---

FORM 10-Q

U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

(Mark one)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For quarterly period ended September 30, 2000

OR

[    ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________

Commission file number: 0-22340

PALOMAR MEDICAL TECHNOLOGIES, INC.

(Exact name of issuer as specified in its charter)

Delaware            04-3128178

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

82 Cambridge Street, Burlington, Massachusetts 01803

(Address of principal executive offices)

(781) 993-2300

(Issuer's telephone number, including area code)

Check whether the issuer:  (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange
Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.  YesX No

As of October 31, 2000, 10,221,558 shares of common stock, $.01 par value per share, were outstanding.

         Transitional Small Business Disclosure Format (check one): YesNoX

---

# PALOMAR MEDICAL
TECHNOLOGIES, INC. AND SUBSIDIARIES

# INDEX

## PART I -
FINANCIAL INFORMATION

`ITEM 1.    CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

                           Consolidated Condensed Balance Sheets                   1

                           Consolidated Statements of Operations                   2

                           Consolidated Statement of Stockholders' Equity          3

                           Consolidated Statements of Cash Flows                   4

                           Notes to Consolidated Financial Statements              5

       ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                CONDITION AND RESULTS OF OPERATIONS                                10

                    RISK FACTORS                                                   14

       ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES
                ABOUT MARKET RISK                                                  17`

## PART II - OTHER INFORMATION

`ITEM 1.  LEGAL PROCEEDINGS                                                 18

        ITEM 2.  CHANGES IN SECURITIES                                             18

        ITEM 3.  DEFAULTS UPON SENIOR SECURITIES                                   18

        ITEM 4.  SUBMISSION OF MATTERS TO A VOTE
                 OF SECURITY HOLDERS                                               18

        ITEM 5.  OTHER INFORMATION                                                 18

        ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K                                  19

 SIGNATURES                                                                        20`

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

`December 31,     September 30,
                                                              1999              2000
                                                         ----------------  --------------
                                                                             (Unaudited)
         ASSETS

Current Assets:
        Cash and cash equivalents                           $2,712,466        $6,356,512
        Available-for-sale investments, at market value     22,505,996        10,860,552
        Accounts receivable, net                             1,879,612         1,588,951
        Inventories                                          1,899,591         1,181,061
        Receivable from sale of subsidiary                   3,330,976                 -
        Income tax refund receivable                                 -         1,619,935
        Other current assets                                   729,301           607,462
                                                         ----------------  --------------
             Total current assets                           33,057,942        22,214,473
                                                         ----------------  --------------
Property and Equipment, Net
                                                               991,432           899,516
                                                         ----------------  --------------
Other Assets:
        Cost in excess of net assets acquired, net             631,026                 -
        Other non-current assets                               162,468           122,024
                                                         ----------------  --------------
             Total other assets                                793,494           122,024
                                                         ----------------  --------------
                                                           $34,842,868       $23,236,013
                                                         ================  ==============

         LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
        Current portion of long-term debt                  $ 1,122,008       $ 1,683,012
        Accounts payable                                       659,280           598,711
        Accrued liabilities                                  6,371,553         5,886,070
        Accrued income taxes                                 2,500,000         1,822,146
        Deferred revenue                                       918,642           367,948
        Deferred gain from sale of subsidiary                3,139,556                 -
                                                         ----------------  --------------
             Total current liabilities                      14,711,039        10,357,887
                                                         ----------------  --------------
Long-Term Debt, Net of Current Portion                       1,622,008           500,000
                                                         ----------------  --------------
Accrued Dividends and Interest on Preferred Stock            1,417,184         1,691,134
                                                         ----------------  --------------
Stockholders' Equity:
       Preferred stock, $.01 par value-

             Authorized - 1,500,000 shares
             Issued and outstanding -
             6,000 shares
             at December 31, 1999 and September 30, 2000           60                 60

       Common stock, $.01 par value-

             Authorized - 45,000,000 shares
             Issued - 11,034,493 shares and 11,074,393
             shares at December 31, 1999 and September 30,
             2000, respectively                                110,345           110,744

        Additional paid-in capital                         162,275,613       161,991,709

        Accumulated deficit                               (141,550,040)     (148,235,638)

        Unrealized loss on available-for-sale investments      (67,943)          (10,497)

        Less: Treasury stock - 1,002,615 and 864,737
        shares at cost at December 31, 1999 and             (3,675,398)       (3,169,386)
        September 30, 2000, respectively                 ----------------  --------------
                     Total stockholders' equity             17,092,637        10,686,992
                                                         ----------------  --------------
                                                           $34,842,868       $23,236,013
                                                         ================   ==============`

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

## PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)

`Three Months Ended                 Nine Months Ended
                                                                September 30,                       September 30,
                                                            1999             2000             1999             2000
                                                       ---------------   --------------   --------------   --------------
Product revenues                                          $ 1,716,517      $ 3,056,139     $ 20,074,303      $ 6,151,262
Royalty revenues                                            1,206,823          954,378        1,856,823        3,307,055
                                                       ---------------   --------------   --------------   --------------
       Total Revenues                                       2,923,340        4,010,517       21,931,126        9,458,317

Cost of product revenues                                    2,044,485        2,439,228       10,991,486        6,611,304
Cost of royalty revenues                                      482,729          381,751          742,749        1,322,822
                                                       ---------------   --------------   --------------   --------------
       Total Cost of Revenues                               2,527,214        2,820,979       11,734,235        7,934,126
                                                       ---------------   --------------   --------------   --------------

       Gross Margin                                           396,126        1,189,538       10,196,891        1,524,191
                                                       ---------------   --------------   --------------   --------------
 Operating Expenses (Income)

       Research and development                             1,642,140        1,909,164        6,272,869        5,877,688
       Sales and marketing                                    590,188        1,019,287        6,307,410        2,172,184
       General and administrative                           1,041,677          892,499        4,199,309        2,985,314
       Goodwill and asset write-off (Note 5 and 11)                 -                -                -          745,804
       Costs incurred for proxy contest                             -                -          624,627                -
       Setlement costs                                              -                -          750,000                -
       Gain from sale of subsidiary                                 -                -      (47,090,876)      (3,139,556)
                                                       ---------------   --------------   --------------   --------------
             Total operating expenses (income)              3,274,005        3,820,950      (28,936,661)       8,641,434
                                                       ---------------   --------------   --------------   --------------
             Income (loss) from operations                 (2,877,879)      (2,631,412)      39,133,552       (7,117,243)

Swiss Franc Redemption                                              -                -       (6,167,369)               -
Interest Income                                               469,984          309,854          877,618          999,466
Interest Expense                                             (182,257)         (36,429)        (546,173)        (123,689)
Other Income (Expense), net                                    (8,148)          57,805          271,489          351,223
                                                       ---------------   --------------   --------------   --------------
       Income (Loss) from Continuing Operations
       Before Provision (Benefit) for Income Taxes         (2,598,300)      (2,300,182)      33,569,117       (5,890,243)

