|Form 10-Q



United States
Securities and Exchange CommissionWashington, D.C. 20549 (Mark one)
|----------------------------------------------------------------------------------------------

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

|For the Quarterly
Period Ended September 30, 2002




Or
|--------------------------------------------------------

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

|For the Transition
Period From _____ to _____



Commission File Number:
0-22340




Palomar Medical
Technologies, Inc.(Exact Name of Issuer as Specified in Its Charter)
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                               | 
|-------------------------------------------------------------- | 
|Delaware                                                       | 
|(State of Other Jurisdiction of Incorporation or Organization) | 

|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, 2002, 11,538,706 shares of common stock, $.01 par value per share, were
outstanding.


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

|Palomar Medical
Technologies, Inc. and Subsidiaries



Index
|------------------------------------------------------------

|                                                                                                                                          | 
|----------------------------------------------------------------------------------------------------------------------------------------- | 
|Part
      I  Financial Information                                                                                                      | 
|                                                                                                                                          | 
|Item
      1. Consolidated Financial Statements (Unaudited)                                                                               | 
|                                                                                                                                          | 
|Consolidated
      Condensed Balance Sheets                                                                                               | 
|                                                                                                                                          | 
|Consolidated
      Condensed Statements of Operations                                                                                     | 
|                                                                                                                                          | 
|Consolidated
      Statement of Stockholders Equity                                                                                      | 
|                                                                                                                                          | 
|Consolidated
      Statements of Cash Flows                                                                                               | 
|                                                                                                                                          | 
|Notes
      to Condensed Consolidated Financial Statements                                                                                | 
|                                                                                                                                          | 
|Item
      2. Managements Discussion and Analysis of Financial Condition and
      
                        
      Results of Operations | 
|                                                                                                                                          | 
|Risk
      Factors                                                                                                                        | 
|                                                                                                                                          | 
|Item
      3. Quantitative and Qualitative Disclosures About Market Risk                                                                  | 
|                                                                                                                                          | 
|Item
      4. Controls and Procedures                                                                                                     | 
|                                                                                                                                          | 
|Part II  Other Information                                                                                                               | 
|                                                                                                                                          | 
|Item
      1. Legal Proceedings                                                                                                           | 
|                                                                                                                                          | 
|Item
      2. Changes in Securities                                                                                                       | 
|                                                                                                                                          | 
|Item
      3. Defaults Upon Senior Securities                                                                                             | 
|                                                                                                                                          | 
|Item
      4. Submission of Matters to a Vote of Security Holders                                                                         | 
|                                                                                                                                          | 
|Item
      5. Other Information                                                                                                           | 
|                                                                                                                                          | 
|Item
      6. Exhibits and Reports on Form 8-K                                                                                            | 
|                                                                                                                                          | 
|Signatures                                                                                                                                | 
|                                                                                                                                          | 
|Certifications                                                                                                                            | 

|i
|-

|Palomar Medical
Technologies, Inc. and Subsidiaries


Consolidated Condensed
Balance Sheets
|-------------------------------------------------------------------------------------------

|                                                                         | December 31,
      2001 |                  | September 30,
      2002 |                
|------------------------------------------------------------------------ | ----------------------- | ---------------- | ------------------------ | ---------------
|
|Assets                                                                   |                         |                  |                          |                
|                                                                         |                        
|Current
      Assets:                                                    |                         |                  |                          |                
|Cash
      and cash equivalents                                          |                         | $     5,825,270  |                          | $     4,343,640
|Accounts
      receivable, net                                           |                         | 2,250,278        |                          | 3,172,477      
|Inventories                                                              |                         | 3,706,828        |                          | 3,870,164      
|Other
      current assets                                               |                         | 436,752          |                          | 343,676        
|                                                                         |                         |                  |                          |                
|Total
      current assets                                               |                         | 12,219,128       |                          | 11,729,957     
|                                                                         |                         |                  |                          |                
|                                                                         |                         |                  |                          |                
|Property
      and Equipment, Net                                        |                         | 649,691          |                          | 538,017        
|                                                                         |                         |                  |                          |                
|Other
      Assets                                                       |                         | 302,024          |                          | 298,268        
|                                                                         |                         |                  |                          |                
|                                                                         |                         |                  |                          |                
|                                                                         |                         | $   13,170,843   |                          | $   12,566,242 
|                                                                         |                         |                  |                          |                
|Liabilities
      and Stockholders Equity                               |                         |                  |                          |                
|                                                                         |                        
|Current
      Liabilities:                                               |                         |                  |                          |                
|Debenture                                                                |                         | $        500,000 |                          |               
|Note
      payable to related party                                      |                         | 1,000,000        |                          | 1,000,000      
|Accounts
      payable                                                   |                         | 1,846,155        |                          | 1,093,281      
|Accrued
      liabilities                                                |                         | 4,173,989        |                          | 4,314,902      
|Accrued
      income taxes                                               |                         | 1,400,146        |                          | 1,400,000      
|Deferred
      revenue                                                   |                         | 354,684          |                          | 422,908        
|                                                                         |                         |                  |                          |                
|Total
      current liabilities                                          |                         | 9,274,974        |                          | 8,231,091      
|                                                                         |                         |                  |                          |                
|Stockholders
      Equity:                                              |                         |                  |                          |                
|Preferred
      stock, $.01 par value                                   |                         |                  |                          |                
|Authorized
       1,500,000 shares                                      |                         |                  |                          |                
|Issued
      and outstanding  6,000 shares at December 31, 2001         |                         |                  |                          |                
|(Liquidation
      preference of $8,177,717 as of December 31, 2001)     |                         | 60               |                          |               
|Common
      stock, $.01 par value                                      |                         |                  |                          |                
|Authorized
       45,000,000 shares                                     |                         |                  |                          |                
|Issued
       11,074,393 and 11,530,406 shares at December 31, 2001     |                         |                  |                          |                
|and
      September 30, 2002, respectively                               |                         | 110,744          |                          | 115,304        
|Additional
      paid-in capital                                         |                         | 163,252,616      |                          | 162,075,896    
|Accumulated
      deficit                                                |                         | (157,368,178     | )                        | (157,856,049   
|Less:
      Treasury stock  573,031 shares at cost at December 31, 2001 |                         | (2,099,373       | )                        |               
|                                                                         |                         |                  |                          |                
|Total
      stockholders equity                                         |                         | 3,895,869        |                          | 4,335,151      
|                                                                         |                         |                  |                          |                
|                                                                         |                         |                  |                          |                
|                                                                         |                         | $   13,170,843   |                          | $   12,566,242 
|                                                                         |                         |                  |                          |                

