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



                                   FORM 10-QSB

(Mark One)
   [x]          QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                  For the quarterly period ended June 30, 1998

   [ ]                       TRANSITION REPORT UNDER
                      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
State or other jurisdiction of                               (I.R.S. Employer
incorporation or organization)                              Identification No.)


                                1958 Kellogg Ave.
                           Carlsbad, California 92008
                    (Address of principal executive offices)

                                 (760) 431-4999
                           (Issuer's telephone number)


         Check whether the issuer (1) filed all reports  required to be filed by
Section 13 or 15(d) of the Exchange  Act during the  preceding 12 months (or for
such shorter period that the registrant was required to file such reports),  and
(2) has been subject to such filing requirements for the past 90 days.

                                 YES [X] NO [ ]


          At June 30, 1998,  9,931,000  shares of Common  Stock of  Photomatrix,
Inc. were outstanding.

                 Transitional Small Business Disclosure Format.

                                 YES [ ] NO [X]

<PAGE>




                                      INDEX

                                PHOTOMATRIX, INC.



                                                                   
PART I - FINANCIAL INFORMATION

ITEM 1:    FINANCIAL STATEMENTS

Consolidated balance sheets as of June 30, 1998 (unaudited) and March 31, 1998

Unaudited consolidated  statements of operations for the three months ended June
30, 1998 and June 30, 1997

Unaudited consolidated  statements of cash flows for the three months ended June
30, 1998 and June 30, 1997

Unaudited notes to consolidated financial statements


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

PART II - OTHER INFORMATION

ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 

ITEM 5: OTHER INFORMATION

ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 

SIGNATURES 







<PAGE>





                       PHOTOMATRIX, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                     AS OF JUNE 30, 1998 AND MARCH 31, 1998




<TABLE>
                                                               June 30, 1998
                                                                (Unaudited)         March 31, 1998
                                                           --------------------- --------------------
<S>                                                        <C>                   <C>   

ASSETS

Current assets:
   Cash and cash equivalents                                            $536,000           $1,342,000
  Accounts receivable, net of allowance
       of $144,000 and $142,000                                        1,841,000            1,733,000
  Inventories                                                          3,169,000            2,171,000
  Prepaid expenses and other                                             272,000               98,000
                                                           ---------------------  -------------------
       Total current assets                                            5,818,000            5,344,000

Property and equipment, net                                            3,650,000              547,000
Intangible assets, net                                                 2,572,000            1,287,000
Other assets                                                             105,000              125,000
                                                           --------------------- --------------------
                                                                    $12,145,000            $7,303,000
                                                             =================== ====================

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
   Accounts payable                                                     $987,000             $502,000
   Accrued liabilities and other                                         962,000              854,000
   Customer deposits                                                     396,000              409,000
   Line of credit                                                        694,000                   --
   Current maturities of notes payable                                   300,000              162,000
   Net current liabilities of discontinued operation                   1,108,000            1,113,000
                                                           --------------------- --------------------
       Total current liabilities                                       4,447,000            3,040,000

Notes payable to related parties, long term                              168,000              213,000

Other non-current liabilities                                          2,497,000               26,000

Commitments and contingencies

Shareholders' equity:

   Preferred Stock, no par value; 3,173,000 shares
       authorized, no shares issued and outstanding
                                                                              --                   --
   Common stock, no par value; 30 million shares
       authorized, 9,931,000 and 5,083,000 shares
       issued and outstanding, respectively                           21,290,000           19,351,000
   Additional paid-in capital                                             30,000                   --
   Accumulated deficit                                               (16,434,000)         (15,480,000)
   Accumulated other comprehensive income                                147,000              153,000
                                                           --------------------- --------------------
       Total shareholders' equity                                      5,033,000            4,024,000
                                                           --------------------- --------------------

                                                                     $12,145,000           $7,303,000
                                                           ===================== ====================
</TABLE>

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


                                        2

<PAGE>



                       PHOTOMATRIX, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND 1997
                                   (Unaudited)