Provision (Benefit) for Income Taxes                                -         (191,056)       2,500,000         (191,056)
                                                       ---------------   --------------   --------------   --------------

       Income (Loss) from Continuing Operations Before
       Cumulative Effect of Change in Accounting Method    (2,598,300)      (2,109,126)      31,069,117       (5,699,187)

Cumulative Effect of Change in Accounting Method (Note 12)          -                -                -         (712,359)

Loss from Discontinued Operations                                   -                -         (435,000)               -
                                                       ---------------   --------------   --------------   --------------
       Net Income (Loss)                                 $ (2,598,300)    $ (2,109,126)    $ 30,634,117     $ (6,411,546)
                                                       ===============   ==============   ==============   ==============
Basic Net Income (Loss) per Share:

       Continuing operations                                  $ (0.27)         $ (0.22)          $ 3.02          $ (0.59)
       Cumulative effect of change in accounting method             -                -                -            (0.07)
       Discontinued operations                                      -                -            (0.04)               -
                                                       ---------------   --------------   --------------   --------------

       Total Basic Net Income (Loss) Per Share                $ (0.27)         $ (0.22)          $ 2.98          $ (0.66)
                                                       ===============   ==============   ==============   ==============
Basic Weighted Average Number of Shares Outstanding        10,087,905       10,209,361       10,188,306       10,148,871
                                                       ===============   ==============   ==============   ==============

Diluted Net Income (Loss) Per Share:

       Continuing operations                                  $ (0.27)         $ (0.22)          $ 2.85          $ (0.59)
       Cumulative effect of change in accounting method             -                -                -            (0.07)
       Discontinued operations                                      -                -            (0.04)               -
                                                       ---------------   --------------   --------------   --------------
       Total Diluted Net Income (Loss) Per Share              $ (0.27)         $ (0.22)          $ 2.81          $ (0.66)
                                                       ===============   ==============   ==============   ==============
Diluted Weighted Average Number of Shares Outstanding      10,087,905       10,209,361       10,957,857       10,148,871
                                                       ===============   ==============   ==============   ==============`

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

## PALOMAR
MEDICAL TECHNOLOGIES, INC AND SUBSIDIARIESCONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY(Unaudited)

`Preferred Stock                 Common Stock                      Treasury Stock                    Additional                               Unrealized Loss
             Total
                                                                                ------------------------------------------------------------------------------------------------------------------
                                                                                                                                                                                                     Paid-in                                on Available-for-
         Stockholders'
                                                                                           Number          $0.01          Number           $0.01             Number                                                   Accumulated

                                                                                          of Shares      Par Value      of Shares         Par Value        of Shares          Cost                   Capital             Deficit            Sale Investments
            Equity
                                                                                ----------------------------------------------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------


Balance, December 31, 1999                                                                     6,000           $ 60        11,034,493            110,345      (1,002,615)     $ (3,675,398)        $ 162,275,613        $ (141,550,040)               $
(67,943)         $ 17,092,637

              Costs incurred related to the issuance of common stock                               -              -                 -                  -               -                 -              (222,050)                    -
-             (222,050)
              Issuance of stock for  Employee Stock Purchase Plan                                  -              -                 -                  -          19,035            69,858               (38,609)                    -
-               31,249
              Issuance of stock for  401K plan                                                     -              -                 -                  -          99,843           366,424              (247,860)                    -
-              118,564
              Exercise of stock options                                                            -              -            39,900                399          19,000            69,730               118,615                     -
-              188,744
              Fair value of warrants issued for investment banking services                        -              -                 -                  -               -                 -               106,000                     -
-              106,000
              Unrealized gain on available-for-sale investments                                    -              -                 -                  -               -                 -                     -                     -
57,446               57,446
              Preferred stock dividends                                                            -              -                 -                  -               -                 -                     -              (274,052)
-             (274,052)
              Net  loss                                                                            -              -                 -                  -               -                 -                     -            (6,411,546)
-           (6,411,546)
                                                                                ----------------------------------------------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------
Balance, September 30, 2000                                                                     6,000          $ 60        11,074,393           $ 110,744       (864,737)     $ (3,169,386)        $ 161,991,709        $ (148,235,638)                $
(10,497)        $ 10,686,992
                                                                                ================================================================================================================================================================
==========================================================`

# PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

`Nine Months Ended September 30,
                                                                        1999           2000
                                                                    -------------  -------------
Cash Flows from Operating Activities:
     Net Income (Loss)                                              $ 30,634,117   $ (6,411,546)
        Add:  Net Loss from discontinued operations                     (435,000)             -
                                                                    -------------  -------------

     Net Income (Loss) from continuing operations                     31,069,117     (6,411,546)
                                                                    -------------  -------------

     Adjustments to reconcile net income (loss) from continuing
        operations to net cash used in operating activities-
        Depreciation and amortization                                    979,546        405,922
        Gain from sale of subsidiary                                 (47,090,876)             -
        Goodwill and asset write-off                                           -        745,804
        Inventory write-off                                                    -        597,000
        Redemption of common stock held by Swiss Franc
               debenture holder                                        6,167,369              -
        Fair value of warrants issued for investment banking services          -        106,000
        Changes in assets and liabilities, net of effects
         from sale of subsidiary
           Accounts receivable                                         2,491,364        290,661
           Inventories                                                (1,221,512)       121,530
           Receivable from sale of subsidiary                         (3,297,138)     3,330,976
           Income tax refund receivable                                        -     (1,619,935)
           Other current assets                                          263,186        121,839
           Accounts payable                                           (3,258,003)       (60,567)
           Accrued expenses                                            1,233,716       (454,147)
           Accrued income taxes                                                -       (647,398)
           Deferred gain from sale of subsidiary                       3,139,556     (3,139,556)
           Deferred revenue                                             (764,128)      (550,694)
                                                                    -------------  -------------
                  Net cash used in operating activities              (10,287,803)    (7,164,111)
                                                                    -------------  -------------
 Cash Flows from Investing Activities:
     Purchases of property and equipment                                (144,341)      (428,785)
     Purchases of available-for-sale investments                     (20,786,767)    (8,871,049)
     Proceeds of available-for-sale investments                                -     20,573,939
     Proceeds from the sale of subsidiary, net of
        cash on hand $288,000                                         49,448,023              -
     Decrease (increase) in other assets                                 (32,803)        40,443
                                                                    -------------  -------------
                Net cash provided by investing activities             28,484,112     11,314,548
                                                                    -------------  -------------

