|FORM 10-Q


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


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


For quarterly period ended September 30, 2001

OR


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


For the transition
period from ________ to ________


Commission file number:
0-22340


PALOMAR MEDICAL
TECHNOLOGIES, INC.(Exact name of issuer as specified
in its charter)
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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


(781) 993-2300
(Issuers telephone number, including area code)


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



As of October 31, 2001, 10,501,362 shares of common stock, $.01 par value per share, were outstanding.

  
Transitional Small Business Disclosure Format (check one): Yes___ No_X_
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|PALOMAR
MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES


INDEX
|-----------------------------------------------------------

|PART I - FINANCIAL INFORMATION
|------------------------------
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|PART II - OTHER INFORMATION   
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|SIGNATURES                    

|-i-
|---

|PALOMAR
MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIESCONSOLIDATED
CONDENSED BALANCE SHEETS
|----------------------------------------------------------------------------------------

|                                                                                  | December 31,2000 | September 30,2001
|--------------------------------------------------------------------------------- | ---------------- | -----------------
|
|ASSETS                                                                            |                  |                  
|                                                                                  |                 
|Current Assets:                                                                   |                 
|Cash and cash equivalents                                                         |                  | $     9,535,694  
|Available-for-sale investments, at market value                                   |                  | 5,868,213        
|Accounts receivable, net                                                          |                  | 1,613,150        
|Inventories                                                                       |                  | 2,411,526        
|Other current assets                                                              |                  | 569,898          
|                                                                                  |                  |                  
|Total current assets                                                              |                  | 19,998,481       
|                                                                                  |                  |                  
|                                                                                  |                 
|Property and Equipment, Net                                                       |                  | 879,156          
|                                                                                  |                 
|Other Assets                                                                      |                  | 122,024          
|                                                                                  |                  |                  
|                                                                                  |                 
|                                                                                  |                  | $   20,999,661   
|                                                                                  |                  |                  
|                                                                                 
|LIABILITIES AND STOCKHOLDERS EQUITY                                              |                 
|                                                                                  |                 
|Current Liabilities:                                                              |                 
|Current portion of long-term debt                                                 |                  | $        951,842 
|Note payable to related party                                                     |                  |                 
|Accounts payable                                                                  |                  | 2,139,150        
|Accrued liabilities                                                               |                  | 5,934,232        
|Accrued income taxes                                                              |                  | 1,822,146        
|Deferred revenue                                                                  |                  | 286,907          
|                                                                                  |                  |                  
|Total current liabilities                                                         |                  | 11,134,277       
|                                                                                  |                  |                  
|                                                                                  |                 
|Long-Term Debt, Net of Current Portion                                            |                  | 500,000          
|                                                                                  |                  |                  
|                                                                                  |                 
|Stockholders Equity:                                                             |                 
|Preferred stock, $.01 par value-                                                  |                 
|Authorized - 1,500,000 shares                                                     |                 
|Issued and outstanding -                                                          |                 
|6,000 shares at December 31, 2000 and September 30, 2001                          |                  | 60               
|Common stock, $.01 par value-                                                     |                 
|Authorized - 45,000,000 shares                                                    |                 
|Issued - 11,074,393 shares at December 31, 2000 and September 30,            2001 |                  | 110,744          
|Additional paid-in capital                                                        |                  | 163,561,833      
|Accumulated deficit                                                               |                  | (151,505,342     
|Unrealized gain (loss) on available-for-sale investments                          |                  | (2,836           
|Less: Treasury stock - 763,835 and 588,496 shares at cost                         |                 
|at December 31, 2000 and September 30, 2001, respectively                         |                  | (2,799,075       
|                                                                                  |                  |                  
|Total stockholders equity                                                        |                  | 9,365,384        
|                                                                                  |                  |                  
|                                                                                  |                 
|                                                                                  |                  | $   20,999,661   
|                                                                                  |                  |                  

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


-1-
|---------------------------------------------------------------------------------------------

|PALOMAR
MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIESCONSOLIDATED
STATEMENTS OF OPERATIONS(Unaudited)
|---------------------------------------------------------------------------------------------------