<TABLE>
                                                               1998                   1997
                                                        ----------------  -------------------------
<S>                                                      <C>                <C>   

REVENUES                                                      $1,292,000                 $2,271,000

COST OF REVENUES                                                 942,000                  1,518,000
                                                        ----------------          -----------------
GROSS PROFIT                                                     350,000                    753,000
                                                        ----------------          -----------------
OPERATING EXPENSES
   Selling, general and administrative                           815,000                    925,000
   Research and development                                      215,000                    181,000
   Facility consolidation and relocation                         223,000                     --
                                                        ----------------          ------------------
       TOTAL OPERATING EXPENSES                               1,253,000                   1,106,000
                                                        ----------------          ------------------
OPERATING LOSS                                                 (903,000)                   (353,000)
                                                        ----------------          ------------------
OTHER INCOME (EXPENSE), NET                                     (51,000)                      8,000
                                                        ----------------          ------------------
NET LOSS                                                   $   (954,000)            $      (345,000)
                                                        ================          ==================
Basic and diluted net loss per share                    $         (0.15)            $         (0.07)
                                                        ================          ==================
Weighted average number of common shares outstanding          6,430,000                   5,083,000
                                                        ----------------          ------------------

</TABLE>






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






                                        3

<PAGE>



                       PHOTOMATRIX, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND 1997
                                   (Unaudited)



<TABLE>
                                                                         1998              1997
                                                                    ---------------  -----------------
<S>                                                                 <C>              <C>   
CASH FLOWS FROM OPERATIONS
   Net loss:                                                              $(954,000)         $(345,000)
   Adjustments:
      Depreciation and amortization                                         168,000            235,000
      Loss on disposal of property and equipment                             13,000                 --
      Stock options granted to third party                                   30,000                 --
      Changes in assets and liabilities, excluding effects of acquisition:
          Accounts receivable                                               722,000           (146,000)
          Inventories                                                       (10,000)           (59,000)
          Prepaid expenses and other                                        (92,000)           (43,000)
         Accounts payable                                                  (420,000)          (329,000)
         Accrued liabilities and other                                      (18,000)            56,000
         Customer deposits                                                  (13,000)          (124,000)
                                                                      --------------      -------------
    Cash used in continuing operations                                     (574,000)          (755,000)
    Cash provided by (used in) discontinued operations                       (5,000)           323,000
                                                                     ---------------      -------------
Cash provided by (used in) operations                                      (579,000)          (432,000)
                                                                     ---------------      --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Cost of acquisition, net of cash received                               (192,000)                 --
   Capital expenditures                                                      (5,000)                 --
   Proceeds from disposal of capital assets                                  20,000              7,000
   Decrease  in other assets                                                  6,000              8,000
                                                                    ------------------    --------------
Cash provided by (used in) investing activities                            (171,000)            15,000
                                                                    ------------------    --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
    Proceeds from line of credit, net of repayments                          11,000                  --
    Repayments on notes payable                                             (51,000)                 --
    Other                                                                   (10,000)             22,000
                                                                    ------------------    --------------
Cash provided by (used in) financing activities                             (50,000)             22,000
                                                                    ------------------    --------------

EFFECTS OF EXCHANGE RATES ON CASH                                           ( 6,000)             (5,000)
                                                                    ------------------    --------------

NET DECREASE TO CASH AND CASH EQUIVALENTS                                  (806,000)           (400,000)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                            1,342,000             812,000
                                                                    ------------------    --------------

CASH AND CASH EQUIVALENTS, END OF PERIOD                            $       536,000       $     412,000
                                                                    ==================    ===============
</TABLE>




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





                                        4

<PAGE>



                       PHOTOMATRIX, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   AS OF JUNE 30, 1998 AND MARCH 31, 1998 AND
                FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND 1997
                                   (Unaudited)


