<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549


                                    FORM 10-Q

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

      For the quarterly period ended June 29, 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 0-21667

                            PHOTOELECTRON CORPORATION
             (Exact Name of Registrant as Specified in its Charter)

                    MASSACHUSETTS                              04-3035323
           (State or Other Jurisdiction of                  (I.R.S. Employer
           Incorporation or Organization)                  Identification No.)

               9 EXECUTIVE PARK DRIVE                             01862
                 NORTH BILLERICA, MA                           (Zip code)
      (Address of Principal Executive Offices)

                                 (978) 670-8777
              (Registrant's Telephone Number, Including Area Code)

                               _________________

     Indicate by check mark whether the registrant: (1) has filed all documents
and reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 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 [_]

                               __________________

     10,052,351 shares of Common Stock, $.01 par value, were outstanding as of
August 14, 2002


<PAGE>

                           PHOTOELECTRON CORPORATION

                         QUARTERLY REPORT ON FORM 10-Q
                       FOR THE PERIOD ENDED JUNE 29, 2002

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                                  Page
                                                                                                                  ----
<S>                                                                                                               <C>
PART I--    FINANCIAL INFORMATION

Item 1      Condensed Consolidated Financial Statements ....................................................         3

            Condensed Consolidated Balance Sheets at June 29, 2002 and December 29, 2001 ...................         3

            Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 29,
            2002 and June 30, 2001 .........................................................................         4

            Condensed Consolidated Statements of Cash Flow for the Six Months Ended June 29, 2002 and
            June 30, 2001 ..................................................................................         5

            Notes to Unaudited Consolidated Financial Statements ...........................................         6

Item 2      Management's Discussion and Analysis of Financial Condition and Results of Operations ..........         8

Item 3      Quantitative and Qualitative Disclosures About Market Risk .....................................        11


PART II--   OTHER INFORMATION

Item 1      Legal Proceedings ..............................................................................        12

Item 2      Changes in Securities and Use of Proceeds ......................................................        12

Item 3      Defaults upon Senior Securities ................................................................        12

Item 4      Submission of Matters to a Vote of Security Holders ............................................        12

Item 5      Other Information ..............................................................................        12

Item 6      Exhibits and Reports on Form 8-K ...............................................................        12
</TABLE>

                                       2

<PAGE>

                    PHOTOELECTRON CORPORATION AND SUBSIDIARY

                      CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                        June 29,       December 29,
                                                                                        --------       ------------
                                                                                          2002             2001
                                                                                          ----             ----
                                                                                      (Unaudited)
<S>                                                                                      <C>             <C>
                                       ASSETS

Current Assets:
     Cash and cash equivalents ....................................................    $   2,394,233     $   4,007,547
     Accounts receivable ..........................................................          401,480           277,674
     Inventories ..................................................................        1,583,480         1,656,889
     Prepaid expenses .............................................................          338,126           198,289
     Held to maturity investments .................................................               --         1,594,166
                                                                                       -------------     -------------
          Total current assets ....................................................        4,717,319         7,734,565
                                                                                       =============     =============
Property and Equipment:
     Computer equipment ...........................................................        1,026,534         1,026,534
     Lab and production equipment .................................................        1,263,574         1,188,131
     Clinical site equipment ......................................................          875,122           875,122
     Sales demo equipment .........................................................          148,450           148,450
     Furniture and fixtures .......................................................          183,104           183,104
     Leasehold improvements .......................................................          866,230           866,230
                                                                                       -------------     -------------
     Property and equipment .......................................................        4,363,014         4,287,571
     Less--Accumulated depreciation and amortization ..............................        4,030,060         3,849,728
                                                                                       -------------     -------------
     Net property and equipment ...................................................          332,954           437,843
                                                                                       -------------     -------------
Other Assets:
     Deferred offering costs, net .................................................          887,226         1,030,444
                                                                                       -------------     -------------
          Total assets ............................................................    $   5,937,499     $   9,202,852
                                                                                       =============     =============

                      LIABILITIES AND SHAREHOLDERS' DEFICIT

Current Liabilities:
     Accounts payable .............................................................    $     412,786     $     298,182
     Accrued expenses .............................................................          546,685           659,360
     Accrued payroll and benefits .................................................           57,371           171,712
                                                                                       -------------     -------------
          Total current liabilities ...............................................    $   1,016,842     $   1,129,254
                                                                                       =============     =============
Long Term Liabilities

