FORM 10-QSB

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

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

                  For quarterly period ended September 30, 1996

                                       OR

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

               For the transition period from ________ to ________

                         Commission file number: 0-22340



                       PALOMAR MEDICAL TECHNOLOGIES, INC.
                -------------------------------------------------
        (Exact name of small business issuer as specified in its charter)


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



                     66 Cherry Hill Drive, Beverly, MA 01915
                    (Address of principal executive offices)

                                 (508) 921-9300
             ------------------------------------------------------
                (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 of during  the past 12 months (or for
such shorter period that the registrant was required to file such reports),  and
(2) has been subject to such filing requirements for the past 90 days. 
                                                                     Yes X  No
                                                                        --    --
         As of November 4, 1996,  28,930,357  shares of Common  Stock,  $.01 par
value per share, were outstanding.

         Transitional Small Business Disclosure Format (check one):
          Yes        No  X
             -----     -----
                                                                    Page 1 of 23




                       PALOMAR MEDICAL TECHNOLOGIES, INC.

                                      INDEX
<TABLE>
<CAPTION>

<S>                                                                                                                          <C>
PART I - FINANCIAL INFORMATION

         ITEM 1.  FINANCIAL STATEMENTS

                  Consolidated Balance Sheets - December 31, 1995 and September 30, 1996                                       P. 3

                  Consolidated Statements of Operations - For the Three and Nine Months Ended
                           September 30, 1995 and 1996                                                                         P. 4

                  Consolidated Statements of Stockholders' Equity - For the Nine Months Ended
                           September 30, 1996                                                                                  P. 5

                  Consolidated Statements of Cash Flows - For the Nine Months Ended
                           September 30, 1995 and 1996                                                                         P. 6

                  Notes to Consolidated Financial Statements                                                                   P. 8

         ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                           RESULTS OF OPERATIONS                                                                               P.16

PART II - OTHER INFORMATION

         ITEM 1.  LEGAL PROCEEDINGS                                                                                            P.22

         ITEM 2.  CHANGES IN SECURITIES                                                                                        P.22

         ITEM 3.  DEFAULTS UPON SENIOR SECURITIES                                                                              P.22

         ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                          P.22

         ITEM 5.  OTHER INFORMATION                                                                                            P.22

         ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K                                                                             P.22

SIGNATURES                                                                                                                     P.23

</TABLE>





                                       -2-




                       PALOMAR MEDICAL TECHNOLOGIES, INC.

                           CONSOLIDATED BALANCE SHEETS
                                   (Unaudited)
<TABLE>
<CAPTION>


                                                                                   December 31,              September 30,
                                                                                       1995                       1996
                                                                                 -----------------          -----------------
<S>                                                                             <C>                         <C>    
ASSETS

CURRENT ASSETS:
       Cash and cash equivalents                                                      $17,138,178                $20,972,540
       Marketable securities                                                              749,410                  3,332,799
       Accounts receivable, net                                                         4,737,766                 19,491,588
       Inventories                                                                      3,649,884                 14,845,433
       Current portion of deferred costs                                                  462,787                     42,110
       Loans to officers                                                                  948,198                    980,759
       Loans to related and non-related parties                                         3,161,375                  3,893,145
       Other current assets                                                               352,130                  1,452,998
                                                                                 -----------------          -----------------
            Total current assets                                                       31,199,728                 65,011,372
                                                                                 -----------------          -----------------

PROPERTY AND EQUIPMENT, AT COST, NET                                                    3,165,015                  4,710,207
                                                                                 -----------------          -----------------

OTHER ASSETS:
       Cost in excess of net assets acquired, net                                       3,729,508                  5,597,022
       Intangible assets, net                                                           1,597,745                  1,755,394
       Deferred costs, net of current portion                                             346,333                    888,753
       Long-term investments                                                              500,000                  5,672,488 
       Loans to related party                                                             700,000                  --
       Other assets                                                                       631,831                  1,933,398 
                                                                                 -----------------          -----------------
            Total other assets                                                          7,505,417                 15,847,055
                                                                                 -----------------          -----------------

                                                                                      $41,870,160                $85,568,634
                                                                                 =================          =================

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:

       Revolving lines of credit                                                       $1,296,462                 $1,160,709
       Short term notes payable                                                           100,000                  --
       Current portion of long-term debt                                                2,474,265                  2,523,533
       Contingent note payable                                                            500,000                  --
       Accounts payable                                                                 4,246,950                 14,839,026
       Accrued expenses                                                                 4,633,557                  8,299,397
                                                                                 -----------------          -----------------
            Total current liabilities                                                  13,251,234                 26,822,665
                                                                                 -----------------          -----------------

LONG-TERM DEBT, NET OF CURRENT PORTION                                                  3,330,172                  8,831,806
                                                                                 -----------------          -----------------

COMMITMENTS (NOTE 14)

STOCKHOLDERS' EQUITY:
       Preferred stock, $.01 par value-
            Authorized - 5,000,000 shares Issued and outstanding - 
            13,860 shares at December 31, 1995
            and 24,565 shares at September 30, 1996                                           139                        246
       Common stock, $.01 par value-
            Authorized - 100,000,000 shares
            Issued - 20,135,406 shares at December 31,
            1995 and 28,355,694 shares at September 30, 1996                              201,353                    283,557
       Treasury stock (200,000 shares at cost)                                         (1,211,757)                (1,211,757)
       Additional paid-in capital                                                      54,152,385                 97,830,064
       Accumulated deficit                                                            (25,864,657)               (45,903,951)
       Subscriptions receivable from related party                                     (1,988,709)                (1,083,996)
                                                                                 -----------------          -----------------
            Total stockholders' equity                                                 25,288,754                 49,914,163
                                                                                 -----------------          -----------------

                                                                                      $41,870,160                $85,568,634
                                                                                 =================          =================



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

</TABLE>

                                       -3-




                       PALOMAR MEDICAL TECHNOLOGIES, INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (Unaudited)



<TABLE>
<CAPTION>

                                                                      Three Months Ended              Nine Months Ended
                                                                          September 30,                  September 30,
                                                                    1995              1996           1995             1996
                                                                 -----------   ---------------   -------------   ---------------

<S>                                                             <C>             <C>             <C>               <C>        
REVENUES                                                          $5,868,190      $24,690,970     $15,665,673       $49,153,990

COST OF REVENUES                                                   4,494,123       20,729,923      11,825,719        42,834,703
                                                                 -----------   ---------------   -------------   ---------------

         Gross profit                                              1,374,067        3,961,047       3,839,954         6,319,287
                                                                 -----------   ---------------   -------------   ---------------

OPERATING EXPENSES

         Research and development                                   1,297,384        1,639,712       2,521,531         5,731,009
         Sales and marketing                                          707,985        2,167,195       1,696,154         6,338,865
         General and administrative                                 1,800,826        5,581,662       4,203,362        13,793,418
         Business development and other financing costs               658,314          477,380       1,354,080         2,419,476
         Pooling-of-interest expenses                              --                --              --                  443,780
                                                                 ------------  ---------------   -------------   ---------------

                  Total operating expenses                          4,464,509        9,865,949       9,775,127        28,726,548
                                                                 ------------  ---------------   -------------   ---------------

                  Loss from operations                             (3,090,442)      (5,904,902)     (5,935,173)      (22,407,261)

INTEREST EXPENSE                                                     (416,889)        (510,107)       (899,394)       (1,248,986)

INTEREST INCOME                                                       688,709          643,898         734,456         1,847,345

OTHER INCOME                                                          160,597        1,820,311          (7,950)        2,548,629

MINORITY INTEREST IN LOSS OF SUBSIDIARY                                18,177            1,388          76,322            47,059
                                                                 -------------   --------------  --------------   ----------------

         Net loss                                                 $(2,639,848)     $(3,949,412)    $(6,031,739)     $(19,213,214)
                                                                 =============   ==============  ==============   ================

NET LOSS PER COMMON SHARE                                              $(0.17)          $(0.15)         $(0.45)           $(0.80)
                                                                 ==============   =============  ==============   ================

WEIGHTED AVERAGE NUMBER OF
    COMMON SHARES OUTSTANDING                                      15,293,971       27,681,158      13,261,752        25,194,388
                                                                 =============   ==============  ==============   ================


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

</TABLE>

                                       -4-




                       PALOMAR MEDICAL TECHNOLOGIES, INC.