1. GENERAL

Basis of Presentation

The  accompanying   unaudited  consolidated  financial  statements  reflect  the
accounts of Photomatrix,  Inc. (the "Company"),  together with its subsidiaries.
On June 5, 1998 the shareholders of the Company  approved the merger  ("Merger")
between Photomatrix,  Inc. and I-PAC Manufacturing,  Inc. ("I-PAC"). The Company
issued 4,848,000 shares of Photomatrix common stock to shareholders of I-PAC  in
exchange  for  the  8,500  outstanding   shares  of  the  common  stock  of  the
privately-held  company.  This transaction resulted in an increase in the number
of outstanding  shares of Photomatrix  common stock from 5,083,000 to 9,931,000.
All significant intercompany transactions and balances have been eliminated.

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,  1998.  The  results  for the  interim
periods presented are not necessarily indicative of results to be expected for a
full year.

2. CREDIT FACILITY

As of June 30, 1998,  the Company was obligated  under a series of notes payable
totaling  $3,659,000.  This debt included a $750,000  unused line of credit with
the Company's bank. In addition,  as of the Merger, I-PAC had a $700,000 line of
credit with another bank.

Subsequent  to June 30, 1998 the Company  entered into a new  $2,100,000  credit
facility with its bank that included a $1,500,000  line of credit and a $600,000
term loan which matures in June, 2002. The Company  immediately used this credit
facility  to  retire   approximately   $932,000  of  debt  of  its  wholly-owned
subsidiary,  I-PAC,  $694,000  under a line of credit and  $162,000  and $76,000
under term loans with two other banks. The aggregate  outstanding  balance under
these loans as of June 30, 1998 was $918,000.  The Company also used some of the
proceeds  from the term loan to acquire  additional  state-of-the-art  equipment
which will  significantly  broaden its surface mount technology  ("SMT") printed
circuit board manufacturing capacity.

The new line of credit will accrue  interest on  outstanding  borrowings  at the
bank's  prime rate plus 1 % per annum.  The  Company's  previous  line of credit
accrued  interest  at prime plus 2%. All other  terms of the new line of credit,
except for various covenants,  essentially remained the same. Under the terms of
the new agreement,  total borrowings under the line of credit will be limited to
the lesser of  $1,500,000  or 75% of eligible  accounts  receivable  (as defined
under the  agreement).  The Company is  required  to continue to (1)  maintain a
minimum  tangible net worth of  $2,400,000  as of June 30, 1998,  increasing  to
$2,600,000  as of September 30, 1998,  $3,200,000  as of December 31, 1998,  and
$3,500,000  thereafter (2) maintain a ratio of total liabilities to tangible net
worth of not greater  than 2.75 to 1.0,  and (3) maintain a minimum debt service
coverage  of no less than 1.25 to 1.0.  The new line of credit  expires in July,
1999.  Based on June 30, 1998 financial  data, the Company was not in compliance
with one of these covenants.  The Company's bank has waived compliance with this
requirement.



                                        5

<PAGE>



The Company has issued two notes in the aggregate  amount of  $2,015,000,  which
are  collateralized  by trust deeds of the Company's  real  property  located in
Carlsbad,  California.  The  repayment of these notes is  guaranteed  by certain
major shareholders of the Company and the Small Business  Administration.  These
notes are payable in aggregage  monthly  installments of  approximately  $19,000
including interest ranging from 7.5 to 9.5%.

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").  The Company is currently in the
process of winding down and closing this operation.  Lexia's operational results
have been  reclassified  as  discontinued  operations for the  respective  years
presented herein. Lexia's balance sheets have similarly been reclassified as net
current liabilities of discontinued operations as of June 30, 1998 and March 31,
1998.

Currently, Lexia carries on its books accounts payable and unpaid rent claims of
International Computers Limited, Inc. ("ICL") and related entities in the amount
of $786,000.  Lexia disputes these  liabilities.  Lexia is attempting to resolve
these disputes  through  negotiations.  There is no assurance that Lexia will be
able to resolve this matter.