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


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

# Palomar Medical
Technologies, Inc. and Subsidiaries

# Consolidated Condensed
Statements of Operations

# (Unaudited)

|
|

|                                                | Three Months
      Ended
      September 30, |                 | Nine Months
      Ended
      September 30, |                  
|----------------------------------------------- | -------------------------------------------- | --------------- | ------------------------------------------- | -----------------
|
|Product
      revenues                          |                                              | $   2,484,521   |                                             | $   6,495,295    
|Royalty
      revenues                          |                                              | 717,767         |                                             | 858,799          
|                                                |                                              |                 |                                             |                  
|Total
      Revenues                            |                                              | 3,202,288       |                                             | 7,354,094        
|                                                |                                              |                 |                                             |                  
|Cost
      of product revenues                  |                                              | 2,248,227       |                                             | 3,250,074        
|Cost
      of royalty revenues                  |                                              | 287,107         |                                             | 343,520          
|                                                |                                              |                 |                                             |                  
|Total
      Cost of Revenues                    |                                              | 2,535,334       |                                             | 3,593,594        
|                                                |                                              |                 |                                             |                  
|Gross
      Margin                              |                                              | 666,954         |                                             | 3,760,500        
|                                                |                                              |                 |                                             |                  
|Operating
      Expenses                        |                                             
|                                                |                                              |                 |                                             |                  
|Research
      and development                  |                                              | 1,725,329       |                                             | 1,154,774        
|Sales
      and marketing                       |                                              | 762,745         |                                             | 1,646,798        
|General
      and administrative                |                                              | 821,997         |                                             | 832,643          
|                                                |                                              |                 |                                             |                  
|Total
      Operating Expenses                  |                                              | 3,310,071       |                                             | 3,634,215        
|                                                |                                              |                 |                                             |                  
|Income
      (Loss) from Operations             |                                              | (2,643,117      | )                                           | 126,285          
|                                                |                                              |                 |                                             |                  
|Interest
      Income                           |                                              | 81,265          |                                             | 22,143           
|Interest
      Expense                          |                                              | (17,539         | )                                           | (29,172          
|Other
      Income                              |                                              |                |                                             |                 
|                                                |                                              |                 |                                             |                  
|Net
      Income (Loss)                         |                                              | $(2,579,391     | )                                           | $      119,256   
|                                                |                                              |                 |                                             |                  
|Basic
      Net Income (Loss) Per Share         |                                              | $         (0.25 | )                                           | $            0.01
|                                                |                                              |                 |                                             |                  
|Diluted
      Net Income (Loss) Per Share       |                                              | $         (0.25 | )                                           | $            0.01
|                                                |                                              |                 |                                             |                  
|Basic
      Weighted Average Number of Shares   |                                              | 10,844,046      |                                             | 11,504,563       
|                                                |                                              |                 |                                             |                  
|Diluted
      Weighted Average Number of Shares |                                              | 10,844,046      |                                             | 11,944,058       
|                                                |                                              |                 |                                             |                  

|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 |  |            | AdditionalPaid-in
      Capital |          |  | Accumulated
      Deficit |   |  | Total Stockholders
      Equity |  
|-------------------------------------------------------------------- | --------------------- | ------ | - | ------------------ | -------- | -------------------- |  | ---------- | ------------------------------- | -------- |  | ------------------------- | - |  | -------------------------------- | -
|
|
|                                                                     |                      
|Balance,
      December 31, 2001                                     |                       | 6,000  |   |                    | $     60 |                      |  | 11,074,393 |                                 | $110,744 |  | (573,031                  | ) |  | $(2,099,373                      | )
|                                                                     |                       |        |   |                    |          |                      |  |            |                                 |          |  |                           |   |  |                                  |  
|Costs
      incurred related to the issuance of common stock         |                       |       |   |                    |         |                      |  |           |                                 |         |  |                          |   |  |                                 |  
|Issuance
      of stock for settlement                               |                       |       |   |                    |         |                      |  | 358,547    |                                 | 3,585    |  |                          |   |  |                                 |  
|Issuance
      of stock for employee stock purchase plan             |                       |       |   |                    |         |                      |  | 15,902     |                                 | 159      |  | 13,617                    |   |  | 49,839                           |  
|Issuance
      of stock for 2001 employer 401K matching contribution |                       |       |   |                    |         |                      |  |           |                                 |         |  | 148,855                   |   |  | 545,362                          |  
|Issuance
      of stock for services                                 |                       |       |   |                    |         |                      |  | 25,000     |                                 | 250      |  |                          |   |  |                                 |  
|Conversion
      of convertible preferred stock                      |                       | (6,000 | ) |                    | (60      | )                    |  | 56,564     |                                 | 566      |  | 410,559                   |   |  | 1,504,172                        |  
|Preferred
      stock dividends                                      |                       |       |   |                    |         |                      |  |           |                                 |         |  |                          |   |  |                                 |  
|Net
      loss                                                       |                       |       |   |                    |         |                      |  |           |                                 |         |  |                          |   |  |                                 |  
|                                                                     |                       |        |  
|Balance,
      September 30, 2002                                    |                       |       |   |                    | $       |                      |  | 11,530,406 |                                 | $115,304 |  |                          |   |  | $                               |  
|                                                                     |                       |        |  

