|FORM 10-Q


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


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


For quarterly period
ended March 31, 2001


OR


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


For the transition
period from ________ to ________


Commission file number:
0-22340


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

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

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


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


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


As of
March 31, 2001, 10,446,564 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
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|PART II - OTHER INFORMATION   
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|SIGNATURES                    

|-i-
|---

|PART I - FINANCIAL
INFORMATION



Item 1.   Consolidated
Financial Statements (Unaudited).


PALOMAR MEDICAL
TECHNOLOGIES, INC. AND SUBSIDIARIES



CONSOLIDATED CONDENSED
BALANCE SHEETS
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                            | December 31,2000 | March 31,2001
|----------------------------------------------------------- | ---------------- | -------------
|
|ASSETS                                                     
|Current Assets:                                             |                  |              
|Cash and cash equivalents                                   |                  |              
|Available-for-sale investments, at market value             |                  |              
|Accounts receivable, net                                    |                  |              
|Inventories                                                 |                  |              
|Other current assets                                        |                  |              
|                                                           
|Total current assets                                        |                  |              
|                                                           
|Property and Equipment, Net                                 |                  |              
|                                                           
|Other Assets                                                |                  |              
|                                                           
|                                                            |                  |              
|                                                           
|LIABILITIES AND STOCKHOLDERS EQUITY                       
|Current Liabilities:                                        |                  |              
|Current portion of long-term debt                           |                  |              
|Accounts payable                                            |                  |              
|Accrued liabilities                                         |                  |              
|Accrued income taxes                                        |                  |              
|Deferred revenue                                            |                  |              
|                                                           
|Total current liabilities                                   |                  |              
|                                                           
|Long-Term Debt, Net of Current Portion                      |                  |              
|                                                           
|Preferred Stock Accrued Dividends and Interest              |                  |              
|                                                           
|Stockholders Equity:                                       |                  |              
|Preferred stock, $.01 par value-                            |                  |              
|Authorized - 1,500,000 shares                               |                  |              
|Issued and outstanding -                                    |                  |              
|6,000 shares                                                |                  |              
|at December 31, 2000 and March 31, 2001                     |                  |              
|Common stock, $.01 par value-                               |                  |              
|Authorized - 45,000,000 shares                              |                  |              
|Issued - 11,074,393 at December 31, 2000 and March 31, 2001 |                  |              
|Additional paid-in capital                                  |                  |              
|Accumulated deficit                                         |                  |              
|Unrealized loss on available-for-sale investments           |                  |              
|Less: Treasury stock - 763,835 and 627,829 shares at cost   |                  |              
|at December 31, 2000 and March 31, 2001, respectively       |                  |              
|                                                           
|Total stockholders equity                                  |                  |              
|                                                           
|                                                            |                  |              
|                                                           

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


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

|PALOMAR MEDICAL
TECHNOLOGIES, INC. AND SUBSIDIARIES



CONSOLIDATED
STATEMENTS OF OPERATIONS(Unaudited)
|-------------------------------------------------------------------------------------------------------

|                                                                | Three Months EndedMarch 31,
|--------------------------------------------------------------- | ---------------------------
|
|Product Revenues                                                |                            
|Royalty Revenues                                                |                            
|                                                               
|Total Revenues                                                  |                            
|                                                               
|Cost of Product Revenues                                        |                            
|Cost of Royalty Revenues                                        |                            
|                                                               
|Total Cost of Revenues                                          |                            
|                                                               
|Gross Margin                                                    |                            
|                                                               
|Operating Expenses                                              |                            
|                                                               
|Research and development                                        |                            
|Sales and marketing                                             |                            
|General and administrative                                      |                            
|                                                               
|Total operating expenses                                        |                            
|                                                               
|Loss from operations                                            |                            
|                                                               
|Interest Income                                                 |                            
|Interest Expense                                                |                            
|Other Income                                                    |                            
|                                                               
|Loss Before Cumulative Effect of Change in
Accounting Method    |                            
|                                                               
|Cumulative Effect of Change in Accounting Method                |                            
|                                                               
|Net Loss                                                        |                            
|                                                               
|Basic and Diluted Net Loss Per Share                            |                            
|                                                               
|Continuing Operations                                           |                            
|Cumulative Effect of Change in Accounting Method                |                            
|                                                               
|Total Basic and Diluted Net Loss Per Share                      |                            
|                                                               
|Basic and Diluted Weighted Average Number of Shares Outstanding |                            
|                                                               