|                                                                           | Three Months EndedSeptember 30, | Nine Months EndedSeptember 30,
|-------------------------------------------------------------------------- | ------------------------------- | ------------------------------
|
|Product revenues                                                           |                                 | $   3,056,139                 
|Royalty revenues                                                           |                                 | 954,378                       
|                                                                           |                                 |                               
|Total Revenues                                                             |                                 | 4,010,517                     
|                                                                           |                                
|Cost of product revenues                                                   |                                 | 2,439,228                     
|Cost of royalty revenues                                                   |                                 | 381,751                       
|                                                                           |                                 |                               
|Total Cost of Revenues                                                     |                                 | 2,820,979                     
|                                                                           |                                 |                               
|                                                                           |                                
|Gross Margin                                                               |                                 | 1,189,538                     
|                                                                           |                                 |                               
|                                                                           |                                
|Operating Expenses (Income)                                                |                                
|Research and development                                                   |                                 | 1,909,164                     
|Sales and marketing                                                        |                                 | 1,019,287                     
|General and administrative                                                 |                                 | 892,499                       
|Goodwill and asset write-off (Note 11)                                     |                                 |                              
|Gain from sale of subsidiary (Note 13)                                     |                                 |                              
|                                                                           |                                 |                               
|Total operating expenses                                                   |                                 | 3,820,950                     
|                                                                           |                                 |                               
|                                                                           |                                
|Loss from operations                                                       |                                 | (2,631,412                    
|                                                                           |                                
|Interest Income                                                            |                                 | 309,854                       
|Interest Expense                                                           |                                 | (36,429                       
|Other Income, net                                                          |                                 | 57,805                        
|                                                                           |                                 |                               
|                                                                           |                                
|Loss from Operations Before Benefit for            Income Taxes            |                                 | (2,300,182                    
|                                                                           |                                
|Benefit for Income Taxes                                                   |                                 | 191,056                       
|                                                                           |                                 |                               
|                                                                           |                                
|Loss from Operations Before Cumulative                                     |                                
|Effect in Accounting Method                                                |                                 | (2,109,126                    
|Cumulative Effect of Change in                 Accounting Method (Note 12) |                                 |                              
|                                                                           |                                 |                               
|                                                                           |                                
|Net Loss                                                                   |                                 | $    (2,109,126               
|                                                                           |                                 |                               
|                                                                           |                                
|Basic and Diluted Net Loss per Share:                                      |                                
|                                                                           |                                
|Loss from Operations Before Cumulative                                     |                                
|Effect in Accounting Method                                                |                                 | $         (0.22               
|Cumulative Effect of Change in                 Accounting Method (Note 12) |                                 |                              
|                                                                           |                                 |                               
|                                                                           |                                
|Total Basic and Diluted Net Loss Per                 Share                 |                                 | $         (0.22               
|                                                                           |                                 |                               
|                                                                           |                                
|Basic and Diluted Weighted Average Number of            Shares Outstanding |                                 | 10,209,361                    
|                                                                           |                                 |                               

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


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

|PALOMAR
MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENT
OF STOCKHOLDERS EQUITY


(Unaudited)
|------------------------------------------------------------------------------------------------------------------

|                                                                      | Preferred Stock | Common Stock | Treasury Stock |     |  | Unrealized Gain (Loss)on | 
|--------------------------------------------------------------------- | --------------- | ------------ | -------------- | --- |  | ------------------------ | 
|
|Balance, December 31, 2000                                            |                 | 6,000        |                | $60 |  | 11,074,393               | 
|                                                                      |                
|Costs incurred related to issuance of common stock                    |                 |             |                |    |  |                         | 
|Issuance of stock for Employee Stock        Purchase Plan             |                 |             |                |    |  |                         | 
|Issuance of stock for 2000 employer        401K matching contribution |                 |             |                |    |  |                         | 
|Unrealized gain on available-for-sale investments                     |                 |             |                |    |  |                         | 
|Preferred stock dividends and interest                                |                 |             |                |    |  |                         | 
|Net  loss                                                             |                 |             |                |    |  |                         | 
|                                                                      |                
|Balance, September 30, 2001                                           |                 | 6,000        |                | $60 |  | 11,074,393               | 
|                                                                      |                

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

|-3-
|---

|PALOMAR
MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES



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

|                                                              | Nine Months Ended September 30, |               
|------------------------------------------------------------- | ------------------------------- | --------------
|
|Cash Flows from Operating Activities:                         |                                
|Net loss                                                      |                                 | $(6,411,546   
|Adjustments to reconcile net loss to net cash used            |                                
|in operating activities-                                      |                                
|Depreciation and amortization                                 |                                 | 405,922       
|Goodwill and asset write-off                                  |                                 | 745,804       
|Inventory write-off                                           |                                 | 597,000       
|Fair value of warrants issued for investment banking services |                                 | 106,000       
|Changes in assets and liabilities                             |                                
|Accounts receivable                                           |                                 | 290,661       
|Inventories                                                   |                                 | 121,530       
|Receivable from sale of subsidiary                            |                                 | 3,330,976     
|Income tax refund receivable                                  |                                 | (1,619,935    
|Other current assets                                          |                                 | 121,839       
|Accounts payable                                              |                                 | (60,567       
|Accrued liabilities                                           |                                 | (454,147      
|Accrued income taxes                                          |                                 | (647,398      
|Deferred gain from sale of subsidiary                         |                                 | (3,139,556    
|Deferred revenue                                              |                                 | (550,694      
|                                                              |                                 |               
|Net cash used in operating activities                         |                                 | (7,164,111    
|                                                              |                                 |               
|                                                              |                                
|Cash Flows from Investing Activities:                         |                                
|Purchases of property and equipment                           |                                 | (428,785      
|Purchases of available-for-sale investments                   |                                 | (8,871,049    
|Proceeds from sale of available-for-sale investments          |                                 | 20,573,939    
|Decrease in other assets                                      |                                 | 40,443        
|                                                              |                                 |               
|Net cash provided by investing activities                     |                                 | 11,314,548    
|                                                              |                                 |               
|                                                              |                                
|Cash Flows from Financing Activities:                         |                                
|Proceeds from the exercise of warrants, stock options         |                                
|and Employee Stock Purchase Plan                              |                                 | 219,993       
|Costs incurred related to issuance of common stock            |                                 | (222,050      
|Proceeds from the issuance of notes payable to related party  |                                 |              
|Payment on Swiss Franc convertible debentures                 |                                 | (504,334      
|                                                              |                                 |               
|Net cash used in financing activities                         |                                 | (506,391      
|                                                              |                                 |               
|Net increase (decrease) in cash and cash equivalents          |                                 | 3,644,046     
|Cash and cash equivalents, beginning of the period            |                                 | 2,712,466     
|                                                              |                                 |               
|Cash and cash equivalents, end of the period                  |                                 | $   6,356,512 
|                                                              |                                 |               
|Supplemental Disclosure of Cash Flow Information:             |                                
|Cash paid for interest                                        |                                 | $      151,271
|                                                              |                                 |               
|Issuance of stock for 1999 and 2000 employer 401 (k)          |                                
|matching contribution                                         |                                 | $      118,564
|                                                              |                                 |               