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


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

|Palomar Medical
Technologies, Inc. and Subsidiaries


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

|                                                                             | Nine Months
      Ended September 30, |                 |  
|---------------------------------------------------------------------------- | ------------------------------------- | --------------- | -
|
|Cash
      Flows from Operating Activities:                                  |                                       |                 |  
|Net
      loss                                                               |                                       | $(5,079,529     | )
|                                                                             |                                       |                 |  
|Adjustments
      to reconcile net loss                                      |                                       |                 |  
|to
      net cash used in operating activities:                              |                                       |                 |  
|Depreciation
      and amortization                                          |                                       | 250,096         |  
|Issuance
      of common stock for services                                  |                                       |                |  
|Changes
      in assets and liabilities,                                     |                                       |                 |  
|Accounts
      receivable                                                    |                                       | (427,446        | )
|Inventories                                                                  |                                       | (743,478        | )
|Other
      current assets                                                   |                                       | (20,791         | )
|Accounts
      payable                                                       |                                       | (799,394        | )
|Accrued
      liabilities                                                    |                                       | (1,097,642      | )
|Deferred
      revenue                                                       |                                       | 244,646         |  
|                                                                             |                                       |                 |  
|Net
      cash used in operating activities                                  |                                       | (7,673,538      | )
|                                                                             |                                       |                 |  
|Cash
      Flows from Investing Activities:                                  |                                       |                 |  
|Purchases
      of property and equipment                                    |                                       | (48,099         | )
|Purchases
      of available-for-sale investments                            |                                       | (3,894,356      | )
|Proceeds
      from sale of available-for-sale investments                   |                                       | 7,826,561       |  
|Decrease
      in other assets                                               |                                       |                |  
|                                                                             |                                       |                 |  
|Net
      cash provided by (used in) investing activities                    |                                       | 3,884,106       |  
|                                                                             |                                       |                 |  
|Cash
      Flows from Financing Activities:                                  |                                       |                 |  
|Proceeds
      from employee stock purchase plan                             |                                       | 64,866          |  
|Costs
      incurred related to issuance of common stock                     |                                       | (189,375        | )
|Proceeds
      from the issuance of notes payable to related party           |                                       | 1,000,000       |  
|Payment
      on convertible debenture                                       |                                       | (951,842        | )
|                                                                             |                                       |                 |  
|Net
      cash used by financing activities                                  |                                       | (76,351         | )
|                                                                             |                                       |                 |  
|                                                                             |                                       |                 |  
|Net
      decrease in cash and cash equivalents                              |                                       | (3,865,783      | )
|Cash
      and cash equivalents, beginning of the period                     |                                       | 9,535,694       |  
|                                                                             |                                       |                 |  
|Cash
      and cash equivalents, end of the period                           |                                       | $ 5,669,911     |  
|                                                                             |                                       |                 |  
|Supplemental
      Disclosure of Cash Flow Information:                      |                                      
|                                                                             |                                       |                 |  
|Cash
      paid for interest                                                 |                                       | $      60,243   |  
|                                                                             |                                       |                 |  
|Supplemental
      Disclosure of Noncash Financing and Investing Activities: |                                      
|                                                                             |                                       |                 |  
|Preferred
      stock accrued dividends and interest                         |                                       | $    291,283    |  
|                                                                             |                                       |                 |  
|                                                                             |                                       |                 |  
|Issuance
      of stock for employer 401(k) matching contribution            |                                       | $    164,327    |  
|                                                                             |                                       |                 |  
|                                                                             |                                       |                 |  
|Issuance
      of stock for settlement                                       |                                       | $              |  
|                                                                             |                                       |                 |  

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


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

|Palomar Medical
Technologies, Inc. and Subsidiaries Notes to Condensed 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 consolidated financial statements and notes should be read in
conjunction with the Companys Form 10-K for the year ended December 31, 2001.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2. | CASH
AND CASH EQUIVALENTS
|-- | -------------------------

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

|3. | INVENTORIES
|-- | -----------

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

| |  | December 31, 
      2001 |  | September 30, 
      2002 | 
| |  | ------------------------ |  | ------------------------- | 
| |  | Raw
      materials      |  | $1,489,330                | 
| |  | Work-in-process          |  | 292,404                   | 
| |  | Finished
      goods     |  | 1,925,094                 | 
| |  |                          |  |                           | 
| |  |                          |  | $3,706,828                | 
| |  |                          |  |                           | 
| |  |                          | 

|4. | PROPERTY
AND EQUIPMENT
|-- | ----------------------

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

| |  | December 31, 
      2001             |  | September 30, 
      2002 | 
| |  | ------------------------------------ |  | ------------------------- | 
| |  | Machinery
      and equipment        |  | $   984,883               | 
| |  | Furniture
      and fixtures         |  | 1,352,932                 | 
| |  | Leasehold
      improvements         |  | 251,106                   | 
| |  |                                      |  |                           | 
| |  |                                      |  | 2,588,921                 | 
| |  | Less:
      accumulated depreciation |  |                           | 
| |  | and
      amortization               |  | 1,939,230                 | 
| |  |                                      |  |                           | 
| |  |                                      |  | $   649,691               | 
| |  |                                      |  |                           | 

|5. | DEBENTURE
|-- | ---------

|On March 13, 1997, the Company issued a
$500,000, 6% convertible debenture due March 13, 2002. The convertible debenture had a
conversion price of $77.00 and the debenture holder could convert no more than one-third
of the debenture in any 30-day period. The Company accounted for this debenture at face
value.


The Company entered into an agreement
with the debenture holder to pay the $500,000 convertible debenture originally due March
13, 2002 in five equal monthly installments, beginning April 2002. As part of this
agreement, the debenture holder no longer had the option to convert the debenture into
common stock. As of September 30, 2002, the Company had fully paid the remaining balance of $500,000.


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

|Palomar Medical
Technologies, Inc. and Subsidiaries Notes to Condensed Consolidated Financial
Statements
|--------------------------------------------------------------------------------------------------------

|6. | SEGMENT
AND GEOGRAPHIC INFORMATION
|-- | ----------------------------------

|Product revenue from international
sources were $1.6 million and $4.0 million for the three months ended September 30, 2001
and 2002, respectively, and $4.0 million and $8.3 million for the nine months ended
September 30, 2001 and 2002, respectively. The following table represents the percentage
of product revenue by geographic region from customers for the three and nine months ended
September 30, 2001 and 2002:
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                    | Three Months Ended 
      September 30, |  | Nine Months Ended 
      September 30, |  
|------------------- | --------------------------------------- |  | -------------------------------------- | -
|                    |                                         |  |                                       
|
|                    |                                         |  |                                       
|United
      States |                                         |  | 35.9                                   | %
|Japan               |                                         |  | 24.9                                   | %
|Canada              |                                         |  | 12.5                                   | %
|Europe              |                                         |  | 0.0                                    | %
|Australia           |                                         |  | 16.0                                   | %
|Middle East         |                                         |  | 4.1                                    | %
|Asia/Pacific        |                                         |  | 6.5                                    | %
|Latin America       |                                         |  | 0.1                                    | %
|                    |                                         |  |                                       
|Total               |                                         |  | 100.0                                  | %
|                    |                                         |  |                                       

|7. | STOCKHOLDERS EQUITY
|-- | --------------------

|Options to Purchase Common
Stock.During the nine months ended September 30, 2002, the Company granted
options to purchase 740,000 shares of the Companys common stock at an exercise price
of $0.91 to $0.97. During the nine months ended September 30, 2002, options to purchase
103,516 shares of the Companys common stock were cancelled and no options were exercised.


Warrants to Purchase Common
Stock. During the nine months ended September 30, 2002, no warrants were
granted, exercised or cancelled.


