FORM 10-Q

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

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

                    For quarterly period ended June 30, 1997

                                       OR

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

               For the transition period from ________ to ________

                         Commission file number: 0-22340


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

<TABLE>
<S>                                                                                  <C>

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


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

                                 (508) 921-9300
             ------------------------------------------------------
                (Issuer's telephone number, including area code)


        Check whether the issuer:  (1) filed all reports required to be filed by
Section  13 or 15(d) of the  Exchange  Act of during  the past 12 months (or for
such shorter period that the registrant was required to file such reports),  and
(2) has been subject to such filing requirements for the past 90 days. Yes X No

        As of July 30, 1997,  33,149,170  shares of Common Stock, $.01 par value
per share, were outstanding.

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



                                       1
<PAGE>


               PALOMAR MEDICAL TECHNOLOGIES, INC. AND SUBSIDIARIES

                                      INDEX


PART I - FINANCIAL INFORMATION

         ITEM 1.  FINANCIAL STATEMENTS
<TABLE>
<S>                                                                                              <C>

         Consolidated Condensed Balance Sheets - December 31, 1996 and June 30, 1997             P.  3

         Consolidated Statements of Operations - For the Three and Six Months Ended
                  June 30, 1996 and 1997                                                         P.  4

         Consolidated Statement of Stockholders' Equity - For the Six Months Ended                   
                  June 30,  1997                                                                 P.  5

         Consolidated Statements of Cash Flows - For the Six Months Ended
                  June 30, 1996 and 1997                                                         P.  6

         Notes to Consolidated Financial Statements                                              P.  8

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

PART II - OTHER INFORMATION

         ITEM 1.  LEGAL PROCEEDINGS                                                              P. 22

         ITEM 2.  CHANGES IN SECURITIES                                                          P. 22

         ITEM 3.  DEFAULTS UPON SENIOR SECURITIES                                                P. 23

         ITEM 4.  SUBMISSION OF MATTERS TO A VOTE
                    OF SECURITY HOLDERS                                                          P. 23

         ITEM 5.  OTHER INFORMATION                                                              P. 23

         ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K                                               P. 23

SIGNATURES                                                                                       P. 24

</TABLE>



                                       2
<PAGE>



                       PALOMAR MEDICAL TECHNOLOGIES, INC.

                      CONSOLIDATED CONDENSED BALANCE SHEETS
                                   (Unaudited)

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

                                                                             

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

                                                                                      December 31,         June 30,
                                                                                      1996                   1997
                                                                                  --------------        ---------------
ASSETS
Current Assets:
      Cash and cash equivalents                                                     $16,172,731            $21,085,277
      Marketable securities                                                           2,893,792              2,401,550
      Accounts receivable                                                            18,308,077             22,825,978
      Inventories                                                                    18,790,484             21,199,188
      Loans to officers                                                                 995,331              1,841,816
      Notes receivable related parties                                                  464,153                746,199
      Other notes receivable                                                            899,937                883,406
      Other current assets                                                            7,623,161              3,486,380
                                                                                  --------------        ---------------
           Total current assets                                                      66,147,666             74,469,794
                                                                                  --------------        ---------------

Property and Equipment, at Cost, Net                                                  8,404,605             12,844,959
                                                                                  --------------        ---------------
Other Assets:
      Cost in excess of net assets acquired, net                                      5,024,299              4,619,424
      Intangible assets, net                                                          2,286,058              1,632,293
      Deferred costs                                                                  2,895,803              1,766,671
      Long-term investments                                                           3,179,554              4,340,134
      Loan to related party                                                           1,100,000                244,270
      Other assets                                                                    1,719,211              1,480,403
                                                                                  --------------        ---------------
           Total other assets                                                        16,204,925             14,083,195
                                                                                  --------------        ---------------

                                                                                    $90,757,196           $101,397,948
                                                                                  ==============        ===============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:

      Revolving lines of credit                                                      $4,558,052             $5,168,674
      Current portion of long-term debt                                               2,783,683              2,646,537
      Accounts payable                                                               14,304,285             12,378,982
      Accrued expenses                                                               14,669,893             18,729,575
                                                                                  --------------        ---------------
           Total current liabilities                                                 36,315,913             38,923,768
                                                                                  --------------        ---------------

Long-Term Debt, Net of Current Portion                                               16,204,692             20,011,215
                                                                                  --------------        ---------------

Minority Interest                                                                       160,000              7,086,050
                                                                                  --------------        ---------------

Commitments and Contingencies
Stockholders' Equity:
      Preferred stock, $.01 par value-                                                      182                    298
           Authorized - 5,000,000  shares Issued and outstanding - 18,151 shares
           and 29,707 shares at December 31, 1996 and June 30, 1997
      Common stock, $.01 par value-                                                     305,968                330,832
           Authorized - 100,000,000 shares
           Issued and outstanding - 30,596,812 shares
           and 33,083,190 shares at December 31, 1996 and June 30, 1997
      Additional paid-in capital                                                    104,900,551            134,274,308
      Accumulated deficit                                                          (64,971,200)           (95,876,557)
      Unrealized loss on marketable securities                                        (342,500)            (1,409,263)
      Subscriptions receivable from related party                                     (604,653)              (504,653)
      Less: Treasury stock-
           (200,000 and 275,000 shares at cost, respectively)                       (1,211,757)            (1,438,050)
                                                                                  --------------        ---------------
           Total stockholders' equity                                                38,076,591             35,376,915
                                                                                  --------------        ---------------

                                                                                    $90,597,196           $101,397,948
                                                                                  ==============        ===============
</TABLE>


                                       3
<PAGE>


                       PALOMAR MEDICAL TECHNOLOGIES, INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (Unaudited)

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


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

                                                          Three Months Ended                   Six Months Ended
                                                               June 30,                            June 30,
                                                         1996            1997               1996             1997
                                                     ------------------------------     -------------------------------

Revenues                                              $17,538,019      $24,773,595        $24,463,020      $44,900,033

Cost of Revenues                                       14,821,014       23,198,121         22,104,780       43,204,343
                                                     ------------------------------     -------------------------------

        Gross profit                                    2,717,005        1,575,474          2,358,240        1,695,690
                                                     ------------------------------     -------------------------------

Operating Expenses

        Research and development                        2,374,494        3,076,085          4,091,297        5,923,891
        Sales and marketing                             2,604,532        4,622,186          4,171,670        7,872,598
        General and administrative                      4,555,102        5,756,053          8,211,756       11,084,838
        Business development and other financing        1,444,822          807,919          1,942,096        1,464,158
        costs
        Pooling-of-interest expenses                      443,780              ---            443,780              ---
        Settlement and litigation costs                      ---           400,000                ---        3,550,000
                                                     ------------------------------     -------------------------------

               Total operating expenses                11,422,730       14,662,243         18,860,599       29,895,485
                                                     ------------------------------     -------------------------------

               Loss from operations                   (8,705,725)     (13,086,769)       (16,502,359)     (28,199,795)

Interest Expense                                        (414,197)      (1,904,807)          (738,879)      (3,569,584)

Interest Income                                           597,253          325,303          1,203,447          523,557

Net Gain (Loss) on Trading Securities                     613,234         (529,940)           728,318          549,977

Other Expense                                                 ---         (585,147)               ---         (450,660)

Minority Interest in Loss of Subsidiary                    15,096          968,372             45,671          968,372
                                                     ------------------------------     -------------------------------

        Net loss                                      $(7,894,339)    $(14,812,988)      $(15,263,802)    $(30,178,133)
                                                     ==============================     ===============================

Net Loss Per Common Share (Note 6)                         $(0.32)          $(0.49)            $(0.66)          $(1.01)
                                                     ==============================     ===============================

Weighted Average Number of
    Common Shares Outstanding                          25,643,137       32,699,944         23,892,331       31,528,613
                                                     ==============================     ===============================
</TABLE>

                                       4
<PAGE>

                       PALOMAR MEDICAL TECHNOLOGIES, INC.

