FORM 10-KSB/A-3

                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
(Mark one)
            [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                     For fiscal year ended December 31, 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)

<TABLE>
<C>                                                                   <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)

Securities registered pursuant to Section 12 (b) of the Act:
------------------------------------------------------------
                                                        Name of each exchange on
         Title of each class                               which registered
         -------------------                            ------------------------
         Not Applicable                                     Not Applicable

          SECURITIES REGISTERED PURSUANT TO SECTION 12 (G) OF THE ACT:
          ------------------------------------------------------------
                          Common Stock , $.01 par value

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

     Check if there is no disclosure  of  delinquent  filers in response to Item
405 of  Regulation  S-B  contained  in  this  form,  and no  disclosure  will be
contained,  to the  best of  registrant's  knowledge,  in  definitive  proxy  or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]

     The  issuer's  revenues  for its fiscal year ended  December  31, 1996 were
$70,098,443.

     As of March 20, 1997, 30,945,824 shares of Common Stock, $.01 par value per
share,  and  16,000  shares of  Preferred  Stock  $.01 par value per share  were
outstanding.  The aggregate market value, held by  non-affiliates,  of shares of
the  Common  Stock,  based  upon the  average of the bid and ask prices for such
stock on that date was approximately $195,345,514.

        Transitional Small Business Disclosure Format:  Yes          No     X
                                                            ----         -------

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                                        1


                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS

GENERAL

     Palomar Medical Technologies,  Inc., a Delaware corporation, (the "Company"
or "Palomar")  was organized in 1987 to design,  manufacture  and market lasers,
delivery systems and related disposable products for use in cosmetic and medical
procedures.  The Company currently  operates in two business  segments:  medical
products and services and electronic products.  In the medical products segment,
the Company  manufactures and markets U.S. Food and Drug Administration  ("FDA")
approved  ruby and CO2 lasers for hair  removal,  skin  resurfacing  and wrinkle
treatment,  among other  things.  The Company has and continues to develop ruby,
pulse dye and diode medical lasers for use in clinical  trials and is engaged in
the research and  development  of  additional  laser  products.  The Company has
expanded  its  efforts in the  cosmetic  laser area  through a series of product
development activities, acquisitions and strategic alliances that target patient
self-pay procedures  performed in doctors' offices and clinics.  Principal among
these are the  development of the  EpiLaserTM,  a ruby laser system for removing
unwanted hair. The laser hair removal,  skin  resurfacing and wrinkle  treatment
products are  significant  to the Company's  strategic plan and are discussed in
further  detail  below.  The  Company  has  entered  into a number  of  research
agreements with recognized  research  hospitals and clinical  laboratories.  The
Company  provides  research  funding,  laser  technology and optics expertise in
return for licensing  agreements to specific medical applications and patents as
more fully described below. See "Patents and Licenses." Management believes that
this method of conducting  research and  development  provides a higher level of
technical and clinical expertise than it could provide on its own, and in a more
cost-efficient manner.

     In  February  1997,  Palomar  Medical  Products,   Inc.  ("Palomar  Medical
Products")  was formed as a  wholly-owned  subsidiary  of the  Company  with the
purpose of  consolidating  the management and operations of the medical products
companies.  In January 1997, the Company named an outside party as the President
and CEO of  Palomar  Medical  Products  to oversee  and  manage the  operations.
Included in the medical  products  group are the following  companies:  Spectrum
Medical   Technologies,   Inc.,   Tissue   Technologies,   Inc.,   Star  Medical
Technologies, Inc., Dermascan, Inc. and Palomar Technologies, Ltd., all of which
remain  wholly-owned  subsidiaries  of the Company  (see  "Formation  of Palomar
Technologies,  Ltd.").  Included  as part of the  medical  business  segment but
excluded  from the  medical  products  group  is a newly  formed,  wholly  owned
subsidiary  of the  Company,  Cosmetic  Technology  International,  Inc.,  which
intends to establish a worldwide  network of cosmetic and  dermatological  laser
sites with medical  service  partners  (see  "Formation  of Cosmetic  Technology
International, Inc.").

     In September 1995, the Company established Palomar Electronics  Corporation
as a wholly-owned subsidiary of Palomar Medical Technologies,  Inc. as part of a
plan to separate the electronics and computer  segments of the business from the
medical laser segments of the business.

     In the electronic products segment, the Company's Nexar Technologies,  Inc.
subsidiary  manufactures,  markets and sells  personal  computers  with a unique
circuit  board design that  enables end users to easily  upgrade and replace the
microprocessor, memory and hard drive components, which management believes will
decrease  the level of  technical  obsolescence  associated  with  most  desktop
personal  computers  in the market.  Dynaco  Corp.  manufactures  high  density,
flexible  electronic  circuitry  for use in  industrial,  military  and  medical
devices and is also  introducing a number of  proprietary  products  targeted to
service the personal computer  industry,  including high density memory modules.
These new  proprietary  computer  memory modules  double the memory  capacity of
traditional  memory modules using the same  interface.  Comtel  Electronics is a
contract  manufacturer which provides turnkey manufacturing and test services of
electronic assemblies.

THE COMPANY'S STRATEGIC PLAN

         The  Company's  near-term  strategy  is to  increase  its  focus on the
medical segment portion of the business.  The company  believes that it can spin
out companies in the non-core electronics segment in the form of publicly traded

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                                       2


companies.  The Company  believes that with the  attainment of FDA clearance for
marketing  and sales of its  lasers  for the  treatment  of hair  removal,  skin
resurfacing,  and  wrinkle  treatment,  the medical  segment of its  business is
positioned for success. The Company will continue to develop, acquire or license
technologies  that can be integrated  into its current and proposed  products in
the medical business segment. Through its Cosmetic Technology International Inc.
subsidiary, the Company will also focus on the services segment of the business.
The  Company  intends  to  address  very large  markets  incorporating  its core
technology with  proprietary  products and services and structure its operations
to strive  to be the  low-cost  producer  and  provider  of these  products  and
services.  The Company  intends to seek  agreements or  arrangements  with other
medical products and high technology companies in order to acquire technical and
financial assistance in the research and development of such products and in the
extensive experimentation and testing required to obtain regulatory approvals in
the United States and elsewhere. The Company will continue to seek marketing and
distribution  agreements with established  companies to enable it to market some
of its products quickly and more efficiently and will also utilize and enhance a
direct sales force.

     The Company  has already  begun to spin out  Companies  in its  electronics
segment. On April 30, 1997, the Company entered into an agreement to sell its CD
Titles  subsidiary  to the  management  of CD Titles  for a  promissory  note of
$600,000 due April 30, 1999. In addition, the Company also received a warrant to
purchase  750,000  shares of CD Titles common stock at various  exercise  prices
ranging  from  $6.00  to  $10.00  Management  is  currently  evaluating  various
alternatives  and methods for Dynaco Corp.  and its  subsidiaries.  Although the
Company  cannot  guarantee  successful   completion  of  these  publicly  traded
spinouts,  the  intention is to complete  these  transactions  during  1997.  In
addition,  the Company's subsidiary Nexar Technologies,  Inc. (See "Formation of
Nexar Technologies,  Inc.") is in the process of completing its proposed initial
public offering.  Management  anticipates that this initial public offering will
be completed by mid-April 1997. However, the Company can in no way guarantee nor
ensure successful completion of the initial public offering.

     The Company  believes  that the  expansion  and success of its  business is
significantly  influenced by key employees at its  operating  subsidiaries.  The
Company  has and intends to continue  to create  incentive  programs  that allow
management  as well as key members of senior  management of the Company at these
operating  subsidiaries  to  participate  in  the  success  of  these  operating
subsidiaries by participating in the equity of each subsidiary or profit sharing
plans.

     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.  (See  "Item 6.  Management's
Discussion  and Analysis of Financial  Condition  and Results of  Operations  --
Liquidity  and  Capital  Resources."  and "Item 12.  Certain  Relationships  and
Related Transactions.")

     RECENT FINANCING OF OPERATIONS AND INVESTMENTS

     The Company has  financed  current  operations  and  expansion  of its core
business  with  short-term  financial  borrowings  and  investments  through the
private sale of debt and equity securities of the Company.  The Company raised a
total of $56,112,391 and  $31,083,892 in such financings  during the years ended
December 31, 1996, and December 31, 1995, respectively.  The Company anticipates
that  it  will  require  substantial   additional   financing  during  the  next
twelve-month  period.  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.  Sales of  securities  to  private  investors  are sold at a
discount to the current or future 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  their  securities  for resale to the public at
some future time. The Company  increased its authorized  shares on July 19, 1996
from  40,000,000  shares of common stock to 100,000,000  shares of common stock.
There  can be no  assurance  that the  Company  will be  successful  in  raising
additional  capital  on  favorable  terms.  (See Notes 5 and 15 in the "Notes to
Consolidated  Financial  Statements,"  and "Item 5. Market for Common Equity and
Related Stockholder Matters.")

     INCREASE IN OUTSTANDING SHARES

     As a result of financing  activities,  business  developments,  mergers and
acquisitions,  issuance of  incentive  stock  options  and  warrants to purchase
common  stock to attract  and retain key  employees,  the  Company's  issued and
outstanding  

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                                       3


shares of common stock have  increased to 30,596,812  at December 31, 1996.  The
Company also had  additional  reserved  but  unissued  shares of common stock of
20,467,819  shares at December 31, 1996.  The Company's  issued and  outstanding
shares of common stock  increased  subsequent to December 31, 1996 to 30,996,283
shares  with  additional  reserved  but  unissued  shares  of  common  stock  of
20,061,274 shares as of February 21, 1997. A substantial number of the Company's
reserved shares are registered and could be resold into the public market.

     RELATED PARTY INVESTMENTS AND TRANSACTIONS

     The Company has entered into a number of transactions with related parties.
To date,  the Company has an aggregate of  $5,076,751  of notes  receivable  and
investments with related parties.  Included in the aggregate amount are loans to
certain officers,  directors and key employees of $995,331;  notes receivable to
related parties of $464,153; a loan of $1,100,000 to a public company of which a
former director is the director and chief financial  officer;  an unsecured note
of $604,653 to the Company's  underwriter;  and trading securities of $1,912,614
in a  publicly  traded  company  in which  the  chief  executive  officer  is an
approximately  13% owner.  See Note 11 in the "Notes to  Consolidated  Financial
Statements."

MEDICAL PRODUCTS SEGMENT

BUSINESS DEVELOPMENTS

     ACQUISITION OF STAR MEDICAL TECHNOLOGIES, INC.

     On July 1, 1993,  the  Company  acquired  80% of the  common  stock of Star
Medical Technologies, Inc. ("Star"), a development stage company formed on April
1, 1993.  Star develops  medical and commercial  products using high power laser
diodes.  To date, Star has developed a number of medical diode laser  prototypes
under clinical  investigation.  The  acquisition  price was $600,000 in cash and
five-year  nonqualified  stock  options  granted to certain  officers of Star to
purchase up to an aggregate of 100,000  shares of the Company's  common stock at
an exercise price of $1.78 (50% of the fair market value of the Company's common
stock on July 1, 1993).  In  addition,  during  1994,  the  Company  acquired an
additional 5% of the common stock of Star for cash payments of $970,000.

     In April 1996, the Company  purchased the remaining 15% of the  outstanding
common  stock of Star from its  founders,  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 have
agreed to rescind all royalties due to them under a Rights  Agreement dated July
1, 1993. To date, revenue from the Star subsidiary has not been significant.

     ACQUISITION OF SPECTRUM MEDICAL TECHNOLOGIES, INC.

     On April 5, 1995, the Company acquired all of the outstanding  common stock
of  Spectrum  Medical  Technologies,   Inc.  ("Spectrum").  The  purchase  price
consisted  of $300,000 in cash, a $700,000  two-year  promissory  note,  364,178
shares of the  Company's  common  stock with an  aggregate  fair market value of
$1,000,000,  acquisition  costs of  $161,138  and assumed  liabilities  totaling
$1,128,139.  In  addition,  the  purchase  price  consists of a 20%  contingency
payment,  payable in the Company's common stock,  based upon the future earnings
performance  of Spectrum over a three to five-year  period.  Spectrum  develops,
manufactures,   sells  and  services  ruby  lasers   throughout  the  world  for
dermatological applications.

     FORMATION OF SPECTRUM FINANCIAL SERVICES LLC

     On June 30, 1995,  Spectrum  Financial  Services  LLC ("SFS"),  a financial
services  leasing company and a  minority-owned  subsidiary of the Company,  was
formed.  As of December  31, 1996 and 1995,  the Company had funded the minority
subsidiary with cash in the amount of $1,680,919 and $856,300 respectively.  SFS
arranges for  financing of medical  products  sold by the Company.  In addition,
during 1996 as part of its business  strategy,  the Company  aligned itself with
Copelco  Capital,  one of the  world's  largest  and  most  established  leasing
companies,  to become the  exclusive  label  leasing  company for the  Company's
complete line of cosmetic lasers.
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                                       4

     LICENSE AND RESEARCH  AGREEMENT  WITH  MASSACHUSETTS  GENERAL  HOSPITAL FOR
     LASER HAIR REMOVAL

     In August 1995, the Company entered into an exclusive, worldwide, perpetual
license for certain  technology  that applies to a patented method of delivering
laser energy to treat  unwanted  hair. The Company also entered into a four-year
agreement with the Massachusetts General Hospital ("MGH"), whereby MGH agreed to
conduct clinical trials on a laser treatment for hair removal/reduction invented
by Dr. R. Rox Anderson,  Wellman Laboratories of Photomedicine,  MGH. As part of
the agreement, MGH provided the Company with prior data already generated by Dr.
Anderson with respect to the ruby laser device at MGH. This  information was the
basis for an application  filed on December 8, 1995 with the FDA for approval of
the Company's  EpiLaser(TM) for treating unwanted hair. The Company is obligated
to fund the clinical research in the aggregate amount of approximately  $917,000
over the term of the contract. On August 18, 1995, the Company also entered into
a worldwide  exclusive  license  agreement with MGH. Upon  completion of a valid
product or service,  or new uses (not related  solely to hair removal)  based on
the findings of the clinical studies, the Company shall be given the first right
of refusal to  negotiate an exclusive or  non-exclusive  license  agreement.  As
consideration for this license, the Company is obligated to pay MGH royalties of
5.5% of net revenue from  product/services  covered by valid patents licensed to
the Company exclusively;  2.5% of net revenues of  products/services  covered by
valid patents licensed to the Company  non-exclusively;  1.5% of net revenues of
products  developed and exploited,  not covered above and no less than 3% on the
sale of any other laser using  other  technology  as defined for the use of hair
removal.

     ACQUISITION OF TISSUE TECHNOLOGIES, INC.

     On May 3,  1996 the  Company  acquired  100% of Tissue  Technologies,  Inc.
("Tissue  Technologies"),  an  Albuquerque,  New Mexico  based  manufacturer  of
dermatology  laser products,  in exchange for 3,200,000  shares of the Company's
common   stock.   The  Company  has  accounted   for  this   acquisition   as  a
pooling-of-interest  in  accordance  with  Accounting  Principles  Board Opinion
No.16. Tissue Technologies is engaged in the manufacture, marketing and sales of
C02 laser systems used in skin resurfacing and treatment of wrinkles.

     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
the  Company.  The  Company  included  these  35,000  shares  in a  registration
statement that became effective February 28, 1997. In addition,  the Company has
agreed  to pay the  Dermascan  stockholder  an  amount  equal to the  difference
between  $14.00 and $7.8125,  the closing bid price on February  28,  1997.  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 President of Dermascan
which guarantees annual payments of up to $125,000. Dermascan's operations prior
to acquisition  were not material.  The Company has recorded the  acquisition at
the  guaranteed  stock price of $490,000 in total.  Dermascan  markets and sells
electrology  equipment  and supplies to the  electrology  market.  To date,  the
operations of Dermascan have not been significant.

     FORMATION OF PALOMAR TECHNOLOGIES, LTD.

     On November 13, 1996, the Company formed Palomar Technologies, Ltd. located
in Hull,  England.  This company was formed to establish a European  resource to
manufacture,  sell and service laser  products  throughout  Europe and provide a
low-cost sourcing alternative for specialty components.  Operations have not yet
begun and will not begin until mid-1997.  Through February 28, 1997, the Company
has funded this  subsidiary  with  $1,592,180  for the purchase and lease of its
manufacturing facilities and the hiring of certain key employees.

     FORMATION OF PALOMAR MEDICAL PRODUCTS, INC.

     On February 18, 1997, the Company formed Palomar Medical Products,  Inc., a
wholly-owned  subsidiary,  for the purpose of  consolidating  the management and
operations of the medical products  companies.  Included in the medical 

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products  group are the following  companies,  all of which remain  wholly-owned
subsidiaries  of the Company:  Spectrum,  Tissue,  Star  Medical,  Dermascan and
Palomar Technologies, Ltd.

MEDICAL SERVICES SEGMENT

     FORMATION OF COSMETIC TECHNOLOGY INTERNATIONAL, INC.

     On December 20, 1996, Cosmetic Technology  International,  Inc. ("CTI") was
formed as a 100%-owned  subsidiary  of the Company.  As of December 31, 1996 the
Company had funded CTI with cash of  approximately  $650,000.  CTI is a services
company   which   intends  to   establish  a   worldwide   network  of  cosmetic
dermatological  laser and medical  device sites with medical  services  partners
(both fixed and mobile) in key geographic locations.  Each site will be provided
a turnkey package of laser and medical device  technology,  equipment,  training
and service, operations personnel, strategic advertising and marketing programs,
patient  financial credit programs and management  assistance.  In early 1997, a
binding letter of intent was completed with Columbia/HCA,  a $20 billion company
and one of the world's  largest owners and operators of medical  facilities,  to
establish revenue sharing sites throughout the country in existing  Columbia/HCA
facilities.  CTI and Columbia/HCA are working together to determine the location
and opening dates of such sites; to date, none have been  established.  To date,
CTI has opened and is operating two sites that are  wholly-owned  by CTI, one in
Los Angeles and one in Phoenix.  CTI has also established a revenue-sharing site
in Australia. During 1996 the operations of CTI were not significant.

Medical Products and Lasers in Medicine

     EpiLaser Product for Laser Hair Removal

     In recent years,  scientists and clinicians have developed a concept called
tissue optics to describe how the unique  properties of the laser can be used to
treat human tissue selectively and more precisely. By careful selection of laser
parameters,  such as wavelength (color), energy and pulse width (exposure time),
and with a detailed  understanding of the physical and optical properties of the
target  tissue,  the  clinician  can  selectively  treat the target tissue while
minimizing or  eliminating  damage to surrounding  tissue.  The concept of color
selectivity  has been useful in developing a number of  successful  dermatologic
applications.  With the appropriate selection of energy and pulse width to allow
for the preferential  absorption by the melanin present in the target area or by
the  hemoglobin  in blood  there is  negligible  absorption  by the  surrounding
tissue.  This  concept  of tissue  optics  applies to all of the  medical  laser
products under development by the Company.

     Spectrum has  developed a long pulse ruby laser,  using its core ruby laser
technology  developed  for  tattoo  removal  and  pigmented  lesions,   that  is
specifically  configured to allow the appropriate  wavelength,  energy level and
pulse  duration to  effectively  be absorbed by the hair follicle  without being
absorbed  by the  surrounding  tissue.  In  March  1997  Spectrum  received  FDA
clearance to sell and market the EpiLaser in the U.S. for hair removal.  In July
1996 the Company received clearance from the FDA to sell and market the EpiLaser
for a wide range of  dermatological  applications,  not including  hair removal.
During April of 1996, clearance was given to market the laser-based hair removal
system in Canada.  This method of hair removal allows for selective  destruction
of the target follicle without harming the surrounding  skin. The laser operates
in the 20-25 J energy range, delivering fluences in the range of 10-50J/cm2 in a
3-ms  pulse.  The beam  delivering  system  produces  a round beam with a nearly
flat-top energy distribution, thereby avoiding local hot spots. The hair-removal
technology  utilized by Palomar  targets the pigment in a hair  follicle and was
developed  by Dr. Rox  Anderson at MGH.  The laser  incorporates  a  proprietary
handpiece  delivery  system that  enables the laser  light to  penetrate  to the
correct  depth  while  at the  same  time  limiting  the  amount  of  discomfort
associated  with the  procedure.  The  laser  light is  pulsed  at a rapid  rate
covering approximately one half square inch at each pulse. This treatment method
allows for a large area of treatment over a short period of time.

     In an effort to find a way to allow the  laser  light to pass  through  top
skin  layers  and be  deeply  absorbed  in the hair  follicle  below,  a contact
handpiece  applicator  was  developed  by MGH and  licensed  to  Spectrum  on an
exclusive  world-wide perpetual basis. This unique delivery device is the key to
the success and  selectivity  of the ruby based laser hair removal  system.  The
Company  believes  this  unique  delivery  system  enables the user to address a
potentially larger 

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                                       6


market than electrolysis  currently does by offering to treat large areas of the
body such as back, chest, abdomen,  legs, arms and other areas. See "License and
Research Agreement with Massachusetts General Hospital for Laser Hair Removal".

     THE HAIR-REMOVAL MARKET

     The market for  laser-based  hair  removal is in its early  stages  and, as
such,  market  segment  information  is  only  now  being  formulated.  However,
management  believes that the current  electrolysis market is a good model. Last
year, more than one million women in the United States underwent treatment using
electrolysis,  spending on average more than $1,000 each,  representing a market
of approximately $1 billion annually.  In addition,  surveys indicate as many as
15% of men would  also like to remove  unwanted  hair  especially  from back and
chest areas.  Electrolysis is the only proven commercially  available method for
the  long-term  removal of body hair.  Other  methods  of hair  removal  include
waxing,  depilators,  tweezing,  depilatory creams and shaving, all resulting in
only short-term hair removal.

     Electrolysis  is a  process  in which  an  electrologist  inserts  a needle
directly into a hair  follicle and activates an electric  current in the needle,
which disables the hair  follicle.  The tiny blood vessels in each hair follicle
are heated and coagulated,  presumably  cutting off the blood supply to the hair
matrix or are destroyed by chemical  action  depending  upon modality  used. The
success  rate for  electrolysis  is  variable  depending  upon the  skill of the
electrologist  and  always  requires  a series of  treatments.  Electrolysis  is
time-consuming, expensive and sometimes painful. There is also some risk of skin
blemishes and a rising concern relating to needle infection.  Since electrolysis
only  treats  one  hair  follicle  at a time  and can only  treat  visible  hair
follicles,  the  treatment  of an area as  small  as an  upper  lip may  require
numerous  visits  at an  aggregate  cost of up to  $1,000.  Although  70% of all
electrolysis  treatments are for facial hair, the neck,  breasts and bikini line
are  also  treated.   Because  hair  follicles  are  disabled  one  at  a  time,
electrolysis  is rarely  used to remove  hair from large areas such as the back,
chest, abdomen and legs.

