<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

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

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

  For the fiscal year ended December 31, 1997    Commission File Number: 0-29194

                            NEXAR TECHNOLOGIES, INC.
                Exact name of registrant as specified in charter


                 DELAWARE                                    04-3268334
(State or other jurisdiction of incorporation   (I.R.S. Employer Identification)
         or organization)

               257 Turnpike Road
        Southborough, Massachusetts                          01772
    (Address of principal executive office)                (Zip code)


                                 (508) 485-7900
              (Registrant's telephone number, including area code)

        Securities registered pursuant to Section 12(b) of the Act: None
           Securities registered pursuant to Section 12(g) of the Act:
                          Common Stock, par value $0.01

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

Aggregate market value of common stock held by non-affiliates of the Registrant
as of February 28, 1998:  $19,747,684

Number of shares outstanding of the Registrant's only class of common stock as
of February 28, 1998:  10,009,055

                      DOCUMENTS INCORPORATED BY REFERENCE:

                                                    Part of Form 10-K into which
                                                    ----------------------------
          Document                                           incorporated
          --------                                           ------------

-Portions of Registrant's Proxy Statement                      Part III
 relating to Registrant's Annual
 Meeting of Stockholders scheduled to be
 held on June 8, 1998.
<PAGE>

         This Form 10-K, future filings of the registrant, press releases of the
 registrant, and oral statements made with the approval of an authorized
 executive officer of the Registrant may contain forward looking statements.
In connection therewith, please see the cautionary statements and risk factors
contained in Item 1. "Business - Forward Looking Statements; Cautionary
Statement"; "Business - Risk Factors"; Item 7.  "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Recent Developments"
and elsewhere in this report which identify important factors which could cause
actual results to differ materially from those in any such forward-looking
statements.


                                    PART I

ITEM 1.  BUSINESS.
------------------
         Nexar Technologies, Inc. (the "Company" or "Nexar") is a new class of
personal computer (PC) manufacturer which has developed what it believes is the
industry's first "future-ready" PC that is readily upgradable using industry-
standard components.   Nexar PCs, which are based on patented and patent-
pending technologies, enable end-users to reduce total cost of ownership (TCO),
protect their technology investments and extend the lifecycle of their PC.
Unlike conventional PCs, NEXAR systems allow end-users to easily upgrade or
switch important components of the PC to accommodate emerging and future
technologies, resulting in a significant extension of the computer's useful
life.  NEXAR sells a high-performance system which can be shipped to resellers
without the key system-defining components (microprocessor, memory and hard
drive), but which is otherwise fully configured. This ability:

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

                . Enables the Company's resellers to offer Build-to-Order
                  capability in order to compete with direct marketers, such as
                  Dell Computer and Gateway 2000, because a NEXAR PC provides
                  resellers with the ability to promptly deliver a custom-
                  configured, high-performance PC at a competitive price.

         The Company's objective is to become the industry leader in designing
and marketing PCs with technology which enables resellers and end-users, in an
easy and cost-effective manner, to upgrade and transition the central processing
unit (CPU) and the other key system-defining components in accordance with the
known and anticipated roadmaps of various makers of fundamental and leading edge
PC technology.  NEXAR's current PCs feature the Company's patent-pending Cross-
Processor Architecture(TM) (NEXAR XPA(TM)) in which any one of several state-of-
the-art CPUs can be initially included or later installed, including Intel
Corporation's Pentium, Pentium Pro, Pentium II, dual Pentium II and compatible
CPUs.  The Company also intends to develop the NEXAR XPA technology to
accommodate microprocessors based on other technologies.  The NEXAR XPA allows
the CPU, random access memory (RAM), and cache memory to be replaced by
end-users without technical assistance.  The Company's PCs also feature a
removable hard drive, permitting its replacement and the further advantages
of increased data portability and security, and the use of multiple operating
systems in a single PC.  The Company does not market its products directly to
end-users, but instead distributes its products through a network of
international, national and regional distributors, value-added and other
resellers, original equipment manufacturers (OEMs), system integrators, computer
superstores, direct response resellers, and independent dealers.

                                       2
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INDUSTRY BACKGROUND

         The PC market has been characterized by intense competition and
substantial technological advances occurring over short periods of time.
Hundreds of vendors compete in today's PC marketplace. Leading manufacturers
include Acer America Corporation, Apple Computer, Inc., Compaq Computer
Corporation, Dell Computer Corporation, Gateway 2000, Inc., Hewlett-Packard
Company, International Business Machines Corporation (IBM), and Packard Bell
NEC, Inc. See " - Competition." Rapid technology advances have resulted in high
rates of product innovation and enhancements, and short product life cycles,
creating difficult choices for both current owners and prospective purchasers of
PC systems. PC users occasionally find that they cannot effectively use the
latest software programs, or even the latest enhancements to their existing
software programs, because their PC has insufficient memory, their CPU is too
slow, or their hard drive is full and cannot store additional data.
Consequently, a user who does not wish to forego the latest technology
advancements must either attempt to upgrade his or her existing PC (to the
extent the system can be upgraded and which typically requires technical
assistance) or make a substantial investment in a newer, more powerful PC.

         End-users, especially corporate users, are currently migrating to next
generation PCs such as Windows NT(R)/Pentium Pro and competing systems.  The
increase in the capabilities of such systems is occurring concurrently with an
increase in the number of variables, such as compatibility with 32-bit
software applications and multimedia functionality, which PC buyers must
consider in making purchasing decisions. The result is a more intricate outlook
for evaluation of PC technology advancements.  In the past year, Intel
introduced MMX multimedia extensions into its P55C model, Advanced Micro
Devices, Inc. (AMD(R)) introduced its K6 CPU which, like a microprocessor Cyrix
Corporation also introduced in 1997, incorporates architectural enhancements to
Pentium-class processors providing significant performance improvements when
running multimedia applications.  AMD supports MMX on their K6 CPU and the
Cyrix(R) M2 processor is also MMX compatible. Also in 1997 Intel introduced its
Pentium II processor, a next generation Pentium Pro-class CPU that supports MMX
technology and improves 16-bit software performance (the current Pentium-Pro,
which does not include MMX technology, is designed primarily for 32-bit
applications). In 1998, Intel is expected to release Deschutes, the code-name
for a Pentium II CPU processor which is expected to support clock speeds of 350
to 450 MHz and bus speeds of 100 MHz.

         Further complicating the outlook for advances in processor technology
for PC manufacturers and end-users concerned about obsolescence is a recent
trend by industry leader Intel to introduce their CPUs with proprietary
interfaces.  Intel's Pentium Pro was the first to use a Socket 8 interface
connecting the CPU to the motherboard, making it incompatible with prior Intel
and Intel-compatible CPUs using the predecessor Socket 7.  In 1997 Intel
introduced its Pentium II with yet another interface, the Slot 1, which
represented a major departure from prior standards.  The Pentium II was the
first Intel CPU to be enclosed in a sealed plastic housing requiring a special
single edge contact to the motherboard.  The NEXAR XPA directly addresses this
trend by permitting cost effective upgrades of the PC's processor from the
current generation of CPUs to future generations by allowing the easy
replacement  of not only the CPU itself but also the core logic portion of the
motherboard to which the CPU connects.

