<PAGE>


                                   UNITED STATES
                         SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, D. C.  20549

                                     FORM 10-QSB

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

                  For the quarterly period ended December 31, 1997


(   )          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 0-16055
               

                                 PHOTOMATRIX, INC.
                                          
                                          
         (Exact name of small business issuer as specified in its charter)
                                          
                    California                               95-3267788
-------------------------------------------------------------------------------
                                          
11065 Sorrento Valley Court,  San Diego, California                 92121
-------------------------------------------------------------------------------
           (Address of principal executive offices)               (Zip Code)


                                   (619) 625-4400
-------------------------------------------------------------------------------
                  (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 
                      -----              -----

At December 31, 1997, 5,083,000 shares of Common Stock of the Issuer were
outstanding.


             Transitional Small Business Disclosure Format.

                  Yes                 No   X
                      -----              -----

<PAGE>

                                       INDEX
                                          
                                 PHOTOMATRIX, INC.


                                                                         Page
PART I. FINANCIAL INFORMATION                                            ----
------------------------------
ITEM 1. FINANCIAL STATEMENTS


    Consolidated balance sheets                                            1

    Unaudited consolidated statements of operations                        2

    Unaudited consolidated statements of cash flows                        3

    Notes to consolidated financial statements                             4

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
          AND RESULTS OF OPERATIONS                                        7



PART II. OTHER INFORMATION
----------------------------

ITEM 5.  OTHER INFORMATION                                                12

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K                                 12

SIGNATURES                                                                13

<PAGE>

PART I:  FINANCIAL INFORMATION
------------------------------

ITEM 1.  FINANCIAL STATEMENTS

PHOTOMATRIX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                           December 31, 1997
                                                               (Unaudited)    March 31, 1997
                                                           -----------------  --------------
<S>                                                        <C>                <C>
CURRENT ASSETS:
     Cash and cash equivalents                                 $  1,165,000     $  812,000
     Accounts receivable, net                                     1,086,000      1,602,000
     Inventories, net                                             2,915,000      2,520,000
     Prepaid expenses and other                                     159,000        149,000
                                                               ------------   ------------
TOTAL CURRENT ASSETS                                              5,325,000      5,083,000

PROPERTY AND EQUIPMENT, NET                                         912,000      1,346,000

INTANGIBLES AND OTHER ASSETS, NET                                 1,395,000      2,053,000

OTHER ASSETS                                                        151,000         83,000
                                                               ------------   ------------
                                                               $  7,783,000   $  8,565,000
                                                               ------------   ------------
                                                               ------------   ------------
CURRENT LIABILITIES:
     Accounts payable                                            $  516,000     $  844,000
     Accrued and other liabilities                                  634,000        590,000
     Customer deposits                                              451,000        613,000
     Line of credit (See Note 2, Part I, Item 1)                          -              -
     Current portion of notes payable                               162,000        152,000
     Net liabilities of discontinued operations (See Note
          3, Part I, Item 1)                                      1,238,000        452,000
                                                               ------------   ------------
TOTAL CURRENT LIABILITIES                                         3,001,000      2,651,000

NOTES PAYABLE TO RELATED PARTIES                                    252,000        375,000

OTHER NON-CURRENT LIABILITIES                                       101,000         40,000

CONTINGENT LIABILITIES

SHAREHOLDERS' EQUITY:
     Preferred stock, 3,173,000 shares authorized                         -              -
     Common stock, no par value: 30 million shares
          authorized, 5,083,000 shares issued and
          outstanding                                            19,351,000     19,351,000
     Accumulated deficit                                        (15,063,000)   (13,998,000)
     Other                                                          141,000        146,000
                                                               ------------   ------------
TOTAL SHAREHOLDERS' EQUITY                                        4,429,000      5,499,000
                                                               ------------   ------------
                                                               $  7,783,000   $  8,565,000
                                                               ------------   ------------
                                                               ------------   ------------
</TABLE>

