|UNITED STATES
                                                  SECURITIES AND EXCHANGE COMMISSIONWashington, DC 20549


FORM 10-Q

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the quarterly period ended March 31, 2004.


Commission file number 0-22340

                                                    
      Palomar Medical Technologies, Inc.(Exact name of registrant as specified in its charter)
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                        | 
|--------------------------------------- | 
|Delaware                                | 
|(State
      or other jurisdiction      | 
|of incorporation
      or organization) | 

|82
      Cambridge Street, Burlington, Massachusetts | 01803-4107       | 
|---------------------------------------------------- | ---------------- | 
|(Address
      of principal executive offices)       | (Zip
      code) | 

|Registrants
        telephone number, including area code:(781) 993-2300
|-------------------------------------------------------------------------

|Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 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 ý No oIndicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Securities Exchange Act of
1934).o No ý

Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                             | 
|---------------------------- | 
|Class                        | 
|Common Stock, $.01 par value | 

|
|

|Palomar Medical
Technologies, Inc. and Subsidiaries

Table of Contents
|----------------------------------------------------------------------

|                               |                                                                                                                                  |  | Page No.
|------------------------------ | -------------------------------------------------------------------------------------------------------------------------------- |  | --------
|PART I - Financial Information |                                                                                                                                  |  |         
|                               |                                                                                                                                  |  |         
|Item 1                         | Financial Statements                                                                                                             |  |         
|                               | Unaudited Condensed Consolidated Balance Sheets for the periods ending
              March 31, 2004 and December 31, 2003        |  | 1       
|                               | Unaudited Condensed Consolidated Statements of Operations for the periods ending
              March 31, 2004 and March 31, 2003 |  | 2       
|                               | Unaudited Condensed Consolidated Statement of Stockholders Equity                                                               |  | 3       
|                               | Unaudited Condensed Consolidated Statements of Cash Flows                                                                        |  | 4       
|                               | Notes to Unaudited Condensed Consolidated Financial Statements                                                                   |  | 5       
|Item 2.                        | Managements Discussion and Analysis of Financial Condition and the
   Results of Operations                                     |  | 9       
|                               | Cautionary Statements                                                                                                            |  | 16      
|Item 3.                        | Quantitative and Qualitative Disclosures About Market Risk                                                                       |  | 22      
|Item 4.                        | Controls and Procedures                                                                                                          |  | 23      
|                               |                                                                                                                                  |  |         
|PART II - Other Information    |                                                                                                                                  |  |         
|                               |                                                                                                                                  |  |         
|Item 1.                        | Legal Proceedings                                                                                                                |  | 23      
|Item 2.                        | Changes in Securities, Use of Proceeds and Issuer Purchases of Securities                                                        |  | 24      
|Item 3.                        | Defaults Upon Senior Securities                                                                                                  |  | 24      
|Item 4.                        | Submission of Matters to a Vote of Security Holders                                                                              |  | 24      
|Item 5.                        | Other Information                                                                                                                |  | 24      
|Item 6.                        | Exhibits and Reports on Form 8-K                                                                                                 |  | 24      
|SIGNATURES                     |                                                                                                                                  |  | 25      

|i
|-

|
|

|Palomar Medical
Technologies, Inc. and Subsidiaries


Condensed Consolidated Balance Sheets
                                                                (Unaudited)
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                                | March 31,
2004 | December 31,
2003
|------------------------------------------------------------------------------- | -------------- | -----------------
|Assets                                                                          |                |                  
|                                                                                |                |                  
|Current assets:                                                                 |               
|Cash and cash equivalents                                                       |                | $   12,959,487   
|Accounts receivable, net of allowance of $790,453 and $862,114,    respectively |                | 6,349,053        
|Inventories                                                                     |                | 4,169,049        
|Other current assets                                                            |                | 671,190          
|                                                                                |                |                  
|Total current assets                                                            |                | 24,148,779       
|                                                                                |                |                  
|Property and equipment, net                                                     |                | 651,923          
|                                                                                |                |                  
|Other assets                                                                    |                | 111,074          
|                                                                                |                |                  
|Total Assets                                                                    |                | $   24,911,776   
|                                                                                |                |                  
|Liabilities and Stockholders' Equity                                            |               
|Current liabilities:                                                            |               
|Accounts payable                                                                |                | $        632,996 
|Accrued liabilities                                                             |                | 4,591,681        
|Deferred income taxes                                                           |                | 1,100,000        
|Deferred revenue                                                                |                | 1,124,832        
|                                                                                |                |                  
|Total current liabilities                                                       |                | 7,449,509        
|                                                                                |                |                  
|Commitments and Contingencies                                                   |               
|                                                                                |                |                  
|Stockholders' equity:                                                           |               
|Preferred stock, $.01 par value-                                                |               
|Authorized - 1,500,000 shares                                                   |               
|Issued -  none                                                                  |                | --               
|Common stock, $.01 par value-                                                   |               
|Authorized - 45,000,000 shares                                                  |               
|Issued -  15,527,671 and 14,554,407 shares, respectively                        |                | 155,277          
|Additional paid-in capital                                                      |                | 170,197,584      
|Accumulated deficit                                                             |                | (152,890,594     
|                                                                                |                |                  
|Total stockholders' equity                                                      |                | 17,462,267       
|                                                                                |                |                  
|Total liabilities and stockholders equity                                      |                | $   24,911,776   
|                                                                                |                |                  

|The accompanying notes are
an integral part of these consolidated financial statements
-1-
|------------------------------------------------------------------------------------------

|Palomar Medical
Technologies, Inc. and Subsidiaries


Consolidated Condensed
Statements of Operations (Unaudited)
|-----------------------------------------------------------------------------------------------------------------

|                                               | Three Months Ended
March 31, | 
|---------------------------------------------- | ---------------------------- | 
|
|Revenues:                                      |                              | 
|Product revenues                               |                              | 
|Royalty revenues                               |                              | 
|Funded product development revenues            |                              | 
|                                               |                              | 
|Total revenues                                 |                              | 
|                                               |                              | 
|Costs and expenses:                            |                              | 
|Cost of product revenues                       |                              | 
|Cost of royalty revenues                       |                              | 
|Research and development                       |                              | 
|Selling and marketing                          |                              | 
|General and administrative                     |                              | 
|                                               |                              | 
|Total costs and expenses                       |                              | 
|                                               |                              | 
|Income from operations                         |                              | 
|                                               |                              | 
|Interest income                                |                              | 
|Interest expense                               |                              | 
|Other income                                   |                              | 
|                                               |                              | 
|Income from operations                         |                              | 
|                                               |                              | 
|Provision for income taxes                     |                              | 
|                                               |                              | 
|Net income                                     |                              | 
|                                               |                              | 
|Net income per share:                          |                              | 
|Basic                                          |                              | 
|                                               |                              | 
|Diluted                                        |                              | 
|                                               |                              | 
|Weighted average number of shares outstanding: |                              | 
|Basic                                          |                              | 
|                                               |                              | 
|Diluted                                        |                              | 
|                                               |                              | 

|The accompanying notes are
an integral part of these consolidated financial statements
-2-
|------------------------------------------------------------------------------------------

|Palomar Medical
Technologies, Inc. and Subsidiaries


Condensed Consolidated
Statement of Stockholders' Equity (Unaudited)
|--------------------------------------------------------------------------------------------------------------------------

|                                                                 | Common Stock |  |  | Total      | 
|---------------------------------------------------------------- | ------------ |  |  | ---------- | 
|
|
|Balance, December 31, 2003                                       |              |  |  | 14,554,407 | 
|Net income                                                       |              |  |  | --         | 
|Issuance of stock for employee stock purchase plan               |              |  |  | 3,109      | 
|Issuance of stock for 2003 employer 401(k) matching contribution |              |  |  | 38,819     | 
|Costs incurred related to the issuance of common stock           |              |  |  | --         | 
|Tax benefit from the exercise of stock options                   |              |  |  | --         | 
|Exercise of stock options                                        |              |  |  | 893,336    | 
|Exercise of warrants                                             |              |  |  | 38,000     | 
|                                                                 |             
|Balance, March 31, 2004                                          |              |  |  | 15,527,671 | 
|                                                                 |             