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                                   (Unaudited)

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





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


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

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

     Sale of common stock pursuant to warrants and options           --       --      589,879     5,899         --           --
     Payments received on subscriptions receivable                   --       --           --        --         --           --
     Issuance of preferred stock                                  16,000      160          --        --         --           --
     Issuance of common stock for 1996 employer 401(k)               --       --       41,425       414         --           --
     matching contribution
     Conversion of preferred stock                                (4,444)     (44)    695,683     6,957         --           --
     Conversion of convertible debentures                            --       --      896,657     8,967         --           --
     Issuance of common stock for investment banking and merger
               and acquisition consulting services                   --       --        5,000        50         --           --
     Value ascribed to the discount feature of convertible           --       --           --        --         --           --
     debentures issued
     Issuance of common stock for Employee Stock Purchase Plan       --       --        2,414        24         --           --
     Compensation expense related to warrants issued to 
               non-employees under Statement of 
               Financial Accounting Standards No. 123                --       --          --         --         --           --
     Unrealized loss on marketable securities                        --       --          --         --         --           --
     Preferred stock dividends                                       --       --          --         --         --           --
     Issuance of common stock for technology                         --       --      255,320     2,553         --           --
     Purchase of treasury stock                                      --       --          --         --    (75,000)    (226,293)
     Gain related to the issuance of common stock by Nexar           --       --          --         --         --           --
     Technologies, Inc.
     Net loss                                                        --       --          --         --         --           --
                                                                ---------------------------------------------------------------

Balance, June 30, 1997                                            29,707     $298 33,083,190   $330,832   (275,000) ($1,438,050)
                                                                ===============================================================




                                                                 Additional           Unrealized (Loss)                   Total
                                                                  Paid-in    Accumulated   Gain on      Subscription  Stockholders'
                                                                  Capital      Deficit    marketable      Receivable      Equity
                                                                                          securities           
                                                                -------------------------------------------------------------------

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

     Sale of common stock pursuant to warrants and options         1,139,229           --            --         --    1,145,128
     Payments received on subscriptions receivable                        --           --            --    100,000      100,000
     Issuance of preferred stock                                  14,999,840           --            --         --   15,000,000
     Issuance of common stock for 1996 employer 401(k)               268,848           --            --         --      269,262
     matching contribution
     Conversion of preferred stock                                   179,579           --            --         --      186,492
     Conversion of convertible debentures                          3,057,848           --            --         --    3,066,815
     Issuance of common stock for investment banking and merger
               and acquisition consulting services                    38,075           --            --         --       38,125
     Value ascribed to the discount feature of convertible           787,582           --            --         --      787,582
     debentures issued
     Issuance of common stock for Employee Stock Purchase Plan        13,525           --            --         --       13,549
     Compensation expense related to warrants issued to non-employees
               under Statement of Financial Accounting               332,977           --            --         --      332,977
     Standards No. 123
     Unrealized loss on marketable securities                             --           --    (1,066,763)        --   (1,066,763)
     Preferred stock dividends                                            --     (727,224)           --         --     (727,224)
     Issuance of common stock for technology                       1,146,388           --            --         --    1,148,941
     Purchase of treasury stock                                           --           --            --         --     (226,293)
     Gain related to the issuance of common stock by Nexar         7,409,866           --            --         --    7,409,866
     Technologies, Inc.
     Net loss                                                             --  (30,178,133)           --         --  (30,178,133)
                                                                ----------------------------------------------------------------

Balance, June 30, 1997                                          $134,274,308 ($95,876,557)  ($1,409,263) ($504,653) $35,376,915

                                                                ================================================================
</TABLE>

                                       5
<PAGE>



                       PALOMAR MEDICAL TECHNOLOGIES, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)
                                   (Continued)

<TABLE>
<S>                                                                 <C>              <C>
                                                                     Six Months Ended June 30,
                                                                    ---------------------------
                                                                        1996           1997
                                                                    -------------   -----------

Cash Flows from Operating Activities
     Net loss                                                       $(15,263,802)  $(30,178,133)
     Adjustments to reconcile net loss to net cash
        used in operating
        activities-
        Depreciation and amortization                                  1,327,467      2,144,952
        Settlement and litigation costs                                      --       2,900,000
        Write-off of in-process research and development                  57,212             --
        Write-off of deferred financing costs associated with
            redemption of convertible debentures                         201,500         27,554
        Valuation allowances for notes and investments                       --         435,912
        Minority interest in loss of subsidiary                         (30,572)       (948,372)
        Accrued interest receivable on trading securities
            and subscription receivable                                (269,092)             --
        Foreign currency exchange gain                                   --             (608,357)
        Noncash interest expense related to convertible                  117,105       2,302,012
        debentures
        Noncash compensation related to common stock and warrants        903,584         371,102
        Realized gain on marketable securities                           --               49,693
        Unrealized gain on marketable securities                         172,880        (599,639)
        Changes in assets and liabilities, net of effects
            from business combinations;
            Purchases of marketable securities                       (8,737,890)        (152,938)
            Sale of marketable securities and
                  interest received on marketable securities           7,936,148        1,189,501
            Accounts receivable                                      (5,768,220)       (5,098,122)
            Inventories                                              (7,674,475)       (2,538,166)
            Other current assets and loans to officers               (1,287,632)       (2,240,096)
            Accounts payable                                           7,633,792         (675,242)
            Accrued expenses                                           2,310,158          557,656
                                                                    -------------      -----------
                  Net cash used in operating activities             (18,371,837)      (33,060,683)
                                                                    -------------      -----------

Cash Flows from Investing Activities
     Cash paid for purchase of Comtel Electronics, Inc., net of        (146,586)               --
     cash acquired
     Net proceeds received from sale of subsidiary stock                     --         3,925,000
     Purchases of property and equipment                             (1,009,162)       (5,893,602)
     Increase in intangible assets                                     (325,000)         (351,059)
     (Increase) Decrease in other assets                             (1,227,981)          238,808
     Loans to related parties                                        (5,924,314)       (1,250,000)
     Deferred offering costs                                                 --          (199,541)
     Payments received on loans to related parties                     1,491,301          871,288
     Repurchase of Nexar Technologies, Inc. common stock                     --        (2,777,484)
     Investment in nonmarketable securities                          (4,946,479)       (2,257,631)
                                                                    -------------      -----------
                  Net cash (used in) provided by investing          (12,088,221)       (7,694,221)
                  activities
                                                                    -------------      -----------

</TABLE>

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


                                       6
<PAGE>

                       PALOMAR MEDICAL TECHNOLOGIES, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (continued)


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

                                                                          Six Months Ended June 30,
                                                                         --------------------------
                                                                           1996          1997
                                                                         -------------  -----------
Cash Flows from Financing Activities
     Net proceeds from Nexar Technologies, Inc. initial public offering                 19,667,910
     Proceeds from issuance of convertible debentures                             --    10,225,169
     Proceeds from issuance of notes payable                                      --     1,500,000
     Redemption of convertible debentures                                   (930,000)     (196,000)
     Payments of notes payable and capital lease obligations                (502,367)   (2,159,077)
     Net proceeds from revolving lines of credit                             460,644       610,622
     Proceeds from sale of common stock                                    3,276,380        13,549
     Proceeds from exercise of warrants and stock options                  5,893,179     1,145,128
     Issuance of preferred stock                                          15,435,227    15,000,000
     Payment of contingent note payable                                     (500,000)           --
     Redemption of preferred stock, including accrued dividends           (3,194,375)           --
     of $71,223
     Purchase of treasury stock                                                   --      (139,851)
     Payments received on subscriptions receivable                         2,009,591            --
                                                                         -------------  -----------
                  Net cash provided by financing activities               21,948,279   45,667,450
                                                                        -------------  -----------
Net increase (decrease) in cash and cash equivalents                     (8,511,779)    4,912,546
Cash and cash equivalents, beginning of period                           17,138,178    16,172,731
                                                                        -------------  -----------
Cash and cash equivalents, end of period                                 $8,626,399   $21,085,277
                                                                       =============  ============

Supplemental Disclosure of Cash Flow Information
     Cash paid for interest                                                $383,393      $549,822
                                                                       =============  ============

Supplemental Disclosure of Noncash Financing and Investing Activities:
     Conversion of convertible debentures and related accrued
        interest, net of financing fees                                  $1,172,763    $3,066,815
                                                                      =============   ============