     Market  surveys  report  that more than 70% of women in the  United  States
employ one or more  techniques  for temporary hair removal from various parts of
the body.  Pulling  hair from the follicle  produces the longest term  temporary
results,  but is painful and may cause skin  irritation.  A number of techniques
are used to pull  hair  from  the  follicle  including  waxing,  depilators  and
tweezing. In the waxing process, a lotion, generally beeswax-based, is spread on
the area to be treated and allowed to harden,  thereby  trapping the hairs.  The
hardened  film is then  rapidly  peeled off,  pulling out the  entrapped  hairs.
Depilators employ rotating spring coils or slotted rubber rolls to trap and pull
out the  hairs.  Tweezing  involves  removing  individual  hairs  with a pair of
tweezers.  Depilatory creams,  which contain chemicals to separate hair from the
follicle, frequently leave a temporary,  unpleasant odor and may also cause skin
irritation.  Shaving is the most widely used method of hair removal,  especially
for legs and underarms, but produces the shortest term results. Hair bleaches do
not  remove  hair,  but  instead  lighten  the  color of hair so that it is less
visible.  A  principle  drawback  of all of these  methods is that they  require
frequent treatment.

     Preliminary   studies   using   Spectrum's   laser  hair  removal   process
demonstrated  significant  prolonged  hair growth delay ranging from six to nine
months  to in  excess of two years in some  cases.  In some  cases,  the hair is
permanently removed following treatment with the EpiLaser. Potential benefits of
laser hair removal include: treatment of larger areas in each treatment session,
relatively painless procedure, reduced risk of scarring, non-invasive procedure,
carries  no risk of  cross-contamination,  and  higher  success  rates than with
previous methods.

         Competition

         Currently,  there are three other  companies  (ThermoLase  (Division of
Thermo Electron Corp.), Laser Industries, Ltd. and MEHL/Biophile  International)
that have FDA  clearance  for a  laser-based  hair removal  system in the United
States.  ThermoLase, a publicly traded company,  received clearance from the FDA
in April 1995 to commercially market services using its laser-based hair removal
system.   The  ThermoLase  system  uses  a  low-energy,   dermatology  laser  in
combination  with a carbon  based  lotion that  absorbs  the  laser's  energy to
disable hair follicles.  ThermoLase opened up spas in California, Texas, Florida
and  Colorado.  ThermoLase  is also  opening or plans to open  additional  spas,
including in suburban Detroit, Michigan; Greenwich, Connecticut;  Manhasset, New
York;  Minneapolis,   Minnesota;  and  Palm  Beach,  Florida.  As  part  of  its
commercialization   strategy,   ThermoLase  plans  to  establish  a  network  of
ThermoLase-owned  centers in major metropolitan  areas in the U.S.,  third-party

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                                       7


licensees  in  selected  smaller  U.S.  markets  and joint  ventures  in foreign
markets. Laser Industries,  Ltd., received FDA clearance in March 1997 to market
its EpiTouchTM  ruby laser for hair removal.  The EpiTouchTM will be sold in the
U.S. through Sharplan 2000, Inc., a joint venture of Laser Industries,  Ltd. and
MEHL/Biophile  International  Corp.  MEHL/Biophile's  wholly  owned  subsidiary,
Selvec  Acquisitions  Corp.,  received FDA clearance in March 1997 to market its
SLS CHROMOS 694 (R) long pulse ruby laser hair removal system.

     Several other companies have also indicated  interest in developing  and/or
introducing  hair  removal  devices in 1997,  making laser hair removal the most
competitive application within the cosmetic laser marketplace.

     As more companies complete  development of cosmetic/medical  laser products
and/or  receive FDA clearance it is expected that there will be a  consolidation
of companies within the industry via  acquisitions,  partnering  arrangements or
joint  ventures.  In February 1997, ESC Medical  Systems  announced a definitive
stock swap agreement under which it would acquire Luxar Corporation, a privately
held manufacturer of surgical lasers.

     Marketing, Distribution and Service for the EpiLaser

     Spectrum sells and markets the EpiLaser  through an established  network of
distributors  in the U.S.  and  worldwide  and will also  enhance  and develop a
direct sales force during 1997.  Management feels that this  combination  allows
for a level of  coverage  that is more than  adequate  to service  all its major
market  segments.  As part of  Spectrum's  marketing  efforts,  the sales  force
provides  the  doctors  a level  of local  market  support  including  in-office
marketing brochures,  advertising copy and clinical data in a marketing kit that
the doctor uses to educate  the  doctors'  patient  base.  Using this  marketing
approach,  Spectrum  is able to  establish  long  term  relationships  with  its
customers  providing Spectrum with an installed base of customers.  This base of
customers is an important factor in introducing new products to the market.

     Spectrum  provides  for  service  in  the  U.S.  through  its  own  service
organization with regional  representation.  Spectrum's  international sales are
serviced by its  distributor  network.  All service  technicians  are trained by
Spectrum.  Spectrum's  recommended  preventive  maintenance schedule provided by
these  trained  technical  representatives  provides for a high level of product
reliability.

     Manufacturing and Suppliers for the EpiLaser

     Spectrum's  manufacturing operations consist of the assembly and testing of
components purchased from outside suppliers and contract manufacturers. Spectrum
maintains  control and  manufactures key components  in-house.  The entire fully
assembled  system is  subjected  to a rigorous set of tests prior to shipment to
the customer or distributors.

     Spectrum  depends and will depend  upon a number of outside  suppliers  for
components used in its manufacturing  process. Most of Spectrum's components and
raw materials are available from a number of qualified  suppliers.  One critical
component that is available through only one supplier is ruby rods. To date, the
Company has not experienced,  nor does it expect to experience,  any significant
delays in obtaining component parts or raw materials.  Spectrum has expanded its
manufacturing  capabilities in the United States to satisfy projected demand and
allow for manufacturing  capacity for additional products.  Spectrum is pursuing
both CE mark and ISO 9001 Registrations to meet  international  standards needed
to pursue European markets.

     Tru-Pulse(R) C02 Laser for Skin Resurfacing and Treatment of Wrinkles

     Tissue  Technologies  manufactures  and sells the Tru-Pulse  Laser. In late
1995,  Tissue  Technologies  received  FDA  clearance  to sell  and  market  its
Tru-Pulse laser in the U.S. for skin resurfacing.  To date, Tissue  Technologies
has shipped  approximately 250 laser systems to dermatologists and other medical
specialists  worldwide.  In October of 1996 Tissue Technologies received both CE
Mark and ISO 9001 registrations,  meeting the international standards that allow
products to be sold and shipped primarily to European countries. On February 18,
1997, Tissue Technologies received additional clearance from the FDA to sell and
market its Tru-Pulse Laser for the treatment of wrinkles, scar revision and burn
debridement.

     The Tru-Pulse  laser offers skin ablation as a means of reducing  wrinkles.
The laser uses certain  patented C02  technology  designed  especially  for skin
ablation.  The Tru-Pulse  operates at 10,000 watts of peak power  delivering 500

<PAGE>
                                       8


millijoules per pulse in a 65 microsecond  pulse.  The Tru-Pulse has the ability
to deliver the required amount of energy in a relatively short pulse as compared
to competitors'  systems. The Tru-Pulse also has a unique beam profile. Most C02
lasers have a gaussion beam with a central hot spot. In contrast,  the Tru-Pulse
has a  non-gaussion  beam with power  evenly  distributed  throughout  its cross
section.  Clinical data suggests that the  combination of these unique C02 laser
properties  may  account  for the  shorter  healing  time and  reduced  erythema
reported by doctors who use the Tru-Pulse.

     The Tru-Pulse is currently  being sold through  distributors  in the United
States  as  well as  internationally.  Tissue  Technologies  utilizes  the  same
distributors as Spectrum Medical and is in the process of  enhancing/utilizing a
joint direct sales force within the Palomar Medical  Products Group.  The system
is also sold to dermatologists,  plastic surgeons and other medical  specialists
directly.

     Manufacturing and Suppliers for Tru-Pulse Laser

     Tissue Technologies'  manufacturing  operations consist of the assembly and
testing  of   components   purchased   from  outside   suppliers   and  contract
manufacturers.  Tissue  Technologies  depends upon a number of outside suppliers
for components used in its assembly process. To date Tissue Technologies has not
experienced any significant  delays or other  difficulties in obtaining parts or
components.  The Tissue  Technology CO2 technology is based on recent technology
advances  and as such  is yet to be  optimized.  Currently,  the  most  critical
component is manufactured by one supplier that has experienced  problems in tube
reliability.  The Company is currently  seeking other alternative tube suppliers
as well as considering manufacturing and producing the CO2 tubes themselves, and
believes that this reliability issue will be rectified during 1997.

<PAGE>
                                       9

     COMPETITION FOR TISSUE'S TRU-PULSE LASER

     Currently,  there are three main competitors to the Tru-Pulse Laser:  Laser
Industries  (Sharplan),  Coherent,  Inc.  and Luxar  (recently  acquired  by ESC
Medical  Systems.)  Laser  Industries  and  Coherent,   combined,   account  for
approximately  50% of the world market.  The  estimated  U.S.  patient  services
market for skin resurfacing and treatment of wrinkles is $500-plus million.  The
annual worlwide  cosmetic skin resurfacing  product laser market is estimated to
be approximately  $115 million.  These numbers are expected to increase as "baby
boomers" age into their 50's. Coherent had been pricing its UltraPulse System at
the high end of the market with a high power laser that lists for $120,000,  but
recently introduced new models which are priced from $75,000 to $90,000.  Tissue
Technologies, Sharplan and Luxar average list price is $40,000 - $70,000.

     Ruby Laser for Tattoo Removal

     In April 1995, the Company acquired all of the outstanding  common stock of
Spectrum.  This  acquisition  provided the Company with an operating  subsidiary
concentrating  on sales and  marketing  to the cosmetic  laser market  including
dermatologists  and plastic  surgeons.  The majority of Spectrum's  sales in the
past have been Q-Switched Ruby Lasers for tattoo removal and treating  pigmented
lesions,  but in 1996  more than half of  Spectrum's  sales  were from the newly
developed  EpiLaser.  The EpiLaser  will  clearly be the focus in 1997,  but the
RD-1200 ruby laser for tattoo  removal will  continue to be marketed and sold as
it is already approved for sale in the U.S., Japan and in certain other parts of
the world. The basic ruby laser  technology  includes core laser technology that
the Company believes is applicable to other lasers for additional  applications.
Spectrum  sells and  markets  the  RD-1200  through  an  established  network of
distributors  and  direct  sales  force in the  U.S.  and  through  distributors
worldwide.  Spectrum  provides  for service in the U.S.  through its own service
organization with regional  representation.  Spectrum's  international sales are
serviced by its distributor network.

     COMPETITION FOR SPECTRUM'S RUBY LASER FOR TATTOO REMOVAL

     Competition  in the  medical  device  industry  is intense  and  technology
developments  are  expected to continue at the rapid pace  experienced  over the
past few  decades.  Spectrum  relies  on  proprietary  technology,  performance,
product features, price, reputation in the marketplace and its installed base as
leverage to keep its competitive edge in the marketplace. Spectrum competes with
other  manufacturers,  some with similar  technology  and others with  competing
technology.   Some  of  these  competitive  companies  have  greater  financial,
marketing and technical resources than that of Spectrum. The Company anticipates
competition for its tattoo removal laser will continue.

Future Products

     Relationship with Wellman Laboratories

     Wellman Laboratories ("Wellman Labs"), the world's largest biomedical laser
research  facility  and  part  of  the  MGH  Laser  Center  located  in  Boston,
Massachusetts,  was  created to oversee and speed the flow of  biomedical  laser
research from the laboratory to patient care. Funded in part by a grant from the
Department of Energy, the Laser Center brings together two strengths of MGH: its
clinical  departments and Wellman Labs. The MGH Laser Center works together with
industry,  academia,  and  the  Department  of  Energy  Laboratories  to  access
information  and  technology  across  a broad  spectrum  of  laser  and  medical
capabilities.

     The  principals  at Wellman Labs study the  fundamental  photophysical  and
photochemical  properties and processes of biomolecules  excited by ultraviolet,
visible, and near infrared radiation.  The labs are staffed by engineers,  laser
physicists and physicians familiar with all aspects of biomolecules,  cells, and
tissue IN  VITRO.  The  scientists  work  side by side  with the  clinicians  to
understand the basic  principles  involved in the complex  interactions of light
and tissue.

     In 1994, the Company began a number of studies for the treatment of certain
dermatologic  conditions  using its diode laser at Wellman Labs. In 1995,  these
studies  were  expanded  to include  the  Company's  ruby  lasers  for  cosmetic
procedures.  The data  associated  with  these  treatments  is  currently  being
evaluated by Wellman Labs and the Company. The Company works closely with Dr. R.
Rox Anderson,  a recognized expert in laser tissue  interaction and the inventor
of 

<PAGE>
                                       10


a number of laser procedures in use today. The Company feels that these types
of relationships  are critical in developing  effective  products for widespread
use in the market on a timely basis.

     Diode Laser Product Development

     Burn Diagnosis System - U.S. Air Force Contract

     In March 1994,  the  Company's  Star  subsidiary  was  notified  that their
proposal entitled "High Energy Diode Laser for Burn Diagnosis," submitted to the
Phillips  Laboratory  Kirkland Air Force Base, New Mexico under DOD Solicitation
94.1 Topic  AF94-110,  had been selected for funding.  The initial  contract,  a
phase I Small Business  Innovation  Research  Grant  ("SBIR") for  approximately
$60,000, was completed.

     On June 21, 1994, Star was granted an exclusive  worldwide  license for the
measurement  of the Burn Depth in Skin from the Office of Technology  Affairs at
MGH.

     In March 1995, Star was granted a follow-on phase II SBIR contract with the
U.S. Air Force,  Phillips  Laboratory,  for the research and  development of the
burn diagnosis system.  The aggregate  contract value is approximately  $743,000
over a two-year  performance period.  During the fiscal years ended December 31,
1996 and 1995,  the Company  recognized  $281,991  and  $307,000  of  government
contract revenue, respectively.

     In January 1996, Star Began initial  clinical testing of the burn diagnosis
system at the Shriner  Burn Center in Boston,  Massachusetts  and at the Augusta
Medical  Center in Augusta,  Georgia in November 1996. The system is designed to
illuminate  the burn site with near  infrared  light  from a diode  laser and to
image the blood flow using fluorescence from an FDA cleared dye as an aid to the
doctor in determining the burn depth.  The treatment of the burn differs greatly
depending  on the  degree  of burn.  This  technique  has been  licensed  by MGH
exclusively to Star. To date the system has been tested on five burn victims and
has  demonstrated  the  ability to detect the  absence or presence of blood flow
deep in the dermis.  The Company expects that it may take several years before a
commercial product for the measurement of burn depth is available.

     Laser Tonsillectomy  Research Agreement with the New England Medical Center
     ("NEMC")

     In June 1994, the Company signed an agreement (the "NEMC  Agreement")  with
the Otolaryngology  Research Center for Advanced Endoscopic  Applications at New
England Medical Center, Boston,  Massachusetts,  to provide a research grant and
to  sponsor  investigations  and  development  of laser  applications,  advanced
delivery  systems  and  disposable  products  in the area of dye and diode laser
applications in  otolaryngology  and related  specialties.  As defined under the
NEMC  Agreement,  the Company will  provide a total of $150,000  over a one-year
period,  of which  $50,000  has been paid in the form of laser  hardware  and an
additional  $100,000 has been incurred  through  December 31, 1995.  The parties
have reached an  understanding  that the Company will obtain ownership rights or
the right of first  refusal to exclusive  worldwide  licenses to sell and market
any  inventions  developed  with the grant  funding.  In August  1994,  the NEMC
Agreement was amended to support animal testing with one of the Company's  diode
lasers in connection with performing  tonsillectomies.  The Company has provided
funding of $54,813 and $36,534  for the years ended  December  31, 1995 and 1996
respectively.  The Company  intends to fund human clinical  studies in this area
over the next twelve-month  period. The Company expects that it may take several
years before a commercial product for tonsillectomy is available.

     Dye Laser Products

     U.S. Army Contract

     During  1995,  the  Company  entered  into a  two-year  cost plus fixed fee
contract  with  the  U.S.  Army.  The  contract  provides  for  the  Company  to
investigate Compact,  Wavelength Diverse, High Efficiency Solid-State Dye Lasers
and is valued at $3,555,223.  Revenue on the contract is recognized as costs are
incurred. During the fiscal years ended December 31, 1995, and December 31, 1996
the Company  recognized  $1,305,542  and $190,694,  respectively,  of government
contract revenue. The Company does not anticipate this research will result in a

<PAGE>
                                       11


commercial product within the next few years. In April 1997, the Company novated
this contract to Physical Sciences,  Inc. ("PSI"). If the contract is novated to
PSI,  upon  completion  of the  contract,  PSI has agreed to offer the Company a
right of  first  refusal  for a  commercial  license  to  sell,  manufacture  or
otherwise  dispose of solid-state dye laser technology as developed by PSI under
the contract for use in medical products.

     THROMBOLYSIS AGREEMENT

     On September 10, 1993, the Company  entered into the Baxter  Agreement with
the  Edwards  LIS  Division  of  Baxter.  Under the  Baxter  Agreement,  the two
companies  intend to develop,  market,  and sell an integrated  system utilizing
lasers and catheters for the removal of blood clots.  Baxter is responsible  for
sales and  marketing  of the  product  after FDA  clearance  and the  Company is
responsible for the  development  and manufacture of the product.  Following FDA
clearance the Company will receive 80% of the net sales for laser  equipment and
50% of the net  sales  for  catheter  and  disposable  components.  Prior to FDA
clearance,  the Company will receive 100% of the revenue received from the laser
and the catheter.  Under the Baxter  Agreement,  Baxter licensed its proprietary
technology  to the Company,  and the Company  cross-licensed  its  technology to
Baxter. The Company also granted to Baxter a license to sell and market products
incorporating  such  technology.  Baxter  agreed to transfer its interest in the
agreement to ACS, a division of Eli Lilly, as part of a purchase by Eli Lilly of
the Baxter LIS division. Eli Lilly subsequently sold ACS to Guidant Corp.

     In January 1997, Palomar became an equity partner in the formation of a new
company,  LaTIS, Inc., created to use Palomar's Laser Thrombolysis technology to
develop a pulsed-dye  laser system for treating  stroke.  With the  formation of
this new venture,  Laser  Thrombolysis is no longer part of Palomar's  strategic
agenda,  although the Company can still derive the benefits from its research by
potentially being the laser supplier for this large market.

Patents and Licenses

     On February 24, 1993,  the  principals  of the  Company's  Star  subsidiary
applied for a patent.  This application was subsequently  transferred to Star in
connection with the technology  underlying the use of a high powered diode laser
for the treatment of psoriasis and other derma vascular malformation. The patent
was  issued on June 18,  1996.  On June 22,  1995,  the NEMC  filed a patent for
Coagulation Laser Tonsillectomy. The patent was issued on May 28, 1996. Star has
applied for  additional  patents  regarding  the design and use of high  powered
diode lasers. The Company has exclusive rights to the NEMC patent. MGH has filed
a number of patents  surrounding  technology  involving laser hair removal.  The
first patent was issued on January 21, 1997. The Company has licensed this laser
hair  removal  technology  from MGH in  accordance  with a certain  license  and
research agreement as previously discussed.

     The Company intends to pursue certain  applications of laser  technologies,
and  is  aware  of  patents  relating  to  laser   technologies  used  in  those
applications.  If those patents are valid and enforceable, they may be infringed
by the  Company.  If the  Company's  current or  proposed  products  are, in the
opinion of patent  counsel,  infringing  on any of these  patents,  the  Company
intends to seek non-exclusive, royalty-bearing licenses to such patents.

     The  Company  has  obtained  opinions  of counsel  that the  Company is not
infringing  on patents held by others;  however,  these  opinions  have not been
challenged in court.

     In March 1997, Selvac  Acquisitions  Corp.  ("Selvac") filed a complaint in
the United States District Court for the District of New Jersey alleging,  among
other things,  that the EpiLaser  infringes a patent held by Selvac. The Company
filed an action  against  Selvac's  parent  MEHL/Biophile  in the United  States
District Court for the District of Massachusetts in October 1996 seeking,  among
other things, a declaration  that the Company does not infringe  Selvac's patent
and that Selvac's patent is invalid, void and unenforceable.  See "Item 3. Legal
Proceedings."  Other than the Selvac  action,  the Company has not been notified
that it is  currently  infringing  on any patents nor has it been the subject of
any patent infringement action. Defense of a claim of infringement is costly and
could have a material  adverse  effect on the  Company's  business,  even if the
Company were to prevail.

     The United States Patent and Trademark  Office has granted  certain patents
covering  basic  laser  technology  to  Dr.  Gordon  Gould,  an  individual  not
affiliated with the Company. In October 1988, Dymed, the Company's  predecessor,
entered into a License  Agreement  with Patlex  Corporation  ("Patlex")  whereby
Dymed was granted a worldwide  
<PAGE>
                                       12

non-exclusive  license to several laser related  patents  developed by Dr. Gould
and  assigned  to  Patlex  ("Dymed  Agreement").  In  exchange  for  payment  of
royalties,  Patlex  granted to Dymed the right to  manufacture  lasers using its
patented  technologies until the expiration of its patents and agreed not to sue
the Company or any of its customers for infringement of the licensed patents. In
January  1992,  the Company  entered into a new Patent  License  Agreement  with
Patlex (the "Patlex  Agreement") that superseded the Dymed Agreement.  Under the
terms of the Patlex  Agreement,  the Company is required to pay, during the term
of the  applicable  licenses  (which are for the life of the  patents  covered),
royalties of 5% of the "net selling price" (as defined  therein) of lasers which
are manufactured,  used or sold by the Company,  and incorporate Patlex's patent
rights.  These patents  expire on various dates through May 4, 2005.  During the
years ended  December  31,  1996 and 1995,  the Company  recorded  $167,000  and
$620,000, respectively, of royalty expense relating to this agreement.

GOVERNMENT REGULATION

         All medical  device  are  subject to FDA  regulation  under the Medical
Device  Amendments of the United  States Food,  Drug and Cosmetics Act (the "FDA
Act"). The Company's business, financial condition and operations are critically
dependent upon timely receipt of FDA regulatory clearances.

     FDA Clearance Status for Cosmetic Laser Products

     The FDA clearance  process in  dermatology  may be  accomplished  through a
pre-market  approval  ("PMA") or under Section 510(k) of the FDA Act. Based upon
discussions  with  several  experts  familiar  with the FDA  clearance  process,
management  believes  that  the  appropriate  FDA  clearance  process  for  most
dermatology  laser  systems is via the 510(k)  process  which  historically  has
required  less  clearance  time than the PMA clearance  process.  The Company is
subject to FDA regulation governing the use and marketing of medical devices.

     In December 1995,  the Company filed an application  for clearance with the
FDA to  commercially  market the  EpiLaser  system  pursuant to the FDA's 510(k)
process.  The data  submitted  in the filing was based on  clinical  information
obtained at Wellman Laboratories under the direction of Dr. R. Rox Anderson. The
purpose of the data was to illustrate  the safety and  effectiveness  of using a
ruby laser for removing  unwanted  hair. In March 1997 the Company  received FDA
clearance to sell and market the EpiLaser in the U.S. for hair removal.  In July
1996 the Company received clearance from the FDA to sell and market the EpiLaser
for a wide range of dermatological applications, not including hair removal. The
Company's  other FDA cleared lasers  include the Tru-Pulse for skin  resurfacing
and  treatment  of  wrinkles  and the  RD-1200(TM)  Q-switched  ruby  laser  for
treatment  of age spots and  tattoos.  In the event the  Company  changes  laser
specifications  of its  lasers,  it may be  required  to  obtain  FDA  clearance
pursuant to a new 510(k) application.