|The accompanying notes are
an integral part of these consolidated financial statements
-3-
|------------------------------------------------------------------------------------------

|Palomar Medical
Technologies, Inc. and Subsidiaries


Condensed Consolidated
Statements of Cash Flow(Unaudited)
|---------------------------------------------------------------------------------------------------------------

|                                                                                          | Three Months Ended March 31, | 
|----------------------------------------------------------------------------------------- | ---------------------------- | 
|
|Cash flows from operating activities:                                                     |                              | 
|Net income                                                                                |                              | 
|                                                                                          |                              | 
|Adjustments to reconcile net income  to net cash provided (used in) operating activities: |                              | 
|Depreciation and amortization                                                             |                              | 
|Increase (decrease) in accounts receivable allowance                                      |                              | 
|Tax benefit from the exercise of stock options                                            |                              | 
|Changes in assets and liabilities,                                                        |                              | 
|Accounts receivable                                                                       |                              | 
|Inventories                                                                               |                              | 
|Other current assets                                                                      |                              | 
|Accounts payable                                                                          |                              | 
|Accrued liabilities                                                                       |                              | 
|Deferred revenue                                                                          |                              | 
|                                                                                          |                              | 
|Net cash provided by (used in) operating activities                                       |                              | 
|                                                                                          |                              | 
|Cash flows from investing activities:                                                     |                              | 
|Purchases of property and equipment                                                       |                              | 
|                                                                                          |                              | 
|Net cash (used in) investing activities                                                   |                              | 
|                                                                                          |                              | 
|Cash flows from financing activities:                                                     |                              | 
|Proceeds from the exercise of stock options, warrants and employee stock purchase plan    |                              | 
|Costs incurred related to issuance of common stock                                        |                              | 
|Proceeds from sale of common stock                                                        |                              | 
|                                                                                          |                              | 
|Net cash provided by financing activities                                                 |                              | 
|                                                                                          |                              | 
|Net increase 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:                    |                              | 
|Issuance of stock for employer 401(k) matching contribution                               |                              | 
|                                                                                          |                              | 
|Exchange of note payable for common stock                                                 |                              | 
|                                                                                          |                              | 

|The accompanying notes are
an integral part of these consolidated financial statements
-4-
|------------------------------------------------------------------------------------------

|Palomar Medical
Technologies, Inc. and SubsidiariesNotes to
Condensed Consolidated Financial Statements




Note 1    Basis of presentation


The
accompanying unaudited condensed 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 (
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 condensed consolidated financial statements and notes should be read in
conjunction with Palomars Form 10-K for the year ended December 31, 2003.  Certain
prior-period amounts have been reclassified to conform with the current-period
presentation.


Note 2   Stock based compensation


Palomar
follows the intrinsic value method for Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25) and related interpretations, in accounting for its stock-based
compensation plans, rather than the alternative fair value accounting method provided for
under SFAS No. 123, Accounting for Stock-Based Compensation. Under APB 25, when the
exercise price of options granted under these plans equals the market price of the
underlying stock on the date of grant, no compensation expense is required. In accordance
with EITF 96-18, Palomar records compensation expense equal to the fair value of options
and warrants granted to non-employees over the vesting period, which is generally the
period of service.


The
following table illustrates the effect on net income and earnings per share if Palomar
had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee
compensation. Palomar has computed the pro forma disclosures required under SFAS No. 123
for all stock options granted to employees of Palomar for the three months ended March
31, 2004 and 2003, respectively, using the Black-Scholes option-pricing model prescribed
by SFAS No. 123.


Pro forma disclosure


The
pro forma effect on Palomar of applying SFAS No. 123 for all options and warrants to
purchase common stock of Palomar would be as follows:
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                                                                                | Three Months Ended
March 31, | 
|------------------------------------------------------------------------------------------------------------------------------- | ---------------------------- | 
|
|Net income, as reported                                                                                                         |                              | 
|Less: Total stock-based employee compensation expense
determined       under fair value based method for all awards, net of tax |                              | 
|                                                                                                                                |                              | 
|Pro forma net income (loss)                                                                                                     |                              | 
|                                                                                                                                |                              | 
|Net income (loss) per share:                                                                                                    |                              | 
|Basic - as reported                                                                                                             |                              | 
|                                                                                                                                |                              | 
|Basic - pro forma                                                                                                               |                              | 
|                                                                                                                                |                              | 
|Diluted - as reported                                                                                                           |                              | 
|                                                                                                                                |                              | 
|Diluted - pro forma                                                                                                             |                              | 
|                                                                                                                                |                              | 

|-5-
|---

|Palomar Medical
Technologies, Inc. and SubsidiariesNotes to
Condensed Consolidated Financial Statements


Note 3  Cash equivalents



Cash
equivalents consist of short-term, highly liquid investments which are readily
convertible into cash with maturities of three months or less when purchased.


Note 4  Inventories


Inventories
are valued at the lower of standard cost, which approximates actual cost determined on a
first-in, first-out basis or market.  At March 31, 2004 and December 31, 2003,
inventories consisted of the following:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                | March 31,
2004 | December 31,
2003
|--------------- | -------------- | -----------------
|Raw materials   |                | $2,535,294       
|Work-in-process |                | 364,712          
|Finished goods  |                | 1,269,043        
|                |                |                  
|                |                | $4,169,049       
|                |                |                  

|Note 5  Property and equipment
Property
and equipment are recorded at cost.  Repairs and maintenance costs are expensed as
incurred. Depreciation and amortization are provided using the straight-line method over
the estimated useful lives. At March 31, 2004 and December 31, 2003, property and
equipment consisted of the following:
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                   | March 31,
2004 | December 31,
2003
|---------------------------------- | -------------- | -----------------
|Machinery and equipment            | $1,106,219     | $1,008,960       
|Furniture and fixtures             | 1,745,739      | 1,721,254        
|Leasehold improvements             | 265,845        | 257,326          
|                                   |                |                  
|                                   | 3,117,803      | 2,987,540        
|Less: accumulated depreciation and |                |                  
|amortization                       | 2,465,880      | 2,404,642        
|                                   |                |                  
|                                   | $   651,923    | $   582,898      
|                                   |                |                  

|Note 6  Warranty costs


Palomars
products generally carry a standard one-year warranty.  Palomar sets aside a reserve
based on anticipated warranty claims at the time product revenue is recognized.  In
anticipation of actual warranty claims, Palomar amortizes the reserve ratably over the
life of the warranty thereby offsetting actual warranty claims incurred.  Actual warranty
claims incurred and charged to product costs of sale during an interim period may be more
or less than the amount of amortized warranty reserve allocated against them. Factors
that affect Palomars product warranty liability include the number of installed units,
the anticipated cost of warranty repairs and historical and anticipated rates of warranty
claims.


The
following table reflects the changes in Palomars accrued warranty during the three
months ended March 31, 2004:
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                            | Total
(in thousands)
|------------------------------------------- | --------------------
|Warranty accrual as of December 31, 2003    |                     
|Plus accruals related to new sales          |                     
|Less: amortization of prior period accruals |                     
|                                            |                     
|                                            |                     
|Warranty accrual as of March 31, 2004       |                     
|                                            |                     

|
|

|-6-
|---

|Palomar Medical
Technologies, Inc. and SubsidiariesNotes to
Condensed Consolidated Financial Statements



Note 7  Segment information



Product
revenue from international sources were $3.1 million and $3.6 million for the three
months ended March 31, 2004 and 2003, respectively. The following table represents the
percentage of product revenue by geographic region from customers for the three months
ended March 31, 2004 and 2003:
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                             | Three Months Ended
March 31, |    
|---------------------------- | ---------------------------- | ---
|
|United States                |                              | 68 
|Asia / Pacific / Middle East |                              | 10 
|Europe                       |                              | 8  
|Canada                       |                              | 7  
|Japan                        |                              | 3  
|Australia                    |                              | 0  
|South and Central America    |                              | 0  
|                             |                              |    
|Total                        |                              | 100
|                             |                              |    

|Note 8  Net income per common share


Basic
net income per share was determined by dividing net income attributable to common
stockholders by the weighted average common shares outstanding during the period.
 Diluted net income per share was determined by dividing net income attributable to
common stockholders by diluted weighted average shares outstanding. Diluted weighted
average shares reflect the dilutive effect, if any, of common stock options and warrants
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.