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

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

|PALOMAR MEDICAL
TECHNOLOGIES, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY(Unaudited)
|----------------------------------------------------------------------------------------------------------------

|                                                                      | Preferred Stock | Common Stock | Treasury Stock | AdditionalPaid-inCapital | AccumulatedDeficit | Unrealized (Loss) Gainon Available-for-Sale Investments | TotalStockholdersEquity (Deficit)
|--------------------------------------------------------------------- | --------------- | ------------ | -------------- | ------------------------ | ------------------ | ------------------------------------------------------- | ----------------------------------
|
|Balance, December 31, 2000                                            |                 |              |                | 6,000                    |                    | $                                                       | 60                                
|                                                                     
|Costs incurred related to the issuance of common stock                |                 |              |                |                         |                    |                                                         |                                  
|Issuance of stock for  Employee Stock Purchase Plan                   |                 |              |                |                         |                    |                                                         |                                  
|Issuance of stock for 2000 employer 401K        matching contribution |                 |              |                |                         |                    |                                                         |                                  
|Unrealized gain on available-for-sale investments                     |                 |              |                |                         |                    |                                                         |                                  
|Preferred stock dividends                                             |                 |              |                |                         |                    |                                                         |                                  
|Net  loss                                                             |                 |              |                |                         |                    |                                                         |                                  
|                                                                     
|Balance, March 31, 2001                                               |                 |              |                | 6,000                    |                    | $                                                       | 60                                
|                                                                     

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

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

|PALOMAR MEDICAL
TECHNOLOGIES, INC. AND SUBSIDIARIES


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

|                                                                       | Three Months Ended March 31,
|---------------------------------------------------------------------- | ----------------------------
|
|Cash Flows from Operating Activities:                                  |                             
|Net loss                                                               |                             
|                                                                      
|Adjustments to reconcile net loss from continuing operations           |                             
|to net cash used in operating activities-                              |                             
|Depreciation and amortization                                          |                             
|Changes in assets and liabilities,                                     |                             
|Accounts receivable                                                    |                             
|Inventories                                                            |                             
|Receivable from sale of subsidiary                                     |                             
|Other current assets                                                   |                             
|Accounts payable                                                       |                             
|Accrued liabilities                                                    |                             
|Accrued income taxes                                                   |                             
|Deferred revenue                                                       |                             
|                                                                      
|Net cash used in operating activities                                  |                             
|                                                                      
|Cash Flows from Investing Activities:                                  |                             
|Purchases of property and equipment                                    |                             
|Purchases of available-for-sale investments                            |                             
|Proceeds from sale of available-for-sale investments                   |                             
|Decrease in other assets                                               |                             
|                                                                      
|Net cash provided by investing activities                              |                             
|                                                                      
|Cash Flows from Financing Activities:                                  |                             
|Proceeds from the exercise of warrants, stock options                  |                             
|and Employee Stock Purchase Plan                                       |                             
|Costs incurred related to issuance of common stock                     |                             
|Payment on Swiss Franc convertible debentures                          |                             
|                                                                      
|Net cash provided by (used in) financing activities                    |                             
|                                                                      
|Net increase (decrease) in cash and cash equivalents                   |                             
|Cash and cash equivalents, beginning of the period                     |                             
|                                                                      
|Cash and cash equivalents, end of the period                           |                             
|                                                                      
|Supplemental Disclosure of Cash Flow Information:                      |                             
|Cash paid for interest                                                 |                             
|                                                                      
|Supplemental Disclosure of Noncash Financing and Investing Activities: |                             
|Unrealized gain (loss) on available-for-sale investments               |                             
|                                                                      
|Preferred stock accrued dividends and interest                         |                             
|                                                                      