Cash Flows from Financing Activities:
     Net proceeds from the issuance of notes payable and
        advances from distributor                                        750,000              -
     Proceeds from exercise of warrants, stock options
        and Employee Stock Purchase Plan                                  37,527        219,993
     Costs incurred related to issuance of common stock                 (291,000)      (222,050)
     Payments on line of credit                                       (1,000,000)             -
     Payment on Swiss Franc convertible debentures                    (4,441,064)      (504,334)
     Purchase of treasury stock                                       (1,382,202)             -
     Payment on note payable                                          (2,290,041)             -
     Redemption of preferred stock                                      (781,387)             -
                                                                    -------------  -------------
                Net cash used in financing activities                 (9,398,167)      (506,391)
                                                                    -------------  -------------
Net increase in cash and cash equivalents                               8,798,142      3,644,046
Net cash used in discontinued operations                               (2,115,171)             -
Cash and cash equivalents, beginning of the period                      1,874,718      2,712,466
                                                                    -------------  -------------
Cash and cash equivalents, end of the period                           $8,557,689     $6,356,512
                                                                    =============  =============
Supplemental Disclosure of Cash Flow Information:
      Cash paid for interest                                           $ 357,829      $ 151,271
                                                                    =============  =============

Supplemental Disclosure of Noncash Financing and Investing
      Activities:
      Conversion of convertible debentures and related accrued
         interest, net of financing fees                             $ 1,806,074            $ -
                                                                    =============  =============

      Conversion of preferred stock                                     $ 63,411            $ -
                                                                    =============  =============

      Issuance of common stock for 1999 and 2000 employer 401(k)
         matching contribution                                         $ 206,659      $ 118,564
                                                                    =============  =============

      Accrued dividends and interest on preferred stock                 $ 86,816      $ 274,052
                                                                    =============  =============`

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

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

## 1.BASIS OF
PRESENTATION

The accompanying  unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
for interim information. Accordingly, they do not include all of the information
and footnotes required by accounting principles generally accepted in the United
States for complete  financial  statements.  The results of  operations  for the
interim periods shown in this report are not necessarily  indicative of expected
results for any future  interim  period or for the entire  fiscal year.  Palomar
Medical  Technologies,  Inc. and its  subsidiaries  (the "Company" or "Palomar")
believes  that the  quarterly  information  presented  includes all  adjustments
(consisting of normal,  recurring adjustments) necessary for a fair presentation
in  accordance  with  accounting  principles  generally  accepted  in the United
States.  The  accompanying  financial  statements  and  notes  should be read in
conjunction with the Company's Form 10-K for the year ended December 31, 1999.

## 2. CASH AND CASH
EQUIVALENTS

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



## 3. INVESTMENTS

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

`December 31,          September 30,
                                               1999                   2000
                                         ------------------     -----------------

      Market Value                             $22,505,996           $10,860,552
                                         ==================     =================

      Cost Basis                               $22,573,939           $10,871,049
                                         ==================     =================

      Gross Unrealized Loss                       $(67,943)             $(10,497)
                                         ==================     =================`

Available-for-sale  investments  in the  accompanying  balance  sheet at  September  30, 2000 include debt
securities of $10,860,552.  Actual  maturities may differ from contractual  maturities as a result of the Company's
intent to sell these  securities  prior to maturity and as a result of call features of the securities  that enable
either the Company,  the issuer,  or both to redeem these securities at an earlier date.  Unrealized  holding gains
totaling  $57,446 on such debt  securities  were  recorded in  stockholders'  equity  during the nine months  ended
September 30, 2000.

## 4.INVENTORIES

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

`December 31,        September 30,
                                              1999                2000
                                        -----------------   -----------------
           Raw materials                      $1,403,001            $767,143
           Work-in-process                       496,590             215,556
           Finished goods                              -             198,361
                                        -----------------   -----------------
                                              $1,899,591          $1,181,061
                                        =================   =================`

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

## 5.PROPERTY
AND EQUIPMENT

Property and equipment consist of the following:

`December 31,      September 30,
                                                                1999              2000
                                                         ------------------ ----------------
                  Machinery and equipment                      $1,062,774        $ 958,130
                  Furniture and fixtures                        1,006,125        1,248,330
                  Leasehold improvements                          139,046          206,554
                                                         ------------------ ----------------
                                                                2,207,945        2,413,015
                  Less:  Accumulated depreciation
                         And amortization                       1,216,513        1,513,498
                                                         ------------------ ----------------
                                                                 $991,432         $899,516
                                                         ================== ================`

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

## 6.NOTES
PAYABLE

Notes payable consist of the following:

`December 31,        September 30,
                                                                            1999                2000
                                                                      ------------------  ------------------
                    Dollar denominated convertible debentures               $500,000            $500,000
                    Swiss franc denominated convertible debentures         2,244,016           1,683,012
                                                                      ------------------  ------------------
                                                                           2,744,016           2,183,012
                    Less - current maturities                             (1,122,008)         (1,683,012)
                                                                      ------------------  ------------------
                                                                          $1,622,008            $500,000
                                                                      ==================  ==================`

## 7.SEGMENT AND
GEOGRAPHIC INFORMATION

Product revenue from  international  sources were $0.6 million and $1.5 million for the three months ended
September 30, 1999 and 2000,  respectively,  and $8.0 million and $2.6 million for the nine months ended  September
30, 1999 and 2000,  respectively.  The Company's revenue from  international  sources was primarily  generated from
customers located in Japan, Asia/Pacific and Canada/Australia.

The following table  represents the percentage of product revenue by geographic  region from customers for
the three and nine months ended September 30, 1999 and 2000:

`Three Months Ended                     Nine Months Ended
                                                  September 30,                          September 30,
                                     ------------------  ------------------  ------------------  ---------------
                                            1999               2000                 1999             2000
                                     ------------------  ------------------  ------------------  ---------------

         United States                            64.8%              51.5%                60.4%          58.4%
         Japan                                    20.9%              34.5%                13.9%          28.1%
         Asia/Pacific                              8.5%               5.5%                 4.1%           6.3%
         Canada/Australia                          5.8%               4.7%                 1.9%           5.1%
         Europe/Middle East                        0.0%               1.7%                18.2%           1.0%
         Latin America                             0.0%               2.1%                 1.5%           1.1%
                                     ------------------  ------------------  ------------------  ---------------
         Total                                   100.0%             100.0%               100.0%         100.0%
                                     ==================  ==================  ==================  ===============`

## 8.STOCKHOLDERS EQUITY

During the nine months  ended  September  30,  2000,  the Company  granted  options to purchase  1,011,200
shares of the  Company's  common stock at exercise  prices  ranging from $1.38 to $5.06 per share.  During the nine
months ended  September 30, 2000,  58,900 options were exercised at $3.19.  During the nine months ended  September
30, 2000,  options to purchase  354,055 shares of the Company's  common stock at exercise prices ranging from $1.97
to $17.50 per share expired or were cancelled.

During the nine months ended September 30, 2000, the Company granted  warrants to purchase  330,000 shares
of the  Company's  common  stock at an exercise  price of $1.97 to $3.50 per share.  During the nine  months  ended
September 30, 2000, 408,132 warrants expired with an exercise price of $10.50 to $105.00 per share.

