----

| x |   | Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
|---|--------|----------------------------------------------------------------------------------------------|

|  ̈ |   | Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
|--------|--------|-----------------------------------------------------------------------------------------------|

| Title of each classCommon Stock, $0.01 par valuePreferred Stock Purchase Rights | Name of each exchange on which registeredNASDAQ – Global Select Market |
|---------------------------------------------------------------------------------|------------------------------------------------------------------------------|

----

|                                 |                                                                                                                                      |  Page No. |
|--------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------|----------------|
| PART I – Financial Information |                                                                                                                                      |
|  Item 1.                        | Financial Statements                                                                                                                      |           |
|                                 | Unaudited Condensed Consolidated Balance Sheets as of  September 30, 2010 and December 31, 2009                                      |   3  |
|                                 | Unaudited Condensed Consolidated Statements of Operations for the periods ended September 30, 2010 and September 30, 2009       |   4  |
|                                 | Unaudited Condensed Consolidated Statements of Cash Flows for the periods ended  September 30, 2010 and September 30, 2009 |  5        |
|                                 | Notes to Unaudited Condensed Consolidated Financial Statements                                                                            |  6        |
| Item 2.                         | Management’s Discussion and Analysis of Financial Condition and the Results of Operations                                           |  14       |
| Item 3.                              | Quantitative and Qualitative Disclosures About Market Risk                                                                           |  20       |
| Item 4.                         | Controls and Procedures                                                                                                              |  21       |
| PART II – Other Information    |                                                                                                                                      |
| Item 1.                         | Legal Proceedings                                                                                                                         |  21       |
| Item 1A.                        | Risk Factors                                                                                                                              | 24             |
| Item 2.                         | Changes in Securities, Use of Proceeds and Issuer Purchases of Securities                                                                 | 26             |
| Item 3.                         | Defaults Upon Senior Securities                                                                                                           | 26             |
| Item 4.                    | (Removed and Reserved)                                                                                                               | 26             |
| Item 5.                              | Other Information                                                                                                                         | 26             |
| Item 6.                    | Exhibits                                                                                                                                  |  26       |
| SIGNATURES                           |                                                                                                                                      | 27             |

----

P

|                                                    |   | September 30, |        |   | December 31, |   |
|---------------------------------------------------------|--------|---------------|-------------|--------|--------------|--------|
|                                                    |   | 2010          |        |   | 2009         |   |
|                                                    |   |          |        |   |         |   |
| Assets                                                  |   |
| Current assets                                          |   |          |        |   |         |   |
| Cash and cash equivalents                               |   | $             | 76,623,685  |   |         | $      | 81,948,482 |   |
| Short-term investments                                  |   |          | 1,999,675   |   |         |   | 25,000,000 |   |
| Total cash, cash equivalents and short-term investments |   |          | 78,623,360  |   |         |   | 106,948,482 |   |
| Accounts receivable, net                                |   |          | 5,035,232   |   |         |   | 4,436,219 |   |
| Inventories                                             |   |          | 12,218,475  |   |         |   | 11,126,352 |   |
| Other current assets                                    |   |          | 1,783,674   |   |         |   | 2,179,233 |   |
| Total current assets                                    |   |          | 97,660,741  |   |         |   | 124,690,286 |   |
|                                                    |   |          |        |   |         |   |   |   |
| Marketable securities, at estimated fair value          |   |          | 24,129,348  |   |         |   | 4,024,313 |   |
|                                                    |   |          |        |   |         |   |   |   |
| Property and equipment, net                             |   |          | 37,271,766  |   |         |   | 34,629,410 |   |
|                                                    |   |          |        |   |         |   |   |   |
| Other assets                                            |   |          | 218,716     |   |         |   | 126,087 |   |
|                                                    |   |          |        |   |         |   |   |   |
| Total assets                                            |   | $             | 159,280,571 |   |         | $      | 163,470,096 |   |
|                                                    |   |          |        |   |         |   |   |   |
| Liabilities and Stockholders' Equity                    |   |
|                                                    |   |          |        |   |         |   |   |   |
| Current liabilities                                     |   |          |        |   |         |   |   |   |
| Accounts payable                                        |   | $             | 3,326,847   |   |         | $      | 2,696,217 |   |
| Accrued liabilities                                     |   |          | 9,245,816   |   |         |   | 8,959,679 |   |
| Deferred revenue                                        |   |          | 3,793,124   |   |         |   | 5,221,924 |   |
| Total current liabilities                               |   |          | 16,365,787  |   |         |   | 16,877,820 |   |
|                                                    |   |          |        |   |         |   |   |   |
| Accrued income taxes                                    |   |          | 2,788,802   |   |         |   | 2,965,077 |   |
|                                                    |   |          |        |   |         |   |   |   |
| Total liabilities                                       |   | $             | 19,154,589  |   |         | $      | 19,842,897 |   |
|                                                    |   |          |        |   |         |   |   |   |
| Commitments and contingencies (Note 9)                  |   |          |        |   |         |   |   |   |
|                                                    |   |          |        |   |         |   |   |   |
| Stockholders' equity                                    |   |          |        |   |         |   |   |   |
| Preferred stock, $0.01 par value-                       |   |          |        |   |         |   |   |   |
| Authorized - 1,500,000 shares                           |   |          |        |   |         |   |   |   |
| Issued -  none                                |   |          | -           |   |         |   | - |   |
| Common stock, $0.01 par value-                          |   |          |        |   |         |   |   |   |
| Authorized - 45,000,000 shares                          |   |          |        |   |         |   |   |   |
| Issued - 18,573,262 and 18,521,045 shares, respectively |   |          | 185,733     |   |         |   | 185,211 |   |
| Additional paid-in capital                              |   |          | 209,629,876 |   |         |   | 206,740,492 |   |
| Accumulated other comprehensive loss                    |   |          | (460,540    | )      |         |   | (292,297 | ) |
| Accumulated deficit                                     |   |          | (69,229,087 | )      |         |   | (63,006,207 | ) |
| Total stockholders' equity                              |   | $             | 140,125,982 |   |         | $      | 143,627,199 |   |
|                                                    |   |          |        |   |         |   |   |   |
| Total liabilities and stockholders’ equity        |   | $             | 159,280,571 |   |         | $      | 163,470,096 |   |
|                                                    |   |          |        |   |         |   |   |   |
|                                                    |   |          |        |   |         |   |   |   |