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


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

|
|

|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, 2000.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|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,  all of which have
maturities within one year, 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 gains (losses) of  available-for-sale  investments
are as follows:
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                             | December 31,2000 | September 30,2001
|---------------------------- | ---------------- | -----------------
|                             |                  |                  
|Market Value                 |                  | $5,868,213       
|                             |                  |                  
|Cost Basis                   |                  | $5,871,049       
|                             |                  |                  
|Gross Unrealized Gain (Loss) |                  | $(2,836          
|                             |                  |                  

|Available-for-sale  investments  in the  accompanying  balance  sheet  at  September  30,  2001  include  debt  securities  of
$1,945,450.  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 $9,442 on such debt securities were recorded in stockholders
equity during the nine months ended September 30, 2001.
-5-
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|PALOMAR
MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES



NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
|-------------------------------------------------------------------------------------------------

|4. |  | INVENTORIES
|-- |  | -----------

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

| |  | December 31,2000 | September 30,2001
| |  | ---------------- | -----------------
| |  |                  |                  
| |  | Raw materials    |                  
| |  | Work-in-process  |                  
| |  | Finished goods   |                  
| |  |                  |                  
| |  |                  |                  
| |  |                  |                  

|5. |  | PROPERTY
AND EQUIPMENT
|-- |  | ----------------------

| |  | December 31,2000               | September 30,2001
| |  | ------------------------------ | -----------------
| |  |                                |                  
| |  | Machinery and equipment        |                  
| |  | Furniture and fixtures         |                  
| |  | Leasehold improvements         |                  
| |  |                                |                  
| |  |                                |                  
| |  | Less: Accumulated depreciation |                  
| |  | and amortization               |                  
| |  |                                |                  
| |  |                                |                  
| |  |                                |                  

|6. |  | NOTES
PAYABLE
|-- |  | -------------

|Notes
payable consist of the following:
|---------------------------------------

|                                               | December 31,2000 | September 30,2001
|---------------------------------------------- | ---------------- | -----------------
|                                               |                  |                  
|Dollar denominated convertible debentures      |                  | $    500,000     
|Note payable to related party                  |                  |                 
|Swiss Franc denominated convertible debentures |                  | 951,842          
|                                               |                  |                  
|                                               |                  | 1,451,842        
|Less - current maturities                      |                  | (951,842         
|                                               |                  |                  
|                                               |                  | $    500,000     
|                                               |                  |                  
|                                              

|The Company signed a promissory note with a Director of the Company on September 28, 2001 for $1,000,000.  This note bears an
interest rate of 5.5% per annum and is due upon demand.


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

|PALOMAR
MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES



NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
|-------------------------------------------------------------------------------------------------

|7. |  | SEGMENT
AND GEOGRAPHIC INFORMATION
|-- |  | ----------------------------------

|Product  revenue from  international  sources were $1.5 million and $1.6 million for the three months ended September 30, 2000
and 2001,  respectively,  and $2.6 million and $4.0 million for the nine months ended  September 30, 2000 and 2001,  respectively.  The
Companys revenue from international sources was primarily generated from customers located in Japan, Canada and Australia.


The following table  represents the percentage of product  revenue by geographic  region from customers for the three and nine
months ended September 30, 2000 and 2001:
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                    | Three Months EndedSeptember 30, |        | Six Months EndedSeptember 30,
| | ------------------ | ------------------------------- | ------ | -----------------------------
| |                    |                                 |        |                              
|
| |                    |                                 |        |                              
| | United States      | 51.5%                           | 35.9%  |                              
| | Japan              | 34.5%                           | 24.9%  |                              
| | Canada/Australia   | 4.7%                            | 28.5%  |                              
| | Asia/Pacific       | 5.5%                            | 6.5%   |                              
| | Europe/Middle East | 1.7%                            | 4.1%   |                              
| | Latin America      | 2.1%                            | 0.1%   |                              
| |                    |                                 |        |                              
| |                    |                                 |        |                              
| | Total              | 100.0%                          | 100.0% |                              
| |                    |                                 |        |                              
|