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

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

     Dividends payable                                                     $508,344      $727,224
                                                                      =============   ============

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

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

     Issuance of common stock for technology                                    $--    $1,148,941
                                                                      =============   ============

Acquisition of Comtel Electronics, Inc.
     Liabilities assumed                                                   (258,144)          $--
     Fair value of assets acquired                                           72,661            --
     Cash paid, net of cash acquired                                       (146,586)           --
                                                                       -------------  ------------
Cost In Excess of Net Assets Acquired                                      (332,069)          $--
                                                                       =============  ============


</TABLE>


                                       7
<PAGE>

                       PALOMAR MEDICAL TECHNOLOGIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.      BASIS OF PRESENTATION

        The accompanying  unaudited  consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
information.  Accordingly,  they  do not  include  all of  the  information  and
footnotes  required by generally  accepted  accounting  principles  for complete
financial statements. The results of operations for the interim periods shown in
this report are not  necessarily  indicative of expected  results for any future
interim period or for the entire fiscal year. Palomar Medical Technologies, Inc.
(the "Company" or "Palomar") believes that the quarterly  information  presented
includes all adjustments (consisting of normal, recurring adjustments) necessary
for a  fair  presentation  in  accordance  with  generally  accepted  accounting
principles.  The accompanying  financial  statements and notes should be read in
conjunction with the Company's Form 10-KSB,  as amended,  as of and for the year
ended December 31, 1996.

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


2.      INVESTMENTS

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

        The Company  accounts for  investments  in accordance  with Statement of
Financial   Accounting  Standards  ("SFAS")  No.  115,  Accounting  for  Certain
Investments in Debt and Equity Securities.  Under SFAS No. 115,  securities that
the Company  has the  positive  intent and  ability to hold to maturity  will be
reported at amortized cost and are classified as held-to-maturity. There were no
held-to-maturity  securities  as  of  December  31,  1996  and  June  30,  1997.
Securities  purchased to be held for indefinite periods of time and not intended
at  the  time  of  purchase  to  be  held  until   maturity  are  classified  as
available-for-sale securities and any unrealized gains or losses are recorded as
a  component  of  stockholders'  equity.  Securities  that are  bought  and held
principally  for the purpose of selling them in the near term are  classified as
trading securities. Realized and unrealized gains and losses relating to trading
securities are included  currently in the accompanying  unaudited  statements of
operations.


                                       8
<PAGE>

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

                                                                                June 30, 1997
                                                           -------------------------------------------------------
                                                                            Gross         Gross
                                                                         Unrealized    Unrealized        Fair
                                                              Cost          Gain          Loss           Value
                                                           ------------  ------------  ------------   ------------
             Trading Securities:
                    Investments in publicly
                    traded companies                          $684,327    $1,801,223       $84,000     $2,401,550
                                                           ------------  ------------  ------------   ------------

             Available-for-Sale:
                    Investments in publicly
                    traded companies                        $2,494,550       ---        $1,409,263     $1,085,287
                                                           ------------  ------------  ------------   ------------
                    Total                                   $3,178,877    $1,801,223    $1,493,263     $3,486,837
-------------                                              ============  ============  ============   ============

</TABLE>



3.      INVENTORIES

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

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

                                                                    December 31,          June 30,
                                                                        1996                1997
                                                                   ----------------    ----------------
                           Raw materials                               $13,266,204         $11,383,310
                           Work in process and finished goods            5,524,280           9,815,878
                                                                   ----------------    ----------------
                                                                       $18,790,484         $21,199,188
                                                                   ================    ================
</TABLE>


4.      PROPERTY AND EQUIPMENT

        Property and Equipment consist of the following:

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

                                                                      December 31,          June 30,
                                                                          1996                1997
                                                                    -----------------    ---------------
                            Equipment under capital leases                $2,261,339         $2,519,933
                            Machinery and equipment                        5,429,764          9,371,762
                            Furniture and fixtures                         1,926,948          3,162,539
                            Leasehold improvements                         1,160,814          1,556,344
                                                                    -----------------    ---------------
                                                                          10,778,865         16,610,578
                            Less:  Accumulated depreciation
                                       and amortization                    2,374,260          3,765,619
                                                                    -----------------    ---------------
                                                                          $8,404,605        $12,844,959
                                                                    =================    ===============
</TABLE>

                                       9
<PAGE>

5.      ACCRUED EXPENSES

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

                                                                     December 31,          June 30,
                                                                         1996                1997
                                                                    ----------------    ---------------
                          Payroll and consulting costs                   $3,456,311         $2,496,769
                          Professional fees                                 961,815            667,563
                          Settlement costs                                1,755,000          3,780,000
                          Warranty                                        2,854,401          3,169,532
                          Deferred revenue/gain                             256,912          2,987,912
                          Other                                           5,385,454          5,627,799
                                                                    ================    ===============
                              Total                                     $14,669,893        $18,729,575
                                                                    ================    ===============
</TABLE>


6.      NET LOSS PER COMMON SHARE

        For the three and six months ended June 30, 1996 and 1997,  net loss per
common  share has been  computed  by  dividing  the net loss,  as  adjusted  for
preferred stock dividends and amortization of the value ascribed to the discount
feature of the Series H  Preferred  stock,  by the  weighted  average  number of
shares of common stock outstanding  during the period.  Common stock equivalents
are not considered as outstanding, as the result would be antidilutive.

        The calculation of the Company's net loss per common share for the three
and six months ended June 30, 1996 and 1997 is as follows:

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

                                                          Three Months Ended                        Six Months Ended


                                                     June 30,             June 30,           June 30,             June 30,
                                                       1996                 1997               1996                 1997
                                                 -----------------     ---------------    ----------------     ---------------
          Net Loss                                   $(7,894,339)       $(14,812,988)       $(15,263,802)       $(30,178,133)
          Preferred stock dividends                     (265,222)           (432,228)           (508,344)           (727,224)
          Amortization of value ascribed to
          preferred stock conversion discount          ---                  (941,176)           ---                 (941,176)
                                                 -----------------     ---------------    ----------------     ---------------
          Adjusted net loss                          $(8,159,561)       $(16,186,392)       $(15,772,146)       $(31,846,533)
                                                 =================     ===============    ================     ===============

          Net Loss Per Common Share                       $(0.32)             $(0.49)             $(0.66)             $(1.01)
                                                 =================     ===============    ================     ===============

          Weighted Average Number of
                     Common shares outstanding         25,643,137          32,699,944          23,892,331          31,528,613
                                                 =================     ===============    ================     ===============
</TABLE>

        In March of 1997,  SFAS No. 128,  Earnings  Per Share,  was issued which
established new standards for calculating and presenting earnings per share. The
Company is required to adopt this new standard in its 1997 financial statements.
In accordance with this new standard,  basic and diluted  earnings per share for
the  three  months  ended  June  30,  1996 and 1997  are  $(0.32)  and  $(0.49),
respectively,  and the six months  ended June 30,  1996 and 1997 are $(0.66) and
$(1.01), respectively.


                                       10
<PAGE>


7.       NOTES PAYABLE AND DEMAND LINE OF CREDIT

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

                                                                                            December 31,       June 30,
                                                                                                1996             1997
                                                                                           ---------------- --------------
Dollar denominated convertible debentures                                                       $7,288,063    $12,305,678
Swiss franc denominated convertible debentures                                                   7,222,846      6,414,642
7.4% to 21% Capital lease obligations, maturities ranging from August 1997 to May 2001           2,290,847      2,296,093
Margin loan collateralized by subsidiary stock                                                   ---            1,500,000
Other notes payable                                                                              2,186,619        141,339
                                                                                           ---------------- --------------
                                                                                                18,988,375     22,657,752
Less - current maturities                                                                        2,783,683      2,646,537
                                                                                           ---------------  --------------
                                                                                               $16,204,692    $20,011,215
                                                                                           ================ ==============
</TABLE>

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

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

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

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

        During the second quarter,  investors converted $1,600,000 in face value
of 4.5%  convertible  debentures  into  543,466  shares  of  common  stock  with
unamortized deferred financing costs of $131,778.