----

P

|                                                                                   |   | Three Months Ended |       |   | Nine Months Ended |   |
|----------------------------------------------------------------------------------------|--------|--------------------|------------|--------|-------------------|--------|
|                                                                                   |   | September 30,      |       |   | September 30,     |   |
|                                                                                   |   | 2010               |       |   | 2009              |   |   | 2010 |   |   | 2009 |   |
|  Revenues                                                                         |   |               |       |   |              |   |   |   |   |   |   |   |
|  Product revenues                                                                 |   | $                  | 9,273,158  |   |              | $      | 7,528,645 |   |   | $ | 27,655,391 |   |   | $ | 23,939,493 |   |
|  Service revenues                                                                 |   |               | 3,749,164  |   |              |   | 3,700,511 |   |   |   | 11,512,299 |   |   |   | 10,884,073 |   |
|  Royalty revenues                                                                 |   |               | 1,499,182  |   |              |   | 1,264,022 |   |   |   | 4,444,327 |   |   |   | 4,032,039 |   |
|  Funded product development revenues                                              |   |               | -          |   |              |   | 806,482 |   |   |   | - |   |   |   | 1,636,082 |   |
|  Other revenues                                                                   |   |               | 1,250,000  |   |              |   | 1,250,000 |   |   |   | 3,750,000 |   |   |   | 3,750,000 |   |
|  Total revenues                                                                   |   |               | 15,771,504 |   |              |   | 14,549,660 |   |   |   | 47,362,017 |   |   |   | 44,241,687 |   |
|                                                                                   |   |               |       |   |              |   |   |   |   |   |   |   |   |   |   |   |
|  Costs and expenses                                                               |   |               |       |   |              |   |   |   |   |   |   |   |   |   |   |   |
|  Cost of product revenues                                                         |   |               | 3,781,473  |   |              |   | 2,873,956 |   |   |   | 10,583,241 |   |   |   | 9,849,383 |   |
|  Cost of service revenues                                                         |   |               | 1,367,316  |   |              |   | 1,901,303 |   |   |   | 4,320,439 |   |   |   | 5,417,280 |   |
|  Cost of royalty revenues                                                         |   |               | 599,673    |   |              |   | 505,609 |   |   |   | 1,777,731 |   |   |   | 1,612,816 |   |
|  Research and development                                                         |   |               | 3,545,622  |   |              |   | 3,305,311 |   |   |   | 11,320,691 |   |   |   | 10,125,279 |   |
|  Selling and marketing                                                            |   |               | 4,663,632  |   |              |   | 4,062,930 |   |   |   | 14,408,442 |   |   |   | 13,464,732 |   |
|  General and administrative                                                       |   |               | 4,267,535  |   |              |   | 2,451,496 |   |   |   | 11,579,566 |   |   |   | 7,566,053 |   |
|  Total costs and expenses                                                         |   |               | 18,225,251 |   |              |   | 15,100,605 |   |   |   | 53,990,110 |   |   |   | 48,035,543 |   |
|                                                                                   |   |               |       |   |              |   |   |   |   |   |   |   |   |   |   |   |
|  Loss from operations                                                             |   |               | (2,453,747 | )      |              |   | (550,945 | ) |   |   | (6,628,093 | ) |   |   | (3,793,856 | ) |
|                                                                                   |   |               |       |   |              |   |   |   |   |   |   |   |   |   |   |   |
|  Interest income                                                                  |   |               | 108,630    |   |              |   | 218,169 |   |   |   | 309,747 |   |   |   | 551,817 |   |
|  Other income                                                                     |   |               | 390,784    |   |              |   | 156,941 |   |   |   | 212,922 |   |   |   | 506,761 |   |
|                                                                                   |   |               |       |   |              |   |   |   |   |   |   |   |   |   |   |   |
|  Loss before income taxes                                                         |   |               | (1,954,333 | )      |              |   | (175,835 | ) |   |   | (6,105,424 | ) |   |   | (2,735,278 | ) |
|                                                                                   |   |               |       |   |              |   |   |   |   |   |   |   |   |   |   |   |
|  Provision for (benefit from) income taxes                                        |   |               | 69,454     |   |              |   | 120,752 |   |   |   | 117,456 |   |   |   | (780,319 | ) |
|                                                                                   |   |               |       |   |              |   |   |   |   |   |   |   |   |   |   |   |
|  Net loss                                                                         |   | $                  | (2,023,787 | )      |              | $      | (296,587 | ) |   | $ | (6,222,880 | ) |   | $ | (1,954,959 | ) |
|                                                                                   |   |               |       |   |              |   |   |   |   |   |   |   |   |   |   |   |
|  Net loss per share                                                               |   |               |       |   |              |   |   |   |   |   |   |   |   |   |   |   |
|  Basic                                                                            |   | $                  | (0.11      | )      |              | $      | (0.02 | ) |   | $ | (0.34 | ) |   | $ | (0.11 | ) |
|  Diluted                                                                          |   | $                  | (0.11      | )      |              | $      | (0.02 | ) |   | $ | (0.34 | ) |   | $ | (0.11 | ) |
|                                                                                   |   |               |       |   |              |   |   |   |   |   |   |   |   |   |   |   |
| Weighted average number of shares outstanding                                          |   |               |       |   |              |   |   |   |   |   |   |   |   |
|  Basic                                                                            |   |               | 18,561,877 |   |              |   | 18,065,655 |   |   |   | 18,539,847 |   |   |   | 18,058,246 |   |
|  Diluted                                                                          |   |               | 18,561,877 |   |              |   | 18,065,655 |   |   |   | 18,539,847 |   |   |   | 18,058,246 |   |
|                                                                                   |   |               |       |   |              |   |   |   |   |   |   |   |   |   |   |   |
|  Comprehensive loss:                                                              |   |               |       |   |              |   |   |   |   |   |   |   |   |   |   |   |
|  Net loss                                                                         |   | $                  | (2,023,787 | )      |              | $      | (296,587 | ) |   | $ | (6,222,880 | ) |   | $ | (1,954,959 | ) |
|      Unrealized gain (loss) on marketable securities, net of taxes |   |               | 5,256      |   |              |   | (24,138 | ) |   |   | (56,657 | ) |   |   | 142,645 |   |
|  Foreign currency translation adjustment                                          |   |               | (122,434   | )      |              |   | (24,690 | ) |   |   | (111,586 | ) |   |   | (115,680 | ) |
|  Comprehensive loss                                                               |   | $                  | (2,140,965 | )      |              | $      | (345,415 | ) |   | $ | (6,391,123 | ) |   | $ | (1,927,994 | ) |
|                                                                                   |   |               |       |   |              |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                   |   |               |       |   |              |   |   |   |   |   |   |   |   |   |   |   |