|8. |  | STOCKHOLDERS EQUITY
|-- |  | --------------------
|  

|(a) |  | Options
to Purchase Common Stock
|--- |  | --------------------------------

|During the nine months ended  September 30, 2001, the Company granted  options to purchase  1,993,600  shares of the Companys
common stock at exercise  prices  ranging from $1.00 to $2.68 per share.  During the nine months ended  September 30, 2001,  options to
purchase 133,005 shares of the Companys common stock expired and no options were exercised.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) |  | Warrants
to Purchase Common Stock
|--- |  | ---------------------------------

|During the nine months  ended  September  30,  2001,  no warrants  were  granted or  exercised.  During the nine months  ended
September 30, 2001, warrants to purchase 515,728 shares of the Companys common stock expired.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(c) |  | Preferred Stock Dividends and Interest
|--- |  | --------------------------------------

|The Company has reclassified undeclared, but accrued preferred stock dividends and related interest to
additional paid in capital for all periods presented.
-7-
|----------------------------------------------------------------------------------------------------------------------------------------------------------------

|PALOMAR
MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES



NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
|-------------------------------------------------------------------------------------------------

|9. |  | NET
LOSS PER COMMON SHARE
|-- |  | -------------------------

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


The Companys net loss per share for the three and nine months ended September 30, 2000 and 2001 is as follows:
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                | Three Months EndedSeptember 30, | Six Months EndedSeptember 30,
|--------------------------------------------------------------- | ------------------------------- | -----------------------------
|
|                                                                |                                 |                              
|Net loss                                                        |                                 | $    (2,109,126              
|Preferred stock dividends and interest                          |                                 | (92,817                      
|                                                                |                                 |                              
|Loss attributable to common stockholders                        |                                 | $    (2,201,943              
|                                                                |                                 |                              
|Basic and diluted net loss per common share                     |                                 | $             (0.22          
|                                                                |                                 |                              
|Basic and diluted weighted average number of shares outstanding |                                 | 10,209,361                   
|                                                                |                                 |                              

|For the  three  and nine  months  ended  September  30,  2000 and 2001,  4,834,214  and  6,068,526  shares,  respectively,  of
outstanding  stock options,  stock warrants and  convertible  debt and preferred  stock were not included in diluted  weighted  average
shares outstanding as they were antidilutive.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10. |  | COMPREHENSIVE
LOSS
|--- |  | ------------------

|A reconciliation of comprehensive loss is as follows:
|-----------------------------------------------------

|                               | Three Months EndedSeptember 30, |                 | Six Months EndedSeptember 30,
|------------------------------ | ------------------------------- | --------------- | -----------------------------
|
|                               |                                 |                 |                              
|Net loss                       |                                 | $    (2,109,126 | )                            
|Unrealized gain (loss) on      |                                
|available-for-sale investments |                                 | 8,333           |                              
|                               |                                 |                 |                              
|Comprehensive loss             |                                 | $    (2,100,793 | )                            
|                               |                                 |                 |                              

|11. |  | INTANGIBLE
ASSETS
|--- |  | -----------------

|The Company  assesses the  realizability of intangible  assets in accordance with SFAS No. 121, Accounting for the Impairment
Of Long-Lived  Assets And For Long-Lived  Assets To Be Disposed Of. Under SFAS No. 121, the Company is required to assess the valuation
of its  long-lived  assets,  including  intangible  assets,  based on the  estimated  undiscounted  cash flows to be  generated by such
assets.  During the nine months ended  September  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.
-8-
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|PALOMAR
MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES



NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
|-------------------------------------------------------------------------------------------------

|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 past 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.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|13. |  | GAIN
ON SALE OF SUBSIDIARY
|--- |  | --------------------------

|In connection with the sale of the Companys  subsidiary on April 27, 1999, the Company recorded  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 and recognized the deferred gain through  operating  income in the accompanying  Consolidated
Statements of Operations.
-9-
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|
|

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

|(a) |  | Overview
|--- |  | --------

|We are a researcher  and  developer of  proprietary  laser \ light based systems for hair removal and other  cosmetic
treatments; as well as, the first company to obtain  clearance  using laser systems from the FDA for  permanent  hair  reduction.
Palomar's laser \ light based systems have been  installed in physician  practices  worldwide.  Through  Palomars  research
partnership with Massachusetts  General Hospitals Wellman  Laboratories,  new indications are being tested to further advance the hair
removal market and other cosmetic laser \ light based applications including fat reduction, acne treatment and skin rejuvenation.