Convertible Preferred
Stock. The Company converted 6,000 shares of its Series F Preferred Stock
including $2,267,553 of accrued dividends and interest into 467,123 shares of the
Companys common stock during the three months ended March 31, 2002.


Issuance of Stock for
Settlement of Litigation. In connection with the settlement of litigation
relating to Varljen v. H.J. Meyers, Inc., et. al, the Company delivered the balance
owed under the settlement agreement and issued 358,547 shares of the Companys common
stock during the three months ended March 31, 2002.


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

|8. | NET
INCOME (LOSS) PER COMMON SHARE
|-- | ----------------------------------

|Basic net income (loss) per share was
determined by dividing net income (loss) attributable to common stock holders by the
weighted average common shares outstanding during the period. Diluted net income (loss)
per share was determined by dividing net income (loss) attributable to common stock
holders 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 income (loss)
per share for the three and nine months ended September 30, 2001 and 2002 is as follows:


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

|Palomar Medical
Technologies, Inc. and Subsidiaries Notes to Condensed Consolidated Financial
Statements
|--------------------------------------------------------------------------------------------------------

|                                                                         | Three Months
      Ended
      September 30, |                 | Nine
      Months Ended
      September 30, |                 
|------------------------------------------------------------------------ | -------------------------------------------- | --------------- | ------------------------------------------- | ----------------
|
|Net
      income (loss)                                                  |                                              | $(2,579,391     | )                                           | $     119,256   
|Preferred
      stock dividends                                          |                                              | (98,818         | )                                           |                
|                                                                         |                                              |                 |                                             |                 
|Net
      income (loss) attributable to common
             stockholders |                                              | $(2,678,209     | )                                           | $     119,256   
|                                                                         |                                              |                 |                                             |                 
|Basic
      net income (loss) per common share                           |                                              | $         (0.25 | )                                           | $           0.01
|                                                                         |                                              |                 |                                             |                 
|Diluted
      net income (loss) per common share                         |                                              | $         (0.25 | )                                           | $           0.01
|                                                                         |                                              |                 |                                             |                 
|Basic
      weighted average number of shares                            |                                             
|outstanding                                                              |                                              | 10,844,046      |                                             | 11,504,563      
|                                                                         |                                             
|Effect
      of dilutive securities:       stock
      options           |                                              |                |                                             | 439,495         
|                                                                         |                                              |                 |                                             |                 
|Diluted
      weighted average number of shares                          |                                             
|outstanding                                                              |                                              | 10,844,046      |                                             | 11,944,058      
|                                                                         |                                              |                 |                                             |                 

|For the nine-months ended September
30, 2001 and 2002, 6,068,526 and 6,131,639 shares, respectively, of certain outstanding
stock options, stock warrants, convertible debt and preferred stock were not included in
the diluted weighted average shares outstanding as they were antidilutive.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|9. | COMPREHENSIVE
INCOME (LOSS)
|-- | ---------------------------

|The Company records unrealized gains
or losses on available-for-sale securities in other comprehensive income. Components of
other comprehensive income (loss) for the three and nine-months ended September 30, 2001
and 2002, respectively, consisted of the following:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                           | Three
      Months Ended
      September 30, |             | Nine
      Months Ended
      September 30, |         
|------------------------------------------ | -------------------------------------------- | ----------- | ------------------------------------------- | --------
|
|Net
      income (loss)                    |                                              | $(2,579,391 | )                                           | $119,256
|Unrealized
      (loss) gain on available- |                                             
|for-sale
      investments                 |                                              | (3,333      | )                                           |        
|                                           |                                              |             |                                             |         
|Comprehensive
      income (loss)          |                                              | $(2,582,724 | )                                           | $119,256
|                                           |                                              |             |                                             |         
|                                           |                                             

|7
|-

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


Overview


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


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



Significant Accounting
Policies


The Company believes the following
represent its significant accounting policies:


Revenue
Recognition.  The Company recognizes revenue in accordance with
SEC Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB
101), as amended by SAB 101A and 101B. SAB 101 requires that four basic criteria must be
met before revenue can be recognized: (1) persuasive evidence of an arrangement exists;
(2) delivery has occurred or services rendered; (3) the fee is fixed and determinable; and
(4) collectibility is reasonably assured. Determination of criteria (3) and (4) are based
on managements judgments regarding the fixed nature of the fee charged for services
rendered and products delivered and the collectibility of those fees. Should changes in
conditions cause management to determine these criteria are not met for certain future
transactions, revenue recognized for any reporting period could be adversely affected.
Royalty revenues are recognized upon receipt of cash payments.


Product Warranties.
 Products sold are generally covered by a warranty for a period of one year or a
certain number of shots fired. The Company accrues a warranty reserve for estimated costs
to provide warranty services. The Companys estimate of costs to service its warranty
obligations is based on historical experience and expectation of future conditions. To the
extent the Company experiences increased or decreased warranty claim activity or increased
or decreased costs associated with servicing those claims, its warranty accrual will
increase or decrease, respectively, resulting in decreased or increased gross margin.


Inventory Reserves.As a designer and manufacturer of high technology equipment, we are exposed to a
number of economic and industry factors that could result in portions of our inventory
becoming either obsolete or in excess of anticipated usage. These factors include, but are
not limited to, technological changes in our markets, our ability to meet changing
customer requirements, competitive pressures in products and prices, reliability and
replacement of and the availability of key components from our suppliers. Our policy is to
establish inventory reserves when conditions exist that suggest that our inventory may be
in excess of anticipated demand or is obsolete based upon our assumptions about future
demand for our products and market conditions. We regularly evaluate the ability to
realize the value of our inventory based on a combination of factors including the
following: historical usage rates, forecasted sales or usage, product end of life dates,
estimated current and future market values and new product introductions. Assumptions used
in determining managements estimates of future product demand may prove to be
incorrect, in which case the provision required for excess and obsolete inventory would
have to be adjusted in the
future. If inventory is determined to be overvalued, the Company would be required to
          recognize such costs as cost of goods sold at the time of such determination.
          Although every effort is made to ensure the accuracy of managements
          forecasts of future product demand, any significant unanticipated changes in
          demand could have significant impact on the value of the Companys
          inventory and the Companys reported operating results. Additionally,
          purchasing requirements and alternative usage avenues are explored within these
          processes to mitigate inventory exposure. When recorded, our reserves are
          intended to reduce the carrying value of our inventory to its net realizable
          value.