A
reconciliation of basic and diluted shares is as follows:
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                               | Three Months Ended
March 31, |           
|-------------------------------------------------------------- | ---------------------------- | ----------
|
|Basic weighted average number of shares outstanding            | 15,063,754                   | 11,889,899
|                                                              
|Potential common shares pursuant to stock options and warrants | 2,288,482                    | 1,420,742 
|                                                               |                              |           
|Diluted weighted average number of shares outstanding          | 17,352,236                   | 13,310,641
|                                                               |                              |           

|Note 9  Research and development
arrangement with Massachusetts General Hospital


In August 1995, Palomar entered into an agreement with The Massachusetts General Hospital Corporation whereby
Massachusetts General Hospital agreed to conduct clinical trials on a laser treatment for hair removal/reduction developed
at Wellman Laboratories of Photomedicine. In July 1999, Palomar further amended this agreement to extend the research
agreement for an additional five years, with Palomar agreeing to pay Massachusetts General Hospital $475,000 on an annual
basis, and to expand the research beyond photothermal hair removal into the fields of fat removal and acne treatment.
Palomar has the right to exclusively license, on royalty terms to be negotiated, Palomar-funded inventions in the relevant
fields.  Palomar is in discussions with Massachusetts General Hospital for an extension of this agreement for clinical
research beyond August 2004.


Note 10  Development and
license agreement with Gillette


Effective
as of February 14, 2003, Palomar entered into a Development and License Agreement with
Gillette to complete the development and commercialize a home-use, light-based hair
removal device for women. The agreement provides for up to $7 million in support of
research and development to be paid by Gillette over approximately 30 months.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|-7-
|---

|Palomar Medical
Technologies, Inc. and SubsidiariesNotes to
Condensed Consolidated Financial Statements


At
the end of the 30-month period, or such later date as regulatory clearance is obtained
for the device, Gillette will decide whether or not to continue with the project based on
all the information known at that time. Upon Gillette deciding to continue, Gillette will
be obligated to make a development completion payment to Palomar of $2.5 million.  If
Gillette decides not to continue, Palomar may proceed to develop and commercialize the
device on its own or with a different party.


After
Gillette makes the development completion payment to Palomar of $2.5 million, Gillette
will conduct approximately 12 months of commercial assessment tests with respect to the
device. Based on the commercial assessment tests, Gillette will then decide whether or
not to continue with the project. Upon deciding to continue, Gillette will be obligated
to make a development completion payment to Palomar of $10 million.  If Gillette decides
not to continue to commercialize the device, Palomar may proceed to commercialize the
device on its own or with a different party.


Commencing
12 months after the $10 million development completion payment, Gillette will be
obligated to pay Palomar annual collaboration payments of $10 million for as long as
Gillette elects to have Palomar work exclusively with Gillette.


After
launch of the first device for females, Gillette will pay Palomar a percentage of net sales of
the device, subject in certain instances to various reductions and offsets. Again, for as
long as Gillette elects to have Palomar work exclusively with Gillette, Gillette will
continue to be obligated to pay Palomar annual collaboration payments of $10 million,
which will be offset against the net sales percentage payments.


In
addition to the amounts to be paid by Gillette to Palomar in connection with jointly
developed products, Gillette is required to make certain lump sum and net sales based
payments to Palomar in the event that Gillette launches independent light-based female
hair removal products.  Gillette also receives the right to enter into a separate
agreement with Palomar for the development and commercialization of home-use, light-based
hair removal devices for men.


Note 11  Research contract
with the Department of the Army


In the first quarter of 2004, Palomar began providing services under a $2.5 million research contract with the
Department of the Army to develop a light-based self-treatment device for Pseudofolliculitis Barbae or PFB.  The contract
is a cost plus fee arrangement whereby Palomar is reimbursed for the expenses incurred in connection with PFB research plus
an 8% fee.  Revenue is recognized under the contract as the costs are incurred and the services are rendered.  This revenue
is included in funded product development revenue in the accompanying statements of operations.  Palomar has recognized
approximately $261,000 to funded product development revenues during the three months ended March 31, 2004.


Note 12  Product upgrade
rights


During
the quarter ended March 31, 2004, Palomar introduced the StarLux Pulsed Light and Laser
System, which is expected to be ready for general release by the end of the second
quarter of 2004.  In connection with this product introduction, Palomar offered certain
customers an upgrade option to trade-in existing products for a new StarLux system for an
upgrade fee.  Palomar deferred approximately $585,000 of revenue during the quarter ended
March 31, 2004 in connection with the upgrade right in accordance with the Emerging
Issues Task Force issue No. 00-21.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|-8-
|---

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


Forward-looking statements


This
Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. All statements other than historical or current facts,
including, without limitation, statements about our business strategy, plans and
objectives of management and our future prospects, are forward-looking statements.
Although we believe that the expectations reflected in such forward-looking statements
are reasonable, such forward-looking statements are subject to risks and uncertainties
that could cause actual results to differ materially from these expectations. Such risks
and uncertainties include, without limitation, the following:
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | financing of future operations, manufacturing risks, variations in our quarterly results, the occurrence of
             unanticipated events and circumstances and general economic conditions, including stock market volatility, results of
             future operations, technological difficulties in developing or introducing new products, the results of future research,
             lack of product demand and market acceptance for current and future products, challenges in managing joint ventures,
             government contracts and research with third parties, the impact of competitive products and pricing, governmental
             regulations with respect to medical devices, including whether FDA clearance will be obtained for future products, the
             results of litigation, difficulties in collecting royalties, potential infringement of third-party intellectual property
             rights;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | we expect to face increased competition that could result in price reductions and reduced margins, as well as
             loss of market share; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------

| |  | other risks indicated below under the caption Cautionary Statements.
| | - | ----------------------------------------------------------------------

|These
risks and uncertainties are beyond our control and, in many cases; we cannot predict the
risks and uncertainties that could cause our actual results to differ materially from
those indicated by the forward-looking statements. When used in this document, the words believes,plans,expects, anticipates, intends, continue, may, will, could, should, future,potential,estimate, or
the negative of such terms and similar expressions as they relate to us or our management
are intended to identify forward-looking statements. Palomar undertakes no obligation to
release publicly the result 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 following discussion should be read in conjunction with, and is qualified in its entirety by, the
condensed consolidated financial statements and notes thereto included in Item 1 of this
Quarterly Report and the condensed consolidated financial statements and notes thereto
and Managements Discussion and Analysis of Financial Condition and Results of Operations
in our Form 10-K filed with the SEC on March 17, 2004. Historical results and percentage
relationships among any amounts in the financial statements are not necessarily
indicative of trends in operating results for any future periods.


Critical accounting policies


The discussion and analysis of the Palomars financial
condition and results of operations are based upon its consolidated financial
statements, which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements requires
Palomar to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, Palomar evaluates its estimates, including those
related to revenue recognition, bad debts, inventories, warranty obligations,
contingencies, restructurings and income taxes. Palomar bases its estimates on
historical experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making judgments about
the   carrying value of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different assumptions or
conditions. A discussion of Palomars critical accounting policies and the related
judgments and estimates affecting the preparation of  consolidated financial
statements is included in Palomars Annual Report on Form 10-K for fiscal year
2003.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|-9-
|---

|Overview


We
are engaged in research, development, manufacturing and sale of proprietary light based
systems for hair removal and other cosmetic treatments. Since our inception, we have been
able to develop a differentiated product mix of light based systems for cosmetic
treatments through our own research and development as well as through research with our partnerships with
Massachusetts General Hospitals Wellman Laboratories and other centers throughout the
world.  We are continually developing and testing new indications to further the
advancement in cosmetic light based hair removal techniques, fat reduction, acne
treatment, Pseudofolliculitis Barbae or PFB and skin rejuvenation.


This
Managements Discussion and Analysis of Financial Condition and Results of Operations
provide information that our management believes to be necessary to achieve a clear
understanding of our financial statements and results of operations.