4. BASIC AND DILUTED LOSS PER SHARE

In December 1997,  the Company  adopted the provisions of Statement of Financial
Accounting  Standards  ('SFAS")  No. 128,  "Earnings  per  Share."  SFAS No. 128
supersedes APB No. 15 and replaces  "primary" and "fully  diluted"  earnings per
share  ("EPS") under  Accounting  Principles  Board ("APB")  Opinion No. 15 with
"basic" and "diluted"  EPS.  Unlike primary EPS, basic EPS excludes the dilutive
effects of options,  warrants  and other  convertible  securities.  The weighted
average  number of common  shares  outstanding  used in computing  basic EPS was
6,430,000 and  5,083,000,  in the first  quarters of fiscal years 1999 and 1998,
respectively.  Diluted EPS reflects the potential  dilution of  securities  that
could  share in the  earnings  of the  Company,  similar to fully  diluted  EPS.
Options and warrants  representing  approximately  1,196,000 and 886,000  shares
were  excluded  from  the  computations  of net loss per  common  share  for the
quarters  ended  June 30,  1998 and  1997,  respectively,  as  their  effect  is
antidilutive. The adoption of SFAS No. 128 did not have a material effect on the
Company's net loss per common share.

5. ACQUISITION OF I-PAC MANUFACTURING, INC.

On March 16, 1998, the Company  entered into an Agreement and Plan of Merger and
Reorganization with I-PAC Manufacturing,  Inc. The Agreement was approved by the
shareholders of the Company on June 5, 1998, and the transaction  closed on June
11,  1998.  As a result of the  Merger,  the 8,500  outstanding  shares of I-PAC
Common Stock were exchanged for 4,848,000 shares of Photomatrix Common Stock and
possibly  additional  4,652,000 shares of Photomatrix  Common Stock in the event
that I-PAC achieves certain performance  milestones during a twelve month period
commencing on July 1, 1998 or outstanding options to purchase Photomatrix Common
Stock are exercised.

The  Merger  was  accounted  for as a  purchase  of  I-PAC  by the  Company  for
accounting  and  financial  reporting  purposes.  Under the  purchase  method of
accounting,  upon  closing of the Merger,  I-PAC's  results of  operations  were
combined  with those of the Company,  and I-PAC's  assets and  liabilities  were
recorded on the Company's books at their  respective  fair values.  The purchase
price,  amounting to  $2,191,000,  was  comprised of the value of the stock plus
acquisition   costs  and  was  allocated  among  the  assets  acquired  and  the
liabilities  assumed.  The  issuance  of  additional  shares  awarded  to  I-PAC
shareholders  under the earn-out  formula and/or in connection with the exercise
of  Photomatrix  outstanding  options and warrants will be treated in accordance
with APB 16, in that any additional  shares will be treated as additional  costs
of the acquired  enterprise and amortized  accordingly  over the benefit period.
The  $1,369,000  excess of the purchase price over the fair value of I-PAC's net
assets will be amortized over a twenty year period.

If the I-PAC  transaction  had been  consummated at the beginning of fiscal year
1997, the Company's  consolidated  revenues, net loss and net loss per share for
the first quarter would have been:



                                        6

<PAGE>




                                              1998                1997
                                              ----                ----
  Revenues                                $ 2,174,000         $ 4,191,000
  Net Income (Loss)                        $ (790,000)           $ 67,000
  Net Loss per share, basic and
       diluted                               $ ( 0.12)             $ 0.01


6. COMPREHENSIVE INCOME

As of April 1, 1998, the Company  adopted SFAS No. 130 "Reporting  Comprehensive
Income."  SFAS No. 130  establishes  standards  for the reporting and display of
comprehensive  income and its  components.  SFAS No. 130 requires the cumulative
translation  adjustment to be included as a component of  comprehensive  loss in
addition to net loss for the period. During the three months ended June 30, 1998
total comprehensive loss totaled $960,000 and during the three months ended June
30, 1997 total comprehensive loss totaled $350,000.