## 9. NET INCOME
(LOSS) PER COMMON SHARE

Basic net income (loss) per share was  determined  by dividing net income  (loss) by the weighted  average
common shares  outstanding  during the period.  Diluted net income (loss) per share was  determined by dividing net
income  (loss) by diluted  weighted  average  shares  outstanding.  Diluted  weighted  average  shares  reflect the
dilutive effect,  if any, of common stock options based on the treasury stock method and the assumed  conversion of
all debt  obligations  and  convertible  preferred  stock and the  elimination  of  related  interest  expense  and
preferred  stock  dividends.  The  calculations  of basic and diluted  weighted  average shares  outstanding are as
follows:

`Three Months Ended            Nine Months Ended
                                                            September 30,                September 30,
                                                     ---------------------------- ----------------------------
                                                         1999          2000           1999           2000
                                                     ------------- -------------- -------------- -------------
  Basic weighted average common
    Shares outstanding                                 10,087,905     10,209,361     10,188,306    10,148,871
  Potential common shares pursuant to:
    Stock options and warrants                            -              -              167,135       -
    Convertible preferred stock                           -              -              423,979       -
    Convertible debentures                                -              -              178,437       -
                                                     ------------- -------------- -------------- -------------
  Diluted weighted average common
    Shares outstanding                                 10,087,095     10,209,361     10,957,857    10,148,871
                                                     ============= ============== ============== =============

        The  Company's  net income  (loss) per share for the three and nine months  ended  September  30, 1999 and
2000 is as follows:`

`Three Months Ended             Nine Months Ended
                                                           September 30,                  September 30,
                                                   ------------------------------- ----------------------------
                                                         1999            2000           1999          2000
                                                   --------------- --------------- ------------- --------------
  Net income (loss) from continuing operations       $(2,598,300)     $(2,109,126)   $31,069,117   $(5,699,187)
  Preferred stock dividends                              (86,815)         (92,817)      (264,267)     (274,052)
                                                   --------------- --------------- ------------- --------------
  Income (loss) attributable to common
  stockholders                                       $(2,685,115)     $(2,201,943)   $30,804,850   $(5,973,239)
                                                   =============== =============== ============= ==============

  Basic net income (loss) per common share from
  continuing operations                                   $(0.27)          $(0.22)         $3.02        $(0.59)
                                                   =============== =============== ============= ==============

  Basic weighted average number of shares
  outstanding                                         10,087,905       10,209,361     10,188,306    10,148,871
                                                   =============== =============== ============= ==============

  Diluted net income (loss) per common share from
  continuing operations                                   $(0.27)          $(0.22)         $2.85        $(0.59)
                                                   =============== =============== ============= ==============
  Diluted weighted average number of shares
  outstanding                                         10,087,905       10,209,361     10,957,857    10,148,871
                                                   =============== =============== ============= ==============`

For the three months ended  September 30, 1999 and 2000,  4,420,021 and  4,834,214  shares,  respectively,
and for the nine months ended  September  30, 1999 and 2000,  3,650,470  and  4,834,214  shares,  respectively,  of
outstanding  stock  options,  stock  warrants and  convertible  debt and  preferred  stock were not included in the
diluted weighted average shares outstanding as they were antidilutive.

## 10.COMPREHENSIVE INCOME (LOSS)

A reconciliation of comprehensive income (loss) is as follows:

`Three Months Ended                Nine Months Ended
                                                     September 30,                    September 30,
                                           ---------------------------------- -------------------------------
                                                 1999             2000              1999            2000
                                           ----------------- ---------------- ----------------- -------------
Net income (loss)                              $(2,598,300)     $(2,109,126)       $30,634,117  $(6,411,546)
Unrealized gain (loss) on available-
for-sale investments                                (2,804)           8,333            (56,768)      57,446
                                           ----------------- ---------------- ----------------- -------------
Comprehensive income (loss)                    $(2,601,104)     $(2,100,793)       $30,577,349  $(6,354,100)
                                           ================= ================ ================= =============`

## 11. INTANGIBLE
ASSETS

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

## 12.CHANGE IN
ACCOUNTING METHOD - REVENUE RECOGNITION

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

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

If SAB 101 had been adopted  effective  January 1, 1999, the Company would have reported the following pro
forma results:

`Three Months Ended     Nine Months Ended
                                                  September 30, 1999    September 30, 1999
                                                ----------------------- --------------------
                                                            (Pro forma - Unaudited)
                                                ----------------------- --------------------
        Revenues                                             $2,448,311          $21,456,097
        Income from continuing operations
        before extraordinary items                          $(2,883,317)         $30,784,100
        Net income                                          $(2,883,317)         $30,349,100
        Net income per share - basic                             $(0.34)               $2.91
        Net income per share - diluted                           $(0.34)               $2.75`

## 13.GAIN ON SALE OF SUBSIDIARY

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

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

## (a) Overview

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

On April 27, 1999,  the Company  sold all of the issued and  outstanding  common  stock of Palomar's  Star
Medical  Technologies,  Inc. ("Star") subsidiary to Coherent,  Inc. ("Coherent") for $65 million, paid in cash. The
purchase  price was paid to the  stockholders  of Star in proportion to their  holdings of Star capital  stock.  On
the date of sale,  Palomar owned 82.46% of Star.  Palomar received net proceeds of $49,736,023.  As a result of the
above  transaction,  the Company believes it will be able to fund its operations for the short-term.  However,  for
the years ended December 31, 1998 and 1999,  gross revenues  associated with Star's  LightSheer  diode laser system
comprised 80% and 60%,  respectively,  of the Company's total revenues.  Consequently,  the Company's revenues have
declined  significantly.  The Company  believes the  successful  introduction  and  marketing of new products  will
become  critical to the Company's  long-term  success.  Broad market  acceptance of laser hair removal and specific
acceptance of the Company's new hair removal  laser,  the Palomar  SLP1000(TM)diode laser system for hair removal and
vascular  treatments  ("Palomar  SLP1000") is critical to the Company's success.  During the quarter ended June 30,
2000, the Company began shipment of the Palomar SLP1000.  The Company has traditionally  spent a significant amount
of its resources in developing new technology  and products.  The Company  expects this trend will continue for the
foreseeable future.

## b) Results of Operations

For the three months ended  September 30, 2000,  the  Company's  revenues  increased to $4.0  million,  as
compared to $2.9 million for the three months ended  September  30, 1999.  The increase in the  Company's  revenues
of $1.1 million,  or 38% from the three months ended September 30, 1999, was mainly  attributed to the introduction
of the Palomar SLP1000.

Gross profit for the three months ended  September  30, 2000 was $1.2 million,  30% of revenues,  compared
to $396,000,  14% of revenues,  for the three months  ended  September  30, 1999.  The increase in gross profit and
gross profit percentage was mainly attributable to the introduction of the Palomar SLP1000.