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                   (Unaudited)


<TABLE>
<CAPTION>

                                                                  Preferred Stock         Common Stock           Treasury Stock     
                                                              --------------------------------------------------------------------
                                                                Number     $0.01       Number      $0.01     Number               
                                                              of Shares  Par Value   of Shares   Par Value  of Shares      Cost   
                                                              --------------------------------------------------------------------

<S>                                                         <C>          <C>       <C>          <C>       <C>        <C>         
BALANCE, DECEMBER 31, 1995                                      13,860        $139   20,135,406  $201,353  (200,000)  $(1,211,757)

  Sale of common stock pursuant to warrants                      --         --        2,049,039    20,490     --           --     
  Sale of common stock pursuant to Regulation S                  --         --          531,343     5,314     --           --     
  Sale of common stock pursuant to Regulation D                  --         --           44,821       448     --           --     
  Payments received on subscriptions receivable                  --         --          --         --         --           --     
  Issuance of preferred stock, including common stock
            issued as a placement fee, net of issuance
            costs                                                32,000        320      115,000     1,150     --           --     
  Issuance of common stock pursuant to stock options             --         --          524,902     5,249     --           --     
  Issuance of common stock for 1995 employer 401(k)
            matching contribution                                --         --           45,885       459     --           --     
  Conversion of preferred stock                                 (18,795)      (188)   3,317,507    33,176     --           --     
  Conversion of convertible debentures                           --         --           34,615       346     --           --     
  Redemption of convertible debentures                           --         --          --         --         --           --     
  Redemption of preferred stock                                  (2,500)       (25)     --         --         --           --     
  Exercise of underwriter's warrants                             --         --          500,000     5,000     --           --     
  Exercise of stock options in majority controlled
             subsidiary                                          --         --          --         --         --           --     
  Interest accrued on subscription receivable                    --         --          --         --         --           --     
  Issuance of common stock for conversion of debentures 
            at Tissue Technologies, Inc.                         --         --          813,431     8,135     --           --     
  Issuance of common stock for minority interest in Star
            Medical subsidiary                                   --         --          217,943     2,179     --           --     
  Issuance of common stock for Dermascan, Inc.                   --         --           35,000       350     --           --     
  Issuance of common stock for investment banking and
            merger and acquisition consulting services           --         --           36,802       368     --           --     
  Compensation expense related to warrants issued to
            non-employees under Statement of Financial
            Accounting Standards No. 123                         --         --          --         --         --           --     
  Return of escrowed shares                                      --         --          (46,000)     (460)    --           --     
  Amortization of deferred financing costs                       --         --          --         --         --           --     
  Preferred stock dividends                                      --         --          --         --         --           --     
  Net loss                                                       --         --          --         --         --           --     
                                                             ----------------------------------------------------------------------

BALANCE, SEPTEMBER 30, 1996                                      24,565       $246   28,355,694  $283,557    (200,000) $(1,211,757)
                                                             ======================================================================




                                                                       Additional                                  Total       
                                                                        Paid-in     Accumulated  Subscriptions  Stockholders'  
                                                                        Capital       Deficit      Receivable      Equity      
                                                                   ----------------------------------------------------------- 
                                                            
BALANCE, DECEMBER 31, 1995                                           $54,152,385  $(25,864,657) $(1,988,709)    $25,288,754   
                                                                                                                              
  Sale of common stock pursuant to warrants                            6,314,817      --             --           6,335,307   
  Sale of common stock pursuant to Regulation S                        2,854,816      --             --           2,860,130   
  Sale of common stock pursuant to Regulation D                          415,802      --             --             416,250   
  Payments received on subscriptions receivable                         --            --          2,009,591      2,009,591   
  Issuance of preferred stock, including common stock                                                                         
            issued as a placement fee, net of issuance    
            costs                                                     30,911,927      --             --          30,913,397  
  Issuance of common stock pursuant to stock options                     481,274      --             --             486,523 
  Issuance of common stock for 1995 employer 401(k)             
            matching contribution                                        160,139      --             --             160,598         
  Conversion of preferred stock                                          384,799      --             --             417,787  
  Conversion of convertible debentures                                   145,260      --             --             145,606  
  Redemption of convertible debentures                                   (41,530)     --             --             (41,530) 
  Redemption of preferred stock                                       (3,123,127)     --             --          (3,123,152) 
  Exercise of underwriter's warrants                                   1,057,500      --         (1,057,500)          5,000  
  Exercise of stock options in majority controlled              
             subsidiary                                                   50,000      --             --              50,000        
  Interest accrued on subscription receivable                           --            --            (47,378)        (47,378)        
  Issuance of common stock for conversion of debentures                                                                      
            at Tissue Technologies, Inc.                               1,019,022      --             --           1,027,157         
  Issuance of common stock for minority interest in Star                                                                     
            Medical subsidiary                                         1,707,821      --             --           1,710,000         
  Issuance of common stock for Dermascan, Inc.                           489,650      --             --             490,000 
  Issuance of common stock for investment banking and                                                                       
            merger and acquisition consulting services                   303,856      --             --             304,224 
  Compensation expense related to warrants issued to                                                                        
            non-employees under Statement of Financial                                                                      
            Accounting Standards No. 123                                 599,360      --             --             599,360 
  Return of escrowed shares                                                  460      --             --            --       
  Amortization of deferred financing costs                               (54,167)     --             --             (54,167)
  Preferred stock dividends                                             --            (826,080)      --            (826,080)
  Net loss                                                              --         (19,213,214)      --         (19,213,214)
                                                                  ----------------------------------------------------------   
                                                                                                                            
BALANCE, SEPTEMBER 30, 1996                                          $97,830,064  $(45,903,951) $(1,083,996)    $49,914,163 
                                                                  ==========================================================

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

</TABLE>

                                       -5-





                       PALOMAR MEDICAL TECHNOLOGIES, INC.
                                                                
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                                          Nine Months Ended               
                                                                                            September 30,
                                                                                  ---------------------------------
                                                                                      1995               1996
                                                                                  -------------      --------------
<S>                                                                              <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES                                             
     Net loss                                                                      $(6,031,739)       $(19,213,214)
     Adjustments to reconcile net loss to net cash                               
        used in operating activities-                                            
         Depreciation and amortization                                               1,122,007           2,380,297
         Write-off of in-process research and development                              --                   57,212
         Write-off of deferred financing costs associated with                   
             redemption of convertible debentures                                      --                  201,500
         Minority interest in loss of subsidiary                                       109,702             (30,572)
         Accrued interest receivable on trading securities                       
              and subscription receivable                                              --                 (698,378)
         Noncash interest expense related to debt                                      (76,322)            117,105
         Noncash compensation related to common stock and warrants                      95,370             903,584
         Realized gain on trading securities                                                              (877,632)
         Unrealized gain on trading securities                                         --               (1,670,187)
         Changes in assets and liabilities, net of effects                       
              from business combinations;                                        
                  Purchases of trading securities                                     (298,158)        (10,112,596)
                  Sale of trading securities and                                 
                       interest received on trading securities                         --               10,077,026
                  Accounts receivable                                                 (785,570)        (14,990,154)
                  Inventories                                                         (893,464)        (11,030,375)
                  Other current assets and loans to officers                          (439,624)         (1,124,646)
                  Accounts payable                                                   1,493,015          10,436,765
                  Accrued expenses                                                     733,080           3,606,692
                                                                                  -------------      --------------
                       Net cash used in operating activities                        (4,971,703)        (31,967,573)
                                                                                  -------------      --------------
                                                                                 
CASH FLOWS FROM INVESTING ACTIVITIES                                             
     Cash paid for purchase of Comtel Electronics, Inc., net of cash acquired          --                 (146,586)                
     Cash acquired from purchase of Spectrum Medical Technologies, Inc.,         
         net of cash paid                                                               75,087            --
     Cash Acquired from purchase of CD Titles, Inc., net of cash paid                   26,420            --
     Cash paid for purchase of Inter-connecting Products, Inc.                        (397,199)           --
     Purchases of property and equipment                                              (587,898)         (2,198,017)
     Increase in intangible assets                                                     --                 (450,005)
     Increase in other assets                                                         (835,003)         (1,331,652)
     Loans to related parties                                                          --               (7,433,625)
     Payments received on loans from related parties                                   --                8,052,855
     Investments in non-marketable securities                                          (20,000)         (5,172,488)
                                                                                  -------------      --------------
                  Net cash used in investing activities                             (1,738,593)         (8,679,518)
                                                                                  -------------      --------------
                                                                                 
CASH FLOWS FROM FINANCING ACTIVITIES                                             
     Proceeds from issuance of convertible debentures                                2,102,699           7,669,441
     Proceeds from notes payable                                                     1,040,000            --
     Payments of notes payable and capital lease obligations                        (1,239,073)           (515,368)
     Net (payments) proceeds on revolving lines of credit                             (607,539)           (135,753)
     Payment of contingent note payable                                                --                 (500,000)
     Proceeds from sale of common stock                                              7,664,142           3,276,380
     Proceeds from the exercise of warrants                                            --                6,340,307
     Issuance of preferred stock                                                       --               30,913,397
     Redemption of preferred stock, including accrued dividends of $71,223             --               (3,194,375)                 
     Redemption of convertible debentures                                           (1,048,666)           (930,000)
     Proceeds from exercise of stock options                                           --                  536,523
     Deferred Financing Costs                                                          --                 (988,690)
     Payments received on subscription receivable                                      --                2,009,591
     Financing costs related to warrant call                                           (69,317)           --
                                                                                  -------------      --------------
                  Net cash provided by financing activities                          7,842,246          44,481,453
                                                                                  -------------      --------------
INCREASE IN CASH AND CASH EQUIVALENTS                                                1,131,950           3,834,362
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                       3,263,203          17,138,178
                                                                                  -------------      --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD                                            $4,395,153         $20,972,540
                                                                                  =============      ==============
                                                                                 