     OTHER GOVERNMENT APPROVALS FOR MEDICAL PRODUCTS

     In order to be sold outside the United States,  the Company's  products are
subject to FDA permit  requirements  that are conditioned  upon clearance by the
importing  country's  appropriate  regulatory  authorities.  Many countries also
require that imported products comply with their own or international electrical
and safety standards. In November 1992, the Company obtained approval certifying
compliance  with  certain   international   electrical  and  safety  regulations
applicable  to its pulsed dye laser.  Additional  approvals  may be  required in
other countries. The Company has yet to apply for international approval for its
diode  laser for use in  cosmetics  and  dermatology.  In October  1996,  Tissue
Technologies  received  both  CE  Mark  and  ISO  9001  registrations,   meeting
international  standards that allow the Tru-Pulse  laser to be sold and marketed
in certain European  countries.  Another  significant  certification the Company
will pursue will be Shonin,  which allows sales and  marketing of the  Company's
lasers in Japan.

     The Company is subject to the laser radiation safety regulations of the FDA
Act  administered  by the National  Center for Devices and  Radiological  Health
("CDRH") of the FDA. These regulations  require a laser manufacturer to file new
product and annual reports,  to maintain  quality  control,  product testing and
sales  records,  to distribute  appropriate  operation  manuals,  to incorporate
certain design and operating features in lasers sold to end-users and to certify
and label each laser sold to end-users  as one of four classes of lasers  (based
on the level of radiation from the laser).  In addition,  various warning labels
must be affixed to the product and certain protective devices must be installed,
depending  upon the class of  product.  Under the FDA Act,  the  Company is also
required  to  register  with the FDA as a  medical  device  manufacturer  and is
subject to  inspection on a routine  basis by the FDA for  compliance  with Good

<PAGE>
                                       13


Manufacturing  Practice ("GMP") regulations.  The GMP regulations impose certain
procedural  and  documentation  requirements  upon the  Company  relevant to its
manufacturing,  testing and quality control activities. The CDRH is empowered to
seek fines and other remedies for violations of these  regulatory  requirements.
The Company believes that it is currently in compliance with these regulations.

ELECTRONIC PRODUCTS SEGMENT

Business Developments

     Acquisition of Dynaco Corporation

     On February 9, 1994, the Company acquired  substantially  all of the assets
and business of Dynaco Corp.  ("Dynaco"),  Tempe, AZ, for $1,300,000 in cash and
the assumption of  approximately  $6 million in liabilities.  At the time of the
acquisition,  Dynaco had been operating under Chapter 11 of the U.S.  Bankruptcy
Code.  Dynaco now operates as a wholly-owned  subsidiary of the Company and is a
manufacturer of high density flexible  electronic  circuitry with commercial and
government  applications.  The flexible  circuit  technology  utilized by Dynaco
offers  advantages  over  traditional  circuit board  technology in applications
where space constraints and performance  specifications demand compact packaging
and a high  level of  reliability.  Dynaco  has  developed  a number  of  unique
products using the flexcircuit  core technology that it plans to market over the
next twelve months.

     Formation of Nexar Technologies, Inc.

     On March 7, 1995, the Company formed Nexar Technologies,  Inc. ("Nexar),  a
wholly-owned  subsidiary.  Nexar is an early stage company  which  manufactures,
markets,  and sells  personal  computers with a unique circuit board design that
enables end users to upgrade and  replace  the  microprocessor,  memory and hard
drive  components.  Nexar markets its products using various  proprietary  brand
names through multiple channels of distribution, including the wholesale, retail
and direct response channels. Revenue recognized during 1996 was $18,695,364.

     In December 1996 the Company sold 400,000  shares of Nexar common stock for
$4,000,000,  of which  $2,000,000 was collected prior to year end and $2,000,000
is in  other  current  assets  in the  consolidated  balance  sheet.  One of the
purchasers  of 200,000  shares is a  shareholder  of the  Company.  The  Company
recognized a gain on this sale of  $3,830,000 in the  consolidated  statement of
operations.  Subsequent  to year end,  the Company  sold an  additional  200,000
shares of Nexar common stock for $2,000,000 to another Company shareholder.  The
subsequent  to  year  end  sale  of  Nexar  common  stock   includes  an  option
arrangement,  whereby the  purchaser  has the option to  exchange  the shares of
Nexar common stock,  as defined,  for  $2,000,000 of the Company's  common stock
based on a discounted  value as defined,  if an option  exercise  event  occurs,
based on the value of the  Company's  stock on the  exchange  date.  The  option
exercise terminates upon the completion of Nexar's initial public offering.

     On April 14, 1997 Nexar  completed its initial public offering of 2,500,000
shares of its common stock for its own account,  as well as shares held by Nexar
shareholders.  The price per share was $9.00 and Nexar  raised net  proceeds  of
approximately $20.3 million.  Following this offering, Palomar will beneficially
own  approximately  67% of Nexar's common stock.  Included in this percentage is
(i) 1,200,000  shares of Nexar's  common stock owned by Palomar that are subject
to a contingent  repurchase  right by Nexar for an aggregate price of $12,000 in
the event that Nexar does not achieve certain  performance  milestones set forth
in an  agreement  between  Nexar and Palomar,  and (ii) 408,000  shares of Nexar
common stock which  Palomar may acquire upon the  conversion of 45,684 shares of
Nexar  Convertible  Preferred  Stock that is also owns. The 1,200,000  shares of
common stock subject to the contingent repurchase right of Nexar will be held in
escrow and  released to Palomar  upon Nexar  attaining  certain  revenue  levels
ranging from $100 million to $400 million and net income levels  ranging from $7
million to $28 million over a four year period  ending  December  31,  2000,  as
defined in the agreement between Nexar and the Company. These shares may also be
released  from escrow  upon Nexar  attaining  a  specified  minimum  stock price
ranging  from  $15.75 per share to $29.25  per share over this four year  period
ending  December 31, 2000,  and if the Company  achieves  cumulative  net income
totaling  $70,000,000  through  December  31,  2000.  These  shares will also be
released  if Nexar is party to any  merger or sale of  substantially  all of its
assets.


<PAGE>
                                       14


        Upon  completion  of  the  offering,   Nexar  will  repay  the  Company
approximately $8,200,000 from the net proceeds received from this offering.

         FORMATION OF DYNAMEM, INC.

     On September 29, 1995,  Dynaco formed a new company  called  Dynamem,  Inc.
("Dynamem") with an outside party who is a joint owner of the patent  underlying
certain  FRAMM  technology  (a  technology  utilized to package  two  rigid-flex
printed circuit boards in the same slot arrangement  that  customarily  houses a
single  board).  The joint  owner  became  an  employee  of the new  subsidiary,
Dynamem.  Dynamem issued 80% of its authorized and outstanding  capital stock to
Dynaco and the remaining 20% to the joint owner. The joint owner granted Dynamem
a non-exclusive  license to  manufacture,  use, sell and sublicense the patented
FRAMM  technology in exchange for certain  royalty  payments.  The royalties are
guaranteed  by  Dynaco.   Dynaco  and  the  joint  owner  also  entered  into  a
stockholders' agreement which grants the joint owner the right, upon the earlier
of December 29, 2000 or the  termination  of his  employment  with  Dynamem,  to
require Dynaco to purchase a total of 75% of the  securities  owned by the joint
owner in Dynamem.  In  addition,  if the  Company  purchases  the joint  owner's
shares,  the  joint  owner  may  elect to  receive  between  35% and 100% of the
purchase price in the form of common stock of the Company.

     License Agreement with Technovation Computer Lab, Inc.

     Nexar's  current  PCs are shipped  with  motherboards  based on  technology
licensed  from  Technovation  Computer  Lab,  Inc.  ("Technovation"),  a  Nevada
corporation which, to the best of the Company's knowledge,  is owned by Babar I.
Hamirani, a former executive officer of Nexar whose employment was terminated on
November 29, 1996.  The Company has agreed to acquire all such  technology and a
patent application  related thereto,  and settle all claims between Mr. Hamirani
and Nexar, no later than the closing of Nexar's initial public offering pursuant
to the Asset  Purchase  and  Settlement  Agreement  by and  among Mr.  Hamirani,
Technovation,  Nexar and the Company  dated as of February  28, 1997 (the "Asset
Purchase  and  Settlement  Agreement").  Pursuant  to  the  Asset  Purchase  and
Settlement Agreement and a separate asset purchase agreement between the Company
and Nexar, the Company will first acquire the subject technology and then convey
such technology to Nexar.

     Formation of Palomar Electronics Corporation

     On September 15, 1995, the Company formed Palomar  Electronics  Corporation
("PEC"), a wholly-owned subsidiary,  as part of a reorganization to separate the
electronics  and computer  operations of the  Company's  business from the laser
segments of its business. On SEPTEMBER 29, 1995, as part of this reorganization,
the Company contributed all of its outstanding capital stock of Dynaco and Nexar
to PEC in exchange for all of the outstanding common stock of PEC.

     Acquisition of CD Titles, Inc.

     On July 13, 1995, CD Titles,  Inc. ("CD Titles") was incorporated  with the
Company owning  substantially  all of CD Titles' common stock.  Certain minority
stockholders  of CD Titles  loaned CD  Titles a total of  $600,000.  On July 31,
1995, CD Titles  purchased  certain  assets and assumed  certain  liabilities of
CDRP,  Inc. The purchase price consisted of $625,000 in cash and a $600,000 note
due  September  30, 1995,  which was  guaranteed  by the  Company.  The notes to
minority  stockholders  and CDRP, Inc. were repaid in December 1995 with 386,144
shares of the Company's  common stock. CD Titles is a CD ROM publishing  company
which  distributes  various  materials  on  CD  ROM  through  personal  computer
wholesale channels in the United States.

     Acquisition of Comtel Electronics, Inc.

     During 1996, Dynaco acquired 80.32% of Comtel Electronics,  Inc. ("Comtel")
by  converting  a  $100,000  note  receivable  into  equity of Comtel and paying
$27,500 in cash.  Effective December 31, 1996, as part of a recapitalization  of
Comtel,  Dynaco  exchanged  $2,200,000 in intercompany  receivables  from Comtel
issued by Comtel to fund its  operations for an additional  16.98%  ownership in
Comtel, resulting in Dynaco owning 97.3% of Comtel. The remaining 2.7% ownership
is held  by two  individuals.  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 
<PAGE>
                                       15


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 five-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. On April 5, 1996,  Palomar  invested
$2,690,000 in New Media Series E Preferred Stock and common stock and loaned New
Media an  additional  $1,000,000.  Palomar  also  received a warrant to purchase
200,000  shares of common  stock in New Media at $1.20 per  share.  Palomar  has
accounted for this investment under the cost method.

     On  February  14,  1997  Palomar  invested  an  additional  $1,200,000  and
converted its $1,000,000 note plus accrued  interest  totaling  $76,931 into New
Media  Series F Preferred  Stock.  In  addition,  Palomar  also  entered  into a
settlement  agreement  together with Lucent  Technologies  and New Media whereby
Palomar agreed to purchase 33,000 LapTalk(TM)  speaker/microphone  products from
Lucent Technologies and New Media for $1,200,000, which was paid March 1997.

     During the twelve  months  ended  December 31, 1996 Comtel had sales to New
Media of $15,664,967.  At December 31, 1996,  $4,896,632 of accounts  receivable
was due from New Media,  of which  $2,475,929  was  collected  through March 20,
1997.

General

     Through  its   wholly-owned   subsidiary   Nexar,   PEC  is  marketing  and
manufacturing a new family of personal computers that incorporates user-oriented
printed  circuit boards and computer  chassis  designs that allow an end-user to
conveniently  alter or upgrade the computer's  processor,  memory and hard drive
capacity,  thereby reducing the rate of obsolescence in the rapidly changing and
technology-driven arena of personal computers. Nexar offers PCs to its resellers
without  the CPU,  RAM,  cache and hard drive  pre-installed,  allowing  them to
configure  the PC with  their  customers'  choice of  components.  Unlike  other
upgradeable  or  modular  computers,  Nexar PCs are not  based on a  proprietary
architecture.  Industry standard  components can be used. The customer,  not the
manufacturer's  technicians,  is in control of enhancements  to the system.  The
removable hard drive is a feature that is particularly  desirable where security
is an issue or when a user wants portable data to go. It also makes possible the
use of  multiple  operating  systems  on a single PC.  See  "Formation  of Nexar
Corporation".

     PEC,  through its wholly-owned  subsidiary  Dynaco,  designs,  develops and
manufactures   interconnect   products,   principally  flexible  circuits,   for
electronic systems. Dynaco currently designs flexible interconnect solutions for
complex military and commercial  applications where high reliability,  precision
tolerances  and  multilayer   packaging  are  important.   Dynaco's  traditional
customers serve diverse markets, including the defense,  aerospace,  electronics
and  telecommunications  industries.  Dynaco  has  recently  developed  two new,
lower-cost flexible circuit products which it believes will enable it to develop
more cost-effective interconnect solutions for commercial applications.  Comtel,
which is a majority owned subsidiary of Dynaco, is a contract  manufacturer that
specializes  in thin core and high  density  surface  mount  assemblies  for the
computer and telecommunication  industries.  Dynaco,  through its majority-owned
subsidiary  Dynamem,  has developed,  and plans to manufacture and market to the
personal  computer  industry,  foldable rigid  assembly  memory modules which it
believes  will have  between 50% and 100% more memory  capacity  than  currently
available memory modules.

     PERSONAL COMPUTER INDUSTRY BACKGROUND

     In 1991,  there were over 100 vendors  competing in the  personal  computer
marketplace  with intense  competition in both price and product  specification.
Nexar believes that, over the past five years,  the personal  computer  industry
has become  oversaturated  with  manufacturers  of varying  degrees of financial
stability  and  marketing   expertise.   Since  1995,  many  personal   computer
manufacturers  have exited the industry for a variety of reasons,  and many more
have reported significant losses.

     Nexar believes that aggressive  channel  expansion played an important role
in the demise of many  second and third tier  personal  computer  manufacturers.
Since  1995,  many first tier  manufacturers  have  expanded  their  channels of
distribution  to  include  national  distributors,   mass  merchants,   computer
superstores,  office  superstores,  end-user direct 
<PAGE>
                                       16


sellers and wholesale  buying clubs.  Prior to 1992,  these channels were almost
exclusively the domain of the second and third tier  manufacturers.  The channel
expansion of the top tier manufacturers reduced the available retail shelf space
for second and third tier manufactures through these once alternative  channels.
Consequently,  second and third tier suppliers,  which compete  primarily on the
basis of price and availability, are facing ever-increasing competition.

     Nexar Strategy

     The Nexar  strategy is to provide  products  that benefit  wholesalers  and
resellers  by  reducing  their   commitment  to  inventory  with  specific  unit
configuration  and  permitting  them to satisfy  customers  with systems  easily
configured  to their needs,  and that benefit  end-users by  permitting  them to
upgrade  components  from time to time  without  incurring  the expense of a new
system.

     Leverage Nexar's XPA(TM) (Cross-Processor Architecture) Technology.

     Nexar    develops,     manufactures    and    markets     high-performance,
competitively-priced  desktop personal  computers (PCs) based on  patent-pending
technologies.  Unlike  conventional  PCs,  Nexar  systems  permit an end user to
easily upgrade or switch important  components of the PC to accommodate emerging
and future technologies  resulting in a significant  extension of the computer's
useful life. Nexar sells a high-performance system which is typically shipped to
resellers without the key system defining components (microprocessor, memory and
hard drive), but which is otherwise fully configured. This approach:

     Enables the  end-user,  whether  corporate or  individual,  to buy a system
configured exactly to that customer's technical and budgetary  requirements and,
later,  to  easily  upgrade  the  PC's  key  components  with  industry-standard
products;

     Enables  Nexar's  channel  resellers to reduce their  exposure to inventory
depreciation   caused  by  rapid  advances  in  technology  and  frequent  price
reductions of the key system  components,  which typically account for more than
50% of the cost of a PC;

     Enables Nexar's  resellers to compete with direct  marketers,  such as Dell
Computer  and  Gateway  2000,  because a Nexar PC  provides  resellers  with the
ability  to  promptly  deliver a  custom-configured,  high  performance  PC at a
competitive price;

     Enables Nexar to maintain  profit  margins  unaffected  by the  forecasting
risks  borne  by   conventional   PC   manufacturers   who   operate   within  a
several-month-long cycle from component procurement to assembly to date-of-sale,
all conducted in an  environment  of rapid  technological  advances and frequent
price reductions.

     Nexar's current PCs are based on an industry  standard,  open  architecture
design,  co-engineered  by HCL Hewlett  Packard  LTD.,  which allows the central
processing  unit (CPU),  random  access  memory  (RAM),  and cashe  memory to be
replaced by  end-users  without  technical  assistance  and without  opening the
entire chassis.  Nexar's current model accepts Intel  Corporation's  Pentium and
compatible  CPUs,  including the recently  released  Pentium  processor with MMX
multimedia extension technology.  Nexar PCs also include, as a standard feature,
a removable hard drive, permitting its replacement and the further advantages of
increased  data  portability  and  security,  and the use of multiple  operating
systems  in a  single  PC.  The  Nexar  PC  is  configured  with  the  following
components:   system  chassis  with  removable  side  panels,   custom  designed
motherboard,  power supply, video controller,  input/output  controller,  floppy
disk  drive,  caddy for  removable  hard disk,  keyboard,  mouse,  and  hardware
manuals.  Nexar occasionally includes additional  components,  including the key
system defining  components (CPU, memory and hard drive) and peripherals such as
monitors and modems at the customer's request. Nexar PCs sold by resellers fully
configured have list prices generally  ranging from $1,200 to $2,500,  depending
upon the components included.

     Nexar's  objective  is to  become  the  industry  leader in  designing  and
marketing PCs with technology that enables  resellers and end-users,  in an easy
and  cost-effective  manner, to upgrade and transition the CPU and the other key
system defining components in accordance with the known and anticipated roadmaps
of various makers of fundamental and  leading-edge  PC technology.  Accordingly,
Nexar has developed  and will soon market a new  generation of PCs featuring the
Company's  patent-pending  Cross-Processor  Architecture(TM)  (Nexar XPA(TM)) in

<PAGE>
                                       17


which any one of the several  state-of-the-art CPUs can be initially included or
later installed,  including Intel's Pentium or Pentium Pro and Compatible CPU's.
The Nexar XPATM technology will also accommodate  microprocessors based on other
technologies, such as the Alpha CPU made by Digital Equipment Corporation or the
PowerPC processor offered jointly by IBM, Motorola, and Apple Computer.

     Engage in Private Labeling.

     Nexar believes that as personal computer users become increasingly computer
literate, they will tend to shift away from branded products and towards private
label  products.  Nexar  anticipates  that  contemporary  technology and design,
upgradability,  value,  reliability and system  flexibility  will continue to be
essential requirements,  but the method of presentation and product distribution
will adapt to satisfy the  requirements  of resellers and users alike. A primary
component of Nexar's overall  channel  strategy is to bypass the OEM and provide
custom,  private  label  systems  directly  to major  channel  resellers.  Nexar
believes that there will be a proliferation of private label personal  computers
by  channel   resellers,   and  that  private  label  branding  will  become  an
increasingly standard practice in various reseller channels. Nexar intends to be
one of the first manufacturers to capitalize upon this opportunity.

     Exploit specialized government markets.

     Nexar believes  that, in addition to the other  advantages of Nexar PCs and
the  increased  security  and other  benefits of the  removable  hard disk drive
described  herein,  the Nexar PC is  particularly  appealing to many  government
buyers  because the time  required  for  ordering  entirely new systems is often
prohibitive  under  government  regulations,  while  component parts can be more
timely requisitioned, thereby allowing a government office to more easily remain
technologically  current.  In 1996,  Nexar recognized  approximately  66% of its
total year revenue from Government  Technology Services,  Inc. (GTSI), a leading
supplier of desktop systems to the U.S. government.

     COMPETITION

     The desktop PC industry is intensely  competitive and may become more so as
the  result  of,  among  other  things,  the  introduction  of  new  competitors
(including large multi-national,  diversified  companies) and possibly weakening
demand. Nexar currently competes in the desktop PC market principally with Acer,
Apple Computer,  Compaq Computer, Dell Computer,  Gateway 2000,  Hewlet-Packard,
IBM and  Packard  Bell NEC. In  addition,  Nexar plans to compete in the network
server market by late 1997 with established companies such as ALR, Compaq, Dell,
Hewlett-Packard and IBM. All of these companies have stronger brand recognition,
significantly  greater financial,  marketing,  manufacturing,  technological and
distribution  resources,  broader  product lines and larger  installed  customer
bases than  Nexar.  Principal  competitive  factors  include  product  features,
product performance,  quality and reliability, the ability to deliver product to
customers  in a timely  fashion,  customer  service and support,  marketing  and
distribution   capabilities   and  price.   The  ability  of  Nexar  to  compete
successfully  will depend on factors  within and outside its control,  including
the  acceptance  of its Nexar  XPA(TM)  system and general  market and  economic
conditions.

     Manufacturing and Suppliers

     Nexar's  manufacturing process requires a high volume of quality components
that are  procured  from third party  suppliers.  Most of these  components  are
generally available from multiple sources;  however, Nexar relies on two outside
contractors to manufacture  motherboards used in PCs and plans to rely on a sole
outside  contractor to manufacture  the  motherboards  to be used in its planned
server  product.  In addition,  Nexar relies on a single supplier to produce its
customized chassis and has several other single supplier  relationships for less
critical  components.  In some  cases,  alternative  sources  of supply  are not
readily  available  for  some  of  Nexar's  single  sourced  components.   Nexar
occasionally  experiences delays in receiving certain components,  which can and
has caused delays in shipment of products.

     Environmental Controls and Government Certifications

     Although Nexar conducts certain manufacturing operations,  those operations
consist  primarily  of product  assembly  and do not involve the use of material
quantities of hazardous or other  regulated  substances.  Nexar believes that it
has substantially complied with existing environmental laws and regulations, but

<PAGE>
                                       18


has not  conducted  any  environmental  studies of its  operations  to determine
whether contamination has occurred at its facilities.  Nexar's computer products
are subject to certain FCC  guidelines.  Nexar  believes  they are in compliance
with these FCC guidelines.

