FORM 10-Q

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

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

                    For quarterly period ended March 31, 1997

                                       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


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

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


                     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 May 9, 1997,  32,634,923  shares of Common Stock,  $.01 par value per
share, were outstanding.

     Transitional Small Business Disclosure Format (check one): Yes____ No X

                                                                   Page 1 of ___
<PAGE>
                                       2


               PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES

                                      INDEX


PART I - FINANCIAL INFORMATION
<TABLE>
<S>                                                                                              <C>
         ITEM 1.  FINANCIAL STATEMENTS

         Consolidated Condensed Balance Sheets - December 31, 1996 and March 31, 1997            P.  3

         Consolidated Statements of Operations - For the Three Months Ended                      
                  March 31, 1996 and 1997                                                        P.  4

         Consolidated Statements of Stockholders' Equity - For the Three Months 
                  Ended  March 31,  1997                                                         P.  5

         Consolidated Statements of Cash Flows - For the Three Months Ended
                  March 31, 1996 and 1997                                                        P.  6

         Notes to Consolidated Financial Statements                                              P.  8

     ITEM 2.  MANAGEMENT'S  DISCUSSION  AND ANALYSIS OF FINANCIAL  CONDITION AND
     RESULTS OF OPERATIONS                                                                       P. 15

PART II - OTHER INFORMATION

         ITEM 1.  LEGAL PROCEEDINGS                                                              P. 19

         ITEM 2.  CHANGES IN SECURITIES                                                          P. 19

         ITEM 3.  DEFAULTS UPON SENIOR SECURITIES                                                P. 20

         ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                            P. 20

         ITEM 5.  OTHER INFORMATION                                                              P. 20

         ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K                                               P. 20

SIGNATURES                                                                                       P. 21

</TABLE>
<PAGE>
                                       3


                       PALOMAR MEDICAL TECHNOLOGIES, INC.

                      CONSOLIDATED CONDENSED BALANCE SHEETS
                                   (Unaudited)
<TABLE>
<CAPTION>
<S>    <C>                                                                           <C>                     <C>

                                                                                       December 31,         March 31,
                                                                                        1996                   1997
                                                                                   ---------------        ---------------
ASSETS

CURRENT ASSETS:
       Cash and cash equivalents                                                      $16,172,731            $17,661,622
       Marketable securities                                                            2,893,792              4,127,472
       Accounts receivable, net                                                        18,308,077             19,851,315
       Inventories, net                                                                18,790,484             21,004,585
       Loans to officers                                                                  995,331                958,850
       Notes receivable related parties                                                   464,153              1,117,487
       Other notes receivable                                                             899,937                883,406
       Other current assets                                                             7,623,161              2,199,641
                                                                                   ---------------        ---------------
           Total current assets                                                        66,147,666             67,804,378
                                                                                   ---------------        ---------------

PROPERTY AND EQUIPMENT, AT COST, NET                                                    8,404,605             10,570,927
                                                                                   ---------------        ---------------

OTHER ASSETS:
       Cost in excess of net assets acquired, net                                       5,024,299              4,837,742
       Intangible assets, net                                                           2,286,058              2,115,158
       Deferred costs                                                                   2,895,803              3,439,978
       Long-term investments                                                            3,179,554              5,381,485
       Loan to related party                                                            1,100,000                802,000
       Other assets                                                                     1,719,211              1,504,011
                                                                                   ---------------        ---------------
           Total other assets                                                          16,204,925             18,080,374
                                                                                   ---------------        ---------------

                                                                                      $90,757,196            $96,455,679
                                                                                   ===============        ===============

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
       Revolving lines of credit                                                       $4,558,052             $5,387,023
       Current portion of long-term debt                                                2,783,683              2,609,928
       Accounts payable                                                                14,464,285             15,235,908
       Accrued expenses                                                                14,669,893             20,101,740
                                                                                   ---------------        ---------------
           Total current liabilities                                                   36,475,913             43,334,599
                                                                                   ---------------        ---------------

LONG-TERM DEBT, NET OF CURRENT PORTION                                                 16,204,692             20,902,840
                                                                                   ---------------        ---------------

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
       Preferred stock, $.01 par value-                                                       182                    198
           Authorized - 5,000,000  shares Issued and outstanding - 18,151 shares
           and 19,707 shares at December 31, 1996 and March 31, 1997
       Common stock, $.01 par value-                                                      305,968                320,144
           Authorized - 100,000,000 shares
           Issued and outstanding - 30,596,812 shares
           and 32,014,404 shares at December 31, 1996 and March 31, 1997
       Additional paid-in capital                                                     104,900,551            114,143,149
       Accumulated deficit                                                           (64,971,200)           (80,631,341)
       Unrealized (loss) gain on marketable securities                                  (342,500)                102,500
       Subscriptions receivable from related party                                      (604,653)              (504,653)
       Less: Treasury Stock (200,000 shares at cost)                                  (1,211,757)            (1,211,757)
                                                                                   ---------------        ---------------
           Total stockholders' equity                                                  38,076,591             32,218,240
                                                                                   ---------------        ---------------

                                                                                      $90,757,196            $96,455,679
                                                                                   ===============        ===============
</TABLE>

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

<PAGE>
                                       4


                       PALOMAR MEDICAL TECHNOLOGIES, INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (Unaudited)


<TABLE>
<CAPTION>
<S>     <C>                                                 <C>               <C>


                                                              Three Months Ended March 31,
                                                            ----------------------------------
                                                                 1996              1997
                                                            ---------------   ----------------

REVENUES                                                        $6,925,001        $20,126,438

COST OF REVENUES                                                 7,283,766         20,006,222
                                                            ---------------   ----------------

        Gross (loss) profit                                      (358,765)            120,216
                                                            ---------------   ----------------

OPERATING EXPENSES

        Research and development                                 1,716,803          2,847,806
        Sales and marketing                                      1,567,138          3,250,412
        General and administrative                               3,397,681          5,328,785
        Business development
             and other financing costs                             497,273            656,239
        Settlement and Litigation Costs                            258,973          3,150,000
                                                            ---------------   ----------------

                Total operating expenses                         7,437,868         15,233,242
                                                            ---------------   ----------------

                Loss from operations                           (7,796,633)       (15,113,026)

INTEREST EXPENSE                                                 (324,682)        (1,664,777)

INTEREST INCOME                                                    606,194            198,254

NET GAIN ON TRADING SECURITIES                                     115,084          1,079,917

OTHER INCOME                                                        30,575            134,487
                                                            ---------------   ----------------


        NET LOSS                                              $(7,369,462)      $(15,365,145)
                                                            ===============   ================

 NET LOSS PER COMMON SHARE                                         $(0.33)            $(0.50)
                                                            ===============   ================

WEIGHTED AVERAGE NUMBER OF
    COMMON SHARES OUTSTANDING                                   22,239,301         31,037,426
                                                            ===============   ================

</TABLE>

              The accompanying notes are an integral part of these
                       consolidated financial statements.
<PAGE>
                                       5


                       PALOMAR MEDICAL TECHNOLOGIES, INC.