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

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

|PALOMAR MEDICAL
TECHNOLOGIES, INC. AND SUBSIDIARIES



NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


1.  BASIS OF
PRESENTATION


The
accompanying unaudited consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States for interim
information. Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States for complete
financial statements. The results of operations for the interim periods shown in this
report are not necessarily indicative of expected results for any future interim period
or for the entire fiscal year. Palomar Medical Technologies, Inc. and its subsidiaries
(the Company or Palomar) believes that the quarterly information presented includes
all adjustments (consisting of normal, recurring adjustments) necessary for a fair
presentation in accordance with accounting principles generally accepted in the United
States. The accompanying financial statements and notes should be read in conjunction
with the Companys Form 10-K for the year ended December 31, 2000.


2.  CASH AND
CASH EQUIVALENTS


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


3.  INVESTMENTS


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

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

|Available-for-sale
investments in the accompanying balance sheet at March 31, 2001 include debt securities
of $3,893,104. Actual maturities may differ from contractual maturities as a result of
the Companys intent to sell these securities prior to maturity and as a result of call
features of the securities that enable either the Company, the issuer, or both to redeem
these securities at an earlier date. Unrealized holding gains totaling $1,584 on such
debt securities was recorded in stockholders equity during three months ended March 31,
2001.


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

|PALOMAR MEDICAL
TECHNOLOGIES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS


4.  INVENTORIES


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

|                | December 31,2000 | March 31,2001
|--------------- | ---------------- | -------------
|Raw materials   |                  | $1,331,839   
|Work-in-process |                  | 643,161      
|Finished goods  |                  | 436,526      
|               
|                |                  | $2,411,526   
|               

|5.  PROPERTY AND EQUIPMENT


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

|                                | December 31,2000 | March 31,2001
|------------------------------- | ---------------- | -------------
|Machinery and equipment         |                  | $   969,118  
|Furniture and fixtures          |                  | 1,266,991    
|Leasehold improvements          |                  | 251,107      
|                               
|                                |                  | 2,487,216    
|Less:  Accumulated depreciation |                 
|and amortization                |                  | 1,608,060    
|                               
|                                |                  | $   879,156  
|                               

|6.  LONG-TERM DEBT


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

|                                                 | December 31,2000 | March 31,2001
|------------------------------------------------ | ---------------- | -------------
|Dollar - denominated convertible debentures      |                  | $    500,000 
|Swiss franc - denominated convertible debentures |                  | 951,842      
|                                                
|                                                 |                  | 1,451,842    
|Less - current maturities                        |                  | (951,842     
|                                                
|                                                 |                  | $    500,000 
|                                                

|-6-
|---

|PALOMAR MEDICAL
TECHNOLOGIES, INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


7.  SEGMENT AND
GEOGRAPHIC INFORMATION


Product
revenue from international sources were $0.7 million and $1.3 million for the three
months ended March 31, 2000 and 2001. The following table represents the percentage of product revenue by geographic region from
customers for the three-month periods ended March 31, 2000 and 2001:
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                   | Three Months EndedMarch 31,
|------------------ | ---------------------------
|
|United States      |                            
|Japan              |                            
|Asia/Pacific       |                            
|Canada/Australia   |                            
|Europe/Middle East |                            
|Latin America      |                            
|                  
|Total              |                            
|                  

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

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

|During
the three months ended March 31, 2001, no options were granted or exercised and 59,600
options were cancelled.
|---------------------------------------------------------------------------------------------------------------------

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

|During
the three months ended March 31, 2001, no warrants were granted or exercised and 221,367
warrants were cancelled.


