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, 2001

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

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

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

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

     As of March 31, 2001, 10,446,564 shares of common stock, $.01 par value per share, were outstanding.

     Transitional Small Business Disclosure Format (check one): Yes____   No__X__

PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES

INDEX

PART I - FINANCIAL INFORMATION
	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	10
		RISK FACTORS	12
	ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES
		ABOUT MARKET RISK	16
PART II - OTHER INFORMATION			17
	ITEM 1.	LEGAL PROCEEDINGS	17
	ITEM 2.	CHANGES IN SECURITIES	17
	ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	17
	ITEM 4.	SUBMISSION OF MATTERS TO A VOTE
		OF SECURITY HOLDERS	17
	ITEM 5.	OTHER INFORMATION	17
	ITEM 6.	EXHIBITS AND REPORTS ON FORM 8-K	18
SIGNATURES			20

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PART I - FINANCIAL INFORMATION

Item 1.   Consolidated Financial Statements (Unaudited).

PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

	December 31, 2000			March 31, 2001
				(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents	$	9,535,694		$	9,184,829
Available-for-sale investments, at market value		5,868,213			3,893,104
Accounts receivable, net		1,613,150			1,753,458
Inventories		2,411,526			2,333,302
Other current assets		569,898			284,179
Total current assets		19,998,481			17,448,872
Property and Equipment, Net		879,156			793,774
Other Assets		122,024			122,024
	$	20,999,661		$	18,364,670
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Current portion of long-term debt	$	951,842		$	977,612
Accounts payable		2,139,150			1,382,310
Accrued liabilities		5,934,232			6,270,390
Accrued income taxes		1,822,146			1,822,146
Deferred revenue		286,907			340,171
Total current liabilities		11,134,277			10,792,629
Long-Term Debt, Net of Current Portion		500,000			—
Preferred Stock Accrued Dividends and Interest		1,785,450			1,881,267
Stockholders’ Equity:
Preferred stock, $.01 par value-
Authorized - 1,500,000 shares
Issued and outstanding -
6,000 shares
at December 31, 2000 and March 31, 2001		60			60
Common stock, $.01 par value-
Authorized - 45,000,000 shares
Issued - 11,074,393 at December 31, 2000 and March 31, 2001		110,744			110,744
Additional paid-in capital		161,776,383			161,409,285
Accumulated deficit		(151,505,342	)		(153,528,130	)
Unrealized loss on available-for-sale investments		(2,836	)		(1,252	)
Less: Treasury stock - 763,835 and 627,829 shares at cost
at December 31, 2000 and March 31, 2001, respectively		(2,799,075	)		(2,299,933	)
Total stockholders’ equity		7,579,934			5,690,774
	$	20,999,661		$	18,364,670

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 OPERATIONS
(Unaudited)

	Three Months Ended March 31,
	2000			2001
Product Revenues	$	1,603,103		$	2,559,044
Royalty Revenues		1,249,947			1,043,322
Total Revenues		2,853,050			3,602,366
Cost of Product Revenues		2,050,046			2,298,086
Cost of Royalty Revenues		499,979			417,328
Total Cost of Revenues		2,550,025			2,715,414
Gross Margin		303,025			886,952
Operating Expenses
Research and development		2,077,971			1,616,384
Sales and marketing		481,755			717,657
General and administrative		1,257,954			881,202
Total operating expenses		3,817,680			3,215,243
Loss from operations		(3,514,655	)		(2,328,291	)
Interest Income		413,636			297,764
Interest Expense		(50,468	)		(23,897	)
Other Income		244,690			127,453
Loss Before Cumulative Effect of Change in Accounting Method		(2,906,797	)		(1,926,971	)
Cumulative Effect of Change in Accounting Method		(712,359	)		—
Net Loss	$	(3,619,156	)	$	(1,926,971	)
Basic and Diluted Net Loss Per Share
Continuing Operations	$	(0.30	)	$	(0.19	)
Cumulative Effect of Change in Accounting Method		(0.07	)		—
Total Basic and Diluted Net Loss Per Share	$	(0.37	)	$	(0.19	)
Basic and Diluted Weighted Average Number of Shares Outstanding		10,047,183			10,688,804