                                                                          

            The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>


                                       -6-




                       PALOMAR MEDICAL TECHNOLOGIES, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                  Nine Months Ended
                                                                                    September 30,
                                                                           ---------------------------------
                                                                               1995               1996
                                                                           -------------      --------------
<S>                                                                     <C>                 <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
     Cash paid for interest                                                    $207,946            $324,041
                                                                           =============      ==============

SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING AND INVESTING ACTIVITIES 
     Conversion of convertible debt and related accrued interest,
         net of financing fees                                               $1,315,000          $1,172,763
                                                                           =============      ==============

     Unrealized holding gain on available for sale securities                  $227,500            $--
                                                                           =============      ==============

     Subscriptions received in connection with warrant call                  $5,683,549            $--
                                                                           =============      ==============

     Amortization of deferred financing costs                                  $--                  $54,167
                                                                           =============      ==============

     Officer loan paid by transferring personal investment
         in another company's stock in lieu of cash payment                    $175,000            $--
                                                                           =============      ==============

     Issuance of common stock for 1995 employer 410(k)
         matching contribution                                                 $--                 $160,598
                                                                           =============      ==============

     Value ascribed to warrants issued in connection with
         license agreement                                                     $100,000            $--
                                                                           =============      ==============

     Common stock issued in exchange for license rights
         and convertible note payable                                          $300,000            $--
                                                                           =============      ==============

     Conversion of preferred stock                                             $--                 $417,975
                                                                           =============      ==============

     Common stock issued for repurchase of minority interest                   $--               $1,710,000
                                                                           =============      ==============

     Dividends payable                                                         $--                 $826,080
                                                                           =============      ==============

ACQUISITION OF COMTEL ELECTRONICS, INC.
         Liabilities assumed                                                   $--                $(258,144)
         Fair value of assets acquired                                           --                  72,661
         Cash paid, net of cash acquired                                         --                (146,586)
                                                                           -------------      --------------
COST IN EXCESS OF NET ASSETS ACQUIRED                                          $--                $(332,069)
                                                                           =============      ==============

ACQUISITION OF SPECTRUM MEDICAL TECHNOLOGIES, INC.
         Liabilities assumed                                                $(1,128,139)           $--
         Fair value of assets acquired                                        1,456,920             --
         Fair Value of 364,178 shares of common stock issued                 (1,000,000)            --
         Promissory note issued                                                (700,000)            --
         Cash Paid                                                             (300,000)            --
         Acquisition cost incurred                                             (161,138)            --
                                                                           -------------      --------------
COST IN EXCESS OF NET ASSETS ACQUIRED                                       $(1,832,357)           $--
                                                                           =============      ==============

ACQUISITION OF INTER-CONNECTING PRODUCTS, INC.
     Liabilities assumed                                                      $(201,761)           $--
     Fair value of assets acquired                                              598,960             --
     Cash Paid                                                                 (397,199)            --
     Acquisition costs incurred                                                  --                 --
                                                                           -------------      --------------
COST IN EXCESS OF NET ASSETS ACQUIRED                                          $--                 $--
                                                                           =============      ==============

ACQUISITION OF CD TITLES, INC.
     Liabilities assumed                                                    ($1,271,345)           $--
     Fair value of assets acquired                                            1,271,345             --
                                                                           =============      ==============
COST IN EXCESS OF NET ASSETS ACQUIRED                                          $--                 $--
                                                                           =============      ==============



         The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

                                       -7-






                       PALOMAR MEDICAL TECHNOLOGIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


1.       BASIS OF PRESENTATION
         ---------------------

         The accompanying  unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
information.  Accordingly,  they  do not  include  all of  the  information  and
footnotes  required by generally  accepted  accounting  principles  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.
(the "Company" or "Palomar") believes that the quarterly  information  presented
includes all  adjustments  (consisting  only of normal,  recurring  adjustments)
necessary  for  a  fair  presentation  in  accordance  with  generally  accepted
accounting principles. The accompanying financial statements and notes should be
read in conjunction with the Company's Form 10-KSB/A-1 of and for the year ended
December 31, 1995.

2.       ACQUISITION OF COMTEL ELECTRONICS, INC.
         ---------------------------------------

         On January 1, 1996, Dynaco Corp. ("Dynaco"), a  wholly-owned subsidiary
of Palomar,  converted a $100,000 note receivable from Comtel Electronics,  Inc.
("Comtel") into 11,100 shares of Comtel stock (par value $.05),  giving Dynaco a
10% interest in Comtel. Effective March 20, 1996, Dynaco purchased an additional
500,000 shares of Comtel for $27,500,  resulting in 80.32%  ownership by Dynaco.
The  remaining  19.68%  ownership  is held by two  principals  of  Comtel.  This
acquisition  has been accounted for as a purchase in accordance  with Accounting
Principles  Board (APB) Opinion No. 16.  Accordingly,  the Company has allocated
the  purchase  price  based on the fair  market  value of  assets  acquired  and
liabilities  assumed. The results of Comtel have been included with those of the
Company since March 20, 1996.

         Comtel has entered into a 5 year agreement  with New Media,  Inc. ("New
Media") whereby New Media  subcontracted to Comtel all of its  manufacturing and
assembly  business over the contract term. Comtel is compensated by New Media to
achieve a  guaranteed  15% gross  margin to Comtel.  Management  estimates  this
contract  will  generate $80 million in revenues for Comtel over the life of the
agreement.  On April 5, 1996, Palomar invested $2,345,000 in New Media preferred
and  common  stock and  loaned  New  Media an  additional  $1,000,000.  The note
receivable is subordinated and  nonrecourse,  bears interest at 9% and is due in
April of 1999 or earlier  under  certain  conditions.  Palomar  also  received a
warrant to purchase  200,000 shares of common stock in New Media,  Inc. at $1.20
per share. Palomar has accounted for this investment under the cost method.

         During the nine months ended  September  30, 1996,  Comtel had sales to
New  Media of  $13,192,986.  At  September  30,  1996,  $7,284,527  of  accounts
receivable was due from New Media. The Company's management believes that this
asset will be realized in the near term.

3.       ACQUISITION OF TISSUE TECHNOLOGIES, INC.
         ----------------------------------------

         On May 3, 1996, the Company  acquired 100% of the outstanding  stock of
Tissue  Technologies,  Inc.  ("Tissue")  in  exchange  for  3,200,000  shares of
Palomar's  common stock.  The Company is accounting  for this  acquisition  as a
pooling-of-interest in accordance with APB No. 16. The Company has retroactively
restated its consolidated  financial statements to reflect this acquisition as a
pooling-of-interest.  The Company incurred $443,780 of various legal, accounting
and consulting  services costs related to the acquisition during the nine months
ended September 30, 1996, which are included in pooling-of-interest  expenses in
the accompanying consolidated statement of operations.  Tissue is engaged in the
manufacture, marketing and sale of C02 laser systems used in skin resurfacing.



                                       -8-






4.       ACQUISITION OF MINORITY INTEREST OF STAR MEDICAL TECHNOLOGIES, INC.
         -------------------------------------------------------------------

         In April 1996,  the Company  purchased  15% of the  outstanding  common
stock  of  Star  Medical  Technologies,  Inc.  ("Star  Medical"),  bringing  its
ownership  to 100%,  in exchange for 217,943  shares of  Palomar's  common stock
valued at $7.85 per share.  This  agreement  restricts for a period of two years
the sale of the Company's common stock issued in connection with this agreement.
The  purchase  price  has been  recorded  as  additional  goodwill  and is being
amortized  over a period of five years.  In connection  with this  agreement the
original  founders of Star Medical have agreed to rescind all  royalties  due to
them under a Rights Agreement dated July 1, 1993.

5.       ACQUISITION OF DERMASCAN, INC.
         ------------------------------

         On July 18, 1996, the Company  purchased 80 shares of common stock (80%
of total issued and outstanding capital stock) of Dermascan,  Inc. ("Dermascan")
from a Dermascan  stockholder  in exchange for 35,000  shares of common stock of
Palomar.  The  Company  has agreed to include  these  35,000  shares in a future
registration  statement  to be  filed by the  Company  for the  resale  of these
shares. In addition,  the Company has agreed to pay the Dermascan stockholder an
amount  equal to the  difference  between  $14.00 and the closing bid price,  if
lower,  on the day the  registration  statement  is  declared  effective  by the
Securities and Exchange  Commission.  The agreement also includes a put right by
the remaining 20%  stockholder  of Dermascan,  which  provides that, at any time
after three years from the date of the agreement,  the Company, will be required
to purchase the  stockholders'  20% interest for $130,000 in cash. In connection
with the agreement,  the Company entered into a five year  employment  agreement
with the selling stockholder which guarantees annual payments of up to $125,000.
Dermascans  operations prior to acquisition  were not material.  The Company has
recorded the acquisition at the guaranteed stock price of $490,000 in total.