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 and an on-going 7.5% royalty on the LightSheer product line.  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.  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
Palomar  SLP1000 diode laser system,  Palomar  EsteLux light based system and the Palomar Q-Yag 5 Q-Switched ND: Yag laser system is
critical to the Companys success. The three systems, all of which have FDA approval,  cover a wide spectrum of cosmetic  applications;
the Palomar  SLP1000 is the first diode  laser  system in the  marketplace  cleared  for use on all skin types and has  different  hand
pieces to be used in a variety of cosmetic  applications  including hair and vascular lesion  removal;  the Palomar EsteLux system is a
fast,  more  compact and  efficient  light based  system for hair  removal and the Palomar  Q-Yag 5 is a laser  system for tattoo and
pigmented lesion removal.  The Company has traditionally  spent a significant  amount of its resources in developing new technologies and
products. The Company expects this trend will continue for the foreseeable future.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| |  | (i) |  | REVENUES
AND GROSS PROFIT: Three Months Ended  September 30, 2001, Compared to Three Months Ended September
30, 2000
| |  | --- |  | --------------------------------------------------------------------------------------------------------------------

|For the three months ended September 30, 2001, the Companys revenues  decreased to $3.2 million,  as compared to $4.0 million
for the three months  ended  September  30, 2000.  The  decrease in the  Companys  revenues of $800,000,  or 20% from the three months
ended  September  30,  2000,  was mainly due to a decrease in product  sales of $1.2  million  from the  SLP1000 offset by  shipments
associated  with the the newly  introduced Q-Yag 5 and EsteLux.
Additionally, royalty revenues received by the Company decreased by $236,000.


Gross profit for the three months ended  September 30, 2001 was $667,000,  21% of revenues,  compared to $1.2 million,  30% of
revenues,  for the three months ended  September 30, 2000.  The decrease in gross profit and gross profit  percentage was mainly due to
the  decrease  in  SLP1000 shipments  offset by  shipments  associated  with the newly
introduced Q-Yag 5 and EsteLux.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (ii) |  | OPERATING
AND OTHER EXPENSES: Three Months Ended September 30, 2001, Compared to Three Months Ended September
30, 2000
| |  | ---- |  | ----------------------------------------------------------------------------------------------------------------------

|Research and  development  costs  decreased to $1.7 million for the three months ended September 30, 2001, as compared to $1.9
million for the three months ended  September 30, 2000.  Research and  development  expenses as a percentage of revenue totaled 54% for
the three months ended  September 30, 2001 and 48% for the three months ended  September 30, 2000.  The continued  spending on research
and  development  reflects the  Companys  commitment  to research and  development  for devices and delivery  systems for cosmetic and
medical  applications using a variety of lasers and light-based systems,  while continuing  dermatology  research utilizing the Companys platforms.  The
research and  development  goals in the fields of laser  and light-based hair removal are to design systems that (1) permit more rapid treatment of large
areas, (2) have high gross margins,  and (3) are manufactured at a lower cost, thus addressing  broader markets.  Further,  the Company
is aiming to address  dermatology  and cosmetic  procedure  markets  other than hair,  including  the fields of fat  reduction and acne
treatment covered in its expanded research agreement with Massachusetts General Hospital.

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

|Selling and marketing  expenses were $763,000,  or 23% of revenues for the three months ended September 30, 2001,  compared to
$1.0  million,  or 25% of revenues  for the three  months  ended  September  30,  2000.  The  majority  of the  decrease in selling and
marketing expenses is directly associated with the decrease in shipments of the SLP1000.


General and  administrative  expenses  decreased to $822,000 or 26% of revenues for the three months ended September 30, 2001,
as  compared  to  $892,000,  or 22% of  revenues  for the three  months  ended  September  30,  2000.  This  decrease  in  general  and
administrative expenses is attributable to improved cost management and a reduction in legal expenses.


Interest  income  decreased  to $81,000 for the three  months ended  September  30,  2001,  compared to $310,000 for the three
months ended  September 30, 2000. This decrease in interest income is attributable to the reduction in cash available for investment.


Interest  expense  decreased  to $18,000 for the three  months ended  September  30,  2001,  compared to $36,000 for the three
months ended September 30, 2000.

         
Other income, net was $58,000 for the three months ended September 30, 2000.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (iii) |  | REVENUES
AND GROSS PROFIT: Nine Months Ended September 30, 2001, Compared to the Nine Months Ended September
30, 2000
| |  | ----- |  | ---------------------------------------------------------------------------------------------------------------------

|For the nine months ended September 30, 2001, the Companys revenues  increased to $12.9 million,  as compared to $9.5 million
for the nine months ended  September 30, 2000.  This increase in the Company's revenues of $3.4 million, or 36% from the nine months ended September 30, 2000, was mainly due to an increase in product sales of SLP1000
of $2.0 million, the newly introduced Estelux pulsed light hair removal system of $543,000, shipments associated with the Q-Yag 5 of $600,000,
service revenue of $450,000 offset by a decrease in product sales associated with the RD1200 of $935,000 and a decrease in shipments associated with the
E2000 of $337,000.  Additionally, royalty revenues received by the Company increased by $1.1 million.  Included in this increase was a back-owed payment of $1.2 million paid by one of the Company's
licensees, resulting from a royalty audit performed through the period ending December 31, 2000.