9.  NET INCOME (LOSS) PER
COMMON SHARE


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


-7-
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|PALOMAR MEDICAL
TECHNOLOGIES, INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


The
Companys net loss per share for the three months ended March 31, 2000 and 2001 is as
follows:
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                             | Three Months EndedMarch 31,
|-------------------------------------------- | ---------------------------
|
|Net loss                                     |                            
|Preferred stock dividends                    |                            
|                                            
|Net loss attributable to common stockholders |                            
|                                            
|Basic and diluted net loss per common share  |                            
|                                            
|Basic and diluted weighted average number of |                            
|shares outstanding                           |                            
|                                            

|For
the three months ended March 31, 2000 and 2001, 4,214,814 and 4,470,859, respectively, of
potential common shares related to outstanding stock options, stock warrants and
convertible securities were not included in the diluted weighted average shares
outstanding as they were antidilutive.


10. COMPREHENSIVE INCOME
(LOSS)


The
Company adopted SFAS 130, Reporting Comprehensive Income, effective January 1, 1998. SFAS
130 established standards for reporting and display of comprehensive income (loss) and
its components in the financial statements. The Companys only item of other
comprehensive income (loss) relates to unrealized losses on its available-for-sale
investments and is presented separately on the balance sheet as required. A
reconciliation of comprehensive income (loss) is as follows:
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                      | Three Months EndedMarch 31,
|------------------------------------- | ---------------------------
|
|Net loss                              |                            
|Unrealized gain on available-for-sale |                            
|investments                           |                            
|                                     
|Comprehensive loss                    |                            
|                                     

|-8-
|---

|PALOMAR MEDICAL
TECHNOLOGIES, INC. AND SUBSIDIARIES


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


11.  REVENUE RECOGNITION


The
Company recognizes product revenues upon shipment and acceptance. Provisions are made at
the time of revenue recognition for any applicable warranty costs expected to be
incurred. Revenues from services are recognized in the period the services are provided.


During
the quarter ended June 30, 2000, the Company adopted Securities and Exchange Commission
(SEC) Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial
Statements. As a result of adopting SAB No. 101, the Company now recognizes royalty
revenues when received rather than when earned. In accordance with SAB No. 101, the
Company recorded the impact of adopting SAB No. 101 as a cumulative catch-up adjustment
to income in the current years statement of operations, effective January 1, 2000.
Restated results of operations for the quarter ended March 31, 2000 as a result of
adopting SAB No. 101 are as follows:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                   | Three Months EndedMarch 31, 2000 | Three Months EndedMarch 31, 2000
|------------------ | -------------------------------- | --------------------------------
|
|Revenues           |                                  | $2,778,932                      
|Gross Profit       |                                  | $258,554                        
|Operating Loss     |                                  | $(3,559,126                     
|Net Loss           |                                  | $(2,951,268                     
|Net Loss Per Share |                                  | $(0.30                          

|-9-
|---

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

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

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


On
April 27, 1999, the Company sold all of the issued and outstanding common stock of
Palomars Star Medical Technologies, Inc. (Star) subsidiary to Coherent, Inc.
(Coherent) for $65 million, paid in cash. The purchase price was paid to the
stockholders of Star in proportion to their holdings of Star capital stock. On the date
of sale, Palomar owned 82.46% of Star. Palomar received net proceeds of $49,736,023. As a
result of the above transaction, the Company believes it will be able to fund its
operations for the short-term. The Company believes the successful introduction and
marketing of new products will become critical to the Companys long-term success. Broad
market acceptance of laser hair removal and specific acceptance of the Palomar
SLP1000 diode laser system, Palomar EsteLux light based system and the Palomar
Q-Yag 5 laser system is critical to the Companys success. The three systems, all of
which have FDA approval, cover a wide spectrum of cosmetic applications; the Palomar
SLP1000 is the first diode laser system in the marketplace cleared for use on all skin
types and has different hand pieces to be used in a variety of cosmetic applications
including hair and vascular lesion removal; the Palomar EsteLux system is a fast, more
compact and efficient light based system for hair removal; and the Palomar Q-Yag 5 is a
laser system for tattoo and pigmented lesion removal. The Company has traditionally spent
a significant amount of its resources in developing new technology and products. The
Company expects this trend will continue for the foreseeable future.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| |  | (i) |  | REVENUES
AND GROSS PROFIT: Three Months Ended March 31, 2001, Compared to Three Months Ended March
31, 2000
| |  | --- |  | -----------------------------------------------------------------------------------------------------------