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

                                       1

<PAGE>

PHOTOMATRIX,  INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

<TABLE>
<CAPTION>
                                                     THREE MONTHS ENDED            NINE MONTHS ENDED
                                                         DECEMBER 31,                 DECEMBER 31,
                                                 ---------------------------   ---------------------------
                                                     1997           1996           1997           1996
                                                 ------------   ------------   ------------   ------------
<S>                                              <C>            <C>            <C>            <C>
REVENUES                                         $  1,518,000   $  2,451,000   $  6,076,000   $  6,871,000

COST OF REVENUES                                    1,003,000      1,785,000      3,968,000      5,107,000
                                                 ------------   ------------   ------------   ------------
GROSS PROFIT                                          515,000        666,000      2,108,000      1,764,000

OPERATING EXPENSES:
     Selling, general and administrative              711,000        904,000      2,376,000      2,685,000
     Research and development                         226,000        199,000        580,000        562,000
     Write-off of Capitalized Software
          (See Note 4, Part I, Item 1)                366,000              -        366,000              -
                                                 ------------   ------------   ------------   ------------
TOTAL OPERATING EXPENSES                            1,303,000      1,103,000      3,322,000      3,247,000
                                                 ------------   ------------   ------------   ------------
OPERATING LOSS                                       (788,000)      (437,000)    (1,214,000)    (1,483,000)

OTHER INCOME (EXPENSE), NET                           (10,000)       241,000         87,000        193,000
                                                 ------------   ------------   ------------   ------------
LOSS FROM CONTINUING OPERATIONS                      (798,000)      (196,000)    (1,127,000)    (1,290,000)

LOSS FROM DISCONTINUED OPERATIONS                           -         (3,000)             -       (246,000)
GAIN ON SALE OF DISCONTINUED OPERATION                      -              -              -        184,000
                                                 ------------   ------------   ------------   ------------
NET LOSS                                         $   (798,000)  $   (199,000)  $ (1,127,000)  $ (1,352,000)
                                                 ------------   ------------   ------------   ------------
                                                 ------------   ------------   ------------   ------------
LOSS PER COMMON SHARE:
     CONTINUING OPERATIONS                       $      (0.16)  $      (0.04)  $      (0.22)  $      (0.24)
     DISCONTINUED OPERATION                              0.00           0.00           0.00          (0.01)
                                                 ------------   ------------   ------------   ------------
     NET LOSS                                    $      (0.16)  $      (0.04)  $      (0.22)  $      (0.25)
                                                 ------------   ------------   ------------   ------------
                                                 ------------   ------------   ------------   ------------
Weighted average number of common shares
  outstanding                                       5,083,000      5,050,000      5,083,000      5,383,000
                                                 ------------   ------------   ------------   ------------
                                                 ------------   ------------   ------------   ------------
</TABLE>

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

                                       2

<PAGE>


PHOTOMATRIX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED DECEMBER, 1997 AND 1996

<TABLE>
<CAPTION>
                                                                   1997           1996
                                                              -------------  -------------
<S>                                                           <C>            <C>
Operations:
     Loss from continuing operations                          $  (1,127,000) $  (1,290,000)
     Adjustments:
       Depreciation and amortization                                688,000        716,000
       Write-off of Capitalized Software                            366,000              -
       Change in assets and liabilities:
         Accounts receivable                                        516,000        (28,000)
         Inventories                                               (395,000)       669,000
         Prepaid expenses and other                                 (10,000)       (55,000)
         Accounts payable                                          (328,000)      (586,000)
         Accrued liabilities and other                               44,000        334,000
         Customer deposits                                         (162,000)      (107,000)
                                                              -------------  -------------
     Cash used in continuing operations                            (408,000)      (347,000)
     Cash provided by discontinued operations                       848,000        447,000
     Gain on sale of discontinued operations                              -       (184,000)
                                                              -------------  -------------
Cash provided (used in) by operations                               440,000        (84,000)
                                                              -------------  -------------
Investing activities:
     Proceeds from sale of discontinued operation                         -      2,000,000
     Capital (expenditures) retirements                              38,000       (237,000)
                                                              -------------  -------------
Cash provided by investing activities                                38,000      1,763,000
                                                              -------------  -------------
Financing activities:
     Repayment of credit facility                                         -     (1,024,000)
     Repayment of notes payable                                    (113,000)       (93,000)
     Other Assets and Liabilities                                    (7,000)             -
                                                              -------------  -------------
Cash used in financing activities                                  (120,000)    (1,117,000)
                                                              -------------  -------------

