|Form 10  Q


United States
Securities and Exchange Commission


Washington, D.C. 20549


(Mark one)


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


For the Quarterly
Period Ended June 30, 2002


Or


[ ] Transition Report
Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934


For the Transition
Period From _____ to _____


Commission File Number:
0-22340


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

| | Delaware(State of Other Jurisdiction of Incorporation or Organization) | 04-3128178(I.R.S. Employee 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 July 31, 2002, 11,505,406 shares of common stock, $.01 par value per share, were
outstanding.


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

|Palomar Medical
Technologies, Inc. and Subsidiaries



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

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

|i
|-

|Palomar Medical
Technologies, Inc. and Subsidiaries


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

|                                                                   | December 31,2001 | June 30,2002    
|------------------------------------------------------------------ | ---------------- | ----------------
|
|Assets                                                             |                  |                 
|Current Assets:                                                    |                 
|Cash and cash equivalents                                          |                  | $     5,825,270 
|Accounts receivable, net                                           |                  | 2,250,278       
|Inventories                                                        |                  | 3,706,828       
|Other current assets                                               |                  | 436,752         
|                                                                   |                  |                 
|Total current assets                                               |                  | 12,219,128      
|                                                                   |                  |                 
|Property and Equipment, Net                                        |                  | 649,691         
|Other Assets                                                       |                  | 302,024         
|                                                                   |                  |                 
|                                                                   |                  | $   13,170,843  
|                                                                   |                  |                 
|Liabilities and Stockholders Equity                               |                 
|Current Liabilities:                                               |                 
|Debenture                                                          |                  | $        500,000
|Note payable to related party                                      |                  | 1,000,000       
|Accounts payable                                                   |                  | 1,846,155       
|Accrued liabilities                                                |                  | 4,173,989       
|Accrued income taxes                                               |                  | 1,400,146       
|Deferred revenue                                                   |                  | 354,684         
|                                                                   |                  |                 
|Total current liabilities                                          |                  | 9,274,974       
|                                                                   |                  |                 
|Stockholders Equity:                                              |                 
|Preferred stock, $.01 par value-                                   |                 
|Authorized - 1,500,000 shares                                      |                 
|Issued and outstanding -                                           |                 
|6,000 shares at December 31, 2001                                  |                 
|(Liquidation preference of $8,177,717 as of December 31, 2001)     |                  | 60              
|Common stock, $.01 par value-                                      |                 
|Authorized - 45,000,000 shares                                     |                 
|Issued - 11,074,393 and 11,497,649 shares at December 31, 2001     |                 
|and June 30, 2002, respectively                                    |                  | 110,744         
|Additional paid-in capital                                         |                  | 163,252,616     
|Accumulated deficit                                                |                  | (157,368,178    
|Less: Treasury stock - 573,031 shares at cost at December 31, 2001 |                  | (2,099,373      
|                                                                   |                  |                 
|Total stockholders equity                                         |                  | 3,895,869       
|                                                                   |                  |                 
|                                                                   |                  | $   13,170,843  
|                                                                   |                  |                 

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


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

|Palomar Medical
Technologies, Inc. and Subsidiaries


Consolidated Condensed
Statements of Operations (Unaudited)
|-----------------------------------------------------------------------------------------------------------------

|                                          | Three Months EndedJune 30, | Six Months EndedJune 30,
|----------------------------------------- | -------------------------- | ------------------------
|
|Product revenues                          |                            | $   3,402,893           
|Royalty revenues                          |                            | 2,648,235               
|                                          |                            |                         
|Total Revenues                            |                            | 6,051,128               
|                                          |                            |                         
|Cost of product revenues                  |                            | 2,547,001               
|Cost of royalty revenues                  |                            | 1,059,294               
|                                          |                            |                         
|Total Cost of Revenues                    |                            | 3,606,295               
|                                          |                            |                         
|Gross Margin                              |                            | 2,444,833               
|                                          |                            |                         
|Operating Expenses                        |                           
|Research and development                  |                            | 1,441,235               
|Sales and marketing                       |                            | 1,139,364               
|General and administrative                |                            | 702,097                 
|                                          |                            |                         
|Total Operating Expenses                  |                            | 3,282,696               
|                                          |                            |                         
|Income (loss) from Operations             |                            | (837,863                
|                                         
|Interest Income                           |                            | 288,497                 
|Interest Expense                          |                            | (23,801                 
|Other Income                              |                            |                        
|                                          |                            |                         
|Net Income (Loss)                         |                            | $    (573,167           
|                                          |                            |                         
|Basic Net Income (Loss) Per Share         |                            | $         (0.06         
|                                          |                            |                         
|Diluted Net Income (Loss) Per Share       |                            | $         (0.06         
|                                          |                            |                         
|Basic Weighted Average Number of Shares   |                            | 10,825,673              
|                                          |                            |                         
|Diluted Weighted Average Number of Shares |                            | 10,825,673              
|                                          |                            |                         

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


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

|Palomar Medical
Technologies, Inc. and Subsidiaries


Consolidated Statement
of Stockholders Equity (Unaudited)
|----------------------------------------------------------------------------------------------------------------

|                                                                             | Preferred Stock | Common Stock | Treasury Stock |      |   |            | 
|---------------------------------------------------------------------------- | --------------- | ------------ | -------------- | ---- | - | ---------- | 
|
|Balance, December 31, 2001                                                   |                 | 6,000        |                | $ 60 |   | 11,074,393 | 
|                                                                            
|Costs incurred related to the issuance of common              stock          |                 |             |                |     |   |           | 
|Issuance of stock for settlement                                             |                 |             |                |     |   | 358,547    | 
|Issuance of stock for  Employee Stock Purchase              Plan             |                 |             |                |     |   | 8,145      | 
|Issuance of stock for 2001 employer 401K               matching contribution |                 |             |                |     |   |           | 
|Conversion of convertible preferred stock                                    |                 | (6,000       | )              | (60  | ) | 56,564     | 
|Preferred stock dividends                                                    |                 |             |                |     |   |           | 
|Net  loss                                                                    |                 |             |                |     |   |           | 
|                                                                             |                 |             
|Balance, June 30, 2002                                                       |                 |             |                | $   |   | 11,497,649 | 
|                                                                             |                 |             

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


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

|Palomar Medical
Technologies, Inc. and Subsidiaries


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

|                                                                        | Six Months Ended June 30,
|----------------------------------------------------------------------- | -------------------------
|
|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                                                             |                          
|Other current assets                                                    |                          
|Accounts payable                                                        |                          
|Accrued liabilities                                                     |                          
|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 (used in) investing activities                     |                          
|                                                                        |                          
|Cash Flows from Financing Activities:                                   |                          
|Proceeds from employee stock purchase plan                              |                          
|Costs incurred related to issuance of common stock                      |                          
|Payment on convertible debenture                                        |                          
|                                                                        |                          
|Net cash used by financing activities                                   |                          
|                                                                        |                          
|Net 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 Non-cash Financing and Investing Activities: |                          
|Unrealized gain on available-for-sale investments                       |                          
|                                                                        |                          
|Preferred stock accrued dividends and interest                          |                          
|                                                                        |                          
|Issuance of stock for employer 401 (k) matching contribution            |                          
|                                                                        |                          
|Issuance of stock for settlement                                        |                          
|                                                                        |                          

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


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

|Palomar Medical
Technologies, Inc. and SubsidiariesNotes to Condensed Consolidated Financial Statements




1. BASIS OF PRESENTATION


The
accompanying unaudited consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States for interim
information. Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States for complete
financial statements. The results of operations for the interim periods shown in this
report are not necessarily indicative of expected results for any future interim period or
for the entire fiscal year. Palomar Medical Technologies, Inc. and its subsidiaries (the
Company or Palomar) believes that the quarterly information
presented includes all adjustments (consisting of normal, recurring adjustments) necessary
for a fair presentation in accordance with accounting principles generally accepted in the
United States. The accompanying consolidated financial statements and notes should be read
in conjunction with the Companys Form 10-K for the year ended December 31, 2001.


