UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2003.

Commission file number 0-22340

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ý No o

Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Securities Exchange Act of 1934).
Yes o No ý

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Palomar Medical Technologies, Inc. and Subsidiaries

Table of Contents

i

Palomar Medical Technologies, Inc. and Subsidiaries
Consolidated Balance Sheet

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

1

Palomar Medical Technologies, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)

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

2

Palomar Medical Technologies, Inc. and Subsidiaries
Consolidated Statements of Stockholder’s Equity
(Unaudited)

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

3

Palomar Medical Technologies, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)

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

4

Palomar Medical Technologies, Inc. and Subsidiaries
Notes to Consolidated Condensed Financial Statements

1. Basis of presentation

        The accompanying unaudited condensed 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 condensed consolidated financial statements and notes should be read in conjunction with the Company’s Form 10-K for the year ended December 31, 2002.

2.     Stock based compensation.

        The Company follows Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and related interpretations, in accounting for its stock-based compensation plans, rather than the alternative fair value accounting method provided for under Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. Under APB 25, when the exercise price of options granted under these plans equals the market price of the underlying stock on the date of grant, no compensation expense is required. In accordance with Emerging Issues Task Force (EITF) 96-18, the Company records compensation expense equal to the fair value of options and warrants granted to non-employees over the vesting period, which is generally the period of service.

        The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation. The Company has computed the pro forma disclosures required under SFAS No. 123 for all stock options granted to employees of the Company for the three-months and six-months ended June 30, 2003 and 2002, respectively, using the Black-Scholes option-pricing model prescribed by SFAS No. 123.

        Pro forma disclosure. The pro forma effect on the Company of applying SFAS No. 123 for all options and warrants to purchase common stock of the Company would be as follows:

3. 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 when purchased with an original maturity of three months or less. These investments are carried at cost, which approximates market value.

5

Palomar Medical Technologies, Inc. and Subsidiaries
Notes to Consolidated Condensed Financial Statements

4. Inventories

        Inventories consist of the following:

        During the quarter ended March 31, 2003, the Company wrote-off $250,000 of clinical and demonstration units related to the SLP 1000 product line to cost of product revenues.

5. Property and equipment

        Property and equipment consist of the following:

6. Segment information

        Product revenue from international sources were $3.9 million and $3.0 million for the three-months ended June 30, 2003 and 2002, respectively, and $7.7 million and $4.3 million for the six-months ended June 30, 2003 and 2002, respectively. The following table represents the percentage of product revenue by geographic region from customers for the three and six-months ended June 30, 2003 and 2002:

7. Guarantees

        The Company’s products generally carry a standard one-year warranty. The Company provides a reserve based on anticipated warranty claims at the time product revenue is recognized. In anticipation of actual warranty claims, the Company amortizes the reserve ratably over the life of the warranty thereby offsetting actual warranty claims incurred. Actual warranty claims incurred and charged to cost of product revenues during an interim period may be more or less than the amount of amortized warranty reserve allocated against them. Factors that affect the Company’s product warranty liability include the number of installed units, the anticipated cost of warranty repairs and historical and anticipated rates of warranty claims.

6

Palomar Medical Technologies, Inc. and Subsidiaries
Notes to Consolidated Condensed Financial Statements

        The following table reflects the changes in the Company’s accrued warranty during the six-months ended June 30, 2003:

8. Stockholders’ equity

        Options to purchase common stock. During the six-months ended June 30, 2003, the Company granted options to purchase 74,000 shares of the Company’s common stock at exercise prices from $1.51 to $4.75. During the six-months ended June 30, 2003, 631,506 shares of the Company’s common stock were exercised at exercise prices from $0.90 to $3.1875 per share. During the six-months ended June 30, 2003, options to purchase 67,408 shares of the Company’s common stock were cancelled.

        Warrants to purchase common stock. During the six-months ended June 30, 2003, no warrants were granted, exercised or cancelled.

        Exchange of note payable for common stock. On March 14, 2003, a director surrendered the $1 million principal balance of a Promissory Note and was issued 293,255 shares of the Company’s common stock with no registration rights at a price of $3.41 per share. The price was calculated at 110% of the Company’s common stock trailing ten-day average closing price of $3.10 per share.

        Private placement purchase of common stock. On March 14, 2003, the Company completed a private placement with Craig Drill Capital, a private investment firm based in New York City, for the purchase of 1 million shares of the Company’s common stock with no registration rights at a price of $3.41 per share for an aggregate subscription price of $3.4 million. The price was calculated at 110% of the Company’s common stock trailing ten-day average closing price of $3.10 per share.

        Issuance of common stock for employee stock purchase plan. During the six-months ended June 30, 2003, employees purchased 15,739 shares of the Company’s common stock for approximately $14,000 pursuant to the Purchase Plan.

        Issuance of stock for 401(k) match. The Company issued 184,109 shares of its common stock to the 401(k) Plan in satisfaction of the Company’s employer match for 2002 employee contributions during the six-months ended June 30, 2003.

9. Net income (loss) per common share

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

7

Palomar Medical Technologies, Inc. and Subsidiaries
Notes to Consolidated Condensed Financial Statements

        The Company's net income (loss) per share for the three and six-months ended June 30, 2003 and 2002 is as follows: