FORM 10-Q

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

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

For quarterly period ended March 31, 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 or other jurisdiction of incorporation or organization) 04-3128178
(I.R.S. Employer Identification No.)

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

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

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

     As of March 31, 2002, 11,489,504 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	1
	Consolidated Statements of Operations	2
	Consolidated Statements of Stockholders’ Equity	3
	Consolidated Statements of Cash Flows	4
	Notes to Consolidated Financial Statements	5
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
	CONDITION AND RESULTS OF OPERATIONS	8
	RISK FACTORS	10
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES
	ABOUT MARKET RISK	15

PART II — OTHER INFORMATION			16
	ITEM 1.	LEGAL PROCEEDINGS	16
	ITEM 2.	CHANGES IN SECURITIES	16
	ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	16
	ITEM 4.	SUBMISSION OF MATTERS TO A VOTE	16
		OF SECURITY HOLDERS
	ITEM 5.	OTHER INFORMATION	16
	ITEM 6.	EXHIBITS AND REPORTS ON FORM 8-K	16

SIGNATURES 19

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PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

	December 31, 2001		March 31, 2002
			(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents	$     5,825,270		$     3,925,561
Accounts receivable, net	2,250,278		2,939,932
Inventories	3,706,828		3,284,806
Other current assets	436,752		352,283
Total current assets	12,219,128		10,502,582
Property and Equipment, Net	649,691		656,830
Other Assets	302,024		298,602
	$   13,170,843		$   11,458,014
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Convertible debentures	$        500,000		$        500,000
Note payable to related party	1,000,000		1,000,000
Accounts payable	1,846,155		1,238,613
Accrued liabilities	4,173,989		2,794,483
Accrued income taxes	1,400,146		1,400,146
Deferred revenue	354,684		432,993
Total current liabilities	9,274,974		7,366,235
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 11,489,504 shares at December 31, 2001
and March 31, 2002, respectively	110,744		114,895
Additional paid-in capital	163,252,616		162,171,512
Accumulated deficit	(157,368,178	)	(158,194,628	)
Less: Treasury stock - 573,031 shares at cost at December 31, 2001	(2,099,373	)	—
Total stockholders’ equity	3,895,869		4,091,779
	$   13,170,843		$   11,458,014

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PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

	Three Months Ended March 31,
	2001		2002
Product revenues	$   2,559,044		$   3,385,683
Royalty revenues	1,043,322		856,070
Total Revenues	3,602,366		4,241,753
Cost of product revenues	2,298,086		2,210,949
Cost of royalty revenues	417,328		342,428
Total Cost of Revenues	2,715,414		2,553,377
Gross Margin	886,952		1,688,376
Operating Expenses
Research and development	1,616,384		1,064,709
Sales and marketing	717,657		789,180
General and administrative	881,202		619,063
Total operating expenses	3,215,243		2,472,952
Loss from operations	(2,328,291	)	(784,576	)
Interest Income	297,764		20,227
Interest Expense	(23,897	)	(30,598	)
Other Income	127,453		58,333
Net Loss	$(1,926,971	)	$    (736,614	)
Basic and Diluted Net Loss Per Share	$         (0.19	)	$         (0.08	)
Basic and Diluted Weighted Average Number of Shares Outstanding	10,688,804		10,944,217

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

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PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)

	Preferred Stock				Common Stock		Treasury Stock
	Number of Shares		$0.01 Par Value		Number of Shares	$0.01 Par Value	Number of Shares		Cost		Additional Paid-in Capital		Accumulated Deficit		Total Stockholders’ Equity
Balance, December 31, 2001	6,000		$ 60		11,074,393	$110,744	(573,031	)	$(2,099,373	)	$ 163,252,616		$(157,368,178	)	$ 3,895,869
Costs incurred related to the issuance of           common stock	—		—		—	—	—		—		(62,500	)	—		(62,500	)
Issuance of stock for settlement	—		—		358,547	3,585	—		—		797,553		—		801,138
Issuance of stock for Employee Stock Purchase Plan	—		—		—	—	13,617		49,839		(36,875	)	—		12,964
Issuance of stock for 2001 employer 401K matching            contribution	—		—		—	—	148,855		545,362		(364,440	)	—		180,922
Conversion of convertible preferred stock	(6,000	)	(60	)	56,564	566	410,559		1,504,172		(1,504,678	)	—		—
Preferred stock dividends	—		—		—	—	—		—		89,836		(89,836	)	—
Net loss	—		—		—	—	—		—		—		(736,614	)	(736,614	)
Balance, March 31, 2002	—		$ —		11,489,504	$114,895	—		$             —		$ 162,171,512		$(158,194,628	)	$ 4,091,779