Gross profit for the nine months ended  September 30, 2001 was $4.0  million,  31% of revenues,  as compared $1.5 million,  or
16% of revenues  for the nine months ended  September  30, 2000.  The increase in gross profit and gross profit  percentage  was mainly
due to an increase in product sales of the SLP1000, the newly introduced  EsteLux, shipments  associated
with the Q-Yag 5 as well as the increased royalty payments received during the nine month period.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (iv) |  | OPERATING AND OTHER EXPENSES: Nine Months Ended September 30, 2001, Compared to Nine Months Ended September 30, 2000
| |  | ---- |  | --------------------------------------------------------------------------------------------------------------------

|Research and  development  costs decreased to $4.8 million for the nine months ended September 30, 2001, from $5.9 million for
the nine months  ended  September  30, 2000.  Research and  development  expenses as a percentage  of revenue  totaled 37% for the nine
months  ended  September  30, 2001 and 62% for the nine months  ended  September  30,  2000.  The  continued  spending on research  and
development  reflects the Companys  commitment to research and development  for devices and delivery  systems for cosmetic and medical
applications using a variety of lasers and light-based systems,  while continuing  dermatology  research utilizing the Companys laser platforms.  The research
and  development  goals in the field of laser and light-based hair removal are to design  systems that (1) permit more rapid  treatment of large areas,
(2) have high gross margins,  and (3) are  manufactured at a lower cost,  thus  addressing  broader  markets.  Further,  the Company is
aiming to address  dermatology  and  cosmetic  procedure  markets  other  than hair,  including  the fields of fat  reduction  and acne
treatment covered in its expanded research agreement with Massachusetts General Hospital.

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

|Selling and  marketing  expenses  increased to $2.6 million (20% of revenues)  for the nine months ended  September  30, 2001,
from $2.2  million  (23% of  revenues)  for the nine months  ended  September  30,  2000.  The  majority of the increase in selling and
marketing  expenses is directly  associated  with the  increased  shipments  of the  SLP1000 and launch of the  EsteLux and Q-Yag 5
products.


General and  administrative  expenses  decreased to $2.4 million (19% of  revenues)  for the nine months ended  September  30,
2001,  as compared to $3.0 million  (32% of  revenues)  for the nine months ended  September  30,  2000.  This  decrease in general and
administrative expenses is attributable to improved cost management and a reduction in legal expenses.


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.


Gain from the sale of subsidiary  was $3.1 million in the nine months ended  September 30, 2000 as the one-year  escrow period
had lapsed in connection with the sale of Star.


Interest  income  decreased  to $668,000  for the nine months  ended  September  30, 2001 as compared to $999,000 for the nine
months ended  September 30, 2000. This decrease in interest income is attributable to the reduction in cash available for investment.


Interest  expense  decreased to $65,000 for the nine months ended  September 30, 2001, from $124,000 for the nine months ended
September 30, 2000.


Other  income,  net  decreased to $127,000 for the nine months ended  September 30, 2001, as compared to $351,000 for the nine
months ended September 30, 2000.


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 cash is 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 last years statement of operations, effective January 1, 2000.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(c) |  | Liquidity and Capital Resources
|--- |  | -------------------------------

|As of September 30, 2001,
the Company had $7.6 million in cash, cash equivalents and available-for-sale investments.  The successful sales and marketing of new products
and an on-going royalty stream will be critical to future liquidity.



The Company's  operating  activities  used cash of $7.7 million and $7.2 million for the nine months ended September 30, 2001
  and 2000,  respectively.  Net cash used during the nine  months  ended  September  30, 2001  consisted  primarily  of a net loss from
  operations, offset by depreciation and amortization, an increase in accounts receivable,  inventories, other current assets, deferred
  revenue and a decrease in accounts payable,  and accrued  liabilities.  Net cash used during the nine months ended September 30, 2000
  consisted  primarily of a net loss from  operations,  offset by  depreciation  and  amortization,  non-cash  goodwill  and  inventory
  write-offs,  a decrease in accounts  receivable,  inventories,  receivable from sale of subsidiary,  other current  assets,  accounts
  payable accrued liabilities, accrued income taxes, deferred gain from the sale of subsidiary and deferred revenue.


Investing  activities  provided  cash of $3.9 million and $11.3  million  during the nine months ended  September 30, 2001 and
2000,  respectively.  During the nine months ended  September  30, 2001 and 2000,  the  principal  uses were  purchases of property and
equipment and purchases of available-for-sale investments, offset by proceeds of available-for-sale investments.-12-
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Financing  activities  used cash of $76,000 during the nine months ended  September 30, 2001 due to costs incurred  related to
the  issuance of common stock and  payments  made on Swiss Franc  convertible  debentures  offset by the proceeds  from the issuance of
stock  pursuant to the employee  stock  purchase  plan and  proceeds  from the issuance of notes  payable to related  party.  Financing activities used cash of $506,000 for the nine months ended
September 30, 2000 due primarily from costs incurred related to the issuance of common stock and payments made
on Swiss Franc convertible debentures offset by the proceeds from the exercise of warrants, stock options and employee stock purchase plan.


The Company  anticipates that capital  expenditures for the remainder of 2001 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.