6.       INVESTMENTS
         -----------

  (a) Marketable Securities

         The fair values for the  Company's  marketable  equity  securities  are
based  on  quoted  market  prices.  The  fair  values  of  nonmarketable  equity
securities,  which  represent  equity  investments  in  early  stage  technology
companies, are based on the financial information provided by these ventures and
the amount of the  Company's  investment.  The amount that the Company  realizes
from these investments may differ significantly from the amounts recorded in the
accompanying consolidated financial statements.

         The Company  accounts for  investments in accordance  with Statement of
Financial   Accounting  Standards  ("SFAS")  No.  115,  Accounting  for  Certain
Investments in Debt and Equity Securities.  Under SFAS No. 115,  securities that
the Company has the  intention  and ability to hold to maturity will be reported
at the amortized cost and are classified as  held-to-maturity.  Securities  that
are bought and held principally for the purpose of selling them in the near term
are classified as trading  securities.  Realized and unrealized gains and losses
relating  to trading  securities  are  currently  included  in the  accompanying
consolidated statements of operations.

         During the nine months ended  September  30,  1996,  the Company sold a
portion of its trading securities in three publicly-traded companies,  realizing
a  gain  of  $908,605  which  is  reflected  in  the  accompanying  consolidated
statements of operations.

<TABLE>
<CAPTION>
                                                                          As of September 30, 1996
                                                           --------------------------------------------------------
                                                                            Gross          Gross
                                                            Amortized     Unrealized    Unrealized        Fair
                                                              Costs          Gain          Loss          Value
                                                           ------------  -------------  ------------  -------------
              Trading Securities:
<S>                                                     <C>             <C>            <C>            <C>
                     Investments in publicly-
                     traded companies                       $1,662,613     $1,836,843    $(166,657)     $3,332,799
                                                           ============  =============  ============  =============

</TABLE>


                                       -9-





  (b) Non-Marketable Securities

         In addition to non-marketable  equity securities held by the Company at
September 30, 1996, the Company has invested $500,000 in Clinic Holdings Inc. (a
Delaware  corporation),  in exchange  for 1,000  shares of common  stock (50% of
total issued and outstanding common stock).  Under the terms of this investment,
the Company has  exercised  its option to  terminate  its  investment  in Clinic
Holdings,  Inc.  and it will receive an amount equal to its initial cash capital
contribution plus interest at the rate of 10% per annum.

7.       INVENTORIES
         -----------

         Inventories  are  stated  at lower  of cost  (first-in,  first-out)  or
market.  Work in process and  finished  goods  inventories  consist of material,
labor and manufacturing overhead and consist of the following:

<TABLE>
<CAPTION>
                                                                      December 31,        September 30,
                                                                          1995                1996
                                                                     ---------------     ---------------
<S>                                                                  <C>                 <C>       
                Raw materials                                            $1,949,288          $8,434,893
                Work in process and finished goods                        2,008,389           6,410,540
                Less -- progress billings                                   307,793            --
                                                                     ===============     ---------------
                                                                         $3,649,884         $14,845,433
                                                                     ===============     ===============
</TABLE>

8.       PROPERTY AND EQUIPMENT
         ----------------------

         Property and equipment consist of the following:

<TABLE>
<CAPTION>
                                                                      December 31,        September 30,
                                                                          1995                1996
                                                                     ---------------     ----------------
<S>                                                                 <C>                  <C>       
               Equipment under capital leases                            $1,214,950           $1,215,810
               Machinery and equipment                                    1,992,157            3,371,401
               Furniture and fixtures                                       806,252            1,456,618
               Leasehold improvements                                       308,158              628,972
                                                                     ---------------     ----------------
                                                                          4,321,517            6,672,801
               Less:  Accumulated depreciation
                          and amortization                                1,156,502            1,962,594
                                                                     ---------------     ----------------
                                                                         $3,165,015           $4,710,207
                                                                     ===============     ================
</TABLE>

9.       NET LOSS PER COMMON SHARE
         -------------------------

         For the three and nine months ended  September  30, 1995,  net loss per
common share has been computed by dividing the net loss by the weighted  average
number of shares of common stock  outstanding  during the period.  For the three
and nine months ended  September  30,  1996,  net loss per common share has been
computed by dividing net loss, as adjusted for preferred stock dividends, by the
weighted average number of shares of common stock outstanding during the period.
Common stock equivalents are not considered as outstanding,  as the result would
be antidilutive.





                      [This space intentionally left blank]



                                      -10-





10.      NOTES PAYABLE
         -------------

Notes payable consist of the following:
<TABLE>
<CAPTION>
                                                                                                  December 31,     September 30,
                                                                                                      1995              1996
                                                                                                 ----------------  ---------------
<C>                                                                                               <C>              <C>     
7% Note payable                                                                                         $244,782         $244,782
8% Convertible debentures, $1,000,000 face amount, principal and interest due October
     26, 1997. $775,000 face amount of the debentures were repaid in May 1996. $225,000
     face amount of the debentures were converted into 34,615 shares of common stock                     819,359         --
8% Convertible debentures issued by Tissue, converted into 813,431 shares of common stock
     in May 1996                                                                                         950,000         --
4.5% Swiss Franc convertible debentures, 9,675,000 SF face amount, principal and interest                               
     due July 3, 2003                                                                                                   7,712,236
7.4% to 21% Capital lease obligations, monthly principal and interest payments ranging from
     $144 to $51,235, maturities ranging from August 1997 to January 1999                              1,393,612        1,262,267
Present value of notes payable, discounted at 8% and due in annual installments of principal
     and interest payments of $100,000, $200,000, $200,000 and $100,000 in fiscal 1995, 1996,
     1997 and 1998 respectively                                                                          468,012          285,368
Note payable in connection with the acquisition of Spectrum Medical Technologies, Inc.,
     ("Spectrum")  interest at the prime rate (8.25% at September 30, 1996) plus
     1%, principal  payments of $200,000,  $150,000,  $200,000 and $150,000 plus
     interest due in October 1995, April 1996, October 1996 and April 1997, respectively                 500,000          352,572
Bridge notes payable, interest accruing  at prime (8.25% at September 30, 1996) plus 2%                1,350,000        1,200,000
Other notes payable                                                                                       78,672          298,114
                                                                                                 ----------------  ---------------
                                                                                                       5,804,437       11,355,339
Less -- current maturities                                                                             2,474,265        2,523,533
                                                                                                 ================  ---------------
                                                                                                      $3,330,172       $8,831,806
                                                                                                 ================  ===============
</TABLE>

         On July 3, 1996, the Company raised  approximately $7.6 million, net of
offering costs,  through the issuance of 9,675 units in a convertible  debenture
financing.  These units are traded on the Luxembourg  Stock Exchange.  Each unit
consisted of a  convertible  debenture  denominated  in 1,000 Swiss Francs and a
warrant to purchase 24 shares of the Company's common stock at $16.50 per share.
The  warrants  are  non-detachable  and may be  exercised  only  if the  related
debentures are simultaneously converted,  redeemed or purchased. Interest on the
convertible  debentures  accrues  at a rate of 4.5%  per  annum  and is  payable
quarterly in Swiss Francs.  The  convertible  debentures may be converted by the
holder or the Company  commencing  90 days after July 3, 1996,  at a  conversion
price  equal to 100% to 77.5% of the  price per  share of the  Company's  common
stock,  calculated as defined.  This  conversion  price decreases from the third
anniversary to the seventh  anniversary of the convertible  debentures but in no
event is less than $12.00 per share. In addition,  the Company has the option to
redeem these debentures after the third anniversary of there issuances.

         The Company is required to set up a mandatory sinking fund beginning on
July 3, 2000 through July 3, 2004, for 25% of the aggregate  principal amount of
the convertible debentures..

11.      STOCKHOLDERS' EQUITY
         --------------------

  (a) Stock Options

         During the nine months ended  September  30, 1996,  the Company  issued
options to purchase  1,140,000  shares of common  stock at prices  ranging  from
$6.75 to  $10.50  per  share to  several  employees.  Certain  individuals  also
exercised  stock  options to purchase  524,902  shares of common stock at prices
ranging  from $0.40 to $3.50.  The total  proceeds  received by the Company were
$486,523.


                                      -11-





  (b) Warrants

         During the nine months ended  September  30, 1996,  the Company  issued
warrants to purchase a total of 5,197,577  shares of the Company's  common stock
to certain  officers,  employees,  consultants  and preferred stock investors at
prices   ranging  from  $5.00  to  $16.50  per  share.   In  addition,   certain
warrantholders  exercised  warrants to purchase 2,549,039 shares of common stock
at prices  ranging from $0.60 to $7.69.  The Company  received total proceeds of
$6,340,307 and a note  receivable for $1,057,500  related to the exercise of the
warrants.