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

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PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

	Three Months Ended March 31,
	2001		2002
Cash Flows from Operating Activities:
Net loss	$(1,926,971	)	$  (736,614	)
Adjustments to reconcile net loss from continuing operations
to net cash used in operating activities-
Depreciation and amortization	85,382		73,116
Changes in assets and liabilities,
Accounts receivable	(140,308	)	(689,654	)
Inventories	78,324		422,022
Other current assets	285,719		84,469
Accounts payable	(756,840	)	(607,542	)
Accrued liabilities	500,385		(397,446	)
Deferred revenue	53,264		78,309
Net cash used in operating activities	(1,821,045	)	(1,773,340	)
Cash Flows from Investing Activities:
Purchases of property and equipment	—		(80,255	)
Purchases of available-for-sale investments	(3,894,356	)	—
Proceeds from sale of available-for-sale investments	5,871,049		—
Increase in other assets	—		3,422
Net cash (used in) provided by investing activities	1,976,693		(76,833	)
Cash Flows from Financing Activities:
Proceeds from employee stock purchase plan	18,342		12,964
Costs incurred related to issuance of common stock	(50,625	)	(62,500	)
Payment on Swiss Franc convertible debentures	(474,230	)	—
Net cash used in Financing Activities	(506,513	)	(49,536	)
Net decrease in cash and cash equivalents	(350,865	)	(1,899,709	)
Cash and cash equivalents, beginning of the period	$ 9,535,694		$ 5,825,270
Cash and cash equivalents, end of the period	$ 9,184,829		$ 3,925,561
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest	$      16,299		$        1,910
Supplemental Disclosure of Noncash Financing and Investing Activities:
Unrealized gain on available-for-sale investments	$        1,584		$             —
Preferred stock accrued dividends and interest	$      95,817		$      89,836
Issuance of stock for 2000 and 2001 employer 401 (k)
matching contribution	$    164,327		$    180,922
Issuance of stock for settlement	$    198,470		$    801,138

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

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PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCAL STATEMENTS

1. BASIS OF PRESENTATION

     The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. The results of operations for the interim periods shown in this report are not necessarily indicative of expected results for any future interim period or for the entire fiscal year. Palomar Medical Technologies, Inc. and its subsidiaries (the “Company” or “Palomar”) believes that the quarterly information presented includes all adjustments (consisting of normal, recurring adjustments) necessary for a fair presentation in accordance with accounting principles generally accepted in the United States. The accompanying financial statements and notes should be read in conjunction with the Company’s Form 10-K for the year ended December 31, 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	March 31, 2002
Raw materials	$1,489,330	$1,058,598
Work-in-process	292,404	523,271
Finished goods	1,925,094	1,702,937
	$3,706,828	$3,284,806

4. PROPERTY AND EQUIPMENT

     Property and equipment consist of the following:

	December 31, 2001	March 31, 2002
Machinery and equipment	$   984,883	$   984,883
Furniture and fixtures	1,352,932	1,433,187
Leasehold improvements	251,106	251,106
	2,588,921	2,669,176
Less: accumulated depreciation
and amortization	1,939,230	2,012,346
	$   649,691	$   656,830

5. CONVERTIBLE DEBENTURES

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

     During the three months ended, March 31, 2002, the Company has entered into an agreement with the debentureholder to pay the $500,000 convertible debentures originally due March 13, 2002 in five equal monthly installments, beginning April 2002.

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PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCAL STATEMENTS

6. SEGMENT AND GEOGRAPHIC INFORMATION

     Product revenue from international sources were $1.3 million and $1.4 million for the three months ended March 31, 2001 and 2002, respectively. The following table represents the percentage of product revenue by geographic region from customers for the three-month periods ended March 31, 2001 and 2002:

	Three Months Ended March 31,
	2001		2002
United States	47.4	%	56.2	%
Japan	41.2	%	24.6	%
Asia/Pacific	2.0	%	2.3	%
Canada	3.3	%	4.0	%
Australia	4.2	%	9.5	%
Europe/Middle East	0.0	%	3.4	%
Latin America	1.9	%	0.0	%
Total	100.0	%	100.0	%

7. STOCKHOLDERS’ EQUITY

(a) Options to Purchase Common Stock

     During the three months ended March 31, 2002, the Company granted options to purchase 187,500 shares of the Company’s common stock at exercise prices ranging from $0.91 to $0.92. During the three months ended March 31, 2002, options to purchase 92,751 shares of the Company’s common stock expired and no options were exercised.