----

P

|                                                         |                                                                               |                                                                             |                                                                                                                                                          |                                                                                                              |                                                                                                                                                    |                                                                                                   |                                                                                             |                                                                                                        | Nine Months Ended |   |
|--------------------------------------------------------------|------------------------------------------------------------------------------------|----------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------|-------------------|--------|
|                                                         |                                                                               |                                                                             |                                                                                                                                                          |                                                                                                              |                                                                                                                                                    |                                                                                                   |                                                                                             |                                                                                                        | September 30,     |   |
|                                                         |                                                                               |                                                                             |                                                                                                                                                          |                                                                                                              |                                                                                                                                                    |                                                                                                   |                                                                                             |                                                                                                        | 2010              |   | 2009 |   |
| Operating activities                                         |                                                                               |                                                                             |                                                                                                                                                          |                                                                                                              |                                                                                                                                                    |                                                                                                   |
|                                                         | Net loss                                                                           |                                                                             |                                                                                                                                                          |                                                                                                              |                                                                                                                                                    |  $      (6,222,880                                                  | )                                                                                                |  $      (1,954,959                                                       | )            |
|                                                         |                                                                               |                                                                             |                                                                                                                                                          |                                                                                                              |                                                                                                                                                    |                                                                                                   |                                                                                             |                                                                                                        |              |   |   |   |
|                                                         | Adjustments to reconcile net loss to net cash (used in) from operating activities: |                                                                             |
|                                                         |                                                                               | Depreciation and amortization                                                    |                                                                                                                                                          |               956,602                       |                                                                                                                                                    |              469,167                  |                                                                                             |
|                                                         |                                                                               | Stock-based compensation expense                                                 |                                                                                                                                                          |            2,794,761                                       |                                                                                                                                                    |           2,573,483                                  |                                                                                             |
|                                                         |                                                                               | Provision for bad debt                                                           |                                                                                                                                                          |                 70,694            |                                                                                                                                                    |              139,810                  |                                                                                             |
|                                                         |                                                                               | Inventory write-off                                                              |                                                                                                                                                          |               207,443                       |                                                                                                                                                    |              151,274                  |                                                                                             |
|                                                         |                                                                               | Change in deferred tax asset                                                     |                                                                                                                                                          |                   5,176 |                                                                                                                                                    |          (1,179,411                                       | )                                                                                           |
|                                                         |                                                                               | Tax benefit from the exercise of stock options                                   |                                                                                                                                                          |               (46,437                       | )                                                                                                                                                  |             (264,100                       | )                                                                                           |
|                                                         |                                                                               | Other non-cash items                                                             |                                                                                                                                                          |               (44,781                       | )                                                                                                                                                  |              178,000                  |                                                                                             |
|                                                         |                                                                               | Changes in assets and liabilities:                                               |                                                                                                                                                          |                                                                                                              |                                                                                                                                                    |                                                                                                   |                                                                                             |
|                                                         |                                                                               |                                                                             | Accounts receivable                                                                                                                                           |                                                                                                              |             (660,480                                                                        | )                                                                                                 |              738,195            |                                                                                                        |
|                                                         |                                                                               |                                                                             | Inventories                                                                                                                                                   |                                                                                                              |                                                                                                                                                    |          (1,163,575                                       | )                                                                                           |           3,690,047                                       |              |
|                                                         |                                                                               |                                                                             | Other current assets                                                                                                                                          |                                                                                                              |               402,125                                                             |                                                                                                   |              894,688            |                                                                                                        |
|                                                         |                                                                               |                                                                             | Other assets                                                                                                                                                  |                                                                                                              |                                                                                                                                                    |               (54,797            | )                                                                                           |                  2,538 |              |
|                                                         |                                                                               |                                                                             | Accounts payable                                                                                                                                              |                                                                                                              |               351,590                                                             |                                                                                                   |           2,947,087                            |                                                                                                        |
|                                                         |                                                                               |                                                                             | Accrued liabilities                                                                                                                                           |                                                                                                              |               476,106                                                             |                                                                                                   |           1,428,661                            |                                                                                                        |
|                                                         |                                                                               |                                                                             | Accrued income taxes                                                                                                                                          |                                                                                                              |             (176,275                                                                        | )                                                                                                      |                15,122 |                                                                                                        |
|                                                         |                                                                               |                                                                             | Deferred revenue                                                                                                                                              |                                                                                                              |          (1,612,595                                                                                        | )                                                                                                 |          (2,047,346                                 | )                                                                                                      |
|                                                         |                                                                               |                                                                             |                                                                                                                                                          | Net cash (used in) from operating activities                                                                      |                                                                                                                                                    |          (4,717,323                                       | )                                                                                           |           7,782,256                                       |              |
|                                                         |                                                                               |                                                                             |                                                                                                                                                          |                                                                                                              |                                                                                                                                                    |                                                                                                   |                                                                                             |                                                                                                        |              |   |   |   |