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 STOCKHOLDERS’ EQUITY
(Unaudited)

	Preferred Stock				Common Stock				Treasury Stock						Additional Paid-in Capital			Accumulated Deficit			Unrealized (Loss) Gain on Available-for- Sale Investments			Total Stockholders’ Equity (Deficit)
	Number of Shares		$0.01 Par Value		Number of Shares		$0.01 Par Value		Number of Shares			Cost
Balance, December 31, 2000		6,000	$	60		11,074,393	$	110,744		(763,835	)	$	(2,799,075	)	$	161,776,383		$	(151,505,342	)	$	(2,836	)	$	7,579,934
Costs incurred related to the issuance of common stock		—		—		—		—		—			—			(50,625	)		—			—			(50,625	)
Issuance of stock for Employee Stock Purchase Plan		—		—		—		—		16,058			58,933			(40,591	)		—			—			18,342
Issuance of stock for 2000 employer 401K        matching contribution		—		—		—		—		119,948			440,209			(275,882	)		—			—			164,327
Unrealized gain on available-for-sale investments		—		—		—		—		—			—			—			—			1,584			1,584
Preferred stock dividends		—		—		—		—		—			—			—			(95,817	)		—			(95,817	)
Net loss		—		—		—		—		—			—			—			(1,926,971	)		—			(1,926,971	)
Balance, March 31, 2001		6,000	$	60		11,074,393	$	110,744		(627,829	)	$	(2,299,933	)	$	161,409,285		$	(153,528,130	)	$	(1,252	)	$	5,690,774

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,
	2000			2001
Cash Flows from Operating Activities:
Net loss	$	(3,619,156	)	$	(1,926,971	)
Adjustments to reconcile net loss from continuing operations
to net cash used in operating activities-
Depreciation and amortization		176,559			85,382
Changes in assets and liabilities,
Accounts receivable		1,006,761			(140,308	)
Inventories		532,564			78,324
Receivable from sale of subsidiary		(54,323	)		—
Other current assets		62,800			285,719
Accounts payable		(6,452	)		(756,840	)
Accrued liabilities		(703,841	)		500,385
Accrued income taxes		(2,073,869	)		—
Deferred revenue		(423,832	)		53,264
Net cash used in operating activities		(5,102,789	)		(1,821,045	)
Cash Flows from Investing Activities:
Purchases of property and equipment		(156,787	)		—
Purchases of available-for-sale investments		—			(3,894,356	)
Proceeds from sale of available-for-sale investments		5,498,459			5,871,049
Decrease in other assets		11,360			—
Net cash provided by investing activities		5,353,032			1,976,693
Cash Flows from Financing Activities:
Proceeds from the exercise of warrants, stock options
and Employee Stock Purchase Plan		191,442			18,342
Costs incurred related to issuance of common stock		(90,800	)		(50,625	)
Payment on Swiss Franc convertible debentures		—			(474,230	)
Net cash provided by (used in) financing activities		100,642			(506,513	)
Net increase (decrease) in cash and cash equivalents		350,885			(350,865	)
Cash and cash equivalents, beginning of the period	$	2,712,466		$	9,535,694
Cash and cash equivalents, end of the period	$	3,063,351		$	9,184,829
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest	$	10,847		$	16,299
Supplemental Disclosure of Noncash Financing and Investing Activities:
Unrealized gain (loss) on available-for-sale investments	$	(21,717	)	$	1,584
Preferred stock accrued dividends and interest	$	89,918		$	95,817

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 FINANCIAL STATEMENTS

1.  BASIS OF PRESENTATION

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

2.  CASH AND CASH EQUIVALENTS

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

3.  INVESTMENTS

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

	December 31, 2000		March 31, 2001
Market Value	$ 5,868,213		$ 3,893,104
Cost Basis	$ 5,871,049		$ 3,894,356
Gross Unrealized Loss	$       (2,836	)	$       (1,252	)