        During  the  first  quarter,  the  Company's  Comtel  Electronics,  Inc.
("Comtel") subsidiary failed to satisfy certain financial covenants for its line
of credit with a bank due on November 30, 1998. The total amount  outstanding at
June 30, 1997 was  $3,430,867.  The Company has had  discussions  with this bank
during and subsequent to the second quarter to amend these  financial  covenants
so that Comtel will be in  compliance.  Since  Comtel does not have a definitive
agreement,  the  Company  has  classified  the  amount  outstanding  in  current
liabilities as a demand line of credit.

        During the second  quarter  the Company  repaid an  existing  $1,200,000
bridge loan plus accrued  interest.  In  addition,  the bridge loan holders were
given 99,001 shares of Nexar  Technologies,  Inc.  ("Nexar")  common stock and a
warrant to purchase  95,625  shares of Dynaco  Corp.  common  stock at $1.20 per
share in  exchange  for their  Palomar  Electronic  Corporation  warrants.  This
exchange was  consummated  based on the relative fair values of Dynaco and Nexar
common stock.

        During the second quarter the Company borrowed on margin $1,500,000 from
an investment  banker. The Company pledged its shares of Nexar's common stock as
collateral.  This loan bears  interest  at 8.875% and was repaid  subsequent  to
quarter end.

                                       11
<PAGE>

        On July 3, 1996, the Company raised  $7,669,442  through the issuance of
9,675 units in a convertible debenture financing.  These units are traded on the
Luxembourg  Stock  Exchange.  Each  unit  consists  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 and is due July 3, 2003. The warrants
are  non-detachable  and may be  exercised  only if the related  debentures  are
simultaneously  converted,  redeemed or purchased.  Interest on the  convertible
debentures accrues at a rate of 4.5% per annum and is payable quarterly in Swiss
Francs. The convertible debentures may be converted by the holder or the Company
commencing  October 1, 1996 at a conversion price equal to from 100% to 77.5% of
the price per share of the Company's common stock,  calculated as defined.  This
conversion price decreases from the third anniversary to the seventh anniversary
of the Swiss Franc convertible debentures but in no event is less than $9.60 per
share.  The Company  ascribed a value of $1,917,360 to this discount  conversion
feature of this convertible debenture. This amount will be amortized to interest
expense over the remaining life of the Swiss Franc convertible debenture.  As of
June 30, 1997, the carrying value of the Swiss Franc convertible  debentures was
$6,414,142 based on the exchange rate as of that date.

8.      STOCKHOLDERS' EQUITY

        (a)     Options

        During the six months ended June 30, 1997 the Company  issued options to
purchase  160,000  shares of common stock at prices ranging from $4.125 to $6.50
per share to certain employees.  One individual  exercised an option to purchase
25,000 shares of common stock at a price of $3.00.  The total proceeds  received
by the Company were $75,000.

        (b)     Warrants

        During the six months ended June 30, 1997 the Company  issued to certain
directors  warrants to purchase 500,000 shares of common stock at prices ranging
from $3.25 to $4.00.  This includes a warrant to purchase  400,000 shares of the
Company's  common stock issued to the Company's  newly appointed Chief Executive
Officer.  During the six  months  ended June 30,  1997,  certain  warrantholders
exercised  warrants to purchase 559,192 shares of common stock at prices ranging
from $.60 to $2.25. The Company received total proceeds of $1,070,128 related to
the exercise of the warrants. In addition,  net warrants to purchase 5,687 share
of common stock were exercised in the six months ending June 30, 1997.

        (c)     Reserved Shares

        At June 30, 1997,  the Company has  reserved  shares of its common stock
for the following:

                                                                   June 30,
                                                                     1997
                                                                ---------------
             Convertible debentures                                4,498,407
             Stock option plans                                    3,897,500
             Warrants                                              9,577,940
             Employee 401(k) plan                                    212,690
             Employee stock purchase plan                            997,586
             Convertible preferred stock                           7,755,358
                                                              ---------------
                                   Total                          26,939,481
                                                              ===============

        (d)     Convertible Preferred Stock

        During the second quarter of 1997, the Company completed the issuance of
10,000 shares of Series H Convertible Preferred Stock ("Series H Preferred") for
$10,000,000.  The Series H Preferred  accrues interest at varying rates of 6% to
8% per annum,  as defined.  The Series H Preferred may be converted  into common

                                       12
<PAGE>

stock,  including any accrued but unpaid interest,  at 100% of the average stock
price for the first 179 days from the closing  date,  90% of the  average  stock
price for the following 90 days and 85% of the average  stock price  thereafter.
The average  stock price for the Series H Preferred  is the average  closing bid
price for the ten trading days immediately preceding the conversion date, but in
no event less than $6.00 on or prior to September 27, 1997 and,  thereafter,  at
the lower of $6.00 or the  average  closing  bid  price  for the 20  consecutive
trading  days  prior  to  September  27,  1997.  The  conversion  price  is also
adjustable for certain antidilutive events, as defined. The holder is restricted
for the first 209 days following the closing date to converting no more than 33%
of the  Series  H  Preferred  in any 30 day  period  (or 34% in the  last 30 day
period).  Under  certain  conditions,  the  Company  has the right to redeem the
Series H  Preferred.  The Company  has  ascribed a value of  $2,823,529  to this
discount  conversion  feature of the Series H  Preferred.  This  amount is being
amortized as an adjustment to earnings available to common shareholders over the
most  favorable  conversion  period  attainable  to the  holders of the Series H
Preferred  (270 days from the date of issuance of the Series H  Preferred).  See
Note 6.

        (e)     Stock Purchase Program

        During the second quarter of 1997, the Company  purchased  75,000 shares
of its common stock at an aggregate cost of $226,293 as part of a treasury stock
purchase program  approved by its Board of Directors in May of 1997.  Subsequent
to June 30, 1997 the Company purchased an additional 70,000 shares of its common
stock under this program at an aggregate price of $200,809.

        (f)     Purchased Technology

        On  February  28,  1997,  Nexar  entered  into  an  Asset  Purchase  and
Settlement  Agreement as discussed in Note 15 of the Company's  Form 10-KSB,  as
amended, as of and for the year ended December 31, 1996. Under the terms of this
agreement the Company  previously  paid $1,250,000 in cash, and paid $351,060 in
cash and issued  255,320  shares of  Palomar's  common  stock  during the second
quarter  ended June 30, 1997.  The total value of this  purchased  technology of
$2,750,000 will be amortized over a period of three years.

        (g)     Nexar Initial Public Offering

        On April  14,  1997  Nexar  completed  an  initial  public  offering  of
2,500,000  shares at $9.00 per  share,  for net  proceeds  of  $19,592,910.  The
Company  has  recorded an increase in  stockholders'  equity of  $7,409,866,  in
accordance  with Staff  Accounting  Bulletin  No. 51 (SAB No. 51) as a result of
Nexar's  initial  public  offering.  The Company's  accounting  policy for gains
arising  under  SAB No.  51 is to  recognize  these  gains in its  statement  of
operations  to the  extent  that such gains are  realizable  at the date of each
transaction.

        As of the effective date of Nexar's initial public offering, the Company
owned  6,100,000  shares of Nexar's  common  stock and 45,684  shares of Nexar's
convertible preferred stock. The convertible preferred stock is convertible into
408,080  shares of Nexar's  common stock.  Pursuant to an agreement  between the
Company and Nexar, 1,200,000 common shares ( the Contingent Shares) of the total
6,508,080  common  and common  equivalent  shares of Nexar that are owned by the
Company  are to be placed in escrow and subject to a  mandatory  repurchase,  in
whole or part, by Nexar at $0.01 per share after the 48 month anniversary of the
initial public  offering of Nexar' common stock unless these shares are released
from escrow.  The Contingent Shares are subject to the release to the Company in
installments  of  400,000  shares  each upon the  achievement  of any 3 of the 4
milestones  as specified  in the  agreement  between the Company and Nexar.  The
milestones are based on Nexar achieving certain revenue and net income levels as
defined in the agreement.

        In April 1997,  the Company  purchased  300,000  shares of Nexar's newly
issued publicly  registered common stock for $2,777,484 from Nexar's underwriter
in a private placement transaction.