Our
management monitors and analyzes a number of key performance indicators in order to
manage our business and evaluate our financial and operating performance. Those
indicators include but are not limited to the following:
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Revenues. We derive revenues from products and services relating to our products
and from funded product development. These revenues vary
              based on such factors as demand for our products, the number and size of transactions within the reporting period and
              the impact of changes in our sales prices. In addition to monitoring the amount of our product and service revenues
              and total revenues, we also consider revenue concentration by customer and by geographic region to be possible
              indicators of current and future trends in our business.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Cost of revenues and gross margins. We strive to control our cost of revenues. The major items impacting
              cost of product and service revenues are material costs, personnel and overhead expenses.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Operating expenses. Operating expenses are substantially driven by personnel, commissions and overhead
              expenses. Other significant operating expenses that we monitor include research and development, travel and
              entertainment, professional fees and facilities and other sales and marketing expenses.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Liquidity and cash flows.In recent periods, the primary source of our liquidity is our net income. From
              period to period, we see fluctuations in various items, including our working capital accounts, capital expenditures,
              purchases of property and equipment and proceeds from the exercise of employee stock options.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Balance sheet. We view cash, working capital, inventory, inventory turns, accounts receivable balances
              and days sales outstanding as important indicators of our financial health.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|We
improved product gross margins by 80% due to a higher margin product mix and the effects
of increased sales volume as compared to the same period in 2003. We also strengthened
our balance sheet since the end of last year, including increasing our cash position by
23% and increasing stockholders' equity by 22%. The current ratio is now 3.2x, up from
2.9x at the end of 2003, and we have no long-term debt.




Our reported total
revenues for the three months ended March 31, 2004, were $10.8 million, up from $6.8
million for the same period in 2003. Gross profit from product sales increased to $6.2
million (64% of product revenues), up from $3.5 million (57% of product revenues) for the
same period in 2003. We also reported net income of $1.2 million, or $0.07 per diluted
share, for the three months ended March 31, 2004, versus net income of $358,000, or $0.03
per diluted share, for the same period in 2003.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|-10-
|----

|Over
the last two years, most of our revenue has been from the Lux family of products with
their complementary handpieces, which offer a suite of applications to the end user at a
lower cost than other competing systems.  Customers can invest in their first Lux system
with one handpiece then purchase additional handpieces as their practice grows and
upgrade into a more powerful Lux system when ready.  Additionally, the Lux platform
enables Palomar to custom tailor products to fit almost any professional medical office
or spa location and provides our customers with the comfort that the system can grow with
their practice.  We have kept a commitment to continually provide value to customers who
invest in our Lux system platform. We believe the Lux family of products are the most
affordable and versatile cosmetic light-based systems on the market.


Our
quarterly product revenue has increased as compared to the same period in 2003 as a
result of the increased product demand for our Lux family of products. Looking forward,
we would expect as our installed base of Lux family of products continues to increase
that the demand for replacement handpieces will increase resulting in additional product
revenue.


In
February 2004, we introduced the newest addition to the Lux family of products: the
StarLux Pulsed Light and Laser System.  In comparison to other Lux products, the StarLux
has increased power, a computer controlled touch screen, instant handpiece recognition,
integrated cooling, the ability to operate the Lux Y, LuxG, LuxR, LuxRs, LuxV and the
Lux1064 handpieces.  We expect to start commercial shipment of StarLux products at the
end of the second quarter of 2004.


On
February 18, 2004, we were awarded a $2.5 million research contract by the Department of
the Army to develop a light-based self-treatment device for Pseudofolliculitis Barbae or
PFB.  The project is scheduled to last for nineteen months.


We
continue to focus on delivering innovative light based systems and products to our
customers in order to drive revenue and earnings growth.


Recent developments


On
March 18, 2004, our common stock began trading on the Nasdaq National Market System.
After meeting all the requirements for listing on the Nasdaq National Market, we upgraded
from the Nasdaq Small Cap Market System while retaining the same ticker symbol, PMTI.


On
April 5, 2004, we received clearance from the U.S. Food and Drug Administration (FDA) to
market the LuxV handpiece for the treatment of acne. The LuxV is a handpiece attachment
for use with Palomars family of Lux Pulsed Light systems. The LuxV handpiece offers a
long-term acne solution by treating the root cause of acne. The LuxV emits pulses of
intense light that alter the structure and function of the sebaceous glands to reduce
acne lesions without the many side effects common to drugs while offering longer
remission times and improved efficacy rates when compared to other treatments. Acne
treatment is the most rapidly growing therapeutic category in the dermatology sector and
in the U.S. alone; more than $1.4 billion annually is spent on anti-acne medication and
treatment.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|-11-
|----

|Results of operations


The
following table contains selected statement of operations information, which serves as
the basis of the discussion of our results of operations for the three months ended March
31, 2004 and 2003, respectively (in thousands, except for percentages):
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                        | Three Months Ended
March 31, |  | Change |        |   |  |    
|--------------------------------------- | ---------------------------- |  | ------ | ------ | - |  | ---
|
|
|Revenues:                               |                              |  |        |        |   |  |    
|Product revenues                        |                              |  | $      | 9,627  |   |  | 89 
|Royalty revenues                        |                              |  |        | 193    |   |  | 2  
|Funded product development revenues     |                              |  |        | 1,014  |   |  | 9  
|                                        |                              |  |        |        |   |  |    
|Total revenues                          |                              |  |        | 10,834 |   |  | 100
|                                        |                              |  |        |        |   |  |    
|Cost and expenses:                      |                              | 
|Cost of product revenues                |                              |  |        | 3,419  |   |  | 32 
|Cost of royalty revenues                |                              |  |        | 77     |   |  | 1  
|Research & development                  |                              |  |        | 2,539  |   |  | 23 
|Selling & marketing                     |                              |  |        | 2,681  |   |  | 25 
|General & administrative                |                              |  |        | 1,087  |   |  | 10 
|                                        |                              |  |        |        |   |  |    
|Total costs & expenses                  |                              |  |        | 9,803  |   |  | 91 
|                                        |                              |  |        |        |   |  |    
|Income from operations                  |                              |  |        | 1,031  |   |  | 9  
|Interest income                         |                              |  |        | 29     |   |  | -  
|Interest expense                        |                              |  |        | (2     | ) |  | -  
|Other income                            |                              |  |        | 143    |   |  | 1  
|                                        |                              |  |        |        |   |  |    
|Income before benefit from income taxes |                              |  |        | 1,201  |   |  | 11 
|Provision for income taxes              |                              |  |        | (42    | ) |  | -  
|                                        |                              |  |        |        |   |  |    
|Net income                              |                              |  | $      | 1,159  |   |  | 11 
|                                        |                              |  |        |        |   |  |    

|Product
revenues.  Increases in unit sales and the average selling prices of the Lux family of
products were the leading contributor to the increase in product revenues.  Sales from the Lux family
of products, consisting of the MediLux, EsteLux, NeoLux and related additional handpieces,
increased by $3.7 million for the three months ended March 31, 2004 in comparison to the
same period in 2003. Product revenues were unfavorably impacted by a decrease of $225,000 of sales related to our legacy product,
the RD-1200, in comparison to the same period in 2003.  Market acceptance of the Lux family
of products has been increasing since its introduction in September 2001.


International
product revenue was 32% of total product revenue for the three months ended March 31,
2004 in comparison to 59% for the same period in 2003.  This decrease as a percentage of
revenues in international sales is directly attributed to the increase in domestic
product sales and a decrease in sales to Japan.


During
the three months ended March 31, 2004, we deferred approximately $585,000 of revenue
relating to an upgrade program offered to selected customers.  This upgrade program
consists of a purchase of a MediLux Pulsed Light System with an upgrade option to
purchase the new StarLux Pulsed Light and Laser System.  We expect to start commercial
shipment of StarLux products at the end of the second quarter of 2004.


Royalty
revenues.  The decrease in royalty revenues for the three months ended March 31, 2004 in
comparison to the same period in 2003 is attributed to the termination of the license
agreement with Asclepion, one of the Palomars licensees in 2003, who had made no sales
in the United States and was only paying the minimum required royalties under the license agreement.