Effects of exchange rates on cash                                    (5,000)       123,000
                                                              -------------  -------------

Increase in cash and cash equivalents                               353,000        685,000

Cash and cash equivalents, beginning of year                        812,000        255,000
                                                              -------------  -------------

Cash and cash equivalents, end of year                         $  1,165,000     $  940,000
                                                              -------------  -------------
                                                              -------------  -------------
</TABLE>

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

                                       3

<PAGE>

                          PHOTOMATRIX, INC. AND SUBSIDIARIES
                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    AS OF DECEMBER 31, 1997 AND MARCH 31, 1997 AND
                 FOR THE NINE MONTHS ENDED DECEMBER 31, 1997 AND 1996
                                     (UNAUDITED)

1.   GENERAL
     
     BASIS OF PRESENTATION
     
          The accompanying unaudited consolidated financial statements reflect
     the accounts of Photomatrix, Inc. (the "Company"), together with its
     subsidiaries.  All significant intercompany transactions and balances have
     been eliminated.
          
          These unaudited consolidated financial statements have been prepared
     pursuant to the rules and regulations of the Securities and Exchange
     Commission.  Certain information and disclosures normally included in
     annual financial statements prepared in accordance with generally accepted
     accounting principles have been condensed or omitted pursuant to those
     rules and regulations, although the Company believes that the disclosures
     made are adequate to prevent the information from being misleading.  These
     unaudited consolidated financial statements reflect, in the opinion of
     management, all adjustments (which include only normal recurring
     adjustments) necessary to present the Company's results of operations and
     financial position as of the dates and for the periods presented.  These
     unaudited consolidated financial statements should be read in conjunction
     with the audited financial statements and related notes included in the
     Company's Report on Form 10-KSB filed with the Securities and Exchange
     Commission for the year ended March 31, 1997.  The results for the interim
     periods presented are not necessarily indicative of results to be expected
     for a full year.

2.   CREDIT LINE

          The Company has an unused line of credit with a bank to borrow a total
     of $750,000.  This line of credit, which expires September 1998, accrues
     interest on outstanding borrowings at prime plus 2 percent per annum.  As
     of December 31, 1997, the Company had no outstanding borrowings against
     this line of credit.

3.   DISCONTINUATION OF LEXIA SYSTEMS, INC.

          In December, 1996 the Board of Directors approved a plan to
     discontinue the operations of Lexia Systems, Inc. ("Lexia").  Lexia is
     currently in the process of winding down its affairs and has notified its
     customers that it will cease operations on or before September 30, 1998. 
     Lexia has not been able to resolve outstanding issues between it and ICL
     and Fujitsu/ICL Computers.

                                      4

<PAGE>

4.   WRITE-OFF OF CAPITALIZED SOFTWARE

          In November 1997 the Company announced the introduction of its new,
     state-of-the-art 32-bit Vision Image Capture Software ("VICS"), a true
     32-bit, MS-Windows NT-based software specifically designed for the
     Photomatrix Vision Series scanners. As a result of this introduction, the
     Company does not expect any significant future sales of its Photomatrix
     Image Capture Software ("PICS").  Accordingly, the Company has recorded a
     one-time charge of $366,000 in the quarter ended December 31, 1997 to write
     off all capitalized software costs related to earlier generations of
     software which were previously capitalized.