  (c) Reserved Shares

         At September  30, 1996,  the Company has reserved  shares of its common
stock for the following:

              Stock option plans                                      3,924,400
              Warrants                                                7,654,055
              Employee 401(k) plan                                      254,115
              Preferred stock                                         3,806,092
              Convertible debentures                                    867,800
                                                                 ---------------
                                   Total                             16,506,462
                                                                 ===============

  (d) Preferred Stock

         During the nine months ended  September 30, 1996 the Company  completed
the following issuances of Convertible Preferred Stock
<TABLE>
<CAPTION>

                                Number of                                                     Net
                Date             Shares                          Series                     Proceeds
        ------------------------------------    -------------------------------------------------------
<S>                                <C>        <C>                                          <C>       
        February 14, 1996             6,000     Series D Convertible Preferred Stock        $5,999,940
        April 17, 1996               10,000     Series E Convertible Preferred Stock        $9,488,200
        July 12, 1996                 6,000     Series F Convertible Preferred Stock        $5,999,940
        September 27, 1996           10,000     Series G Convertible Preferred Stock        $9,425,317
                        
</TABLE>

         In connection with the issuance of the Series D, E ,F and G Convertible
Preferred  Stock (the  "Preferred  Stock") the  Company  has issued  warrants to
purchase 1,928,058 shares of common stock at prices ranging from $7.50 to $16.00
per  share.  The  conversion  price  for the  Preferred  Stock is equal to rates
ranging from 80% to 85% of the average  closing price of the common stock on ten
consecutive  preceding  trading days, and subject to certain minimum and maximum
conversion  prices  ranging  from  $4.50 to  $16.00  per  share.  The  Preferred
stockholders  are  entitled  to  dividends  at rates  ranging  from 4% to 8%, as
defined in each of the Preferred Stock  agreements.  The Preferred  stockholders
also have  preference  in  liquidation  equal to $1,000 plus  accrued but unpaid
dividends  and accrued but unpaid  interest.  Under certain  circumstances,  the
Company has the option to redeem these shares at the redemption price defined in
the agreement. During the three months ended September 30, 1996, 7,435 shares of
Preferred Stock had been converted into 1,001,554 shares of common stock and the
remaining Preferred Stock is convertible into 3,806,092 shares of common stock.

  (e) Dividends

         In certain  circumstances  the Company is prohibited  from declaring or
paying  dividends  other than stock dividends under the terms of the convertible
debentures

         The Company is also prohibited from paying any dividends to the holders
of common  stock  until  all  accrued  and  unpaid  dividends  have been paid or
declared.



                                      -12-





  (f) Adoption of Statement of Financial Accounting Standards No. 123

         SFAS No. 123 "Accounting for Stock Based  Compensation"  applies to all
transactions in and reporting  standards for stock based  compensation  plans as
well as transactions in which an entity issues its equity instruments to acquire
goods or services from non-employees. As of January 1, 1996, the Company adopted
the provisions of SFAS No. 123 related to warrants issued to  non-employees  and
the Company  charged  approximately  $600,000 to operations  for the nine months
ended September 30, 1996, related to these warrants. In accordance with SFAS No.
123, the Company will continue to account for employee  stock options or similar
equity  instruments as prescribed by APB Opinion No. 25,  "Accounting  for Stock
Issued  to  Employees".  The  Company  does not  currently  expect  to adopt the
accounting  prescribed  by SFAS No. 123;  however,  the Company will include the
disclosures  required  by  SFAS  No.  123 as  required  in  future  consolidated
financial statements.

12.      RELATED PARTY TRANSACTIONS
         --------------------------

  (a) Loans

         The Board of Directors  have  established a corporate loan policy under
which  loans may be granted to  certain  officers/stockholders/directors  of the
Company  for  amounts up to an  aggregate  of  $800,000.  All such loans must be
collateralized by certain  stockholdings of these  individuals,  as defined.  At
December 31, 1995 and September 30, 1996,  $383,198 and $312,500,  respectively,
with accrued  interest at the rate of 7% per annum,  was  outstanding to certain
officers/stockholders/directors under the corporate loan policy.

         At December  31, 1995 and  September  30,  1996,  the Company had loans
receivable in aggregate of $565,000 and $668,259, (including accrued interest of
$59,259 at September 30, 1996), respectively, from two officers of Dynaco, which
are evidenced by three  promissory  notes due on demand or by December 31, 1996,
bearing  interest at the rates  ranging from prime (8.25% at September 30, 1996)
to 8%. These loans  receivable are  collateralized  with vested stock options in
the Company  owned by the officers with a market price in excess of the exercise
price. As defined in the agreement,  100% of the then outstanding  principal and
accrued  but  unpaid  interest  must never be below the sum of the excess of the
market price over the exercise price of the unexercised vested stock options.

         In connection with a loan receivable to an affiliated  company that was
paid  during  the third  quarter  of 1996,  the  Company  received  a warrant to
purchase  289,790 shares of the affiliated  company's common stock at $1.294 per
share.  The affiliated  company  completed its initial  public  offering and the
Company  exercised  the above  warrant  and  recognized  an  unrealized  gain of
$952,238, which is included in the consolidated statements of operations for the
nine months ended September 30, 1996.

         At September 30, 1996, the Company had a note receivable of $1,267,338,
(including accrued interest of $67,339) from a publicly-traded  company of which
certain  directors  of the  publicly-traded  company are also  directors  of the
Company.  This note bears  interest at 10%. The Company  expects this loan to be
repaid in full in the next twelve months and has classified this note as current
in the consolidated balance sheet at September 30, 1996.

         During the nine months ended  September 30, 1996,  the Company loaned a
director of one of the Company's investment banks $1,057,500,  represented by an
unsecured note  receivable,  in connection  with the exercise of stock warrants.
This note bears  interest  at 7.75% per annum and is due on demand.  The Company
also has a note  receivable from this director of $445,792,  (including  accrued
interest of $10,896) at September  30,  1996,  under the same terms as the notes
described above.

         During the nine months ended  September  30, 1996,  the Company  loaned
$250,000,  in the form of a note receivable,  bearing interest at 10% per annum,
to a company of which a director of Palomar is the chairman.

         It is  reasonably  possible  that the  Company's  estimate that it will
collect these loans within one year will change in the near term.



                                      -13-





  (b) Investments

         In  September  1996,  the  Company  invested   $500,000  in  a  limited
partnership.  A director  of the limited  partnership  is also a director of the
Company. The purpose of the general limited partnership is to invest and provide
services to small and emerging growth companies. It is management's intention to
attempt to sell the limited partnership  investment over the next year, although
there can be no assurance that this objective will be accomplished.

         The  Company  has a  $500,000  equity  investment  in a  privately-held
technology company. A director of one of the Company's  investment banks is also
a director of this investee company.

         The  Company  has a  consulting  agreement  with  one  director  of the
Company.

13.      PRO FORMA INFORMATION
        ---------------------

         The results of  operations  related to Spectrum have been included with
those of the Company since April 5, 1995.

         The results of operations related to  Inter-Connecting  Products,  Inc.
("ICP") have been included with those of the Company since September 5, 1995.

         The results of operations related to Intelligent Computer Technologies,
Inc.  ("ICT") have been included  with those of the Company since  September 18,
1995.

         The results of  operations  related to Comtel have been  included  with
those of the Company since March 20, 1996.

         The  operations  of  Dermascan  were  immaterial.  Unaudited  pro forma
operating  results for the  Company,  assuming  the  acquisitions  of ICT,  ICP,
Spectrum and Comtel had been made as of January 1, 1995, are as follows:

<TABLE>
<CAPTION>
                                                Three Months Ended                        Nine Months Ended
                                                   September 30,                            September 30,
                                        ------------------------------------      -----------------------------------
                                             1995                 1996                 1995               1996
                                        ----------------      --------------      ---------------    ----------------
<S>                                      <C>                <C>                  <C>                 <C>        
     Revenue                                 $9,145,742         $25,070,970          $25,904,007         $49,533,990
     Net loss                              $(4,067,336)        $(3,979,412)        $(10,491,165)       $(19,243,214)
     Net loss per common share                  $(0.27)             $(0.16)              $(0.77)             $(0.80)

</TABLE>

14.      COMMITMENTS
         -----------

         The  Company  has  issued  guarantees  on  behalf  of  several  of  its
subsidiaries  for payment of trade  payables.  The total  amount  guaranteed  at
September 30, 1996, was $5,160,970.

15.      REVENUE AGREEMENTS
         ------------------

         On July 19,  1996,  the  Company,  through a  wholly-owned  subsidiary,
signed a master services agreement with EquiMed.  This exclusive agreement calls
for the  installation  of certain  of the  Company's  cosmetic  lasers at all of
EquiMed's  wholly-owned  centers.  Revenues  will  be  shared  between  the  two
companies.