7. ACQUISITION OF MGM TECHREP, INC.

Subsequent  to June 30, 1998,  the Company  entered into an agreement to acquire
the assets and business of MGM Techrep, Inc. ("MGM"). MGM, a private entity that
is  primarily   owned  by  the  officers  and  former  owners  of  I-PAC,  is  a
manufacturer's sales representative firm headquartered in Santa Ana, California.
Established  in 1994,  MGM has been the primary  sales rep firm in the  Southern
California area for I-PAC Manufacturing,  Inc. ("I- PAC"), being responsible for
approximately  60% of  I-PAC's  new sales  during  the  period  from 1994 to the
present.  MGM also represents  approximately  15 other companies  engaged in the
manufacture and distribution of a wide range of industrial  products used in the
manufacture and sale of electronic and related products.

The Photomatrix  acquisition  will include all contracts with MGM's  principals,
its customer  list, all physical  assets,  and the MGM trade name and associated
goodwill.  MGM will retain existing  liabilities and release its sales personnel
to Photomatrix,  and MGM's shareholders will execute non-compete agreements with
respect to the sales rep business. The purchase price of the transaction will be
determined  primarily on an earn-out basis by a declining percentage (75% in the
first  year,  50% in the  second  year and 25% in the final year  following  the
closing date) of the commissions earned over a three-year period by MGM on sales
involving  its existing  principals  and customers as of the time of purchase by
Photomatrix. No payments would be due to MGM for principals or customer accounts
added after the closing date. In addition,  I-PAC forgave  approximately $18,000
of amounts owing by MGM as of the closing date.

Consistent with the provisions of the Photomatrix-I-PAC  merger agreement,  this
related party  transaction was reviewed and approved by the outside directors on
the Audit Committee of the Photomatrix Board of Directors.




                                        7

<PAGE>




MANAGEMENT'S  DISCUSSION  AND  ANALYSIS OF  FINANCIAL  CONDITION  AND RESULTS OF
OPERATIONS


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


Three  months  ended June 30, 1998  compared to the three  months ended June 30,
1997

During the quarter ended June 30, 1998,  the Company moved its  operations  into
I-PAC's facility  located in Carlsbad,  California and completed the Merger with
I-PAC.  The effect of these  activities was  disruptive  and  inefficient to the
operations of the Company during the period.  Effective June 5, 1998,  I-PAC was
acquired  by the  Company.  Results of  operations  of the  Company  include the
results of I-PAC for the period from June 6,1998 through June 30, 1998, and also
includes the costs associated with the moving and Merger activities.

As expected, consolidated revenues for the quarter ended June 30, 1998 decreased
$979,000 or 43.1% to $1,292,000  from  $2,271,000 for the quarter ended June 30,
1997. The decline is primarily attributable to the rescheduling of approximately
$650,000 in document scanner revenues previously committed for this quarter by a
major customer of the Company, together with a general decline in scanner orders
received by the Company on a world-wide  basis. The Company has renegotiated the
purchase  commitment  terms with its major  customer,  rescheduling  the scanner
shipments  evenly over a nine month period  beginning July 1, 1998. In addition,
the Company is in process of taking  actions to  increase  sales from end users,
Value-added resellers (VARs) and distributors.  Management believes that scanner
revenues will return to normal levels in the second fiscal quarter. In addition,
the second  fiscal  quarter will  include  three  months of I-PAC  revenues,  as
compared to less than one month's revenues for the current quarter.

Consolidated gross margin for the quarter ended June 30, 1998 decreased $403,000
or  53.5% to  $350,000  from  $753,000  for the  quarter  ended  June 30,  1997.
Likewise,  gross  margin as a percent of revenues  decreased  6.1% to 27.1% from
33.2% for the quarter ended June 30, 1997. The  deterioration  was primarily due
to unabsorbed  overhead costs that resulted from lower sales volume.  Management
expects that gross  margins  will improve over the gross  margins of the current
quarter and the prior fiscal year as a result of a return to normal sales volume
as well as favorable product mix and improvements in manufacturing efficiencies.