| Investing activities                                         |                                                                               |                                                                             |                                                                                                                                                          |                                                                                                              |                                                                                                                                                    |                                                                                                   |
|                                                         | Purchases of property and equipment                                                |                                                                             |          (3,592,144                                                                                              | )                                                                                                            |        (15,775,678                                                                                                   | )                                                                                                 |
|                                                         | Purchases of marketable securities                                                 |                                                                             |        (22,055,963                                                                                                         | )                                                                                                            |                          - |                                                                                                   |
|                                                         | Purchases of short-term investments                                                |                                                                             |          (1,999,675                                                                                              | )                                                                                                                 |                          - |                                                                                                   |
|                                                         | Proceeds from sale of short-term investments                                       |                                                                             | 25,000,000                                                                                                                                                    |                                                                                                              | -                                                                                                                                                       |                                                                                                   |
|                                                         | Proceeds from sale of marketable securities                                        |                                                                             |            1,850,000                                                                                   |                                                                                                              |              625,000                                                                   |                                                                                                   |
|                                                         |                                                                               |                                                                             |                                                                                                                                                          | Net cash used in investing activities                                                                             |                                                                                                                                                    |             (797,782                       | )                                                                                                |        (15,150,678                                                       | )            |
|                                                         |                                                                               |                                                                             |                                                                                                                                                          |                                                                                                              |                                                                                                                                                    |                                                                                                   |                                                                                             |                                                                                                        |              |   |   |   |
| Financing activities                                         |                                                                               |                                                                             |                                                                                                                                                          |                                                                                                              |                                                                                                                                                    |                                                                                                   |
|                                                         | Proceeds from the exercise of stock options and warrants                           |                                                                             |                 48,708                                                        |                                                                                                              |              117,415                                                                   |                                                                                                   |
|                                                         | Tax benefit from the exercise of stock options                                     |                                                                             |                 46,437                                                        |                                                                                                              |              264,100                                                                   |                                                                                                   |
|                                                         | Costs incurred related to purchase of stock for treasury                           |                                                                             | -                                                                                                                                                             |                                                                                                              | (258,491                                                                                                                                                | )                                                                                                 |
|                                                         | Proceeds from borrowings on credit facility                                        |                                                                             |                           - |                                                                                                              |         14,000,000                                                                                              |                                                                                                   |
|                                                         | Payments on borrowings on credit facility                                          |                                                                             |                           - |                                                                                                              |        (20,000,000                                                                                                   | )                                                                                                 |
|                                                         |                                                                               |                                                                             |                                                                                                                                                          | Net cash from (used in) financing activities                                                                      |                                                                                                                                                    |                 95,145 |                                                                                             |          (5,876,976                                            | )            |
|                                                         |                                                                               |                                                                             |                                                                                                                                                          |                                                                                                              |                                                                                                                                                    |
| Effect of exchange rate changes on cash and cash equivalents |                                                                               |   95,163                                                                    |                                                                                                                                                          |   4,236                                                                                                      |                                                                                                                                                    |
|                                                         |                                                                               |
| Net decrease in cash and cash equivalents                    |                                                                               |          (5,324,797                 | )                                                                                                                                                             |        (13,241,162                                                             | )                                                                                                                                                  |
| Cash and cash equivalents, beginning of the period           |                                                                               |          81,948,482                 |                                                                                                                                                          |       122,601,139                                                                   |                                                                                                                                                    |
| Cash and cash equivalents, end of the period                 |                                                                               |  $      76,623,685                            |                                                                                                                                                          |  $   109,359,977                                                                              |                                                                                                                                                    |
|                                                         |                                                                               |                                                                             |                                                                                                                                                          |                                                                                                              |                                                                                                                                                    |                                                                                                   |                                                                                             |                                                                                                        |              |   |   |   |
| Supplemental disclosure of cash flow information             |                                                                               |
|                                                         |                                                                               |                                                                             |                                                                                                                                                          |                                                                                                              |                                                                                                                                                    |                                                                                                   |                                                                                             |                                                                                                        |              |   |   |   |
|                                                         |  Cash paid for income taxes                                                   |                                                                             |  $             52,000                                                                   |                                                                                                              |  $            36,493                                                                   |                                                                                                   |
|                                                         |                                                                               |                                                                             |                                                                                                                                                          |                                                                                                              |                                                                                                                                                    |                                                                                                   |                                                                                             |                                                                                                        |              |   |   |   |
| Supplemental noncash investing activities                    |                                                                               |                                                                             |                                                                                                                                                          |                                                                                                              |                                                                                                                                                    |
|                                                         | Unrealized (loss) gain on marketable securities, net of taxes                      |  $           (56,657 | )                                                                                                                                                             |  $          142,645                                        |                                                                                                                                                    |
|                                                         |                                                                               |                                                                             |                                                                                                                                                          |                                                                                                              |                                                                                                                                                    |                                                                                                   |                                                                                             |                                                                                                        |              |   |   |   |
|                                                         |                                                                               |                                                                             |                                                                                                                                                          |                                                                                                              |                                                                                                                                                    |                                                                                                   |                                                                                             |                                                                                                        |              |   |   |   |