         On June 14,  1996,  the  Company,  through a  wholly-owned  subsidiary,
signed a master services  agreement with Medical Alliance,  Inc.  ("MAI").  This
exclusive  agreement calls for the use of the Company's cosmetic lasers in MAI's
Mobile  Medical  Services  business.  Revenues  will be shared  between  the two
companies.

16.      SUBSEQUENT EVENTS
         -----------------

         Subsequent to September 30, 1996, the Company raised approximately $4.6
million,  net of  offering  costs,  through  the  issuance  of 4.5%  convertible
subordinated promissory notes.


                                      -14-





         On October 11, 1996,  the Company loaned  $500,000 to a  privately-held
medical  company.  A director of the  privately-held  medical company is also an
employee  of Palomar.  The note bears  interest at a rate of 8% per annum and is
due  on  the  earlier  of  the   completion  of  a  private   placement  by  the
privately-held  company or October 11, 1997. In connection  with this loan,  the
Company received 500,000 shares of common stock in the medical company.

         On October 24, 1996, the Company  loaned  $150,000 to a director of the
Company under the Company's corporate loan policy. The note is due on demand and
bears  interest  at the rate of 7% per annum.  The loan is  collateralized  with
vested warrants in the Company.

         On October 25, 1996, the Company loaned  $1,000,000 to a privately-held
company.  A  director  of one of the  Company's  investment  bankers  is  also a
director of the  privately-held  company.  The loan is due in November  1996 and
bears  interest  at the  rate  of 18%  per  annum.  The  Company  received  a 5%
origination fee which has been paid.








                      [This space intentionally left blank]






                                      -15-





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

THREE MONTHS ENDED SEPTEMBER 30, 1996,  COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1995

         For the three months ended September 30, 1996, the Company had revenues
of $24,690,970  as compared to $5,868,190  for the three months ended  September
30,  1995.  The 321%  increase in revenues  from 1995 to 1996 is  primarily  the
result of acquisitions,  additional  product lines and the transition of certain
subsidiaries from the development stage to commercialization in both the medical
and  electronic  business  segments.  Net  revenues  by the  Company's  business
segments are as follows:

                                                Three months ended
                                                  September 30,
                                      ---------------------------------------
                                            1995                   1996
                                      -----------------       ---------------
    Medical                                 $1,544,293            $5,155,052
    Electronic                               4,323,897            19,535,918
                                      -----------------       ---------------
               Total                        $5,868,190           $24,690,970
                                      =================       ===============

         The  increase  in  revenues  for  the  Company's  medical  segment  was
principally  attributable to $3.3 million of revenues generated by the Company's
Tissue Technologies  subsidiary during the three months ended September 30,1996,
as compared to almost no revenues for the three months ended September 30, 1995,
Tissue began commercial  shipments of its product in the fourth quarter of 1995.
Approximately  $1.5 million of medical  revenues were generated by the Company's
Spectrum  Medical  Technologies,  Inc.  subsidiary  in the  three  months  ended
September  30, 1996 as compared to only  approximately  $1.1 million of revenues
for the three months ended  September  30,  1995.  This  increase in revenues at
Spectrum was due to the  introduction  and initial  shipments of its  EpilaserTM
during the third quarter of 1996.

         The  increase in revenues  for the  Company's  electronics  segment was
attributable  to  approximately  $9.2  million of  revenues  generated  from the
Company's Nexar subsidiary,  which introduced its proprietary  upgradeable PC in
April of 1996, as compared to only  approximately  $51,300 of revenues generated
from the sale of  non-proprietary  PC's during the three months ended  September
30, 1995.  The  remaining  increase in the  electronics  segment was due to $5.4
million of sales by Dynaco's Comtel subsidiary  acquired in the first quarter of
1996.

         Gross  margin  for the three  months  ended  September  30,  1996,  was
$3,961,047 (16% of revenues)  versus  $1,374,067 (23% of revenues) for the three
months ended  September 30, 1995.  The increase in gross dollars was a result of
the additional  revenues generated from new products introduced during the three
months ended September  30,1996 as discussed above. The decrease in gross profit
percent is directly  attributable  to two  factors:  1.) a decrease in yields at
Dynaco  due to an  increase  in  production  costs  attributable  to a change in
Dynaco's product mix and 2.)  underutilization of increased  production capacity
at Spectrum in  preparation  for the increased  demand of its  EpilaserTM in the
fourth  quarter of 1996 and in 1997. A portion of this  decrease in gross margin
percent was offset by an increase in gross margins attributed to the acquisition
of  Tissue  which  introduced  its  skin  resurfacing  laser  to the  commercial
marketplace in the first quarter of 1996.

         Research and development costs increased to $1,639,712 (7% of revenues)
for the three months ended September 30, 1996, from $1,297,384 (23% of revenues)
for the three months ended September 30, 1995. This 26% increase in research and
development  reflects  the  Company's  continuing  commitment  to  research  and
development  for both its  medical  and  electronic  business  segments.  In the
Company's medical segment,  the Company continues to focus its efforts to obtain
FDA approval for hair prevention  using the EpilaserTM,  previously FDA approved
for other dermatological applications,  and to concentrate on the development of
additional products for medical laser  applications.  In the electronics segment
the  Company's  Nexar  subsidiary  continues to enhance and further  develop its
current  proprietary  upgradeable  PC product in order to stay  competitive in a
rapidly  changing high technology  industry.  In addition,  the Company's Dynaco
subsidiary began funding new process engineering and materials development,  and
has filed several  patents for this process.  Management  believes that research
and  development  expenditures  will  increase  over the  next few  years as the
Company continues clinical trials of its medical products,  develops  additional
applications  for its  lasers  and  delivery  systems  and  develops  commercial
applications for unique electronic interconnect packaging.



                                      -16-





         General and  Administrative  expenses  increased to $5,581,662  (23% of
revenues) for the three months ended September 30, 1996, from $1,800,826 (31% of
revenues) for the three months ended  September 30, 1995.  This 210% increase is
primarily   attributable  to   acquisitions,   and  the  transition  of  certain
subsidiaries  from  the  development  stage  to  commercialization.   Also,  the
Company's  growth through  acquisitions  has required  increased  administrative
resources  at the  Company's  corporate  offices  to  oversee  the growth of the
Company's medical and electronic business segments.  In the medical segment, the
Company  expanded its general and  administrative  support  staff at Spectrum to
accommodate  the forecasted  growth for the fourth quarter of 1996 and for 1997.
In the  electronics  segment,  the Company's  Nexar  subsidiary has expanded its
executive,   administrative  and  finance  staffs  to  support  Nexar's  growing
operations.  The  Company  has  continued  to  increase  its  support  staffs in
anticipation of several new product  introductions in 1996. All of the Company's
subsidiaries maintain their own general and administrative support staffs.

         Selling and Marketing expenses increased to $2,167,195 (9% of revenues)
for the three months ended  September 30, 1996,  from $707,985 (12% of revenues)
for the three  months ended  September  30, 1995.  This 206%  increase  reflects
expansion  through  acquisitions  and new product lines. In the medical segment,
this increase is attributable to the Company's  Spectrum  subsidiary  increasing
its sales and  marketing  expenditures  to coincide with the addition of two new
product lines. In the electronics segment,  this increase reflects the change in
focus of the Company's Nexar subsidiary from product  development to selling and
marketing proprietary upgradeable PC.

         Business  Development  and Other  Financing Costs decreased to $477,380
(2% of revenues) for the three months ended  September  30, 1996,  from $658,314
(11% of  revenues)  for the three  months ended  September  30,  1995.  This 27%
decrease  is  attributable  to  the  Company's  focus  on  operations,   product
development  and  enhancements  during the third  quarter of 1996.  The  Company
anticipates that it will continue to expend funds to raise additional sources of
financing and to focus its efforts to acquire other  technologies to broaden its
scope of product  applications  and services in both the medical and  electronic
business segments.

         Interest  expense  increased  to $510,107  for the three  months  ended
September 30, 1996, from $416,889 for the three months ended September 30, 1995.
This 22% increase is primarily the result of interest on convertible  debentures
redeemed  in May  1996 and the  issuance  of the 4.5%  Swiss  Franc  convertible
debentures in July 1996.

         Interest  income  decreased  to  $643,898  for the three  months  ended
September 30, 1996, from $688,709 for the three months ended September 30, 1995.
This decrease is primarily the result of the interest  income  received from the
collection of  approximately  $3.8 million of  subscription  receivables  in the
third quarter of 1995 partially offset by other  investments made as a result of
the Company's improved cash position during the third quarter of 1996.

         Other  Income  represents  realized  and  unrealized  trading  gains of
$1,820,311  for the three months ended  September  30, 1996 and $160,597 for the
three months ended  September  30, 1995 . These gains  resulted from the sale of
certain marketable  securities during the quarter. It is the Company's intention
to  continue  to invest in trading  securities,  which may result in  additional
trading gains or losses in the future.