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                                   (Unaudited)

<TABLE>
<CAPTION>
<S>     <C>                                                 <C>          <C>    <C>  <C>           <C>       <C>       <C>

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

BALANCE, DECEMBER 31, 1996                                        18,151    $182     30,596,812    $305,968  (200,000) ($1,211,757)

       Sale of common stock pursuant to warrants and              --         --         319,879       3,199     --          --
                 options
       Payments received on subscriptions receivable              --         --         --          --          --          --
       Issuance of preferred stock                                 6,000     60         --          --          --          --
       Issuance of common stock for 1996 employer
                401(k) matching contribution                      --         --          41,425         414     --          --
       Conversion of preferred stock                             (4,444)    (44)        695,683       6,957     --          --
       Conversion of convertible debentures                       --         --         353,191       3,532     --          --
       Issuance of common stock for investment banking
                 and merger and acquisition consulting
       services                                                   --         --           5,000          50     --          --
       Value ascribed to the discount feature of convertible
                 debentures issued                                --         --         --          --          --          --
       Issuance of common stock for 1997 Employee
                 Stock Purchase Plan                              --         --           2,414          24     --          --
       Compensation expense related to warrants issued
                 to non-employees under Statement
                 of Financial Accounting Standards No. 123        --         --         --          --          --          --
       Unrealized gain on marketable securities                   --         --         --          --          --          --
       Preferred stock dividends                                  --         --         --          --          --          --
       Net loss                                                   --         --         --          --          --          --
                                                              ---------------------------------------------------------------------

BALANCE, MARCH 31, 1997                                           19,707    $198     32,014,404    $320,144   (200,000)($1,211,757)
                                                              =====================================================================
</TABLE>
<TABLE>
<CAPTION>
<S>     <C>    <C>    <C>    <C>    <C>    <C>
                                                            Additional  Accumulated   Unrealized (Loss)                 Total
                                                              Paid-in     Deficit    Gain on Marketable  Subscription Stockholders'
                                                              Capital                    securities       Receivable      Equity
                                                            -----------------------------------------------------------------------

BALANCE, DECEMBER 31, 1996                                  $104,900,551 ($64,971,200)   ($342,500)       ($604,653)   $38,076,591

    Sale of common stock pursuant to warrants and
              options                                            584,429    --               --               --           587,628
    Payments received on subscriptions receivable              --           --               --             100,000        100,000
    Issuance of preferred stock                                5,699,940    --               --               --         5,700,000
    Issuance of common stock for 1996 employer
              401(k) matching contribution                       268,848    --               --               --           269,262
    Conversion of preferred stock                                179,579    --               --               --           186,492
    Conversion of convertible debentures                       1,504,131    --               --               --         1,507,663
    Issuance of common stock for investment banking
              and merger and acquisition consulting
              services                                            38,075    --               --               --            38,125
    Value ascribed to the discount feature of convertible
              debentures issued                                  787,582    --               --               --           787,582
    Issuance of common stock for 1997 Employee Stock
              Purchase Plan                                       13,525    --               --               --            13,549
    Compensation expense related to warrants issued to
              non-employees under Statement of Financial
              Accounting Standards No. 123                       166,489    --               --               --           166,489
    Unrealized gain on marketable securities                       --       --            445,000             --           445,000
    Preferred stock dividends                                      --        (294,996)       --               --          (294,996)
    Net loss                                                       --     (15,365,145)       --               --       (15,365,145)
                                                            -----------------------------------------------------------------------
BALANCE, MARCH 31, 1997                                     $114,143,149 ($80,631,341)    $102,500       ($504,653)     $32,218,240
                                                            =======================================================================
</TABLE>


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

<PAGE>

                                       6


                       PALOMAR MEDICAL TECHNOLOGIES, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)
                                   (Continued)
<TABLE>
<CAPTION>
<S>  <C>                                                                   <C>               <C>

                                                                              Three Months Ended March 31,
                                                                            ---------------------------------
                                                                                1996              1997
                                                                            --------------   ----------------
CASH FLOWS FROM OPERATING ACTIVITIES
     Net loss                                                                $(7,369,462)      $(15,365,145)
     Adjustments to reconcile net loss to net cash
         used in operating activities-
         Depreciation and amortization                                           570,710          1,078,556
         Settlement and litigation costs                                         --               2,500,000
         Write-off of in-process research and development                         57,212          --
         Write-off of deferred financing costs associated with
             redemption of convertible debentures                                --                  27,554
         Valuation allowances for notes and investments                          --                 250,000
         Minority interest in loss of subsidiary                                 (30,572)          --
         Foreign currency exchange gain                                          --                (548,552)
         Noncash interest expense related to convertible debentures               16,538          1,025,865
         Noncash compensation related to common stock and warrants                36,724            204,614
         Realized gain on marketable securities                                 (164,640)          --
         Unrealized gain on marketable securities                                 49,496         (1,079,886)
         Changes in assets and liabilities, net of effects
             from business combinations;
             Purchases of marketable securities                                 (780,056)          (146,294)
             Sale of marketable securities and
                   interest received on marketable securities                     616,860          --
             Accounts receivable                                                   34,314        (1,543,238)
             Inventories                                                       (2,452,661)       (2,214,101)
             Other current assets and loans to officers                          (793,722)          (23,468)
             Accounts payable                                                   2,333,136           906,623
             Accrued expenses                                                      65,008           868,403
                                                                            --------------   ----------------
                   Net cash used in operating activities                       (7,811,115)      (14,059,069)
                                                                            --------------   ----------------

CASH FLOWS FROM INVESTING ACTIVITIES
     Cash paid for purchase of Comtel Electronics, Inc., net of cash             (146,586)          --
     acquired
     Net proceeds received from sale of subsidiary stock                         --               3,925,000
     Purchases of property and equipment                                         (631,344)       (2,808,339)
     Increase in intangible assets                                               (325,000)          --
     (Increase) decrease in other assets                                         (381,694)          215,200
     Loans to related parties                                                  (3,113,116)       (1,250,000)
     Deferred offering costs                                                     --               (199,541)
     Payments received on loans to related parties                              1,421,467           500,000
     Investment in nonmarketable securities                                    (1,150,000)       (1,764,431)
                                                                            --------------   ----------------
                   Net cash used in investing activities                       (4,326,273)       (1,382,111)
                                                                            --------------   ----------------
<PAGE>
                                       7