2. CASH AND CASH
EQUIVALENTS


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


3. INVENTORIES


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

| | December 31,2001 | June 30,2002
| | ---------------- | ------------
| | Raw materials    |             
| | Work-in-process  |             
| | Finished goods   |             
| |                  |             
| |                  |             
| |                  |             

|4. PROPERTY AND EQUIPMENT


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

| | December 31,2001                | June 30,2002
| | ------------------------------- | ------------
| | Machinery and equipment         |             
| | Furniture and fixtures          |             
| | Leasehold improvements          |             
| |                                 |             
| |                                 |             
| | Less:  accumulated depreciation |             
| | and amortization                |             
| |                                 |             
| |                                 |             
| |                                 |             

|5. DEBENTURE


On
March 13, 1997, the Company issued a $500,000, 6% convertible debenture due March 13,
2002. The convertible debenture has a conversion price of $11.00. The debenture holder may
convert no more than one-third of the debenture in any 30-day period. The Company
accounted for this debenture at face value.


During
the six months ended, June 30, 2002, the Company entered into an agreement with the
debenture holder to pay the $500,000 convertible debenture originally due March 13, 2002
in five equal monthly installments, beginning April 2002. As part of this agreement, the
debenture holder no longer has the option to convert the debenture into common stock. As
of June 30, 2002, the Company paid $300,000 plus all outstanding interest.
5
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Palomar Medical
Technologies, Inc. and SubsidiariesNotes to Condensed Consolidated Financial Statements





6. SEGMENT AND
GEOGRAPHIC INFORMATION


Product
revenue from international sources were $1.0 million and $3.0 million for the three months
ended June 30, 2001 and 2002, respectively, and $2.4 million and $4.3 million for the six
months ended June 30, 2001 and 2002, respectively. The following table represents the
percentage of product revenue by geographic region from customers for the three and six
months ended June 30, 2001 and 2002:
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                   | Three Months EndedJune 30, | Six Months EndedJune 30,
|------------------ | -------------------------- | ------------------------
|
|United States      |                            | 69.2                    
|Japan              |                            | 10.8                    
|Canada/Australia   |                            | 9.2                     
|Europe/Middle East |                            | 3.4                     
|Asia/Pacific       |                            | 5.7                     
|Latin America      |                            | 1.7                     
|                   |                            |                         
|Total              |                            | 100.0                   
|                   |                            |                         

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

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

|During
the six months ended June 30, 2002, the Company granted options to purchase 190,000 shares
of the Companys common stock at an exercise price of $0.91 to $0.97. During the six months
ended June 30, 2002, options to purchase 91,718 shares of the Companys common stock
were cancelled. During the six months ended June 30, 2002, no options were exercised and
none had expired.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|During
the six months ended June 30, 2002, no warrants were granted, exercised or cancelled.
|--------------------------------------------------------------------------------------------

|(c) |  | Convertible
Preferred Stock
|--- |  | ---------------------------

|During
the six months ended June 30, 2002, the Company converted 6,000 shares of its Series F
Preferred Stock including $2,267,553 of accrued dividends and interest into 467,123 shares
of the Companys common stock.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(d) |  | Issuance
of Stock for Settlement of Litigation
|--- |  | ----------------------------------------------

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

|(e) |  | Issuance
of Stock for 401K Match
|--- |  | --------------------------------

|During
the six months ended June 30, 2002, the Company issued 148,855 shares of its common stock
held in treasury to the 401(k) Plan in satisfaction of the Companys employer match
for 2001 employee contributions.