         Minority  interest in loss of  subsidiary  decreased  to $1,388 for the
three months ended  September 30, 1996,  from $18,177 for the three months ended
September 30, 1995.

         The Company has not recorded a deferred  tax benefit for net  operating
losses as the utilization of such losses is uncertain.




                      [This space intentionally left blank]





                                      -17-





NINE MONTHS ENDED  SEPTEMBER 30, 1996,  COMPARED TO NINE MONTHS ENDED  SEPTEMBER
30, 1995

         For the nine months ended  September 30, 1996, the Company had revenues
of $49,153,990 as compared to  $15,665,673  for the nine months ended  September
30,  1995.  The 214%  increase in revenues  from 1995 to 1996 is  primarily  the
result of acquisitions,  additional  product lines and the transition of certain
subsidiaries from the development stage to commercialization in both the medical
and  electronic  business  segments.  Net  revenues  by the  Company's  business
segments are as follows:

                                                Nine months ended
                                                  September 30,
                                      ---------------------------------------
                                            1995                   1996
                                      -----------------       ---------------
        Medical                          $   3,490,579          $ 12,780,664
        Electronic                          12,175,094            36,373,326
                                      -----------------       ---------------
                   Total                  $ 15,665,673          $ 49,153,990
                                      =================       ===============

         The  increase  in  revenues  for  the  Company's  medical  segment  was
principally  attributable  to  $8.8  million  of  revenues  generated  from  the
Company's Tissue  subsidiary  during the nine months ended September  30,1996 as
compared to only $19,000 for the nine months ended  September  30, 1995.  Tissue
Technologies  began commercial  shipment of its product in the fourth quarter of
1995.  Approximately  $2.9  million of medical  revenues  were  generated by the
Company's  Spectrum  subsidiary during the nine months ended September 30, 1996,
as compared to approximately  $2.2 million of revenues for the nine months ended
September  30,  1995.  This  increase in  revenues  at  Spectrum  was due to the
introduction and initial shipments of its EpilaserTM during the third quarter of
1996.

         The  increase in revenues  for the  Company's  electronics  segment was
partially attributable to approximately $11.3 million of revenues generated from
the Company's Nexar subsidiary  which introduced its proprietary  upgradeable PC
in April  of 1996,  as  compared  to only  approximately  $264,000  of  revenues
generated  from the sale of  non-proprietary  PCs during the nine  months  ended
September 30, 1995. The remaining increase in the electronics segment was due to
$11.6  million of sales by  Dynaco's  Comtel  subsidiary  acquired  in the first
quarter of 1996

         Gross  margin  for the  nine  months  ended  September  30,  1996,  was
$6,319,287  (13% of revenues)  versus  $3,839,954 (25% of revenues) for the nine
months  ended  September  30, 1995.  The increase in gross profit  dollars was a
result of the additional  revenues generated from new products introduced during
the nine months  ended  September  30,1996 as discussed  above.  The decrease in
gross profit  percent is  attributed to a decrease in yields at Dynaco due to an
increase in production  costs  attributable to a change in Dynaco's  product mix
combined with  underutilization of increased  production capacity at Spectrum in
preparation  for the  anticipated  increase in demand of its  EpilaserTM  in the
fourth  quarter of 1996 and for fiscal 1997. A portion of this decrease in gross
margin  percent  was offset by an increase in gross  margins  attributed  to the
acquisition  of  Tissue  which  introduced  its  skin  resurfacing  laser to the
commercial marketplace in the first quarter of 1996.

         Research  and  development   costs  increased  to  $5,731,009  (12%  of
revenues) for the nine months ended  September 30, 1996, from $2,521,531 (16% of
revenues) for the nine months ended  September  30, 1995.  This 127% increase in
research  and  development  reflects  the  Company's  continuing  commitment  to
research and development for both its medical and electronic  business segments.
In the Company's  medical segment the Company  continues to focus its efforts to
obtain FDA approval for hair  prevention  using the  EpilaserTM,  previously FDA
approved  for  other  dermatological   applications,   and  concentrate  on  the
development  of  additional  products  for medical  laser  applications.  In the
electronics  segment,  the Company's Nexar  subsidiary  continues to enhance and
further develop its current proprietary  upgradeable PC product in order to stay
competitive in a rapidly changing high technology industry. In addition,  Dynaco
began funding a new process engineering and materials development, and has filed
several patents.  Management believes that research and development expenditures
will increase over the next few years as the Company  continues  clinical trials
of its medical  products,  develops  additional  applications for its lasers and
delivery  systems and develops  commercial  applications  for unique  electronic
interconnect packaging.

         General and  Administrative  expenses  increased to $13,793,418 (28% of
revenues) for the nine months ended  September 30, 1996, from $4,203,362 (27% of
revenues) for the nine months ended  September  30, 1995.  This 228% increase is
primarily   attributable   to   acquisitions   and  the  transition  of  certain
subsidiaries from the development stage to



                                      -18-





commercialization  combined with the increased administrative resources required
at the  Company's  corporate  offices  to oversee  the  growth of the  Company's
medical and electronic  business segments.  In the medical segment,  the Company
acquired  Tissue and  expanded it general and  administrative  support  staff at
Spectrum to accommodate the forecasted  growth in the fourth quarter of 1996 and
in 1997. In the electronics  segment,  the Company's Dynaco subsidiary  acquired
Comtel and formed Dynamem, Inc. Additionally, the Company's Nexar subsidiary has
expanded its executive,  administrative  and finance  staffs to support  Nexar's
growing operations.  The Company has continued to increase its support staffs in
anticipation  of several new product  introductions  in 1996.  All the Company's
subsidiaries maintain their own general and administrative support staffs.

         Selling  and  Marketing   expenses  increased  to  $6,338,865  (13%  of
revenues) for the nine months ended  September 30, 1996, from $1,696,154 (11% of
revenues)  for the nine months  ended  September  30, 1995.  This 274%  increase
reflects  expansion  through  acquisitions and new product lines. In the medical
segment,  this increase is  attributable  to the Company's  Spectrum  subsidiary
increasing its sales and marketing expenditures to coincide with the addition of
two new product lines. In the electronics  segment,  this increase  reflects the
change in focus of the Company's Nexar  subsidiary  from product  development to
selling and marketing its proprietary upgradeable PC.

         Business Development and Financing Costs increased to $2,419,476 (5% of
revenues) for the nine months ended  September 30, 1996,  from $1,354,080 (9% of
revenues)  for the nine months ended  September  30, 1995.  This 79% increase is
attributable to the Company's continuing  acquisitions and financing activities.
The  Company  anticipates  that  it will  continue  to  expend  funds  to  raise
additional  sources of  financing  and to focus its  efforts  to  acquire  other
technologies to broaden its scope of product  applications  and services in both
the medical and electronic business segments.

         Pooling-of-Interest expenses totaled $443,780 for the nine months ended
September 30, 1996 and are comprised of  professional  fees  associated with the
merger of Tissue and the Company.

         Interest  expense  increased  to  $1,248,986  for the nine months ended
September 30, 1996,  from $899,394 for the nine months ended September 30, 1995.
This 39% increase is primarily the result of the issuance of acquisition debt in
April 1995 to purchase Spectrum,  the issuance of 8% convertible  debentures and
the issuance of the 4.5% Swiss Franc convertible debentures in July 1996.

         Interest  income  increased  to  $1,847,345  for the nine months  ended
September 30, 1996,  from $734,456 for the nine months ended September 30, 1995.
This  increase is primarily the result of interest  received from  subscriptions
receivable  and other loans and  investments  made as a result of the  Company's
improved cash position.

         Other  Income  represents  realized  and  unrealized  trading  gains of
$2,548,629  for the nine months  ended  September  30, 1996 and net realized and
unrealized trading losses of $7,950 for the nine months ended September 30, 1995
 . The realized  gains  resulted from the sale of certain  marketable  securities
during the year. It is the Company's  intention to continue to invest in trading
securities,  which  may  result  in  additional  trading  gains or losses in the
future.

         Minority  interest in loss of  subsidiary  decreased to $47,059 for the
nine months ended  September  30,  1996,  from $76,322 for the nine months ended
September 30, 1995.

         The Company has not recorded a deferred  tax benefit for net  operating
losses as the utilization of such losses is uncertain.

LIQUIDITY AND CAPITAL RESOURCES

         As of September 30, 1996,  the Company had  $24,305,339  in cash,  cash
equivalents and trading  securities.  During the nine months ended September 30,
1996, the Company generated approximately  $3,276,380,  $30,913,397,  $7,669,441
and  $6,876,830 in net proceeds  from the sale of its common stock,  the sale of
its  preferred  stock,  the  issuance  of 4.5%  convertible  debentures  and the
exercise of stock options and warrants, respectively.