----

P

|   | Note 1 –    Basis of presentation |
|--------|--------------------------------------------------------|

|   |            |   |                                                                              |  September 30,                                                                               | December 31,                                                     |                |
|--------|-----------------|--------|-----------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------|---------------------|
|   |            |   |                                                                              |   2010                                                                                       | 2009                |      |
|   | Raw materials   |   |  $         4,984,923            |  $         4,365,150                            |                                                                                           |
|   | Work in process |   |             1,397,387 |                361,931 |                                                                                           |
|   | Finished goods  |   |             5,836,165 |             6,399,271                 |                                                                                           |
|   |            | Total  |                                                                              |  $       12,218,475                                       |  $       11,126,352                                    |                |
|   |            |   |                                                                              |                                                                                              |                                                                                           |                |

----

|                                                              |   | September 30, |       |   | December 31, |   | Estimated   |
|-------------------------------------------------------------------|--------|---------------|------------|--------|--------------|--------|-------------|
|                                                              |   | 2010          |       |   | 2009         |   | useful life |
|                                                              |   |          |       |   |         |   |        |
| Land                                                              |   | $             | 10,680,000 |   |         | $      | 10,680,000  |   |   |
| Building                                                          |   |          | 24,307,148 |   |         |   | -           |   | 39 years |
| Machinery and equipment                                           |   |          | 2,698,464  |   |         |   | 2,100,331   |   | 3-7 years |
| Furniture and fixtures                                            |   |          | 5,405,189  |   |         |   | 3,364,989   |   | 7 years |
| Leasehold improvements                                            |   |          | 39,589     |   |         |   | 537,648     |   | Shorter of estimated useful life or term of lease |
| Construction in progress                                          |   |          | -          |   |         |   | 23,385,614  |   |   |
|                                                              |   |          | 43,130,390 |   |         |   | 40,068,582  |   |   |
| Accumulated depreciation                                          |   |          | (5,858,624 | )      |         |   | (5,439,172  | ) |   |
|           Total |   | $             | 37,271,766 |   |         | $      | 34,629,410  |   |   |

|   |                                                |   |    September 30, |       |   |    December 31, |   |
|--------|-----------------------------------------------------|--------|----------------------------|------------|--------|---------------------------|--------|
|   |                                                |   |   2010                |       |   |    2009         |   |
|   | Warranty accrual, beginning of period               |   | $                          | 596,210    |   |                      | $      | 856,158 |   |
|   | Charges to cost and expenses relating to new sales  |   |                       | 1,097,107  |   |                      |   | 1,280,301 |   |
|   | Costs of product warranty claims/change of estimate |   |                       | (1,173,832 | )      |                      |   | (1,540,249 | ) |
|   | Warranty accrual, end of period                     |   | $                          | 519,485    |   |                      | $      | 596,210 |   |

----

| ·   | Level 1 - Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.  |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Level 2 - Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.  |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Level 3 - Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| Assets                       |   | Fair Value as of September 30, 2010 |   |
|-----------------------------------|--------|-------------------------------------|--------|
| (In thousands)                    |   |   Level 1                 |   | Level 2 |   | Level 3 |   | Total |   |
| Short-term investments            |   | $                                   | 2,000  |   | $ | - |   | $ | - | 24 | $ | 2,000 |   |
| Marketable securities             |   |                                | 22,042 |   |   | - |   |   | - |   |   | 22,042 |   |
| Auction-rate preferred securities |   |                                | -      |   |   | - |   |   | 1,006 |   |   | 1,006 |   |
| Auction-rate municipal securities |   |                                | -      |   |   | - |   |   | 1,081 |   |   | 1,081 |   |
| Total                             |   | $                                   | 24,042 |   | $ | - |   | $ | 2,087 |   | $ | 26,129 |   |

|   |   |
|--------|--------|

| Assets                       |   | Fair Value as of December 31, 2009 |   |
|-----------------------------------|--------|------------------------------------|--------|
| (In thousands)                    |   |   Level 1                |   | Level 2 |   | Level 3 |   | Total |   |
| Short-term investments            |   | $                                  | 25,000 |   | $ | - |   | $ | - | 24 | $ | 25,000 |   |
| Auction-rate preferred securities |   |                               | -      |   |   | - |   |   | 2,622 |   |   | 2,622 |   |
| Auction-rate municipal securities |   |                               | -      |   |   | - |   |   | 1,402 |   |   | 1,402 |   |
| Total                             |   | $                                  | 25,000 |   | $ | - |   | $ | 4,024 |   | $ | 29,024 |   |

|   |   |
|--------|--------|

----

|                              |    Auction-rate         |        Auction-rate                |                                |    |
|-----------------------------------|-----------------------------------|-----------------------------------------------------------------------|-------------------------------------|---------|
| (In thousands)                    |    preferred securities |          municipal securities | Total                               |
| Balance at December 31, 2009 | $2,622                            |                                                                  | $1,402                              |    | $4,024 |   |
| Net payments, purchases and sales | (1,750                            | )                                                                | (100                                | )  | (1,850 | )  |
| Net transfers in/(out)            | -                                 |                                                                  | -                                   |    | - |   |
| Gains/(losses)                    |                              |                                                                  |                                |    |   |   |
|     Realized       | -                                 |                                                                  | -                                   |    | - |   |
|     Unrealized     | 134                               |                                                                  |       (221 | )  |   (87 | )  |
| Balance at September 30, 2010     | $1,006                            |                                                                  | $1,081                              |    | $2,087 |   |
|                              |                              |                                                                  |                                |    |   |   |
|                              |                              |                                                                  |                                |    |   |   |