|For
the three months ended March 31, 2001, the Companys revenues increased to $3.6 million,
as compared to $2.9 million for the three months ended March 31, 2000. The increase in
the Companys revenues of $0.7 million, or 26% from the three months ended March 31,
2000, was due to an increase in product sales of $0.9 million associated with the
SLP1000 diode laser. This increase was offset by a decrease of $0.2 million in
royalties received by the Company.


Gross
profit for the three months ended March 31, 2001 was $890,000 (25% of revenues) compared
to $303,000 (11% of revenues) for the three months ended March 31, 2000. The increase in
gross profit and gross profit percentage was mainly due to sales volume associated with
the SLP1000.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (ii) |  | OPERATING
AND OTHER EXPENSES: Three Months Ended March 31, 2001, Compared to Three Months Ended
March 31, 2000
| |  | ---- |  | --------------------------------------------------------------------------------------------------------------

|Research
and development costs for the three months ended March 31, 2001 decreased to $1.6 million
(44% of revenues) compared to $2.1 million (73% of revenues) for the three months ended
March 31, 2000. The continued spending on research and development reflects the Companys
commitment to research and development for devices and delivery systems for cosmetic and
medical applications using a variety of lasers, while continuing dermatology research
utilizing the Companys laser platforms. The research and development goals in the field
of laser hair removal are to design systems that (1) permit more rapid treatment of large
areas, (2) have high gross margins, and (3) are manufactured at a lower cost, thus
addressing broader markets. Further, the Company is aiming to address dermatology and
cosmetic procedure markets other than hair, including the fields of fat reduction and
acne treatment covered in its expanded research agreement with Massachusetts General
Hospital.


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

|Sales
and marketing expenses increased to $718,000, or 20% of revenues for the three months
ended March 31, 2001, from $482,000, or 17% of revenues for the three months ended March
31, 2000. The increase in selling and marketing expenses is directly attributable to the
sales volumes related to the SLP1000 diode laser.


General
and administrative expenses decreased to $881,000, or 24% of revenues for the three
months ended March 31, 2001, as compared to $1.3 million, or 44% of revenues for the
three months ended March 31, 2000. This decrease in general and administrative expenses
is attributable the companys continued efforts on managing costs.


Interest
expense decreased to $24,000 for the three months ended March 31, 2001, compared to
$50,000 for the three months ended March 31, 2000. As a result of the sale of Star
Medical in 1999, which generated $49.7 million in cash, the Company paid a significant
portion of its outstanding debt, which has resulted in a decrease of interest expense.


Interest
income decreased to $298,000 for the three months ended March 31, 2001, compared to
$414,000 for the three months ended March 31, 2000. This amount represents interest
earned on the balance of the funds received from the sale of Star which are invested in
high-grade corporate and government notes and bonds and will be used to fund future
ongoing operations and research and development efforts.


Other
income decreased to approximately $127,000 for the three months ended March 31, 2001.
This amount compares to $245,000 for the three months ended March 31, 2000.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|The
Companys operations are carried out at the subsidiary level and consist primarily of
research and development. To date, the Companys operating subsidiaries have required
cash advances from the Company to fund their operations. As of March 31, 2001, the
Company had $13.1 million in cash, cash equivalents and available-for-sale investments.
With the proceeds from the Star sale, the Company believes that its financial position
will meet its ongoing cash flow requirements and fund expected operating losses of its
subsidiaries in the near term. The successful introduction and marketing of new products
currently under development will be critical to future liquidity.