5.   PENDING MERGER AGREEMENT
     
          On October 29, 1997, the Company announced that it had entered into a
     non-binding letter of intent with I-PAC Manufacturing, Inc. ("I-PAC"), a
     custom contract manufacturer of electrical and mechanical assemblies,
     including complex, multi-layer printed circuit board assemblies; wire and
     cable harnesses; molded cables; and complete system and subsystem
     assemblies, whereby the companies had agreed to combine their respective
     business operations through a merger. The companies have revised the terms
     to the original letter of intent.  The revised non-binding agreement calls
     for the issuance of 4,848,000 shares of Photomatrix common stock to
     shareholders of I-PAC in exchange for all of the outstanding stock of the
     privately-held company. In addition, I-PAC shareholders will have the right
     to receive up to 4,652,000 additional shares based upon the exercise of
     Photomatrix options and attaining certain performance milestones for I-PAC
     operations. The merger is subject to several conditions, including:  a) 
     satisfactory completion of due diligence by each of the parties;  b)  the
     absence of any material adverse change in assets, liabilities, personnel,
     financial conditions or prospects of the respective companies; c) 
     compliance with all applicable statutory and regulatory requirements; d) 
     the approval of the transaction and the execution, delivery and performance
     of the agreement by their respective Boards of Directors and shareholders;
     e)  the receipt of all necessary or appropriate consents, waivers and
     approvals of third parties; f)  qualification of the transaction as a tax
     free exchange under Federal and California tax laws; g)  the absence of a
     significant number of dissenting shareholders and h)  the negotiation and
     execution of a merger agreement and other appropriate documentation.  The
     merger will initially result in increasing the number of outstanding shares
     of Photomatrix common stock from 5,083,000 to 9,931,000, and could
     eventually result in increasing that number to 15,490,000 shares if I-PAC's
     performance milestones are achieved and all existing Photomatrix options
     and warrants are converted to common stock. Photomatrix has previously
     granted options and warrants to officers, directors, key employees and
     various other parties to purchase 907,000 shares of its common stock, all
     of which remain outstanding.
          
          Under the terms of the merger agreement, the corporate headquarters of
     Photomatrix will be relocated as soon as possible after the close of the
     merger transaction to the I-PAC Manufacturing, Inc. facility located in
     Carlsbad, California. In addition, William Grivas, currently Chief
     Executive Officer of I-PAC Manufacturing, will assume the position of
     Chairman of the Board of Directors of Photomatrix and Patrick Moore,

                                       5

<PAGE>

     currently President of I-PAC Manufacturing, will assume the position of
     Chief Executive Officer of Photomatrix. Suren Dutia, currently President,
     Chief  Executive Officer and Chairman of the Board for Photomatrix, will
     retain the position of President of Photomatrix. The composition of the
     Photomatrix Board of Directors will change from four members to seven
     members. The existing members of the Board will remain the same, and the
     three additional positions will be filled by William Grivas, James Hill and
     one additional person. The transaction will be treated as a purchase for
     accounting purposes.
 
          I-PAC specializes in surface mount and hybrid printed circuit boards
     used in high value industrial products and commercial products which
     require an exceptionally high level of quality, a critical emphasis on
     delivery schedules, and intensive customer support.  I-PAC's primary
     customers include ITT, Lockheed Martin, Disney, Hughes JVC, Sattel
     Communications, Sanyo, Schumacher, Triconex (a Siebe company) and Palomar
     Products. For the year ended December 31, 1997, I-PAC reported revenues of
     nearly $5.6 million. I-PAC Manufacturing, Inc. owns a 40,000 square foot,
     two story concrete building located in a high end R&D industrial park in
     Carlsbad, California, which houses its operations. It also has an
     investment in a wholly owned subsidiary, I-PAC Express Assembly, Inc.

          I-PAC Express Assembly, Inc. is a custom contract manufacturer
     specializing in quick turn printed circuit board prototypes incorporating
     surface mount and hybrid technologies. It is located in Santa Ana,
     California, in the heart of the Orange County high technology community.
     I-PAC Express is situated to support prototyping requirements for new
     products during their design phase, allowing those products to then
     seamlessly migrate to the main facility when production build quantities
     are required.
          