----

|                                                                                      |   | Three Months Ended |       |   | Nine Months Ended |   |
|-------------------------------------------------------------------------------------------|--------|--------------------|------------|--------|-------------------|--------|
|                                                                                      |   | September 30,      |       |   | September 30,     |   |
|                                                                                      |   | 2010               |       |   | 2009              |   |   | 2010 |   |   | 2009 |   |
| Basic weighted average number of shares outstanding                                       |   |               | 18,561,877 |   |              |   | 18,065,655 |   |   |   | 18,539,847 |   |   |   | 18,058,246 |   |
| Potential common shares pursuant to stock options, stock appreciation rights and warrants |   |               | -          |   |              |   | - |   |   |   | - |   |   |   | - |   |
| Diluted weighted average number of shares outstanding                                     |   |               | 18,561,877 |   |              |   | 18,065,655 |   |   |   | 18,539,847 |   |   |   | 18,058,246 |   |

----

----

----

----

Item 

----

|                                |   | Three Months Ended September 30, |   |   |      |   |   |   |   |
|-------------------------------------|--------|----------------------------------|--------|--------|-----------|--------|--------|--------|--------|
|                                |   | 2010                             |   |   | 2009      |   |   |   |   |   |   |   |
|                                |   |                             |   |   | As a % of |   |   |   |   |   | As a % of |   |   |   |   |   |   |   |
|                                |   |                             |   |   | Total     |   |   |   |   |   | Total |   |   | Change |
|                                |   | Amount                           |   |   | Revenue   |   |   | Amount |   |   | Revenue |   |   |  $ |   |   |   | % |
| Revenues                            |   |                             |   |   |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Product revenues                    |   | $                                | 9,273  |   |      |   | 59     | %      |   | $ | 7,529 |   |   |   | 52 | % |   | $ | 1,744 |   |   |   | 23 | % |
| Service revenues                    |   |                             | 3,749  |   |      |   | 24     | %      |   |   | 3,700 |   |   |   | 25 | % |   |   | 49 |   |   |   | 1 | % |
| Royalty revenues                    |   |                             | 1,499  |   |      |   | 10     | %      |   |   | 1,264 |   |   |   | 9 | % |   |   | 235 |   |   |   | 19 | % |
| Funded product development revenues | -      |                             |   |   | -         | %      |   |   | 806    |   |   |   | 6 | % |   |   | (806 | ) |   |   | (100 | %) |
| Other revenues                      |   |                             | 1,250  |   |      |   | 8      | %      |   |   | 1,250 |   |   |   | 9 | % |   |   | - |   |   |   | - | % |
| Total revenues                      |   |                             | 15,771 |   |      |   | 100    | %      |   |   | 14,549 |   |   |   | 100 | % |   |   | 1,222 |   |   |   | 8 | % |
|                                |   |                             |   |   |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Costs and expenses                  |   |                             |   |   |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost of product revenues            |   |                             | 3,781  |   |      |   | 24     | %      |   |   | 2,874 |   |   |   | 20 | % |   |   | 907 |   |   |   | 32 | % |
| Cost of service revenues            |   |                             | 1,367  |   |      |   | 9      | %      |   |   | 1,901 |   |   |   | 13 | % |   |   | (534 | ) |   |   | (28 | %) |
| Cost of royalty revenues            |   |                             | 600    |   |      |   | 4      | %      |   |   | 506 |   |   |   | 3 | % |   |   | 94 |   |   |   | 19 | % |
| Research and development            |   |                             | 3,546  |   |      |   | 22     | %      |   |   | 3,305 |   |   |   | 23 | % |   |   | 241 |   |   |   | 7 | % |
| Selling and marketing               |   |                             | 4,664  |   |      |   | 30     | %      |   |   | 4,063 |   |   |   | 28 | % |   |   | 601 |   |   |   | 15 | % |
| General and administrative          |   |                             | 4,267  |   |      |   | 27     | %      |   |   | 2,451 |   |   |   | 17 | % |   |   | 1,816 |   |   |   | 74 | % |
| Total costs and expenses            |   |                             | 18,225 |   |      |   | 116    | %      |   |   | 15,100 |   |   |   | 104 | % |   |   | 3,125 |   |   |   | 21 | % |
|                                |   |                             |   |   |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loss from operations                |   |                             | (2,454 | )      |      |   | (16    | %)     |   |   | (551 | ) |   |   | (4 | %) |   |   | 1,903 |   |   |   | 345 | % |
|                                |   |                             |   |   |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest income                     |   |                             | 109    |   |      |   | 1      | %      |   |   | 218 |   |   |   | 1 | % |   |   | (109 | ) |   |   | (50 | %) |
| Other income                        |   |                             | 391    |   |      |   | 2      | %      |   |   | 157 |   |   |   | 1 | % |   |   | 234 |   |   |   | 149 | % |
|                                |   |                             |   |   |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loss before income taxes            |   |                             | (1,954 | )      |      |   | (12    | %)     |   |   | (176 | ) |   |   | (1 | %) |   |   | 1,778 |   |   |   | 1010 | % |
|                                |   |                             |   |   |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Provision for income taxes          | 69     |                             |   |   | -         | %      |   |   | 121    |   |   |   | 1 | % |   |   | (52 | ) |   |   | (43 | %) |
|                                |   |                             |   |   |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net loss                            |   | $                                | (2,023 | )      |      |   | (13    | %)     |   | $ | (297 | ) |   |   | (2 | %) |   | $ | 1,726 |   |   |   | 581 | % |
|                                |   |                             |   |   |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                |   |                             |   |   |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