(b) Warrants to Purchase Common Stock

     During the three months ended March 31, 2002, no warrants were granted, exercised or cancelled.

(c) Convertible Preferred Stock

     During the three months ended March 31, 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 of which 410,559 shares were issued from treasury stock.

(d) Issuance of Stock for Settlement of Litigation

     On March 11, 1999, the United States District Court for the Southern District of New York granted plaintiffs leave to amend their complaint in the action styled Varljen v. H.J. Meyers, Inc., et. al. The court entered a final judgement of dismissal with prejudice on November 6, 2000. All cash payments required by Palomar under the settlement agreement have been previously made. During the three months ended March 31, 2002, the Company delivered the balance owed under the settlement agreement and issued 358,547 shares of the Company’s common stock.

(e) Issuance of Stock for 401K Match

     During the three months ended March 31, 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.

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PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCAL STATEMENTS

8. NET LOSS PER COMMON SHARE

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

     The Company’s net loss per share for the three months ended March 31, 2001 and 2002 is as follows:

	Three Months Ended March 31,
	2001		2002
Net loss	$(1,926,971	)	$    (736,614	)
Preferred stock dividends	(95,817	)	(89,836	)
Net loss attributable to common stockholders	$(2,022,788	)	$    (826,450	)
Basic and diluted net loss per common share	$         (0.19	)	$         (0.08	)
Basic and diluted weighted average number of
shares outstanding	10,688,804		10,944,217

     For the three months ended March 31, 2001 and 2002, 4,470,859 and 6,052,244, respectively, of potential common shares related to outstanding stock options, stock warrants and convertible securities were not included in the diluted weighted average shares outstanding as they were antidilutive.

9. COMPREHENSIVE LOSS

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

	Three Months Ended March 31,
	2001		2002
Net loss	$(1,926,971	)	$(736,614	)
Unrealized gain on available-for-sale
investments	1,252		—
Comprehensive loss	$(1,925,719	)	$(736,614	)

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.

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

(a) Overview

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

     The Company believes the successful introduction and marketing of new products will become critical to the Company’s long-term success. Broad market acceptance of laser \ light based hair removal and specific acceptance of the Palomar SLP1000® diode laser system, Palomar EsteLux™ light based system and the Palomar Q-Yag 5™ Q-Switched ND: Yag laser system is critical to the Company’s success. The three systems, all of which have FDA 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.

(b) Results of Operations

(i) REVENUES AND GROSS PROFIT: Three Months Ended March 31, 2002, Compared to Three Months Ended March 31, 2001

     For the three months ended March 31, 2002, the Company’s revenues increased to $4.2 million, as compared to $3.6 million for the three months ended March 31, 2001. The increase in the Company’s revenues of $600,000, or 18% from the three months ended March 31, 2001, was mainly due to an increase in product sales of $1.6 million from the EsteLux, an increase of $473,000 in product sales of the Q-Yag 5, an increase in sales of $150,000 associated with the RD1200 offset by a decrease of $1.4 million from shipments associated with the SLP 1000. Additionally, royalty revenues received by the Company decreased by $187,000 in 2002 compared to 2001.

     Gross profit for the three months ended March 31, 2002 was $1.7 million, 40% of revenues, compared to $887,00, 25% of revenues, for the three months ended March 31, 2001. The EsteLux and Q-Yag 5 are higher margin products. As a result, the EsteLux and Q-Yag 5 have directly contributed to the increase in gross profit and gross profit percentage for the three months ended March 31, 2002.

(ii) OPERATING AND OTHER EXPENSES: Three Months Ended March 31, 2002, Compared to Three Months Ended March 31, 2001

     Research and development costs decreased to $1.1 million for the three months ended March 31, 2002, as compared to $1.6 million for the three months ended March 31, 2001. Research and development expenses as a percentage of revenue totaled 25% for the three months ended March 31, 2002 and 45% for the three months ended March 31, 2001. This decrease of $500,000 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 lasers and light-based systems, while continuing dermatology research utilizing the Company’s platforms. The research and development goals in the fields of laser and light-based hair removal are to design systems that (1) permit more rapid treatment of large areas, (2) have high gross margins, and (3) are manufactured at a lower cost, thus addressing broader markets. Further, the Company is aiming to address dermatology and cosmetic procedure markets other than hair, including the fields of fat reduction, acne treatment and skin rejuvenation covered in its expanded research agreement with Massachusetts General Hospital.