8
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------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Results of Operations


The following table contains selected
income statement information, which serves as the basis of the discussion of the
Companys results of operations for the quarter and nine months ended September 30,
2002 (in thousands, except for percentages):
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                               |  | Three
      Months EndedSeptember 30, 2001 |  | Three
      Months EndedSeptember 30, 2002 |   | Nine
      Months EndedSeptember 30, 2001 |         | Nine
      Months EndedSeptember 30, 2002
|------------------------------ |  | ------------------------------------------ |  | ------------------------------------------ | - | ----------------------------------------- | ------- | -----------------------------------------
|
|
|
|
|Product
      revenue          |  | $2,484                                     |  | 78                                         | % |                                           | $6,495  |                                          
|Royalty
      revenue          |  | 718                                        |  | 22                                         | % |                                           | 859     |                                          
|
|Total
      net revenue        |  | $3,202                                     |  | 100                                        | % |                                           | $7,354  |                                          
|                               |  |                                            |  |                                            |   |                                           |         |                                          
|Product
      gross margin     |  | $   236                                    |  | 9                                          | % |                                           | $3,245  |                                          
|Royalty
      gross margin     |  | 431                                        |  | 60                                         | % |                                           | 516     |                                          
|
|                               |  |                                            |  |                                            |   |                                           |         |                                          
|Total
      gross margin       |  | $   667                                    |  | 21                                         | % |                                           | $3,761  |                                          
|                               |  |                                            |  |                                            |   |                                           |         |                                          
|Research
      & development   |  | $1,725                                     |  | 54                                         | % |                                           | $1,155  |                                          
|Selling
      & marketing      |  | $   763                                    |  | 24                                         | % |                                           | $1,647  |                                          
|General
      & administrative |  | $   822                                    |  | 26                                         | % |                                           | $   833 |                                          

|Revenue. Product
revenues have increased during the three and nine-month periods ended           September
30, 2002 in comparison to the same periods in 2001. Although product           revenues
have increased to $6.5 million from $2.5 million for the three months           ended
September 30, 2002 and 2001, respectively, and to $15.2 million from $8.4
          million for the nine-month period ended September 30, 2002 and 2001,
          respectively, average end-user selling prices have decreased due to the change
          in the Companys product mix. The leading contributor to product revenues
          in 2002 was the EsteLux, which has a significantly lower price point than the
          Companys other products. Market acceptance of the EsteLux has been
          increasing every quarter since its introduction in September 2001. In 2001, the
          EsteLux made up a much smaller portion of total sales.


Royalty revenues increased to
$859,000 from $718,000 for the three-months ended September 30, 2002 and 2001,
respectively, and decreased to $2.7 million from $4.4 million for the nine-month period
ended September 30, 2002 and 2001, respectively. This increase of $141,000 for the
three-months ended September 30, 2002 in comparison to the same period in 2001 is
attributed to a general strengthening in the product market for the Companys
licensees. However, the reduction in royalty revenue of $1.7 million for the nine-months
ended September 30, 2002 in comparison to the same period in 2001 is attributable to the
general softening that the aesthetic market has experienced in the first half of 2002 and a
back-owed payment of $1.2 million, paid by one of the Companys licensees in 2001,
resulting from a royalty audit performed.


Gross Margin.
Gross margins for the Companys products increased during the three and nine-month
periods ended September 30, 2002 in comparison to the same periods in 2001. Product gross
margins increased to $3.2 million (50% of product revenues) from $236,000 (9% of product
revenues) for the three months ended September 30, 2002 and
2001, respectively, and to $7.2
million (47% of product revenues) from $1.4 million (16% of product revenues) for the
nine-month period ended September 30, 2002 and 2001, respectively. Contributing to this
increase in product gross margins is a shift in product mix to a lower cost and higher
gross margin product platform, which emphasize the Companys focus on low cost
products. Furthermore, this significant increase in gross margin in 2002 was offset by
additional warranty costs of $150,000, recognized in the third quarter of 2002, associated
with issues related to some of the Companys prior generation products.


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

|Gross margins for the Companys
royalty revenues has increased to $516,000 from $431,000 for the three months ending
September 30, 2002 and 2001, respectively, and has decreased to $1.6 million from $2.7 for
the nine-months ended September 30, 2002 and 2001, respectively. As a percentage of
royalty revenues, royalty gross margin was consistent at 60% for all periods presented as
the Company pays a fixed 40% of royalty income to its licensor. This increase in
royalty gross margin for the three-months ended September 30, 2002 in comparison to the
same period in 2001 is attributed to a general strengthening in the aesthetic market for
the Companys licensees. However, the reduction in royalty gross margin for the
nine-months ended September 30, 2002 in comparison to the same period in 2001 is
attributable to the general softening that the aesthetic market experienced in the first
half of 2002 and a back-owed payment which contributed $720,000 to royalty gross margin,
paid by one of the Companys licensees in 2001, resulting from a royalty audit
performed.


Research and Development
Costs. Research and development costs decreased to $1.2 million (16% of
revenues) from $1.7 million (54% of revenues) for the three-months ended September 30,
2002 and 2001, respectively, and decreased to $3.3 million (18% of revenues) from $4.8
million (37% of revenues) for the nine-months ended September 30, 2002 and 2001,
respectively. These decreases in both dollars and as a percentage of revenues are a direct
result of increased revenues as well as the investments that the Company has made in prior periods in the development of
product platforms. These platforms have allowed the Company to introduce new applications
by developing new hand pieces and other complimentary features. The Company
continues its development of new product platforms. The spending on research and
development reflects the Companys commitment to continuing dermatology research for
a better understanding of various cosmetic and medical conditions and to continuing
research and development of devices and delivery systems to better treat those various
cosmetic and medical conditions. The research and development goals in the field of light
based hair removal and pigmented and vascular lesion removal are to design systems that (1) permit more rapid treatment of large
areas, (2) have high gross margins, and (3) are manufactured at lower costs, to expand our
current markets. Furthermore, the Company is developing products to address dermatology
and cosmetic conditions other than hair, including the fields of fat reduction, acne
treatment and skin rejuvenation.


Selling and Marketing
Costs. Selling and marketing costs increased to $1.6 million (22% of
revenues) from $763,000 (24% of revenues) for the three-months ended September 30, 2002
and 2001, respectively, and increased to $3.8 million (21% of revenues) from $2.6 million
(20% of revenues) for the nine-months ended September 30, 2002 and 2001, respectively.
These increases are associated with direct sales force and international commissions,
upfront costs associated with both international and domestic sales force and distribution
channel expansion and additional marketing expenses attributed to the Companys increase in product revenues.