     Senior convertible debentures ................................................       15,401,307        15,024,333
                                                                                       -------------     -------------
Commitments and Contingencies
Shareholders' Deficit:
     Preferred stock, $0.01 par value
          Authorized--2,500,000
          Issued and outstanding--none at June 29, 2002 and December 29, 2001,
             respectively .........................................................               --                --
     Common stock, $0.01 par value
          Authorized--20,000,000
          Issued and outstanding--10,020,162 and 9,947,418 at June 29, 2002 and
             December 29, 2001, respectively ......................................          100,202            99,474
     Capital in excess of par value common stock ..................................       48,611,119        48,374,531
     Deferred compensation ........................................................          (35,964)          (77,298)
     Accumulated deficit ..........................................................      (59,156,007)      (55,347,442)
                                                                                       -------------     -------------
          Total shareholders' deficit .............................................      (10,480,650)       (6,950,735)
                                                                                       -------------     -------------
          Total liabilities and shareholders' deficit .............................    $   5,937,499     $   9,202,852
                                                                                       =============     =============
</TABLE>

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

                                       3

<PAGE>

                    PHOTOELECTRON CORPORATION AND SUBSIDIARY

                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                Three Months Ended                      Six Months Ended
                                                                ------------------                      ----------------
                                                         June 29, 2002      June 30, 2001      June 29, 2002        June 30, 2001
                                                         -------------      -------------      -------------        -------------
                                                          (Unaudited)        (Unaudited)        (Unaudited)          (Unaudited)
<S>                                                       <C>               <C>                <C>                  <C>
Revenues ...............................................       $   449,959        $   517,980        $   852,633        $   602,780
Cost of Goods Sold .....................................           285,558            329,342            442,161            388,903
                                                               -----------        -----------        -----------        -----------
Gross Margin ...........................................           164,401            188,638            410,472            213,877
Operating Expenses
     Research and development
        Expenses .......................................           974,722            929,356          1,969,958          1,803,674
     Sales, general and administrative
        Expenses .......................................           717,019          1,180,158          1,632,520          2,429,856
                                                               -----------        -----------        -----------        -----------
        Total operating expenses .......................         1,691,741          2,109,514          3,602,478          4,233,530
                                                               -----------        -----------        -----------        -----------
        Operating loss .................................        (1,527,340)        (1,920,876)        (3,192,006)        (4,019,653)
                                                               -----------        -----------        -----------        -----------
Interest income ........................................            15,641             66,192             36,996            160,679
Interest expense .......................................          (330,043)          (263,727)          (653,553)          (520,192)
                                                               -----------        -----------        -----------        -----------
Interest expense, net ..................................          (314,402)          (197,535)          (616,557)          (359,513)
                                                               -----------        -----------        -----------        -----------
Net loss ...............................................       $(1,841,742)       $(2,118,411)       $(3,808,563)       $(4,379,166)
                                                               ===========        ===========        ===========        ===========
Basic and diluted net loss per
   share ...............................................       $     (0.18)       $     (0.22)       $     (0.38)       $     (0.46)
                                                               ===========        ===========        ===========        ===========
Weighted average basic and
   diluted shares ......................................         9,996,359          9,768,592          9,978,068          9,485,205
</TABLE>