CASH FLOWS FROM FINANCING ACTIVITIES
     Proceeds from issuance of convertible debentures                              --             10,225,169
     Proceeds from issuance notes payable                                          21,816            --
     Redemption of convertible debentures                                          --               (196,000)
     Payments of notes payable and capital lease obligations                     (319,350)          (229,246)
     Net (payments) proceeds from revolving lines of credit                      (47,282)            828,971
     Proceeds from sale of common stock                                        2,860,130              13,549
     Exercise of warrants and stock options                                    3,751,637             587,628
     Issuance of preferred stock                                               5,964,224           5,700,000
     Payment of contingent note payable                                         (500,000)            --
     Redemption of preferred stock, including accrued dividends of            (3,123,152)            --
     $71,223
     Payments received on subscriptions receivable                             1,988,709             --
                                                                            --------------   ----------------
                   Net cash provided by financing activities                  10,596,732          16,930,071
                                                                            --------------   ----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                          (1,540,656)          1,488,891
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                  17,138,178          16,172,731
                                                                            --------------   ----------------
CASH AND CASH EQUIVALENTS, END OF YEAR                                       $15,597,522         $17,661,622
                                                                            ==============   ================

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
     Cash paid for interest                                                      $90,127            $263,843
                                                                            ==============   ================

SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING AND INVESTING ACTIVITIES:
     Conversion of convertible debentures and related accrued
         interest, net of financing                                              $--              $1,507,663
         fees
                                                                            ==============   ================

     Amortization of deferred financing costs                                    $32,500            $--
                                                                            ==============   ================

     Conversion of preferred stock                                              $233,842            $186,492
                                                                            ==============   ================

     Dividends payable                                                          $243,122            $294,996
                                                                            ==============   ================

     Issuance of common stock for employer 401(k)
         matching contribution                                                  $160,598            $269,262
                                                                            ==============   ================

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)          $--
                                                                            ==============   ================
</TABLE>

<PAGE>
                                       8

                       PALOMAR MEDICAL TECHNOLOGIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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 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,  as amended,  as of and for the year
ended December 31, 1996.

     The Company has incurred  significant  losses since inception.  The Company
continues to seek  additional  financing  from issuances of common stock and/ or
other prospective  sources in order to fund future  operations.  The Company has
financed  current  operations,  expansion  of  its  core  business  and  outside
short-term financial  investments primarily through the private sale of debt and
equity securities of the Company.  The Company  anticipates that it will require
additional  financing  throughout  the year to continue to fund  operations  and
growth.  The Company may from time to time be required to raise additional funds
through  additional  private  sales of the Company's  debt or equity  securities
and/or the  liquidation  of some of its  marketable  and long-term  investments.
Sales of  securities  to private  investors are sold at a discount to the public
market for similar securities. It has been the Company's experience that private
investors  require  that the  Company  make its best  effort to  register  these
securities for resale to the public at some future time.


2.   INVESTMENTS

     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 other factors . The
amount that the Company realizes from these investments may differ significantly
from the amounts recorded in the accompanying  unaudited  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  positive  intent and  ability to hold to maturity  will be
reported at amortized cost and are classified as held-to-maturity. There were no
held-to-maturity  securities  as of  December  31,  1996  and  March  31,  1997.
Securities  purchased to be held for indefinite periods of time and not intended
at  the  time  of  purchase  to  be  held  until   maturity  are  classified  as
available-for-sale  securities.  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 included  currently in the accompanying  unaudited  statements of
operations.

<PAGE>
                                       9

<TABLE>
<CAPTION>
<S>                                                        <C>           <C>   <C>    <C>             <C>

                                                                               March 31, 1997
                                                           -------------------------------------------------------
                                                                            Gross         Gross
                                                            Amortized    Unrealized    Unrealized        Fair
                                                              Costs         Gain          Loss           Value
                                                           ------------  ------------  ------------   ------------
             Trading Securities:
                    Investments in publicly
                    traded companies                        $1,849,412    $2,442,197      $164,137     $4,127,472
                                                           ------------  ------------  ------------   ------------

             Available-for-Sale:
                    Investments in publicly
                    traded companies                        $1,000,000      $102,500       ---         $1,102,500
                                                           ------------  ------------  ------------   ------------
                    Total                                   $2,849,412    $2,544,697      $164,137     $5,229,972
                                                           ============  ============  ============   ============

</TABLE>



3.   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>
<S>                        <C>                                    <C>                  <C>

                                                                    December 31,          March 31,
                                                                        1996                1997
                                                                   ----------------    ----------------
                           Raw materials                               $13,266,204         $15,396,664
                           Work in process and finished goods            5,524,280           5,607,921
                                                                   ----------------    ----------------
                                                                       $18,790,484         $21,004,585
                                                                   ================    ================

</TABLE>
<PAGE>
                                       10


4.   PROPERTY AND EQUIPMENT

     Property and Equipment consist of the following:
<TABLE>
<CAPTION>
<S>                         <C>                                    <C>                  <C>

                                                                     December 31,          March 31,
                                                                         1996                1997
                                                                    ----------------    ----------------

                            Equipment under capital leases             $2,261,339          $2,517,652
                            Machinery and equipment                     5,429,764           6,922,410
                            Furniture and fixtures                      1,926,948           2,951,325
                            Leasehold improvements                      1,160,814           1,207,020
                                                                   ----------------    ----------------
                                                                       10,778,865          13,598,407

                            Less:  Accumulated depreciation

                                       and amortization                 2,374,260           3,027,480
                                                                    ----------------    ----------------

                                                                       $8,404,605         $10,570,927
                                                                    ================    ================
</TABLE>


5.   ACCRUED EXPENSES

     Accrued Expenses consist of the following:
<TABLE>
<CAPTION>
<S>                      <C>                                        <C>                 <C>

                                                                     December 31,         March 31,
                                                                         1996                1997
                                                                    ----------------    ---------------

                          Payroll and consulting costs                 $3,456,311         $2,353,128
                          Professional fees                               961,815          1,157,649
                          Settlement Costs                              1,755,000          5,231,000
                          Warranty                                      2,854,401          2,968,172
                          Other                                         5,642,366          8,391,791
                                                                    ----------------    ---------------
                              Total                                   $14,669,893        $20,101,740
                                                                    ================    ===============
</TABLE>


6.   NET LOSS PER COMMON SHARE

     For the three  months  ended March 31,  1996 and 1997,  net loss per common
share has been  computed by dividing  the 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.