Research and  development  costs  increased to $1.9 million for the three months ended September 30, 2000,
as compared to $1.6 million for the three months ended  September 30, 1999.  Research and  development  expenses as
a percentage  of revenue  totaled 47% for the three months  ended  September  30, 2000 and 56% for the three months
ended September 30, 1999. The continued spending on research and development  reflects the Company's  commitment to
research and development  for devices and delivery  systems for cosmetic and medical  applications  using a variety
of lasers,  while  continuing  dermatology  research  utilizing the  Company's  laser  platforms.  The research and
development  goals in the field of laser hair removal are to design  systems  that (1) permit more rapid  treatment
of large areas,  (2) have high gross margins,  and (3) are  manufactured at a lower cost,  thus addressing  broader
markets.  Further,  the Company is aiming to address  dermatology and cosmetic  procedure  markets other than hair,
including the fields of fat reduction, acne treatment and skin rejuvenation.

Selling  and  marketing  expenses  were  $1.0  million,  or 25% of  revenues  for the three  months  ended
September 30, 2000,  compared to $590,000,  or 20% of revenues for the three months ended  September 30, 1999.  The
increase in selling and marketing expenses is directly attributable to the introduction of the Palomar SLP1000.

General and administrative  expenses decreased to $892,000,  or 22% of revenues for the three months ended
September  30, 2000,  as compared to $1.0  million,  or 36% of revenues for the three  months ended  September  30,
1999.  This decrease in general and  administrative  expenses is attributable  to the Company's  restructuring  and
consolidation of administrative functions at the end of 1999.

Interest  income  decreased  to $310,000  for the three  months  ended  September  30,  2000,  compared to
$470,000 for the three months  ended  September  30,  1999.  This  decrease in interest  income was the result of a
decrease in cash, cash equivalents and available-for-sale investments.

Interest  expense  decreased  to $36,000  for the three  months  ended  September  30,  2000,  compared to
$182,000 for the three months ended  September 30, 1999.  As a result of the sale of Star,  which  generated  $49.7
million in cash, the Company paid  substantially  all of its  outstanding  debt resulting in a decrease of interest
expense.

Other income  (expense),  net increased to approximately  $58,000 for the three months ended September 30,
2000.  This amount compares to ($8,000) for the three months ended September 30, 1999.

For the nine months ended  September 30, 2000,  the Company's  revenues were $9.5 million,  as compared to
$21.9  million for the nine months ended  September  30,  1999.  The  decrease in the  Company's  revenues of $12.4
million,  or 57% from the nine months ended  September 30, 1999, was mainly due to the reduction in sales volume of
$14.5 million  associated  with the LightSheer  diode laser system  manufactured by Star. The decrease is offset by
an increase of $1.4 million in royalties  received by the Company and an increase of $0.7 million in other  product
revenues.

Gross profit for the nine months ended September 30, 2000 was $1.5 million,  16% of revenues,  as compared
to $10.2  million,  or 46% of revenues for the nine months ended  September 30, 1999. The decrease in the Company's
gross  profit of $8.7  million,  or 85% from the nine  months  ended  September  30,  1999,  was  mainly due to the
reduction in sales volume  associated with the LightSheer  diode laser system  manufactured by Star.  Additionally,
gross  margin was  negatively  affected  in the nine months  ended  September  30,  2000 as the  Company  wrote-off
$597,000 of the remaining inventory associated with past generation product lines being phased out.

Research and  development  costs  decreased to $5.9 million for the nine months ended  September 30, 2000,
from  $6.3  million  for the nine  months  ended  September  30,  1999.  Research  and  development  expenses  as a
percentage  of revenue  totaled 62% for the nine months ended  September 30, 2000 and 29% for the nine months ended
September  30, 1999.  The  increase as a percentage  of sales is directly  attributable  to the  reduction in sales
volume  associated  with the  LightSheer  diode laser system  manufactured  by Star while the Company  continued to
spend on research and  development.  The  continued  spending on research and  development  reflects the  Company's
commitment  to research  and  development  for devices and delivery  systems for cosmetic and medical  applications
using a variety of lasers,  while continuing  dermatology  research  utilizing the Company's laser  platforms.  The
research  and  development  goals in the field of laser hair  removal  are to design  systems  that (1) permit more
rapid  treatment  of large areas,  (2) have high gross  margins,  and (3) are  manufactured  at a lower cost,  thus
addressing broader markets.  Further,  the Company is aiming to address  dermatology and cosmetic procedure markets
other than hair, including the fields of fat reduction, acne treatment and skin rejuvenation.

Selling and  marketing  expenses  decreased to $2.2  million,  23% of revenues,  for the nine months ended
September  30, 2000 from $6.3  million,  29% of  revenues,  for the nine  months  ended  September  30,  1999.  The
decrease in selling and marketing expenses as a percentage of revenues is a result of the Company's sale of Star.

General and  administrative  expenses  decreased to $3.0  million,  32% of  revenues,  for the nine months
ended  September 30, 2000, as compared to $4.2 million,  19% of revenues,  for the nine months ended  September 30,
1999.  This decrease in general and  administrative  expenses is  attributable  to the sale of the  Company's  Star
subsidiary and due to the Company's  restructuring  and  consolidation  of  administrative  functions at the end of
1999.

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

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

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



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

Redemption  expense was $6.2 million for the nine months ended  September 30, 1999.  This amount  reflects
a redemption  expense as a result of a settlement  agreement  between  Palomar and certain  European banks that had
held 4.5% Swiss franc denominated  subordinated  convertible debentures originally totaling $7.7 million and due in
2003.  Under the terms of this  agreement,  which  resolved a lawsuit,  Palomar  agreed to rescind  its  conversion
notices issued in November 1997. Through these conversion  notices,  Palomar converted the subordinated  debentures
into 130,576  shares of the  Company's  common  stock.  Since the  conversion  date,  the Company had treated these
shares as issued and  outstanding.  Under the terms of this  compromise,  the Company agreed to pay a total of $6.7
million to the  European  banks,  of which $5.0  million has been paid.  The balance of $1.7 million is due through
2001.  Accordingly,  the Company has recorded a charge to operations of $6.2 million.  This amount  represents  the
total  amount  due to the  European  banks  less the fair  market  value of the  redemption  of the  common  shares
previously considered outstanding by the Company.

Interest  income  increased to $1.0 million for the nine months  ended  September  30, 2000 as compared to
$878,000 for the nine months ended  September 30, 1999.  This amount  represents  interest earned on the balance of
the  funds  received  from the April  27,  1999  sale of Star,  which are  invested  in  high-grade  corporate  and
government notes and bonds and will be used to fund future operations and research and development efforts.

Interest  expense  decreased to $124,000 for the nine months ended  September 30, 2000,  from $546,000 for
the nine months ended  September 30, 1999. As a result of the sale of Star,  which generated $49.7 million in cash,
the Company paid substantially all of its outstanding debt resulting in a decrease of interest expense.