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

                                       4

<PAGE>

                    PHOTOELECTRON CORPORATION AND SUBSIDIARY

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW

<TABLE>
<CAPTION>
                                                                              Six Months Ended
                                                                      ---------------------------------
                                                                       June 29, 2002      June 30, 2001
                                                                      --------------     --------------
                                                                        (Unaudited)        (Unaudited)
<S>                                                                   <C>                <C>
Cash flows from operating activities:
  Net loss .........................................................   $  (3,808,563)     $ (4,379,166)
   Adjustments to reconcile net loss to net cash used in
    operating activities--
    Depreciation and amortization ..................................         180,332           247,735
    Noncash amortization of offering expenses ......................         151,641           111,323
    Noncash compensation expense ...................................          10,621            33,560
    Noncash interest expense on 10% convertible debt ...............         500,154           520,192
    Noncash interest expense on 6% convertible debt ................         153,399                --
   Changes in current accounts--
    Accounts receivable ............................................        (123,806)         (238,313)
    Inventories ....................................................          73,409          (110,583)
    Prepaid expenses ...............................................        (139,837)          (24,512)
    Accounts payable ...............................................         114,604           169,633
    Accrued expenses and accrued payroll and benefits ..............        (227,016)         (180,851)
      Net cash used in operating activities ........................      (3,115,062)       (3,850,982)
                                                                       -------------      ------------
Cash flows from investing activities:
   Proceeds from  held to maturity investments .....................       1,594,166         3,229,467
   Purchases of equipment and leasehold improvements ...............         (75,443)          (87,825)
                                                                       -------------      ------------
      Net cash provided by  investing activities ...................       1,518,723         3,141,642
                                                                       -------------      ------------
Cash flows from financing activities:
   Proceeds from issuance of common stock ..........................           9,221         3,876,121
   Deferred offering expenses ......................................         (26,196)               --
                                                                       -------------      ------------
      Net cash provided by (used in) financing activities ..........         (16,975)        3,876,121
                                                                       -------------      ------------
Increase (decrease) in cash and cash equivalents ...................      (1,613,314)        3,166,781
                                                                       -------------      ------------
Cash and cash equivalents, beginning of period .....................       4,007,547           662,857
                                                                       -------------      ------------
Cash and cash equivalents, end of period ...........................   $   2,394,233      $  3,829,638
                                                                       -------------      ------------
Noncash financing activities:
   Conversion of 10% convertible debentures to common stock ........   $     276,579      $  1,519,252
                                                                       =============      ============
</TABLE>

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

                                       5

<PAGE>

                           PHOTOELECTRON CORPORATION

         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.  Basis of Presentation and Significant Accounting Policies

Basis of Presentation

         The interim unaudited condensed consolidated financial statements
contained herein have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission for reporting on Form 10-Q. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted pursuant to such rules
and regulations. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In management's opinion, the unaudited information
includes all adjustments (consisting of normal recurring entries) necessary for
a fair presentation of the financial position, results of operations, and cash
flows for the periods presented. The results of operations for the interim
periods shown on this report are not necessarily indicative of the results
expected for the full year. The interim financial statements should be read in
conjunction with the financial statements and notes for the year ended December
29, 2001 included in the Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission.

         The Company has experienced significant operating losses in each year
since its inception, due primarily to substantial research and development
expenditures. As of June 29, 2002, the Company had an accumulated deficit of
approximately $59 million and expects to continue to incur losses until such
time as its commercialization efforts yield offsetting revenues. There can be no
assurance that the Company's products will ever gain commercial acceptance, or
that the Company will ever generate significant revenues or achieve
profitability. The Company's ability to achieve profitable operations will be
dependent in a large part on whether it can successfully commercialize its
products and make the transition to a manufacturing and marketing company. The
Company believes that its existing cash and investments together with
anticipated revenues will be sufficient for at least the remainder of the year.
The Company will have to raise additional capital for fiscal 2003 unless
revenues are greater than anticipated. However, there is no assurance that it
will be able to find additional financing on acceptable terms, if at all.

Significant Accounting Policies

         The significant accounting policies followed by the Company in
preparing its financial statements are set forth in Note 1 to the financial
statements included in its Form 10-K for the year ended December 29, 2001. The
Company has made no changes to these policies during this quarter.

2.  Net Loss Per Share

         During the first six months of 2002 and 2001, basic and diluted net
loss per share were calculated as follows:

<TABLE>
<CAPTION>
                                                            Three Months Ended                     Six Months Ended
                                                        ---------------------------        --------------------------------
                                                      June 29, 2002   June 30, 2001      June 29, 2002      June 30, 2001
                                                     --------------- ----------------   ---------------  --------------------
     <S>                                             <C>             <C>                <C>              <C>
     Basic:
          Net loss ................................      $(1,841,742)     $(2,118,411)      $(3,808,563)           (4,379,166)
          Weighted average shares .................        9,996,359        9,768,592         9,978,068             9,485,205
          Basic net loss per share ................      $     (0.18)     $     (0.22)      $     (0.38)          $     (0.46)
</TABLE>

         The computation of diluted earnings per share for June 29, 2002 and
June 30, 2001 excludes the effect of assuming the exercise of certain
outstanding stock options and the conversion of convertible securities because
the effect would be anti-dilutive, due to the Company's net loss during the
period. As of June 29, 2002 and 2001, there were 902,367 and 1,005,707 of such
options outstanding, respectively, with exercise prices ranging from
$2.125-$9.00 per share with expiration dates ranging from March 18, 2003 to July
31, 2011. As of June 29, 2002, there were securities convertible into 4,896,207
shares of common stock, with conversion prices ranging from $2.45-$4.74 per
share with expiration dates ranging from May 1, 2003 to September 1, 2005.