8. 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
6
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Palomar Medical
Technologies, Inc. and SubsidiariesNotes to Condensed Consolidated Financial Statements





The
Companys net income (loss) per share for the three and six months ended June 30,
2001 and 2002 is as follows:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                           | Three Months Ended  June 30, | Six Months Ended  June 30,
|------------------------------------------ | ---------------------------- | --------------------------
|
|Net income (loss)                          |                              | $    (573,167             
|Preferred stock dividends                  |                              | (96,650                   
|                                           |                              |                           
|Net income (loss) attributable to common   |                             
|stockholders                               |                              | $    (669,817             
|                                           |                              |                           
|Basic net income (loss) per common share   |                              | $         (0.06           
|                                           |                              |                           
|Diluted net income (loss) per common share |                              | $         (0.06           
|                                           |                              |                           
|Basic weighted average number of shares    |                             
|outstanding                                |                              | 10,825,673                
|                                           |                              |                           
|Diluted weighted average number of shares  |                             
|outstanding                                |                              | 10,825,673                
|                                           |                              |                           

|For
the three and six months ended June 30, 2001 and 2002, 6,167,410 and 5,415,678 shares,
respectively, of certain outstanding stock options, stock warrants, convertible debt and
preferred stock were not included in the diluted weighted average shares outstanding as
they were antidilutive.


9. COMPREHENSIVE INCOME
(LOSS)


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

|                                      | Three Months EndedJune 30, | Six Months EndedJune 30,
|------------------------------------- | -------------------------- | ------------------------
|
|Net income (loss)                     |                            | $(573,167               
|Unrealized gain on available-for-sale |                           
|investments                           |                            | 11,191                  
|                                      |                            |                         
|Comprehensive income (loss)           |                            | $(561,976               
|                                      |                            |                         

|10. 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. Royalty
revenues are recognized upon receipts cash payments.





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

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

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

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


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

| |  | Significant Accounting Policies
| |  | -------------------------------

|The Company believes the following represent its critical accounting policies:


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

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


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

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

| |  | (i) |  | REVENUES
AND GROSS PROFIT: Three Months Ended June 30, 2002, compared to Three Months Ended June
30, 2001
| |  | --- |  | ---------------------------------------------------------------------------------------------------------

|For
the three months ended June 30, 2002, the Companys revenues increased to $6.4
million, as compared to $6.1 million for the three months ended June 30, 2001. The
increase in the Companys revenues of $300,000, or 5% from the three months ended
June 30, 2001, was mainly due to an increase in product sales of $3.7 million from the
EsteLux, an increase of $330,000 in product sales of the Q-Yag 5, offset by a decrease in
sales of $25,000 associated with the RD1200, $206,000 associated with the E2000 and $1.8
million from shipments associated with the SLP 1000. Additionally, royalty revenues
received by the Company decreased by $1.7 million in 2002 compared to 2001. This decrease
in royalty revenue is attributed to a back-owed payment of $1.2 million, paid by one of
the Companys licensees in 2001, resulting from a royalty audit performed through the
period ending December 31, 2000.


Gross
profit for the three months ended June 30, 2002 was $3.4 million, 53% of revenues,
compared to $2.4 million, 40% of revenues, for the three months ended June 30, 2001. The
EsteLux and Q-Yag 5 are lower cost and higher margin products. As a result, the shift in
product mix to the EsteLux and Q-Yag 5 has directly contributed to the increase in gross
profit and gross profit percentage for the three months ended June 30, 2002.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (ii) |  | OPERATING
AND OTHER EXPENSES: Three Months Ended June 30, 2002, compared to Three Months Ended June
30, 2001
| |  | ---- |  | ------------------------------------------------------------------------------------------------------------

|Research
and development costs decreased to $1.1 million for the three months ended June 30, 2002,
as compared to $1.4 million for the three months ended June 30, 2001. Research and
development expenses as a percentage of revenue totaled 17% for the three months ended
June 30, 2002 and 24% for the three months ended June 30, 2001. This decrease of $300,000
is a result from the investment that the Company made in prior periods in the development
of product platforms. These platforms allow the Company to introduce new applications by
changing the specifications of these platforms rather than developing entirely new
products. 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 light-based