Other  income  (expense),  net  increased to $351,000 for the nine months  ended  September  30, 2000,  as
compared to $271,000 for the nine months ended September 30, 1999.

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

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

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

## (c) Liquidity and Capital Resources

The Company's  operations  are carried out at the subsidiary  level and consist  primarily of research and
development.  To date, the Company's  operating  subsidiaries  have required cash advances from the Company to fund
their  operations.  As of  September  30,  2000,  the  Company  had $17.2  million in cash,  cash  equivalents  and
available-for-sale  investments.  With the proceeds  from the Star sale,  the Company  believes  that its financial
position will meet its ongoing cash flow  requirements  and fund expected  operating  losses of its subsidiaries in
the near term.  The successful  introduction  and marketing of new products  currently  under  development  will be
critical to future liquidity.

As of September 30, 2000,  the Company's  accounts  receivable,  net totaled $1.6 million,  as compared to
$1.9 million as of December  31, 1999.  The  Company's  allowance  for  doubtful  accounts  totaled  $224,000 as of
September 30, 2000, compared to $207,000 as of December 31, 1999.

As of September 30, 2000, the Company's  accounts payable  decreased to $599,000,  as compared to $659,000
as of December 31, 1999.

The Company  anticipates  that capital  expenditures  for the  remainder of 2000 will total  approximately
$100,000,  consisting  primarily  of  machinery,  equipment,  computers  and  peripherals.  The Company  expects to
finance these expenditures with cash on hand and equipment leasing lines, if available.

## (d) Material Uncertainties

## Year 2000 Impact

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

## RISK FACTORS

In addition to the other  information  in this  Quarterly  Report on Form 10-Q,  the following  cautionary
statements  should be considered  carefully in evaluating  the Company and its  business.  Statements  contained in
this Form 10-Q that are not historical facts (including,  without limitation,  statements concerning products under
development,  the timing of new product introductions,  financing of future operations,  and the Company's research
partnership  with MGH) and other  information  provided  by the  Company  and its  employees  from time to time may
contain certain  forward-looking  information,  as defined by (i) the Private  Securities  Litigation Reform Act of
1995 (the "Reform  Act") and (ii)  releases by the SEC. The risk factors  identified  below,  among other  factors,
could cause actual results to differ materially from those suggested in such  forward-looking  statements.  Readers
are  cautioned not to place undue  reliance on these  forward-looking  statements,  which speak only as of the date
hereof.  The  Company  undertakes  no  obligation  to  release  publicly  the  results  of any  revisions  to these
forward-looking  statements  that may be made to  reflect  events  or  circumstances  after  the date  hereof or to
reflect the occurrence of  unanticipated  events.  The cautionary  statements  below are being made pursuant to the
provisions  of the Reform Act and with the  intention of obtaining  the benefits of safe harbor  provisions  of the
Reform Act.

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

We face rapidly changing  technology and continuing  improvements in cosmetic laser  technology.  In order
to be  successful,  we must  continue to make  significant  investments  in research  and  development  in order to
develop in a timely and cost-effective  manner new products that meet changing market demands,  to enhance existing
products,  and to  achieve  market  acceptance  for  such  products.  We have in the  past  experienced  delays  in
developing  and marketing  new products and  enhancing  existing  products.  Furthermore,  some of our new products
under  development  are based on  unproven  technology  and/or  technology  with which the  Company has no previous
experience.  As a result of the sale of Star to Coherent,  our future revenue will be almost entirely  dependent on
sales of newly  introduced  products.  Sales to date for the Company's  current  products have been minimal and the
Company's  future  products may not achieve market  acceptance or generate  sufficient  margins.  In addition,  the
market for this type of hair  removal  laser may already be  saturated.  At present,  broad  market  acceptance  of
laser hair removal is critical to our  success.  We intend to diversify  our product  line by  developing  cosmetic
laser products other than hair removal  lasers,  but there can be no assurance that we will be able to successfully
implement such strategy in a timely fashion or at all.

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

The laser hair removal  industry is highly  competitive and companies  frequently  introduce new products.
We compete in the  development,  manufacture,  marketing and servicing of hair removal  lasers with numerous  other
companies,  some of which have  substantially  greater  financial,  marketing and other  resources than we do. As a
result,  some of our competitors are able to sell hair removal lasers at prices  significantly  below the prices at
which we sell our hair removal lasers. In addition,  as a result of the Star sale,  Coherent,  our former exclusive
distributor  and one of the largest and best financed  laser  companies,  is now our competitor and we have to find
new ways to distribute our products.  We currently  have no  significant  sales force in place for our new products
under  development.  Our laser products also face  competition  from  alternative  medical products and procedures,
such as  electrolysis  and  waxing,  among  others.  We may not be able to  differentiate  our  products  from  the
products of our  competitors,  and customers may not consider our products to be superior to competing  products or
medical  procedures,  especially  if  competitive  products  and  procedures  are  offered  at  lower  prices.  Our
competitors may develop products or new technologies that make our products obsolete or less competitive.

## Our quarterly operating results have decreased as a result of the Star sale, and that may hurt the price
of our common stock.

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

## We could be delisted from NASDAQ.

For  continued  listing on The NASDAQ  SmallCap  Market,  a company  must  maintain a minimum bid price of
$1.00 per share.  In March 1999,  NASDAQ held a hearing  regarding  our  continued  listing on The NASDAQ  SmallCap
Market in light of the fact that our common  stock had traded  below the $1.00  minimum bid price  requirement  for
longer than 30 trading days. As a result of our reverse stock split,  we regained  compliance  with the minimum bid
price  requirement  before that date,  and are now in compliance  with all of NASDAQ's  requirements  for continued
listing on The NASDAQ SmallCap  Market.  However,  there can be no assurance that we will remain in compliance with
NASDAQ's  criteria  for  continued  listing or that we will remain  listed on NASDAQ.  The  delisting of our common
stock  would  likely  reduce the  liquidity  of our common  stock and our ability to raise  capital.  If our common
stock is delisted from The NASDAQ  SmallCap  Market,  it will likely be quoted on the "pink  sheets"  maintained by
the  National  Quotation  Bureau,  Inc. or NASDAQ's  OTC  Bulletin  Board.  These  listings  can make  trading more
difficult for stockholders.

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

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

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

All of our  current  products  are laser  medical  devices.  Laser  medical  devices  are  subject  to FDA
regulations  regulating  clinical testing,  manufacturing,  labeling,  sale,  distribution and promotion of medical
devices.  Before a new laser medical device can be introduced  into the market,  we must obtain  clearance from the
FDA.  Compliance with the FDA clearance process is expensive and  time-consuming,  and we may not be able to obtain
such clearances in a timely fashion or at all.