Selling, general and administrative expenses ("SG&A"), while including one month
of expenses from I-PAC,  decreased  $110,000 for the quarter ended June 30, 1998
or 11.9% to $815,000  from  $925,000 for the quarter  ended June 30, 1997.  As a
percent of revenues, SG&A for the quarter ended June 30, 1998 increased to 63.1%
from 40.7% for the quarter  ended June 30, 1997.  The  reduction in SG&A expense
resulted from early  redundant cost savings as a result of the Merger,  together
with reduced sales commission  expense due to lower sales volumes.  The increase
in SG&A expenses  expressed as a percentage of sales is strictly a reflection of
lower sales volume.

Research and development  expenses for the quarter ended June 30, 1998 increased
$34,000 or 18.8% to $215,000  from $181,000 for the quarter ended June 30, 1997.
As a percent of revenues  research and development  expenses  increased to 16.6%
from 8.0% for the quarter ended June 30, 1997. During the quarter ended June 30,
1998 no  expenditures  were  capitalized  due to an emphasis  being  placed upon
scanner  development,  including the  development  of a new  mid-range  scanner.
During the previous quarter ended June 30, 1997 product development spending was
$219,000, and $38,000 of expenditures were capitalized because they related
to technologically feasible software development projects.

During the  quarter  ended June 30,  1998,  the Company  incurred  approximately
$223,000  in costs  associated  with the  consolidation  and  relocation  of its
facilities.  These moving costs included the cost of idle facilities,  duplicate
facilities costs and cost directly related to the move.


                                        8

<PAGE>



Other  income and  expense  for the  quarter  ended June 30, 1998 was $51,000 of
expense,  compared  to income of $8,000 for the  quarter  ended  June 30,  1997.
Interest expense increased  $26,000,  which reflects the interest payment on the
mortgage for the Carlsbad facility.

The net effect of the increases in research and  development  expenses and other
expenses,  together with the decreases in gross margin and selling,  general and
administrative  expenses  resulted in a net loss for the quarter  ended June 30,
1998 of $954,000 or $(0.15)  per share.  This  compares to a loss of $345,000 or
$(0.07)  per share for the quarter  ended June 30,  1997.  The Company  does not
anticipate a continuation of these significant losses.


Liquidity and Capital Resources

Recent and Future Sources of and Demands on Liquidity and Capital Resources

During the three months ended June 30, 1998,  the Company's  primary  sources of
liquidity were from reductions to accounts receivable ($722,000),  proceeds from
the disposal of capital  assets  ($20,000),  proceeds from line of credit net of
repayment ($11,000), decrease in other assets ($6,000) and cash reserves. During
the same period the primary uses of cash were a net loss net of noncash  charges
($743,000),  increases to inventories  ($10,000) and prepaid  expenses and other
assets ($92,000),  reduction to accounts payable ($420,000), accrued liabilities
($18,000) and customer deposits ($13,000), costs associated with the acquisition
of I-PAC net of cash received ($192,000),  repayments on notes payable and other
obligations ($61,000),  capital expenditures ($5,000), cash used by discontinued
operations  ($5,000) and the effects of exchange  rates on cash  ($6,000).  As a
result of these sources and uses of liquidity during the three months ended June
30, 1998 as described  above,  the Company's cash and cash  equivalents  balance
decreased $806,000 or 60.1%, to $536,000 from $1,342,000.

As of June 30, 1998,  the Company was obligated  under a series of notes payable
totaling  $3,659,000.  This debt included a $750,000  unused line of credit with
the Company's bank. In addition,  as of the Merger, I-PAC had a $700,000 line of
credit  with  another  bank,  the  outstanding  balance  of  which  was paid off
subsequent to June 30, 1998.