     Intellectual Property

     Nexar has rights to two pending patent applications  covering the essential
technology which enables the easy  installation,  removal and replacement of key
components  in the  Nexar  PC.  Nexar  filed a patent  application  in late 1996
covering its proprietary Nexar XPATM technology, which is expected to be used in
Nexar's PCs by  mid-1997.  Also Nexar has agreed to  acquire,  no later than the
closing of its initial public offering, a patent application originally filed in
March 1995 together with the related  technology which is currently  included in
Nexar's PCs under an exclusive license agreement.
<PAGE>
                                       19


DYNACO CORP. BUSINESS INTRODUCTION

     Dynaco Corp. ("Dynaco")

     Dynaco is a leading U.S.  supplier of  high-density,  multilayer,  flexible
printed  circuit  products  for  original  equipment   manufacturers   ("OEMs"),
value-added  resellers and contract  manufacturers of sophisticated  electronics
equipment. Specifically, Dynaco designs, develops and manufactures products that
provide  electrical   connections  between  components  in  electronic  systems.
Dynaco's  interconnect  solutions  use  3-dimensional  packaging  techniques  to
enhance  space  utilization  and  increase  signal  speed via  thin,  multilayer
substrates.  Dynaco's  principal  products are flexible  circuits and rigid-flex
circuits.  Dynaco's flexible circuits are flexible,  multilayer  printed circuit
boards  that can be bent or  folded  to fit into  spaces  too small or too oddly
shaped  for  traditional  rigid  printed  circuit  boards.  Dynaco's  rigid-flex
circuits  consist  of one or  more  rigid,  multilayer  printed  circuit  boards
combined with flexible  circuitry.  The multiple layers of circuitry in Dynaco's
products  increase  reliability and reduce the overall size of its  interconnect
systems by reducing the number of circuit boards,  connectors and wires.  Dynaco
also  manufactures  specialty  interconnect  cable  harnesses that are sold with
Dynaco's traditional flexible circuit products and that are sold independently.

     Dynaco  currently  designs  flexible  interconnect  solutions  for  complex
military  and  commercial   applications   where  high  reliability,   precision
tolerances  and  multilayer   packaging  are  important.   Dynaco's  traditional
customers serve diverse  markets,  including  defense,  aerospace,  electronics,
telecommunications,  global positioning systems navigation, medical electronics,
interactive displays and semiconductor wafer fabrication equipment. For example,
Dynaco's products have been used in guidance systems for the Tomahawk and AMRAAM
missiles,  and  Dynaco has  developed  applications  for  lasers,  night  vision
systems, digital imaging and engine monitoring controls.

     Flexible Interconnect Substrate Industry Background

     Generally,  interconnect  substrates  are printed  circuits,  consisting of
copper traces  (circuitry)  and an insulating  (dielectric)  base,  that provide
electrical  connections  between electronic  components such as microprocessors,
resistor networks and capacitors.  Interconnect substrates include rigid printed
circuit  boards,  ceramic hybrid  circuits and flexible  circuits.  Each type of
substrate  has  specific  performance  and price  ratios  which affect usage and
demand in the marketplace.

     Dynaco believes that its multilayer  flexible  circuits offer the following
advantages  over  rigid  printed  circuit  boards  and  ceramic  substrates  for
sophisticated, compact electronic equipment:

     Flexible circuits are thinner and better able to conform to smaller volumes
     and unusual container shapes;

     Flexible circuits allow 3-dimensional interconnect packaging techniques;

     Flexible  circuits  are  lighter  and  more  space-efficient  because  they
     eliminate the need for connectors and wires;

     Film-based  flexible  substrates cost  significantly  less per input/output
     connection than ceramic-based interconnect systems; and

     The use of multiple layers can provide significant performance enhancements
     over single-sided and double-sided interconnect packages.

     The  3-dimensional  packaging  and flexure  characteristics  of  multilayer
flexible circuits and multilayer  rigid-flex circuits have made them the fastest
growing  segment of the U.S.  printed  circuit  market.  According to a May 1996
report by TechSearch International,  Inc., a technology licensing and consulting
firm, the world market for flexible printed  circuits in 1995 was  approximately
$1.8 billion to $2.0 billion,  of which the U.S. market was  approximately  $550
million,  an  increase  of  nearly  18% from  $470  million  in  1994.  Japanese
manufacturers  and their affiliated  offshore  operations had  approximately 60%
share of the world  market.  According  to  Flexible  Circuits  Engineering,  an
industry  publication,  sales of flexible  circuits in North  America have grown
from $300 million in 1985 to an estimated $650 million in 1995. The  publication
points out that the market has grown  erratically,  growing  principally  in the

<PAGE>
                                       20


periods from 1985  through 1987 and from 1993 through the present.  According to
Flexible  Circuits  Engineering,  the first growth phase reflected a short-lived
increase in the use of flexible  circuits in missiles,  "black  boxes" and other
defense-related products shortly before the end of the Cold War, and the current
growth  phase  reflects the  increased  use of flexible  circuits in  commercial
markets,  including the personal computer,  automotive,  consumer and instrument
markets.  As a  result  of  these  market  trends,  Dynaco  believes  there is a
significant market opportunity for manufacturers that can timely deliver complex
multilayer  flexible and rigid-flex  circuits to leading suppliers of electronic
equipment.

     Dynaco Strategy

     Dynaco's objective is to be the preferred  supplier of multilayer  flexible
circuits and rigid-flex  circuits in the electronics  industry and to expand its
business  to include  high  density  memory  modules.  Dynaco's  strategy  is to
capitalize on its significant investment in flexible circuit technology,  modern
facilities  and  multilayer  packaging  expertise in order to participate in the
growth of the worldwide  electronics  market.  In order to achieve its objective
and benefit  from the trends in the  industry,  Dynaco's  strategy  includes the
following:

     Maintain and Improve the Company's Market Position in the Defense/Aerospace
     Markets

     Dynaco  seeks  to  capitalize   on  a  growing   trend  among   electronics
manufacturers  in the  defense  and  aerospace  markets  to reduce the number of
suppliers  with which they do business  and to increase  their  out-sourcing  of
higher level assemblies.  Dynaco is currently a preferred  supplier with leading
prime contractors such as Hughes Aircraft Company,  Lockheed Martin Corporation,
Loral  Corporation,  McDonnell  Douglas  Corporation  and  Raytheon  Company.  A
preferred  supplier is one of a select  number of suppliers  whose  products and
facilities have been determined by the customer to meet certain  performance and
quality  specifications.  Because  customers  frequently  contact only preferred
suppliers for  particular  products,  Dynaco  intends to obtain and maintain the
status of preferred supplier with its current and prospective customers.

     In January 1997,  Raytheon announced a tentative agreement to purchased the
defense  operations of Texas  Instruments,  Inc. and GM Hughes Electronics Corp.
for $2.95 billion and $9.5 billion respectively.  These three companies combined
accounted for approximately one third of Dynaco's 1996 revenue.  It is too early
to determine how this proposed consolidation will affect Dynaco.

     Another market trend is the growth occurring in defense  electronics due to
electronic upgrades,  re-packaging for lower cost, and the  commercialization of
defense  hardware.  Dynaco is  currently  developing  new  flat-panel  displays,
night-vision  systems,  digital electronic  upgrades,  global positioning system
navigation  products  and  enhanced  communication  systems  that  use  flexible
circuits as the principal electronic interconnect.  Dynaco also plans to utilize
its  packaging  expertise  to convert  wire  bundles  and cable  harnesses  into
flexible  circuits to reduce  weight,  space and cost.  Dynaco has  designed and
currently   expects  to  convert  at  least  five  wire  and  cable   electronic
interconnect systems.

     Commercialize the Dynaflex Products

     Dynaco  believes  that the  demand for  smaller  electronic  products  will
increasingly  cause  commercial  designers to consider  high-density  multilayer
flexible packaging.  Historically,  Dynaco's flexible circuit products have been
too costly to make most commercial  applications  feasible.  Dynaco has recently
developed,  and in June, 1995,  submitted patent  applications  for,  Dynaflex-D
(Dynamic)  and  Dynaflex-S  (Static),  two new flexible  circuit  products  that
utilize less expensive,  commercial-grade substrates. Dynaco believes that these
proposed  products  will permit it to expand  into  commercial  markets.  Dynaco
believes that its proposed Dynaflex-D and Dynaflex-S products will ultimately be
used in commercial  applications such as automotive engine monitoring  controls,
disk  drives,  personal  computers,  workstations,  and  cellular  communication
systems.

     Exploit Manufacturing and Marketing Capabilities

     Dynaco  believes there are few domestic or foreign  high-volume  multilayer
flexible and rigid-flex  circuit  manufacturers  with  comparable  expertise and
know-how.  As the  manufacture  of multilayer  flexible  circuits for commercial
applications  proliferates,  Dynaco  intends to license  its  manufacturing  and

<PAGE>
                                       21


marketing  expertise to high volume,  highly  capitalized  printed circuit board
manufacturers  throughout the world.  Dynaco recently signed a license agreement
with Wong  Circuits  International,  a Hong  Kong  corporation,  to  manufacture
certain  flexible  circuit  products in Hong Kong and China.  In  addition,  the
Company is currently  conducting  negotiations  with other  manufacturers in the
United States and Europe. By working with these  manufacturers,  Dynaco hopes to
expand the customer base for its flexible circuits technology.

     Acquire, Develop and Market Flexible Circuit Products

     Dynaco   through  its  Dynamem   subsidiary   and  internal   research  and
development, intends to produce and market additional flexible circuit products.
Dynaco has recently  obtained  certain rights to the patented FRAMM  technology.
See "Acquisition of Dynamem."

     Comtel Electronics, Inc. Business Introduction

     Comtel Electronics, Inc. ("Comtel")

     Comtel,    which   was   acquired   in   1996,   is   an   electronic   and
electro-mechanical,  contract  manufacturer.  Comtel's  business is to provide a
lower cost alternative  (outsourcing) to OEM in-house, or captive manufacturing.
Comtel's  primary  product is  turnkey,  build-to-print  (versus its own design)
circuit card assemblies.  These circuit card assemblies range in complexity from
very high volume,  relatively  simple (few components)  assemblies in support of
the consumer electronics  industry,  to very complex, full "black and white box"
builds for high technology industry.

     Contract Manufacturing Industry Background

     Contract  electronics   manufacturers  (CEMs)  are  playing  an  even  more
important  role  in the  electronics  market.  The  world  market  for  contract
manufacturing  services  exceeded  $30 billion in 1996,  and  industry  analysts
recently  estimated the U.S.  contract  manufacturing  market will grow from $11
billion in 1994 to over $36 billion by the year 2001, a compound  average annual
growth rate of 20%. Based on industry  data, the Company  believes that OEMs are
increasingly  relying  upon  independent  manufacturers  of complex,  electronic
interconnect  products,   such  as  Comtel,  rather  than  on  internal  captive
production.  Factors which Comtel  believes  will lead OEMs to utilize  contract
manufacturers include:

     Limited  Resources  Used  on  Core   Competencies:   In  recent  years  the
electronics industry has experienced greater levels of competition and technical
changes forcing OEMs to focus their resources on critical product activities. By
offering  comprehensive  turnkey  manufacturing  services,  CEMs afford OEMs the
resources to focus on core activities such as product development, marketing and
product distribution.

     Improved  Purchasing  Power and  Material  Management:  OEMs are faced with
increasing  difficulties  planning,  procuring  and managing  their  inventories
efficiently due to frequent design changes, short product life-cycles, component
price  fluctuations,  and the need to  achieve  economies  of scale in  material
procurement. By using the CEMs' combined purchasing power and required expertise
in inventory  management,  OEMs can reduce  capital  required for production and
inventory.

     Reduced   capital   investment:   As   electronic   products   become  more
technologically advanced,  including the transition from through-hole to surface
mount assembly,  the manufacturing  operation has become more  sophisticated and
automated,  requiring a greater level of capital  investment  in  equipment.  By
outsourcing,  OEMs  can  reduce  their  overall  capital  equipment  investment,
maintain access to the latest advanced manufacturing  technology,  and enjoy the
lower costs associated with higher capacity utilization experienced by CEMs.

     Design/Packaging   Expertise:   The   customer   benefits   from  the  ever
accumulating  design and packaging  capabilities  of CEMs.  For example,  Comtel
works on hundreds of different designs each year and certain packaging solutions
can be applied to a multitude of new  applications.  OEMs are  motivated to work
with a CEM in order to gain access to this process  expertise and  manufacturing
know-how.
<PAGE>
                                       22


     Comtel  Electronics  believes  they can exploit this market with the latest
manufacturing  capabilities  in  surface  mount  assembly  and thin core PC card
assembly.


<PAGE>
                                       23


     Comtel Strategy

     Comtel is a CEM who provides  turnkey  manufacturing  and test  services of
electronic assemblies.  Comtel specializes in thin core and high density surface
mount   assemblies.   Comtel's   services   consist  of   design,   procurement,
manufacturing and test.

     Design:  Working  closely with  customers and the  substrate  manufacturer,
Comtel  designs a specific  packaging  configuration  to satisfy the  customer's
requirements  for  reliability  and lowest cost of  ownership.  In  selection of
substrate materials, Comtel advises its customers with respect to issues such as
size, power consumption and package configuration.

     Procurement:  Early  involvement  in the design  process  allows  Comtel to
assist in the selection of suppliers  and  components to enhance time to market,
manufacturability  and  logistical  support of volume  ramp-ups.  As part of the
procurement   process,   Comtel  offers  its  customers  material  planning  and
procurement,  inventory management, and material handling services. From time to
time,  material  suppliers  must allocate  components  among their  customers in
response to supply shortages. By assuming responsibility for procurement, Comtel
and the  Company may be  required  to bear the risks of price  fluctuations  and
availability.  However,  in certain cases,  Comtel can pool its purchasing power
and leverage its position as a  manufacturing  partner to receive more favorable
pricing and volume allocations.

     Assembly:  Substrate assembly involves the exact placement and soldering of
a wide size range of electronic components. Comtel's current assembly techniques
range from manual assembly of through-hole connectors to highly automated screen
printing  and  placement  of  miniaturized  SMT  components.  SMT is a method of
affixing electronic components,  including integrated circuits, onto the surface
of a substrate.  Components mounted in SMT assemblies can be of relatively small
size  due to  the  use of  fine  lead-to-lead  spacing  (called  "pitch")  which
currently can be as small as 12 Mils.  Comtel's SMT assembly  process has become
increasingly  complex because of these smaller  dimensions and tight tolerances,
and  accordingly  requires  the use of  expensive  automated  assembly  and test
equipment.

     Test:  Using sophisticated  in-circuit and functional test systems,  Comtel
tests complex  assemblies in order to determine whether the electronic  assembly
is performing to customer satisfactions. Comtel's current and planned investment
in  manufacturing  defect analyzer  testers enables  customers to specify a wide
range of test options.

     DYNAMEM, INC. BUSINESS INTRODUCTION

     DYNAMEM, INC. ("DYNAMEM")

     Dynamem spent most of 1996 developing the 64MB, 128MB, and 256MB FRAMM high
density memory  modules.  These memory modules are currently  being  technically
evaluated by a number of potential OEM users. A memory module  usually  consists
of various  configurations  of memory chips or other memory devices mounted on a
printed circuit board inserted into a slot on a computer's  motherboard.  Memory
modules  currently in use include single  in-line  memory modules  ("SIMMs") and
double  in-line memory  modules  ("DIMMs"),  both of which utilize rigid printed
circuit boards.  Industry standards limit the number of memory chips that can be
mounted on a rigid  printed  circuit  board  within a given  length and  height.
Consequently,  a traditional  memory module that has reached the maximum  length
and height has also  reached  maximum  memory  capacity.  Dynamem  believes  its
proposed  memory  modules will  overcome this  limitation of memory  capacity by
utilizing the FRAMM  technology to fit two rigid printed  circuit  boards in the
same slot arrangement that customarily houses SIMMs and DIMMs. Dynaco's proposed
memory  modules will mount thin,  small  outline  package  memory chips onto two
rigid printed circuit boards,  connected by flexible  circuits,  that are folded
for insertion into the motherboard.

     High-Density Memory Modules

     A memory  module  usually  consists  of  various  configurations  of memory
devices or chips mounted on a printed  circuit  board  inserted into a slot on a
computer's  motherboard.  Dynamem's memory modules consists of two rigid printed
circuit boards connected by flexible circuits that are folded for insertion.  In
recent  years,  the  overall  size of  computers,  especially  that of  portable
computers, has shrunk while the newest program applications, such as Windows 95,
continue to use increasing  amount of random-access  memory ("RAM").  Meanwhile,

<PAGE>
                                       24


computer manufacturers are shipping an increasing number of systems with limited
RAM in order to  maintain  price  competitiveness.  As a result,  end-users  who
desire to run the latest applications must add memory modules or buy new systems
with  greater  memory  capacity.  Dynaco  believes  that these trends will favor
manufacturers  of high density memory modules as  requirements  for RAM increase
from 16MB to 32MB, 64MB, 128MB and beyond.

     DYNAMEM STRATEGY

     Dynaco has  introduced  high density  memory  modules based on the patented
FRAMM technology. These memory modules overcome the current limitation on memory
capacity by utilizing  the FRAMM  technology  to fit two rigid  printed  circuit
boards in the same slot  arrangement  that  customarily  houses SIMMs and DIMMs.
Dynaco's memory modules will mount thin, small outline package memory chips onto
two rigid  printed  circuit  boards,  connected by flexible  circuits,  that are
folded for insertion into the motherboard.  This  combination  produces a module
that is no wider or taller than  conventional  rigid boards but that offers four
substrate surface areas, twice the area offered by rigid boards. Dynaco believes
that FRAMM represents a novel and innovative  packaging approach which will have
between  50% and 100% more  memory  capacity  than  currently  available  memory
modules.

     This is in  comparison  to a  traditional  memory  module that  consists of
various  configurations  of memory  chips or other memory  devices  mounted on a
printed circuit board inserted into a slot on a computer's motherboard. Industry
standards  limit the  number  of memory  chips  that can be  mounted  on a rigid
printed  circuit  board  within  a given  length  and  height.  Consequently,  a
traditional  memory  module that has  reached the maximum  length and height has
also reached maximum memory capacity.  Dynaco is designing a full memory product
line   around  the  FRAMM   technology.   Initial   products   are  planned  for
IBM-compatible  personal,   portable,  laptop  and  notebook  computers,   Apple
Computer's Macintosh computers and Sun Microsystems'  workstations.  Dynaco also
plans to design custom  modules for certain  special needs and is  investigating
other applications.

     Sales and Distribution

     Dynaco  markets  its  products  through a direct  sales force and through a
network of four independent sales representatives and distributors  specializing
in electronics equipment.  Dynaco principally targets large OEM corporations and
government prime contractors. These and other customers often employ competitive
bidding techniques with respect to large, multi-year contracts, for which Dynaco
competes with other qualified suppliers of flexible circuits.

     Comtel  presently  utilizes a combination of direct factory and independent
manufacturers  representatives  sales  personnel and is moving towards  complete
direct selling.  Comtel relocated its manufacturing facility in November 1996 to
a much larger  (65,000 square feet) facility to increase its capacity to fulfill
the expected increase in demand.

     Dynaco's  Dynamem  subsidiary  markets its FRAMM  products  through  both a
separate  sales  organization  and  through  Nexar.  Dynaco  believes  that this
approach  will  enable the  Dynamem  sales  force to develop  specific  industry
contacts and a focused knowledge base of the high-density memory market.

     Dynaco has generally utilized selected sources to obtain volume discounts.

     Customers

     Dynaco

     Dynaco's traditional customers include OEMs, prime contractors and contract
manufacturers   of  defense  and   aerospace   electronics,   telecommunications
equipment,  navigational  systems and medical  products.  Dynaco's  new Dynaflex
products  have  attracted  prototype  orders from  customers in the  automotive,
computer and data storage markets.

     For the year  ended  December  31,  1996,  sales to Hughes,  Raytheon,  and
Lockheed Martin accounted for approximately  20%, 10% and 5%,  respectively,  of
Dynaco's net sales.  For the year ended  December 31, 1995,  sales to Raytheon ,
Hughes  Electronics  and Loral  accounted for 15%, 9% and 6%,  respectively,  of
Dynaco's  net  sales.   Sales  to  Dynaco's  top  10  customers   accounted  for
approximately  55% of Dynaco's  net sales for the year ended  December 31, 1996.
Approximately  100 other  customers  accounted for the remainder of Dynaco's net
sales for the year ended December 31, 1996.
<PAGE>
                                       25


     Comtel

     Comtel  entered  into a five year  agreement  New Media,  whereby New Media
subcontracted to Comtel all of its  manufacturing and assembly business over the
contract term. Comtel recognized approximately $17.1 million of total revenue of
which 91% was from New Media.  Comtel's  intention  in 1997 is to  increase  and
diversify  its  overall  revenue  base and  reduce the  percentage  of New Media
concentration.  The Company has received  orders in 1997 from  customers such as
MCI,  MGE UPS  Systems  and  others,  thereby  reducing  the New Media  customer
concentration.   However,   the  Company   cannot  ensure  that  the  New  Media
concentration will significantly decrease in 1997.

     Competition

     The flexible  circuit  industry is  characterized  by intense  competition.
Dynaco and its competitors  have developed  various  technologies to serve niche
packaging  requirements.  Dynaco has  focused  its  development  efforts on more
complex  multilayer  circuit technology rather than single sided or double sided
circuit technology.  Among others,  Dynaco's competitors include  Packard-Hughes
Interconnect  Co.,  Parlex  Corporation  and Teledyne,  Inc.  Dynaco believes it
competes  principally  on the  basis of  design,  quality,  price  and  customer
service.  Some of  Dynaco's  competitors  include  larger  companies  that  have
substantially greater managerial,  financial,  technical and marketing resources
than Dynaco.

     Other flexible circuit companies such as Adflex Solutions,  Inc., Sheldahl,
Inc., MFlex and Smartflex primarily market single sided and double sided circuit
technology.  Although Dynaco does not currently compete with such companies with
respect to those products, Dynaco believes that the customers of these companies
have begun to demand  multilayer  flexible circuits and that such companies will
become competitors in the near future.

     The  contract  manufacturing  market is  estimated  to be $30 billion  plus
worldwide made up of many  competitors.  Comtel primarily  competes with smaller
sized regional competitors. The same is true for Dynamem which competes in a $20
plus billion computer memory market.

     Environmental Controls and Government Certifications

     The  manufacture  of  substrate  interconnect  products  involves  numerous
chemical solvents and other solid,  chemical and hazardous wastes and materials.
Dynaco incurs  approximately  $200,000 per year in waste treatment costs. Dynaco
is  subject to a variety  of  environmental  laws  relating  to the  generation,
storage,  handling,  use, emission,  discharge and disposal of these substances.
Dynaco  believes that it operates its facilities in substantial  compliance with
existing environmental laws and regulations. In June 1989 and April 1994, Dynaco
conducted  environmental  studies of its Tempe, Arizona substrate  manufacturing
facility and did not discover any contamination requiring remediation.

     Certain  sales  of  flexcircuits   are  subject  to  certain  military  and
government   certifications.   Dynaco  maintains  military   certifications  for
Mil-P-50884,  Mil-P-55110, Mil-I-45208 and Mil-Std. 2000, and various subsets of
such  certifications.  In January 1996, Dynaco obtained ISO 9001  certification.
Dynaco is  further  subject  to  various  federal,  state and local  regulations
regarding environmental protection and hazardous substance controls.  Management
believes  that  its  Dynaco  operations  are  in  compliance  with  governmental
environmental regulations.