         The constant and rapid escalation of technology causes instability in
the PC industry.  Because several months may lapse between the manufacture and
actual sale date of a conventional, pre-configured system, PC manufacturers face
substantial business risk in forecasting which components to include and the
pricing of the system.  As technology advancements and price reductions occur,
vendors which have shipped pre-configured systems to their resellers are forced
to offer price protection by reducing the price of their products and issuing
credits to the reseller. These and other concessions further erode the profit
margin of the manufacturer.  Meanwhile, resellers unavoidably accumulate
overpriced and aging inventory, and end-users are offered a discount on
yesterday's technology.

                                       3
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         The telephone and mail order direct response market continues to be one
of the fastest growing segments of the PC industry. Companies in this market,
primarily Gateway and Dell, have been able to capitalize on the destabilizing
effect of rapid technological advances and frequent price reductions.
Because direct marketers sell directly to end-users on a Build-to-Order basis,
they can sell the latest technology to end-users more quickly than traditional
PC suppliers. In addition, because they have large and rapidly changing
inventories of components, direct marketers can also offer more configurations
of their PCs at the latest industry price points than resellers who are subject
to longer manufacturing to date-of-sale cycles. Some PC manufacturers, such as
IBM, have addressed the same market challenge by allowing reseller partners to
perform "channel assembly" in completing the configuration of their PCs.
Others, including Compaq, have attempted to mimic Dell's Build to Order model by
assembling to order large volume purchases from large enterprise customers and
handing off channel assembly of smaller orders to their resellers.

THE NEXAR XPA PC ARCHITECTURE

         The key elements of NEXAR's patent-pending XPA PC architecture are a
custom designed main integrated circuit board (a "motherboard") which is
separable into two-halves, and a tower chassis design allowing ease of access,
permitting non-technically trained users to install and replace key components
connecting to either half of the motherboard with industry-standard, off-the-
shelf products. The CPU and RAM of a conventional PC typically reside on top of
a motherboard which also includes expansion board slots for peripheral and
controller cards for communicating with mass storage and input/output
components. NEXAR XPA technology places sockets for the CPU and RAM on the core-
logic half of the motherboard, which faces in the opposite direction of the
input/output half of the motherboard, thereby making the sockets and slots for
insertion and removal of the key components more accessible. The design also
provides access to the expansion slots of the PC on the input/output half of the
motherboard for cards providing features such as networking and multimedia
functionality. Because the core-logic half of the motherboard is itself easily
removable and replaceable, the NEXAR XPA also permits multiple and cross-
processor upgrades and transitions on a single PC.

         NEXAR XPA PCs allow resellers or end-users to initially select or later
vary the type of microprocessor used in the system from among those based on
competing technologies, such as Pentium, Pentium Pro, Pentium II, dual Pentium
II and other x86 CPUs.  The Company believes this capability will become
increasingly important as technology continues to advance and the demands of
personal computing continue to intensify.  End-users without this ability to
cost-effectively upgrade or switch microprocessors and operating platforms will
face the daunting task of precisely forecasting their own increasingly intensive
information and other computing system requirements, not only with regard to
speed, memory, and data access, but also to accommodate the demands of
graphics-rich applications, Internet and intranet capability and diverse
multimedia functionality. The Company expects that customers purchasing a NEXAR
XPA system will be able to not only increase their PC's speed and capacity as
such advances become available, but will also be able to cost-effectively
custom-fit their operating platform to ever-increasing application needs and
capabilities by converting their system from among various x86 processor lines,
and from among Windows NT, OS/2(R), UNIX and other operating systems. The
Company believes that in most cases, regardless of the demands of the end-user,
a NEXAR XPA PC will be an optimal solution to purchasers seeking investment
protection of their system infrastructure.  The NEXAR XPA PC also features a
lockable, removable hard disk drive mounted on rails in a design similar to that
used in many laptop computers.  This provides the added benefits of permitting
increased portability of data and increased security, attributes which appeal to
many government and corporate buyers, and the use of multiple operating systems
on one PC.

                                       4
<PAGE>

STRATEGY

         The Company's objective is to claim a significant share of the desktop
PC market by offering open-architecture PCs incorporating technology which
enables end-users in an easy and cost-effective manner to upgrade and transition
to the new and varied CPU platforms of different manufacturers in accordance
with expected roadmaps of fundamental and leading-edge PC technology. The
principal elements of NEXAR's strategy to achieve its goal include the
following:

ESTABLISH AND MAINTAIN TECHNOLOGICAL LEADERSHIP IN UPGRADABLE AND
CROSS-PROCESSOR PCS

         The Company devotes most of its product development efforts to the
continued implementation of the NEXAR XPA technology to a broad range of
microprocessor platforms and to monitoring and participating in developments in
the computer markets in which it competes generally.  These efforts seek to
ensure that the Company's future products offer the distribution channel and
end-users the same benefits of investment protection and technical flexibility
as the Company's current PCs. The Company intends to periodically advance the
design of its PCs, including the NEXAR XPA technology, to address announced and
anticipated technological advances by leading makers of the system defining
components. See " -- Product Development."

FOCUS ON ADVANTAGES OF NEXAR PC XPA DESIGN

         The Company believes that the flexibility of its XPA PCs provides NEXAR
products a competitive differentiation, especially as more variables, such as
enhanced multimedia performance and 32-bit software applications, become factors
in the purchasing decisions within the PC markets in which the Company does and
intends to participate. The design of the XPA system permits NEXAR resellers the
ability to offer a significantly broader range of configurations than is
possible with conventionally designed PCs. The benefits of NEXAR's PCs to end-
users include the following:

                . Protects the consumer's PC investment by allowing end-users to
                  purchase a customized PC and to later upgrade components to
                  keep up with technology advances without incurring the expense
                  of a new system.

                . Reduces TCO by saving management information systems (MIS)
                  departments of large and small enterprises time and expense
                  upgrading components or replacing outdated systems.

                . End-users are not locked into the upgrade path of a single
                  manufacturer, but, instead, can utilize numerous widely-
                  available, industry-standard components and platforms.

FOCUS ON CHANNEL MARKETING

         The Company markets its products through multiple channels of
distribution, using a controlled distribution model in which a limited number of
resellers and distributors are given exclusive or shared responsibility for
certain territories or market segments in exchange for best-efforts sales volume
or marketing commitments. The Company is initially targeting commercial entities
rather than the home consumer market.  Accordingly, the Company primarily
distributes its PCs not through retail outlets, but through the following
channels:

                                       5
<PAGE>

         Distributors and Resellers.  The Company plans to expand its network of
distributors and resellers by emphasizing the following advantages attained by
carrying NEXAR PCs:

                . Reduced inventory depreciation risk and improved profit
                  margins enhanced by using one system platform and sourcing
                  components on a "just-in-time" basis.