The
Companys operating activities used cash of $1.8 million and $5.1 million for the three
months ended March 31, 2001 and 2000, respectively. Net cash used during the three months
ended March 31, 2001 consisted primarily of a net loss from operations, an increase in
accounts receivable and a decrease in accounts payable, offset by depreciation and
amortization, a decrease in inventories, a decrease in other current assets, an increase
in accrued liabilities and deferred revenue. Net cash used during the three months ended
March 31, 2000 consisted primarily of a net loss from operations, an increase in
receivable from the sale of subsidiary, a decrease in accrued liabilities, a decrease in
accrued income taxes and a decrease in deferred revenue, offset by depreciation and
amortization, a decrease in accounts receivable, a decrease in inventories and a decrease
in other current assets.


Investing
activities provided cash of $2.0 million and $5.4 million during the three months ended
March 31, 2001 and 2000, respectively. During the three months ended March 31, 2001, the
principal uses were purchases of investments offset by proceeds from the sale of
investments. During the three months ended March 31, 2000, the principle uses were
purchases of property and equipment offset by proceeds from the sale of investments and a
decrease in other assets.


Financing
activities used cash of $507,000 during the three months ended March 31, 2001 due to
costs incurred related to the issuance of common stock and a payment made on Swiss Franc
convertible debentures offset by the proceeds from the issuance of treasury stock
pursuant to the employee stock purchase plan and 401K matching contribution. Financing
activities provided cash of $101,000 for the three months ended March 31, 2000 due
primarily to the proceeds from the exercise of warrants, stock options and employee stock
purchase plan offset by costs incurred related to the issuance of common stock.


The
Company anticipates that capital expenditures for the remainder of 2001 will total
approximately $300,000, consisting primarily of machinery, equipment, computers and
peripherals. The Company expects to finance these expenditures with cash on hand and
equipment leasing lines, if available.


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

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



RISK FACTORS


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


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


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


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


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


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


-12-
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|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 million or market capitalization of $35 million or net income (in
latest fiscal year or 2 of the last 3 fiscal years) of $500,000. In March 1999, NASDAQ
held a hearing regarding our continued listing on The NASDAQ SmallCap Market in light of
the fact that our common stock had traded below the $1.00 minimum bid price requirement
for longer than 30 trading days. As a result of our reverse stock split, we regained
compliance with the minimum bid price requirement before that date, and are now in
compliance with all of NASDAQs requirements for continued listing on The NASDAQ SmallCap
Market. However, there can be no assurance that we will remain in compliance with
NASDAQs criteria for continued listing or that we will remain listed on NASDAQ. The
delisting of our common stock would likely reduce the liquidity of our common stock and
our ability to raise capital. If our common stock is delisted from The NASDAQ SmallCap
Market, it will likely be quoted on the pink sheets maintained by the National
Quotation Bureau, Inc. or NASDAQs OTC Bulletin Board. These listings can make trading
more difficult for stockholders.


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


We
develop laser systems that incorporate third-party components as part of the overall
systems. Some of these items are custom made or otherwise not readily available on the
market. We purchase some of these components from small, specialized vendors that are not
well capitalized. A disruption in the delivery of these key components could have an
adverse effect on our business. In 2001, we anticipate that we will be substantially
dependent on an overseas third-party manufacturer over whom we do not have absolute
control to provide us with critical components for our Super Long Pulse diode laser.


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


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


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


We are dependent on
third-party researchers.


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


-13-
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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


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


Our proprietary
technology has only limited protections.


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


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


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


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


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


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

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


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


We may not be able to
successfully collect licensing royalties.


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


We face risks associated
with pending litigation.


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


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


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


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


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


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

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

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

|SFAS
No. 107 requires disclosure about fair value of financial instruments. Financial
instruments consist of cash equivalents, investments, accounts receivable, accounts
payable and long-term debt obligations. The fair value of these financial instruments
approximates their carrying amount as of March 31, 2001. All of the Companys investments
are considered cash equivalent money market accounts and debt securities which are
considered available-for-sale investments and are carried at market value, with the
difference between cost and market value, net of related tax effects, recorded as a
separate component of stockholders (deficit) equity. Accordingly, the Company has no
quantitative information concerning the market risk of participating in such investments.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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


The
Companys significant exposure to currency exchange rate fluctuations is specifically
related to its Swiss franc convertible debentures. The impact of exchange rate movements
on these debentures was immaterial for the three months ended March 31, 2001. The Company
has mitigated its potential exposure related to such debentures by entering into forward
contracts that have been designated as a cash flow hedge for the final remaining payment
due in June of 2001. The Companys other exposure to currency exchange rate fluctuations
has been and is expected to continue to be modest since it sells its products in United
States dollars.