          THERE IS NO ASSURANCE THAT THIS COMBINATION WILL BE CONSUMMATED.

                                       6

<PAGE>

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

     THIS 10-QSB CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
     UNCERTAINTIES.  THESE STATEMENTS INCLUDE, WITHOUT LIMITATION,
     STATEMENTS RELATING TO THE COMPANY'S PLANS AND OBJECTIVES FOR FUTURE
     OPERATIONS, INCLUDING INCREASING SALES AND IMPROVING MARGINS,
     ASSUMPTIONS AND STATEMENTS RELATING TO THE COMPANY'S FUTURE ECONOMIC
     PERFORMANCE AND OTHER NON-HISTORICAL INFORMATION.  THE COMPANY'S
     ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN. 
     FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE,
     WITHOUT LIMITATION, THOSE RISKS DISCUSSED IN ITEM 7 UNDER THE HEADING
     "ADDITIONAL RISK FACTORS" AS WELL AS OTHER FACTORS AS DISCUSSED IN THE
     COMPANY'S ANNUAL REPORT ON FORM 10-KSB FOR THE FISCAL YEAR ENDED MARCH
     31, 1997.


     Management's discussion and analysis of financial condition and results of
operations should be read in conjunction with the consolidated financial
statements and notes to consolidated financial statements included elsewhere
herein.


               THREE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO THE 
                        THREE MONTHS ENDED DECEMBER 31, 1996

     For the quarter ended December 31, 1997, consolidated revenues decreased
$933,000 or 38.1% to $1,518,000 from $2,451,000 for the quarter ended December
31, 1996.  This was due to a 47.6%  ($952,000) decrease in equipment and
software revenues offset by a 4.2% ($19,000) increase in service revenues.  This
reduction in equipment and software revenues was primarily due to extended
customer purchasing decisions and a significant reduction in orders from a major
OEM customer of Photomatrix. The Company has also not yet received anticipated
orders from a potentially significant new distributor.  During December 1997,
the Company received a binding commitment from Bell & Howell for purchasing
Vision Series 5000 document scanners to be delivered over a seven-month period
beginning in December 1997. The purchase commitment, which exceeds $1.5 million,
is part of an agreement between Photomatrix and the Bell & Howell, whereby Bell
& Howell becomes the exclusive agent, with certain specifically identified
exceptions, to sell Photomatrix peripheral document scanners to distributors and
value-added resellers in the United States and Canada. In return for the
purchase commitment, Photomatrix agreed to restrict its direct sales activities
to the service bureau markets and not compete with Bell & Howell in the indirect
distribution channels. In addition, Photomatrix also retains rights to continue
selling its document scanners to international distributors as well as certain
domestic distributors and end users under existing distribution agreements. 
Eight of the scanners were delivered in December 1997.
     
     For the quarter ended December 31, 1997, consolidated gross margin
decreased $151,000 or 22.7% to $515,000 from $666,000 for the quarter ended
December 31, 1996.  However, gross margin as a percent of revenues increased
24.6% to 33.9% from 27.2%.  This increase was due to a 19.1% increase in
equipment and software margins coupled with a 36.6% increase in service margins.
The equipment and software gross margin improvement resulted from the effects of
both a continuing favorable product mix and a reduction in costs associated with
production 

                                       7

<PAGE>

efficiencies.  The service gross margin improvement resulted from a 15.6% 
decrease in service costs, primarily labor, tax and labor-related costs 
coupled with a 21.0% increase in charges to customers for labor and materials 
not covered by maintenance contracts.

     For the quarter ended December 31, 1997, selling, general and 
administrative expenses ("SG&A") decreased $193,000 or 21.4% to $711,000 from 
$904,000 for the quarter ended December 31, 1996.  As a percent of revenue 
SG&A increased 26.8% to 46.8% from 36.9%.  This increase is a reflection of 
reduced revenues as actual SG&A costs continue to be held below previous year 
amounts, primarily in the area of labor and labor-related costs and taxes.  
In January 1998, in response to the lower level of sales in the third 
quarter, uncertainties in the market segment in which Photomatrix sells its 
aperture card and document scanners and the restructuring of its sales and 
marketing department as a result of the new OEM arrangement with Bell & 
Howell, the Company took definitive actions to further reduce operating 
expenses, including eliminating several positions. The Company expects these 
cost reductions will exceed $400,000 on an annual basis.