                . The ability to be "first to market" with the latest technology
                  on a  consistent basis by offering customers "next generation"
                  components without concern for existing pre-configured
                  inventory levels.

                . Lower inventory costs due to the ability to stock one line of
                  semi-configured NEXAR systems in place of several lines of
                  pre-configured PCs.

                . The ability to custom-configure a system on a Build-to-Order
                  basis in order to compete effectively against direct marketers
                  such as Gateway 2000 and Dell Computer.

         Government Resellers.  The Company believes that, in addition to the
other advantages of NEXAR XPA PCs and the increased security and other benefits
of the removable hard disk drive described herein, the NEXAR XPA PC is
particularly appealing to many government buyers because the time required for
ordering entirely new systems is often prohibitive under government regulations,
 while component parts can be more timely requisitioned, thereby allowing a
government office to more easily remain technologically current.  The Company
has entered into an agreement with Government Technology Services, Inc. (GTSI),
a leading supplier of desktop systems to the U.S. government, pursuant to which
GTSI serves as NEXAR's exclusive federal reseller with respect to GSA scheduled
purchases provided that GTSI purchase a specified minimum of the Company's
products in 1998. GTSI is, however, under no obligation to purchase any products
of the Company. In the year ended December 31, 1997, GTSI accounted for
approximately 44% of the Company's revenues. The Company expects that GTSI will
continue to be an important customer, but that sales to GTSI as a percentage of
total revenue will decline further as the Company further expands its
distribution network and increases its overall sales. See " -- Customers." The
Company also pursues relationships with resellers selling to government agencies
not purchasing from the GSA Schedule.

         VARs, Systems Integrators and OEMs. The Company believes its PCs enable
value-added resellers (VARs) and systems integrators to offer their clients a
more flexible and cost effective PC and network solution. By offering NEXAR PCs,
VARs and system integrators are able to minimize depreciation of their inventory
and deliver a custom configured system solution virtually on demand, and enable
their customers to reduce their MIS costs. The Company will seek to capture
market share in some territories by entering into agreements with OEMs who will
deliver PCs to their customers with both the OEM's brand name and a product
label identifying that the base unit contains XPA technology.

         Private Brand Resellers.  The Company intends to increasingly seek out
and enter into reseller arrangements whereby selected channel participants both
nationally and regionally will be permitted to private label NEXAR's XPA
architecture by selling PCs primarily bearing such reseller's names but
crediting NEXAR with the underlying technology.  The Company anticipates that
most such private label resellers, especially systems integrators, will purchase
base XPA systems and complete the assembly of the PC themselves, but the Company
also plans to provide fulfillment services using products consigned by such
resellers for such purpose.

                                       6
<PAGE>

SALES AND MARKETING

         The Company's marketing strategy is channel-based, focused primarily on
distributors, value added and other resellers, and system integrators, rather
than on end-users. During its initial marketing period, NEXAR has concentrated
on building awareness of NEXAR and its innovative PC architecture with its
channel resellers. In particular, NEXAR has co-marketed extensively with GTSI,
its largest customer, to the federal government market. See " -- Strategy --
Government Resellers." The Company conducts its marketing primarily through
meetings with and sales presentations to national and regional resellers. In
addition, the Company displays its products at national and international trade
shows such as COMDEX and PC Expo.

         The Company executes its marketing strategy primarily through the
efforts of a direct sales force and through independent manufacturer sales
representatives.  As of December 31, 1997, NEXAR's sales force consisted of 15
people, 11 located at its Southborough, Massachusetts headquarters and the
remainder in regional locations.  The Company intends to increase the size of
its sales force as its revenue grows.  As of December 31, 1997, the Company was
also a party to agreements with five independent manufacturer sales
representatives.  These sales representatives are primarily responsible for
securing sales of NEXAR products to regional resellers and are paid commissions
based on such sales.

CUSTOMERS

         The Company manufactures and sells its PCs to resellers of varying size
and market share, including national and regional distributors, value-added and
other resellers, computer and office superstores, system integrators, direct
response resellers, and independent dealers.

         In the fiscal year ended December 31, 1997, GTSI accounted for
approximately 44% of the Company's revenues.  The Company expects that GTSI will
continue to be an important customer, but that sales to GTSI as a percentage of
total revenue will decline further as the Company further expands its
distribution network and increases its overall sales. The Company's business
plan for 1998 anticipates that sales to GTSI will continue to represent a
significant portion of the Company's sales during the fiscal year. The Company
has entered into an agreement with GTSI pursuant to which GTSI must purchase a
specified minimum of products in order to retain its status as the Company's
exclusive reseller with respect to GSA scheduled purchases, but GTSI is under no
obligation to purchase any products from the Company. The loss of GTSI as a
significant customer, or if GTSI purchases significantly less products than the
Company anticipates, would have a material adverse effect on the Company. See
"--Strategy -- Focus on Channel Marketing -- Government Resellers" and Note 2 of
Notes to Consolidated Financial Statements.

PRODUCTS

         NEXAR began shipping its patent-pending NEXAR Cross-Processor
Architecture systems in September 1997. The NEXAR XPA systems features a split
motherboard design consisting of a fixed input/output card and an easily
removable CPU card that permits easy and cost effective cross-processor
upgrades on a single PC. A NEXAR XPA PC allows resellers or end-users to
initially select or later vary the type of microprocessor used in the system
from one of several state-of-the-art CPU product families. NEXAR XPA systems
currently enable the use of any of Pentium, Pentium Pro, Pentium II, dual
Pentium II and compatible CPUs which currently have different socket
configurations and are thus not currently easily replaceable in conventional
PCs.  The multi-platform support is designed to accept either Microsoft Windows
95 or Windows NT operating systems.

                                       7
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CUSTOMER SERVICE AND SUPPORT

         NEXAR PCs are sold with a three-year limited warranty on hardware with
one-year on-site service. To provide its customers with technical support, NEXAR
and certain of its resellers have entered into agreements with third party
service providers, including Wang Laboratories, Inc. (WANG), pursuant to which
these companies provide NEXAR's customers with one year on-site hardware
support, including diagnostics and repair. Wang also provides telephone support
for software products bundled with NEXAR's systems for a period of ninety days
after purchase. While the Company and its resellers selected these service
providers based on its belief that these providers have the capability to
perform these warranty obligations on a timely and efficient basis, the failure
of these providers to meet the demands of the end-users of the Company's
products could materially and adversely affect the reputation of the Company and
its products, which in turn could result in lower sales and profits.