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

|PART II - OTHER
INFORMATION



Item 1. Legal
Proceedings.


On
March 11, 1999, the United States District Court for the Southern District of New York
granted plaintiffs leave to amend their complaint in the action styled Varljen v. H.J.
Meyers, Inc., et. al. The court entered a final judgement of dismissal with prejudice on
November 6, 2000. All payments required by Palomar under the settlement agreement have
been made except for the delivery of 358,547 shares of Palomar Common stock, which is the
balance of the shares owed under the settlement agreement. These shares will be delivered
in 2001 upon receipt of instruction from plaintiffs counsel.


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




Item 2. Changes in
Securities.


Not
applicable.



Item 3. Defaults upon
Senior Securities.


Not
applicable.




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


Not
applicable.




Item 5. Other
Information.


Not
applicable.


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

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

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

|^^^3(i).1 |  | Certificate of Designation, as filed with the Delaware Secretary of State on April 21, 1999.                                        |        
|--------- |  | ----------------------------------------------------------------------------------------------------------------------------------- | -------
|          | 
|^3(i).2   |  | Second Restated Certificate of Incorporation, as filed with the Delaware Secretary of State on January 8, 1999.                     |        
|          | 
|^^^^3(ii) |  | Bylaws, as amended.                                                                                                                 |        
|          | 
|^4.1      |  | Common Stock Certificate.                                                                                                           |        
|          | 
|^^4.2     |  | Rights Agreement Between Palomar Medical Technologies, Inc. and American Stock Transfer & Trust Company, dated as of April 20, 1999 |        
|          | 
|##4.3     |  | Form of 4.5% Convertible Debenture (denominated in Swiss Francs) due July 3, 2003.                                                  |        
|          | 
|####4.4   |  | First Allonge and Amendment to 4.5% Subordinated Convertible Debenture                                                              |        
|          | 
|##4.5     |  | Form of 6% Convertible Debenture due March 13, 2002.                                                                                |        
|          | 
|<4.6      |  | Second Amended 1991 Stock Option Plan.                                                                                              |        
|          | 
|<4.7      |  | Second Amended 1993 Stock Option Plan.                                                                                              |        
|          | 
|<4.8      |  | Second Amended 1995 Stock Option Plan.                                                                                              |        
|          | 
|<4.9      |  | Second Amended 1996 Stock Option Plan.                                                                                              |        
|          | 
|<4.10     |  | Third Amended 1996 Employee Stock Purchase Plan.                                                                                    |        
|          | 
|*4.11     |  | Form of Stock Option Grant under the 1991, 1993 and 1995 Amended Stock Option Plans.                                                |        
|          | 
|##4.12    |  | Form of Stock Option Agreement under the 1996 Amended Stock Option Plan.                                                            |        
|          | 
|#4.13     |  | Form of Company Warrant to Purchase Common Stock.                                                                                   |        
|          | 
|###10.1   |  | Employment Agreement, dated as of May 15, 1997, between the Company and Louis P. Valente.                                           |        
|          | 
|<10.2     |  | Amendment No. 1 to Key Employment Agreement between the Company and Louis P. Valente dated May 15, 1999.                            |        
|          | 
|####10.3  |  | Amendment No. 2 to Key Employment Agreement between the Company and Louis P. Valente dated February 1, 2000                         |        
|          | 
|<10.4     |  | Amended and Restated Employment Agreement between the Company and Joseph P. Caruso dated June 30, 1999.                             |        
|          | 
|####10.5  |  | Amendment No. 1 to Amended and Restated Employment Agreement between the Company and Joseph P. Caruso, dated February 1, 2000.      |        
|          | 
|<10.6     |  | Lease for premises at 82 Cambridge Street, Burlington, Massachusetts, dated June 17, 1999.                                          |        
|          | 
|###10.7   |  | License Agreement between the Company and Massachusetts General Hospital, dated August 18, 1995.                                    |  
;
|          | 
|###10.8   |  | First Amendment to License Agreement between the Company and Massachusetts General Hospital, dated August 18, 1995.                 |        

