of March 31, 2002 due to their short-term nature. All of the
Companys investments are considered cash equivalent money market accounts and debt
securities which are considered available-for-sale investments 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 (deficit) equity. Accordingly, the
Company has no quantitative information concerning the market risk of participating in
such investments.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (ii) |  | Primary
Market Risk Exposures.
| |  | ---- |  | ------------------------------

|The
Companys primary market risk exposures are in the areas of interest rate risk. The
Companys investment portfolio of cash equivalents is subject to
interest rate fluctuations, but the Company believes this risk is immaterial because of
the short-term nature of these investments.


-15-
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|PART II 
OTHER INFORMATION


Item 1. Legal
Proceedings.


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



Item 2.
Changes in Securities.


During
the three months ended March 31, 2002, the Company converted 6,000 shares of its Series F
Preferred Stock including $2,267,553 of accrued dividends and interest into 467,123
shares of the Companys common stock of which 410,559 shares were issued from treasury
stock.


Item 3. Defaults
upon Senior Securities.


Not
applicable.



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


Not
applicable.



Item 5. Other
Information.


Not
applicable.


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

|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.                                                                                   

|-16-
|----

|
|

|*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.                                                                                                                                                                                                                    
|        
|###10.1  |  | Employment
Agreement, dated as of May 15, 1997, between the Company and Louis P. Valente.                                                                                                                                                                            
|        
|<10.2    |  | Amendment No. 1 to Key Employment Agreement between the Company and Louis P. Valente
dated May 15, 1999.                                                                                                                                                             
|        
|####10.3 |  | Amendment
No. 2 to Key Employment Agreement between the Company and Louis P. Valente dated February
1, 2000                                                                                                                                                          
|        
|<10.4    |  | Amended and Restated Employment Agreement between the Company and Joseph P. Caruso dated
June 30, 1999.                                                                                                                                                              
|        
|####10.5 |  | Amendment
No. 1 to Amended and Restated Employment Agreement between the Company and Joseph P.
Caruso dated February 1, 2000.                                                                                                                                        
|        
|<10.6    |  | Lease for premises at 82 Cambridge Street, Burlington, Massachusetts, dated June 17, 1999.                                                                                                                                                                           
|        
|###10.7  |  | License
Agreement between the Company and Massachusetts General Hospital, dated August 18, 1995.                                                                                                                                                                     
|        
|###10.8  |  | First
Amendment to License Agreement between the Company and Massachusetts General Hospital
dated August 18, 1995.                                                                                                                                                   
|        
|###10.9  |  | Second
Amendment to License Agreement between the Company and Massachusetts General Hospital
dated August 18, 1995.                                                                                                                                                  
|        
|-10.10   |  | The
Companys 401(k) Plan.                                                                                                                                                                                                                                           
|        
|**10.11  |  | Agreement
and Plan of Reorganization by and among Coherent, Inc., Medical Technologies,
Acquisition, Inc., Palomar Medical Technologies, Inc., Star Medical Technologies, Inc.,
Robert E. Grove, James Z. Holtz and David C. Mundinger, dated as of December 7, 1998.
|        
|<<10.12  |  | Amendment No. 1 to Key Employment Agreement between the Company and Joseph P. Caruso
dated June 8, 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.                                                                                                    

|-17-
|----

|
|

|**   |  | 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.                                                              
|    
|<<   |  | Previously
filed as an exhibit Form 10-Q for the period ended June 30, 2000, and incorporated herein
by reference.                                                              

|-18-
|----

|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 May 9, 2002.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|DATE: May 9, 2002 |  | PALOMAR MEDICAL TECHNOLOGIES, INC. (Registrant)By: /s/ Louis P. Valente
Louis P. ValenteChief Executive Officer and Chairman(Principal Executive Officer)
|----------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|DATE: May 9, 2002 |  | By: /s/ Joseph P. Caruso
Joseph P. Caruso
President, Chief Operating Officer and Director
(Principal Financial Officer and Principal Accounting Officer) 

|-19-
|----