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     Selling and marketing expenses were $789,000, or 19% of revenues for the three months ended March 31, 2002, compared to $718,000, or 20% of revenues for the three months ended March 31, 2001.

     General and administrative expenses decreased to $619,000 or 15% of revenues for the three months ended March 31, 2002, as compared to $881,000, or 25% of revenues for the three months ended March 31, 2001. This decrease in general and administrative expenses is attributable to improved cost management and a reduction in legal expenses.

     Interest income decreased to $20,000 for the three months ended March 31, 2002, compared to $298,000 for the three months ended March 31, 2001. This decrease in interest income is attributable to the reduction in cash available for investment.

     Interest expense increased to $31,000 for the three months ended March 31, 2002, compared to $24,000 for the three months ended March 31, 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 decreased to $58,000 for the three months ended March 31, 2002, compared to $127,000 for the three months ended March 31, 2001.

(c) Liquidity and Capital Resources

     As of March 31, 2002, the Company had $3.9 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 approximately $1.8 million for the three months ended March 31, 2002 and 2001, respectively. Net cash used during the three months ended March 31, 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 three months ended March 31, 2001 consisted primarily of a net loss from operations, an increase in accounts receivable and a decrease in accounts payable, offset by depreciation and amortization, a decrease in inventories, a decrease in other current assets, an increase in accrued liabilities and deferred revenue.

     Investing activities used cash of $77,000 and provided cash of $2.0 million during the three months ended March 31, 2002 and 2001, respectively. During the three months ended March 31, 2002, the principal uses were purchases of property and equipment. During the three months ended March 31, 2001, the principal uses were purchases of investments offset by proceeds from the sale of investments.

     Financing activities used cash of $50,000 and $507,000 during the three months ended March 31, 2002 and 2001, respectively. During the three months ended March 31, 2002, the decrease from financing activities were due to costs incurred related to the issuance of common stock offset by the proceeds from the issuance of stock pursuant to the employee stock purchase plan and 401K matching contribution. Financing activities used cash of $507,000 during the three months ended March 31, 2001 due to costs incurred related to the issuance of common stock and a payment made on Swiss Franc convertible debentures offset by the proceeds from the issuance of stock pursuant to the employee stock purchase plan and 401K matching contribution.

     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.

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

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

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

-10-

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

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

     All of our current products are laser / light-based medical devices which are subject to FDA regulations for clinical testing, manufacturing, labeling, sale, distribution and promotion. Before a new product or a new use of or claim for an existing product can be introduced into the market, we must obtain clearance from the FDA. Our products 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.

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     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, non-physicians, including nurse practitioners and, in some cases, chiropractors and electrologists, may operate our product. We do not supervise the procedures performed with our products, nor do we require that direct medical director supervision occur. The lack of required training and 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. 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 some of our products. This could have a material adverse effect on our business, results of operations and financial condition.

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

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

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

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

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

We may not be able to successfully collect licensing royalties.

     At present, material portions of our revenues consist of royalties from 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 licensing additional third parties.

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We face risks associated with pending litigation.

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

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

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

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

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

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

We face risks associated with liquidity and capital resources.

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

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

     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.

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     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.

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 March 31, 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’ (deficit) equity. Accordingly, the Company has no quantitative information concerning the market risk of participating in such investments.

(ii) Primary Market Risk Exposures.

     The Company’s primary market risk exposures are in the areas of interest rate risk. 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.

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

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

Item 2. Changes in Securities.

     During the three months ended March 31, 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 of which 410,559 shares were issued from treasury stock.

Item 3. Defaults upon Senior Securities.

     Not applicable.

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

     Not applicable.

Item 5. Other Information.

     Not applicable.

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

ˆˆˆ3(i).1	Certificate of Designation, as filed with the Delaware Secretary of State on April 21, 1999.
ˆ3(i).2	Second Restated Certificate of Incorporation, as filed with the Delaware Secretary of State on January 8, 1999.
ˆˆˆˆ3(ii)	Bylaws, as amended.
ˆ4.1	Common Stock Certificate.
ˆˆ4.2.	Rights Agreement Between Palomar Medical Technologies, Inc. and American Stock Transfer & Trust Company, dated as of April 20, 1999
##4.3	Form of 4.5% Convertible Debenture (denominated in Swiss Francs) due July 3, 2003.
####4.4	First Allonge and Amendment to 4.5% Subordinated Convertible Debenture
##4.5	Form of 6% Convertible Debenture due March 13, 2002.
<4.6	Second Amended 1991 Stock Option Plan.
<4.7	Second Amended 1993 Stock Option Plan.
<4.8	Second Amended 1995 Stock Option Plan.
<4.9	Second Amended 1996 Stock Option Plan.
<4.10	Third Amended 1996 Employee Stock Purchase Plan.