Manufacturing and Suppliers

     Dynaco  relies  upon  a  number  of  outside   suppliers  for  all  of  its
manufacturing  supplies,  parts and components and, to date, has not experienced
any significant  delays in obtaining parts and components.  Although most of the
supplies,  parts and components are available from multiple sources,  Dynaco has
generally  utilized selected sources to obtain volume discounts.  Pyralux(R),  a
substrate  material used in substantially  all of the products sold by Dynaco in
1994, is available only from DuPont. In addition,  certain customers issue, from
time to time,  narrow  product  specifications  that can be fulfilled  only by a
single  component  available from a single source.  Because such  specifications
vary from product to product,  Dynaco is unable to  anticipate  its future needs
for such  components  and  therefore  cannot make advance  arrangements  for the

<PAGE>
                                       26


supply of such  components.  Dynaco believes that it will continue to be able to
obtain  most of the  required  components  and parts from a number of  different
suppliers. Dynaco may subcontract production of certain subsystems, such as heat
exchangers,  power supplies and electronic control modules, in order to minimize
production  overhead and to avoid rapid fluctuations in capacity  utilization as
the demand for Dynaco's product changes.

PATENTS IN THE ELECTRONIC BUSINESS SEGMENT

     The  Company's  Nexar  subsidiary  has filed a patent for the  construction
method  facilitating  replacement  of CPU memory and other modules in a personal
computer.  This technology allows the end user a simple, quick and easy platform
for upgrading the most volatile components in a personal computer.

     The Company,  through its Dynaco subsidiary has filed a patent for flexible
circuit boards and method for their manufacture. This technology covers a unique
method  of   manufacturing,   using   proprietary   materials  that  enable  the
manufacturer to be cost  competitive with rigid board  manufacturers.  Dynaco is
awaiting  first  office  action  from the  U.S.  Patent  Office.  As part of the
formation  of Dynamem  discussed  previously,  Dynamem  became joint owner of an
issued patent surrounding  technology that uses two rigid printed circuit boards
attached by flex  circuitry  that can be folded with low  profile  memory  chips
attached to be inserted into the motherboard of a computer.  This design,  while
no larger  than  conventional  rigid  board  designs,  doubles  the  capacity of
conventional memory modules.

RESEARCH AND DEVELOPMENT

     For the fiscal year ended  December  31, 1996,  and December 31, 1995,  the
Company incurred  $7,977,085 and $4,419,487,  respectively,  in product research
and development  costs. Due to the intense  competition and rapid  technological
changes in the medical device and electronic industry, the Company believes that
it must continue to improve and refine its existing  products and services,  and
develop new applications for its technology.  The Company also intends to obtain
additional   technology   and  expand  its  product   line   through   strategic
partnerships, joint ventures, licensing and acquisitions.

EMPLOYEES

     As of December 31, 1996 the Company and its  subsidiaries had 522 full-time
employees and 64 temporary employees. When necessary, the Company also relies on
consultants  with  particular  expertise  for specific  research and  consulting
assignments.  The  Company's  ability to  develop,  manufacture,  and market its
products and to establish  and maintain a  competitive  position in the industry
will  depend,  in large part,  upon its ability to attract and retain  qualified
technical,  marketing and managerial  personnel.  The Company  believes that its
relations  with its  employees  are good.  None of the  Company's  employees are
represented by a union.


<PAGE>
                                       27

                                    PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     The company's Common Stock is currently traded on the National  Association
of Securities Dealers Automated Quotation System (NASDAQ) under the symbol PMTI.
The following  table sets forth the high and low bid prices quoted on NASDAQ for
the Common Stock for the periods indicated. Such quotations reflect inter-dealer
prices,  without retail mark-up,  mark-down or commission and do not necessarily
represent actual transactions.
 
                                                          Fiscal Year Ended
                                                          December 31, 1995
                                                          --------------------
                                                          High        Low
                                                          --------------------
                     Quarter Ended March 31, 1995         3 5/8       2 1/2
                     Quarter Ended June 30, 1995          2 5/8       1 15/16
                     Quarter Ended Sept. 30, 1995         6 11/16     1 7/8
                     Quarter Ended Dec. 31, 1995          7 1/8       4 7/16
 
                                                          Fiscal Year Ended
                                                          December 31, 1996
                                                          --------------------
                                                          High        Low
                                                          --------------------
                     Quarter Ended March 31, 1996         13 1/8      5
                     Quarter Ended June 30, 1996          16 3/8      9 1/8
                     Quarter Ended Sept. 30, 1996         14 5/8      7 7/8
                     Quarter Ended Dec. 31, 1996           9 1/8      6
 
     As of March 24,  1997,  the  Company  had 600  holders  of record of common
stock. This does not include holdings in street or nominee names.

     The Company has not paid  dividends  to its common  stockholders  since its
inception and does not plan to pay dividends to its common  stockholders  in the
foreseeable  future.  The Company  intends to retain any earnings to finance the
growth of the Company.

     PRIVATE PLACEMENT OF COMMON STOCK

     Pursuant to Regulation S under the Act, the Company sold 365,533  shares of
common  stock and 182,765  warrants to  purchase  common  stock to a total of 23
overseas  individuals  and  corporations  on February  1, 1996 for an  aggregate
purchase price of  $1,783,800.  The warrants were issued at a price of $5.00 per
share,  are  immediately  exercisable and expire on February 1, 1999. The common
stock, and common stock  underlying the warrants,  were registered on a Form S-3
filed on February 6, 1996.

     Pursuant to  Regulation  D and Section  4(2) of the Act, the Company sold a
total of  165,810  shares of common  stock on March  29,  1996 for an  aggregate
purchase price of $1,364,842. 114,810 shares of common stock were sold to Arista
High-Tech Growth Fund, Ltd. for an aggregate purchase price of $936,442;  45,000
shares of common  stock  were sold to Histon  Financial  Services,  Inc.  for an
aggregate  purchase price of $378,000 and 6,000 shares of common stock were sold
to Berkshire  International Finance, Inc. Pension Plan for an aggregate purchase
price of $50,400.  The common stock was  registered  on a Form S-3 filed on June
28, 1996.
<PAGE>
                                       28


     Pursuant to  Regulation  D and Section  4(2) of the Act, the Company sold a
total of 44,862  shares of common  stock on April 15, 1996 to Egger & Co. for an
aggregate purchase price of $450,000.  The common stock was registered on a Form
S-3 filed on June 28, 1996.

     Pursuant to Section 4(2) of the Act,  the Company  sold  600,000  shares of
common  stock on  December  27,  1996 to  Finmanagment,  Inc.  for an  aggregate
purchase  price of  $3,150,000.  In addition to the common  stock,  Finmanagment
received  420,000  net  warrants to  purchase  common  stock at $7.50 per share,
300,000 net warrants to purchase common stock at $9.50 per share and 180,000 net
warrants to purchase  common  stock at $11.50 per share.  The net  warrants  are
subject to a cashless exercise for common stock in which the number of shares of
common  stock  issuable  upon such  cashless  exercise  shall be  determined  by
multiplying  (1) the difference  between (a) the closing bid price of the common
stock on the day prior to the date exercised, as reported by NASDAQ, and (b) the
exercise price, by (2) the number of net warrant shares;  divided by the closing
bid price of the common  stock on the day prior to the date  exercised.  The net
warrants are exercisable immediately and expire on February 28, 1997. The common
stock, and common stock  underlying the warrants,  were registered on a Form S-3
filed on February 4, 1997.

     CONVERTIBLE DEBENTURES

     Pursuant  to  Regulation  S of the Act,  the  Company  sold 9,675  units of
convertible debentures to a total of 11 overseas individuals on July 3, 1996 for
an aggregate  purchase price of $7,669,441.  Each unit consists of a convertible
debenture  due July 3, 2003  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  immediately  exercisable  and expire on June 27, 2003.  The common
stock  underlying the debentures and warrants was registered on a Form S-3 filed
on March 4, 1997.

     Pursuant to Section 4(2) of the Act, the Company sold a total of $5,000,000
4.5% Convertible Debentures on October 17, 1996 to Cameron Capital Ltd. and Wood
Gundy London Limited. The debentures,  due October 17, 2001, may be converted at
any time after 75 days from  issuance at the option of the holder into shares of
the Company's  common stock at a price equal to 85% of the average trailing five
day bid price from the date of  conversion.  The  common  stock  underlying  the
debentures was registered on a Form S-3 filed on February 4, 1997.

     Pursuant to Section 4(2) of the Act, the Company sold a total of $6,000,000
5% Convertible Debentures as follows:  $3,000,000 to High Risk Opportunities Hub
Fund Ltd. on December 31, 1996;  $2,000,000 to Berckeley  Investment Group, Ltd.
on December 31, 1996; and $1,000,000 to High Risk Opportunities Hub Fund Ltd. on
January 13, 1997. The debentures,  due December 31, 2001,  December 31, 2001 and
January 13, 2002, respectively, are convertible into shares of common stock at a
conversion  price equal to 85% of the average trailing 10 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 30 day  period
available for  conversion) of the  debentures.  The common stock  underlying the
debentures was registered on a Form S-3 filed on March 4, 1997.

     PREFERRED STOCK

     Pursuant  to Section  4(2) of the Act,  the  Company  sold 6,000  shares of
Series D  Convertible  Preferred  Stock on February  14,  1996 to the  Travelers
Insurance  Company for an aggregate  purchase  price of  $6,000,000.  All of the
Series D Convertible  Preferred  Stock was converted  into  1,116,918  shares of
common stock  (including  accrued  dividends of $342,092 and accrued interest of
$9,183) as of December 31,  1996.  In  connection  with the issuance of Series D

<PAGE>
                                       29


Convertible  Preferred  Stock the Company  issued  600,000  warrants to purchase
common  stock at a price of $7.50 per share,  and  200,000  warrants to purchase
common stock at a price of $8.00 per share, both of which expire on February 14,
2001 and are immediately exercisable.  The common stock underlying the Preferred
Stock and the warrants was registered on a Form S-3 filed on June 28, 1996.

     Pursuant  to Section  4(2) of the Act,  the Company  sold 10,000  shares of
Series E Convertible  Preferred  Stock on April 17, 1996 to GFL  Advantage  Fund
Limited for an  aggregate  purchase  price of  $10,000,000.  All of the Series E
Preferred Stock was converted into 1,381,506  shares of common stock  (including
accrued  dividends of $326,174 and accrued interest of $7,536) as of January 28,
1997. In connection with the issuance of Series E Convertible  Preferred  Stock,
the Company issued 304,259  warrants to purchase  common stock at a price of $15
per share, which expire on April 17, 2001 and are immediately  exercisable.  The
common stock underlying the Preferred Stock and the warrants was registered on a
Form S-3 filed on June 28, 1996.
 
     Pursuant  to Section  4(2) of the Act,  the  Company  sold 6,000  shares of
Series F Convertible Preferred Stock on July 12, 1996 to the Travelers Insurance
Company for an aggregate purchase price of $10,000,000. The Series F Convertible
Preferred  Stock,  together  with  any  accrued  but  unpaid  dividends,  may be
converted  into common stock at 80% of the daily  average  closing  price of the
common stock on the ten trading days preceding such conversion,  but in no event
less than $7.00 or more than $16.00. Series F Preferred stock may be redeemed at
any time,  with no less than 10 days and no more than 30 days notice or when the
stock  price  exceeds  $16.50  per  share,  at an amount  equal to the amount of
liquidation  preference  determined  as of the  applicable  redemption  date. In
connection  with the  issuance  of Series F  Convertible  Preferred  Stock,  the
Company issued 500,000  warrants to purchase  common stock at a price of $11 per
share, which expire on July 12, 2001 and are immediately exercisable. The common
stock  underlying the Preferred  Stock and the warrants was registered on a Form
S-3 filed on August 23, 1996.

     Pursuant  to Section  4(2) of the Act,  the Company  sold 10,000  shares of
Series G  Convertible  Preferred  Stock to Genesee Fund Limited on September 26,
1996 for an  aggregate  purchase  price of  $10,000,000.  Genesee  Fund  Limited
subsequently  transferred 5,000 of its shares of Series G Convertible  Preferred
Stock to GFL Advantage  Fund and the remaining  5,000 shares to GFL  Performance
Fund. The Series G Convertible  Preferred  Stock,  together with any accrued but
unpaid  dividends,  may be  converted  into  common  stock at 85% of the average
closing  bid  price  for  the  three  trading  days  immediately  preceding  the
conversion  date, but in no event at less than $6.00 or more than $11.50 for the
5,000 shares of Series G Convertible  Preferred Stock held by GFL Advantage Fund
and no less  than  $6.00 or more than  $8.00  for the  5,000  shares of Series G
Convertible  Preferred  Stock held by GFL  Performance  Fund.  The  warrants are
immediately  exercisable  and expire on December 31, 2001.  Series G Convertible
Preferred  Stock may be redeemed  at any time,  with no less than 10 days and no
more than 20 days  notice,  at an amount  equal to the sum of (a) the  amount of
liquidation  preference determined as of the applicable redemption date plus (b)
$176.50.  In  connection  with the  issuance of Series G  Convertible  Preferred
Stock,  the Company issued 323,799  warrants to purchase common stock at a price
of $12 per share,  which expire on September  27, 2001,  and 50,000  warrants to
purchase common stock at a price of $6.5625 per share,  which expire on December
31,  2001 and are  immediately  exercisable.  The common  stock  underlying  the
Preferred  Stock and the warrants was registered on a Form S-3 filed on February
4, 1997.

     STOCKHOLDER SERVICES

     Stockholders  of the Company who desire  information  about the Company are
invited to contact  John  Ingoldsby,  Director  of Investor  Relations,  Palomar
Medical Technologies,  Inc., 66 Cherry Hill Drive, Beverly, Massachusetts 01915,
508-921-9300,  e-mail at jingoldsby@palmed.com.  A mailing list is maintained to
enable  stockholders  whose stock is held in street name,  and other  interested
individuals,  to receive quarterly reports, annual reports and press releases as
quickly as possible.  (Quarterly  reports and press  releases are also available
through  the  Internet  at the  Company's  home  page  on  the  World  Wide  Web
(http://www.palmed.com)).

<PAGE>
                                       30

ITEM 6. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS.

YEAR ENDED DECEMBER 31, 1996, COMPARED TO YEAR ENDED DECEMBER 31, 1995

     For the  year  ended  December  31,  1996,  the  Company  had  revenues  of
$70,098,443 as compared to $21,906,504 for the year ended December 31, 1995. The
220%  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:
<TABLE>
<S>       <C>                                            <C>           <C>      <C>       


                                                                        Year ended
                                                                       December 31,
                                                             1995                    1996
           Medical                                       $  5,610,280            $ 17,824,158
           Electronic                                      16,296,224              52,274,285
                                                           ----------              ----------
                             Total                       $ 21,906,504            $ 70,098,443
                                                         ============            ============
</TABLE>


     The increase in revenues for the Company's  medical segment was principally
attributable  to $10.1 million of revenues  generated from the Company's  Tissue
Technologies  subsidiary  during the year ended December 31, 1996 as compared to
only $114,000 for the year ended December 31, 1995.  Tissue  Technologies  began
commercial shipment of its product in the fourth quarter of 1995.  Approximately
$6.1  million of medical  revenues  were  generated  by the  Company's  Spectrum
subsidiary during the year ended December 31, 1996, as compared to approximately
$3.8 million of revenues for the year ended December 31, 1995.  This increase in
revenues at Spectrum was due to the  introduction  and initial  shipments of its
EpiLaser  during the third and fourth  quarters of 1996. The Company expects its
revenue from the medical  segment to continue to increase as the Company further
penetrates the domestic and international medical markets with its Tru-Pulse CO2
laser for treatment of wrinkles and skin  resurfacing  and begins  marketing and
shipping its EpiLaser for hair removal which was approved by the FDA in March of
1997.

     The  increase  in  revenues  for  the  Company's  electronics  segment  was
attributable  to  approximately  $18.6  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  $620,000 of revenues generated
from the sale of  non-proprietary  PCs during the year ended  December 31, 1995.
The remaining increase in 1996 in the electronics segment was principally due to
$17.1  million of sales by  Dynaco's  Comtel  subsidiary  acquired  in the first
quarter of 1996. The Company believes that the revenue in the electronic segment
will continue to increase as Nexar further expands its production  capabilities,
marketing  and   distribution   efforts  and  as  Comtel  expands  its  contract
manufacturing  operations.  However,  the Company intends to divest a portion of
its interest in  companies  in the  electronics  segment,  and such  increase in
revenue may not be reflected in the  consolidated  results of the Company to the
extent it is successful in its divesture.

     Gross margin for the year ended December 31, 1996 was  $6,920,888  (9.9% of
revenues) versus  $4,714,034 (21.5% of revenues) for the year ended December 31,
1995. Gross margin by the Company's business segments are as follows:

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

                                                                  Year ended
                                                             December 31, 1995                     1996
         Medical                                      $ 2,145,808             $ 3,437,399
         Electronic                                     2,568,226               3,483,489
                                                        ---------               ---------
                          Total                       $ 4,714,034             $ 6,920,888
                                                      ===========             ===========
</TABLE>


     The  increase  in  gross  profit  dollars  was a result  of the  additional
revenues  generated from new products  introduced during the year ended December
31, 1996 as discussed above. In the medical segment the principal reason for the
decrease in the gross profit percent was the phase-out of the Company's research

<PAGE>
                                       31


and   development   contract  with  the  U.S.  Army  in   anticipation   of  the
commercialization  of its  medical  products.  The  gross  profit  percent  also
decreased due to underutilization  of increased  production capacity at Spectrum
in preparation for the anticipated  increase in demand of its EpiLaser in fiscal
1997. A portion of this  decrease in gross  margins was offset by an increase in
gross  margins  attributed  to the  acquisition  of Tissue  Technologies,  which
introduced  its Tru-Pulse CO2 laser to the  commercial  marketplace in the first
quarter of 1996.

     In the  electronic  segment,  the principal  reason for the decrease in the
gross  profit  percent  was a decrease in yields at Dynaco due to an increase in
production  costs  attributable  to a  change  in  Dynaco's  product  mix and an
inventory  valuation  write-off of $643,000 at Dynaco's Comtel subsidiary offset
by an  increase  in the gross  margin as a result of  Nexar's  introduction  and
initial volume shipments of its proprietary upgradeable PC in 1996.

     Research and  development  costs  increased to $7,977,085 (11% of revenues)
for the year ended December 31, 1996,  from $4,419,487 (20% of revenues) for the
year ended December 31, 1995.  This 80.5%  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  focused its efforts during 1996 to obtain FDA clearance for
hair removal  using the  EpiLaser.  The Company  received FDA clearance for hair
removal in March of 1997.  The Company  also  continued  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,  Dynaco
began funding a new process engineering and materials  development  program, 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 and develops additional applications for
its lasers and delivery systems.  However,  management anticipates that research
and  development  expenditures  as a percentage  of revenue will decrease as its
revenues increase with commercialization of its products.

     General  and  Administrative  expenses  increased  to  $21,569,054  (31% of
revenues)  for the  year  ended  December  31,  1996,  from  $7,879,694  (36% of
revenues)  for the year  ended  December  31,  1995.  This  173.7%  increase  is
primarily due to acquisitions  and the transition of certain  subsidiaries  from
the  development  stage  to   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  Technologies  and expanded its
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.
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.  The  increase in general and
administrative  expenses is also due to  write-downs  and  valuation  allowances
totaling  approximately  $3,100,000 related to accounts receivable,  intangibles
and the accrual of severance costs.

     Selling and Marketing  expenses  increased to $11,420,943 (16% of revenues)
for the year ended December 31, 1996,  from $2,768,541 (13% of revenues) for the
year ended December 31, 1995. This 312.5% increase reflects the Company's effort
to increase its marketing and  distribution as a result of its new product lines
developed  internally within the medical segment.  This increase is attributable
to the Company's Spectrum subsidiary and the acquisition of Tissue Technologies,
both  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. During 1996
Nexar began its efforts to increase  its  selling,  marketing  and  distribution
which  resulted in additional  costs of $4.8 million in 1996 as compared to $0.6
million in 1995.

     Business  Development  and Financing  Costs  increased to $2,879,603 (4% of
revenues) for the year ended December 31, 1996, from $1,409,303 (6% of revenues)
for the year ended December 31, 1995.  This 104.3%  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.
<PAGE>
                                       32


     Settlement and litigation  costs increased to $2,255,000 for the year ended
December  31, 1996 from  $700,000 for the year ended  December  31,  1995.  This
increase is a result of a settlement of potential claims with a former executive
of Nexar for  approximately  $1,400,000  and  under  which  Nexar is  purchasing
previously-licensed  core technology and eliminated  future royalty  payments on
the use of Nexar's core technology,  a settlement of  approximately  $525,000 in
connection  with a suit  brought  against the  Company  and the chief  executive
officer  of Nexar  upon  Nexar's  organization,  and other  claims  against  the
Company, combined with the associated legal costs.

     Merger expenses  totaled  $443,780 for the year ended December 31, 1996 and
are  comprised  of  professional  fees  associated  with the  merger  of  Tissue
Technologies and the Company.

     Interest  expense  increased to $1,443,564  for the year ended December 31,
1996,  from $1,374,199 for the year ended December 31, 1995. This 5% increase is
primarily  the  result of the  issuance  of  acquisition  debt in April  1995 to
purchase  Spectrum,  and  the  issuance  of the  4.5%  Swiss  Franc  convertible
debentures in July 1996.

     Interest  income  increased to $1,586,620  for the year ended  December 31,
1996,  from  $913,050 for the year ended  December 31,  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.

     Net gain on trading securities  represents  realized and unrealized trading
gains and losses of $2,033,371 for the year ended December 31, 1996. Included in
this amount is an unrealized gain totaling  approximately  $1,547,000 related to
the  Company's  investment in a publicly  traded  company in which the Company's
chief  executive  officer owns  approximately  13% and a realized  gain totaling
approximately  $827,000 related to the Company's  investment in another publicly
traded company offset by various  unrealized  losses  aggregating  approximately
$340,000.  The Company had a net realized  trading gain of $201,067 for the year
ended December 31, 1995. It is the Company's  intention to continue to invest in
trading  securities,  which may result in  additional  realized  and  unrealized
trading gains or losses in the future

     Gain on the  sale of  stock  of a  subsidiary  stock  represents  a gain of
$3,830,000 related to the private placement sale by the Company of 400,000 Nexar
common  shares.  See  Note  10  of  the  Notes  to  the  Consolidated  Financial
Statements.

     Other income and expense  totaled  $4,245,642 of expense for the year ended
December 31, 1996 as compared to $102,305 income for the year ended December 31,
1995.  Significant  amounts  included  in this  amount  for 1996 is a charge  to
operations of  $3,690,000  related to the  Company's  New Media  investment  and
additional  reserves  totaling  $1,306,038  required  for  other  loans to joint
ventures.  Offsetting  these  losses  is a  foreign  currency  exchange  gain of
$446,596. See Note 9 of the Notes to the Consolidated Financial Statements.

LIQUIDITY AND CAPITAL RESOURCES

     As of  December  31,  1996,  the  Company  had  $19,066,523  in cash,  cash
equivalents and trading securities. During the year ended December 31, 1996, the
Company  generated  the  following  net cash  proceeds  from its  financing  and
investing activities to fund operations, acquisitions and the development of its
products:

                                                               YEAR ENDED
                                                           DECEMBER 31, 1996
             Sale of common stock                               $ 6,061,380
             Sale of preferred stock                             30,823,147
             Issuance of convertible debentures                  14,169,441
             Sale of Stock of a subsidiary                        2,000,000
             Exercise of stock options and warrants               7,653,907
                                                                  ---------
                     Total                                      $60,707,875


     The Company's net loss for the year ended  December 31, 1996,  included the
following  noncash items:  $3,916,221 of depreciation and amortization  expense;

<PAGE>
                                       33


$70,130 of interest expense relating to the amortization of the discounts on the
convertible debentures; and $741,982 related to common stock and warrants issued
to non-employees  and consultants of which  approximately  $532,758 results from
the issuance of warrants for services in accordance with SFAS No. 123.