Funded
product development revenues.  We account for funded product development revenue under
the Gillette agreement ratably over the funding period as payments are received.  For the
three months ended March 31, 2004, we received from Gillette $752,000 to fund
development.  To date, Palomar   has received from Gillette approximately $3.4 million to
fund development.  Any amounts received in advance are recorded as deferred revenue.
Payments are not refundable if the development is not successful.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|-12-
|----

|For
the cost reimbursement contract with a fixed fee awarded by the Department of the Army,
we earn a fixed fee of 8% as costs are incurred or services are provided.  The total
value of the contract is $2.5 million.  As of March 31, 2004, we billed the Department of
the Army for approximately $242,000 plus a fixed fee of $19,000 totaling approximately
$261,000.


Cost
of product revenues.  The cost of product revenues decreased as a percentage of product
revenue to 32% for the three months ended March 31, 2004 from 39% during the same period
in 2003.  This cost decreased as a percentage of product revenue primarily as a result of
lower manufacturing costs associated with the Lux product lines.  In addition, the
increased sales volume and increased average selling prices of the Lux family of products
has improved the absorption of manufacturing overhead at our manufacturing facility for
each product line.


Cost
of royalty revenues.  As a percentage of royalty revenues, the cost of royalty revenues
was consistent at 40% for both periods. The decrease in the cost of royalty revenues is
attributed to the termination of the license agreement with Aesclepion, one of Palomars
licensees in 2003, who had made no sales in the United States and was only paying the minimum required royalties
under the license agreement.


Research
and development expense. The increase in both dollars and as a percentage of revenue in
research and development expense is a direct result of our spending related to the
Gillette agreement, other expenses related to the Department of the Army contract, legal
costs related to our increasing patent portfolio, our continued commitment to introducing
new platforms and enhancing our current family of products.


For
the three months ended March 31, 2004 expenses relating to the Gillette agreement have
increased by approximately $495,000 as compared to the same period in 2003.  This
increase in expenses relating to the Gillette agreement is directly attributed to Palomar
incurring additional payroll and payroll related expenses as well as additional
development costs.


Expenses
relating to the Army contract, which began in February of 2004, totaled approximately
$242,000.  The project is scheduled to last for nineteen months.


For
the three months ended March 31, 2004, legal expenses relating to the prosecution of new
patents increased by approximately $90,000 in comparison to the same period in 2003. Palomar
 is committed to expanding its intellectual property rights necessary to protect
discoveries made through its investment in research and development.  Expenses relating
to the introduction of new products such as the StarLux, enhancements made to Palomars
current family of products and research and development overhead increased by
approximately $311,000 in comparison to the same period in 2003.


The
spending on research and development reflects Palomars commitment to continuing
dermatology research for a better understanding of various cosmetic and medical
conditions and to continuing research and development of devices and delivery systems to
better treat those various cosmetic and medical conditions.  The research and development
goals in the fields of light based hair removal, pigmented and vascular lesion removal
and acne treatment are to design systems that: (1) permit effective treatment and more
rapid treatment of large areas, (2) have high gross margins, and (3) are manufactured at
lower costs, to expand our current markets. Furthermore, we are developing products to
address other dermatology and cosmetic conditions, including the fields of fat reduction,
acne treatment and skin rejuvenation.


Selling
and marketing expense.  The increase in selling and marketing expenses is directly
associated with an increase in commissions of approximately $216,000, an increase of
$655,000 in costs related to the doubling of our domestic sales force in October 2003,
which includes salaries and wages, travel, demonstration materials and insurance
increases, an increase of $189,000 in marketing and   advertising costs and an increase
in costs relating to tradeshows of approximately $75,000.  These increases directly
correlate with our increased revenues, upfront costs associated with both international
and domestic sales force and distribution channel expansion.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|-13-
|----

|General
and administrative expense. The increase in general and administrative expense is mainly attributed to increases to incentive compensation of
$166,000, related to our incentive compensation plan of 2004, as well as additional rental expenses of approximately
$80,000.  As of January 2004, Palomar terminated the sub-lease granted to a third party of approximately 4,000 square
feet to allow Palomar to expand into this area and better maximize its manufacturing capabilities.  In the past, rental
income from the sub-lease was being offset to rental expense.  As a result of terminating the sub-lease, Palomar
incurred an increase in rental expense of approximately $42,000.  Additionally, Palomar incurred an additional rental
expense of approximately $38,000 relating to a one time charge from an increase in lease operating expenses.


Interest
income. Interest income increased due to higher levels of excess cash on hand for the
three months ended March 31, 2004 in comparison to the same period in 2003.


Interest
expense. The interest expense decrease is attributable to our reduction of debt. On March
14, 2003, a director surrendered a $1 million Promissory Note in exchange for 293,255
unregistered shares of our Common Stock at a price of $3.41 per share.


Other
income.  Other income is attributable to payments received from a previously written-off
note receivable and equity investment.


Provision
for income taxes.  We provided approximately a 4% effective tax rate for anticipated
federal alternative minimum taxes and minimum state income taxes due for 2004. We
recorded no tax provision in 2003 as we were able to fully offset minimum taxes with net
operating loss carryforwards.  We have fully reserved our otherwise recognizable deferred
tax asset, as its realization is uncertain.


Liquidity and capital resources


The
following table sets forth, for the periods indicated, a year-over year comparison of key
components of our liquidity and capital resources (000s omitted except in current ratio
calculation):
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                          | Three months ended
March 31, | Change
2004 to 2003 |   |      
|------------------------- | ---------------------------- | ------------------- | - | -----
|
|
|Operating cash flows      |                              |                     | $ | 829  
|Investing cash flows      |                              |                     |   | (130 
|Financing cash flows      |                              |                     |   | 1,702
|                          |                              |                     |   |      
|Capital expenditures, net |                              |                     | $ | 130  
|                          |                              |                     |   |      

|                          | March 31,
2004 | December 31,
2003 | Dollars | %     
|------------------------- | -------------- | ----------------- | ------- | ------
|Cash and cash equivalents |                | $                 |         | 12,959
|Accounts receivable, net  |                |                   |         | 6,349 
|Inventories, net          |                |                   |         | 4,169 
|Working capital           |                |                   |         | 16,699
|Current ratio             |                |                   |         | 3.24  

|* These percentages are not meaningful to the
understanding of our financial condition and results of operations.                                                                                                                                                                                                                                                                                                                                             
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|As
of March 31, 2004, we had $13.0 million in cash and cash equivalents.  The sales of our
current products and future products will be critical to our future liquidity.
         We believe that our current cash balances and expected future cash flows will be
sufficient to meet our anticipated cash needs for working capital, capital expenditures
and other activities for at least the next 12 months. At March 31, 2004, we had no
long-term debt.

|-14-
|----

|Operating
cash flows in the three months ended March 31, 2004 amounted to $829,225 compared to cash
used in operating activities of $1,062,293 for the same period in 2003.  This increase
primarily reflects the increase of net profits with a decrease in accounts receivable.
 Net cash used in investing activities totaled $130,263 for the three months ended March
31, 2004 compared to $3,000 for the same period in 2003.  These amounts reflect cash used
in the purchases of capital equipment.  Cash provided by financing activities totaled
$1,701,579 for the three months ended March 321, 2004 compared to $3,555,173 for the same
period in 2003.  These increases were a result of sales of common stock, and exercises of
stock options and purchases of common stock pursuant to the employee stock purchase plan
offset by costs related to the issuance of common stock.


We
anticipate that capital expenditures for the remainder of 2004 will total approximately
$400,000, consisting primarily of machinery, equipment, computers and peripherals.  We
expect to finance these expenditures with cash on hand.


On
February 14, 2003, Palomar entered into a Development and License Agreement with Gillette
to complete development and commercialize a home-use, light-based, hair removal device
for women.  The agreement provides up to $7 million in initial development support
funding to be paid by Gillette to Palomar over approximately the first 30 months of the
agreement.  For the three months ended March 31, 2004, Palomar received from Gillette
$752,000 to fund development.  To date, Palomar has received from Gillette approximately
$3.4 million to fund development.  Any amounts received in advance are recorded as
deferred revenue.  Payments are not refundable if the development is not successful.