General and Administrative
Costs. General and administrative costs increased to $833,000 (11% of
revenues) from $822,000 (26% of revenues) for the three-months ended September 30, 2002
and 2001 respectively, and decreased to $2.2 million (12% of revenues) from $2.4 million
(19% of revenues) for the nine-month period ending September 30, 2002 and 2001,
respectively. Although general and administrative costs decreased through improved
cost management over the nine-month period ended September 30, 2002 in comparison to the
same period ended in 2001, the Company incurred additional legal expenses during the
three-month period ended September 30, 2002 in comparison to the same period in 2001.
These additional legal costs are a direct result from aggressively enforcing the
Companys patent position against infringers.


Interest Income.
Interest income has decreased to $22,000 from $81,000 for the three-months ended September
30, 2002 and 2001, respectively, and has decreased to $57,000 from $668,000 for the
nine-months ended September 30, 2002 and 2001, respectively. These decreases are primarily
from lower interest income due to lower cash balances invested and lower interest rates in
2002 as compared to the same periods in 2001.


Interest
Expense. Interest expense increased to $29,000 from $18,000 for the
three-months ended September 30, 2002 and 2001, respectively, and increased to $87,000
from $65,000 for the nine-months ended September 30, 2002
and 2001, respectively. These
increases are due to a higher average debt balance in 2002 as a result of the note payable
to a related party as compared to 2001.


10
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|Other income.
Other income increased to $168,000 from $127,000 for the nine-months ended September 30,
2002 and 2001, respectively. Other income is attributable to payments received from a
previously written-off note receivable and equity investment.


Income Taxes.
The Company has not recorded a provision for income taxes, as the Company believes that a
tax provision or benefit will not be required for the fiscal year ending December 31,
2002.


Liquidity and Capital
Resources


As of September 30, 2002, the Company
had $4.3 million in cash and cash equivalents. The continued, successful sales and
marketing of the Companys products, the introduction of new products and the
continued on-going royalty stream will be critical to the Companys future liquidity.


Lumenis, Inc.
failed to make the royalty payment due October 30, 2002 for sales of their Lightsheer diode laser
system for the quarter ended, September 30, 2002. See Part II other information, Item 1
Legal Proceedings in this form 10-Q for more details. A loss or reduction in the
Companys on-going royalty stream could have a material adverse effect on our
business and financial condition, affect future liquidity and prevent the Company from
achieving and maintaining profitability.


The Consolidated Statements of Cash
Flows reflect events in the first nine months of 2002 and 2001 as they affect the
Companys liquidity. A net use of cash from operating activities was $730,000 in the
2002 period as compared to $7.7 million in 2001. Other than the significant decrease in
net loss items, positively affecting cash flows for the 2002 period were depreciation and
amortization, increases in other current assets and accrued liabilities. Negatively
impacting operating cash flows in 2002 were decreases in accounts receivable, inventories,
accounts payable and deferred revenue. Positively affecting cash flows for the 2001 period
were depreciation and amortization and deferred revenue. Negatively impacting operating
cash flows in 2001 were decreases in accounts receivable, inventories, other current
assets, accounts payable and accrued liabilities.


Net cash from investing activities
used cash of $89,000 in 2002 and provided cash of $3.8 million in 2001. Positively
affecting cash flows from investing activities for the 2002 period was an increase in
other assets. Negatively affecting cash flows from investing activities for 2002 were
purchases of property and equipment. Positively affecting cash flows from investing
activities for 2001 was proceeds from the sale of available-for-sale investments.
Negatively affecting cash flows from investing activities for the 2001 were purchases of
property and equipment and purchases of available- for-sale investments.


Net cash from financing activities
used cash of $663,000 in 2002 and $76,000 in 2001. Positively affecting cash flows from
financing activities for 2002 was proceeds from employee stock purchase plan. Negatively
affecting cash flows from financing activities for the 2002 were costs incurred related to
the issuance of common stock and payments on convertible debenture. Positively affecting
cash flows from financing activities for 2001 were proceeds from employee stock purchase
plan and proceeds from the issuance of notes payable to related party. Negatively
affecting cash flows from financing activities for 2001 were costs incurred related to the
issuance of common stock and payments on convertible debenture.


The Company anticipates that capital
expenditures for 2002 will total $125,000, consisting primarily of machinery, equipment,
computers and peripherals. The Company expects to finance these expenditures with cash on
hand and equipment leasing.


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
partnerships, 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.


11
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------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|RISK FACTORS


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


Light based technology is rapidly
changing and improving. In order to be successful, we must continue to make significant
investments in research and development in order to develop in a timely and cost-effective
manner new products that meet changing market demands, enhance existing products, and
achieve market acceptance for such products. We have in the past experienced delays in
developing and marketing new products and enhancing existing products. Furthermore, some
of our new products under development are based on unproven technology and/or technology
with which the Company has no previous experience. In addition, the market for hair
removal light based devices may already be saturated. At present, broader market
acceptance of light based hair removal is critical to our success. We intend to continue
to diversify our product line by developing cosmetic light based products for uses other
than hair and tattoo removal and treatment of pigmented and vascular lesions, 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 light based hair removal industry
is highly competitive and companies frequently introduce new products. We compete in the
development, manufacture, marketing and servicing of light based hair removal devices with
numerous other companies, some of which have substantially greater financial, marketing
and other resources than we do. Some of our competitors are able to sell light based hair
removal 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. Our products also face competition from 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.


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


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


12
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|Our quarterly operating results
are and may continue to be volatile, and that may hurt the price of our common stock.


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


We could be delisted
from NASDAQ.


For continued listing on The NASDAQ
SmallCap Market, a company must maintain a minimum bid price of $1.00 per share. A company
must also maintain a minimum requirement of net tangible assets of $2.5 million or market
capitalization of $35 million or net income (in latest fiscal year or 2 of the last 3
fiscal years) of $500,000. We are currently in compliance with all of NASDAQs
requirements for continued listing on The NASDAQ SmallCap Market. However, there can be no
assurance that we will remain in compliance with NASDAQs criteria for continued
listing or that we will remain listed on NASDAQ. The delisting of our common stock would
likely reduce the liquidity of our common stock and our ability to raise capital. If our
common stock is delisted from The NASDAQ SmallCap Market, it will likely be quoted on the
pink sheets maintained by the National Quotation Bureau, Inc. or NASDAQs
OTC Bulletin Board. These listings can make trading more difficult for stockholders.


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


We develop 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. We depend on an acceptable level
of reliability for purchased components. Reliability below expectations for key components
could have an adverse affect on inventory and inventory reserves.