     The  Company  anticipates  that  capital  expenditures  for 1997 will total
approximately $16 million,  with nearly 60% of this amount funding lasers needed
for CTI laser  centers.  The Company  intends to finance the majority of the CTI
expenditures  under  equipment  leasing   arrangements  with  various  financing
institutions.  However,  there can be no assurance that the Company will be able
to obtain the necessary financing.

     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 December 31,
1996, the amount of accounts  receivable sold that remained  uncollected totaled
$1,787,057 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 December 31, 1996.  The interest rate on such
outstanding  amounts is the bank's  prime rate (8.25% at December 31, 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. Borrowings under this line 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 $2,770,375 as of December 31, 1996. The loan agreement terminates on
November 30, 1998.  Borrowings  under this loan  agreement are guaranteed by the
Company.

     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  investments in core technologies and companies that
management  feels are strategic to the Company's  business or hopes will yield a
higher than average financial return to support the Company's core business. For
example,  the Company has invested  money in Nexar (see Item 1.  Description  of
Business -- Formation of Nexar  Technologies,  Inc.);  the American  Materials &
Technologies  Corporation,  a manufacturer of advanced composite  materials,  of
which the Company owns 13% as of December 31, 1996; GreenMan Technologies, Inc.,
a  developer  and  manufacturer  of   "environmentally   friendly"  plastic  and
thermoplastic  rubber parts and products that are  manufactured  using  recycled
materials, in which the Company has invested $1,200,000;  and HealthCare 2000, a
privately  held medical and cosmetic  services  company in which the Company has
invested  $500,000.  (See  Note  11 to  Financial  Statements.)  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  "Item  12.  Certain   Relationships   and  Related
Transactions.") At December 31, 1996, the Company had $1,564,153 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,  spin-off 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

<PAGE>
                                       34


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

     SUBSTANTIAL  AND  CONTINUING  LOSSES.  The  Company  incurred a net loss of
$37,863,792  for the year ended  December 31, 1996 and a net loss of $15,365,145
for the quarter ended March 31, 1997.  Losses of this  magnitude are expected to
continue for the near term,  and there can be no assurance that the Company will
achieve profitable operations or that profitable operations will be sustained if
achieved.   At  December  31,  1996,  the  Company's   accumulated  deficit  was
$64,971,200  and at March  31,  1997,  the  Company's  accumulated  deficit  was
$80,631,341.  Dynaco Corp. ("Dynaco"), Star Medical Technologies, Inc. ("Star"),
CD Titles, Inc. ("CD Titles"),  Dynamem, Inc.  ("Dynamem"),  Comtel Electronics,
Inc. ("Comtel").  Tissue Technologies,  Inc. ("Tissue"),  Spectrum Technologies,
Inc. ("Spectrum") and Nexar Technologies, Inc. ("Nexar") each have had a history
of  losses.  There  can  be no  assurance  that  these  companies  will  achieve
profitable  operations  or  that  profitable  operations  will be  sustained  if
achieved. The Company anticipates incurring substantial research and development
expenses,  which will reduce cash  available  to fund  current  operations.  The
Company must  continue to secure  additional  financing to complete its research
and  development  activities,  commercialize  its current and proposed  cosmetic
laser products, expand its current electronics business, execute its acquisition
business plan and fund ongoing operations.  The Company anticipates that it will
require substantial  additional  financing during the next twelve-month  period.
The  Company  believes  that  the cash  generated  to date  from  its  financing
activities;  amounts  available  under its credit  agreement  and the  Company's
ability to raise  cash in future  financing  activities  will be  sufficient  to
satisfy its working capital  requirements  through the next twelve-month period.
However,  there  can be no  assurance  that  this  assumption  will  prove to be
accurate  or that  events in the future  will not  require the Company to obtain
additional  financing  sooner than presently  anticipated.  The Company may also
determine,  depending upon the opportunities available to it, to seek additional
debt or  equity  financing  to fund the  costs  of  acquisitions  or  continuing
expansion.  To the  extent  that the  Company  finances  an  acquisition  with a
combination  of  cash  and  equity  securities,  any  such  issuance  of  equity
securities   could  result  in  dilution  to  the  interests  of  the  Company's
shareholders.  Additionally,  to the extent that the Company incurs indebtedness
to fund increased levels of accounts receivable or to finance the acquisition of
capital  equipment or issues debt securities in connection with any acquisition,
the  Company  will be subject to risks  associated  with  incurring  substantial
additional  indebtedness,  including the risks that interest rates may fluctuate
and cash flow may be  insufficient  to pay  principal  and  interest on any such
indebtedness.   The  Company   continues  to   investigate   several   financing
alternatives,  including  strategic  partnerships,  additional  bank  financing,
private,  debt and  equity  financing  and  other  sources.  While  the  Company
regularly  reviews  potential  funding  sources in  relation  to its 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  will be on
terms satisfactory to the Company.  Failure to obtain additional financing could
have a material adverse effect on the Company,  including  possibly requiring it
to significantly curtail its operations. (See "Item 1. Description of Business,"
"Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations" and Note 1 to Financial Statements; March 31, 1997 Form 10-Q Part
I "Item 2.  Management's  Discussion  and  Analysis of Financial  Condition  and
Results of Operations.")

     HOLDING COMPANY STRUCTURE.  The Company has no significant operations other
than those incidental to its ownership of the capital stock of its subsidiaries.
As  a  holding  company,   the  Company  is  dependent  on  dividends  or  other
intercompany transfers of funds from its subsidiaries to meet the Company's debt
service  and  other   obligations.   Claims  of  creditors   of  the   Company's
subsidiaries,  including trade creditors, will generally have priority as to the
assets of such  subsidiaries  over the claims of the  Company and the holders of
the Company's indebtedness.
     
         LIMITED OPERATING HISTORY;  RECENT ACQUISITIONS.  Many of the Company's
subsidiaries have limited operating  histories and are in the development stage,
and the Company is subject to all of the risks inherent in the  establishment of
a new  business  enterprise.  The  likelihood  of success of the Company must be
considered in light of the problems, expenses,  difficulties,  complications and
delays  frequently  encountered in connection  with the  establishment  of a new
business and development of new  technologies in the cosmetic laser products and
electronic  products  industries.   These  include,  but  are  not  limited  to,
government   regulation,   competition,   the  need  to   expand   manufacturing
capabilities  and  market  expertise,   and  setbacks  in  production,   product
development,  market acceptance and sales and marketing. The Company's prospects
could be  significantly  affected  by its  ability  to  subsequently  manage and
integrate the operations of several distinct  businesses with diverse  products,
services and customer bases in order to achieve cost efficiencies.  There can be

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                                       35


no assurance that the Company will be able to successfully  manage and integrate
the  operations of newly  acquired  businesses  into its  operations or that the
failure to do so will not increase the costs  inherent in the  establishment  of
new business  enterprises.  (See "Item 1. Description of Business" and Note 1 to
Financial Statements.)

     RISKS  ASSOCIATED WITH  ACQUISITIONS.  Since going public,  the Company has
acquired  seven  companies.  In the  normal  course  of  business,  the  Company
evaluates potential  acquisitions of businesses,  products and technologies that
would complement or expand the Company's  business.  Promising  acquisitions are
difficult  to  identify  and  complete  for  a  number  of  reasons,   including
competition  among  prospective  buyers and the need for  regulatory  approvals.
Acquisitions  may result in the incurrence of additional  debt, the write-off of
in-process  research and  development or technology  acquisition and development
costs and the  amortization of expenses related to goodwill and other intangible
assets,  any of which  could have a  material  adverse  effect on the  Company's
business, financial condition, results of operations and cash flow. Acquisitions
involve numerous additional risks, including difficulties in the assimilation of
the operations,  services,  products and personnel of the acquired company,  the
diversion of  management's  attention  from other  business  concerns,  entering
markets in which the Company has little or no direct  prior  experience  and the
potential  loss of key  employees of the acquired  company.  In order to finance
acquisitions,  it may be  necessary  for the Company to raise  additional  funds
through public or private financings. Any equity or debt financing, if available
at all, may be on terms which are not  favorable to the Company and, in the case
of equity financing, may result in dilution to the Company's stockholders.  (See
"Item 1. Description of Business" and Note 1 to Financial Statements.)

     NEW VENTURES. The Company's Cosmetic Technology International, Inc. ("CTI")
subsidiary has entered into several  agreements with physician groups to provide
cosmetic laser services at laser treatment centers, and plans to enter into more
such agreements in the future. While the Company believes these new partnerships
are strategically important, there are substantial uncertainties associated with
the development of new products, technologies and services for evolving markets.
The  success of these  ventures  will be  determined  not only by the  Company's
efforts,  but  also  by  those  of its  partners.  Initial  timetables  for  the
development and introduction of new  technologies,  products or services may not
be achieved,  and  price/performance  targets may not prove  feasible.  External
factors,  such as the  development  of  competitive  alternatives  or government
regulation,  may cause new markets to evolve in unanticipated  directions.  (See
"Highly Competitive Industries," and "Item 1. Description of Business.")

     INVESTMENTS  IN  UNRELATED  BUSINESSES.  The  Company  has  investments  in
marketable  and  non-marketable  securities  and loans to related and  unrelated
parties,  including  approximately $8 million  invested in equity  securities of
high-tech companies, both public and privately held. The amount that the Company
may ultimately  realize from these  investments could differ materially from the
value of these investments recorded in the Company's financial  statements,  and
the  ultimate  disposition  of these  investments  could result in a loss to the
Company.  (See  "Item 6.  Management's  Discussion  and  Analysis  of  Financial
Condition  and  Results of  Operations,"  "Item 12.  Certain  Relationships  and
Related Transactions" and Notes 2 and 11 to Financial Statements; March 31, 1997
Form  10-Q  Notes  3 and  10  to  Financial  Statements  and  Part  I  "Item  2.
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations.")

     MANAGEMENT OF GROWTH.  In light of management's  views of the potential for
future growth,  the Company has adopted an aggressive  growth plan that includes
substantial  investments in its sales,  marketing,  production and  distribution
organizations,  the  creation  of new  research  and  development  programs  and
increased   funding  of  existing   programs,   and   investments  in  corporate
infrastructure  that will be required to support  significant  growth. This plan
carries  with it a  number  of  risks,  including  a higher  level of  operating
expenses,  the difficulty of attracting  and  assimilating a large number of new
employees,  and the  complexities  associated  with managing a larger and faster
growing organization.  Depending on the extent of future growth, the Company may
experience a significant  strain on its management,  operational,  manufacturing
and  financial  resources.  The  failure  of the  Company's  management  team to
effectively  manage growth,  should it continue to occur,  could have a material
adverse effect on the Company's  financial  condition and results of operations.
(See "Item 1. Description of Business.")

     HIGHLY   COMPETITIVE   INDUSTRIES.   The  cosmetic  laser  and  electronics
industries are characterized by intense competition. The cosmetic laser industry
is highly  competitive and is characterized by the frequent  introduction of new
products.  The Company competes in the development,  manufacture,  marketing and
servicing of laser technology products with numerous other companies, certain of
which have substantially  greater financial,  marketing and other resources than
the Company. In addition, the Company's cosmetic laser products face competition

<PAGE>
                                       36


from alternative medical products and procedures, such as dermabrasion, chemical
peels, pharmaceutical treatment, electrolysis, waxing and surgery, among others.
There can be no  assurance  that the Company will be able to  differentiate  its
products  from the  products of its  competitors  or that the  marketplace  will
consider the Company's  products to be superior to competing products or medical
procedures. There can be no assurance that competitors will not develop products
or that new  technologies  will  not be  developed  that  render  the  Company's
products obsolete or less competitive.  (See  "Technological  Obsolescence.") In
addition, in entering areas of business in which it has little or no experience,
such as the opening of laser treatment  centers,  the Company may not be able to
compete  successfully  with competitors that are more established in such areas.
(See "New Ventures.")

     In the  electronics  industry,  the Company  competes  with  Packard-Hughes
Interconnect Co., Parlex Corporation, Teledyne Inc., IBM, Apple Computer, Compaq
and Dell Computer, among others. Many, if not most, of the Company's current and
prospective  competitors are substantial in size and have substantial financial,
managerial,  technical,  manufacturing,  marketing and other resources,  and may
introduce additional products that compete with those of the Company.  There can
be no assurance  that the  Company's  products will compete  favorably  with the
products  of its  competitors  or that  the  Company  will  have  the  resources
necessary  to compete  effectively  against such  companies.  As a result of the
intense  competition in the personal  computer market,  the Company expects that
gross margins on sales of its upgradeable  personal  computers will be extremely
narrow and will require the Company to manage  carefully its cost of goods sold.
There can be no  assurance  that the Company  will be able to manage its cost of
goods sold to the degree necessary for sales of upgradeable computer products to
generate  significant gross margins. The Company currently has limited marketing
capabilities   and  expects  to  place   significant   reliance  on  independent
distributors  and resellers for the  distribution and marketing of its products.
The  Company  will be  dependent  upon the  efforts of such third  parties.  The
inability to establish and maintain a network of  independent  distributors  and
resellers,  or a reduction in their sales efforts, could have a material adverse
effect on the  Company's  financial  condition  and  results of  operations.  In
addition,  there can be no assurance as to the viability or financial  stability
of the Company's independent  distributors and resellers.  The computer industry
has  been  characterized  from  time  to  time  by  financial   difficulties  of
distributors  and  resellers;  any such problems could lead to reduced sales and
could have a material  adverse effect on the Company's  financial  condition and
results of  operations.  There can be no assurance  that the Company's  products
will compete  favorably with the products of its competitors or that the Company
will have the resources necessary to compete effectively against such companies.
(See "Item 1. Description of Business.")

     FLUCTUATIONS IN QUARTERLY PERFORMANCE.  The Company's results of operations
have  fluctuated   substantially  and  can  be  expected  to  continue  to  vary
significantly.  The Company's  quarterly operating results depend on a number of
factors,  including the timing of the introduction or acceptance of new products
offered by the Company or its  competitors,  changes in the mix of products sold
by the Company,  changes in regulations affecting the cosmetic laser products or
electronics  industry,  changes in the Company's operating  expenses,  personnel
changes and general economic conditions.

     The Company's  stock price,  like that of other  technology  companies,  is
subject to significant  volatility.  If revenues or earnings in any quarter fail
to meet the  investment  community's  expectations,  there could be an immediate
impact on the price of the Company's  common  stock.  The price of the Company's
common  stock may also be affected by broader  market  trends  unrelated  to the
Company's  performance.  (See "Volatility of Share Price;" "Item 6. Management's
Discussion and Analysis of Financial Condition and Results of Operations;" March
31, 1997 Form 10-Q "Item 2.  Management's  Discussion  and Analysis of Financial
Condition and Results of Operations.")

     VOLATILITY OF SHARE PRICE.  Factors such as  announcements  of developments
related to the  Company's  business,  announcements  by  competitors,  quarterly
fluctuations  in the Company's  financial  results and other factors have caused
the price of the Company's stock to fluctuate, in some cases substantially,  and
could  continue  to do so in the  future.  In  addition,  the stock  market  has
experienced  extreme  price  and  volume  fluctuations  that  have  particularly
affected the market price for many technology companies and that have often been
unrelated to the operating  performance of these  companies.  These broad market
fluctuations  may  adversely  affect the market  price of the  Company's  common
stock.  The trading prices of many technology  companies'  stocks are at or near
their historical highs, and reflect  price/earnings  ratios  substantially above
historical  norms.  There  can be no  assurance  that the  trading  price of the
Company's common stock will remain at or near its current level.

     GOVERNMENT REGULATION. The Company's laser product business segment and, to
a lesser degree,  its electronics  business segment are subject to regulation in
the United  States and  abroad.  Failure to comply  with  applicable  regulatory
requirements can result in fines, denial or suspension of approvals, seizures or

<PAGE>
                                       37


recall of products, operating restrictions and criminal prosecutions, any or all
of which  could  have a material  adverse  effect on the  Company.  Furthermore,
changes in existing regulations or adoption of new regulations could prevent the
Company  from  obtaining,  or could  affect  the timing  of,  future  regulatory
approvals. (See "Item 1. Description of Business - Government Regulation.")

     LASER PRODUCT SEGMENT.  All laser product devices,  including those sold by
the  Company,  are subject to  regulation  by the FDA under the  Medical  Device
Amendments  of the United  States Food,  Drug and Cosmetics Act (the "FDA Act").
The Company's  business,  financial  condition  and  operations  are  critically
dependent upon timely receipt of FDA regulatory clearance.

     FDA CLEARANCE  STATUS FOR COSMETIC LASER  PRODUCTS.  Three of the Company's
lasers  have  received  clearance  from  the  FDA  for  certain   dermatological
applications:  the Q-switched  Ruby laser,  the Tru-Pulse laser and the Epilaser
system.  The Company's  diode laser has not yet received FDA  clearance,  and is
currently under an Investigative Device Exemption.

     The Company is also investigating other applications in dermatology for its
laser systems.  It will be required to obtain FDA clearance before  commercially
marketing any other  application.  The Company  believes that it will be able to
seek such clearance under the 510(k) application process;  however, no assurance
can be given  that the FDA will not  require  the  Company  to  follow  the more
extensive and time-consuming  Pre-Market Approval ("PMA") process. FDA review of
a 510(k)  application  currently  averages  about  seven to  twelve  months  and
requires limited  clinical data based on "substantial  equivalence" to a product
marketed  prior to 1976,  while a PMA  review  can last for  several  years  and
require substantially more clinical data.

     The FDA also imposes various  requirements on manufacturers  and sellers of
products under its jurisdiction, such as labeling, good manufacturing practices,
record keeping and reporting requirements.  The FDA also may require post-market
testing and surveillance  programs to monitor a product's effects.  There can be
no assurance that the appropriate  clearances from the FDA will be granted, that
the process to obtain  such  clearances  will not be  excessively  expensive  or
lengthy  or  that  the  Company  will  have  sufficient  funds  to  pursue  such
clearances.

     No  assurance  can be given  that FDA  approval  will be  obtained  for the
Company's  current or proposed laser products on a timely basis,  if at all. The
laser products segment of the Company's  business,  is, and will continue to be,
critically  dependent  upon FDA  approval of its current and  proposed  cosmetic
laser products.  Delays or failure to obtain such approval would have a material
adverse effect on the Company.

     OTHER  GOVERNMENT   APPROVALS  FOR  LASER  PRODUCTS;   GOOD   MANUFACTURING
PRACTICES. In order to be sold outside the United States, the Company's products
are subject to FDA permit  requirements  that are conditioned  upon clearance by
the importing country's appropriate regulatory authorities.  Many countries also
require that imported products comply with their own or international electrical
and safety standards.  Additional  approvals may be required in other countries.
The Company's  Tru-pulse laser has received the CE Mark pursuant to the European
Medical  Device  Directive  which allows that laser to be sold in all  countries
that  recognize the CE Mark,  including the countries that comprise the European
Community.  The Company is currently  seeking to obtain the CE Mark registration
for its Epilaser.  The Company has yet to apply for  international  approval for
its diode laser for use in cosmetic surgery and dermatology.

     The Company is subject to the laser radiation safety regulations of the FDA
Act  administered  by the National  Center for Devices and  Radiological  Health
("CDRH") of the FDA. These regulations  require a laser manufacturer to file new
product and annual reports,  to maintain  quality  control,  product testing and
sales  records,  to distribute  appropriate  operation  manuals,  to incorporate
certain design and operating features in lasers sold to end-users and to certify
and label each laser sold to end-users  as one of four classes of lasers  (based
on the level of radiation from the laser).  In addition,  various warning labels
must be affixed on the product and certain  protective devices must be installed
depending upon the class of product. Under the Act, the Company is also required
to  register  with the FDA as a medical  device  manufacturer  and is subject to
inspection on a routine basis by the FDA for compliance with Good  Manufacturing
Practice ("GMP") regulations.  The GMP regulations impose certain procedural and
documentation  requirements  upon the  Company  relevant  to its  manufacturing,
testing and quality control activities.  The CDRH is empowered to seek fines and
other  remedies for  violations of these  regulatory  requirements.  The Company
believes that it is currently in compliance with these regulations.


<PAGE>
                                       38


     ELECTRONIC  SEGMENT.  A  significant  percentage  of the total sales of the
flexible  circuit  board  component  business of the  Company,  which  presently
accounts for a significant amount of the sales of the Company, are the result of
either a subcontract or a direct contract for government  programs funded by the
U.S. military.  Generally,  government contracts and subcontracts are terminable
at the convenience of the government.  Cutbacks in military spending for certain
programs or lack of military  spending in general could have a material  adverse
effect on the Company.  There can be no assurance that termination of contracts,
cessation of purchase orders,  or a failure to appropriate  funds will not occur
in the future. Any termination,  cessation, or failure to appropriate funds with
respect to contracts or  subcontracts  having a  significant  dollar value would
have a material adverse effect on the Company's  business,  financial  condition
and results of operation. The unpredictable nature of the government procurement
process  also  may  contribute  to  fluctuations  in  the  Company's   quarterly
performance. (See "Fluctuations in Quarterly Performance.")

     Flexible circuit board component sales to the U.S.  military are subject to
certain military certifications.  These certifications are based upon compliance
with specification standards set by the U.S. military. The certification for one
of the Company's  products  expires in late 1998,  and, for the other  certified
product, in early 1999. The Company is subject to periodic audit and review from
U.S.  government agencies to ensure compliance under criteria set forth by these
agencies.  The  Company  has passed all  government  audits.  Failure to meet or
exceed  criteria set forth could result in a suspension or  disqualification  of
certain  certifications.  Such  suspension  or  disqualification  could  have  a
material adverse effect on the Company.

     One customer of Nexar,  Government  Technology  Services,  Inc.  (GTSI),  a
leading  supplier  of desktop  systems  to United  States  government  agencies,
accounted for a majority of Nexar's revenues. The Company expects that GTSI will
continue  to be an  important  customer,  and  that  while  sales  to GTSI  will
increase,   such  sales  as  a  percentage   of  total   revenues  will  decline
substantially  as Nexar further expands its  distribution  network and increases
its overall  sales.  Nexar has entered into an agreement  with GTSI  pursuant to
which  GTSI  serves as  Nexar's  exclusive  federal  reseller  with  respect  to
Government Services Administration (GSA) scheduled purchases, provided that GTSI
purchases  at least $35 million of Nexar's  products  in 1997.  GTSI is under no
obligation,  however,  to purchase any products of Nexar's.  If GTSI makes fewer
purchases  in 1997 than Nexar  anticipates,  that would have a material  adverse
effect on the Company.

     UNCERTAINTY  OF MARKET  ACCEPTANCE.  The Company  continually  develops new
products  intended  for  use in the  cosmetic  laser  products  segment  and the
electronic products segment. As with any new products, there is substantial risk
that the marketplace may not accept or be receptive to the potential benefits of
such products.  Market acceptance of the Company's current and proposed products
will  depend,  in large part,  upon the ability of the Company or any  marketing
partners to  demonstrate  to the  marketplace  the  advantages  of the Company's
products  over  other  types  of  products.  There  can  be  no  assurance  that
applications  or uses for the  Company's  current and proposed  products will be
accepted by the  marketplace  or that any of the  Company's  current or proposed
products  will be able to  compete  effectively.  (See "Item 1.  Description  of
Business.")