In July, 1998 the Company entered into a new $2,100,000 credit facility with its
bank that  includes a $1,500,000  line of credit and a $600,000  term loan.  The
Company immediately used this credit facility to retire  approximately  $933,000
of debt of its wholly-owned  subsidiary,  I-PAC, $694,000 under a line of credit
and $76,000 and $162,000 under term loans with two other banks.  The outstanding
balances  under these loans as of June 30, 1998 was  $918,000.  The Company also
used  some  of  the   proceeds   from  the  term  loan  to  acquire   additional
state-of-the-art  equipment which will  significantly  broaden its surface mount
technology ("SMT") printed circuit board manufacturing capacity.

The new line of credit will accrue  interest on  outstanding  borrowings  at the
bank's  prime rate plus 1 % per annum.  The  Company's  previous  line of credit
accrued  interest  at prime plus 2%. All other  terms of the new line of credit,
except for various covenants,  essentially remained the same. Under the terms of
the new agreement,  total borrowings under the line of credit will be limited to
the lesser of  $1,500,000  or 70% of eligible  accounts  receivable  (as defined
under the  agreement).  The Company is  required  to continue to (1)  maintain a
minimum  tangible net worth of  $2,400,000  as of June 30, 1998,  increasing  to
$2,600,000  as of September 30, 1998,  $3,200,000  as of December 31, 1998,  and
$3,500,000  thereafter (2) maintain a ratio of total liabilities to tangible net
worth of not greater  than 2.75 to 1.0,  and (3) maintain a minimum debt service
coverage  of no less than 1.25 to 1.0.  The new line of credit  expires in July,
1999.  Based on June 30, 1998 financial  data, the Company was not in compliance
with one of these covenants.  The Company's bank has waived compliance with this
requirement.

The Company has issued two notes in the aggregate  amount of  $2,015,000,  which
are  collateralized  by trust deeds of the Company's  real  property  located in
Carlsbad,  California.  The  repayment of these notes is  guaranteed  by certain
major shareholders of the Company and the Small Business  Administration.  These
notes are payable in aggregate  monthly  installments of approximately  $19,000,
including interest ranging from 7.5 to 9.5%.

The Company is obligated under a series of notes payable totaling $334,000 as of
June 30, 1998. 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.


                                        9

<PAGE>


The Company also has certain other  equipment  notes in the aggregate  amount of
$57,000 with interest  rates varying  between 11% and 26.6% with final  payments
due between 2000 and 2005. These notes are collateralized by equipment.

The Company also has a non-interest bearing liability in the amount of $227,000,
proceeds  of  which  were  used  primarily  for the  purchase  of  manufacturing
equipment. The repayment of this liability can be made by withholding 40% of the
non-material  component  of any sales made by I-PAC to the note  holder  through
September,  1998.  Any unpaid  balance on the due date will be canceled  and the
security  interest  released.  As of August 9,  1998  there  have been no orders
received by the Company from the note holder.

The Company's wholly-owned  subsidiary,  Lexia Systems, has recorded liabilities
reflecting  accounts  payable and unpaid rent claims of ICL and related entities
in the amount of $786,000 at June 30, 1998 and classified  under net liabilities
of  discontinued  operations.   Lexia  disputes  these  liabilities.   Lexia  is
attempting to resolve these disputes through negotiations. There is no assurance
that Lexia will be able to resolve this matter.

The  Company's  sources of future  short-term  liquidity are its cash balance of
$536,000  as of June 30,  1998 and the  $806,000  unused  amount of its new $2.1
million credit facility with its bank. Availability under the line of credit can
be further  limited  based upon the balance of eligible  accounts  receivable as
described above.

The Company is currently obligated as a guarantor under an assignment  agreement
of a lease in the amount of approximately  $20,000 per month through  September,
2002.  The Company is also  obligated to pay  approximately  $8,000 per month on
various other  leases.  In June 1998,  the Company  entered into a commitment to
purchase  approximately  $400,000 of equipment for its manufacturing  operation.
Aside from these  commitments,  the  Company has not made any  material  capital
commitments.