Statement
Under the Private Securities Litigation Reform Act


In addition to the other information in this Form 10-Q, the following  cautionary  statements  should be considered  carefully
in  evaluating  the  Company  and its  business.  Statements  contained  in this  Form  10-Q  that are not  historical  facts and other
information  provided by the Company and its employees from time to time may contain certain  forward-looking  information,  as defined
by (i) the Private  Securities  Litigation Reform Act of 1995 (the Reform Act) and (ii) releases by the SEC. Our actual results could
differ materially from those suggested in such  forward-looking  statements due to the risk factors  identified below and other factors
including,  without  limitation,  risks  concerning  the timing of new  product  introductions,  financing  of future  operations,  the
Companys  research  partnership  with MGH,  manufacturing  risks,  variations in our quarterly  results,  enforcement of  intellectual
property rights by us and our competitors,  the occurrence of unanticipated events and circumstances,  and general economic conditions,
including stock market volatility.  Readers are cautioned not to place undue reliance on these forward-looking statements,  which speak
only as of the date  hereof.  The  Company  undertakes  no  obligation  to  release  publicly  the  results of any  revisions  to these
forward-looking  statements that may be made to reflect events or  circumstances  after the date hereof or to reflect the occurrence of
unanticipated  events.  The  cautionary  statements  below are being made  pursuant  to the  provisions  of the Reform Act and with the
intention  of obtaining  the benefits of safe harbor  provisions  of the Reform Act.  Forward  looking  statements  include  statements
regarding our  expectations,  beliefs,  intentions or strategies  regarding the future and can be identified by  forward-looking  words
such as "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "should," "will," and "would" or similar words.
-13-
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|RISK FACTORS


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


We face rapidly changing  technology and continuing  improvements in cosmetic laser / light-based  technology.  In order to be
successful,  we must  continue  to make  significant  investments  in  research  and  development  in order to  develop in a timely and
cost-effective  manner new products that meet changing market demands,  to enhance existing products,  and to achieve market acceptance
for such products.  We have in the past experienced  delays in developing and marketing new products and enhancing  existing  products.
Furthermore,  some of our new products under development are based on unproven  technology and/or technology with which the Company has
no previous  experience.  Since the sale of Star to Coherent,  our revenues have almost entirely  depended on sales of newly introduced
products.  In addition,  the market for hair removal laser / light-based  devices may already be  saturated.  At present,  broad market
acceptance  of laser /  light-based  hair  removal is critical to our success.  We intend to continue to diversify  our product line by
developing  cosmetic  laser / light-based  products for uses other than hair and tattoo removal and treatment of pigmented and vascular
lesions, but there can be no assurance that we will be able to successfully implement such strategy in a timely fashion or at all.


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


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


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





We could be delisted from NASDAQ.




For  continued  listing on The NASDAQ  SmallCap  Market,  a company  must  maintain a minimum bid price of $1.00 per share.  A
company must also maintain a minimum  requirement  of net tangible  assets of $2.5 million or market  capitalization  of $35 million or
net income (in latest  fiscal year or 2 of the last 3 fiscal  years) of $500,000.  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.

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

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



We develop  laser /  light-based  systems  that  incorporate  third-party  components.  Some of these items are custom made or
otherwise not readily available on the market. We purchase some of these components from small,  specialized  vendors that are not well
capitalized. A disruption in the delivery of these key components could have an adverse effect on our business.






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


 
All of our current  products  are laser /  light-based  medical  devices  which are subject to FDA  regulations  for  clinical
testing,  manufacturing,  labeling,  sale,  distribution  and promotion.  Before a new product or a new use of or claim for an existing
product can be introduced into the market,  we must obtain  clearance from the FDA. Our products are subject to similar  regulations in
our major  international  markets.  Complying  with these  regulations  is necessary  for our strategy of expanding the markets for and
sales of our products into these countries.
Compliance  with the  regulatory  clearance  process in any country is expensive and  time-consuming,  and we may not be able to obtain
such clearances in a timely fashion or at all.  Regulatory  clearances may necessitate  clinical testing,  limitations on the number of
sales and limitations on the type of end user, among other things. In certain  instances,  these constraints can delay planned shipment
schedules as design and engineering modifications are made in response to regulatory concerns and requests.



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,  copyright,  trademark and trade secret laws,  license and  confidentiality  agreements to
protect our proprietary  rights. We generally enter into  non-disclosure  agreements with our employees and third parties with which we
work,  including but not limited to consultants and vendors,  to restrict access to, and distribution of, our proprietary  information.
Despite  our efforts to protect our  proprietary  rights,  unauthorized  parties  may attempt to copy or  otherwise  obtain and use our
technology.  Monitoring  unauthorized  use of our  technology  is difficult  and we cannot be certain that the steps we have taken will
prevent  unauthorized use of our technology,  particularly in foreign  countries where the laws may not protect our proprietary  rights
as fully as in the United States.  If competitors are able to use our technology,  our ability to compete  effectively could be harmed.
Costly and time  consuming  lawsuits may be necessary to enforce  patents  issued or licensed  exclusively  to us, to protect our trade
secrets  and/or  know-how  or to  determine  the  enforceability,  scope and  validity  of  others intellectual  property  rights.  Our
competitors also may independently develop technologies that are substantially equivalent or superior to our technology.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|-15-
|----

|
|

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

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






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.