PRODUCT DEVELOPMENT

         The Company currently has only a limited product development staff.
The Company engaged GDA Technologies, Inc. (GDA), a provider of computer
engineering services, to develop the XPA technology and to implement this
technology on several motherboards for use in its XPA PCs.  Although the
Company believes that it could find and engage equivalent development and
engineering services elsewhere within a reasonable period of time, or hire
sufficient capable engineers to perform such development work in-house, the
inability of GDA to adequately perform such services on a timely basis could
have a material adverse effect on the Company.

         From its inception, NEXAR has devoted continuing efforts to research
and development activities both to develop the current line of NEXAR PCs and to
introduce new models that further leverage the Company's proprietary technology
in providing simplified upgradability of major components and the ability
to accommodate emerging and future technologies.  Current development efforts
are principally directed to implementation of its NEXAR XPA architecture. The
Company's future success will be highly dependent upon its ability to develop,
produce and market products that incorporate new technology, are priced
competitively and achieve significant market acceptance. There can be no
assurance that the Company's products will be technically advanced or
commercially successful due to the rapid improvements in computer technology and
resulting product obsolescence. There is also no assurance that the Company
will be able to deliver commercial quantities of new products in a timely
manner. The success of new product introductions is dependent on a number of
factors, including market acceptance, the Company's ability to anticipate and
manage risks associated with product transitions, the effective management of
inventory levels in line with anticipated product demand and the timely
manufacturing of products in appropriate quantities to meet anticipated demand.
The failure of the Company to develop, produce and market commercially viable
products could result in the Company's business, operating results and financial
condition being materially and adversely affected.

         The Company's product development efforts will continue to require
substantial investments by the Company for third-party development, engineering,
refinement and testing, and there can be no assurance that the Company will have
the resources sufficient to make such investments. Participants in the PC
industry generally rely on the creation and implementation of technology
standards to win the broadest market acceptance for their products. The Company
must successfully manage and participate in the development of standards while
continuing to differentiate its products in a manner valued by customers. While
industry participants generally accept, and may encourage, the use of their
intellectual property by third parties under license, nonetheless, when
intellectual property owned by competitors or suppliers becomes accepted as an
industry standard, the Company must obtain a license, purchase components
utilizing such technology from the owners of such technology or their licensees,
or otherwise acquire rights to use such technology. The failure of the Company
to license, purchase or otherwise

                                       8
<PAGE>

acquire rights to such technologies could result in the Company's business,
operating results and financial condition being materially and adversely
affected.

MANUFACTURING

         The Company operates a 100,000 square foot manufacturing facility in
Hayward, California. The Company's manufacturing operations consist primarily
of assembly, test and quality control of its PC systems. The single shift
capacity of the facility is up to 15,000 units produced per month, although
NEXAR's actual manufacturing capacity depends in part on the ability of NEXAR's
suppliers to provide it with assembled circuit boards and other components.

         The Company uses industry-standard components for its products and
contracts with specific vendors to manufacture certain components included in
its products, primarily circuit boards. Most of these components are generally
available from multiple sources; however, NEXAR relies on two contract
manufacturers to manufacture motherboards used in its PCs.  In addition, the
Company relies on a single supplier to produce its customized chassis and has
several other single supplier relationships for less critical components.
During the third quarter of 1997, the Company did not have in inventory and was
unable to obtain on a timely basis sufficient quantities of key components to
meet outstanding purchase orders, which caused the financial results for such
period to be adversely affected.

COMPETITION

         The desktop PC industry is intensely competitive and may become more so
as the result of, among other things, the introduction of new competitors
(including large multi-national, diversified companies) and possibly weakening
demand. The Company currently competes in the desktop PC market principally with
Acer, Apple Computer, Compaq Computer, Dell Computer, Gateway 2000, Hewlett-
Packard, IBM and Packard Bell NEC.  All of these companies have stronger brand
recognition, significantly greater financial, marketing, manufacturing,
technological and distribution resources, broader product lines and larger
installed customer bases than does the Company. Principal competitive factors
include product features, product performance, quality and reliability, the
ability to deliver product to customers in a timely fashion, customer service
and support, marketing and distribution capabilities and price. Also, in order
to compete successfully, the Company must attract and retain a sufficient number
of management, sales, and technical personnel with high levels of relevant
skills and meaningful experience. Although the Company has assembled an
experienced senior management team, there can be no assurance that the
Company will be able to attract and retain sufficient numbers of additional
personnel, as the need for such individuals increases with the Company's
anticipated growth, or maintain or improve its current position with respect to
any of these or other competitive factors. This intense competition could result
in loss of customers or pricing pressures, which would negatively affect the
Company's results of operations.

         The Company's ability to compete favorably is dependent, in significant
part, upon its ability to control costs, react timely and appropriately to
short-and long-term trends and competitively price its products while preventing
erosion of its margins, and there is no assurance that the Company will be able
to do so. Many of the Company's competitors can devote greater managerial and
financial resources than the Company can to develop, promote and distribute
products and provide related consulting and training services. Some of the
Company's competitors have established, or may establish, cooperative
arrangements or strategic alliances among themselves or with third parties, thus
enhancing their ability to compete with the Company. There can be no assurance
that the Company will be able to compete successfully against current or future
competitors or that the competitive pressures faced by the Company will not
materially and adversely affect its business, operating results and financial
condition.

                                       9
<PAGE>

INTELLECTUAL PROPERTY

         The Company's success is dependent in large part upon its intellectual
property rights. In September 1997, the United States Patent and Trademark
Office issued the Company a patent covering the essential technology which
enables the easy installation, removal and replacement of key components in the
Company's original PCs, which was the predecessor to its XPA architecture. The
Company has filed an additional patent application relating to the same
technology covered by the patent which has issued. The Company has also filed
ten domestic and foreign patent applications, the first in late 1996, covering
its XPA technology. See "Business -- Intellectual Property." There can be no
assurance that any patents will be issued pursuant to the pending or any future
patent applications of the Company. In addition, there can be no assurance that
the patent which has issued or any future patents issued would survive a legal
challenge to their validity or provide adequate protection. In addition, the
Company has not conducted any formal study of prior art and, therefore, has not
determined what effect any prior art may have on any such patents that may
issue. The Company also relies on copyrights, unpatented trade secrets and
trademarks to protect its proprietary technology. No assurance can be given that
the Company's competitors will not independently develop or otherwise acquire
substantially equivalent techniques or otherwise gain access to the Company's
proprietary technology or that the Company can ultimately protect its rights to
such proprietary technology. In addition, there can be no assurance that the
Company will be able to afford the expense of any litigation which may be
necessary to enforce its rights under any such patents that may issue. The
Company also relies on confidentiality agreements with its collaborators,
employees, advisors, vendors and consultants to protect its proprietary
technology. There can be no assurance that these agreements will not be
breached, that the Company would have adequate remedies for any breach or that
the Company's trade secrets will not otherwise become known or be independently
developed by competitors. Failure to obtain or maintain patent and trade secret
protection, for any reason, could have a material adverse effect on the
Company's business, financial condition and results of operations.