9.      RELATED PARTY TRANSACTIONS

        Included  in current  assets at  December  31, 1996 and June 30, 1997 is
$1,459,484  and  $2,588,015,  respectively,  of notes  receivable  from  various
officers and related entities.  Also included in trading  securities at December
31,  1996  and  June  30,  1997  is a  $1,912,614  investment  and a  $2,086,488
investment, respectively, in a related entity.

                                       13
<PAGE>

        At  December  31,  1996 and  June 30,  1997,  $578,680  and  $1,509,254,
respectively,  including  accrued  interest  at the  rate of 7% per  annum,  was
outstanding to certain  officers/directors  under the (now terminated) corporate
loan policy.

        At June 30,  1997,  the Company  had loans  receivable  of $186,156  and
$146,406,  including accrued interest,  from two officers of Dynaco Corp., which
are evidenced by promissory notes due upon demand,  with accrued interest at the
rate of 7% per annum.  The $146,406 is partially  collateralized  with a certain
amount of vested stock options in the Company owned by the officer with a market
price in excess of the exercise price.

        During the six months  ended June 30,  1997,  the  Company  invested  an
additional  $250,000 in a privately held medical and cosmetic  services company.
The Company's  cumulative  investment as of June 30, 1997 totaled  approximately
$750,000 and represents  approximately 12% of the total equity ownership of this
company.  An officer of CTI is a director  of the  privately  held  company.  In
return for the  $250,000  investment,  the Company  received  250,000  shares of
common stock and a promissory  note for  $249,900  accruing  interest at 12% per
annum.

        During the six months ended June 30,  1997,  the Company sold of all the
issued and outstanding  common stock of its wholly owned subsidiary,  CD Titles,
Inc. ("CD Titles"). In exchange, the Company received three promissory notes for
an aggregate  total of $600,000 and  warrants to purchase  750,000  shares of CD
Titles common stock at various  exercise prices ranging from $6.00 to $10.00 per
share.  The sale of CD Titles  did not have a material  effect on the  Company's
financial position or results of operations.

10.     PRO FORMA INFORMATION

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

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

                                                               Six Months Ended June 30,
                                                 ------------------------------------------------------
                                                         1996                             1997
                                            -------------------------------   -----------------------------
Revenue                                              $16,758,266                     $44,900,033
Net loss                                            $(15,293,802)                   $(30,178,133)
Net loss per common share                                 $(0.66)                         $(1.01)
</TABLE>

11.     COMMITMENTS

        The Company has issued  guarantees  to several of its  subsidiaries  for
payment of trade  payables.  The total  amount  guaranteed  at June 30, 1997 was
$750,000.

        The Company is a defendant in a lawsuit filed by Commonwealth Associates
("Commonwealth")  on March 14, 1996 in the United States  District Court for the
Southern  District  of New York.  In its  suit,  Commonwealth  alleges  that the
Company  breached a contract  with  Commonwealth  in which  Commonwealth  was to
provide certain investment banking services in return for certain  compensation.
In January  1997,  Commonwealth's  motion for summary  judgment on its breach of
contract  claim was  granted,  and in April 1997,  the  District  Court  awarded
Commonwealth $3,174,070 in damages. That judgment has been appealed by Palomar.

        During the three  months ended March 31,  1997,  the Company  accrued an
additional $2,900,000 related to the above matter and another $650,000 for other
smaller claims and litigation costs.


                     [This space intentionally left blank.]


                                       14
<PAGE>


Item 2.  Management's  Discussion  and  Analysis of Financial  Condition  and
         Results of Operations.

         Three Months  Ended June 30,  1997,  Compared to Three Months Ended 
         June 30, 1996

        For the three months  ended June 30,  1997,  the Company had revenues of
$24.8  million as compared to $17.5  million for the three months ended June 30,
1996.  The 41% increase in revenues  from the quarter ended June 30, 1996 to the
quarter ended June 30, 1997 is due to increased  sales volume  generated in both
the electronics  and medical  segments.  Net revenues by the Company's  business
segments are as follows:
<TABLE>
<S>                <C>                                      <C>                    <C>

                                                                    Three months ended
                                                                         June  30,
                                                            ----------------------------------
                                                            1996                     1997
                                                            ----------------------------------
                   Medical                                   $5,219,193             $7,120,743
                   Electronics                               12,318,826             17,652,852
                                                            -----------            -----------
                           Total                            $17,538,019            $24,773,595
                                                            ===========            ===========
</TABLE>


        The increase in the Company's  medical  segment of $1.9 million or 36.4%
was  mainly  due to  additional  sales  volume  of  approximately  $4.9  million
associated with the EpiLaser(TM)  product. The Company obtained FDA clearance to
market and sell this  product  for hair  removal  in the United  States in March
1997.  This  increase was offset by a decline of  approximately  $2.8 million in
sales  volume for the  Company's  TruPulse(R)  laser  product and  approximately
$200,000 in  government  contract  revenue.  The Company  believes  that overall
revenues from its medical  segment will continue to increase due to its improved
manufacturing  process and market demand for its EpiLaser product.  The expected
increase in  EpiLaser  product  revenue  should  offset the overall  decrease in
TruPulse revenue which has been caused by a diminishing  demand in the worldwide
CO2 skin resurfacing laser market.

        The increase in the Company's  electronics segment of approximately $5.4
million was principally due to an increase in Nexar sales volume of $7.1 million
and an  increase  in Dynaco  revenues  of $1.9  million  offset by a decline  of
approximately  $3.3  million  in sales  volume at  Dynaco.  Nexar  continues  to
increase its revenue  since the  introduction  in April 1996 of its  proprietary
upgradeable  PC, and  revenue at Nexar is  expected to continue to grow with the
introduction of its proprietary  upgradeable XPA PC in the third quarter. Dynaco
generated  sales of  approximately  $8.6 million for the quarter  ended June 30,
1997 compared to sales of  approximately  $10 million for the quarter ended June
30,  1996,  due mainly to a decrease in revenue  generated  by  Dynaco's  Comtel
subsidiary.   The  revenue  at  Comtel,  a  contract  electronics  manufacturer,
decreased  due to changes  in its  customer  mix,  lower  volume  sales from its
exiting customers and restructuring of its management team.

        Gross  margin for the three  months ended June 30, 1997 was $1.6 million
(6% of revenues)  versus $2.7  million  (15% of  revenues)  for the three months
ended June 30, 1996.  Gross  margin by the  Company's  business  segments are as
follows:

                                                  Three months ended June 30,
                                             ----------------------------------
                                                   1996               1997
                                             ----------------------------------
                    Medical                     $1,270,316         $ 695,149
                    Electronics                  1,446,689           880,325 
                                                ----------          ---------
                    Total                       $2,717,005        $1,575,474 
                                                ==========        ===========

        The Company's medical products' gross margin decreased to a gross margin
of $695,149 (9.8% of revenues) for the three months ended June 30, 1997 compared
to a gross margin of $1,270,316  (24% of revenues) in 1996. The decline in gross
margin dollars in 1997 occurred mainly due to lower revenues associated with the
Company's  TruPulse  product,  as discussed  above.  The decline in gross margin
percentage  was  caused by lower  margins  attained  on the  Company's  EpiLaser
product due to initial manufacturing and production of this product. The Company
believes that the gross margins for its EpiLaser  product  should improve as the
Company obtains manufacturing efficiencies and volume production.

        In the  electronics  segment of the  Company's  business,  gross  margin
decreased to $880,325  (5.0% of revenues) for the quarter ended June 30, 1997 as
compared  to a gross  margin of  $1,446,689  (11.7% of  revenues)  for the three

                                       15
<PAGE>

months ended June 30,  1996.  This  decrease in gross  margin is  primarily  the
result of a decrease in gross margin at Dynaco.  Comtel, a subsidiary of Dynaco,
incurred a negative  gross  margin of $.7 million  (29.0% of  revenues)  for the
three months ended June 30, 1997. This gross loss was attributable to unabsorbed
overhead  costs  caused by Comtel's  lower  volume and change in customer  base.
Nexar had a gross margin of 7.2% for the three months ended June 30, 1997.  This
low margin was the result of continuous  competitive market pressure on personal
computer ("PC") prices.