     For the quarter ended December 31, 1997, research and development 
expenses increased by $27,000 or 13.6% to $226,000 from $199,000 for the 
quarter ended December 31, 1996.  As a percent of revenue research and 
development expenses increased 84.0% to 14.9% from 8.1% for the quarter ended 
December 31, 1996. Total spending increased $15,000 to $226,000 from 
$211,000.  During the quarter, with a greater emphasis being placed on 
research, there was no capitalization of expenses for new product 
development, a decrease of  $12,000 from the prior quarter.
      
     The company recorded a write off of certain capitalized software costs 
during the quarter ended December 31, 1997 in the amount of $366,000.

     In the current quarter, other expense consists of $10,000 of interest 
expense. In the prior quarter, other income was comprised of $9,000 of 
interest income, offset by a $250,000 one-time settlement payment from a 
major customer to settle a shortfall of guaranteed purchase commitments for 
spare parts shipments in calendar year 1996.

     There was no provision for income taxes booked in either the quarter 
ended December 31, 1997 or the quarter ended December 31, 1996, because of 
the effects of net operating loss carry-forwards, net of related allowances.

     The net effect of the decreases in gross margin and SG&A, increases in 
product development expenses and other expenses plus the one-time write off 
of certain capitalized costs resulted in a net loss from continuing 
operations for the quarter ended December 31, 1997 of $798,000 or $(0.16) per 
share.  This compares to a loss from continuing operations of $196,000 or 
$(0.04) per share for the quarter ended December 31, 1996.  There was no 
income from discontinued operations in the current quarter compared to a loss 
of $3,000 in the quarter ended December 31, 1996.  The net loss in the 
current quarter of $798,000 or $(0.16) per share compares to a net loss of  
$199,000 or $(0.04) per share in the prior quarter.

                                       8

<PAGE>

            NINE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO THE 
                    NINE MONTHS ENDED DECEMBER 31, 1996

     For the nine months ended December 31, 1997, consolidated revenues 
decreased $795,000 or 11.6% to $6,076,000 from $6,871,000 for the nine months 
ended December 31, 1996, primarily as a consequence of the poor results shown 
in the current quarter.  Equipment and software revenue decreased $947,000 or 
17.5% to $4,463,000 from $5,410,000 for the nine months ended December 31, 
1996. Service revenue increased $152,000 or 10.4% to $1,613,000 from 
$1,461,000 for the prior nine months ended December 31, 1996.

     For the nine months ended December 31, 1997, consolidated gross margin 
increased $344,000 or 19.5% to $2,108,000 from $1,764,000 for the nine months 
ended December 31, 1996. As a percent of revenues gross margin increased 
35.0%, to 34.7 % from 25.7%.  Equipment and software gross margin increased 
23.9% to 28.5% from 23.0%, this improvement resulting from the effects of 
both a continuing favorable product mix and a reduction in costs associated 
with production efficiencies.  Service gross margin increased 45.9% to 51.8% 
from 35.5%, resulting primarily from decreases in service costs, primarily 
labor and labor-related costs and taxes. 
 
     For the nine months ended December 31, 1997, selling, general and 
administrative expenses ("SG&A") decreased  $309,000 or 11.5% to $2,376,000 
from $2,685,000 for the nine months ended December 31, 1996.  As a percent of 
revenue, SG&A remained constant at 39.1%. As previously discussed, the 
Company is further reducing costs as a result of the lower level of sales in 
the third quarter, uncertainties in the market segment in which Photomatrix 
sells its aperture card and document scanners and the restructuring of its 
sales and marketing department as a result of the new OEM arrangement with 
Bell & Howell. As a result of the actions taken the Company expects cost 
reductions to exceed $400,000 on an annual basis.