EMPLOYEES

         As of December 31, 1997, NEXAR had 78 employees, including executive
officers, sales, marketing, technical support, finance, manufacturing,
engineering, and administrative personnel. Thirty-three of these employees are
employed at the Southborough, Massachusetts facility, and 45 are employed at the
Hayward, California facility. In addition, the Company currently utilizes
contract labor to meet its manufacturing needs on an ongoing basis. None of the
Company's employees is represented by a collective bargaining agreement, nor has
the Company experienced work stoppages. The Company believes that its relations
with its employees are satisfactory.

                                       10
<PAGE>

FORWARD LOOKING STATEMENTS; CAUTIONARY STATEMENT
------------------------------------------------

         When used anywhere in this Form 10-K, in future filings by the Company
with the Securities and Exchange Commission, in the Company's press releases and
in oral statements made with the approval of an authorized executive officer of
the Company, the words or phrases "will likely result", "are expected to", "will
continue", "is anticipated", "estimated", "project", or "outlook" or similar
expressions (including confirmations by an authorized executive officer of the
Company of any such expressions made by a third party with respect to the
Company) are intended to identify "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. The Company
wishes to caution readers not to place undue reliance on any such forward-
looking statements, which speak only as of the date made. Such statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from historical earnings and those presently anticipated or
projected. These risks and uncertainties are described above and in the risk
factors set forth below. The Company specifically declines any obligation to
publicly release the result of any revisions which may be made to any forward-
looking statements to reflect anticipated or unanticipated events or
circumstances occurring after the date of such statements.

RISK FACTORS
------------

LIMITED OPERATING HISTORY; HISTORY OF OPERATING LOSSES; ACCUMULATED DEFICIT

         The Company was incorporated in March 1995 and commenced selling its
PCs in volume in April 1996. Accordingly, the Company has a limited operating
history upon which an evaluation of the Company and its prospects can be based.
The Company's prospects must be evaluated with regard to the risks encountered
by a company in an early stage of development, particularly in light of the
uncertainties relating to the intensely competitive market in which the Company
operates. As of December 31, 1997, the Company had an accumulated deficit of
approximately $23,118,000. The Company's ability to generate significant revenue
growth in the future is subject to substantial uncertainty.

SIGNIFICANT CAPITAL REQUIREMENTS; UNCERTAINTY OF ADDITIONAL FUNDING

         The Company's capital requirements in connection with its development
and marketing activities have been and will continue to be significant. The
Company believes that amounts available from cash generated from operations and
the recent sale of securities and future financing transactions which the
Company believes it can consummate as necessary will be sufficient to meet the
Company's cash requirements through at least the next twelve months. Cash
requirements for periods beyond the next twelve months depend on the Company's
profitability, its ability to manage working capital requirements and its growth
rate. The Company may need to raise additional funds sooner in order to fund
more rapid expansion, to develop new or enhanced products, or to respond to
competitive pressures. There can be no assurance that additional financing will
be available when needed on terms favorable to the Company or at all. If
adequate funds are not available or are not available on acceptable terms, the
Company maybe unable to develop or enhance products or services, take advantage
of future opportunities, or respond to competitive pressures, which could have a
material adverse effect on the Company's business, financial condition or
operating results. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

                                       11
<PAGE>

RISKS ASSOCIATED WITH INTENSE COMPETITION

         The desktop PC industry is intensely competitive and may become more so
as the result of, among other things, the introduction of new competitors
(including large multi-national, diversified companies) and possibly weakening
demand. The Company currently competes in the desktop PC market principally with
Acer America, Apple Computer, Compaq Computer, Dell Computer, Gateway 2000,
Hewlett-Packard, IBM and Packard Bell NEC. All of these companies have stronger
brand recognition, significantly greater financial, marketing, manufacturing,
technological and distribution resources, broader product lines and larger
installed customer bases than does the Company. Principal competitive factors
include product features, product performance, quality and reliability, the
ability to deliver product to customers in a timely fashion, customer service
and support, marketing and distribution capabilities and price. Also, in order
to compete successfully, the Company must attract and retain a sufficient number
of management, sales and technical personnel with high levels of relevant skills
and meaningful experience.Although the Company has assembled an experienced
senior management team, there can be no assurance that the Company will be able
to attract and retain sufficient numbers of additional personnel, as the need
for such individuals increases with the Company's anticipated growth, or
maintain or improve its current position with respect to any of these or other
competitive factors. This intense competition could result in loss of customers
or pricing pressures, which would negatively affect the Company's results of
operations.

         The Company's ability to compete favorably is dependent, in significant
part, upon its ability to control costs, react timely and appropriately to
short- and long-term trends and competitively price its products while
preventing erosion of its margins, and there is no assurance that the Company
will be able to do so. Many of the Company's competitors can devote greater
managerial and financial resources than the Company can to develop, promote and
distribute products and provide related consulting and training services. Some
of the Company's competitors have established, or may establish, cooperative
arrangements or strategic alliances among themselves or with third parties, thus
enhancing their ability to compete with the Company. There can be no assurance
that the Company will be able to compete successfully against current or future
competitors or that the competitive pressures faced by the Company will not
materially and adversely affect its business, operating results and financial
condition.  See "Business -- Competition."

DEPENDENCE ON SUBSTANTIAL CUSTOMER

         In the fiscal year ended December 31, 1997, one customer of the
Company, Government Technology Services, Inc. (GTSI), a leading supplier of
desktop systems to United States government agencies, accounted for
approximately 44% of the Company's revenues. The Company expects that GTSI
will continue to be an important customer, but that sales to GTSI as a
percentage of total revenues will decline further as the Company further
expands its distribution network and increases its overall sales. The Company
has entered into an agreement with GTSI pursuant to which GTSI serves as the
Company's exclusive federal reseller with respect to Government Services
Administration (GSA) scheduled purchases, provided that GTSI purchases a
specified minimum of the Company's products in 1998. GTSI is under no
obligation, however, to purchase any products of the Company. If GTSI makes
fewer purchases in 1998 than the Company anticipates, that would have a material
adverse effect on the Company. See "Business -- Customers," "Business --
Strategy" and Note 2 of Notes to Consolidated Financial Statements.