8
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|systems, while continuing dermatology
research utilizing the Companys platforms. The research and development goals in the
fields of  light-based hair removal are to design systems that (1) permit more
rapid treatment of large areas, (2) have high gross margins, and (3) are manufactured at a
lower cost, thus addressing broader markets. Further, the Company is aiming to address
dermatology and cosmetic procedure markets other than hair, including the fields of fat
reduction, acne treatment and skin rejuvenation.


Sales
and marketing expenses were $1.4 million, or 22% of revenues for the three months ended
June 30, 2002, compared to $1.1 million, or 19% of revenues for the three months ended
June 30, 2001. This increase in sales and marketing expenses is attributable to the
product launch of the EsteLux and Q-Yag 5 systems.


General
and administrative expenses were $789,000 or 12% of revenues for the three months ended
June 30, 2002, as compared to $702,000, or 12% of revenues for the three months ended June
30, 2001. This increase in general and administrative expenses is attributable to an
increase in legal expenses.


Interest
income decreased to $15,000 for the three months ended June 30, 2002, compared to $288,000
for the three months ended June 30, 2001. This decrease in interest income is attributable
to the reduction in cash available for investment and a reduction in effective interest
rates.


Interest
expense increased to $27,000 for the three months ended June 30, 2002, compared to $24,000
for the three months ended June 30, 2001. This increase in interest expense is
attributable to higher average debt balances as a result of the note payable to related
party.


Other
income was $110,000 for the three months ended June 30, 2002. This amount was a receipt of
a partial payment of a note receivable that was written off in a prior year.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (iii) |  | REVENUES
AND GROSS PROFIT: Six Months Ended June 30, 2002, compared to the Six Months Ended June
30, 2001
| |  | ----- |  | ---------------------------------------------------------------------------------------------------------

|For
the six months ended June 30, 2002, the Companys revenues increased to $10.6
million, as compared to $9.7 million for the six months ended June 30, 2001. This increase
in the Companys revenues of $944,000, or 10% from the six months ended June 30,
2001, was mainly due to an increase in product sales of $5.2 million from the EsteLux, an
increase of $803,000 in product sales of the Q-Yag 5, an increase in sales of $125,000
associated with the RD1200 offset by a decrease of $388,000 from shipments associated with
the E2000 and $2.9 million from shipments associated with the SLP 1000. Additionally,
royalty revenues received by the Company decreased by $1.9 million in 2002 compared to
2001. This decrease in royalty revenue is attributed to a back-owed payment of $1.2
million, paid by one of the Companys licensees in 2001, resulting from a royalty
audit performed through the period ending December 31, 2000.


Gross
profit for the six months ended June 30, 2002 was $5.1 million, 48% of revenues, as
compared $3.3 million, 35% of revenues for the six months ended June 30, 2001. The EsteLux
and Q-Yag 5 are lower cost and higher margin products. As a result, the shift in product
mix to the EsteLux and Q-Yag 5 has directly contributed to the increase in gross profit
and gross profit percentage for the six months ended June 30, 2002.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (iv) |  | OPERATING
AND OTHER EXPENSES: Six Months Ended June 30, 2002, compared to the Six Months Ended June
30, 2001
| |  | ---- |  | ------------------------------------------------------------------------------------------------------------

|Research
and development costs decreased to $2.1 million for the six months ended June 30, 2002,
from $3.1 million for the six months ended June 30, 2001. Research and development
expenses as a percentage of revenue totaled 20% for the six months ended June 30, 2002 and
32% for the six months ended June 30, 2001. This decrease of $1.0 million is a result from
the investment that the Company has made over the past quarters into the development of
product platforms. These platforms allow the Company to introduce new applications by
changing the specifications of these platforms rather than developing entirely new
products. 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  light-based systems, while

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

|continuing dermatology research
utilizing the Companys platforms. The research and development goals in the fields
of  light-based hair removal are to design systems that (1) permit more rapid
treatment of large areas, (2) have high gross margins, and (3) are manufactured at a lower
cost, thus addressing broader markets. Further, the Company is aiming to address
dermatology and cosmetic procedure markets other than hair, including the fields of fat
reduction, acne treatment and skin rejuvenation.