     For the nine months ended December 31, 1997, research and development 
expenses increased by $18,000 or 3.2% to $580,000 from $562,000 for the nine 
months ended December 31, 1996.  As a percentage of revenue, research and 
development expenses increased 15.9 % to 9.5% from 8.2%. Total product 
development spending increased $28,000 to $664,000 from $636,000. 
Expenditures for new product development that were considered to be 
technologically feasible, and as such were capitalized, increased $10,000 to 
$84,000 from $74,000.

     As previously discussed, the company recorded a write off of certain 
capitalized software costs during the quarter ended December 31, 1997 in the 
amount of $366,000.

     Other income of $87,000 in the nine months ended December 31, 1997, 
compares to income of $193,000 in the nine months ended December 31, 1996, a 
decrease of $106,000.  This decrease primarily reflects a sale of a trademark 
for $100,000 in the current period compared to a one-time settlement payment 
of $250,000 from a major customer in the prior period.

     There was no provision for income taxes booked in the nine months ended
December 31, 1997, the same as in the nine months ended December 31, 1996,
because of the effects of net operating loss carry-forwards, net of related
allowances.

                                       9

<PAGE>

     The net effect of the increases in gross margin and research and 
development, decreases in SG&A and other income plus the write off of 
capitalized software resulted in a net loss from continuing operations for 
the nine months ended December 31, 1997 of $1,127,000 or $(0.22) per share.  
This compares to a net loss from continuing operations of $1,290,000 or 
$(0.24) per share for the nine months ended December 31, 1996.  There was no 
income from discontinued operations in the current period compared to a loss 
of $62,000 or $(0.01) per share in the nine months ended December 31, 1996.  
The net loss in the current period of $1,127,000 or $(0.22) per share 
compares to a loss of $1,352,000 or $(0.25) in the prior nine month period.

    RECENT AND FUTURE SOURCES OF AND DEMANDS ON LIQUIDITY AND CAPITAL RESOURCES

     For the nine months ended December 31, 1997, the Company's loss before 
taxes, depreciation and amortization and the one-time write off of certain 
capitalized software costs was $73,000.  During this period the Company's 
primary sources of liquidity were a reduction of accounts receivable 
($516,000), an increase in accrued and other liabilities ($44,000), 
retirement of capital assets ($38,000), cash flows provided by discontinued 
operation ($848,000), and cash reserves.  During the same period the primary 
uses of cash were to increase inventories ($395,000), increase prepaid 
expenses ($10,000), reduce accounts payable ($328,000), reduce customer 
deposits ($162,000), reduce notes payable ($113,000) and reduce other assets 
and liabilities (7,000).  As a result of these sources and uses of liquidity 
during the nine months ended December 31, 1997 the Company's cash balance 
increased $353,000 or 43.58%, from $812,000 to $1,165,000.

     The Company has a $750,000 line of credit with its bank.  This line of 
credit accrues interest on outstanding borrowings at the bank's prime rate 
plus 2% per annum.  Under the terms of the line total borrowings are limited 
to the lesser of $750,000 or 70% of eligible accounts receivable (as defined 
under the agreement).  The Company is required to (1) maintain a minimum 
tangible net worth of $2,800,000, (2) maintain a ratio of total liabilities 
to tangible new worth of not greater than 1.1 to 1.0, (3) maintain working 
capital of $1,750,000 and (4) maintain a current ratio of 1.7 to 1.0.  The 
line of credit expires in September, 1998.  As of December 31, 1997, the 
Company had no outstanding borrowings against this line of credit and is in 
compliance with all requirements.

     The Company is obligated under a series of notes payable totaling 
$414,000 as of December 31, 1997.  These notes bear interest at a rate of 8% 
per annum and mature in April 2000.  Interest and principal payments totaling 
$16,000 are due monthly.  As of December 31, all payments under these 
obligations are current. 