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


All of our current products are light
based devices, which are subject to FDA regulations for clinical testing, manufacturing,
labeling, sale, distribution and promotion. Before a new product or a new use of or claim
for an existing product can be introduced into the market, we must obtain clearance from
the FDA. We have modified some of our products under letters to file. The FDA could
retroactively decide that the modifications require 510(k) or PMA clearance and may force
us to cease marketing and/or recall the modified products. Our products may also be
subject to state regulations, which are, in many instances, in flux. Changes in state
regulations may enhance or impede sales. Our products are subject to similar regulations
in our major international markets. Complying with these regulations is necessary for our
strategy of expanding the markets for and sales of our products into these countries.
Compliance with the regulatory clearance process in any country is expensive and
time-consuming, and we may not be able to obtain such clearances in a timely fashion or at
all. Regulatory clearances may necessitate clinical testing, limitations on the number of
sales and limitations on the type of end user, among other things. In certain instances,
these constraints can delay planned shipment schedules as design and engineering
modifications are made in response to regulatory concerns and requests.


Federal regulation allows our
products to be sold to and used by licensed practitioners as determined on a
state-by-state basis. As a result in some states, non-physicians may operate our product.
However, a state could disagree with the Companys decision to sell to a particular
type of end user. Similar risks apply to our international markets.  The purchase and
use of our products by non-physicians may result in their misuse, which could harm our
reputation and expose us to costly product liability litigation.


13
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|We are dependent on
third-party researchers.


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


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


In the past, we have issued
and still outstanding convertible securities in the form of warrants in order to
raise money and for payment of certain consulting arrangements. 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 could dilute
our stockholders and could adversely affect the market price of our common stock.


Our proprietary
technology has only limited protections.


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


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


14
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----------------------------------------------------------------------------------------------------------------

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


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


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


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


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



We may not be able to
successfully collect licensing royalties.


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


Lumenis, Inc.
failed to make the royalty payment due October 30, 2002 for sales of their Lightsheer diode laser
system for the quarter ended, September 30, 2002. See Part II other information, Item 1
Legal Proceedings in this form 10-Q for more details. A loss or reduction in the
Companys on-going royalty stream could have a material adverse effect on our
business and financial condition, affect future liquidity and prevent the Company from
achieving and maintaining profitability.


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

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


We face risks of obsolete
inventory as a result of rapid changes in technology.


We operate in an industry that is
subject to rapid changes in technology and intense competition, which could make our light
based systems obsolete. If forecasted demand decreases, we could have excess inventories,
which could obsolete certain product lines and result in a write-off of some or our entire
inventory.


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 product warranties.


We could incur substantial costs as a
result of product failures for which the Company is responsible under warranty
obligations.


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.


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

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


We face risks associated with
selling more than half of our products and services internationally.


We sell more than half of our
products and services outside of the United States and Canada and expect that they will
continue to be significant. As a result, a major part of our revenues and operating
results could be adversely affected by risks associated with international sales. In
particular, longer payment cycles common in foreign markets, credit risk and delays in
obtaining necessary import or foreign regulating approvals for products may occur.


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


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

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

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


Derivative Financial
Instruments, Other Financial Instruments, and Derivative Commodity Instruments.


SFAS No. 107 requires disclosure
about fair value of financial instruments. Financial instruments consist of cash
equivalents, accounts receivable, accounts payable and short-term debt obligations. The
fair value of these financial instruments approximates their carrying amount as of
September 30, 2002 due to their short-term nature. All of the Companys investments
are considered cash equivalent money market accounts and debt securities which are
considered available-for-sale investments and are carried at market value, with the
difference between cost and market value, net of related tax effects, recorded as a
separate component of stockholders equity. Accordingly, the Company has no
quantitative information concerning the market risk of participating in such investments.


Under its current policies, the
Company does not use derivative financial instruments, derivative commodity instruments or
other financial instruments to manage its exposure to changes in interest rates, foreign
currency exchange rates, commodity prices or equity prices.


Primary Market Risk
Exposures


The Companys primary market
risk exposures are in the areas of interest rate risk. The Companys investment
portfolio of cash equivalents is subject to interest rate fluctuations, but the Company
believes this risk is immaterial because of the short-term nature of these investments.
The Companys currency exchange rate fluctuations has been and is expected to
continue to be modest since the Company sells its products in United States currency.



Item 4. Controls and
Procedures


Within 90 days before filing this
report, we evaluated the effectiveness of the design and operation of our disclosure
controls and procedures. Our disclosure controls and procedures are the controls and other
procedures that we designed to ensure that we record, process, summarize and report in a
timely manner the information we must disclose in reports that we file with or submit to
the SEC. Joseph P. Caruso, our President and Chief Executive Officer, and Paul Weiner, our
Vice President and Chief Financial Officer, supervised and participated in this
evaluation. Based on this evaluation, Messrs. Caruso and Weiner concluded that, as of the
date of their evaluation, our disclosure controls and procedures were effective. Since the
date of the evaluation described above, there have not been any significant changes in our
internal accounting controls or in other factors that could significantly affect those
controls.


18
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|PART II  OTHER
INFORMATION


Item 1. Legal Proceedings


The Company is a party to various
legal proceedings incident to its business. Except as noted below, there are no legal
proceedings pending or threatened against the Company that management believes are likely
to have a material adverse effect on the Companys consolidated financial position.


The Company is the exclusive licensee
of U.S. Patent Nos. 5,595,568 and 5,735,844 (the 568 and 844
patents) from Massachusetts General Hospital. Pursuant to a Patent License Agreement
dated December 7, 1998, Lumenis, Inc.
pays the Company a 7.5% royalty on net sales of the LightSheer
diode laser system. As of the quarter ended September 30, 2002 the Company received approximately
$3.6 million dollars in royalties from Lumenis for sales of the LightSheer system. On October 24, 2002,
Lumenis told the Company that it would no longer pay royalties for sales of the LightSheer
system and filed a complaint in the United States District Court for the Northern District
of California seeking a declaratory judgement that the 568 and 844 patents are
invalid and/or unenforceable and not infringed by any Lumenis products. The Company believes that Lumenis'
claims are without merit and on October 29, 2002, the Company filed a complaint in the Middlesex County Superior Court in
Massachusetts against Lumenis for breach of contract, breach of the implied covenant of
good faith and fair dealing, and violation of Massachusetts General Laws Chapter 93A.
Neither Lumenis nor the Company has served their respective complaints on each other. The
parties are in negotiations in an attempt to settle the matter as an alternative to
litigation.