----

|                                                        |   | Nine Months Ended September 30, |   |   |      |    |   |   |   |
|-------------------------------------------------------------|--------|---------------------------------|--------|--------|-----------|---------|--------|--------|--------|
|                                                        |   | 2010                            |   |   | 2009      |    |   |   |   |   |   |   |
|                                                        |   |                            |   |   | As a % of |    |   |   |   |   | As a % of |   |   |   |   |   |   |   |
|                                                        |   |                            |   |   | Total     |    |   |   |   |   | Total |   |   | Change |
|                                                        |   | Amount                          |   |   | Revenue   |    |   | Amount |   |   | Revenue |   |   |  $ |   |   |   | % |
| Revenues                                                    |   |                            |   |   |      |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Product revenues                                            |   | $                               | 27,656 |   |      |    | 58     | %      |   | $ | 23,940 |   |   |   | 54 | % |   | $ | 3,716 |   |   |   | 16 | % |
| Service revenues                                            |   |                            | 11,512 |   |      |    | 24     | %      |   |   | 10,884 |   |   |   | 25 | % |   |   | 628 |   |   |   | 6 | % |
| Royalty revenues                                            |   |                            | 4,444  |   |      |    | 9      | %      |   |   | 4,032 |   |   |   | 9 | % |   |   | 412 |   |   |   | 10 | % |
| Funded product development revenues                         | -      |                            |   |   | -         | %       |   |   | 1,636  |   |   |   | 4 | % |   |   | (1,636 | ) |   |   | (100 | %) |
| Other revenues                                              |   |                            | 3,750  |   |      |    | 8      | %      |   |   | 3,750 |   |   |   | 8 | % |   |   | - |   |   |   | - | % |
| Total revenues                                              |   |                            | 47,362 |   |      |    | 100    | %      |   |   | 44,242 |   |   |   | 100 | % |   |   | 3,120 |   |   |   | 7 | % |
|                                                        |   |                            |   |   |      |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Costs and expenses                                          |   |                            |   |   |      |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost of product revenues                                    |   |                            | 10,584 |   |      |    | 22     | %      |   |   | 9,850 |   |   |   | 22 | % |   |   | 734 |   |   |   | 7 | % |
| Cost of service revenues                                    |   |                            | 4,320  |   |      |    | 9      | %      |   |   | 5,417 |   |   |   | 12 | % |   |   | (1,097 | ) |   |   | (20 | %) |
| Cost of royalty revenues                                    |   |                            | 1,778  |   |      |    | 4      | %      |   |   | 1,613 |   |   |   | 4 | % |   |   | 165 |   |   |   | 10 | % |
| Research and development                                    |   |                            | 11,321 |   |      |    | 24     | %      |   |   | 10,125 |   |   |   | 23 | % |   |   | 1,196 |   |   |   | 12 | % |
| Selling and marketing                                       |   |                            | 14,408 |   |      |    | 30     | %      |   |   | 13,465 |   |   |   | 30 | % |   |   | 943 |   |   |   | 7 | % |
| General and administrative                                  |   |                            | 11,579 |   |      |    | 24     | %      |   |   | 7,566 |   |   |   | 17 | % |   |   | 4,013 |   |   |   | 53 | % |
| Total costs and expenses                                    |   |                            | 53,990 |   |      |    | 114    | %      |   |   | 48,036 |   |   |   | 109 | % |   |   | 5,954 |   |   |   | 12 | % |
|                                                        |   |                            |   |   |      |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loss from operations                                        |   |                            | (6,628 | )      |      |    | (14    | %)     |   |   | (3,794 | ) |   |   | (9 | %) |   |   | 2,834 |   |   |   | 75 | % |
|                                                        |   |                            |   |   |      |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest income                                             |   |                            | 310    |   |      |    | 1      | %      |   |   | 552 |   |   |   | 1 | % |   |   | (242 | ) |   |   | (44 | %) |
| Other income                                                |   |                            | 212    |   |      |    | -      | %      |   |   | 507 |   |   |   | 1 | % |   |   | (295 | ) |   |   | (58 | %) |
|                                                        |   |                            |   |   |      |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loss before income taxes                                    |   |                            | (6,106 | )      |      |    | (13    | %)     |   |   | (2,735 | ) |   |   | (6 | %) |   |   | (3,371 | ) |   |   | 123 | % |
|                                                        |   |                            |   |   |      |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Provision for (benefit from) income taxes    | 117    |                            |   |   | -         | %  |   |   | (780   | )  |   |   | (2 | %)  |   |   | 897 |   |   |   | 115 | % |
|                                                        |   |                            |   |   |      |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net loss                                                    |   | $                               | (6,223 | )      |      |    | (13    | %)     |   | $ | (1,955 | ) |   |   | (4 | %) |   | $ | 4,268 |   |   |   | 218 | % |
|                                                        |   |                            |   |   |      |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                        |   |                            |   |   |      |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