In
the first quarter of 2004, Palomar began providing services under a $2.5 million research
contract with the Department of the Army to develop a light-based self-treatment device
for Pseudofolliculitis Barbae or PFB.  The contract is a cost plus fee arrangement
whereby Palomar is reimbursed for the expenses incurred in connection with PFB research
plus an 8% fee.  Revenue is recognized under the contract as the costs are incurred and
the services are rendered.  This revenue is included in funded development revenue in the
accompanying statements of operations.  As of March 31, 2004, Palomar has billed the
Department of the Army for approximately $242,000 plus a fixed fee of $19,000 totaling
approximately $261,000.  This contract began on February 18, 2004 and is scheduled to
last for nineteen months.


Contractual obligations


It
is not our usual business practice to enter into off-balance sheet arrangements, except
for off-balance sheet arrangements related to inventory purchase commitments and
operating lease commitments, as disclosed in the table of contractual obligations below.
 In addition, it is not our normal policy to issue guarantees to third parties.


In
August 1995, we entered into an agreement with Massachusetts General Hospital whereby
Massachusetts General Hospital agreed to conduct clinical trials on a laser treatment for
hair removal/reduction developed at Wellman Laboratories of Photomedicine. In July 1999,
we further amended this agreement to extend its exclusive research agreement for an
additional five years.  In addition to laser hair removal, the agreement has been
expanded to include research and development in the fields of fat removal and acne
treatment.  We have the right to exclusively license, on royalty terms to be negotiated,
the Palomar-funded inventions in the relevant fields.  Under the terms of this agreement,
we have paid   Massachusetts General Hospital $475,000 on an annual basis for clinical
research through August 2004. Palomar is in discussions with Massachusetts General Hospital
for an extension of this agreement for clinical research beyond August 2004. We are a party to a license agreement, as amended, with
Massachusetts General Hospital whereby Palomar is obligated to pay royalties to
Massachusetts General Hospital.  Royalty expense in 2004 totaled approximately $347,000.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|-15-
|----

|We
are obligated to make future payments under various contracts, including non-cancelable
inventory purchase commitments and our operating lease relating to our Burlington,
Massachusetts manufacturing, research and development and administrative offices.


The
following table summarizes our estimated contractual cash obligations as of March 31,
2004, excluding royalty and employment obligations because they are variable and/or
subject to uncertain timing (000s omitted):
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                     | Remainder of
2004 | 2005   | 2006 | 2007  | 2008 | Thereafter
|-------------------- | ----------------- | ------ | ---- | ----- | ---- | ----------
|Purchase commitments |                   | $2,672 |      | $  -- |      | $  --     
|Operating leases     |                   | 669    |      | 949   |      | 949       
|                     |                   |        |      |       |      |           
|Total                |                   | $3,341 |      | $949  |      | $949      

|Cautionary statements


Our future revenue may decrease if
we are unable to successfully develop and market new products.


Light
based technology is rapidly changing and improving.  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,
enhance existing products, and 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 we have no previous experience. In
addition, the market for professional hair removal light based devices may already be
saturated. At present, broader market acceptance of light based hair removal is critical
to our success and we intend to continue our goals of bringing light based hair removal
devices to the mass consumer market. We also intend to continue to diversify our product
line by developing cosmetic light based products for uses other than hair and tattoo
removal and treatment of pigmented and vascular lesions. There can be no assurance that
we will be able to successfully implement such strategy in a timely fashion or at all and
our failure to do so could decrease our future revenue.


Our failure to respond to rapid
changes in technology could make our products obsolete and we may be unable to compete
with companies having superior financial, marketing and other resources.


The
light based cosmetic and dermatology industry is highly competitive and companies
frequently introduce new products. We compete in the development, manufacture, marketing,
sales and servicing of light based devices with numerous other companies, some of which
have substantially greater financial, marketing and other resources than us. Our products
also face competition from medical products and cosmetic 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 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.  If forecasted demand decreases, we
could have excess inventories which may result in a write-off of some or all of our
inventory.


We may need to secure additional
financing and without such additional financing we may be unable to fund ongoing
operations or grow the business.


Although
we have generated a profit in recent quarters, we have a history of losses. We may have
to secure additional financing to complete our research and development activities,
commercialize our   current and proposed 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.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|-16-
|----

|Failure to receive shipments of
critical components could reduce revenues and reduced reliability of critical components
could increase expenses.


We
develop 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 prevent us from manufacturing
product and result in a decrease in revenue.  We depend on an acceptable level of
reliability for purchased components.  Reliability below expectations for key components
could have an adverse affect on inventory and inventory reserves.


Our products are subject to
numerous medical device regulations. Compliance is expensive and time-consuming. Without
necessary clearances, we may be unable to sell products and compete effectively.


All
of our current products are light based 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 marketed in the United
States, we must obtain clearance from the FDA.  The types of medical devices that we seek
to market in the U.S. generally must receive either "510(k) clearance" or "PMA approval"
in advance from the U.S. Food and Drug Administration (FDA) pursuant to the Federal Food,
Drug, and Cosmetic Act. The FDA's 510(k) clearance process usually takes from four to
twelve months, but it can last longer. The process of obtaining PMA approval is much more
costly and uncertain and generally takes from one to three years or even longer. To date,
the FDA has deemed our products eligible for the 510(k) clearance process. We believe
that our products in development will receive similar treatment. However, we cannot be
sure that the FDA will not impose the more burdensome PMA approval process upon one or
more of our future products, nor can we be sure that 510(k) clearance or PMA approval
will ever be obtained for any product we propose to market and our failure to do so could
adversely affect our ability to sell our products.


Our
products are subject to similar regulations in many international markets. Complying with
these regulations is necessary for our strategy of expanding the markets for sales of our
products into these countries. Compliance with the regulatory clearance process in any
country is expensive and time consuming.  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.  We may not be able to obtain clearances in each country in a
timely fashion or at all, and our failure to do so could adversely affect our ability to
sell our products in those countries.


We have modified some of our
products and sold them under prior 510(k) clearances. The FDA could retroactively decide
the modifications required new 510(k) clearances and require us to cease marketing and/or
recall the modified products.


Any
modification to one of our 510(k) cleared devices that could significantly affect its
safety or effectiveness, or that would constitute a major change in its intended use,
requires a new 510(k) clearance. The FDA requires every manufacturer to make this
determination in the first instance, but the FDA can review any such decision. We have
modified some of our marketed devices, but we believe that new 510(k) clearances were not
required. We cannot be certain that the FDA would agree with any of our decisions not to
seek 510(k) clearance. If the FDA requires us to seek 510(k) clearance for any
modification, we also   may be required to cease marketing and/or recall the modified
device until we obtain a new 510(k) clearance.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|-17-
|----

|We may also be subject to state
regulations.   State regulations, and changes to state regulations, may prevent sales to
particular end users which may decrease revenues or prevent growth of revenues.


Our
products may also be subject to state regulations.   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, in some states non-physicians may purchase and
operate our product. However, a state could disagree with our decision to sell to a
particular type of end user or change regulations preventing sales to particular types of
end users.  Thus, state regulations and changes to state regulations may decrease
revenues or prevent growth of revenues.  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.


Achieving complete compliance
with FDA regulations is difficult, and if we fail to comply, we could be subject to FDA
enforcement action.



We
are subject to inspection and market surveillance by the FDA to determine compliance with
regulatory requirements. The FDA's regulatory scheme is complex, especially the Quality
System Regulation ("QSR"), which requires manufacturers to follow elaborate design,
testing, control, documentation, and other quality assurance procedures. This complexity
makes complete compliance difficult to achieve. Also, the determination as to whether a
QSR violation has occurred is often subjective. If the FDA finds that we have failed to
comply with the QSR or other applicable requirements, the agency can institute a wide
variety of enforcement actions, including a public warning letter or other stronger
remedies, such as fines, injunctions, and civil penalties, recall or seizure of our
products, operating  restrictions, partial suspension, or total shutdown of our
production, refusing our requests for 510(k) clearance or PMA approval of new products,
withdrawing product approvals already granted or criminal prosecution


Failure to manage our
relationships with third party researchers effectively may limit our access to new
technology, increase the cost of licensing new technology, and divert management
attention from our core business.



We
are 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 dependent upon
third-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, light technology and optics know-how in return for licensing
rights with respect to specific dermatologic and cosmetic applications and patents. In
return for certain exclusive license rights, we are subject to due diligence obligations
in order to maintain such exclusivity.  Our success will be dependent upon the results of
research with our partners and meeting due diligence obligations. We cannot be sure that
third-party researchers will agree with our interpretation of the terms of our
agreements, that we will meet our due diligence obligations, or 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 by the conversion of outstanding options and warrants.