Our  products  are subject to similar  regulations  in our major  international  markets.  Complying  with
these  regulations  is necessary for our strategy of expanding the markets for and sales of our products into these
countries.  These approvals may necessitate  clinical  testing,  limitations on the number of sales and controls of
end user purchase price,  among other things.  In certain  instances,  these constraints can delay planned shipment
schedules as design and  engineering  modifications  are made in response to regulatory  concerns and requests.  In
addition, there can be no assurance that we will obtain such approvals in timely fashion or at all.

## We are dependent on third-party researchers.

We are substantially  dependent upon third-party  researchers over whom we do not have absolute control to
satisfactorily  conduct  and  complete  research  on our  behalf  and to grant us  favorable  licensing  terms  for
products,  which they may develop.  At present,  our  principal  research  partner is the Wellman  Laboratories  of
Photomedicine  at  Massachusetts  General  Hospital.  We provide  research  funding,  laser  technology  and optics
know-how in return for licensing  rights with respect to specific  medical  applications  and patents.  Our success
will be highly  dependent upon the results of this research.  We cannot be sure that such research  agreements will
provide us with  marketable  products in the future or that any of the products  developed  under these  agreements
will be profitable for us.

## Our common stock could be further diluted as the result of outstanding convertible securities, warrants
and options.

In the past, we have issued convertible securities,  such as debentures,  preferred stock and warrants, in
order to raise  money.  We have also issued  options and  warrants  as  compensation  for  services  and  incentive
compensation  for our employees and  directors.  We have a  substantial  number of shares of common stock  reserved
for issuance upon the  conversion  and exercise of these  securities.  These  outstanding  convertible  securities,
options and warrants could affect the rights of our  stockholders,  and could adversely  affect the market price of
our common stock.

## Our proprietary technology has only limited protections.

Our business  could be  materially  and adversely  affected if we are not able to  adequately  protect our
intellectual  property  rights.  We rely on a combination of patent,  trademark and trade secret laws,  license and
confidentiality  agreements to protect our proprietary  rights. We generally enter into  non-disclosure  agreements
with our  employees  and  customers  and restrict  access to, and  distribution  of, our  proprietary  information.
Nevertheless,  we may be unable to deter misappropriation of our proprietary  information,  detect unauthorized use
and take appropriate  steps to enforce our intellectual  property  rights.  Our competitors also may  independently
develop  technologies  that are  substantially  equivalent or superior to our technology.  Although we believe that
our services and products do not infringe the  intellectual  property  rights of others,  we cannot prevent someone
else from  asserting  a claim  against  us in the future for  violating  their  intellectual  property  rights.  In
addition,  costly and  time-consuming  lawsuits may be necessary to enforce patents issued or licensed  exclusively
to us, to protect our trade  secrets  and/or  know-how or to determine  the  enforceability,  scope and validity of
others' intellectual property rights.

The  medical  laser  industry  is  characterized  by  frequent   litigation   regarding  patent  and  other
intellectual  property  rights.  Because  patent  applications  are maintained in secrecy for a period of time , we
can  conduct  only  limited  searches  to  determine  whether  our  technology  infringes  any  patents  or  patent
applications.  Any  claims  for  patent  infringement  could be  time-consuming,  result in costly  litigation  and
diversion of technical and  management  personnel,  cause  shipment  delays,  require us to develop  non-infringing
technology or to enter into royalty or licensing  agreements.  Although patent and intellectual  property  disputes
in the laser industry have often been settled  through  licensing or similar  arrangements,  costs  associated with
such  arrangements  may be  substantial  and often  require  the payment of ongoing  royalties,  which could have a
negative  impact on gross margins.  There can be no assurance  that necessary  licenses would be available to us on
satisfactory  terms,  or that we could  redesign our products or processes  to avoid  infringement,  if  necessary.
Accordingly,  an adverse  determination in a judicial or  administrative  proceeding or failure to obtain necessary
licenses  could  prevent  us from  manufacturing  and  selling  some of our  products.  This  could have a material
adverse effect on our business, results of operations and financial condition.

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

Our  Second  Restated  Certificate  of  Incorporation  and  our  By-laws  contain  provisions  that  could
discourage  takeover  attempts or make more difficult the  acquisition of a substantial  block of our common stock.
Our  By-laws  require a  stockholder  to  provide  to the  Secretary  of the  Company  advance  notice of  director
nominations and business to be brought by such  stockholder  before any annual or special meeting of  stockholders,
as well as certain  information  regarding such  nomination  and/or  business,  the stockholder and others known to
support such proposal and any material  interest they may have in the proposed  business.  They also provide that a
special  meeting  of  stockholders  may be  called  only by the  affirmative  vote of a  majority  of the  Board of
Directors.  These provisions  could delay any stockholder  actions that are favored by the holders of a majority of
the outstanding  stock of the Company until the next  stockholders'  meeting.  In addition,  the Board of Directors
is  authorized  to issue shares of common stock and  preferred  stock that,  if issued,  could dilute and adversely
affect various  rights of the holders of common stock and, in addition,  could be used to discourage an unsolicited
attempt to acquire control of the Company.

The  Company is also  subject  to the  anti-takeover  provisions  of Section  203 of the  Delaware  General
Corporation  Law,  which  prohibits  the Company  from  engaging in a "business  combination"  with an  "interested
stockholder"  for a period  of three  years  after  the date of the  transaction  in which the  person  becomes  an
interested  stockholder,  unless the business  combination is approved in a prescribed  manner.  The application of
Section 203 may limit the ability of stockholders  to approve a transaction  that they may deem to be in their best
interests.  These  provisions  of our Second  Restated  Certificate  of  Incorporation,  By-laws  and the  Delaware
General  Corporation  Law could deter certain  takeovers or tender offers or could delay or prevent certain changes
in control or management of the Company,  including  transactions in which  stockholders  might otherwise receive a
premium for their shares over the then current market prices.

## As with any new products, there is substantial risk that the marketplace may not accept or be
receptive to the potential benefits of our products.

Market  acceptance  of our current and  proposed  products  will  depend,  in large part,  upon our or any
marketing  partner's  ability to demonstrate to the  marketplace the advantages of our products over other types of
products.  There can be no assurance  that the  marketplace  will accept  applications  or uses for our current and
proposed products or that any of our current or proposed products will be able to compete effectively.

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

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

## We face risks associated with pending litigation.

We are involved in disputes with third  parties.  Such  disputes  have  resulted in  litigation  with such
parties.  We have  incurred,  and likely will continue to incur,  legal  expenses in connection  with such matters.
There can be no assurance that such litigation  will result in favorable  outcomes for us. Although we have reached
a settlement  agreement with the plaintiffs in the Varljen litigation,  the court must approve the settlement,  and
there can be no assurance that it will be approved.  An adverse  result in that suit could have a material  adverse
effect on our business, financial condition and results of operations.

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

As a small company with less than 100 employees,  our success  depends on the services of key employees in
executive  and  research and  development  positions.  The loss of the  services of one or more of these  employees
could have a material adverse effect on our business.