     In March of 1997,  SFAS No.  128,  EARNINGS  PER SHARE,  was  issued  which
established new standards for calculating and presenting earnings per share. The
Company is required to adopt this new standard in its 1997 financial statements.
In accordance  with this new standard, basic and diluted  earnings per share for
the  three  months  ended  March  31,  1996  and  1997 are  $(.33)  and  $(.50),
respectively.

<PAGE>
                                       11

7.   NOTES PAYABLE AND DEMAND LINE OF CREDIT

     Notes payable consist of the following:
<TABLE>
<CAPTION>
<S>                                                                                                <C>              <C>

                                                                                                    December 31,      March 31,
                                                                                                        1996            1997
                                                                                                   ---------------  --------------
Dollar denominated convertible debentures                                                              $7,288,063     $12,785,458
Swiss franc denominated convertible debentures                                                          7,222,846       6,474,447
7% Notes payable                                                                                          244,782         244,782
7.4% to 21% Capital lease obligations, maturities ranging from August 1997 to May 2001                  2,290,847       2,369,361
Present value of notes payable, discounted at 8%, maturities ranging from February 1996 to
     February 1998                                                                                        337,606         141,836
Note payable in connection with the Spectrum Medical Technologies, Inc. ("Spectrum")
     acquisition, interest at the prime rate (8.5%
     at March 31, 1997) plus 1%, due April 1997                                                           150,000         150,000
Bridge notes payable due in June 1997, interest at prime (8.5% at March 31, 1997) plus 2%.              1,200,000       1,200,000


Other notes payable                                                                                       254,231         146,884
                                                                                                   ---------------  --------------
                                                                                                       18,988,375      23,512,768
Less - current maturities                                                                               2,783,683       2,609,928
                                                                                                   --------------   --------------
                                                                                                      $16,204,692     $20,902,840
                                                                                                   ===============  ==============
</TABLE>

     On  January  13,  1997 the  Company  issued  $1,000,000  of 5%  convertible
debentures.  The convertible debentures have a conversion price which represents
a discount of 15% from the price of the  Company's  common  stock at the time of
conversion.  The Company has  ascribed a value of $176,471  for the 15% discount
conversion feature.

     On  March  10,  1997  the  Company  issued  $5,500,000  of  5%  convertible
debentures.  The convertible  debentures have a conversion  price of 100% of the
Company's  average stock price, as defined,  within the first 90 days and 90% of
the average stock price, as defined, thereafter. In addition, after 90 days, the
debentureholder  may  convert  no more than 1/3 of the  debenture  in any 30 day
period.  The Company has  ascribed a value of  $611,111  for the 10%  conversion
discount.

     The Company has  credited  this  ascribed  value for the  discount  feature
described  above  to  additional  paid-in  capital,  and  this  amount  is being
amortized  to  interest  expense  over  the  expected  life  of the  convertible
debenture.  In  addition,  the  Company  incurred  deferred  financing  costs of
$375,000  relating to the  issuance of these  debentures.  These costs have been
reflected in deferred costs in the accompanying consolidated balance sheet as of
March  31,  1997 and are  amortized  to  interest  expense  over the term of the
related convertible  debentures.  Any remaining  unamortized  deferred financing
costs are recorded to additional paid-in capital upon conversion.

     On March 13, 1997 the Company issued $500,000 of 6% convertible debentures.
The convertible debentures have a conversion price of $11.00. In addition, after
90 days,  the  debentureholder  may convert no more than 1/3 of the debenture in
any 30 day period. The Company has accounted for these debentures at face value.

     During the first quarter, the Company's Comtel Electronics, Inc. ("Comtel")
subsidiary failed to satisfy certain financial  covenants for its line of credit
with a bank due on November 30, 1998. The total amount  outstanding at March 31,
1997 was $3,588,562.  The Company has had discussions  with this bank subsequent
to quarter  end to amend  these  financial  covenants  so that Comtel will be in
compliance.  Since Comtel does not have a definitive agreement,  the Company has
classified  the amount  outstanding  in current  liabilities as a demand line of
credit.


<PAGE>
                                       12


8.   STOCKHOLDERS' EQUITY

     (a)  OPTIONS

          During  the three  months  ended  March 31,  1997 the  Company  issued
options  to  purchase  10,000  shares of  common  stock at $6.50 per share to an
employee. One individual exercised an option to purchase 25,000 shares of common
stock at a price of $3.00.  The total  proceeds  received  by the  Company  were
$75,000.

     (b)  EXERCISE OF WARRANTS

          During the three months ended March 31, 1997,  certain  warrantholders
exercised  warrants to purchase 289,192 shares of common stock at prices ranging
from $0.60 to $2.25.  The Company received total proceeds of $512,628 related to
the exercise of the warrants. In addition,  net warrants to purchase 5,687 share
of common stock were exercised in the first quarter ending March 31, 1997.

     (c)  RESERVED SHARES

          At March 31, 1997, the Company has reserved shares of its common stock
for the following:

                                                                    March 31,
                                                                      1997
                                                                 ---------------

             Convertible debentures                                  3,803,156
             Stock option plans                                      3,897,500
             Warrants                                                9,647,940
             Employee 401(k) plan                                      212,690
             Convertible Preferred stock                             3,287,176
                                                                 ---------------
                                   Total                            20,848,462
                                                                 ===============



     (d)  CONVERTIBLE PREFERRED STOCK

          On March 31, 1997, for  $6,000,000 the Company  completed the issuance
of 6,000 shares of Series H Convertible Preferred Stock ("Series H"). The Series
H preferred  stock accrues  interest at varying rates of 6% to 8% per annum,  as
defined.  The Series H  preferred  stock may be  converted  into  common  stock,
including  any accrued but unpaid  interest,  at 100% of the average stock price
for the first 179 days from the closing date, 90% of the average stock price for
the following 90 days and 85% of the average stock price thereafter. The average
stock  price for the Series H preferred  stock is the average  closing bid price
for the ten trading days  immediately  preceding the conversion  date, but in no
event less than  $6.00.  The  conversion  price is also  adjustable  for certain
antidilutive events, as defined. The holder is restricted for the first 209 days
following  the  closing  date to  converting  no more  than 33% of the  Series H
preferred  stock in any 30 day  period (or 34% in the last 30 day  period).  The
Company has not  ascribed any value to the  discount  conversion  feature of the
Series H. Under  certain  conditions,  the  Company  has the right to redeem the
Series H preferred stock.