        Research  and  development  costs  increased  to  $3.1  million  (12% of
revenues)  for the three months  ended June 30, 1997,  from $2.4 million (14% of
revenues)  for the three  months  ended  June 30,  1996.  This 30%  increase  in
research  and  development  reflects  the  Company's  continuing  commitment  to
research and development  for medical devices and delivery  systems for cosmetic
laser  applications  and other medical  applications  using a variety of lasers,
while  continuing  dermatology  research  utilizing the Company's ruby and diode
lasers.  Approximately  $2.7 million of the $3.1 million expended in the quarter
ended June 30, 1997 is attributed to the medical  segment.  Management  believes
that research and development  expenditures  will increase over the next year as
the Company  continues  clinical  trials of its medical  products  and  develops
additional applications for its lasers and delivery systems. However, management
anticipates  that research and  development as a percentage of net revenues will
decrease as revenues  increase with the  commercialization  of its laser medical
products.  The  remaining  $0.4 million  expended in the current  year's  second
quarter was in the electronics segment,  mainly due to the continued development
and improvement of Nexar PC products.

        General and  Administrative  expenses  increased to $5.8 million (23% of
revenues)  for the three months  ended June 30, 1997,  from $4.6 million (26% of
revenues)  for the three  months  ended  June 30,  1996.  This 26%  increase  is
attributable  to  increased  administrative  resources  required  to oversee the
growth of the Company's medical and electronics business segments. Approximately
54% of the general and administrative expense increase for the three month ended
June 30, 1997  compared to the three months ended June 30, 1996 is attributed to
the Company's Cosmetic Technology International, Inc. ("CTI") subsidiary. CTI is
in the process of opening and  establishing  revenue sharing sites with partners
such as Columbia/HCA,  as well as with various international  partners. To date,
CTI has opened two wholly-owned sites as well as four revenue-sharing sites with
partners  other than  Columbia/HCA;  CTI is  scheduled  to open  three  sites in
conjunction with Columbia/HCA in the third quarter of this year.

        Selling  and  Marketing  expenses  increased  to  $4.6  million  (19% of
revenues)  for the three months  ended June 30, 1997,  from $2.6 million (15% of
revenues)  for  the  three  months  ended  June  30,  1996.   This  increase  in
substantially all areas of selling and marketing is attributable to the increase
in sales volume  throughout the Company,  particularly  in the medical  products
segment as revenues  have begun to increase  now that the Company has a suite of
FDA-cleared laser products.

        Business  Development  and Financing Costs decreased to $0.8 million (3%
of revenues) for the three months ended June 30, 1997,  from $1.4 million (8% of
revenues)  for the three  months  ended  June 30,  1996.  This 44%  decrease  is
attributable  to  the  Company's  maturation.  The  Company  has  decreased  its
acquisition  and  financing  activities  and is now  focused on  developing  and
growing its existing core medical products.

        Pooling-of-interest expenses totaled $443,780 for the three months ended
June 30, 1996 and are  comprised of primarily of  professional  fees  associated
with the merger of Tissue Technologies, Inc. ("Tissue") and the Company.

        Settlement and  Litigation  costs were $400,000 (2% of revenues) for the
three  months  ended June 30, 1997.  There were no  settlement  costs during the
three months ended June 30, 1996.  The costs are  attributable  to an additional
legal  settlement  accrual of  $400,000  recorded  by the  Company in the second
quarter  of  1997  related  to  a  lawsuit  filed  by  Commonwealth   Associates
("Commonwealth"). In the lawsuit, 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.  See Part II,
Item 1.

        Interest  expense  increased  to $1.9 million for the three months ended
June 30, 1997,  from $0.4 million for the three months ended June 30, 1996. This
amount includes $1.3 million of non-cash  interest  expense related to the value
ascribed to the discount of the  convertible  debentures.  This 360% increase is
primarily the result of an increase in convertible  debenture  financings and an

                                       16
<PAGE>

additional  outstanding line of credit  financing at Dynaco's Comtel  subsidiary
which was entered into in December 1996.

        Interest  income  decreased  to $0.3  million for the three months ended
June 30, 1997,  from $0.6 million for the three months ended June 30, 1996. This
decrease  is  primarily  the  result  of a  decrease  in the  Company's  average
outstanding cash and cash equivalents balances.

        Net realized  and  unrealized  trading  losses were $0.5 million for the
three months ended June 30, 1997,  down from gains of $0.6 million for the three
months ended June 30, 1996.  These losses  resulted from the sale and/or loss of
value of certain marketable  securities during the second quarter of the current
year.  It is the  Company's  intention to continue to liquidate a portion of its
trading  investments  in the near term,  which may result in additional  trading
gains or losses in the future.

        Minority  interest in the loss of subsidiary  was $968,372 for the three
months  ended June 30, 1997  compared to $15,096 for the three months ended June
30, 1996. This increase in the minority  interest in the loss of a subsidiary is
due to the successful  completion of Nexar's  initial  public  offering in which
approximately 35% of Nexar's common stock was sold to the public.

SIX MONTHS ENDED JUNE 30, 1997, COMPARED TO SIX MONTHS ENDED JUNE 30, 1996

        For the six months  ended June 30,  1997,  the Company  had  revenues of
$44.9  million as  compared to $24.5  million for the six months  ended June 30,
1996.  The 84%  increase in revenues  from the six months ended June 30, 1996 to
the six months ended June 30, 1997 is due to increased sales volume generated in
both the  electronics  and  medical  segments.  Net  revenues  by the  Company's
business segments are as follows:

                                                         Six months ended
                                                             June  30,
                                                --------------------------------
                                                    1996                1997
                                                --------------------------------
                  Medical                        $7,625,612           $9,733,508
                  Electronic                     16,837,408           35,166,525
                                                 ----------          -----------
                           Total                $24,463,020          $44,900,033
                                                ===========          ===========

        The increase in the Company's  medical products business of $2.1 million
or 27.6% was due to additional sales volume of the Company's EpiLaser product of
approximately  $5.7  million.  The Company  obtained FDA clearance to market and
sell this  product for hair  removal in the United  States in March  1997.  This
increase was offset by a decline of  approximately  $3.6 million in sales volume
for the Company's  TruPulse  laser  product.  The Company  believes that overall
revenues from its medical  segment will continue to increase due to its improved
manufacturing  process and market demand for its EpiLaser product.  The expected
increased  EpiLaser  product  revenue  should  offset the  overall  decrease  in
TruPulse revenue which has been caused by a diminishing  demand in the worldwide
CO2 skin resurfacing laser market.

        The  increase in the  Company's  electronics  business of  approximately
$18.3 million was  principally due to an increase in Nexar sales volume of $15.8
million,  with the remaining  revenue  increase  attributable  to Dynaco.  Nexar
continues to increase its revenue  since the  introduction  in April 1996 of its
proprietary  upgradeable PC and revenue at Nexar is expected to continue to grow
with  the  introduction  of its  proprietary  upgradeable  XPA  PC in the  third
quarter.

        Gross margin for the six months  ended June 30,  1997,  was $1.7 million
(4% of revenues)  versus $2.4 million (10% of revenues) for the six months ended
June 30, 1996. Gross margin by the Company's business segments are as follows:


                                       17
<PAGE>


                                                         Six months ended
                                                             June 30,
                                                       -------------------------
                                                         1996          1997
                                                       -------------------------
                  Medical                                $953,405     $  423,888
                  Electronics                           1,404,835      1,271,802
                                                        ---------     ----------
                           Total                       $2,358,240     $1,695,690
                                                       ==========    ===========

        The decline in gross margin  dollars in the Company's  medical  products
business  in 1997  occurred  mainly due to lower  revenues  associated  with the
Company's  TruPulse  product as  discussed  above.  The decline in gross  margin
percentage  was  caused by lower  margins  attained  on the  Company's  EpiLaser
product due to initial manufacturing and production of this product. The Company
believes that the gross margins for its EpiLaser  product  should improve as the
Company obtains manufacturing efficiencies and volume production.