     UNCERTAINTY OF HEALTHCARE REIMBURSEMENT AND REFORM. The healthcare industry
is subject to changing  political,  economic and regulatory  influences that may
affect  the  procurement   practices  and  operations  of  healthcare   industry
participants.  During  the past  several  years,  state and  federal  government
regulation of reimbursement rates and capital  expenditures in the United States
healthcare  industry has increased.  Lawmakers  continue to propose  programs to
reform the United  States  healthcare  system,  which may  contain  programs  to
increase  governmental  involvement in  healthcare,  lower Medicare and Medicaid
reimbursement  rates or  otherwise  change  the  operating  environment  for the
Company's  customers.  Healthcare  industry  participants  may  react  to  these
proposals by curtailing or deferring  investments,  including investments in the
Company's products.

     DEPENDENCE  ON  THIRD  PARTY  RESEARCHERS.  The  Company  is  substantially
dependent upon third party  researchers and others,  over which the Company will
not have absolute control,  to  satisfactorily  conduct and complete research on
behalf of the Company and to grant to the Company favorable  licensing terms for
products  which may be  developed.  The  Company  has  entered  into a number of
research   agreements   with   recognized   research   hospitals   and  clinical
laboratories.  These  research  institutions  include the Oregon  Medical  Laser
Center at the Heart  Institute of St.  Vincent  Hospital  and Medical  Center in
Portland,  Oregon,  the Wellman Labs at  Massachusetts  General Hospital and the
Otolaryngology  Research  Center for  Advanced  Endoscopic  Applications  at New
England Medical Center,  Boston,  Massachusetts.  The Company provides  research
funding, laser technology and optics know-how in return for licensing agreements

<PAGE>
                                       39


with respect to specific medical  applications and patents.  Management believes
that this method of conducting research and development  provides a higher level
of technical  and clinical  expertise  than it could provide on its own and in a
more cost efficient manner.  The Company's success will be highly dependent upon
the results of the research,  and there can be no assurance  that these research
agreements  will provide the Company with  marketable  products in the future or
that any of the products developed under these agreements will be profitable for
the Company.  (See "Item 1.  Description  of  Business"  and Note 6 to Financial
Statements.)

     TECHNOLOGICAL  OBSOLESCENCE.  The markets for the  Company's  products  are
characterized by rapid and significant  technological change,  evolving industry
standards and frequent new product  introductions and enhancements.  Many of the
Company's   products  and  products  under   development   are   technologically
innovative,  and require significant planning,  design, development and testing,
at the technological, product and manufacturing process levels. These activities
require  significant  capital  commitments  and  investment by the Company.  The
Company's  failure to develop products in a timely manner in response to changes
in the industry,  whether for financial,  technological  or other reasons,  will
have a material adverse effect on the Company's  business,  financial  condition
and results of operations.

     The flexible circuit board component, electronics interconnect and personal
computer  industries  are  characterized  by large  capital  investments  in new
automated processes and  state-of-the-art  fabrication  techniques.  In order to
participate  effectively in those industries,  the Company must continue to make
large  capital  investments  in new  automated  processes  and  state-of-the-art
fabrication  techniques.  Development  by  others of new or  improved  products,
processes or technologies may make the Company's  products or proposed  products
obsolete or less  competitive.  The Company will be required to devote continued
efforts and  financial  resources to  enhancement  of its existing  products and
development  of new  products.  There can be no assurance  that the Company will
have the financial resources or the technological  capability necessary to carry
out such product  enhancement  and  development.  Nor can there be any assurance
that any of the products  currently being developed by the Company,  or those to
be developed in the future, will be technologically  feasible or accepted by the
marketplace,  that any such development will be completed in any particular time
frame,  or that the  Company's  products or  proprietary  technologies  will not
become uncompetitive or obsolete. (See "Item 1. Description of Business.")

     LACK OF PATENT PROTECTION.  The Company currently holds several patents and
intends  to pursue  various  additional  avenues  that it deems  appropriate  to
protect its  technology.  There can be no assurance,  however,  that the Company
will file any additional  patent  applications  or that any patent  applications
that have been,  or may be,  filed will  result in issued  patents,  or that any
patent, patent application,  know-how,  license or cross-license will afford any
protection or benefit to the Company.

     The cosmetic  laser device  market has been  characterized  by  substantial
litigation  regarding patent and other intellectual  property rights. One of the
Company's  competitors in the cosmetic laser business has filed suit against the
Company alleging patent  infringement,  among other things. In both the cosmetic
laser products and the electronic  products  segments,  litigation,  which could
result in  substantial  cost to and  diversion of effort by the Company,  may be
necessary  to protect  trade  secrets or  know-how  owned by or  licensed to the
Company  or  to  determine  the  enforceability,   scope  and  validity  of  the
proprietary   rights  of  others.   Adverse   determination   in  litigation  or
interference proceedings could subject the Company to significant liabilities to
third parties, require the Company to seek licenses from third parties and could
prevent the Company from  manufacturing  and selling its products,  all of which
could  have a  material  adverse  effect on the  Company's  business,  financial
condition and results of  operations.  (See "Item 1.  Description  of Business,"
"Item 3.  Legal  Proceedings;"  March  31,  1997  10-Q,  Part II "Item 1.  Legal
Proceedings.")

     POSSIBLE PATENT INFRINGEMENTS. In the medical products segment, the Company
is aware of patents relating to laser technologies used in certain applications.
The Company intends to pursue such laser  technologies in the future;  hence, if
the patents relating to those  technologies are valid and enforceable,  they may
be infringed by the Company.  The Company has obtained  opinions of counsel that
the Company is not infringing currently on patents held by others; however, such
opinions have not been challenged in any court of law. If the Company's  current
or proposed products are, in the opinion of patent counsel, infringing on any of
these  patents,  the  Company  intends  to seek  non-exclusive,  royalty-bearing
licenses to such  patents but there can be no  assurance  that any such  license
would  be  available  on  favorable  terms,  if at  all.  One of  the  Company's
competitors  in the cosmetic  laser  business has filed suit against the Company
alleging patent  infringement,  among other things.  In the electronic  products
segment,  the Company has not been notified  that it is currently  infringing on
any patents nor has it been the subject of any patent  infringement  action.  No
assurance  can be given that  infringement  claims  will not be made or that the
Company  would  prevail in any legal action with respect  thereto.  Defense of a
claim of infringement  would be costly and could have a material  adverse effect
on the Company's business, even if the Company were to prevail.
<PAGE>
                                       40


     DEPENDENCE ON PROPRIETARY  RIGHTS.  The Company relies on trade secrets and
proprietary  know-how  which it seeks to protect,  in part,  by  confidentiality
agreements with its  collaborators,  employees and consultants.  There can be no
assurance  that these  agreements  will not be breached,  that the Company would
have adequate  remedies for any breach, or that the Company's trade secrets will
not otherwise become known or be independently developed by competitors.

     NEED FOR ADDITIONAL QUALIFIED  PERSONNEL/DEPENDENCE  ON KEY PERSONNEL.  The
Company's ability to develop, manufacture and market all of its products, and to
attain  a  competitive  position  within  the  laser  products  and  electronics
industries,  will  depend,  in large part,  on its ability to attract and retain
qualified personnel.  Competition for qualified personnel in these industries is
intense and the Company  will be  required  to compete for such  personnel  with
companies which may have greater financial and other resources;  there can be no
assurance  that the Company will be successful in attracting,  assimilating  and
retaining  the  personnel  it  requires  to grow  and  operate  profitably.  The
Company's  inability to attract and retain such personnel  could have a material
adverse effect upon its business. (See "Management of Growth.")

     The  Company's  future  success  depends  to a  significant  extent  on its
executive  officers and certain technical,  managerial and marketing  personnel.
The loss of the  services of any of these  individuals  or group of  individuals
could  have a  material  adverse  effect on the  Company's  business,  financial
condition and results of operations.

     The Company is dependent on various sales  representatives and distributors
to market  and sell its  medical  products.  The  Company  is in the  process of
expanding  its direct sales force to ensure that it  satisfactorily  masters and
controls  the  expected  growth of its  medical  product  sales.  (See  "Item 1.
Description of Business.")

     ISSUANCE OF PREFERRED  STOCK AND  DEBENTURES  COULD AFFECT RIGHTS OF COMMON
SHAREHOLDERS.  The  Company  is  authorized  to issue up to 5 million  shares of
Preferred  Stock,  $.01 par value.  The Preferred  Stock may be issued in one or
more series, the terms of which may be determined at the time of issuance by the
Board of Directors,  without  further  action by  shareholders,  and may include
voting rights  (including the right to vote as a series on particular  matters),
preferences as to dividends and  liquidation,  conversion and redemption  rights
and sinking fund  provisions.  In July 1996,  the Company issued 6,000 shares of
Series F  Convertible  Preferred  Stock  at a price  of  $1,000  per  share.  In
September  1996, the Company issued 10,000 shares of Series G Preferred Stock at
a price of $1,000 per share.  As of May 23, 1997,  2,316  shares were  converted
into 362,824  shares of common stock.  In March 1997,  the Company  issued 6,000
shares of Series H Convertible  Preferred  Stock at a price of $1,000 per share.
In May 1997, the Company issued 10,000 shares of Series H Convertible  Preferred
Stock at a price of $1,000 per share.  In July 1996,  the Company  issued  9,675
units in a convertible debenture financing. 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.  In February 1997, 300 units
were  redeemed by the Company for an  aggregate  price of  $195,044.  In October
1996, the Company issued $5,000,000 in 4.5% Convertible  Subordinated Promissory
Notes.  As of May 23,  1997,  $3,100,000  principal  amount was  converted  into
619,512  shares of common stock.  In December 1996 and January 1997, the Company
issued a total of $6,000,000 in 5% Convertible Debentures.  Also, In March 1997,
the Company issued $5,500,000 in 5% Convertible  Debentures.  In March 1997, the
Company issued $500,000 in 6% Convertible  Debentures.  The issuance of any such
additional  Preferred Stock or Debentures could affect the rights of the holders
of Shares,  and could  reduce the market  price of the  Shares.  In  particular,
specific rights granted to future holders of Preferred Stock or Debentures could
be used to restrict the Company's  ability to merge with or sell its assets to a
third party,  thereby  preserving control of the Company by the existing control
group. (See "Item 1. Description of Business," "Item 5. Market for Common Equity
and Related  Stockholder  Matters,"  and Notes 4 and 5 to Financial  Statements;
March 31, 1997 Form 10-Q, Part II, "Item 2. Changes in Securities" and Note 9 to
Financial Statements.)

     ISSUANCE OF RESERVED SHARES;  REGISTRATION  RIGHTS. As of May 23, 1997, the
Company  had  32,806,045  Shares of Common  Stock  outstanding.  The Company has
reserved an additional  23,714,727 Shares for issuance as follows: (1) 3,897,500
Shares for  issuance to key  employees,  officers,  directors,  consultants  and
advisors  pursuant to the Company's  Stock Option Plans;  (2) 212,690 Shares for
issuance to employees,  officers and directors  pursuant to the Company's 401(k)
Plan; (3) 997,586 Shares for issuance  pursuant to the Company's  Employee Stock
Purchase Plan; (4) 9,377,940 Shares for issuance upon exercise of three-,  four-
five- and seven-year Warrants issued to certain lenders, investors, consultants,
directors  and officers (a portion of which are subject to certain  antidilutive
adjustments);  (5) 600,000  Shares for  issuance  upon  conversion  of the 6,000
shares of Series F Preferred  Stock;  (6)  1,337,176  Shares for  issuance  upon

<PAGE>
                                       41


conversion  of the 7,684 shares of Series G Preferred  Stock (7) 840,892  Shares
for   issuance   upon   conversion   of  the   debentures   sold  in  the  Swiss
Franc-Denominated  Offering;  (8) 280,488 Shares for issuance upon conversion of
$1,900,000 principal amount of a 4.5% Convertible  Subordinated Promissory Note;
(9) 1,200,000 Shares for issuance upon conversion of $6,000,000 principal amount
of  a 5%  Convertible  Debentures;  (10)  2,000,000  Shares  for  issuance  upon
conversion of $5,500,000  principal amount of a 5% Convertible  Debenture;  (11)
45,455 Shares for issuance upon conversion of $500,000 6% Convertible Debentures
and (12) 2,925,000  Shares for issuance upon  conversion of the 13,000 shares of
Series H Preferred.  All of the  foregoing  reserved  Shares are, or the Company
intends for them shortly to be,  registered  with the  Commission  and therefore
freely salable on Nasdaq or elsewhere.

     PRODUCT  LIABILITY  EXPOSURE.  Cosmetic  laser  product  companies  face an
inherent business risk of financial  exposure to product liability claims in the
event that the use of their products results in personal  injury.  The Company's
products are and will continue to be designed with numerous safety features, but
it is possible  that patients  could be adversely  affected by use of one of the
Company's products or that deaths could occur. Further, in the event that any of
the Company's  products  prove to be  defective,  the Company may be required to
recall and redesign such products.  Although the Company has not experienced any
material  losses  due to  product  liability  claims  to date,  there  can be no
assurance  that it will not  experience  such losses in the future.  The Company
maintains general liability insurance in the amount of $1,000,000 per occurrence
and $2,000,000 in the aggregate and maintains umbrella coverage in the aggregate
amount of  $25,000,000;  however,  there can be no assurance  that such coverage
will  continue to be available on terms  acceptable  to the Company or that such
coverage will be adequate for liabilities  actually  incurred.  In the event the
Company  is found  liable for  damages in excess of the limits of its  insurance
coverage,  or if any claim or  product  recall  results in  significant  adverse
publicity against the Company,  the Company's business,  financial condition and
results of operations could be materially and adversely  affected.  In addition,
although the  Company's  products  have been and will continue to be designed to
operate in a safe manner,  and although the Company  attempts to educate medical
personnel  with  respect  to  the  proper  use of its  products,  misuse  of the
Company's  products  by medical  personnel  over whom the Company  cannot  exert
control  may  result in the filing of product  liability  claims or  significant
adverse publicity against the Company.

     RISKS  ASSOCIATED WITH  INTERNATIONAL  OPERATIONS.  As part of its business
strategy,  the Company intends to seek  opportunities  to expand its product and
service  offerings  into  international  markets.  In marketing its products and
services  internationally,  the Company will likely face new competitors.  There
can be no  assurance  that  the  Company  will be  successful  in  marketing  or
distributing  products and services in these  markets or that its  international
revenue will be adequate to offset the expense of  establishing  and maintaining
international operations.  The Company's international business may be adversely
affected by changing economic  conditions in foreign countries.  The majority of
the Company's sales are currently  denominated in U.S. dollars, but there can be
no  assurance  that a  significantly  higher  level of future  sales will not be
denominated  in  foreign  currencies.  To the  extent the  Company  makes  sales
denominated  in  currencies  other  than U.S.  dollars,  gains and losses on the
conversion of those sales to U.S.  dollars may contribute to fluctuations in the
Company's business,  financial condition and results of operations. In addition,
fluctuations  in exchange  rates could affect demand for the Company's  products
and services.  Conducting an international business inherently involves a number
of other  difficulties and risks, such as export  restrictions,  export controls
relating  to  technology,  compliance  with  existing  and  changing  regulatory
requirements,  tariffs and other trade  barriers,  difficulties  in staffing and
managing international operations, longer payment cycles, problems in collecting
accounts  receivable,  political  instability,  seasonal  reductions in business
activity  in Europe  and  certain  other  parts of the world  during  the summer
months, and potentially adverse tax consequences. There can be no assurance that
one or more of these  factors  will not have a  material  adverse  effect on any
international  operations established by the Company and,  consequently,  on the
Company's business, financial condition and results of operations.

     The Company plans to expand its business into international markets and has
set up a manufacturing  and  distribution  center in Hull England.  To date, the
Company has minimal  experience  in  marketing  and  distributing  its  products
internationally  and plans to  establish  alliances  with  sales  representative
organizations and resellers with particular experience in international markets.
Accordingly,   the   Company's   success  in   international   markets  will  be
substantially  dependent  upon the skill  and  expertise  of such  international
participants in marketing the Company's products. There can be no assurance that
the Company will be able to successfully  market,  sell and deliver its products
in these  markets.  In  addition,  there are  certain  risks  inherent  in doing
business in  international  markets,  such as  unexpected  changes in regulatory
requirements,   export   restrictions,   tariffs  and  other   trade   barriers,
difficulties in staffing and managing foreign  operations,  management's lack of
international  expertise,  political  instability  and  fluctuations in currency
exchange rates and potentially  adverse tax consequences,  which could adversely
impact the success of the Company's  international  operations.  There can be no

<PAGE>
                                       42


assurance  that one or more of such  factors  will not have a  material  adverse
effect on the Company's future international  operations and,  consequently,  on
the company's business,  financial condition or operating results. (See "Item 1.
Description of Business.")

     NEED FOR CONTINUED PRODUCT  DEVELOPMENT.  Although the Company received FDA
clearance in February 1997 to  commercially  market its  Tru-Pulse(R)  laser for
wrinkle treatment, and in March 1997 to commercially market its Epilaser(TM) for
hair removal,  the Company is continuing its  development of both products.  The
Company is continuing to study both laser  systems to optimize  performance  and
treatment parameters.

     DEPENDENCE ON SOLE SUPPLIERS.  The Company relies on outside  suppliers for
substantially  all  of  its  manufacturing   supplies,   parts  and  components.
Pyralux(R),  an integral  component of most of the  Company's  flexible  circuit
products,  is  manufactured  exclusively  by E.I. du Pont de Nemours and Company
("DuPont"). Although the Company has a written agreement with DuPont under which
DuPont will supply the Company with all of its requirements  for Pyralux,  there
can be no assurance that the Company will be able to obtain a sufficient  supply
of Pyralux to fulfill orders for its products in a timely manner, if at all.

     In addition,  CO2 laser tubes, an integral  component of Tissue's Tru-Pulse
Laser system, are manufactured  exclusively by Pulse Systems,  Inc. There can be
no assurance  that the Company will be able to obtain  sufficient  supply of CO2
laser tubes to fulfill  orders for its products in a timely  manner,  if at all.
Furthermore,  several  other  component  parts of the Company's  cosmetic  laser
products and electronic  segment  products are  manufactured  exclusively by one
supplier.  There can be no  assurance  that the Company will be able to obtain a
sufficient  supply of such  components at commercially  reasonable  prices or at
all. A shortage  of  necessary  parts and  components  or the  inability  of the
Company to obtain such parts and components would have a material adverse effect
on the Company's business,  financial condition and results of operations.  (See
"Item 1. Description of Business.")

     DEPENDENCE ON SUBSTANTIAL  CUSTOMERS.  In the year ended December 31, 1996,
one customer of Nexar,  Government Technology Services,  Inc. ("GTSI), a leading
supplier of desktop systems to United States government agencies,  accounted for
17.5% of the Company's revenues and 23.2% of the Company's  accounts  receivable
balance.  In the quarter  ended March 31, 1997,  GTSI  accounted for 9.0% of the
Company's revenues and 9.4% of the Company's accounts  receivable  balance.  The
Company  expects that GTSI will continue to be an important  customer,  but that
sales to GTSI as a percentage of total revenue will decline substantially as the
Company  further  expands its  distribution  network and  increases  its overall
sales.  Nexar has entered  into an  agreement  with GTSI  pursuant to which GTSI
serves as the Company's  exclusive  federal  reseller with respect to Government
Services Administration (GSA) scheduled purchases,  provided that GTSI purchases
at least $35 million of Nexar's  products in 1997.  GTSI is under no obligation,
however,  to purchase  any products of Nexar.  If GTSI makes fewer  purchases in
1997 than the Company anticipates,  that would have a material adverse effect on
the Company.

     In the year ended  December  31, 1996,  one customer of Comtel,  New Media,
Inc.  ("New  Media"),  a related  party,  accounted  for 22.3% of the  Company's
revenues and 26.7% of the Company's accounts  receivable balance. In the quarter
ended March 31, 1997,  New Media  accounted for 11.6% of the Company's  revenues
and 18.3% of the Company's accounts receivable balance.  Comtel has entered into
a five (5) year  agreement  with New Media whereby New Media,  subcontracted  to
Comtel all of its manufacturing and assembly business over the contract term. 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.  Palomar also  received a
warrant to  purchase  200,000  shares of common  stock in New Media at $1.20 per
share.  In February 1997, the note  receivable was converted into equity and the
Company invested an additional $1,200,000 in New Media. The Company expects that
New Media  will  continue  to be an  important  customer,  but that sales to New
Media,  Inc. as a percentage of total revenue will decline  substantially as the
Company  further  expands its  distribution  network and  increases  its overall
sales. New Media has had a history of losses. There can be no assurance that New
Media will achieve profitable  operations or that profitable  operations will be
sustained if achieved.

     A loss from either  customer  could have a material,  adverse effect on the
Company's business in the short term. (See "Item 1. Description of Business" and
Note 2 to Financial Statements.)

     HAZARDOUS  SUBSTANCE  AND  ENVIRONMENTAL  CONCERNS;  LACK OF  ENVIRONMENTAL
IMPAIRMENT  INSURANCE.   The  manufacture  of  substrate  interconnect  products
involves  numerous  chemical  solvents and other solid,  chemical and  hazardous

<PAGE>
                                       43


wastes and  materials.  Dynaco is subject  to a variety  of  environmental  laws
relating to the generation,  storage,  handling,  use,  emission,  discharge and
disposal of these substances and potentially  significant risks of statutory and
common law liability for environmental  damage and personal injury. The Company,
and in certain  circumstances,  its officers,  directors and  employees,  may be
subject to claims arising from the Company's manufacturing activities, including
the  improper  release,   spillage,   misuse  or  mishandling  of  hazardous  or
non-hazardous  substances  or material.  The Company may be strictly  liable for
damages,  regardless  of whether it  exercised  due care and  complied  with all
relevant  laws  and  regulations.   The  Company  does  not  currently  maintain
environmental  impairment insurance.  There can be no assurance that the Company
will not face claims resulting in substantial liability for which the Company is
uninsured  or that  hazardous  substances  are not or will not be present at the
Company's  facilities.   The  Company  believes  that  it  operates  its  Dynaco
facilities  in  substantial  compliance  with  existing  environmental  laws and
regulations. In June 1989 and April 1994, Dynaco conducted environmental studies
of its Tempe, Arizona substrate  manufacturing facility and did not discover any
contamination  requiring  remediation.  Failure to comply with proper  hazardous
substance handling procedures or violation of environmental laws and regulations
would have a material  adverse effect on the Company.  (See "Item 1. Description
of Business.")