## We face a risk of financial exposure to product liability claims in the event that the use of our
products results in personal injury.

Our products are and will continue to be designed with numerous safety  features,  but it is possible that
patients  could  be  adversely  affected  by use of one of our  products.  Further,  in the  event  that any of our
products  prove to be  defective,  we may be required to recall and redesign  such  products.  Although we have not
experienced any material  losses due to product  liability  claims to date,  there can be no assurance that we will
not  experience  such losses in the future.  We maintain  general  liability  insurance in the amount of $1 million
per  occurrence  and $2 million in the aggregate  and maintain  umbrella  coverage in the  aggregate  amount of $25
million;  however,  there can be no assurance that such coverage will continue to be available on terms  acceptable
to us or that such coverage will be adequate for liabilities  actually  incurred.  In the event we are found liable
for  damages  in excess of the  limits of our  insurance  coverage  or if any claim or  product  recall  results in
significant  adverse  publicity  against us, our business,  financial  condition and results of operations could be
materially and adversely  affected.  In addition,  although our products have been and will continue to be designed
to operate in a safe manner,  and although we attempt to educate  medical  personnel with respect to the proper use
of our products,  misuse of our products by medical  personnel  over whom we cannot exert control may result in the
filing of product liability claims or in significant adverse publicity against us.

## Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.

## PART II 
OTHER INFORMATION

## Item 1.Legal
Proceedings.

On March 11,  1999,  the United  States  District  Court for the  Southern  District  of New York  granted
plaintiffs  leave to amend their complaint in the action styled Varljen v. H.J.  Meyers,  Inc., et. al. to join the
Company,  its former chief  executive  officer and current  chief  operating  officer as  defendants.  On March 17,
1999,  the Second  Amended  Class  Action  Complaint  in Varljen was served upon the Company and its current  chief
operating  officer,  alleging that the Company and the former and current officer  violated the federal  securities
laws in various public  disclosures  that the Company made directly and indirectly  during the period from February
1, 1996 to March 26, 1997.  Palomar and the Varljen  plaintiffs have reached an agreement pursuant to
which Palomar and its  insurance  carrier  would pay  plaintiffs  $5 million in settlement of all their claims.  Of
this amount,  Palomar  would  contribute  up to $1 million in stock and $1.375  million in cash,  and its insurance
carrier the remaining  $2.625  million in cash.  This  settlement  agreement  was approved by the court on November 6, 2000.
A final Judgemnet of Dismissal with Prejudice was entered by the court on November 6, 2000.

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

## Item 2.Changes in Securities.

Not applicable.

## Item 3.Defaults
upon Senior Securities.

Not applicable.

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

Not applicable.

## Item 5.Other
Information.

Not applicable.

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

`(a)             Exhibits

       ^^^3(i).1  Certificate of Designation, as filed with the Delaware Secretary of State on April 21, 1999.
         ^3(i).2  Second Restated Certificate of Incorporation, as filed with the Delaware Secretary of State on
                  January 8, 1999.
          3(ii) Bylaws, as amended.
            ^4.1  Common Stock Certificate.
          ^^4.2.  Rights Agreement Between Palomar Medical Technologies, Inc. and American Stock Transfer &
                  Trust Company, dated as of April 20, 1999
           ##4.3  Form of 4.5% Convertible Debenture (denominated in Swiss Francs) due July 3, 2003.
         ####4.4  First Allonge and Amendment to 4.5% Subordinated Convertible Debenture
           ##4.5  Form of 6% Convertible Debenture due March 13, 2002.
            4.6  Second Amended 1991 Stock Option Plan.
            4.7  Second Amended 1993 Stock Option Plan.
            4.8  Second Amended 1995 Stock Option Plan.
            4.9  Second Amended 1996 Stock Option Plan.
           4.10  Third Amended 1996 Employee Stock Purchase Plan.
           *4.11  Form of Stock Option Grant under the 1991, 1993 and 1995 Amended Stock Option Plans.
          ##4.12  Form of Stock Option Agreement under the 1996 Amended Stock Option Plan.
           #4.13  Form of Company Warrant to Purchase Common Stock
          10.1   Amendment No. 1 to Key Employment Agreement between the Company and Joseph P. Caruso
                  dated June 8, 2000
              27  Financial Data Schedule for the Period Ended September 30, 2000
               ^  Previously filed as an exhibit to Form 8-K, filed on April 21, 1999 and incorporated herein by
                  reference.
              ^^  Previously filed as an exhibit to Form 10-K for the period ended December 31, 1998, filed on March
                  30, 1999 and incorporated herein by reference.
             ^^^  Previously filed as an exhibit to Form 10-Q for the period ended March 31, 1999, filed on May 17,
                  1999 and incorporated herein by reference.
            ^^^^  Previously filed as an exhibit to Form 8-K, filed on December 16, 1999 and incorporated herein by
                  reference.
               *  Previously filed as an exhibit to Amendment No. 4 to Form S-1 Registration Statement No. 33-47479
                  filed on October 5, 1992, and incorporated herein by reference.
              **  Previously filed as an exhibit to the Company's Definitive Proxy Statement for the period ended
                  December 31, 1998 filed on March 12, 1999, and incorporated herein by reference.
               #  Previously filed as an exhibit to the Company's Annual Report on Form 10-KSB for the year ended
                  December 31, 1995, and incorporated herein by reference.
              ##  Previously filed as an exhibit to the Company's Annual Report on Form 10-KSB for the year ended
                  December 31, 1996, and incorporated herein by reference.
             ###  Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended
                  December 31, 1998, and incorporated herein by reference.
            ####  Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended
                  December 31, 1999, and incorporated herein by reference.
               -  Previously filed as an exhibit to Form S-8 Registration Statement No. 33-97710 filed on October 4,
                  1995, and incorporated herein by reference.
                 Previously filed as an exhibit Form 10-Q for the period ended June 30, 1999, and incorporated
                  herein by reference.
                Previously filed as an exhibit Form 10-Q for the period ended June 30, 2000, and incorporated
                  herein by reference.


(b)             Reports on Form 8-K
                  None`

## SIGNATURES

Pursuant to the  requirements  of the Securities Act of 1934, the Registrant  certifies that it has caused
this Report to be signed on its behalf by the  undersigned,  thereunto duly  authorized,  in the Town of Burlington
in the Commonwealth of Massachusetts on November 13, 2000.

`PALOMAR MEDICAL TECHNOLOGIES, INC.
                                          (Registrant)







Date:  November 13, 2000       By:  /s/ Louis P.Valente     
                                    Louis P. Valente
                                    Chief Executive Officer
                                    (Principal Executive Officer)

Date:  November 13, 2000       By:  /s/ Joseph P.Caruso     
                                     Joseph P. Caruso
                                     President and Chief Operating Officer
                                     (Principal Financial Officer and
                                     Principal Accounting Officer)`