In
the past, we have issued and still have outstanding convertible securities in the form of
options and warrants.  We have and may continue to issue options and warrants as
compensation for services and incentive compensation for our employees, directors and
consultants or others who provide services to us. We have a substantial number of shares
of common stock reserved for issuance upon the conversion and exercise of these
securities. Such a conversion would dilute our stockholders and could adversely affect
the market price of our common stock.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|-18-
|----

|Our proprietary technology has only limited protections which may not prevent competitors from copying our new developments.  This
may impair our ability to compete effectively, and we may expend significant resources enforcing our intellectual property rights to
prevent such copying



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, licenses and confidentiality agreements to protect our
proprietary rights. We generally enter into non-disclosure agreements with our employees
and third parties with whom 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 and defend 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. Such
lawsuits may result in patents issued or licensed exclusively to us to be found invalid
and unenforceable.  Our competitors also may independently develop technologies that are
substantially equivalent or superior to our technology and which do not infringe our
patents.


Claims by others that our
products infringe their patents or other intellectual property rights could prevent us
from manufacturing and selling some of our products or require us to pay royalties or
incur substantial costs from litigation or development of non-infringing technology.


In
recent years, there has been significant litigation in the United States involving
patents and other intellectual property rights.  The light based cosmetic and dermatology
industry in particular is characterized by a large number of patents and related
litigation regarding patents and other intellectual property rights. Because our
resources are limited and 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 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.


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
our Secretary 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 our
outstanding stock until the next stockholders meeting. In addition, the board of
directors is authorized to issue shares of our 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 us.            We are also subject to the anti-takeover provisions of Section 203 of
the Delaware General Corporation Law, which prohibits us 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 us, including transactions in which stockholders might otherwise receive a
premium for their shares over the then current market price. In April 1999, we adopted a
shareholder rights plan (Rights Plan).  The Rights Plan is intended to protect
shareholders from unfair or coercive takeover practices.  In accordance with the Rights
Plan, the Board of Directors declared a dividend distribution of Series A right for each
share of common stock outstanding until the rights become exercisable.  (See exhibit
10.15, Rights Agreement with American Stock Transfer and Trust Company dated April 21,
1999)
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|-19-
|----

|We may not be able to
successfully collect licensing royalties.


In
past years, material portions of our revenues consisted of royalties from sub-licensing
patents licensed to us on an exclusive basis by Massachusetts General Hospital.


Lumenis
failed to make the royalty payments due since October 30, 2002 for sales of their
Lightsheer diode laser system. On February 14, 2003, we terminated our license agreement
with Lumenis. (See Legal Proceedings) This reduction and any other loss or reduction in
our royalty revenues could have a material adverse effect on the business and financial
condition, affect future liquidity and prevent us from maintaining profitability.  We
face risks associated with pending litigation and there can be no assurance that the
royalty amounts from other third parties will not decrease or that we will be able to
collect all licensing royalties owed by current licensees or increase royalties by
sub-licensing additional third parties.


We
are involved in disputes with other third parties, including Cutera, Inc. (formerly Altus
Medical Inc., See Legal Proceedings). 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 be unable to attract and
retain key executives and research and development personnel that we need to succeed.


As
a small company with less than 125 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.
 Our future success will depend in large part upon our ability to attract, retain, and
motivate highly skilled employees. We cannot be certain that we will be able to do so.


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 and manufactured with numerous safety
features, but it is possible that consumers could be adversely affected by use of one of
our products. Furthermore, in the event that any of our products prove to be defectively
designed and manufactured, 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 and umbrella coverage; 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.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|-20-
|----

|Disappointing quarterly revenue
or operating results could cause the price of our common stock to fall.


Our
quarterly revenue and operating results are difficult to predict and may swing sharply
from quarter to quarter. If our quarterly revenue or operating results fall below the
expectations of investors or public market analysts, the price of our common stock could
fall substantially. Our quarterly revenue is difficult to forecast for many reasons, some
of which are outside of our control.  For example, many factors are related to market
supply and demand, including potential increases in the level and intensity of price
competition between our competitors and us, potential decrease in demand for our products
and possible delays in market acceptance of our new products.  Other factors are related
to our customers and include changes in or extensions of our customers' budgeting and
purchasing cycles and changes in the timing of product sales in anticipation of new
product introductions or enhancements by us or our competitors.   Factors related to our
operations may also cause quarterly revenue or operating results to fall below
expectations, including absence of significant product backlogs, our effectiveness in our
manufacturing process, unsatisfactory performance of our distribution channels, service
providers, or customer support organizations, and timing of any acquisitions and related
costs.


We face risks associated with
product warranties.


We
could incur substantial costs as a result of product failures for which we are
responsible under warranty obligations.


Because we derive a significant
amount of our revenue from international sales, we are susceptible to currency
fluctuations, long payment cycles, credit risks and other risks associated with
conducting business overseas.


We
sell approximately half of our products and services outside the U.S.  International
product revenue, consisting of sales from our distributors in Japan, Europe, Australia,
Asia\Pacific Rim and South and Central America and sales shipped directly to
international locations from the United States was 49% of total product revenue for the
year ended 2003, and we expect that international sales will continue to be significant.
 As a result, a major part of our revenues and operating results could be adversely
affected by risks associated with international sales.  In particular, longer payment
cycles common in foreign markets, credit risk and delays in obtaining necessary import or
foreign regulatory approvals for products may occur.  In addition, significant
fluctuations in the exchange rates between the U.S. dollar and foreign currencies could
cause us to lower our prices and thus reduce our profitability, or could cause
prospective customers to push out orders to later dates because of the increased relative
cost of our products in the aftermath of a currency devaluation or currency fluctuation.


Managing our relationship with
Gillette effectively may divert the attention of key technical personnel and management
from the core business.   If Gillette ends the relationship our stock price could fall,
and we may be unable to bring a home use hair removal device for women to the market.


On
February 14, 2003, we entered into a Development and License Agreement with Gillette to
complete development and commercialize a home-use, light-based hair removal device for
women.  We believe that this represents a unique opportunity to bring light based devices
to the mass market.  Under the agreement, significant resources and the attention of key
technical personnel and management will be directed to the development of such a device
even though such device will not likely be commercialized for several years, if ever.  In
addition, we cannot be sure that Gillette will agree with our interpretation of the terms
of the agreement, that the agreement will provide us with marketable products in the
future or that we will receive payments for any of the products developed under the
agreement.  During the term of the agreement, Gillette has the ability to choose not to
continue and may terminate the agreement.  If Gillette   terminates the agreement, the
price of our common stock could fall significantly, and we will not receive certain
payments.  We may proceed to develop and commercialize the device on our own or with a
third party.  However, there can be no assurance that we will be able to successfully
implement such a strategy.  In addition, after commercialization of such device, Gillette
is to pay us a percentage of net sales of such device. Certain of these percentages of
net sales are only owed if the device is covered by valid patents.  There can be no
assurance that valid patents will cover the device in any or all countries in which the
device will be manufactured, used or sold.  This could have a material adverse effect on
our business, results of operations and financial condition.  (See exhibit 10.14, The
Development and License Agreement with The Gillette Company effective February 14, 2003
with redacted exhibits)
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|-21-
|----

|Managing our contract with the Army
effectively may divert the attention of key technical personnel and management from the
core business.   We may be unable to complete the project within the time period which
may impact our ability to receive future government contracts.


On
February 18, 2004, we announced that we were awarded a $2.5 million research contract by
the Department of the Army to develop a light-based self-treatment device for
Pseudofolliculitis Barbae or PFB.  We believe this represents a unique opportunity to
address PFB.  Although the project is scheduled to last for nineteen months, there can be
no assurance that we will be able to complete the project within that time period which
may impact our ability to receive future government contracts.  Under the agreement,
significant resources and the attention of key technical personnel and management will be
directed to the development of such a device even though such device will not likely be
ready for military use for several years, if ever.


We face risks associated with
Section 11 (a)(4) Securities Act of 1933.