     SIGNIFICANT  OUTSTANDING  INDEBTEDNESS;  SUBORDINATION  OF DEBENTURES.  The
Company has incurred substantial  indebtedness in relation to its equity capital
and will be subject to all of the risks  associated with  substantial  leverage,
including  the risk that  available  cash may not be adequate  to make  required
payments to the holders of the Company's  debentures.  The Company's  ability to
satisfy its  obligations  under the debentures  from cash flow will be dependent
upon the Company's future performance and will be subject to financial, business
and other factors  affecting the operation of the Company,  many of which may be
beyond the Company's control.  In the event the Company does not have sufficient
cash resources to satisfy quarterly  interest or other repayment  obligations to
the  holders  of the  debentures,  the  Company  will be in  default  under  the
debentures,  which would have a material  adverse effect on the Company.  To the
extent that the Company is required to use cash  resources  to satisfy  interest
payments to the holders of the debentures, it will have less resources available
for other  purposes.  Inability  of the  Company  to repay the  debentures  upon
maturity would have a material adverse effect on the Company, which could result
in a reduction of the price of the  Company's  Shares.  The  debentures  will be
unsecured and subordinate in right of payment to all senior  indebtedness of the
Company.  The  debentures  do  not  restrict  the  Company's  ability  to  incur
additional senior indebtedness and most other indebtedness.  The terms of senior
indebtedness  now existing or incurred in the future could affect the  Company's
ability  to make  payments  of  principal  and/or  interest  to the  holders  of
debentures.  (See  "Item 5.  Market for Common  Equity and  Related  Shareholder
Matters" and Note 4 to Financial  Statements;  March 31, 1997 Form 10-Q, Part II
"Item 2. Changes in Securities" and Note 8 to Financial Statements.)

     POTENTIAL EFFECT OF ANTI-TAKEOVER PROVISIONS. The Company is subject to the
anti-takeover provisions of Section 203 of the Delaware General Corporation Law,
which  prohibit the Company from  engaging in a "business  combination"  with an
"interested  stockholder"  for a period  of three  years  after  the date of the
transaction  in which the person becomes an interested  stockholder,  unless the
business  combination  is approved in a prescribed  manner.  The  application of
Section 203 could have the effect of delaying or  preventing a change of control
of the Company.  The  Company's  stock option  grants  generally  provide for an
exercise of some or all of the optioned stock, including non-vested shares, upon
a change of control or similar  event.  The Board of Directors  has authority to
issue  up to  5,000,000  shares  of  Preferred  Stock  and  to fix  the  rights,
preference,  privileges and  restrictions,  including  voting  rights,  of these
shares without any further vote or action by the stockholders. The rights of the
holders of the Common  Stock will be subject to, and may be  adversely  affected
by, the rights of the holders of any  Preferred  Stock that may be issued in the
future. The issuance of Preferred Stock, while providing  desirable  flexibility
in connection with possible  acquisitions  and other corporate  purposes,  could
have the  effect of  making it more  difficult  for a third  party to  acquire a
majority of the  outstanding  voting  stock of the  Company,  thereby  delaying,
deferring or  preventing a change in control of the Company.  Furthermore,  such
Preferred Stock may have other rights,  including  economic rights senior to the
Common Stock, and, as a result,  the issuance of such Preferred Stock could have
a  material  adverse  effect  on the  market  value of the  Common  Stock.  (See
"Issuance  of  Preferred  Stock and  Debentures  Could  Affect  Rights of Common
Shareholders.")

     RISKS ASSOCIATED WITH PENDING LITIGATION.  The Company and its subsidiaries
are involved in disputes  with third  parties.  Such  disputes  have resulted in
litigation with such parties and, although the Company is a plaintiff in several
matters,  the Company is subject to claims and counterclaims for damages and has
incurred,  and likely will continue to incur,  legal expenses in connection with
such  matters.  There can be no assurance  that such  litigation  will result in
favorable outcomes for the Company. The Company is unable to determine the total
expense or  possible  loss,  if any,  that may  ultimately  be  incurred  in the
resolution  of these  proceedings.  These  matters  may result in  diversion  of

<PAGE>
                                       44


management  time  and  effort  from  the  operations  of  the  business.   After
consideration  of the  nature  of the  claims  and the facts  relating  to these
proceedings,  the Company believes that the resolution of these proceedings will
not have a material effect on the Company's  business,  financial  condition and
results of operations; however, the results of these proceedings,  including any
potential  settlements,  are  uncertain  and there can be no  assurance  to that
effect.

     On October 7, 1996 the Company filed a declaratory  judgment action against
MEHL/Biophile  ("MEHL") in the United States  District  Court of the District of
Massachusetts  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
or  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 23,  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  has alleged  that it suffered 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  after  damages  have been  determined,  and believes its grounds for
appeal are  meritorious.  (See March 31,  1997 Form 10-Q "Part II, Item 1. Legal
Proceedings.")


<PAGE>

                                       F-2


                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To Palomar Medical Technologies, Inc. and Subsidiaries:

     We have audited the  accompanying  consolidated  balance  sheets of Palomar
Medical  Technologies,  Inc. (a Delaware  corporation) and  subsidiaries,  as of
December  31,  1995  and  1996,  and  the  related  consolidated  statements  of
operations,  stockholders' equity and cash flows for the years then ended. These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

     We conducted  our audits in accordance  with  generally  accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management as well as evaluating the overall financial  statement  presentation.
We believe that our audits provide a reasonable basis for our opinion.

     In our opinion,  the financial statements referred to above present fairly,
in  all  material   respects,   the  financial   position  of  Palomar   Medical
Technologies,  Inc. and  subsidiaries  as of December 31, 1995 and 1996, and the
results  of their  operations  and their  cash flows for the years then ended in
conformity with generally accepted accounting principles.







                                                             ARTHUR ANDERSEN LLP



Boston,  Massachusetts,  
March  7,  1997  
(Except  with  respect
to the  matter discussed 
in Note15(a) as to which 
the date is March 31, 1997)




<PAGE>

                                      F-11

               PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(1)  ORGANIZATION AND OPERATIONS

     Palomar  Medical  Technologies,  Inc. and  subsidiaries  ("Palomar"  or the
"Company")  is engaged in two business  segments:  medical  device  products and
services and  electronic  products and  services.  The medical  device  products
segment consists of the commercial sales and development of cosmetic and medical
laser systems and services.  The electronics  products  segment  consists of the
manufacture and sale of personal  computers,  high density flexible  electronics
circuitry and memory modules.

     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  associated with some of
the directors and officers of the Company (See Note 11).

     Some of the Company's medical laser and electronic  products are in various
stages of development,  and, as such, success of future operations is subject to
a number of risks  similar  to those of other  companies  in  similar  stages of
development.  Principal  among these risks are the  successful  development  and
marketing  of its  products,  proper  regulatory  approval,  the need to achieve
profitable   operations,   competition  from  substitute   products  and  larger
companies,  the need to obtain adequate  financing to fund future operations and
dependence on key individuals.

     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 raised a total of $56,112,391 and
$31,083,892  in such  financings  during the years ended  December  31, 1996 and
1995,  respectively.  The Company  anticipates  that it will require  additional
financing during the next twelve-month period 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.
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.

MEDICAL SEGMENT BUSINESS DEVELOPMENTS

STAR MEDICAL TECHNOLOGIES, INC.

     On April  22,  1996,  the  Company  purchased  the  remaining  14.5% of the
outstanding  common stock of Star Medical  Technologies,  Inc. ("Star") which it
did not already own in exchange  for 224,054  shares of  Palomar's  common stock
valued between $6 and $8 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 have agreed to rescind all  royalties due to them
under a Rights  Agreement  dated July 1, 1993. To date,  revenues from Star have
not been significant.

SPECTRUM MEDICAL TECHNOLOGIES, INC.

     On April 5, 1995, the Company acquired all of the outstanding  common stock
of  Spectrum  Medical  Technologies,   Inc.  ("Spectrum").  The  purchase  price
consisted  of $300,000 in cash, a $700,000  two-year  promissory  note,  364,178
shares of the  Company's  common  stock with an  aggregate  fair market value of
$1,000,000,  acquisition  costs of  $161,138  and assumed  liabilities  totaling
$1,128,139.  In addition, the purchase price includes a 20% contingency payment,

<PAGE>
                                       F-12


payable  in  the  Company's  common  stock,   based  upon  the  future  earnings
performance of Spectrum over a three to five-year period, which will be recorded
as additional  goodwill if earned.  Spectrum develops,  manufactures,  sells and
services  ruby  lasers  throughout  the  world for  dermatological  applications
including the recently (March 1997) FDA approved  EpiLaser.  The acquisition has
been accounted for as a purchase in accordance with Accounting  Principles Board
("APB") Opinion No. 16.

SPECTRUM FINANCIAL SERVICES LLC

     On June 30,  1995,  the Company  formed  Spectrum  Financial  Services  LLC
("SFS"),  a Limited Liability  Company.  SFS provides financial leasing services
for medical and  electronic  manufacturers  both  related and  unrelated  to the
Company.  The Company has majority control over the operating activities of this
entity. Accordingly,  the Company has consolidated the results of operations and
financial  position of SFS since the date of formation.  To date, the operations
of SFS have not been a significant.

TISSUE TECHNOLOGIES, INC.

     On May 3, 1996,  the Company  acquired  100% of Tissue  Technologies,  Inc.
("Tissue  Technologies"),  a manufacturer of a dermatology laser product for the
treatment of wrinkles,  in exchange for 3,200,000 shares of the Company's common
stock. The Company has accounted for this  acquisition as a  pooling-of-interest
in  accordance  with  APB  No.  16.  Tissue   Technologies  is  engaged  in  the
manufacturing,  marketing  and sales of the  Tru-Pulse  C02 laser system used in
skin resurfacing and treatment of wrinkles.

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 the  Company's
common  stock.  The  Company  included  these  35,000  shares in a  registration
statement  that became  effective  February 28, 1997.  In addition,  the Company
agreed  to pay the  Dermascan  stockholder  an  amount  equal to the  difference
between $14.00 and the $7.8125,  the closing bid price on February 28, 1997. The
Company has recorded the acquisition at a price of $490,000 in total.  Dermascan
markets and sells electrology  equipment and supplies to the electrology market.
To date, the operations of Dermascan have not been significant.

PALOMAR TECHNOLOGIES, LTD.

     On November 13, 1996, the Company formed Palomar Technologies, Ltd. located
in Hull, England.  The purpose of the formation of this company was to establish
a European  entity to  manufacture,  sell and service laser products  throughout
Europe and provide a low-cost  sourcing  alternative  for specialty  components.
Operations are expected to begin in mid-1997. Through March 7, 1997, the Company
has funded this  subsidiary  with  approximately  $1,600,000 for the purchase of
office  building  and lease of its  manufacturing  facilities  and the hiring of
certain key employees, and is committed to fund this subsidiary an additional $1
million.  Subsequent  to  year  end,  Palomar  Technologies  Ltd.  entered  into
employment  agreements  with several  individuals  and issued  stock  options to
purchase up to 49% of the outstanding common shares of Palomar Technologies Ltd.
Under the terms of the employment  agreements,  the optionholders have the right
to require  the  Company to  purchase  all or a portion of these  common  shares
exercised pursuant to such stock option at a purchase price based on an earnings
formula as defined.

PALOMAR MEDICAL PRODUCTS, INC.

     In  February  1997,  Palomar  Medical  Products,   Inc.  ("Palomar  Medical
Products")  was formed  with the purpose of  consolidating  the  management  and
operations of the medical products companies. In January 1997, the Company named
an outside party as the President and CEO of Palomar Medical Products to oversee
and  manage the  operations.  Included  in the  medical  products  group are the
following companies; Spectrum, Tissue, Star, Dermascan and Palomar Technologies,
Ltd.

<PAGE>
                                      F-13

COSMETIC TECHNOLOGY INTERNATIONAL, INC.

     On December 20, 1996, the Company formed Cosmetic Technology International,
Inc.  ("CTI").  CTI is a service  company which intends to establish a worldwide
network of cosmetic,  dermatological laser and medical device sites with medical
service partners (both fixed and mobile) in key geographic locations.  Each site
will be  provided a turnkey  package  of laser and  medical  device  technology,
equipment  and  services.   To  date,  the  operations  of  CTI  have  not  been
significant. 

ELECTRONICS SEGMENT BUSINESS DEVELOPMENTS

NEXAR TECHNOLOGIES, INC.

     On March 7, 1995, the Company formed Nexar  Technologies,  Inc.  ("Nexar").
Nexar is an early-stage  company that  manufactures,  markets and sells personal
computers  with a unique  circuit  board  design  that will  enable end users to
upgrade and replace the microprocessor,  memory and hard drive components. Nexar
markets its products  using various  proprietary  brand names  through  multiple
channels of  distribution,  including the wholesale,  retail and direct response
channels.


     In December 1996 the Company sold 400,000  shares of Nexar common stock for
$4,000,000,  of which  $2,000,000 was collected prior to year end and $2,000,000
is in  other  current  assets  in the  consolidated  balance  sheet.  One of the
purchasers  of 200,000  shares is a  shareholder  of the  Company.  The  Company
recognized a gain on this sale of  $3,830,000 in the  consolidated  statement of
operations.  Subsequent  to year end,  the Company  sold an  additional  200,000
shares of Nexar common stock for $2,000,000 to another Company shareholder.  The
subsequent  to  year  end  sale  of  Nexar  common  stock   includes  an  option
arrangement,  whereby the  purchaser  has the option to  exchange  the shares of
Nexar common stock,  as defined,  for  $2,000,000 of the Company's  common stock
based on a discounted  value as defined,  if an option  exercise  event  occurs,
based on the value of the  Company's  stock on the  exchange  date.  The  option
exercise terminates upon the completion of Nexar's initial public offering.

     On April 14, 1997 Nexar  completed its initial public offering of 2,500,000
shares of its common stock for its own account,  as well as shares held by Nexar
shareholders.  The price per share was $9.00 and Nexar  raiseed net  proceeds of
approximately $20.3 million.  Following this offering, Palomar will beneficially
own  approximately  67% of Nexar's common stock.  Included in this percentage is
(i) 1,200,000  shares of Nexar's  common stock owned by Palomar that are subject
to a contingent  repurchase  right by Nexar for an aggregate price of $12,000 in
the event that Nexar does not achieve certain  performance  milestones set forth
in an  agreement  between  Nexar and Palomar,  and (ii) 408,000  shares of Nexar
common stock which  Palomar may acquire upon the  conversion of 45,684 shares of
Nexar  Convertible  Preferred  Stock that it also owns. The 1,200,000  shares of
common stock subject to the contingent repurchase right of Nexar will be held in
escrow and  released to Palomar  upon Nexar  attaining  certain  revenue  levels
ranging from $100 million to $400 million and net income levels  ranging from $7
million to $28 million over a four year period  ending  December  31,  2000,  as
defined in the agreement between Nexar and the Company. These shares may also be
released  from escrow  upon Nexar  attaining  a  specified  minimum  stock price
ranging  from  $15.75 per share to $29.25  per share over this four year  period
ending  December 31, 2000,  and if the Company  achieves  cumulative  net income
totaling  $70,000,000  through  December  31,  2000.  These  shares will also be
released  if Nexar is party to any  merger or sale of  substantially  all of its
assets.

     Upon completion of the offering, Nexar will repay the Company approximately
$8,200,000 from the net proceeds received from this offering.

     CD TITLES, INC.

     On July 13, 1995,  CD Titles,  Inc.  ("CD  Titles") was  incorporated.  The
Company owns substantially all of CD Titles'  outstanding  common stock.  During
July 1995,  certain minority  stockholders of CD Titles loaned CD Titles a total
of $600,000.  On July 31, 1995, CD Titles  purchased  certain assets and assumed
certain  liabilities  of CD  Titles  totaling  $1,271,345.  The  purchase  price
consisted  of $625,000 in cash and a $600,000  note  payable due  September  30,
1995,  which was  guaranteed  by the Company.  CD Titles is a CD ROM  publishing
company that distributes  various  materials on CD ROM through personal computer
wholesale  channels in the United States. The acquisition has been accounted for
as a purchase in accordance with the APB No. 16.
<PAGE>
                                     F-14


     CD Titles  defaulted  on its  loans to the  minority  stockholders,  and on
October  30,  1995  the  Company  negotiated  a  settlement  with  the  minority
stockholders  by agreeing to issue 257,144 shares of the Company's  common stock
in lieu of the then outstanding  principal and accrued  interest  (approximately
$794,000 at October 30, 1995).  The common stock was issued at a 35% discount of
the closing bid price of the stock on October 30, 1995. The discount represented
the  Company's  cost of  acquiring  capital and was  consistent  with  discounts
offered in similar financings during 1995.

     In addition to the  settlement  of the minority  stockholders'  notes,  the
Company  entered  into a  settlement  agreement  with the  former  stockholders.
Pursuant to the settlement  agreement,  the Company registered 175,000 shares of
its authorized, but unissued common stock (the "pledged shares") which were then
issued to the  former  shareholders  of CD  Titles  for  resale.  As part of the
agreement,  the former  shareholders  of CD Titles would sell only the amount of
pledged  shares to  receive  proceeds  equal to the  outstanding  principal  and
accrued interest on the note payable,  which totaled $628,531,  due on September
30,  1995,  as part  of the  acquisition  of CD  Titles.  In  1996,  the  former
shareholders  of  CD  Titles  returned  46,000  of  the  pledged  shares,  which
represents  the unused  portion.  The Company has retired the  returned  shares.

Dynamem, Inc.

     On September 28, 1995, Dynaco Corp.  ("Dynaco") formed Dynamem  Corporation
("Dynamem") (a Delaware Corporation) and contributed $8,000 for a majority (80%)
ownership  in this  subsidiary.  The  remaining  20%  ownership  is owned by the
president of Dynamem (the "Joint Owner").  Dynamem was formed to manufacture and
distribute a patented, high-density memory packaging technology. The Joint Owner
granted Dynamem a non-exclusive license to manufacture, use, sell and sublicense
certain patented FRAMM technology in exchange for certain royalty payments.  The
royalities  are  guaranteed  by Dynaco.  Dynaco and the Joint Owner also entered
into a stockholders'  agreement which grants the Joint Owner the right, upon the
earlier of December 29, 2000, or the termination of his employment with Dynamem,
to  require  Dynaco to  purchase a total of 75% of the  securities  owned by the
Joint Owner in Dynamem. In addition,  if the Company purchases the Joint Owner's
shares,  the  Joint  Owner  may  elect to  receive  between  35% and 100% of the
purchase price in the form of common stock of the Company.

Palomar Electronics Corporation

     On September 15, 1995, the Company formed Palomar  Electronics  Corporation
("PEC"),  as part of a  reorganization  to separate the electronics and computer
operations  of the Company's  business  from the medical  laser  segments of its
business.  On September  29, 1995, as part of this  reorganization,  the Company
contributed all of its outstanding  capital stock of Dynaco and Nexar,  together
with certain intercompany indebtedness,  to PEC in exchange for 4,500,000 shares
of common  stock of PEC.  On  December  21,  1995,  PEC issued 10% bridge  notes
payable to certain  investors for an aggregate  consideration of $1,350,000 (see
Note 4). In connection with these notes, PEC issued to the noteholders  warrants
to  purchase  up to 240,000  shares of its common  stock.  During the year ended
December 31, 1995, the Company started, but did not complete,  an initial public
offering of PEC and incurred  costs of  approximately  $438,000.  This amount is
included in business  development and other financing costs in the  accompanying
consolidated statement of operations for the year ended December 31, 1995.

     Comtel Electronics, Inc.

     During 1996,  Dynaco acquired 80.23%  ownership  Comtel  Electronics,  Inc.
("Comtel") by converting a $100,000  note  receivable  into equity of Comtel and
paying   $27,500  in  cash.   Effective   December  31,  1996,   as  part  of  a
recapitalization  of  Comtel,   Dynaco  exchanged   $2,200,000  in  intercompany
receivables  due from  Comtel and used by Comtel to fund its  operations  for an
additional  11.98%  ownership  in Comtel.  This  transaction  resulted in Dynaco
owning 97.3% of Comtel. The remaining 2.7% ownership is held by two individuals.
The  acquisition has been accounted for as a purchase in accordance with APB 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.
<PAGE>
                                      F-15


     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 CD  Titles,  Inc./CDRP  have been
included with those of the Company since July 31, 1995.

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

     The results of  operations  related to Dermascan  have been  included  with
those of the Company since July 18, 1996

<PAGE>
                                       F-16

     Unaudited  pro  forma  operating  results  for the  Company,  assuming  the
acquisitions  of Spectrum and Comtel had been made as of January 1, 1995, are as
follows  (operations  of CD  Titles  and  Dermascan  prior to  acquisition  were
insignificant):


                                                       Year Ended
                                              1995                     1996
             Revenue                     $31,051,600                $70,483,048
             Net loss                    (16,827,709)               (37,901,990)
             Net loss per common share      $(1.20)                   $(1.49)

     Separate  and  combined  results of the  Company  and  Tissue  Technologies
preceding the merger were as follows:

                                    Tissue           Palomar           Combined

Four Months Ended May 3, 1996 
(unaudited)
      Net Revenues               $3,093,804       $10,255,380       $13,349,184
      Net Loss                  $(1,731,775)     $(8,259,386)      $ (9,991,161)

Year Ended December 31, 1995
      Net Revenues             $114,425           $21,792,079       $21,906,504
      Net Loss              $(1,969,793)         $(10,650,975)     $(12,620,768)

<PAGE>
                                       48

                                     PART IV

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

(A)  EXHIBITS

     The following  exhibits  required to be filed herewith are  incorporated by
reference  to the  filings  previously  made by the Company  where so  indicated
below.

Exhibit
   No.                                                    Title

###10.47  List of exhibits  omitted from the Asset  Purchase and  Settlement
          Agreement. (The Company hereby undertakes and agrees to furnish copies
          of the exhibits and  schedules set forth in exhibit 10.47 above to the
          Commission upon its request.)

23        Consent of Arthur Andersen LLP.

###       Previously  filed as an exhibit to the Company's  Annual Report on
          Form 10-KSB for the year ended  December  31, 1996,  and  incorporated
          herein by reference.

(B)  Reports on Form 8-K

          None


<PAGE>
                                   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 28, 1997.


                                          PALOMAR MEDICAL TECHNOLOGIES, INC.





                                          By:     /s/ Louis P. Valente
                                              ------------------------------
                                              Louis P. Valente
                                              President and 
                                              Chief Executive Officer

     Pursuant to the requirements of the Securities Act of 1934, this Report has
been  signed  by the  following  persons  on  behalf  of the  Registrant  in the
capacities and on the dates indicated.

<TABLE>
            <C>                                  <C>                                             <C>           
                          Name                                   Capacity                             Date

            /s/ Louis P. Valente                 President, Chief Executive                      May 28, 1997
            ---------------------------------
            Louis P. Valente                     Officer and Director

            /s/ Joseph P. Caruso                 Chief Financial Officer and Treasurer           May 28, 1997
            ---------------------------------
            Joseph P. Caruso                     ( Principal Financial Officer and
                                                 Principal Accounting Officer)

            /s/ Dr. Michael H. Smotrich          Chief Technical Officer,                        May 28, 1997
            ---------------------------------
            Dr. Michael H. Smotrich              and Director

            /s/ Steven Georgiev                  Chairman of the Board                           May 28, 1997
            ---------------------------------
            Steven Georgiev
 
            /s/ Buster C. Glosson                Director                                        May 28, 1997
            ---------------------------------
            Buster C. Glosson

            /s/ John M. Deutch                   Director                                        May 28, 1997
            ---------------------------------
            John M. Deutch

</TABLE>