-16-
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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


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




We may not be able to successfully collect licensing royalties.


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






We face risks associated with pending litigation.



We are involved in disputes  with third  parties.  Such  disputes  have  resulted in  litigation  with such  parties.  We have
incurred,  and likely will continue to incur,  legal  expenses in connection  with such  matters.  There can be no assurance  that such
litigation  will result in favorable  outcomes for us. Any adverse  result in litigation  could have a material  adverse  effect on our
business, financial condition and results of operations.






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


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






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


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

-17-
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|We face risks associated with revenues.


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



We face risks associated with liquidity and capital resources.


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



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


We cannot assure you that our revenues will increase or that we will generate sufficient revenues to achieve or sustain
profitability. While we strive to minimize the Company's business expenses, we will continue to have large fixed expenses and we
expect to continue to incur significant sales and marketing, product development, customer support and service, administrative and
other expenses. As a result, we need to generate significantly higher revenue to achieve and maintain profitability.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

|SFAS  No.  107  requires  disclosure  about  fair  value of  financial  instruments.  Financial  instruments  consist  of cash
equivalents,  investments,  accounts  receivable,  accounts payable and long-term debt  obligations.  The fair value of these financial
instruments  approximates  their  carrying  amount as of September  30, 2001.  All of the Company's  investments  are  considered  cash
equivalent  money market accounts and debt  securities  which are considered  available-for-sale  investments and are carried at market
value,  with the  difference  between  cost and  market  value,  net of related  tax  effects,  recorded  as a  separate  component  of
stockholders (deficit) equity.  Accordingly,  the Company has no quantitative  information concerning the market risk of participating
in such investments.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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


  
The  Company's  significant  exposure to currency  exchange  rate  fluctuations  was  specifically  related to its Swiss franc
convertible  debentures.  The impact of exchange rate movements on these  debentures was immaterial for the nine months ended September
30, 2001.  The Company  mitigated its potential  exposure  related to such  debentures  by entering  into forward  contracts  that were
designated  as a cash flow hedge for the final  remaining  payment  that was paid in June of 2001.  The  Companys  other  exposure  to
currency  exchange  rate  fluctuations  has been and is expected to continue to be modest since it sells its products in United  States
dollars.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|-18-
|----

|
|

## 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. The court entered a final  judgement of dismissal  with
prejudice on November 6, 2000. All payments  required by Palomar under the settlement  agreement have been made except for the delivery
of 358,547 shares of Palomar Common stock,  which is the balance of the shares owed under the settlement  agreement.  These shares will
be delivered  upon receipt of instruction from plaintiffs counsel.

  
The Company is involved  in other legal and  administrative  proceedings  and claims of various  types.  While any  litigation
contains an element of uncertainty,  management,  in consultation  with the Companys  general  counsel,  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.
|---- |  | --------------------------------------

|-19-
|----

|
|

|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 |  | Employment
Agreement dated as of July, 1 2001, between the Company and Louis P. Valente.
|---- |  | ----------------------------------------------------------------------------------------

|10.2 |  | Employment
Agreement dated as of July 1, 2001, between the Company and Joseph P. Caruso.
|---- |  | ----------------------------------------------------------------------------------------

|10.3 |  | Lease for premises at 82 Cambridge Street,
Burlington, Massachusetts, dated June 17, 1999.
|----- |  | ------------------------------------------------------------------------------------------

|###10.4 |  | License Agreement between the Company
and Massachusetts General Hospital, dated August 18,1995.
|------- |  | -----------------------------------------------------------------------------------------------

|###10.5 |  | First Amendment to License Agreement
between the Company and Massachusetts General Hospital dated August 18, 1995.
|------- |  | ------------------------------------------------------------------------------------------------------------------

|###10.6 |  | Second Amendment to License Agreement between the Company and Massachusetts General Hospital,
dated August 18, 1995.
|------- |  | --------------------------------------------------------------------------------------------------------------------

|10.7 |  | The Company's 401(k) Plan.
|----- |  | --------------------------

|**10.8 |  | Agreement
and Plan of Reorganization by and among Coherent, Inc., Medical Technologies,
Acquisition, Inc., Palomar Medical Technologies, Inc., Star Medical Technologies, Inc.,
Robert E. Grove, James Z. Holtz and David C. Mundinger, dated as of December 7, 1998.
|------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|^ |  | 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.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------

|-20-
|----

|
|

|## |  | 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.
|--- |  | ------------------------------------------------------------------------------------------------------------------

|-21-
|----

|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 9, 2001.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                        |  | PALOMAR MEDICAL TECHNOLOGIES, INC.
                               (Registrant)                                                                             
|----------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------
|DATE:  November 9, 2001 |  | By: /s/ Louis P. Valente 
Louis P. ValenteChief Executive Officer(Principal Executive Officer)                                               
|                        |  |                                                                                                                                                            
|DATE:  November 9, 2001 |  | By: /s/ Joseph P. Caruso 
Joseph P. CarusoPresident and Chief Operating Officer(Principal Financial Officer and Principal
Accounting Officer)

|-22-
|----

|
|

| |  | 
| |  | 

|
|