9.   RELATED PARTY TRANSACTIONS

     Included  in current  assets at  December  31,  1996 and March 31,  1997 is
$1,459,484  and  $2,076,337,  respectively,  of notes  receivable  from  various
officers and related entities.  Also included in trading  securities at December
31,  1996  and  March  31,  1997 is a  $1,912,614  investment  and a  $2,781,984
investment,  respectively,  in a related entity. It is reasonably  possible that
the Company's  estimate that it will collect these  receivables  within one year
will change in the near term.

     The Board of Directors had  established a corporate loan policy under which
loans could 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, 1996 and March 

<PAGE>
                                       13


31, 1997, $578,680 and $629,149, respectively, with accrued interest at the rate
of 7% per annum,  was  outstanding  to  certain  officers/stockholders/directors
under the corporate  loan policy.  In addition,  subsequent to March 31, 1997, a
majority of the Company's  outside Board of Directors  approved  loans  totaling
$1,395,000  to two  executive  officers of the Company.  Both of these loans are
collateralized by certain stockholdings of these executive officers, as defined.

     At March 31, 1997, the Company had loans receivable of $51,363 and $134,000
from two officers of Dynaco Corp.,  which are evidenced by promissory  notes due
upon demand,  with accrued interest at the rate of 7%. The $134,000 is partially
collateralized  with a certain  amount of vested  stock  options in the  Company
owned by the officer  with a market price in excess of the  exercise  price.  At
March 31, 1997, the Company had an additional  loan  receivable for $75,000 from
an officer of Dynaco,  which is evidenced by a demand  promissory note and bears
interest at 7%.

     The Company has a $450,000 investment in a privately held retail company. A
director of the  Company's  underwriter,  H.J.  Meyers is also a director of the
investee company.  The Company has also prepaid investment banking fees totaling
$200,000 to the  underwriter.  During the three months ended March 31, 1997, the
Company  loaned this  director  amounts  totaling  $1,000,000.  These loans bear
interest at 12% per annum.  The director  paid back  $500,000 and the  remaining
$500,000 is fully  collateralized by an executive  officer's equity ownership in
an affiliated public company.

     During the three  months  ended March 31,  1997,  the  Company  invested an
additional  $250,000 in a privately held medical and cosmetic  services company.
The Company's cumulative investment as of March 31, 1997 totalled  approximately
$750,000 and represents  approximately 12% of the total equity ownership of this
company.  An officer of CTI is a director  of the  privately  held  company.  In
return for the  $250,000  investment,  the Company  received  250,000  shares of
common stock and a promissory  note for  $249,900  accruing  interest at 12% per
annum due on June 16, 1997.

10.  PRO FORMA INFORMATION

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

     Unaudited pro forma operating results for the Company,  assuming the Comtel
acquisition had been made as of January 1, 1996, are as follows:

<TABLE>
<CAPTION>
<S>                                                               <C>                 <C>
                                                                      Three Months Ended March 31,
                                                                  -------------------------------------
                                                                         1996               1997
                                                                  ------------------- ------------------
                              Revenue                                     $7,310,001        $20,126,438
                              Net loss                                  $(7,407,462)      $(15,365,145)
                              Net loss per common share                      $(0.33)            $(0.50)
</TABLE>

11.  COMMITMENTS

     The  Company  has issued  guarantees  to several  of its  subsidiaries  for
payment of trade  payables.  The total amount  guaranteed  at March 31, 1997 was
$1,225,000.

     The Company is a defendant in a lawsuit  filed by  Commonwealth  Associates
("Commonwealth")  on March 14, 1996 in the United States  District Court for the
Southern  District  of New York.  In its  suit,  Commonwealth  alleges  that the
Company  breached a contract  with  Commonwealth  in which  Commonwealth  was to
provide certain investment banking services in return for certain  compensation.
In January  1997,  Commonwealth's  motion for summary  judgment on its breach of
contract claim was granted.  Commonwealth is seeking up to $3,381,250 in damages
on  its  breach  of  contract  claim,   exclusive  of  interest.   A  ruling  on
Commonwealth's  damages  claim is  pending.  The  Company  intends to appeal the
matter if damages  are  awarded,  and  believes  its  grounds for appeal will be
meritorious.

     During the three  months  ended  March 31,  1997,  the  Company  accrued an
additional $2,500,000 related to the above matter and another $650,000 for other
smaller claims and litigation costs.

<PAGE>
                                       14


12.  SUBSEQUENT EVENT

     Subsequent to March 31, 1997, the Company  raised an additional  $7,000,000
through the issuance of 7,000 shares of Series H  Convertible  Preferred  Stock.
The Company  will  account for this  financing  in a method  similar to previous
preferred stock issuances and the terms are the same as the Series H Convertible
Preferred Stock described in Note 8(d).

     Subsequent  to March 31,  1997,  the Company  sold of all of its issued and
outstanding  common stock of its wholly  owned  subsidiary,  CD Titles,  Inc. In
exchange, the Company will receive three promissory notes for an aggregate total
of $600,000 and warrants to purchase  450,000  shares of common stock at various
exercise  prices  ranging from $6.00 to $10.00 per share.  The sale of CD Titles
did not have a material affect on the Company's financial position or results of
operations.

     On April 14, 1997 Nexar  Technologies,  Inc. ("Nexar") completed an initial
public  offering of  2,500,000  shares at $9.00 per share,  for net  proceeds of
$20,300,000.  As of the effective date of Nexar's initial public  offering,  the
Company  owned  6,100,000  shares of Nexar's  common stock and 45,684  shares of
Nexar's  convertible   preferred  stock.  The  convertible  preferred  stock  is
convertible  into  408,080  shares  of  Nexar's  common  stock.  Pursuant  to an
agreement  between  the  Company  and  Nexar,  1,200,000  common  shares  (  the
Contingent Shares) of the total 6,508,080 common and common equivalent shares of
Nexar that are owned by the Company are  subject to a mandatory  repurchase,  in
whole or part, by Nexar at $0.01 per share after the 48 month anniversary of the
initial public  offering of Nexar' common stock unless these shares are released
from escrow.  The  Contingent  Shares shall be placed in escrow,  subject to the
release  to the  Company  in  installments  of  400,000  shares  each  (upon the
achievement  of any 3 of the 4 milestones as specified in the agreement  between
the Company and Nexar).  The  milestones  are based on Nexar  achieving  certain
revenue and net income  levels as defined in the  agreement.  Subsequent  to the
initial public  offering the Company  purchased  300,000 shares of Nexar's newly
issued publicly  registered common stock for $2,700,000 from Nexar's underwriter
in a private placement transaction.
<PAGE>
                                       15