Sales
and marketing expenses increased to $2.2 million or 20% of revenues for the six months
ended June 30, 2002, from $1.9 million or 19% of revenues for the six months ended June
30, 2001. This increase in sales and marketing expenses is attributable to the product
launch of the EsteLux and Q-Yag5.


General
and administrative expenses decreased to $1.4 million or 13% of revenues for the six
months ended June 30, 2002, as compared to $1.6 million or 16% of revenues for the six
months ended June 30, 2001. This decrease in general and administrative expenses is
attributable to improved cost management.


Interest
income decreased to $35,000 for the six months ended June 30, 2002 as compared to $587,000
for the six months ended June 30, 2001. This decrease in interest income is attributable
to the reduction in cash available for investment and a reduction in effective interest
rates.


Interest
expense increased to $57,000 for the six months ended June 30, 2002, from $48,000 for the
six months ended June 30, 2001. This increase in interest expense is attributable to
higher average debt balances as a result of the note payable to related party.


Other
income increased to $168,000 for the six months ended June 30, 2002, as compared to
$127,000 for the six months ended June 30, 2001.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|As
of June 30, 2002, the Company had $4.1 million in cash and cash equivalents. The
successful sales and marketing of new products and an on-going royalty stream will be
critical to future liquidity.


The
Companys operating activities used cash of $1.2 million and $3.1 million for the six
months ended June 30, 2002 and 2001, respectively. Net cash used during the six months
ended June 30, 2002 consisted primarily of a net loss from operations, offset by
depreciation and amortization, an increase in accounts receivable, deferred revenue and a
decrease in inventories, other current assets, accounts payable and accrued liabilities.
Net cash used during the six months ended June 30, 2001 consisted primarily of a net loss
from operations, offset by depreciation and amortization, an increase in accounts
receivable, inventories, accrued liabilities, deferred revenue and a decrease in other
current assets, and accounts payable.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Investing
activities used cash of $89,000 and provided cash of $1.9 million during the six months
ended June 30, 2002 and 2001, respectively. During the six months ended June 30, 2002, the
principal uses were purchases of property and equipment offset by a decrease in other
assets. During the six months ended June 30, 2001, the principal use was purchases of
property and equipment and purchases of available-for-sale investments, offset by proceeds
from sales of available-for-sale investments.


Financing
activities used cash of $407,000 and $1.0 million during the six months ended June 30,
2002 and 2001, respectively. During the six months ended June 30, 2002, cash used from
financing activities was the result of costs incurred related to the issuance of common
stock and payments made on a debenture offset by the proceeds from the issuance of stock
pursuant to the employee stock purchase plan and 401K matching contributions. Financing
activities used cash of $1.0 million during the six months ended June 30, 2001 due to
costs incurred related to the issuance of common stock and payments made on Swiss Franc
convertible debentures offset by the proceeds from the issuance of stock pursuant to the
employee stock purchase plan and 401K matching contributions.


The
Company anticipates that capital expenditures for 2002 will total $200,000, consisting
primarily of machinery, equipment, computers and peripherals. The Company expects to
finance these expenditures with cash on hand and equipment leasing.