                                       6

<PAGE>

3.  Senior Convertible Debt

         On December 17, 2001, the Company raised $5,000,000 in a private
placement of a 6% senior convertible debenture (the "6% Debenture") to PYC
Corporation, whose advisor, Peter M. Nomikos, is the Company's Chairman of the
Board of Directors and Chief Executive Officer. The Company is using the net
proceeds of the private placement for general and administrative expenses and
for general corporate purposes, including, without limitation, to fund
intra-operative radiation therapy for breast cancer clinical trials, for the
sales and marketing of PRS400(TM) system cancer treatment products, for the
development of an X-SEED(TM) intravascular radiation therapy device, for
brachytherapy product development, for the general support of clinical trials,
and for further development of industrial applications and distribution
alliances.

         PYC Corporation is entitled to receive interest payments at the rate of
6% per annum on the outstanding principal amount of the 6% Debenture. At the
option of the Company, interest may be paid when due by adding the amount
payable to the outstanding principal amount of the 6% Debenture. The Company
exercised that option, and added an aggregate of $78,605 and $153,399 to the
outstanding principal amount of the 6% Debenture, for the three and six months
ended June 29, 2002.

         The principal amount of the 6% Debenture, together with all accrued but
unpaid interest, is due and payable on May 1, 2005. The holder of the 6%
Debenture has the option, at any time prior to May 1, 2005, to convert the 6%
Debenture, in whole or in part, into shares of the Company's common stock at a
price of $3.25 per share. If any shares of common stock or securities
convertible into shares of common stock are issued at an effective price lower
than $3.25 per share (as adjusted and subject to certain exclusions), then the
conversion price of the 6% Debenture will be automatically adjusted to that
lower price.

         The Company may redeem any portion of the 6% Debenture at any time,
provided that the average closing bid price per share of the Company's common
stock as reported on the American Stock Exchange for the twenty (20) consecutive
trading days prior to the date of the redemption notice is at least 175% of the
conversion price. The redemption price will be 105% of the outstanding principal
amount of the 6% Debenture being redeemed, along with accrued but unpaid
interest. In addition, so long as 50% of the outstanding principal amount of the
6% Debenture originally issued is outstanding and subject to certain exceptions,
the Company may not incur more than $10,000,000 in indebtedness after December
17, 2001.

         The securities sold in the private placement have not been registered
under the Securities Act of 1933 or the securities laws of any state. The
offering was made in reliance upon the exemptions from the registration
provisions afforded by Section 4(2) of the Securities Act of 1933 and Rule 506
of Regulation D thereunder. The Company has agreed to use its best efforts to
file with the Securities and Exchange Commission by September 30, 2002 a
registration statement on Form S-3 with respect to the resale of shares of the
Company's common stock issuable upon conversion of the 6% Debenture.

4.  Comprehensive Income (Loss)

         Comprehensive income (loss) approximates the net loss for all periods
presented.

5.  Commitments and Contingencies

         On May 22, 2002, the Company entered into a lease agreement with the
American Power Conversion Corporation for approximately 23,700 square feet of
space at 9 Executive Park Drive in North Billerica, Massachusetts. The premises
serve as the principal executive offices of the Company. The term of the lease
agreement expires on August 31, 2007, but may be extended by the Company for an
additional five-year term. The Company has commitments under this lease
agreement to make payments of approximately $108,625 in 2002, $260,700 in each
of 2003 through 2006, and $152,075 in 2007.

6.  Recent Accounting Pronouncements

         On December 30, 2001, the Company adopted Statement of Financial
Accounting Standards (SFAS) No.144, "Accounting for the Impairment or Disposal
of Long-Lived Assets", which addresses financial reporting for the impairment or
disposal of long-lived assets. SFAS 144 supersedes SFAS 121 and the accounting
and reporting provisions of APB 30 related to the disposal of a segment of a
business. The adoption of this statement did not have a significant effect on
the Company's financial position or results of operations.

7.  Subsequent Event

         On July 9, 2002, the Company filed an amendment to its Articles of
Organization with the Massachusetts Secretary of the Commonwealth, which
amendment increased the number of authorized shares of the Company's common
stock from 20,000,000 to 25,000,000.