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

THREE MONTHS ENDED MARCH 31, 1997, COMPARED TO THREE MONTHS ENDED MARCH 31, 1996

     For the three  months  ended March 31,  1997,  the Company had  revenues of
$20,126,438 as compared to $6,925,001 for the three months ended March 31, 1996.
The 191%  increase  in  revenues  from the  quarter  ended March 31, 1996 to the
quarter  ended March 31,  1997 is  principally  due to  increased  sales  volume
generated in the  electronics  segment.  Net revenues by the Company's  business
segments are as follows:


                                                    Three months ended
                                                         March 31,
                                             -----------------------------------
                                              1996                     1997
                                             -----------------------------------
                  Medical                    $2,406,419            $  2,612,765
                  Electronics                 4,518,582              17,513,673
                                              ---------             -----------
                           Total             $6,925,001             $20,126,438
                                             ==========             ===========


     In the medical segment of the Company's business revenues were $2.6 million
for the quarter  ended March 31, 1997  compared to $2.4  million for the quarter
ended March 31, 1996. The increase of approximately  $206,000 or 8.6% was due to
additional  sales  volume at Spectrum  Medical  Technologies  Inc.  ("Spectrum")
associated with its EpiLaser(TM) product of approximately $1,267,000 offset by a
decline of approximately  $894,000 in sales volume at Tissue Technologies,  Inc.
("Tissue") for its TruPulse(R) laser product.  Spectrum began  manufacturing and
shipping its EpiLaser in the third and fourth  quarters of 1996.  The decline in
sales  volumes  at  Tissue  was  due  to  manufacturing  and  production  issues
associated with the CO2 tubes for the Company's  TruPulse  product.  The Company
anticipates that revenues from its medical segment will increase because in late
March 1997 the Company  obtained  clearance  from the FDA to sell and market the
EpiLaser  product  for hair  removal  in the United  States  and the  Company is
addressing  manufacturing  issues  related to its TruPulse  product and believes
that these production issues will be corrected in the near term.

     In the electronics segment of the Company's  business,  revenues were $17.5
million for the quarter  ended March 31, 1997  compared to $4.5  million for the
quarter ended March 31, 1996.  The increase of  approximately  $13.0 million was
principally  due to Nexar sales volume which  increased  to  $8,824,758  for the
three months ended March 31, 1997 from $117,468 for three months ended March 31,
1996.  Nexar  continues to increase its revenue since the  introduction in April
1996 of its proprietary  upgradeable PC. The overall increase in revenues in the
electronics  segment was also due to an increase in sales volume at Dynaco which
generated sales of approximately $8 million for the quarter ended March 31, 1997
compared to sales of approximately  $4.3 million for the quarter ended March 31,
1996.  This  increase  of $3.7  million was due to the  acquisition  of Dynaco's
Comtel subsidiary, acquired in March of 1996, and revenues of approximately $0.9
million for the quarter ended March 31,1997 from  Dynaco's  Dynamem  subsidiary,
which  manufactures  high  density  memory  modules  and had no revenue  for the
quarter ended March 31, 1996.

     Gross margin for the three  months  ended March 31,  1997,  was a profit of
$120,216 (0.6% of revenues) versus a loss of $358,765  ((19.6%) of revenues) for
the three months ended March 31, 1996.  Gross margin by the  Company's  business
segments are as follows:

                                                       Three months ended
                                                            March 31,
                                             ---------------------------------
                                                1996                     1997
                                             ---------------------------------
                  Medical                    $(316,911)            $  (271,261)
                  Electronics                   (41,854)                391,477
                                               --------               --------
                          Total              $(358,765)            $   120,216
                                              ==========            ===========

     The Company's  medical  products  business segment incurred a gross loss of
$271,261 for the three  months ended March 31, 1997  compared to a gross loss of
$316,911 in 1996.  The loss for 1997  occurred due to the delay in receiving FDA
approval   for  the   Company's   EpiLaser,   combined   with  the   significant
pre-production  costs in order to prepare for the  introduction  of the EpiLaser
into the United  States as well as an  increase in  manufacturing  costs for the
production of the CO2 tubes for Tissue's TruPulse product.
<PAGE>
                                       16

     In  the  electronics  segment  of  the  Company's  business,  gross  margin
increased to $391,477 (2.2% of revenues) for the quarter ended March 31, 1997 as
compared to a gross loss of $41,854 ((1.0%) of  revenues)  for the three  months
ended March 31, 1996.  This  increase in gross margin is primarily the result of
additional  gross  margin for the three  months  ended March 31,  1997  totaling
$688,468  generated by the  Company's  Nexar  subsidiary as a result of revenues
generated from its  proprietary  upgradeable PC. Nexar's gross profit was offset
by a gross loss at Dynaco's Comtel subsidiary.

     Research and  development  costs  increased to $2,847,806 (14% of revenues)
for the three months ended March 31, 1997, from $1,716,803 (25% of revenues) for
the three  months  ended March 31,  1996.  This 66%  increase  in  research  and
development  reflects  the  Company's  continuing  commitment  to  research  and
development  for  medical  devices  and  delivery  systems  for  cosmetic  laser
applications  and other medical  applications  using a variety of lasers,  while
continuing  dermatology  research utilizing the Company's ruby and diode lasers.
Approximately  $2.2  million of the $2.8 million  expended in the quarter  ended
March 31, 1997 is attributed to the medical  segment.  Management  believes that
research and development  expenditures  will increase over the next few years as
the Company  continues  clinical  trials of its medical  products  and  develops
additional applications for its lasers and delivery systems. However, management
anticipates  that research and  development as a percentage of net revenues will
decrease as revenue  increases with the  commercialization  of its laser medical
products and continued  penetration  of its electronic  products.  The remaining
$0.6 million expended in the current year's first quarter was in the electronics
segment,  mainly due to the continued  development  and  improvement of Nexar PC
products.