                                       12
<PAGE>

MANAGEMENT OF GROWTH

         The anticipated growth in the size, geographic scope and complexity of
the Company's business
and development of its customer base are expected to place a significant strain
on the Company's management, operations and capital needs. The Company's
continued growth, if any, will require it to attract, motivate and retain
additional highly skilled technical, managerial, consulting, sales and marketing
personnel both in the United States and abroad, and will also require the
Company to enhance its financial and managerial controls and reporting systems.
There is no assurance that the Company can manage its growth effectively or that
the Company will be able to attract and retain the necessary personnel to meet
its business challenges. If the Company is unable to manage its growth
effectively, the Company's business, financial condition and operating results
would be materially and adversely affected. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

DEPENDENCE ON NEW PRODUCTS; MARKET ACCEPTANCE

         The Company's future success will be highly dependent upon its ability
to develop, produce and market products that incorporate new technology, are
priced competitively and achieve significant market acceptance. There can be no
assurance that the Company's products will be technically advanced or
commercially successful due to the rapid improvements in computer technology and
resulting product obsolescence. There is also no assurance that the Company will
be able to deliver commercial quantities of new products in a timely manner. The
success of new product introductions is dependent on a number of factors,
including market acceptance, the Company's ability to anticipate and manage
risks associated with product transitions, effective product marketing, proper
management of inventory levels in line with anticipated product demand and the
timely manufacturing of products in appropriate quantities to meet anticipated
demand. The Company currently has no other product lines, such as notebook
computers or other computer related products, planned. The failure of the
Company to develop, produce and market commercially viable products could result
in the Company's business, operating results and financial condition being
materially and adversely affected. See "Business -- Product Development" and "--
Products."

PRODUCT DEVELOPMENT RISKS

         The Company's product development efforts will continue to require
substantial investments by the Company for third-party development, refinement
and testing, and there can be no assurance that the Company will have the
resources sufficient to make such investments. Participants in the PC industry
generally rely on the creation and implementation of technology standards to win
the broadest market acceptance for their products. The Company must successfully
monitor and participate in the development of standards while continuing to
differentiate its products in a manner valued by customers. Industry
participants generally accept, and may encourage, the use of their intellectual
property by third parties under license, nonetheless, when intellectual property
owned by competitors or suppliers becomes accepted as an industry standard, the
Company must obtain a license, purchase components utilizing such technology
from the owners of such technology or their licensees, or otherwise acquire
rights to use such technology. The failure of the Company to license, purchase
or otherwise acquire rights to such technologies could result in the Company's
business, operating results and financial condition being materially and
adversely affected. See "Business -- Product Development" and " -- Products."

DEPENDENCE ON OUTSIDE PRODUCT ENGINEERING

         The Company currently has only a limited product development staff.
The Company has engaged GDA Technologies, Inc. (GDA), a provider of computer
engineering services, to develop its new patent-pending NEXAR XPA technology and
to implement this technology on several motherboards for use in its

                                       13
<PAGE>

XPA PCs. Although the Company believes that it could find and engage equivalent
development and engineering services elsewhere within a reasonable period of
time, or hire sufficient capable engineers to perform such development work in-
house, the inability of GDA to adequately perform such services on a timely
basis could have a material adverse effect on the Company. See "Business --
Product Development."

UNCERTAINTY REGARDING INTELLECTUAL PROPERTY RIGHTS

         The Company's success is dependent in large part upon its intellectual
property rights. In September 1997, the United States Patent and Trademark
Office issued the Company a patent covering the essential technology which
enables the easy installation, removal and replacement of key components in the
Company's original PCs, which was the predecessor to its XPA architecture.  The
Company has filed an additional patent application relating to the same
technology covered by the patent which has issued.The Company has also filed ten
domestic and foreign patent applications, the first in late 1996, covering its
XPA technology. See "Business -- Intellectual Property". There can be no
assurance that any patents will be issued pursuant to the pending or future
patent applications of the Company. Even if issued, there can be no assurance
that the patent which has issued or any future patents would survive a legal
challenge to their validity or provide adequate protection. In addition, the
Company has not conducted any formal study of prior art and, therefore, has not
determined what effect any prior art may have on any such patents that may
issue. The Company also relies on copyrights, unpatented trade secrets and
trademarks to protect its proprietary technology. No assurance can be given that
the Company's competitors will not independently develop or otherwise acquire
substantially equivalent techniques or otherwise gain access to the Company's
proprietary technology or that the Company can ultimately protect its rights to
such proprietary technology. In addition, there can be no assurance that the
Company will be able to afford the expense of any litigation which may be
necessary to enforce its rights under any such patents that may issue. The
Company also relies on confidentiality agreements with its collaborators,
employees, advisors, vendors and consultants to protect its proprietary
technology. There can be no assurance that these agreements will not be
breached, that the Company would have adequate remedies for any breach or that
the Company's trade secrets will not otherwise become known or be independently
developed by competitors. Failure to obtain or maintain patent and trade secret
protection, for any reason, could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business -- Intellectual Property."

         In addition, the Company has been advised by counsel for NEXOR Ltd.
("NEXOR"), an electronic messaging software company based in the United Kingdom,
that such company claims prior use of the name NEXOR and intends to oppose the
Company's registration of its NEXAR trademark, which is currently pending before
the United States Patent and Trademark Office. Such counsel has proposed an
agreement pursuant to which, among other things, the parties would each consent
to the other's use of their respective names so long as the respective parties
do not market classes of goods or services falling within the other party's
classes of goods or services. While the Company believes that it will be able to
resolve this potential dispute and continue to use the NEXAR trademark on its
current and anticipated products, there can be no assurance that an agreement
with NEXOR acceptable to the Company will be reached. The failure to reach a
satisfactory agreement could result in the inability of the Company to obtain
registration for the name NEXAR and/or litigation with NEXOR. An adverse
determination of any such litigation could result in the Company having to cease
use of the NEXAR trademark, which could have a material adverse effect on the
Company.

         Also, NexTrend Technologies, Inc., a manufacturer of computer hardware
has filed a Notice of Opposition at the United States Patent and Trademark
Office to the Company's application to register the NEXAR mark for instructional
manuals in view of NexTrend's use of the NEXSTAR mark. NexTrend claims that the
marks are confusingly similar and that, as between the two parties it used its
NEXSTAR

                                       14
<PAGE>

mark first. The Company has filed an answer to the Notice of Opposition denying
these allegations. Nonetheless, if NextTrend were to prevail in this matter and
then bring an action against Nexar for trademark infringement an adverse
determination of such action could have a material adverse effect on Nexar.

POTENTIAL INFRINGEMENT OF PROPRIETARY TECHNOLOGY

         Although the Company believes that its products do not infringe patents
or other proprietary rights of third parties, there can be no assurance that the
Company is aware of all patents or other proprietary rights that may be
infringed by the Company's products, that any infringement does not exist or
that infringement may not be alleged by third parties in the future. If
infringement is alleged, there can be no assurance that the necessary licenses
would be available on acceptable terms, if at all, or that the Company would
prevail in any related litigation. Patent litigation can be extremely protracted
and expensive even if the Company ultimately prevails, and involvement in such
litigation and related diversion of management attention and resources could
have a material adverse effect on the business, results of operations and
financial condition of the Company. See "Business -- Intellectual Property."

RISK OF TECHNOLOGICAL OBSOLESCENCE

         There can be no assurance that products or technologies of the
Company's competitors will not render the Company's products or technologies
noncompetitive or obsolete. Although the Company's product lines have been
designed to forestall such obsolescence, there can be no assurance that the
Company's products will be competitive with products offered by other
manufacturers. In addition, delays in access to technology developed by
competitors and suppliers could slow the Company's design and manufacture of
components and subsystems that distinguish its products. If the Company is
unable for technological or other reasons to develop and introduce new or
enhanced products and services in a timely and effective manner, the Company's
business, operating results and financial condition would be materially and
adversely affected. See "Business -- Product Development" and " -- Products."