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

|Statement under the
Private Securities Litigation Reform Act


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


RISK FACTORS


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


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


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


The
light-based hair removal industry is highly competitive and companies frequently
introduce new products. We compete in the development, manufacture, marketing and
servicing of hair removal light-based devices with numerous other companies, some
of which have substantially greater financial, marketing and other resources than we do.
As a result, some of our competitors are able to sell hair removal light-based
devices at prices significantly below the prices at which we sell our products. In
addition, as a result of the Star sale to Coherent and its subsequent re-sale to Lumenis,
Lumenis is now a stronger competitor and we have had to find new ways to distribute our
products. Our products also face competition from alternative medical products and
procedures, such as electrolysis and waxing, among others. We may not be able to
differentiate our products from the products of our competitors, and customers may not
consider our products to be superior to competing products or medical procedures,
especially if competitive products and procedures are offered at lower prices. Our
competitors may develop products or new technologies that make our products obsolete or
less competitive.
11
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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


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


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


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


We could be delisted
from NASDAQ.


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


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


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


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


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


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

|Federal
regulation allows our products to be sold to and used by licensed practitioners as
determined on a state-by-state basis. As a result in some states, non-physicians
may operate our product. The purchase and use of our products by non-physicians may result in their misuse, which could
harm our reputation and expose us to costly product liability litigation.


We are dependent on
third-party researchers.


We
are substantially dependent upon third-party researchers over whom we do not have absolute
control to satisfactorily conduct and complete research on our behalf. We are also
substantially dependent upon 3rd party researchers to grant us licensing terms,
which may or may not be favorable for products and technology, which they may develop. At
present, our principal research partner is the Wellman Laboratories of Photomedicine at
Massachusetts General Hospital. We provide research funding, laser technology and optics
know-how in return for licensing rights with respect to specific medical applications and
patents. Our success will be highly dependent upon the results of this research. We cannot
be sure that such research agreements will provide us with marketable products in the
future or that any of the products developed under these agreements will be profitable for
us.


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


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


Our proprietary
technology has only limited protections.


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


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


In
recent years, there has been significant litigation in the United States involving patents
and other intellectual property rights. The medical laser / light-based industry in
particular is characterized by the large number of patents and frequent claims and related
litigation regarding patent and other intellectual property rights. Because patent
applications are maintained in secrecy for a period of time, we can conduct only limited
searches to determine whether our technology infringes any patents or patent applications.
Any claims for patent infringement, regardless of merit, could be time-consuming, result
in costly litigation and diversion of technical and management personnel, cause shipment
delays, require us to develop non-infringing technology or to enter into royalty or
licensing agreements. Although patent and intellectual property disputes in the laser /
light-based industry have often been settled through licensing or similar arrangements,
costs associated with such arrangements may be substantial and often require the payment
of ongoing royalties, which could have a negative impact on gross margins. There can be no
assurance that necessary licenses would be available to us on satisfactory terms, or that
we could redesign our products or processes to avoid infringement, if necessary.
Accordingly, an adverse determination in a judicial or administrative proceeding or
failure to obtain necessary licenses could prevent us from manufacturing and selling
13
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|some of our products. This could have
a material adverse effect on our business, results of operations and financial condition.


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


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


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


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


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


We may not be able to
successfully collect licensing royalties.


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


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.


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

|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 customers with respect to the proper use of our products,
misuse of our products by personnel over whom we cannot exert control may result in the
filing of product liability claims or significant adverse publicity against us.


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


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



We face risks associated
with revenues.


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


We face risks associated
with product warranties.


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



We face risks associated
with liquidity and capital resources.