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

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PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4.  INVENTORIES

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

	December 31, 2000	March 31, 2001
Raw materials	$1,331,839	$   363,213
Work-in-process	643,161	1,320,845
Finished goods	436,526	649,244
	$2,411,526	$2,333,302

5.  PROPERTY AND EQUIPMENT

     Property and equipment consist of the following:

	December 31, 2000	March 31, 2001
Machinery and equipment	$   969,118	$   969,118
Furniture and fixtures	1,266,991	1,266,991
Leasehold improvements	251,107	251,107
	2,487,216	2,487,216
Less: Accumulated depreciation
and amortization	1,608,060	1,693,442
	$   879,156	$   793,774

6.  LONG-TERM DEBT

     Notes payable consist of the following:

	December 31, 2000		March 31, 2001
Dollar - denominated convertible debentures	$    500,000		$ 500,000
Swiss franc - denominated convertible debentures	951,842		477,612
	1,451,842		977,612
Less - current maturities	(951,842	)	(977,612	)
	$    500,000		—

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PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7.  SEGMENT AND GEOGRAPHIC INFORMATION

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

	Three Months Ended March 31,
	2000		2001
United States	40	.7%	47	.4%
Japan	52	.7%	41	.2%
Asia/Pacific	5	.9%	2	.0%
Canada/Australia	0	.4%	7	.5%
Europe/Middle East	0	.1%	0	.0%
Latin America	0	.2%	1	.9%
Total	100	.0%	100	.0%

8.  STOCKHOLDERS’ EQUITY

(a) Options to Purchase Common Stock

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

(b) Warrants to Purchase Common Stock

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

9.  NET INCOME (LOSS) PER COMMON SHARE

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

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PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

	Three Months Ended March 31,
	2000		2001
Net loss	$(3,619,156	)	$(1,926,971	)
Preferred stock dividends	(89,918	)	(95,817	)
Net loss attributable to common stockholders	$(3,709,074	)	$(2,022,788	)
Basic and diluted net loss per common share	$(0.37	)	$(0.19	)
Basic and diluted weighted average number of
shares outstanding	10,047,183		10,688,804

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

10. COMPREHENSIVE INCOME (LOSS)

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

	Three Months Ended March 31,
	2000		2001
Net loss	$(3,619,156	)	$(1,926,971	)
Unrealized gain on available-for-sale
investments	21,717		1,252
Comprehensive loss	$(3,597,439	)	$(1,925,719	)

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PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11.  REVENUE RECOGNITION

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

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

	Three Months Ended March 31, 2000		Three Months Ended March 31, 2000
	(As Reported - Unaudited)		(As Restated - Unaudited)
Revenues	$2,778,932		$2,853,050
Gross Profit	$258,554		$303,025
Operating Loss	$(3,559,126	)	$(3,514,655	)
Net Loss	$(2,951,268	)	$(3,619,156	)
Net Loss Per Share	$(0.30	)	$(0.37	)

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

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

(b) Results of Operations

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

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

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

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

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

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

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

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

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

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

(c) Liquidity and Capital Resources

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

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

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

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

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

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

RISK FACTORS

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

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

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

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

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

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

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We could be delisted from NASDAQ.

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

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

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

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

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

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

We are dependent on third-party researchers.

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

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

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

Our proprietary technology has only limited protections.

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

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

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

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

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

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

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

We may not be able to successfully collect licensing royalties.

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

We face risks associated with pending litigation.

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

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

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

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

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

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

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

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

(ii) Primary Market Risk Exposures.

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

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

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

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

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

Item 2. Changes in Securities.

     Not applicable.

Item 3. Defaults upon Senior Securities.

     Not applicable.

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

     Not applicable.

Item 5. Other Information.

     Not applicable.

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

(a) Exhibits

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

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

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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, 2001.

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

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