     The Company's assured sources of future short-term liquidity are its 
cash balance of $1,165,000 as of December 31, 1997 and the full amount of its 
line of credit of $750,000. 

     The Company currently is obligated to pay approximately $20,000 per 
month in lease payments.  Aside from these commitments, the Company has not 
made any material capital commitments.

                                      10

<PAGE>

     The Company is continuing to concentrate on increasing sales and improving
gross margins.  If it is successful, it should have sufficient liquidity to fund
its operations during the next twelve months.  In the event that the proposed
merger is accomplished, although no assurances can be given, the company expects
the effect on liquidity to be positive, and therefore no additional capital will
be required to fund operations.
     
     In March 1997 the Financial Accounting Standards Board issued SFAS 128,
EARNINGS PER SHARE, effective for periods ending after December 15, 1997.  SFAS
128 requires the presentation of "basic" earnings per share, which excludes the
dilutive effect of all common stock equivalents.  Presentation of "diluted"
earnings per share, which reflects the dilutive effects of all common stock
equivalents, is be required.  The diluted presentation is similar to the current
presentation of fully diluted earnings per share, but uses the average market
price of the stock during the period.  For the three and nine months ended
December 31, 1997 and 1996 the company had losses from continuing operations and
thus only basic earnings per share is presented as the effect of common stock
equivalents is antidilutive to the calculation of diluted earnings per share.

                                      11

<PAGE>

PART II:  OTHER INFORMATION
---------------------------

ITEM 5.  OTHER INFORMATION

     On October 29, 1997, the Company announced that it had entered into a
non-binding letter of intent with I-PAC Manufacturing, Inc. ("I-PAC"), a custom
contract manufacturer of electrical and mechanical assemblies, including
complex, multi-layer printed circuit board assemblies; wire and cable harnesses;
molded cables; and complete system and subsystem assemblies,  whereby the
companies had agreed to combine their respective business operations through a
merger. The companies have revised the terms to the original letter of intent. 
The revised non-binding agreement calls for the issuance of 4,848,000 shares of
Photomatrix common stock to shareholders of I-PAC in exchange for all of the
outstanding stock of the privately-held company. In addition, I-PAC shareholders
will have the right to earn up to 4,652,000 additional shares, based upon
Photomatrix options exercised and attaining certain performance milestones for
I-PAC operations. The merger is subject to several conditions, including:  a) 
satisfactory completion of due diligence by each of the parties;  b)  the
absence of any material adverse change in assets, liabilities, personnel,
financial conditions or prospects of the respective companies; c)  compliance
with all applicable statutory and regulatory requirements; d)  the approval of
the transaction and the execution, delivery and performance of the agreement by
their respective Boards of Directors and shareholders; e)  the receipt of all
necessary or appropriate consents, waivers and approvals of third parties; f) 
qualification of the transaction as a tax free exchange under Federal and
California tax laws; g)  the absence of a significant number of dissenting
shareholders and h)  the negotiation and execution of a merger agreement and
other appropriate documentation. THERE IS NO ASSURANCE THAT THIS COMBINATION
WILL BE CONSUMMATED 

ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K
          --------------------------------

(A)  EXHIBITS
     Financial Data Sheet (filed only electronically with the SEC)

(B)  REPORTS ON FORM 8-K 
     There were no reports on Form 8-K filed during the quarter ended December
     31, 1997.

Items 1, 2, 3 and 4 are not applicable and have been omitted.

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<PAGE>

                                      SIGNATURES
                                      ----------

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



                                     PHOTOMATRIX INC.



Date:  February 12, 1998             by  /s/ Suren G. Dutia
                                        ------------------------------
                                     Suren G. Dutia
                                     President
                                     Chief Executive Officer



Date:  February 12, 1998             by  /s/ Roy L. Gayhart
                                        ------------------------------
                                     Roy L. Gayhart
                                     Chief Financial Officer



Date:  February 12, 1998             by  /s/ Charles H. Frady
                                        ------------------------------
                                     Charles H. Frady
                                     Controller
                                     Principal Accounting Officer


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