Prior
to June 28, 2002, Arthur Andersen LLP served as our independent auditors. On March 14,
2002, Arthur Andersen was indicted on federal obstruction of justice charges arising from
the governments investigation of Enron Corporation and on June 15, 2002, Arthur Andersen
was found guilty.  Arthur Andersen ceased practicing before the SEC by August 31, 2002.
 On June 28, 2002, we dismissed Arthur Andersen and retained Ernst & Young LLP as its
independent auditors for its fiscal year ended December 31, 2002. SEC rules require us to
present historical audited financial statements in various SEC filings, such as
registration statements, along with Arthur Andersens consent to our inclusion of Arthur
Andersen's audit report in those filings.  Since Arthur Andersen no longer practices
public accounting, we will not be able to obtain the consent of Arthur Andersen to the
inclusion of Arthur Andersens audit report in our relevant current and future filings.
 The SEC has provided regulatory relief designed to allow companies that file reports
with the SEC to dispense with the requirement to file a consent of Arthur Andersen in
certain circumstances, but purchasers of securities sold under our registration
statements, which were not filed with the consent of Arthur Andersen to the inclusion of
Arthur Andersens audit report will not be able to sue Arthur Andersen pursuant to
Section 11(a)(4) of the Securities Act of 1933 and therefore the purchasers right of
recovery under that section may be limited as a result of the lack of our ability to
obtain Arthur Andersen's consent.



Item 3.        Quantitative and
qualitative disclosures about market risk


Our
primary market risk exposures are in the areas of interest rate risk.  Our investment
portfolio of cash equivalents and debt securities is subject to interest rate
fluctuations, but we believe this risk is immaterial because of the short-term nature of
these investments.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|-22-
|----

|Item 4.        Controls
and procedures
|--------------------------------------

|(a) |  | Evaluation of disclosure controls and procedures. We maintain disclosure controls and procedures designed to
      provide reasonable assurance that information required to be disclosed in the periodic reports we file with the SEC is recorded,
      processed, summarized and reported within the time periods specified in the rules of the SEC.  We carried out an evaluation as
      of March 31, 2004, under the supervision and the participation of our management, including our chief executive officer and
      chief financial officer, of the design and operation of these disclosure controls and procedures pursuant to Exchange Act Rule
      13a-15(e). Based upon that evaluation, our chief executive officer and chief financial officer concluded that our disclosure
      controls and procedures are effective in timely alerting them to material information relating to the company (including our
      consolidated subsidiaries) required to be included in our periodic SEC filings.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) |  | Changes in internal control over financial reporting. There was no change in our internal control over financial
      reporting that occurred during the three months ended March 31, 2004 that has materially affected, or is reasonably likely to
      materially affect, our internal control over financial reporting.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|PART II  Other information




Item 1.        Legal proceedings


Palomar
is the exclusive licensee of U.S. Patent Nos. 5,595,568 and 5,735,844 from The
Massachusetts General Hospital Corporation. Pursuant to a Patent License Agreement dated
December 7, 1998, Lumenis paid Palomar a 7.5% royalty on net sales of the LightSheer
diode laser system. As of the quarter ended September 30, 2002, Palomar received
approximately $3.6 million dollars in cumulative royalties from Lumenis for sales of the
LightSheer system. On October 24, 2002, Lumenis told Palomar that it would no longer pay
royalties for sales of the LightSheer system and filed a complaint in the United States
District Court for the Northern District of California seeking a declaratory judgment
that the patents are invalid and/or unenforceable and not infringed by any Lumenis
products. Palomar believes that Lumenis claims are without merit, and on October 29,
2002, Palomar filed a complaint in the Middlesex County Superior Court in Massachusetts
against Lumenis for breach of contract, breach of the implied covenant of good faith and
fair dealing, and violation of Massachusetts General Laws Chapter 93A. Palomar has also
answered Lumenis federal court complaint in California with similar counter claims. On
February 14, 2003, Palomar terminated the Patent License Agreement and added counter
claims of patent infringement to Lumenis Federal Court complaint in California.  The
Massachusetts state court action has been stayed pending the outcome of the Federal Court
action.  A claim construction hearing (often referred to as a Markman hearing) was held
March 29, 2004.  Following a Markman hearing, a judge will rule on the meaning of
disputed claim terms (often referred to as a Markman ruling), that is, the judge will
construe the disputed claim terms.  On April 20, 2004, the Judge issued his Markman
ruling. Palomar believes the ruling largely embraced Palomars position and will have a
considerable impact on the case as it proceeds toward trial.  A trial date has been set
for March 21, 2005.


On
February 15, 2002, Palomar commenced an action for patent infringement in the United
States District Court for the District of Massachusetts against Altus Medical, Inc., now
known as Cutera, Inc., seeking both monetary damages and injunctive relief. The complaint
alleges Cuteras CoolGlide and CoolGlide Excel laser systems willfully infringe U.S.
patent No. 5,735,844, which is exclusively licensed to Palomar by the Massachusetts
General Hospital.  The Massachusetts General Hospital has been added as a plaintiff in
this lawsuit. Cutera answered the complaint denying that its products infringe the
asserted patent and filed a counterclaim seeking a declaratory judgment that the asserted
patent is invalid and not infringed. Palomar and the Massachusetts General Hospital filed
a reply denying the material allegations of the counterclaims. Palomar and the
Massachusetts General Hospital have further alleged that Cuteras CoolGlide Vantage and
CoolGlide XEO laser systems also willfully infringe the asserted patent. On June 4, 2003,
Cutera amended their answer and asserted a counter claim alleging that the patent is
unenforceable due to inequitable conduct. Palomar and the Massachusetts General Hospital
believe that this claim is without merit and filed a reply denying the material
allegations of this counterclaim. A claim construction hearing (often referred to as a
Markman hearing) was held on June 12, 2003, and on February 27, 2004 the   Judge issued
her ruling.  Palomar believes the ruling largely embraced Palomars position and will
have a considerable impact on the case as it proceeds toward trial.  A trial date has not
yet been set.  (See Cautionary Statements)
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|-23-
|----

|Item 2.  Changes in securities, use of proceeds and issuer purchases of securities
Not applicable.




Item 3.  Defaults upon senior
securities
Not applicable.



Item 4.  Submission of matters to a
vote of security holders
Not applicable.



Item 5.  Other information.
Not applicable.



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

| | (a)  Exhibits
| | -------------

| |      |                                                                                                                                                                                                              
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 31.1 | Certification of Joseph P. Caruso, President and Chief Executive Officer of
Palomar, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.                                                   
| | 31.2 | Certification of Paul S. Weiner, Vice President and Chief Financial Officer
of Palomar, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.                                                
| | 32.1 | Certification of Joseph P. Caruso, President and Chief Executive Officer of
Palomar, pursuant to 18 United States Code Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.   
| | 32.2 | Certification of Paul S. Weiner, Vice President and Chief Financial Officer
of Palomar, pursuant to 18 United States Code Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

| | (b) Reports on Form 8-K
| | -----------------------

| |  | During the three months ended March 31, 2004 we furnished one Report on Form 8-K. Information regarding each item
reported on is listed below.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------

|Date filed or
Furnished | Item No | Description                                                                                                                                                                                                                   
|----------------------- | ------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|February 4, 2004        | 99.1    | On February 4, 2004, we announced our results entitled PALOMAR
MEDICAL REPORTS RECORD REVENUES AND PROFITABILITY FOR FOURTH
QUARTER AND FISCAL YEAR 2003 Fourth Quarter Revenues Increase 35%,
 Net Income More than Doubles

|-24-
|----

|Signatures



Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant certifies that
it has caused this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Palomar Medical
Technologies, Inc.(Registrant)
| |  | ----------------------------------------------

|                    |                                                                                                     
|------------------- | ----------------------------------------------------------------------------------------------------
|Date:  May 11, 2004 | By:/s/ Joseph P. Caruso
      Joseph P. Caruso
      President, Chief Executive Officer and Director
|                    |                                                                                                     

|                    |                                                                                            
|------------------- | -------------------------------------------------------------------------------------------
|Date:  May 11, 2004 | By:/s/ Paul S. Weiner
      Paul S. Weiner
      Vice President and Chief Financial Officer
|                    |                                                                                            

|-25-
|----