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


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


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


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


Terrorist
acts or acts of war (wherever located around the world) may cause damage or disruption to
Palomar, our employees, facilities, partners, suppliers, distributors, resellers, or
customers, which could significantly impact our revenues, costs and expenses and financial
condition. The terrorist attacks that took place in the United States on September 11,
2001 were unprecedented events that have created many economic and political
uncertainties, some of which may materially harm our business and results of operations.
The long-term effects on our business of the September 11, 2001 attacks are unknown. The
potential for future terrorist attacks, the national and international responses to
terrorist attacks, and other acts of war or hostility have created many economic and
political uncertainties, which could adversely affect our business and results of
operations in ways that cannot presently be predicted.
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, accounts receivable, accounts payable and
short-term debt obligations. The fair value of these financial instruments approximates
their carrying amount as of June 30, 2002 due to their short-term nature. All of the
Companys investments are considered cash equivalent money market accounts and debt
securities which are considered available-for-sale investments and are carried at market
value, with the difference between cost and market value, net of related tax effects,
recorded as a separate component of stockholders equity. Accordingly, the Company
has no quantitative information concerning the market risk of participating in such
investments.


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

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

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




PART II  OTHER
INFORMATION




Item 1. Legal Proceedings


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

On February 15, 2002, the Company commenced
action for patent infringement in the United States District Court of Massachusetts against Altus Medical Inc. (Altus)
seeking both monetary damages and injunction relief.  The complaint alleges Altus CoolGlide and CoolGlide Excel laser systems willfully
infringe a U.S. patent exclusively licensed to the Company by The General Hospital Corporation (General).
General has been added as a plaintiff in this lawsuit.  Altus answered the complaint denying that its products infringe the asserted
patent and filed a counterclaim seeking a declaratory judgment that the asserted patent is invalid and not infringed.  The Company and General filed a reply
denying the material allegations of the counterclaims.  The Company and General have further alleged that Altus CoolGlide Vantage laser
system also willfully infringes the asserted patent.  A trial date has not yet been set.





Item 2. Changes in
Securities


Not applicable.




Item 3. Defaults upon
Senior Securities




Not applicable.


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


The
following table sets forth a brief description of each matter voted upon and the number of
votes cast for or against, as well as the number of abstentions, as to each such matter,
at the Companys Annual Meeting of Stockholders held on May 15, 2002.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|16
|--

|
|

|Matter                                              | VotesFor | VotesAgainst | Abstentions
|--------------------------------------------------- | -------- | ------------ | -----------
|Ratification of Selection of Arthur Andersen LLP as |          | 8,594,991    |            
|the Companys Auditors                              |         
|                                                   
|Election of Directors:                              |         
|Management Nominees:                                |         
|Louis P. Valente                                    |          | 8,808,602    |            
|Joseph P. Caruso                                    |          | 8,808,489    |            
|Jeanne Cohane                                       |          | 8,808,630    |            
|Jay Delahanty                                       |          | 8,808,701    |            
|Nicholas P. Economou                                |          | 8,808,517    |            
|James G. Martin                                     |          | 8,808,701    |            
|A. Neil Pappalardo                                  |          | 9,040,616    |            

|Item 5. Other
Information.


Not applicable.




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

|(a) |  | Exhibits
furnished:
|--- |  | -------------------

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

|(b) |  | Reports
on Form 8-K:
|--- |  | --------------------

|A
Form 8-K was filed on July 8, 2002 regarding Palomars announcement that its Board of
Directors, upon the recommendation of its Audit Committee, dismissed Arthur Andersen LLP
who had previously acted as Palomars independent auditor. Palomar engaged Ernst &
Young LLP as its new independent auditors to audit the financial statements of Palomar for
the fiscal year ending December 31, 2002, as well as to perform a timely review of its
second quarter results for fiscal 2002.


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

|SIGNATURES


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

| |  | PALOMAR MEDICAL TECHNOLOGIES, INC.

(Registrant)
| |  | --------------------------------------------------------------

|DATE: August 14, 2002 |  | By:/s/ Louis P. Valente
        Louis P. Valente
        Chairman of the Board of Directors
|--------------------- |  | -------------------------------------------------------------------------------------------

|DATE: August 14, 2002 |  | By:/s/ Joseph P. Caruso
      Joseph P. Caruso
      President, Chief Executive Officer and
      Acting Principal Financial Officer
|--------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------

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