                                       7

<PAGE>

                          PART I: FINANCIAL INFORMATION

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

Overview

         Certain statements contained in this Quarterly Report on Form 10-Q,
including, without limitation, statements containing the words "expects,"
"anticipates," "believes" and words of similar import, constitute "forward
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. These forward looking statements are subject to various
risks and uncertainties, including those referred to in the Company's Annual
Report on Form 10-K for the fiscal year ended December 29, 2001, that could
cause actual future results and events to differ materially from those currently
anticipated. Readers are cautioned not to place undue reliance on these
forward-looking statements.

         Photoelectron Corporation ("PeC" or the "Company") is a technology
company dedicated to developing, manufacturing and marketing miniature x-ray
systems for multiple market applications.

         Established in 1989, the Company initially focused on research and
development for the miniaturization of an x-ray system for cancer treatment. The
Company has since expanded its development efforts and is now creating and
adapting miniature x-ray systems for a variety of applications in healthcare and
non-healthcare related markets. The Company has established an intellectual
property portfolio of twenty-three (23) U.S. patents and has thirteen (13)
additional U.S. patents pending, all of which relate to the Company's core
technology and use.

         The Company's business strategy is to identify opportunities in which
its patented core technology can be used to gain access to new markets by means
of strategic alliances with industry leaders. This strategy allows the Company
to foster the development of multiple applications of its technology, while
remaining focused on its core expertise of developing, manufacturing and
marketing miniature x-ray systems. By joining with one or more industry leaders
to develop an x-ray system to satisfy the needs of a specific market, the
Company gains market and application expertise without having to internalize
many of the costs and organizational overhead necessary to support the specific
application. Leveraging the market expertise of these strategic relationships
allows the Company to rapidly bring the technology to new markets. The Company
plans to identify additional market opportunities that can both be linked to the
core technology and present the opportunity to access the market through a
strategic partner with application expertise and the sales and marketing
organization necessary to drive market acceptance.

         The Company is currently pursuing initiatives in the industrial and
medical markets with miniature x-ray systems designed for x-ray fluorescence
analysis, intravascular radiation therapy, brachytherapy, radiosurgery,
intra-operative radiation therapy, and instrumentation.

         On May 22, 2002, the Company entered into a lease agreement with the
American Power Conversion Corporation for approximately 23,700 square feet of
space at 9 Executive Park Drive in North Billerica, Massachusetts. The premises
serve as the principal executive offices of the Company. The term of the lease
agreement expires on August 31, 2007, but may be extended by the Company for an
additional five-year term. This facility is suitable for the manufacture and
assembly of the Company's products, research and development and corporate
administration. The Company believes that the facility will be adequate to meet
its foreseeable requirements through the expiration of the lease.

         On June 26, 2002, on recommendation of the Audit Committee of the
Company's Board of Directors, the Company's Board of Directors dismissed Arthur
Andersen LLP as the Company's independent public accountants.

         The Company has experienced significant operating losses in each year
since its inception, due primarily to substantial research and development
expenditures. As of June 29, 2002, the Company had an accumulated deficit of
approximately $59 million and expects to continue to incur losses until such
time as its commercialization efforts yield offsetting revenues. There can be no
assurance that the Company's products will ever gain commercial acceptance, or
that the Company will ever generate significant revenues or achieve
profitability. The Company's ability to achieve profitable operations will be
dependent in a large part on whether it can successfully commercialize its
products and make the transition to a manufacturing and marketing company. The
Company anticipates that its sales and marketing efforts through its existing
sales and distribution channels will continue to increase sales of its products
in the current year. The Company anticipates that its research and development
expenses will increase during 2002 to support continued development.

                                       8

<PAGE>

Results of Operations

         Three Months Ended June 29, 2002 and June 30, 2001

         Revenue. The Company had revenues of $449,959 in the second quarter of
2002, as compared with $517,890 in the second quarter of 2001. The 2002 revenue
reflects the sale of two INTRABEAM(TM) systems through the Company's
distributor, Carl Zeiss AG, to health care centers in Italy, along with
continued sales of the LASER-X(TM) industrial x-ray source. The 2001 revenue
reflects the sale of two INTRABEAM systems and a PRS400(TM) core system, and
sales of the LASER-X industrial x-ray source.

         Research and development expenses. The Company's research and
development expenses increased by $45,366 from $929,356 in the second quarter of
2001 to $974,722 in the second quarter of 2002. The increase primarily
represents the continued development of the new miniature x-ray sources for
intravascular radiation therapy (X-SEED(TM)) and x-ray fluorescence systems
(LASER-X).