The Company is  concentrating  on  increasing  its sales and improving its gross
margins.  Management believes that the Company has sufficient  liquidity to fund
the costs associated with the recent Merger and relocation and  consolidation of
its  operations  into  the  I-PAC  facility,  as well as the  operations  of the
combined company for the next twelve months. In addition,  management intends to
structure any future  acquisitions  in a manner that will be neutral or positive
to its liquidity and accretive to its future earnings per share.

Year 2000

The  Company  recognizes  the need to  ensure  that its  operations  will not be
adversely impacted by Year 2000 software and hardware  failures.  The Company is
addressing  Year 2000 risks and  believes  it will  resolve  any such risks in a
timely manner.  The currently  estimated costs associated with these changes are
not  material  in any  year  and are not  material  to the  Company's  financial
position.  However, the Company could be adversely impacted if its suppliers and
customers  do not make the  necessary  changes to their own systems and products
successfully and in a timely manner.

New Accounting Pronouncements

In June  1997,  the  Financial  Accounting  Standards  Board  issued  SFAS  131,
DISCLOSURE  ABOUT  SEGMENTS  OF AN  ENTERPRISE  AND  RELATED  INFORMATION.  This
accounting  statement  established  standards  for the way that public  business
enterprises  report  information  about operating  segments in annual  financial
statements  and requires that  enterprises  report  selected  information  about
operating  segments in interim  financial  reports issued to shareholders.  This
accounting  statement  shall be  effective  for  fiscal  years  beginning  after
December 15, 1997. In the initial year of application,  comparative  information
for earlier years in to be restated.  At this time, the Company does not believe
that this accounting  statement will have a significant  impact on the financial
position or results of operations for the year ending March 31, 1999.




                                       10

<PAGE>

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 ACQUIRING
OTHER  BUSINESSES,  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 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, 1998.




                                       11

<PAGE>


PART II: OTHER INFORMATION

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

On June 5, 1998, a Special Meeting of  Shareholders  of  Photomatrix,  Inc., was
held and the following matters were approved:

1.   The proposed merger with I-PAC Manufacturing, Inc.

2.   The election of six directors of the Company.

3.   The adoption of the  Photomatrix  1998 Stock Option Plan whereby  1,500,000
     shares of Photomatrix  Common Stock were reserved for issuance to officers,
     directors  and employees of the Company  under  incentive  stock options or
     nonqualified  stock options to be granted by the Compensation  Committee of
     the Board of Directors.

4.   The  ratification of the appointment by the Company's Board of Directors of
     KPMG Peat  Marwick LLP as the  independent  auditors of the Company for the
     1998 fiscal year.


Item 5. Other Information

        None


Item 6. Exhibits and Reports on Form 8-K

   a.   Reports on Form 8-K

The Company filed a Current Report on Form 8-K dated June 24, 1998 to report the
Merger of Photomatrix, Inc. and I-PAC Manufacturing, Inc.

   b.   Exhibits

10.35.2       Amendment to Business Agreement with Bell & Howell dated
              June 30, 1998

10.40         Lease Assignment and Assuption Agreement between Photomatrix
              Imaging Corp. and Cryogen, Inc.

10.41         Management Services Agreement with Dr. John Faessel

10.42         Promissory Note with Imperial Bank

10.43         Credit Agreement with Imperial Bank

27            Financial Data Schedule


  

                                       12

<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:  August 10, 1998                by  /s/ William L. Grivas
                                             ---------------------
                                             William L. Grivas
                                             Chairman of the Board

   Date:  August 10, 1998                by  /s/ Patrick W. Moore
                                             --------------------
                                             Patrick W. Moore
                                             Chief Executive Officer

   Date:  August 10, 1998                by  /s/ Suren G.Dutia
                                             -----------------
                                             Suren G. Dutia
                                             President

   Date:  August 10, 1998                by  /s/ Roy L. Gayhart
                                             -------------------
                                             Roy L. Gayhart
                                             Chief Financial Officer

   Date:  August 10, 1998                by  /s/ Charles H. Frady
                                             ---------------------
                                             Charles H. Frady
                                             Controller
                                             Principal Accounting Officer






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