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*4.11	Form of Stock Option Grant under the 1991, 1993 and 1995 Amended Stock Option Plans.
##4.12	Form of Stock Option Agreement under the 1996 Amended Stock Option Plan.
#4.13	Form of Company Warrant to Purchase Common Stock.
###10.1	Employment Agreement, dated as of May 15, 1997, between the Company and Louis P. Valente.
<10.2	Amendment No. 1 to Key Employment Agreement between the Company and Louis P. Valente dated May 15, 1999.
####10.3	Amendment No. 2 to Key Employment Agreement between the Company and Louis P. Valente dated February 1, 2000
<10.4	Amended and Restated Employment Agreement between the Company and Joseph P. Caruso dated June 30, 1999.
####10.5	Amendment No. 1 to Amended and Restated Employment Agreement between the Company and Joseph P. Caruso dated February 1, 2000.
<10.6	Lease for premises at 82 Cambridge Street, Burlington, Massachusetts, dated June 17, 1999.
###10.7	License Agreement between the Company and Massachusetts General Hospital, dated August 18, 1995.
###10.8	First Amendment to License Agreement between the Company and Massachusetts General Hospital dated August 18, 1995.
###10.9	Second Amendment to License Agreement between the Company and Massachusetts General Hospital dated August 18, 1995.
-10.10	The Company’s 401(k) Plan.
**10.11	Agreement and Plan of Reorganization by and among Coherent, Inc., Medical Technologies, Acquisition, Inc., Palomar Medical Technologies, Inc., Star Medical Technologies, Inc., Robert E. Grove, James Z. Holtz and David C. Mundinger, dated as of December 7, 1998.
<<10.12	Amendment No. 1 to Key Employment Agreement between the Company and Joseph P. Caruso dated June 8, 2000
ˆ	Previously filed as an exhibit to Form 8-K, filed on April 21, 1999 and incorporated herein by reference.
ˆˆ	Previously filed as an exhibit to Form 10-K for the period ended December 31, 1998, filed on March 30, 1999 and incorporated herein by reference.
ˆˆˆ	Previously filed as an exhibit to Form 10-Q for the period ended March 31, 1999, filed on May 17, 1999 and incorporated herein by reference.
ˆˆˆˆ	Previously filed as an exhibit to Form 8-K, filed on December 16, 1999 and incorporated herein by reference.
*	Previously filed as an exhibit to Amendment No. 4 to Form S-1 Registration Statement No. 33-47479 filed on October 5, 1992, and incorporated herein by reference.

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**	Previously filed as an exhibit to the Company’s Definitive Proxy Statement for the period ended December 31, 1998 filed on March 12, 1999, and incorporated herein by reference.
#	Previously filed as an exhibit to the Company’s Annual Report on Form 10-KSB for the year ended December 31, 1995, and incorporated herein by reference.
##	Previously filed as an exhibit to the Company’s Annual Report on Form 10-KSB for the year ended December 31, 1996, and incorporated herein by reference.
###	Previously filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 1998, and incorporated herein by reference.
####	Previously filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 1999, and incorporated herein by reference.
-	Previously filed as an exhibit to Form S-8 Registration Statement No. 33-97710 filed on October 4, 1995, and incorporated herein by reference.
<	Previously filed as an exhibit Form 10-Q for the period ended June 30, 1999, and incorporated herein by reference.
<<	Previously filed as an exhibit Form 10-Q for the period ended June 30, 2000, and incorporated herein by reference.

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SIGNATURES

     Pursuant to the requirements of the Securities Act of 1934, the Registrant certifies that it has caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in the Town of Burlington in the Commonwealth of Massachusetts on May 9, 2002.

DATE: May 9, 2002	PALOMAR MEDICAL TECHNOLOGIES, INC. (Registrant) By: /s/ Louis P. Valente —————————————— Louis P. Valente Chief Executive Officer and Chairman (Principal Executive Officer)
DATE: May 9, 2002	By: /s/ Joseph P. Caruso —————————————— Joseph P. Caruso President, Chief Operating Officer and Director (Principal Financial Officer and Principal Accounting Officer)

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