|-18-
|----

|
|

|###10.9 |  | Second Amendment to License Agreement between the Company and Massachusetts General Hospital, dated August 18, 1995.                                                                                                                                                  | 
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|        | 
|-10.10  |  | The Companys 401(k) Plan.                                                                                                                                                                                                                                            | 
|        | 
|**10.11 |  | Agreement and Plan of Reorganization by and among Coherent, Inc., Medical Technologies, Acquisition, Inc., Palomar Medical Technologies, Inc., Star Medical Technologies, Inc.,
Robert E. Grove, James Z. Holtz and David C. Mundinger, dated as of December 7, 1998. | 
|        | 
|<<10.12 |  | Amendment No. 1 to Key Employment Agreement between the Company and Joseph P. Caruso dated June 8, 2000                                                                                                                                                               | 
|        | 
|^       |  | Previously filed as an exhibit to Form 8-K, filed on April 21, 1999 and incorporated herein by reference.                                                                                                                                                             | 
|        | 
|^^      |  | Previously filed as an exhibit to Form 10-K for the period ended December 31, 1998, filed on March 30, 1999 and incorporated herein by reference.                                                                                                                     | 
|        | 
|^^^     |  | Previously filed as an exhibit to Form 10-Q for the period ended March 31, 1999, filed on May 17, 1999 and incorporated herein by reference.                                                                                                                          | 
|        | 
|^^^^    |  | Previously filed as an exhibit to Form 8-K, filed on December 16, 1999 and incorporated herein by reference.                                                                                                                                                          | 
|        | 
|*       |  | Previously filed as an exhibit to Amendment No. 4 to Form S-1 Registration Statement No. 33-47479 filed on October 5, 1992, and incorporated herein by reference.                                                                                                     | 
|        | 
|**      |  | Previously filed as an exhibit to the Companys Definitive Proxy Statement for the period ended December 31, 1998 filed on March 12, 1999, and incorporated herein by reference.                                                                                      | 
|        | 
|#       |  | Previously filed as an exhibit to the Companys Annual Report on Form 10-KSB for the year ended December 31, 1995, and incorporated herein by reference.                                                                                                              | 
|        | 
|##      |  | Previously filed as an exhibit to the Companys Annual Report on Form 10-KSB for the year ended December 31, 1996, and incorporated herein by reference.                                                                                                              | 
|        | 
|###     |  | Previously filed as an exhibit to the Companys Annual Report on Form 10-K for the year ended December 31, 1998, and incorporated herein by reference.                                                                                                                | 
|        | 
|####    |  | Previously filed as an exhibit to the Companys Annual Report on Form 10-K for the year ended December 31, 1999, and incorporated herein by reference.                                                                                                                | 
|        | 
|-       |  | Previously filed as an exhibit to Form S-8 Registration Statement No. 33-97710 filed on October 4, 1995, and incorporated herein by reference.                                                                                                                        | 
|        | 
|<       |  | Previously filed as an exhibit Form 10-Q for the period ended June 30, 1999, and incorporated herein by reference.                                                                                                                                                    | 
|        | 
|<<      |  | Previously filed as an exhibit Form 10-Q for the period ended June 30, 2000, and incorporated herein by reference.                                                                                                                                                    | 

|-19-
|----

|SIGNATURES


Pursuant
to the requirements of the Securities Act of 1934, the Registrant certifies that it has
caused this Report to be signed on its behalf by the undersigned, thereunto duly
authorized, in the Town of Burlington in the Commonwealth of Massachusetts on May 9, 2001.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|-20-
|----