         Selling, general and administrative expenses. Selling, general and
administrative expenses decreased by $463,139 from $1,180,158 in the second
quarter of 2001 to $717,019 in the second quarter of 2002. The decrease is
primarily attributable to a reduction in direct marketing programs and
personnel.

         Interest income. Interest income decreased by $50,551 from $66,192 in
the second quarter of 2001 to $15,641 in the second quarter of 2002. The
decrease resulted from a decrease in amounts invested by the Company in
conjunction with lower market interest rates.

         Interest expense. Interest expense increased by $66,316 from $263,727
in the second quarter of 2001 to $330,043 in the second quarter of 2002. The
change resulted from an increase in amounts borrowed, which is primarily
attributable to the sale by the Company of a $5,000,000 6% senior convertible
debenture to PYC Corporation in December 2001.

         Six Months Ended June 29, 2002 and June 30, 2001

         Revenue. The Company had revenues of $852,633 in the first six months
of 2002, as compared with $602,780 in the first six months of 2001. The 2002
revenue reflects shipments of the Company's LASER-X industrial x-ray source
combined with the shipment of three INTRABEAM systems and Dosimetry product
sales. The 2001 revenue reflects shipments of the Company's LASER-X industrial
x-ray source combined with the shipment of two INTRABEAM systems, a Photon
Radiosurgery System ("PRS") upgrade, a PRS400 core system and Dosimetry product
sales.

         Research and development expenses. The Company's research and
development expenses increased $166,284 from $1,803,674 in the first six months
of 2001 to $1,969,958 in the first six months of 2002. The increase primarily
represents the continued development of the new miniature x-ray sources for
intravascular radiation therapy (X-SEED) and x-ray fluorescence systems
(LASER-X).

         Selling, general and administrative expenses. The Company's selling,
general and administrative expenses decreased by $797,336 from $2,429,856 in the
first six months of 2001 to $1,632,520 in the first six months of 2002. The
decrease is primarily attributable to a reduction in direct marketing programs
and personnel.

         Interest income. Interest income decreased by $123,683 from $160,679 in
the first six months of 2001 to $36,996 in the first six months of 2002. The
decrease resulted from a decrease in amounts invested by the Company in
conjunction with lower market interest rates.

         Interest expense. Interest expense increased by $133,361 from $520,192
in the first six months of 2001 to $653,553 in the first six months of 2002. The
change resulted from an increase in amounts borrowed, which is primarily
attributable to the sale by the Company of a $5,000,000 6% senior convertible
debenture to PYC Corporation in December 2001.

Liquidity and Capital Resources

         The Company has expended substantial funds to research and develop the
PRS, INTRABEAM, LASER-X, X-SEED and other potential products, conduct clinical
trials, pursue regulatory approvals, establish commercial scale manufacturing in
its own facilities or in the facilities of others, and market the PRS,
INTRABEAM, LASER-X, X-SEED and other products. The Company anticipates it will
continue to expend substantial funds in the future on such activities as such
funds become available.

                                       9

<PAGE>

         Since its inception, the Company has financed its operations through
the issuance of convertible debt and equity in a series of private placements
totaling approximately $36.6 million and its initial public offering with net
proceeds of $16,818,854.

         Consolidated working capital was $3,700,477 at June 29, 2002, compared
with $6,605,311 at December 29, 2001. Included in working capital are cash and
cash equivalents of $2,394,233 at June 29 2002, compared with $4,007,547 at
December 29, 2001. During the first six months of 2002, the Company used
$3,115,062 of cash for operating activities as compared to $3,850,982 for the
first six months of 2001.

         The Company used $75,443 of cash in the first six months of 2002 for
lab and production equipment.

         The Company received an aggregate of $0 and $9,221 of cash from the
exercise of stock options to purchase common stock for the three and six months
ended June 29, 2002, respectively.

         In June 2000, the Company issued in a private placement $10,458,909 of
10% senior convertible debentures. The Company used the net proceeds of the
private placement for general and administrative expenses, refinancing of
$2,312,755 of short-term debt bridge financing provided by PYC Corporation and
$786,153 due under an 8% Subordinated Convertible Demand Note to Peter M.
Nomikos, and for general corporate purposes, including, without limitation, to
support the accelerated testing and marketing of the Company's new products.