     General  and  Administrative  expenses  increased  to  $5,328,785  (26%  of
revenues)  for the three months ended March 31, 1997,  from  $3,397,681  (49% of
revenues)  for the three  months  ended  March 31,  1996.  This 57%  increase is
attributable  to  increased  administrative  resources  required  to oversee the
growth of the Company's medical and electronics business segments. Approximately
50% of the general and administrative expense increase for the three month ended
March 31, 1997  compared to the three months ended March 31, 1996 is  attributed
to the Company's Cosmetic Technology International, Inc. ("CTI") subsidiary. CTI
is in the  process  of  opening  and  establishing  revenue  sharing  sites with
established partners such as Columbia/HCA, as well as with various international
partners. CTI also operates its own CliniSpa sites.

     Selling and Marketing  expenses  increased to $3,250,412  (16% of revenues)
for the three months ended March 31, 1997, from $1,567,138 (23% of revenues) for
the three months ended March 31, 1996. This increase is nearly all attributed to
Nexar  which  recorded  approximately  $1.7  million  in selling  and  marketing
expenses in the first quarter of 1997 compared to approximately $300,000 for the
three months ended March 31, 1996.  Selling and marketing expenses will increase
in the near term, particularly in the medical products segment as revenues begin
to increase now that the Company has a suite of FDA cleared lasers products.

     Business  Development  and  Financing  Costs  increased  to $656,239 (3% of
revenues)  for the three  months  ended March 31,  1997,  from  $497,273  (7% of
revenues)  for the three  months  ended  March 31,  1996.  This 32%  increase is
attributable to the Company's continuing financing activities during the quarter
ended March 31, 1997.

     Settlement and Litigation  costs  increased to $3,150,000 (16% of revenues)
for the three months ended March 31, 1997,  from  $258,973 (4% of revenues)  for
the three months ended March 31, 1996. This increase is  attributable  mainly to
an additional legal settlement accrual of $2,500,000  recorded by the Company in
the first  quarter of 1997 related to a former  consultant  combined  with other
smaller  settlement  claims.  The Company is a defendant in a lawsuit filed by a
former  consultant to the Company.  In the suit, the former  consultant  alleges
that the Company breached a contract with the consultant in which the consultant
was to  provide  certain  investment  banking  services  in return  for  certain
compensation.

     Interest  expense  increased to $1,664,777 for the three months ended March
31, 1997,  from  $324,682  for the three months ended March 31, 1996.  This 413%
increase  is  primarily  the  result of an  increase  in  convertible  debenture
financings and an additional  outstanding  line of credit  financing at Dynaco's
Comtel subsidiary which was entered into in December 1996.


<PAGE>
                                       17

     Interest income  decreased to $198,254 for the three months ended March 31,
1997,  from $606,194 for the three months ended March 31, 1996. This decrease is
primarily the result of a change in the Company's  average  balances of its cash
equivalents.

     Net realized and  unrealized  trading gains were  $1,079,917  for the three
months ended March 31, 1997,  up from  $115,084 for the three months ended March
31, 1996.  These gains  resulted  from the sale and/or  appreciation  of certain
marketable  securities  during the first  quarter of the current year. It is the
Company's  intention to begin to liquidate a portion of its trading  investments
in the near term, which may result in additional  trading gains or losses in the
future.

LIQUIDITY AND CAPITAL RESOURCES

     As of March 31, 1997, the Company had $21,789,094 in cash, cash equivalents
and  trading  securities.  During the three  months  ended March 31,  1997,  the
Company  generated  $10,225,169,  $5,700,000 and $3,925,000 in net proceeds from
the issuance of convertible debentures,  the sale of its preferred stock and the
sale of Palomar owned Nexar stock, respectively.

     The Company's net loss for the three months ended March 31, 1997,  included
the  following  noncash  items:  $1,078,556  of  depreciation  and  amortization
expense;  $1,025,865 of additional interest expense relating to the amortization
of the discounts on the convertible  debentures;  $204,614 in investment banking
fees paid with common  stock and  warrants;  and a legal  settlement  accrual of
$2,500,000 in connection  with a breach of contract case (the Company intends to
appeal any damages award in that case).

     The Company  anticipates  that capital  expenditures for the remaining nine
months of 1997 will total  approximately  $12  million,  of which a majority  is
attributed to CTI laser  centers.  The Company will finance  these  expenditures
with cash on hand,  equipment  leasing  lines 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 at
85% of face value,  up to a maximum  commitment of  $3,000,000.  As of March 31,
1997, the amount of accounts  receivable sold that remained  uncollected totaled
$1,798,461 net of related  reserves and fees, as defined in the agreement.  This
amount is classified as a revolving line of credit in the  accompanying  balance
sheet as of March 31, 1997. The interest rate on such outstanding amounts is the
bank's prime rate (8.50% at March 31,  1997) 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.  Borrowings under this loan
agreement are guaranteed by the Company.

     On December  5, 1996,  Comtel  entered  into a loan  agreement  with a loan
association  which  provided  for  borrowings  up to  $4,500,000  in the form of
revolving  receivable and inventory  loans.  Borrowings under the loan agreement
are limited by a borrowing base calculation on eligible accounts  receivable and
inventory, and are collateralized by accounts receivable, inventory, and certain
other assets. Borrowings bear interest at the lender's prime rate plus 2.25% and
amounted to $3,588,562 as of March 31, 1997.  The loan  agreement  terminates on
November 30, 1998. Comtel is in default of a financial  covenant under this line
due to its failure to maintain a minimum  tangible net worth of $3 million.  The
terms of the loan agreement are presently under  negotiation.  Borrowings  under
this loan agreement are guaranteed by the Company.

     A large part of the Company's medical products  businesses are still in the
developmental  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.
<PAGE>
                                       18

     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,  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,  including  additional
government research grants,  strategic partnerships,  additional bank financing,
private debt and equity  financing and other sources.  The Company believes that
it has adequate cash  reserves or it 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 factors  identified in the
Company's Form 10-KSB for the year ended December 31, 1996, as amended,  and the
following:

          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 future operating results are dependent on its ability to
          develop, produce and achieve Food and Drug Administration 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'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.