        In the  electronics  segment of the  Company's  business,  gross  margin
decreased to  $1,271,802  (3.6% of  revenues)  for the six months ended June 30,
1997 as compared to a gross margin of $1,404,835  (8.3% of revenues) for the six
months ended June 30,  1996.  This  decrease in gross  margin is  primarily  the
result of a decrease  in gross  margin at  Dynaco's  Comtel  subsidiary.  Comtel
incurred a negative gross margin of $2.0 million (33.8% of revenues) for the six
months  ended June 30,  1997.  This gross loss was  attributable  to  unabsorbed
overhead  costs  caused by Comtel's  volume  shortfall  and a change in customer
base.  This negative gross margin was partially  offset by the increase in gross
margin dollars provided by Nexar of approximately $1 million. Nexar gross margin
percentage  was 7.5%.  This low margin was the result of continuous  competitive
market pressure on PC prices.

        Research  and  development  costs  increased  to  $5.9  million  (13% of
revenues)  for the six months  ended June 30,  1997,  from $4.1  million (17% of
revenues) for the six months ended June 30, 1996.  This 45% increase in research
and  development  reflects the Company's  continuing  commitment to research and
development  for  medical  devices  and  delivery  systems  for  cosmetic  laser
applications  and other medical  applications  using a variety of lasers,  while
continuing  dermatology  research utilizing the Company's ruby and diode lasers.
Approximately  $4.9 million of the $5.9 million expended in the six months ended
June 30, 1997 is attributed  to the medical  segment.  Management  believes that
research and  development  expenditures  will increase over the next year as the
Company  continues   clinical  trials  of  its  medical  products  and  develops
additional applications for its lasers and delivery systems. However, management
anticipates  that research and  development as a percentage of net revenues will
decrease as revenue  increases with the  commercialization  of its laser medical
products and continued penetration of its electronic products.  The remaining $1
million expended in the current year's six months ended June 30, 1997 was in the
electronics segment,  mainly due to the continued development and improvement of
Nexar PC products.

        General and  Administrative  expenses  increased to $8.2 million (25% of
revenues)  for the six months  ended June 30,  1997,  from $8.7  million (34% of
revenues)  for the six  months  ended  June  30,  1996.  This  35%  increase  is
attributable  to  increased  administrative  resources  required  to oversee the
growth of the Company's medical and electronics business segments. Approximately
57% of the general and administrative  expense increase for the six months ended
June 30, 1997  compared to the six months ended June 30, 1996 is  attributed  to
the Company's CTI subsidiary.  CTI is in the process of opening and establishing
revenue sharing sites with established partners such as Columbia/HCA, as well as
with various  international  partners.  To date, CTI has opened two wholly-owned
sites  as  well  as  four   revenue-sharing   sites  with  partners  other  than
Columbia/HCA;  CTI  is  scheduled  to  open  three  sites  in  conjunction  with
Columbia/HC in the third quarter of this year.

        Selling  and  Marketing  expenses  increased  to  $7.9  million  (18% of
revenues)  for the six months  ended June 30,  1997,  from $4.2  million (17% of
revenues) for the six months ended June 30, 1996. This increase in substantially
all areas of selling and  marketing  is  attributable  to the  increase in sales
volume  throughout the Company,  particularly in the medical products segment as
revenues have begun to increase now that the Company has a suite of  FDA-cleared
laser products.

        Business  Development  and Financing Costs decreased to $1.5 million (3%
of revenues)  for the six months  ended June 30, 1997,  from $1.9 million (8% of
revenues)  for the six  months  ended  June  30,  1996.  This  25%  decrease  is

                                       18
<PAGE>

attributable  to  the  Company's  maturation.  The  Company  has  decreased  its
acquisition  and  financing  activities  and is now  focused on  developing  and
growing its existing core medical products.

        Pooling-of-interest  expenses  totaled $443,780 for the six months ended
June 30, 1996 and are comprised  primarily of professional  fees associated with
the merger of Tissue and the Company.

        Settlement and  Litigation  costs were $3.6 million (8% of revenues) for
the six months ended June 30, 1997;  there were no  settlement  costs during the
six months  ended June 30, 1996 . The costs are  attributable  to an  additional
legal  settlement  accrual of $3.2 million  recorded by the Company in the first
six months of 1997 related to a former  investment  banking  consultant.  In the
suit, the former investment banking consultant alleges that the Company breached
a contract with the consultant in which the  consultant  was to provide  certain
investment banking services in return for certain compensation.

        Interest expense increased to $3.6 million for the six months ended June
30, 1997,  from $0.7 million for the six months ended June 30, 1996. This amount
includes $2.3 million of non-cash interest expense related to the value ascribed
to the discount  feature of the  convertible  debenture.  This 383%  increase is
primarily the result of an increase in convertible  debenture  financings and an
additional  outstanding line of credit  financing at Dynaco's Comtel  subsidiary
which was entered into in December 1996.

        Interest income  decreased to $0.5 million for the six months ended June
30,  1997,  from $1.2  million  for the six  months  ended June 30,  1996.  This
decrease  is  primarily  the  result  of a  decrease  in the  Company's  average
outstanding cash and cash equivalents.

        Net realized and unrealized  trading gains were $0.5 million for the six
months ended June 30, 1997, down from $0.7 million for the six months ended June
30, 1996.  These gains  resulted  from the sale and/or  appreciation  of certain
marketable  securities  during the first  half of the  current  year.  It is the
Company's   intention  to  continue  to  liquidate  a  portion  of  its  trading
investments  in the near term,  which may result in additional  trading gains or
losses in the future.

        Minority  interest in the loss of  subsidiary  was  $968,372 for the six
months ended June 30, 1997 compared to $45,671 for the six months ended June 30,
1996. This increase in the minority interest in the loss of subsidiary is due to
the  successful   completion  of  Nexar's   initial  public  offering  in  which
approximately 35% of Nexar was sold to the public.

LIQUIDITY AND CAPITAL RESOURCES

        As of June 30,  1997,  the  Company  had  $23.4  million  in cash,  cash
equivalents  and  trading  securities  including  $7.0  million of cash and cash
equivalents held at the Company's Nexar subsidiary.  During the six months ended
June 30,1997 the Company generated $10 million, $15.0 million, $19.6 million and
$4 million in net proceeds from the issuance of convertible debentures, the sale
of its preferred  stock,  the initial  public  offering of Nexar and the sale of
Palomar owned Nexar common stock, respectively.

        The  Company's net loss for the six months ended March 31, 1997 included
the following  noncash  items:  $2.1 million of  depreciation  and  amortization
expense;   $2.3  million  of  additional   interest   expense  relating  to  the
amortization  of  the  discounts  on the  convertible  debentures;  $371,102  in
investment  banking  fees  paid with  common  stock  and  warrants;  and a legal
settlement accrual of $2.9 million in connection with a breach of contract case,
involving a former investment banking consultant.

        The Company anticipates that capital  expenditures for the remaining six
months of 1997 will total  approximately  $10 million,  of which $8.2 million is
attributed the purchase of laser  products for CTI's laser centers.  The Company
will finance these  expenditures  with cash on hand and equipment leasing lines,
or the Company will seek to raise  additional  funds.  However,  there can be no
assurance that the Company will be able to raise the funds.

                                       19
<PAGE>

        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 June 30,
1997, the amount of accounts  receivable sold that remained  uncollected totaled
$1,737,808 net of related  reserves and fees, as defined in the agreement.  This
amount is classified as a revolving line of credit in the  accompanying  balance
sheet as of June 30, 1997. The interest rate on such outstanding  amounts is the
bank's  prime rate plus 1.5%,  and interest is payable  monthly in arrears.  The
financing  is   collateralized   by  the  purchased   accounts   receivable  and
substantially  all of Dynaco's assets.  Borrowings under this loan agreement are
guaranteed by the Company.

        On December 5, 1996,  Comtel  entered into a loan  agreement with a loan
association  which  provided  for  borrowings  up to  $4,500,000  in the form of
revolving  receivable and inventory  loans.  Borrowings under the loan agreement
are limited by a borrowing base calculation on eligible accounts  receivable and
inventory, and are collateralized by accounts receivable, inventory, and certain
other assets. Borrowings bear interest at the lender's prime rate plus 2.25% and
amounted to $3,430,867  as of June 30, 1997.  The loan  agreement  terminates on
November 30, 1998. Comtel is in default of a financial  covenant under this line
related to the aging of accounts receivable. The terms of the loan agreement are
presently under negotiation. Borrowings under this loan agreement are guaranteed
by the Company.