         The holders of the 10% senior convertible debentures are entitled to
receive interest payments at the rate of 10% per annum on the outstanding
principal amount of the debentures. At the option of the Company, interest may
be paid when due by adding the amount payable to the outstanding principal of
the debentures. The principal amount of the debentures, together with all
accrued and unpaid interest, is due and payable on May 1, 2005. The holders of
the debentures have the option, at any time prior to May 1, 2005, to convert the
debentures, in whole or in part, into shares of the Company's common stock at a
price of $4.00 per share. In the three and six months ended June 29, 2002,
holders of $118,674 and $276,579 worth of debentures, respectively, exercised
their option to convert such amounts of debentures into shares of the Company's
common stock.

         On February 5, 2001, Johnson & Johnson Development Corporation
purchased 904,762 shares of the Company's common stock for an aggregate purchase
price of $3.8 million.

         On December 17, 2001, the Company raised $5,000,000 in a private
placement of a 6% senior convertible debenture (the "6% Debenture") to PYC
Corporation, whose advisor, Peter M. Nomikos, is the Company's Chairman of the
Board of Directors and Chief Executive Officer. The Company is using the net
proceeds of the private placement for general and administrative expenses and
for general corporate purposes, including, without limitation, to fund
intra-operative radiation therapy for breast cancer clinical trials, for the
sales and marketing of PRS400 system cancer treatment products, for the
development of an X-SEED intravascular radiation therapy device, for
brachytherapy product development, for the general support of clinical trials,
and for further development of industrial applications and distribution
alliances.

         PYC Corporation is entitled to receive interest payments at the rate of
6% per annum on the outstanding principal amount of the 6% Debenture. At the
option of the Company, interest may be paid when due by adding the amount
payable to the outstanding principal amount of the 6% Debenture. The principal
amount of the 6% Debenture, together with all accrued but unpaid interest, is
due and payable on May 1, 2005. The holder of the 6% Debenture has the option,
at any time prior to May 1, 2005, to convert the 6% Debenture, in whole or in
part, into shares of the Company's common stock at a price of $3.25 per share.
If any shares of common stock or securities convertible into shares of common
stock are issued at an effective price lower than $3.25 per share (as adjusted
and subject to certain exclusions), then the conversion price of the 6%
Debenture will be automatically adjusted to that lower price.

         The Company may redeem any portion of the 6% Debenture at any time,
provided that the average closing bid price per share of the Company's common
stock as reported on the American Stock Exchange for the twenty (20) consecutive
trading days prior to the date of the redemption notice is at least 175% of the
conversion price. The redemption price will be 105% of the outstanding principal
amount of the 6% Debenture being redeemed, along with accrued but unpaid
interest. In addition, so long as 50% of the outstanding principal amount of the
6% Debenture originally issued is outstanding and subject to certain exceptions,
the Company may not incur more than $10,000,000 in indebtedness after December
17, 2001.

         Prior to entering into the transaction with PYC Corporation, the
Company attempted over a period of several months to raise funds from other
sources. After considering other financing alternatives, including a proposal
from another stockholder of the Company, the Board of Directors determined that
the terms and conditions of the financing proposal from PYC Corporation were
more favorable to the Company than the terms and conditions available from the
other stockholder or from non-related parties.

                                       10

<PAGE>

         The securities sold in the private placement have not been registered
under the Securities Act of 1933 or the securities laws of any state. The
offering was made in reliance upon the exemptions from the registration
provisions afforded by Section 4(2) of the Securities Act of 1933 and Rule 506
of Regulation D thereunder. The Company has agreed to use its best efforts to
file with the Securities and Exchange Commission by September 30, 2002 a
registration statement on Form S-3 with respect to the resale of shares of the
Company's common stock issuable upon conversion of the 6% Debenture.

         The Company maintains medical product liability insurance policies with
respect to its clinical trials which the Company believes contain reasonable
deductibles and other ordinary and customary provisions. The Company believes
that these policies cover such risks in such amounts as are reasonable and
prudent under the circumstances, and the Company does not anticipate that claims
under these policies, if any, will have a material adverse impact on the
Company's liquidity or capital resources. Prior to commercial sale of its
products, the Company obtained product liability insurance covering the
commercial use of its products.

         The Company's future capital requirements will depend on a variety of
factors, including the time and costs involved in obtaining new and expanding
existing United States Food and Drug Administration and other regulatory
approvals, the results of the Company's ongoing clinical trials, the market
acceptance of the PRS, INTRABEAM, LASER-X, X-SEED and any other Company
products, the expense and results of the Company's continued scientific research
and development programs, the time and costs expended in filing, prosecuting and
enforcing patent claims, and the development of competing technologies.