FORECASTING ISSUES

         Because of the pace of technological advances in the computer industry,
the Company must introduce on a timely basis new products that offer customers
competitive technologies while managing the production and marketing cycles of
its existing products. Forecasting demand for newly-introduced products is
complicated by the availability of different product models, which may include
various types of built-in peripherals and software in certain markets. As a
result, while overall demand may be in line with the Company's projections and
manufacturing implementation, local market variations can lead to differences
between expected and actual demand and resulting delays in shipment, which can
affect the Company's financial results. See "Business -- Strategy" and " --
Products."

DEPENDENCE UPON THIRD PARTIES TO PERFORM SERVICE OBLIGATIONS

         All of the Company's products are sold with a three year limited
warranty on hardware with one year on-site service. The Company currently lacks
the capability to provide technical support for its PCs in the field and it and
certain of its resellers have contracted with third party service providers,
including Wang, to perform the Company's warranty obligations with respect to
its products. These companies provide NEXAR's customers on-site hardware
support, including diagnostics and repair and also provides telephone support
for software products bundled with NEXAR's systems for a period of 90 days.
While the Company and its resellers selected these providers based on its belief
that these companies have the capability to perform these warranty obligations
on a timely and efficient basis, the failure of these providers to meet the
demands of the end-users of the Company's products could materially and
adversely

                                       15
<PAGE>

affect the reputation of the Company and its products, which in turn could
result in lower sales and profits. See "Business -- Customer Service and
Support."

DEPENDENCE ON MARKET SUCCESS OF THIRD PARTY CHANNEL DISTRIBUTION

         The Company does not sell its products directly to end-users, but
relies instead on a variety of distribution channels, primarily distributors,
value-added and other resellers, original equipment manufacturers (OEMs),
systems integrators, direct response resellers, and independent dealers. The
Company's revenue is dependent, among other things, upon the ability of these
distribution channels to sell the Company's products to end-users. Factors
affecting the ability of these distribution channels to develop and sell their
products include competition, their ability to offer products that meet user
requirements at acceptable prices and overall economic conditions in both the
United States and foreign markets. The Company's business, results of operations
and financial condition would be materially and adversely affected if these
distribution channels are unsuccessful in selling the Company's products. See
"Business -- Sales and Marketing."

RELIANCE ON SUPPLIERS; RISK OF DELAY

         The Company's manufacturing process requires a high volume of quality
components that are procured from third party suppliers. Reliance on suppliers,
as well as industry supply conditions generally, involves several risks,
including the possibility of defective parts, a shortage of components,
increases in component costs and reduced control over delivery schedules, any or
all of which could adversely affect the Company's financial results. As part of
the manufacturing process, the Company uses industry standard components for its
products. Most of these components are generally available from multiple
sources; however, the Company relies on two outside contractors to manufacture
motherboards used in its PCs. In addition, the Company relies on a single
supplier to produce its customized chassis and has several other single supplier
relationships for less critical components, and the lack of availability of
timely and reliable supply of components from these sources could adversely
affect the Company's business. Also, the Company ultimately is reliant on major
suppliers of key components, such as CPUs and chipsets sold by Intel, which are
included in the Company's products, either at the request of a customer prior to
shipment or by the Company's resellers. Occasionally, such components are
subject to allocations and the Company has at times experienced difficulty in
obtaining sufficient quantities of such products. In some cases, alternative
sources of supply are not readily available for some of the Company's single-
sourced components. In other cases, the Company may establish a working
relationship with a single source, even when multiple suppliers are available,
if the Company believes it is advantageous to do so due to performance, quality,
support, delivery, capacity or price considerations. Where alternative sources
are available, qualification of the alternative suppliers and establishment of
reliable supplies could result in delays, which could adversely affect the
Company's manufacturing processes and results of operations.

         The Company occasionally experiences delays in receiving certain
components, which can cause delays in the shipment of some products to
customers. There can be no assurance that the Company will be able to continue
to obtain additional supplies of reliable components in a timely or cost-
effective manner. See "Business -- Manufacturing."

RISKS ASSOCIATED WITH INVENTORY LEVELS

         Although the design of the NEXAR PC provides the Company with the
ability to operate with reduced inventories of components and finished goods,
shifts in technology and market demand may nevertheless result in excess
inventory, declining inventory values or even obsolescence. Maintaining a low
inventory level is dependent upon the Company's ability to achieve targeted
revenue and product mix.

                                       16
<PAGE>

There can be no assurance that the Company will be able to maintain optimal
inventory levels in future periods. See "Business -- Manufacturing."

DEPENDENCE ON KEY PERSONNEL

         The Company's future success depends to a significant extent on certain
key personnel, including its Chairman and Chief Executive Officer, Albert J.
Agbay, and its other executive officers and certain technical, managerial,
consulting, sales and marketing personnel. The loss of the services of any of
these individuals or group of individuals could have a material adverse effect
on the Company's business,operating results and financial condition. See
"Business --Strategy," "-- Products" and "Management."

POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS

         The Company's quarterly revenues, expenses and operating results are
likely to vary considerably in the future. Such fluctuations can be traced to
many factors, including the timing and terms of large transactions, delays in
customer acceptance, delays in receiving components, the length of sales cycles,
changes in the level of operating expenses, demand for the Company's products
and services, the introduction of new products and product enhancements by the
Company and its competitors, changes in customer budgets, competitive conditions
in the industry and general economic conditions. For example, during the third
quarter of 1997, the Company did not have in inventory and was unable to obtain
on a timely basis sufficient quantities of key components to meet outstanding
purchase orders, which caused the financial results for such period to be
adversely affected. The Company budgets its product development and other
expenses anticipating future revenues. If revenues fall below expectations, the
Company's business, operating results and financial condition are likely to be
materially and adversely affected because a proportionately smaller amount of
the Company's expenses vary with its revenues. As a result, the Company believes
that period-to-period comparisons of its operating results are not necessarily
meaningful and should not be relied upon to predict future performance. Due to
the foregoing factors, it is likely that, in some future quarters, the Company's
operating results will fall below the market's or investors' expectations, and,
in such event, the price of the Common Stock would likely be materially and
adversely affected. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

RISKS ASSOCIATED WITH INTERNATIONAL EXPANSION

         The Company plans to expand its business into international markets. To
date, the Company has minimal experience in marketing and distributing its
products internationally and plans to establish alliances with sales
representative organizations and resellers with particular experience in
international markets. Accordingly, the Company's success in international
markets will be substantially dependent upon the skill and expertise of such
international participants in marketing the Company's products. There can be no
assurance that the Company will be able to successfully market, sell and deliver
its products in these markets. In addition, there are certain risks inherent in
doing business in international markets, such as unexpected changes in
regulatory requirements, export restrictions, tariffs and other trade barriers,
difficulties in staffing and managing foreign operations, political instability
and fluctuations in currency exchange rates and potentially adverse tax
consequences, which could adversely impact the success of the Company's
international operations. There can be no assurance that one or more of such
factors will not have a material adverse effect on the Company's future
international operations and, consequently, on the Company's business, financial
condition or operating results. See "Business -- Sales and Marketing."