                                      -19-





         The  Company's  net loss for the nine months ended  September 30, 1996,
included  the  following   noncash  items:   $2,380,297  of   depreciation   and
amortization expense;  $117,105 of interest expense relating to the amortization
of the discounts on the convertible  debentures;  and $903,584 related to common
stock  and  warrants   issued  to   non-employees   and   consultants  of  which
approximately  $600,000  results  from the  issuance of warrants for services in
accordance with SFAS No. 123.

         The Company  anticipates  that capital  expenditures  for the remaining
three  months of 1996 will total  approximately  $1,000,000.  The  Company  will
finance these  expenditures  with cash on hand or the Company will seek to raise
additional  funds.  However,  there can be no assurance that the Company will be
able to raise the funds.

         Dynaco has a three-year  revolving credit and security agreement with a
financial  institution.  The  agreement  provides  for  the  revolving  sale  of
acceptable accounts receivable, as defined in the agreement, with recourse up to
a maximum  commitment of  $3,000,000.  As of September  30, 1996,  the amount of
accounts  receivable sold that remained  uncollected  totaled  $1,160,709 net of
related  reserves  and  fees,  as  defined  in the  agreement.  This  amount  is
classified  as a  revolving  line of  credit  in the  accompanying  consolidated
balance  sheet as of September 30, 1996.  The interest rate on such  outstanding
amounts is the bank's  prime rate (8.25% at September  30, 1996) plus 1.5%,  and
interest is payable monthly in arrears.  The financing is  collateralized by the
purchased accounts receivable and substantially all of Dynaco's assets.

         Some of the  Company's  medical  products  businesses  are still in the
development   stage,  with  significant   research  and  development  costs  and
regulatory constraints that currently limit sales of its medical products. These
activities  are an important  part of the Company's  business  plan.  Due to the
nature of clinical  trials and research and  development  activities,  it is not
possible to predict with any certainty  the  timetable  for  completion of these
research  activities  or the total amount of funding  required to  commercialize
products  developed as a result of such  research and  development.  The rate of
research  and the number of research  projects  underway  are  dependent to some
extent upon external funding. While the Company is regularly reviewing potential
funding  sources in relation to these  ongoing and proposed  research  projects,
there can be no  assurance  that the  current  levels of funding  or  additional
funding  will be  available,  or, if  available,  on terms  satisfactory  to the
Company.

         The Company also makes early stage investments in core technologies and
companies that management feels are strategic to the Company's  business or will
yield a higher  than  average  financial  return to support the  Company's  core
business.  Some of these investments are with companies that are related to some
of the directors and officers of the Company. In addition,  the Company has made
loans to various  affiliated  parties.  See  "Related  Party  Transactions".  At
September 30, 1996, the Company had $5,001,389 of such related party investments
and loans.

         The Company has had significant losses to date and expects these losses
to continue for the near future.  Therefore, the Company must continue to secure
additional  financing  to complete  its  research  and  development  activities,
commercialize  its current and proposed  medical  products  segment,  expand its
electronic  products  segment,  execute its  acquisition  business plan and fund
ongoing  operations.  The Company  believes that the cash generated to date from
its financing  activities and amounts  available under its credit agreement will
be sufficient to satisfy its working capital  requirements  through at least the
next twelve months. However, there can be no assurance that events in the future
will not require the Company to seek additional  financing  sooner.  The Company
continues to investigate several financing alternatives, strategic partnerships,
additional bank financing,  private debt and equity financing and other sources.
The Company believes that it has adequate cash reserves or will be successful in
obtaining  additional  financing in order to fund current operations in the near
future.

FACTORS THAT MAY AFFECT FUTURE RESULTS

         From time to time,  information  provided by the Company or  statements
made by its employees may contain "forward-looking" information, as that term is
defined in the Private  Securities  Litigation  Reform Act of 1995 (the  "Act").
This report may also contain  information  that is deemed to be forward  looking
information  under the Act. The Company cautions  investors that there can be no
assurance that actual results or business  conditions will not differ materially
from those projected or suggested in such forward-looking statements as a result
of various factors, including but not limited to the following:



                                      -20-





         The Company's future operating  results are dependent on its ability to
         develop,  produce and achieve FDA approval for certain medical products
         and market new and innovative products and services. There are numerous
         risks inherent in this complex process,  including rapid  technological
         change and the requirement that the Company bring to market in a timely
         fashion new products and services which meet customers' changing needs.

         The Company and certain of its  subsidiaries  have a history of losses,
         and the Company expects its losses to continue. The Company must secure
         additional   financing  to  complete   its  research  and   development
         activities,  commercialize  its current and proposed medical  products,
         expand  its  current  non-medical  business,  execute  its  acquisition
         business plan and fund ongoing operations.

         The  Company's  business  segments  operate  in  a  highly  competitive
         environment  and  in  highly  competitive  industries,   which  include
         significant  competitive  pricing pressures and intense competition for
         skilled employees.

         The  market  price of the  Company's  securities  could be  subject  to
         fluctuations in response to quarter to quarter  variations in operating
         results, changes in analysts' earnings estimates,  market conditions in
         the  information  technology  industry,  as  well as  general  economic
         conditions and other factors external to the Company.








                      [This space intentionally left blank]







                                      -21-





                           PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS
         -----------------

         On March 14, 1996,  the Company was served with a summons and complaint
with respect to Commonwealth Associates v. Palomar Medical Technologies, Inc., a
purported  breach of contract action brought in the United States District Court
for the Southern  District of New York.  The complaint  alleges  violations of a
letter agreement pursuant to which Commonwealth Associates was to render certain
services to the Company  and the Company was to pay certain  dollar  amounts and
issue a warrant to purchase shares of the Company's Common Stock to Commonwealth
Associates.  The Company  intends to assert defenses  vigorously.  The extent of
exposure of the Company cannot be determined at this time.

ITEM 2.  CHANGES IN SECURITIES
         ---------------------
         Not applicable

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES
         Not applicable

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
         ---------------------------------------------------

         On July 19, 1996, the Company held a Special  Meeting of  Stockholders.
At the Special Meeting the  Stockholders  (i) ratified and approved an amendment
to increase the number of  authorized  shares of the Company from  45,000,000 to
105,000,000  shares,  of which  100,000,000 are common stock with a par value of
$.01 per share and 5,000,000  are  preferred  stock with a par value of $.01 per
share;  (ii)  ratified and approved the  Company's  1996 Stock Option Plan;  and
(iii) ratified and approved the Company's 1996 Employee Stock Purchase Plan.

ITEM 5.  OTHER INFORMATION
         -----------------
         Not applicable

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

     (a)  Exhibits

<TABLE>
<CAPTION>
             Exhibit
               No.                                                     Title
          ---------------      ----------------------------------------------------------------------------------------
<S>        <C>              <C>                         
              10(ss)           Key Employment Agreement dated as of May 1, 1996, between the Company
                               and Ronald G. Wheeland
              10(tt)           Certificate of Designation of Series F Convertible Preferred Stock dated, July 12, 1996
              10(uu)           Securities Purchase Agreement between the Company and The Travelers Insurance
                               Company, dated July 12, 1996
              10(vv)           Warrant to purchase Common Stock of the Company, dated July 12, 1996
              10(ww)           Certificate of Designation of Series G Convertible Preferred Stock, dated
                               September 26, 1996
              10(xx)           Subscription Agreement between the Company and Genesee Fund Limited, dated
                               September 26, 1996
              10(yy)           Registration Rights Agreement between the Company and Genesee Fund Limited,
                               dated September 26, 1996
              10(zz)           Warrant to purchase Common Stock of the Company, dated September 27, 1996
             10(aaa)           Warrant Agreement between Palomar Medical Technologies, Inc. and American
                               Stock Transfer & Trust Co. as warrant agent, dated June 24, 1996
             10(bbb)           Palomar Medical Technologies, Inc. and American Stock Transfer & Trust
                               Company as  trustee,  Indenture  dated as of June 24, 1996, SF 25,000,000, 
                               4.5% Convertible Subordinated Debentures due 2003
</TABLE>

     (b)  Reports on Form 8-K.
         None


                                      -22-





                                   SIGNATURES

         Pursuant  to the  requirements  of the  Securities  Act  of  1934,  the
Registrant  certifies  that it has caused this Report to be signed on its behalf
by the  undersigned,  thereunto duly  authorized,  in the Town of Beverly in the
Commonwealth of Massachusetts on November 13, 1996.

                                      PALOMAR MEDICAL TECHNOLOGIES, INC.
                                      ----------------------------------
                                                (Registrant)



DATE:  November 13, 1996              By: /s/ Steven Georgiev
                                          -------------------------------------
                                          Steven Georgiev
                                          Chief Executive Officer and Chairman
                                          of the Board

DATE:  November 13, 1996                 /s/ Joseph P. Caruso
                                         --------------------------------------
                                         Joseph P. Caruso
                                         Vice President, Chief Financial Officer
                                         (Principal Financial Officer)




                                      -23-