|   |                               |   | Three Months Ended |   |   | Nine Months Ended |   |
|--------|------------------------------------|--------|--------------------|--------|--------|-------------------|--------|
|   |                               |   | September 30,      |   |   | September 30,     |   |
|   |                               |   | 2010               |   |   | 2009              |   |   | 2010 |   |   | 2009 |   |
|   | North America                      |   |               | 52     | %      |              |   | 63 | % |   |   | 58 | % |   |   | 60 | % |
|   | Europe                             |   |               | 22     | %      |              |   | 17 | % |   |   | 20 | % |   |   | 18 | % |
|   | South and Central America          |   |               | 7      | %      |              |   | 10 | % |   |   | 7 | % |   |   | 8 | % |
|   | Australia                          |   |               | 6      | %      |              |   | 4 | % |   |   | 6 | % |   |   | 5 | % |
|   | Asia/Pacific Rim                   |   |               | 10     | %      |              |   | 3 | % |   |   | 6 | % |   |   | 5 | % |
|   | Other                              |   |               | 3      | %      |              |   | 3 | % |   |   | 3 | % |   |   | 4 | % |
|   | Total Product and Service Revenues |   |               | 100    | %      |              |   | 100 | % |   |   | 100 | % |   |   | 100 | % |

----

----

|                                           |   |                 |   |   |   |    |    |    |    |                                         |     |
|------------------------------------------------|--------|----------------------|--------|--------|--------|---------|---------|---------|---------|----------------------------------------------|----------|
|                                           |   | Nine months ended    |   |   |   |    |    |
|                                           |   |   September 30, |   | Change |
|                                           |   | 2010                 |   | 2009   |   | $       | %       |    |
|                                           |   |                 |   |   |   |    |    |    |    |                                         |     |
| Cash flows (used in) from operating activities |   | $                    | (4,717 | )      | $      | 7,782   |    | (12,499 | )       | (161                                         | %)  |
| Cash flows used in investing activities        |   |                 | (798   | )      |   | (15,151 | )  | 14,353  |    |        95 | %   |
| Cash flows from (used in) financing activities |   |                 | 95     |   |   | (5,877  | )  | 5,972   |    | 102                                          | %   |
|                                           |   |                 |   |   |   |    |    |    |    |                                         |     |
| Capital expenditures                           |   | $                    | 3,592  |   | $      | 15,776  |    | (12,184 | )  | (77                                          | %)  |

|                                           |   |  September 30, |   |   |  December 31, |   |  Change                  |   |
|------------------------------------------------|--------|---------------------|--------|--------|--------------------|--------|-------------------------------|--------|
|                                           |   |  2010          |   |   |  2009         |   |  $                       |   |  % |   |
|                                           |   |                |   |   |               |   |                          |   |   |   |
| Cash and cash equivalents                      | $      | 76,624              |   | $      | 81,948             | $      |    (5,324           | )      |    (6 | %) |
| Short-term investments                         |   | 2,000               |   |   | 25,000             |   | (23,000                       | )      | (92 | %)  |
| Accounts receivable, net                       |   | 5,035               |   |   | 4,436              |   | 599                           |   | 14 | % |
| Inventories, net                               |   | 12,218              |   |   | 11,126             |   |     1,092 |   |     10 | % |
| Working capital                                |   | 81,295              |   |   | 107,812            |   | (26,517                       | )      | (25 | %) |
| Marketable securities, at estimated fair value |   | 24,129              |   |   | 4,024              |   |   20,105            |   | 500 | % |

----

----

|                               | Payments due by period |
|------------------------------------|------------------------|
|                               |                   |  Total | Less than 1 year | 1 - 3Years | 4 - 5Years | After 5Years |
| Operating leases                   | $                      | 265 | $ | 167 | $ | 98 | $ | - | $ | - |
| Purchase commitments               |                   | 7,928 |   | 7,928 |   | - |   | - |   | - |
| Total contractual cash obligations | $                      | 8,193 | $ | 8,095 | $ | 98 | $ | - | $ | - |

It

----

Item 

PA

Item 

----

----

----

Item

----

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Item 

| Period                                       | Total number of shares purchased | Average price paid per share | Total number of shares purchased as part of publicly announced program * | Maximum number of shares that may yet be purchased under program * |
|----------------------------------------------|----------------------------------|------------------------------|--------------------------------------------------------------------------|--------------------------------------------------------------------|
| July 1, 2010 through July 31, 2010           | -                                | -                            | -                                                                        | 324,500                                                            |
| August 1, 2010 through August 31, 2010       | -                                | -                            | -                                                                        | 324,500                                                            |
| September 1, 2010 through September 30, 2010 | -                                | -                            | -                                                                        | 324,500                                                            |
| Total                                        | -                                | -                            | -                                                                        | 324,500                                                            |

Item 

Item 

It

Exhibits

|   | 31.1 | Certification of Joseph P. Caruso, President and Chief Executive Officer of the Company, 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 the Company, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                      |
|   | 32   | Certification of Joseph P. Caruso, President and Chief Executive Officer of the Company, pursuant to 18 United States Code Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.    |
|   | 32   | Certification of Paul S. Weiner, Vice President and Chief Financial Officer of the Company, pursuant to 18 United States Code Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

----

Signatures

|                                                      | Palomar Medical Technologies, Inc.(Registrant)                                                                                                    |
|-----------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------|
|     Date:  November 5, 2010 |    /s/  Joseph P. Caruso     Joseph P. CarusoPresident, Chief Executive Officer and Director    |
|                                                      |                                                                                                                                              |
|     Date: November 5, 2010            |     /s/  Paul S. Weiner      Paul S. WeinerVice President and Chief Financial Officer |
|                                                      |                                                                                                                                              |

----