         The Company believes that its existing cash and investments together
with anticipated revenues will be sufficient for at least the remainder of the
year. The Company's primary source of liquidity in 2002 is the $5,000,000 of
proceeds from the 6% Debenture issued in December 2001. The Company will have to
raise additional capital for fiscal 2003 unless revenues are greater than
anticipated. There is no assurance that it will be able to find additional
financing on acceptable terms, if at all.

         The Company has commitments under an operating lease agreement for
office space to make payments of approximately $108,625 in 2002, $260,700 in
each of 2003 through 2006, and $152,075 in 2007.

Critical Accounting Policies

         In the Company's Form 10-K for the fiscal year ended December 29, 2001,
the Company's most critical accounting policies and estimates upon which its
financial status depends were identified as those relating to revenue
recognition, warranty reserve and inventory valuation. The Company considered
the disclosure requirements of Financial Release ("FR") 60 ("FR-60") regarding
critical accounting policies and FR-61 regarding liquidity and capital
resources, certain trading activities and related party/certain other
disclosures, and concluded that nothing materially changed during the three and
six months ended June 29, 2002 that would warrant further disclosure under these
releases.

Item 3:  Quantitative and Qualitative Disclosures about Market Risk.

         There have been no material changes in the market risk associated with
the Company's financial instruments. The Company is exposed to market risk from
changes in interest rates, which may adversely affect the Company's financial
position, results of operations and cash flows. In seeking to minimize the risks
from interest rate fluctuations, the Company manages exposure through its
regular operating and financial activities. The Company does not use financial
instruments for trading or other speculative purposes and is not a party to any
leveraged financial instruments.

                                       11

<PAGE>

                           PART II: OTHER INFORMATION

Item 1:  Legal Proceedings

         Not Applicable

Item 2:  Changes in Securities and Use of Proceeds

         On July 9, 2002, the Company filed an amendment to its Articles of
Organization with the Massachusetts Secretary of the Commonwealth, which
amendment increased the number of authorized shares of the Company's common
stock from 20,000,000 to 25,000,000.

Item 3:  Defaults upon Senior Securities

         Not Applicable

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

         On June 14, 2002, the Company held its Special Meeting in Lieu of
Annual Meeting of Stockholders.  At the meeting, the stockholders elected as
directors Peter M. Nomikos, Roger D. Wellington, Dr. Leonard Laster and Thomas
J. Miller (each with 6,621,030 affirmative votes and 238,524 votes withheld).

         The stockholders also approved an amendment to the Company's 1996
Equity Incentive Plan to increase the number of shares of common stock reserved
for issuance under the plan from 1,041,775 to 1,341,775 (with 6,448,306 shares
voting for, 401,991 against and 9,257 abstaining).

         In addition, the stockholders approved an amendment to the Company's
Articles of Organization to increase the number of authorized shares of common
stock from 20,000,000 to 25,000,000 (with 6,688,348 shares voting for, 163,319
shares voting against and 7,887 abstaining).

Item 5:  Other Information

Subsequent Event

         On August 12, 2002, the Company engaged Deloitte & Touche LLP to serve
as independent public accountants for the fiscal year ending December 28, 2002.
The decision to engage Deloitte & Touche LLP was approved by the Company's Audit
Committee of the Board of Directors under authority of the Company's Board of
Directors.

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

         (A)  Exhibits

         No.       Description

         3.1       Articles of Organization of the Company, as amended

         10.1      Lease, dated May 22, 2002, between the Company and American
                   Power Conversion Corporation

         99.1      Certification pursuant to 18 U.S.C. Section 1350, as adopted
                   pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

         99.2      Certification pursuant to 18 U.S.C. Section 1350, as adopted
                   pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

         (B)  Reports on Form 8-K

         None.

                                       12

<PAGE>

                                   SIGNATURES

         Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

                                                   Photoelectron Corporation

                                                   By: /s/ Timothy W. Baker
                                                       --------------------
                                                       Timothy W. Baker
                                                       President and Chief
                                                       Financial Officer

Dated: August 19, 2002

                                       13

<PAGE>

                                  EXHIBIT INDEX

Exhibit      Description
No.

3.1          Articles of Organization of the Company, as amended


10.1         Lease, dated May 22, 2002, between the Company and American Power
             Conversion Corporation

99.1         Certification pursuant to 18 U.S.C. Section 1350, as adopted
             pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

99.2         Certification pursuant to 18 U.S.C. Section 1350, as adopted
             pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

                                       14