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

        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 and services,  and fund
ongoing operations. There can be no assurance that events in the future will not
require the Company to seek additional  financing sooner.  The Company continues
to investigate several financing  alternatives,  including additional government
research grants, strategic partnerships, additional bank financing, private debt
and  equity  financing  and other  sources.  The  Company  believes  that it has
adequate  cash  reserves  or it  will  be  successful  in  obtaining  additional
financing in order to fund current operations in the near future.

FACTORS THAT MAY AFFECT FUTURE RESULTS

        From time to time,  information  provided by the  Company or  statements
made by its employees may contain "forward-looking" information, as that term is
defined in the Private  Securities  Litigation  Reform Act of 1995 (the  "Act").
This report may also contain  information  that is deemed to be forward  looking
information  under the Act. The Company cautions  investors that there can be no
assurance that actual results or business  conditions will not differ materially
from those projected or suggested in such forward-looking statements as a result
of various factors,  including but not limited to the factors  identified in the
Company's Form 10-KSB, as amended, for the year ended December 31, 1996, and the
following:

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

        The Company's future  operating  results are dependent on its ability to
        develop,  produce and achieve Food and Drug Administration  approval for
        certain  medical  products  and market new and  innovative  products and
        services.  There are numerous  risks  inherent in this complex  process,

                                       20
<PAGE>

        including  rapid  technological  change  and the  requirement  that  the
        Company  bring to market in a timely  fashion new  products and services
        which meet customers' changing needs.

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

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

        In July 1997, one of Nexar's two outside turn-key manufacturers notified
        Nexar of its  inability to timely  manufacture  on a going forward basis
        Nexar's proprietary  motherboards.  Nexar has made arrangements with two
        new manufacturers to assume timely production of the motherboards. Nexar
        does not believe that the transition to the new manufacturers  will have
        a long-term  material  adverse effect on Nexar, but the several weeks it
        may take to resume full production of these key components  could have a
        short-term negative impact on Nexar's results of operations in the third
        quarter  due  to the  possibility  of  limited  delays  in  the  initial
        shipments of Nexar's new XPA product.


                      [This space intentionally left blank]

                                       21
<PAGE>


                           PART II - OTHER INFORMATION


ITEM 1.  LEGAL PROCEEDINGS

        On October 7, 1996 the Company  filed a declaratory  judgment  action in
the United  States  District  Court for the  District of  Massachusetts  against
MEHL/Biophile  ("MEHL")  seeking (i) a declaration that MEHL is without right or
authority to threaten or maintain  suit against the Company or its customers for
alleged infringement of the patent held by MEHL's subsidiary Selvac Acquisitions
Corp.  ("Selvac"  and the "Selvac  Patent"),  that the Selvac Patent is invalid,
void and  unenforceable,  and that the  Company  does not  infringe  the  Selvac
patent;  (ii)  a  preliminary  and  permanent  injunction  enjoining  MEHL  from
threatening  the  Company  or its  customers  with  infringement  litigation  or
infringement;  and  (iii)  an  award  to the  Company  of  damages  suffered  in
connection with MEHL's conduct.  On March 7, 1997,  Selvac filed a complaint for
injunctive relief and damages for patent infringement and for unfair competition
against the Company,  its Spectrum Medical  Technologies and Spectrum  Financial
Services  subsidiaries,  and a New Jersey  dermatologist,  in the United  States
District Court for the District of New Jersey.  Selvac's  complaint alleges that
the Company's EpiLaser infringes the Selvac Patent and that the Company unfairly
competed by promoting  the EpiLaser for hair removal  before it had received FDA
approval for that  specific  application.  The Company and Selvac have agreed to
dismiss the Massachusetts  litigation without prejudice.  Palomar has brought in
the New Jersey  action its claims that the Selvac  patent is  invalid,  that the
Company has not infringed the Selvac  patent,  that MEHL should be enjoined from
making further assertions  concerning  infringement and unfair competition,  and
that the Company should be awarded attorney fees and other  appropriate  relief.
Thus,  both the  Company's  and MEHL's claims will be tried on the merits in New
Jersey. As of August 12, 1997, apart from automatic disclosure as required under
the Federal  Rules of Civil  Procedure,  discovery  has 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,  and in April 1997,  the  District  Court  awarded
Commonwealth  $3,174,070 in damages. That judgment has been appealed by Palomar.
 .

ITEM 2. CHANGES IN SECURITIES

        Preferred Stock

        Pursuant to Section 4(2) of the Act,  the Company sold 10,000  shares of
Series H Convertible  Preferred  Stock ("Series H Preferred") to three investors
for a total of  $10,000,000.  Credit Suisse First Boston  Corporation  purchased
4,000 shares on May 5, 1997, CC  Investments,  LDC purchased 3,000 shares on May
5, 1997 and Southbrook International purchased 3,000 shares on May 23, 1997. The
Series H Preferred may be converted into common stock, including any accrued but
unpaid interest,  at 100% of the average stock price for the first 179 days from
the closing  date,  90% of the average stock price for the following 90 days and
85% of the average stock price  thereafter.  The average  stock price  ("Average
Stock  Price") for the Series H Preferred  is the average  closing bid price for
the ten trading days  immediately  preceding the conversion date but in no event
less  than  $6.00  for the first 210 ten days  following  the  closing  date and
thereafter  no less  than the  lower of $6.00 or 65% of the  conversion  ceiling
price, as defined. The holder is restricted for the first 209 days following the
closing  date to  converting  no more than 33% of the Series H Preferred  in any
thirty  day  period  (or  34%  in the  last  thirty  day  period  available  for
conversion).  Interest  shall be  accrued at 6% per annum for the first 179 days
following the closing  date, 7% for the following 80 days and at 8%  thereafter.
Interest  shall cease to be accrued if, at any time,  the Average Stock Price is
greater than 175% of the Conversion  Ceiling  Price.  The Company has a right to
redeem 50% of the Series H Preferred  if, at any time after  April 1, 1999,  the
Average Stock Price is greater than 150% of the Conversion Ceiling Price and any
and all of the Series H  Preferred  if, at any time after  March 31,  1999,  the
Average Stock Price is greater than 200% of the Conversion  Ceiling  Price.  The
redemption  amount shall be  calculated by  multiplying  the sum of the Series H
Preferred  and  the  premium  by  150%  and  200%  respectively  divided  by the
Conversion  Ceiling Price and a redemption notice must be received by the Holder
no less than 10 and no more than 20  trading  days  priors to the date which the

                                       22
<PAGE>

Company intends to redeem the Series H Preferred. Notwithstanding the foregoing,
the Holder  would be  entitled  to convert  any or all of the Series H Preferred
prior to 10 days after the Company's redemption notice.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

        Not applicable.

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

        Not applicable.

ITEM 5. OTHER INFORMATION

        Not applicable.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

        (a)     Exhibits


        *10.1   Patent  License  Agreement by and between the Company and Patlex
                Corporation, effective as of January 1, 1992.

        10.2    Employment  Agreement  dated  as of May 15,  1997,  between  the
                Company and Louis P. Valente

        27      Financial Data Schedule


        (b)     Reports on Form 8-K.

         None.

        *       Previously  filed  over five  years ago on April 27,  1992 as an
                exhibit to Registration Statement No. 33-47479.


                                       23
<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 August 14, 1997.

                                              PALOMAR MEDICAL TECHNOLOGIES, INC.
                                                          (Registrant)



DATE:  August 14, 1997                        By:  /s/ Louis P. Valente
                                                   --------------------
                                                   Louis P. Valente
                                                   Chief Executive Officer
                                                   (Principal Executive Officer)

DATE:  August 14 , 1997                            /s/ Joseph P. Caruso
                                                   --------------------
                                                   Joseph P. Caruso
                                                   Chief Financial Officer and 
                                                   Treasurer
                                                   (Principal Financial Officer
                                                   and Principal Accounting 
                                                   Officer)