On February 15, 2002, the Company
commenced an action for patent infringement in the United States District Court for the
District of Massachusetts against Altus Medical Inc. (Altus) seeking both
monetary damages and injunctive relief. The complaint alleges Altus CoolGlide and
CoolGlide Excel laser systems willfully infringe a U.S. patent No. 5,735,844, which is
exclusively licensed to the Company by The General Hospital Corporation
(General). General has been added as a plaintiff in this lawsuit. Altus
answered the complaint denying that its products infringe the asserted patent and filed a
counterclaim seeking a declaratory judgment that the asserted patent is invalid and not
infringed. The Company and General filed a reply denying the material allegations of the
counterclaims. The Company and General have further alleged that Altus CoolGlide
Vantage laser system also willfully infringes the asserted patent. A trial date has not
yet been set.


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.


19
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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


Exhibits furnished:


99.1  Certificate pursuant to
18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (filed herewith).


99.2  Certificate pursuant to
18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (filed herewith).

20
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Signatures


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

|Date: November 12, 2002 |  | Palomar
      Medical Technologies, Inc.
                         (Registrant)
      
      By: /s/ Louis P. Valente
             
             Louis P. Valente
             Chairman of the Board of Directors
|----------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Date: November 12, 2002 |  | By: /s/ Joseph P. Caruso
             
             Joseph P. Caruso
             President, Chief Executive Officer
      and Director
|----------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------

|Date: November 12, 2002 |  | By: /s/ Paul S. Weiner
             
             Paul S. Weiner
             Chief Financial Officer
|----------------------- |  | -------------------------------------------------------------------------------------------------------------------------

|21
|--

|Certifications


I, Joseph P. Caruso certify that:
|--------------------------------------------------

| | 1. | I
have reviewed this quarterly report on Form 10-Q of Palomar Medical
          Technologies, Inc.
| | -- | --------------------------------------------------------------------------------------------------

| | 2. | Based
on my knowledge, this quarterly report does not contain any untrue           statement of
a material fact or omit to state a material fact necessary to make           the
statements made, in light of the circumstances under which such statements           were
made, not misleading with respect to the period covered by this quarterly
          report;
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | Based
on my knowledge, the financial statements, and other financial information
          included in this quarterly report, fairly present in all material respects the
          financial condition, results of operations and cash flows of the registrant as
          of, and for, the period presented in this quarterly report;
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. | The
registrants other certifying officers and I are responsible for
          establishing and maintaining disclosure controls and procedures as defined in
          Exchange Act Rules 13a-14 and 15d-14 for the registrant and have:
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | a) | designed
such disclosure controls and procedures to ensure that material           information
relating to the registrant, including its consolidated subsidiaries,           is made
known to us by others within those entities, particularly during the           period in
which this quarterly report is being prepared;
| |  |  | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | b) | evaluated
the effectiveness of the registrants disclosure controls and           procedures
as of a date within 90 days prior to the filing date of this           quarterly report
(the Evaluation Date ); and
| |  |  | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | c) | presented
in this quarterly report our conclusions about the effectiveness of           the
disclosure controls and procedures based on our evaluation as of the           Evaluation
Date;
| |  |  | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5. | The
registrants other certifying officers and I have disclosed, based on           our
most recent evaluation, to the registrants auditors and the audit
          committee of registrants board of directors (or persons performing the
          equivalent functions):
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | a) | all
significant deficiencies in the design or operation of internal controls
                    which could adversely affect the registrants ability to record,
process,                     summarize and report financial data and have identified for
the                     registrants auditors any material weaknesses in internal
controls; and
| |  |  | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | b) | any
fraud, whether or not material, that involves management or other employees           who
have a significant role in the registrants internal controls; and
| |  |  | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 6. | The
registrants other certifying officers and I have indicated in this
          quarterly report whether there were significant changes in internal controls or
          in other factors that could significantly affect internal controls subsequent
to           the date of our most recent evaluation, including any corrective actions
with           regard to significant deficiencies and material weaknesses.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Date: November 12, 2002
                  |  | By: /s/ Joseph P. Caruso
             
             Joseph P. Caruso
             President, Chief Executive Officer
      and Director
|------------------------------------------------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------

|22
|--

|
|

I, Paul S. Weiner certify that:

| | 1. | I
have reviewed this quarterly report on Form 10-Q of Palomar Medical
          Technologies, Inc.;
| | -- | ---------------------------------------------------------------------------------------------------

| | 2. | Based
on my knowledge, this quarterly report does not contain any untrue           statement of
a material fact or omit to state a material fact necessary to make           the
statements made, in light of the circumstances under which such statements           were
made, not misleading with respect to the period covered by this quarterly
          report;
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | Based
on my knowledge, the financial statements, and other financial information
          included in this quarterly report, fairly present in all material respects the
          financial condition, results of operations and cash flows of the registrant as
          of, and for, the period presented in this quarterly report;
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. | The
registrants other certifying officers and I are responsible for
          establishing and maintaining disclosure controls and procedures as defined in
          Exchange Act Rules 13a-14 and 15d-14 for the registrant and have:
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | a) | designed
such disclosure controls and procedures to ensure that material           information
relating to the registrant, including its consolidated subsidiaries,           is made
known to us by others within those entities, particularly during the           period in
which this quarterly report is being prepared;
| |  |  | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | b) | evaluated
the effectiveness of the registrants disclosure controls and           procedures
as of a date within 90 days prior to the filing date of this           quarterly report
(the Evaluation Date ); and
| |  |  | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | c) | presented
in this quarterly report our conclusions about the effectiveness of           the
disclosure controls and procedures based on our evaluation as of the           Evaluation
Date;
| |  |  | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5. | The
registrants other certifying officers and I have disclosed, based on           our
most recent evaluation, to the registrants auditors and the audit
          committee of registrants board of directors (or persons performing the
          equivalent functions):
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | a) | all
significant deficiencies in the design or operation of internal controls
                    which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for
the registrants auditors any material weaknesses in internal
controls; and
| |  |  | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | b) | any
fraud, whether or not material, that involves management or other employees           who
have a significant role in the registrants internal controls; and
| |  |  | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 6. | The
registrants other certifying officers and I have indicated in this
          quarterly report whether there were significant changes in internal controls or
          in other factors that could significantly affect internal controls subsequent
to           the date of our most recent evaluation, including any corrective actions
with           regard to significant deficiencies and material weaknesses.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Date: November 12, 2002
                  |  | By: /s/ Paul S. Weiner
             
             Paul S. Weiner
             Chief Financial Officer
|------------------------------------------------ |  | -------------------------------------------------------------------------------------------------------------------

|23
|--