<PAGE>
                                       19

                           PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

     On October 7, 1996 the Company filed a declaratory  judgment action against
MEHL/Biophile  ("MEHL")  seeking (i) a declaration that MEHL is without right or
authority to threaten or maintain  suit against the Company or its customers for
alleged infringement of the patent held by MEHL's subsidiary Selvac Acquisitions
Corp.  ("Selvac"  and the "Selvac  Patent"),  that the Selvac Patent is invalid,
void and  unenforceable,  and that the  Company  does not  infringe  the  Selvac
patent;  (ii)  a  preliminary  and  permanent  injunction  enjoining  MEHL  from
threatening  the  Company  or its  customers  with  infringement  litigation  or
infringement;  and  (iii)  an  award  to the  Company  of  damages  suffered  in
connection with MEHL's conduct.  On March 7, 1997,  Selvac filed a complaint for
injunctive relief and damages for patent infringement and for unfair competition
against the Company,  its Spectrum Medical  Technologies and Spectrum  Financial
Services  subsidiaries,  and a New Jersey  dermatologist,  in the United  States
District Court for the District of New Jersey.  Selvac's  complaint alleges that
the Company's EpiLaser infringes the Selvac Patent and that the Company unfairly
competed by promoting  the EpiLaser for hair removal  before it had received FDA
approval for that  specific  application.  The Company and Selvac have agreed to
dismiss the Massachusetts  litigation without prejudice.  Palomar has brought in
the New Jersey  action its claims that the Selvac  patent is  invalid,  that the
Company has not infringed the Selvac  patent,  that MEHL should be enjoined from
making further assertions  concerning  infringement and unfair competition,  and
that the Company should be awarded attorney fees and other  appropriate  relief.
Thus,  both the  Company's  and MEHL's claims will be tried on the merits in New
Jersey.  As of May 13,  1997,  discovery  had not yet  commenced.  The extent of
exposure of the Company cannot be determined at this time.

     The Company is a defendant in a lawsuit  filed by  Commonwealth  Associates
("Commonwealth")  on March 14, 1996 in the United States  District Court for the
Southern  District  of New York.  In its  suit,  Commonwealth  alleges  that the
Company  breached a contract  with  Commonwealth  in which  Commonwealth  was to
provide certain investment banking services in return for certain  compensation.
In January  1997,  Commonwealth's  motion for summary  judgment on its breach of
contract claim was granted.  Commonwealth is seeking up to $3,381,250 in damages
on  its  breach  of  contract  claim,   exclusive  of  interest.   A  ruling  on
Commonwealth's  damages  claim is  pending.  The  Company  intends to appeal the
matter if damages  are  awarded,  and  believes  its  grounds for appeal will be
meritorious.

ITEM 2.   CHANGES IN SECURITIES

          CONVERTIBLE DEBENTURES

          Pursuant  to  Section  4(2) of the Act,  the  Company  sold a total of
$5,500,000  5%  Convertible  Debentures  on  March  10,  1997 to the  Promethean
Investment Group. The notes may be converted within 90 days from issuance at the
option of the holder into shares of the Company's  common stock at a price equal
to 100% of the average  trailing five day bid price from the date of conversion.
The notes may be  converted  after 90 days from  issuance  at the  option of the
holder into shares of the Company's  common stock at a price equal to 90% of the
average  trailing five day bid price from the date of conversion,  provided that
in any 30 day period the holder of these debentures may convert no more than 33%
(or  34%  in the  last  thirty  day  period  available  for  conversion)  of the
debentures.

          Pursuant  to  Section  4(2) of the Act,  the  Company  sold a total of
$500,000 6%  Convertible  Debentures  on March 13, 1997 to Soginvest  Bank.  The
debentures may be converted at any time after 180 days from issuance,  including
accrued  interest,  into  shares  of the  Company's  common  stock at a price of
$11.00.  Interest  will be forfeited  if  converted  prior to 180 days after the
closing date. The holder may not convert more than 33% of the debentures (or 34%
in the last thirty day period available for conversion) in any 30 day period.

          PREFERRED STOCK

          Pursuant to Section 4(2) of the Act, the Company sold 13,000 shares of
Series  H  Convertible  Preferred  Stock  to  three  investors  for a  total  of
$13,000,000.  RGC International  Investors,  LDC purchased 6,000 shares on March
31, 1997; Credit Suisse First Boston  Corporation  purchased 4,000 shares on May
5, 1997 and CC  


<PAGE>
                                       20


Investments, LDC purchased 3,000 shares on May 5, 1997. The Series H Convertible
Preferred  Stock may be converted  into common stock,  including any accrued but
unpaid interest,  at 100% of the average stock price for the first 179 days from
the closing  date,  90% of the average stock price for the following 90 days and
85% of the average  stock  price  thereafter.  The  average  stock price for the
Series H Convertible  Preferred  Stock is the average  closing bid price for the
ten trading days immediately  preceding the conversion date but in no event less
than $6.00 for the first 210 ten days  following the closing date and thereafter
no less  than the  lower of $6.00 or 65% of the  conversion  ceiling  price,  as
defined.  The holder is restricted  for the first 209 days following the closing
date to converting no more than 33% of the Series H Convertible  Preferred Stock
in any thirty day period  (or 34% in the last  thirty day period  available  for
conversion).  Interest  shall be  accrued at 6% per annum for the first 179 days
following the closing  date, 7% for the following 80 days and at 8%  thereafter.
Interest  shall cease to be accrued if, at any time,  the Average Stock Price is
greater than 175% of the Conversion  Ceiling  Price.  The Company has a right to
redeem 50% of the Series H preferred  stock if, at any time after April 1, 1999,
the Average Stock Price is greater than 150% of the Conversion Ceiling Price and
any and all of the  Series H  preferred  stock if, at any time  after  March 31,
1999,  the Average  Stock Price is greater than 200% of the  Conversion  Ceiling
Price.  The redemption  amount shall be calculated by multiplying the sum of the
preferred  stock and the  premium by 150% and 200%  respectively  divided by the
Conversion  Ceiling Price and a redemption notice must be received by the Holder
no less than 10 and no more than 20  trading  days  priors to the date which the
Company  intends to redeem the Series H  preferred  stock.  Notwithstanding  the
foregoing,  the Holder  would be  entitled to convert any or all of the Series H
preferred stock prior to 10 days after the Company's redemption notice.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

         Not applicable.

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

         Not applicable.

ITEM 5.  OTHER INFORMATION

         Not applicable.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

     (a)  EXHIBITS

          None.

     (b)  REPORTS ON FORM 8-K.

          None.

<PAGE>
                                       21


                                   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 May 15, 1997.

                                             PALOMAR MEDICAL TECHNOLOGIES, INC.
                                                       (Registrant)



DATE:  May 15, 1997                          By:    /s/ Louis P. Valente
                                                    --------------------
                                                    Louis P. Valente
                                                    Chief Executive Officer
                                                   (Principal Executive Officer)

DATE:  May 15, 1997                                 /s/ Joseph P. Caruso
                                                    --------------------
                                                    Joseph P. Caruso
                                                    Chief Financial Officer and 
                                                    Treasurer
                                                   (Principal Financial Officer 
                                                    and Principal Accounting 
                                                    Officer)