                                       17
<PAGE>

ITEM 2.  PROPERTIES.
--------------------

         The Company's headquarters and executive offices are located in a
leased facility in Southborough, Massachusetts. The Southborough facility also
serves as the base for NEXAR's sales, marketing, technical support, and general
and administrative functions. The facility, totaling approximately 20,500 square
feet, is leased through 2002. The annual rent under the terms of the lease
agreement is approximately $422,000 per year. The Company believes that suitable
additional or alternative space will be available, when needed, on commercially
reasonable terms.

         The Company's manufacturing, engineering, and warehousing operations
are located in a leased facility in Hayward, California, which is leased for a
five year period expiring in August 2001, with a five year option to extend. The
annual base rent under the lease agreement begins at approximately $288,000 in
the first year and increases annually to approximately $528,000 in 2001. The
Company is also responsible for the operating expenses and real estate taxes
relating to the leased premises.


ITEM 3.  LEGAL PROCEEDINGS.
---------------------------

         As of the date of the filing of this report, the Company was not a
party to any material legal proceedings, except as arise in the ordinary course
of its business.


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

None

                                       18
<PAGE>

                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
-------------------------------------------------------------------------------

         (a) The Company's common stock is traded on the Nasdaq National Market
under the symbol "NEXR". The following table sets forth the high and low bid
quotations for the Company's common stock on The Nasdaq Stock Market during the
periods specified:

<TABLE>
<CAPTION>
                                                High                     Low
         <S>                                    <C>                      <C>

         April 9, 1997* to June 30, 1997        $9.875                   $5.75
         Third Quarter 1997                     $7.375                   $3.875
         Fourth Quarter 1997                    $8.125                   $2.00
         ____________
</TABLE>

         *The date of the commencement of the Company's initial public offering.

         As of February 28, 1998, the Company had approximately 52 stockholders
of record.  No cash dividends have been declared or paid by the Company since
its inception.  It is the policy of the Company to retain any cash flow for
future business expansion.  The Company anticipates no change in this policy in
the foreseeable future.

         (b) The Company filed a Form SR with the Securities and Exchange
Commission on July 18, 1997 reporting through June 30, 1997 the Company's use of
proceeds from its initial public offering (under Form S-1 Registration Statement
No. 333-18489; declared effective April 8, 1997) of its Common Stock, $0.01 par
value. The Company registered and sold 2,500,000 shares of its common stock in
such offering for aggregate gross proceeds of $22,500,000. Net proceeds after
underwriting discounts and commissions and offering expenses were approximately
$18,687,000. The managing underwriters of the offering were Sands Brothers &
Co., Ltd. and Credit Lyonnais Securities (USA) Inc. As of September 30, 1997 the
Company had utilized approximately $7,700,000 and approximately $8,388,000 of
the net offering proceeds for repayment of indebtedness (to the Company's
largest stockholder, Palomar Medical Technologies, Inc.) and working capital,
respectively. During the quarter ended December 31, 1997, the Company utilized
the balance of the net proceeds for working capital.

                                       19
<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA.
---------------------------------

         The following selected financial data should be read in conjunction
with the Consolidated Financial Statements, including the related notes, and
"Management Discussion and Analysis of Financial Condition and Results of
Operations." The information set forth below is not necessarily indicative of
the results of future operations.

<TABLE>
<CAPTION>

                                  SELECTED CONSOLIDATED FINANCIAL DATA

                              PERIOD FROM
                               INCEPTION
                               (MARCH 7,
                                 1995)
                                  TO
                              DECEMBER 31,        YEAR ENDED         YEAR ENDED
                                  1995        DECEMBER 31, 1996  DECEMBER 31, 1997
                              -----------     -----------------  -----------------
                              (In thousands except for shares and per share data)
<S>                        <C>                <C>              <C>
Consolidated Statements
   of Operations
Data:
Net revenues                 $      619        $   18,695       $    33,608
Cost of revenues                    574            16,392            32,868
   Gross profit                      45             2,303               740

Operating expenses:
   Research and
    development                     104               803             1,551
   Selling and Marketing            581             4,819             7,291
   General and
    administrative                1,621             4,191             5,422
Total operating expenses          2,306             9,813            14,264


Interest Income, net                  -                 -               178

   Net Loss                  $   (2,261)       $   (7,510)      $   (13,346)

Net loss per common
 share:
   Basic                     $    (0.47)       $    (1.56)      $     (1.84)
   Diluted                         (.29)             (.98)            (1.32)

Weighted average
 common shares:
   Basic                      4,800,000         4,800,000         7,264,320
   Diluted                    7,672,920         7,672,920        10,116,600


Statement of Financial
   Position Data:
Working capital              $     582            $10,425          $  9,924
Total assets                      1,469            19,589            19,909
Long-term debt                    2,943            22,818               134
Stockholders' equity
  (deficit)                      (2,261)           (9,771)           11,139
</TABLE>


ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
-------------------------------------------------------------------------
RESULTS OF OPERATIONS.
----------------------

     The following discussion provides information that management believes is
relevant to an understanding of the Company's consolidated financial condition
and results of operations. This discussion should be read in conjunction with
the Company's Consolidated Financial Statements, the Notes thereto and the other
financial information, included elsewhere in this report.

RESULTS OF OPERATIONS

     The Company was organized and commenced operations in March of 1995. The
Company has focused on developing its products and its marketing and
distribution strategies and did not generate material revenues until April 1996
when it began shipping its proprietary personal computers. Prior to April 1996
the Company only had minimal revenues from sales of a non-proprietary PC. In
addition, the Company's operations through April 1996 consisted principally of
start-up activity associated with the design, development, and marketing of its
desktop PCs.

                                       20
<PAGE>

     The following table summarizes the results of the Company's operations for
each of the past three years as a percentage of revenues. All percentage amounts
were calculated using the underlying data in thousands.

<TABLE>
<CAPTION>

                                   PERIOD FROM
                                    INCEPTION
                                 (MARCH 7, 1995)       YEAR ENDED DECEMBER 31,
                                 TO DECEMBER 31,
                                      1995                 1996         1997
                                 ---------------           ----         ----
<S>                              <C>                      <C>           <C>

Consolidated Statements of
Operations Data:

Net revenues                     100.0%                    100.0%        100.0%
Cost of revenues                  92.7%                     87.7%         97.8%
     Gross profit                  7.3%                     12.3%          2.2%

Operating expenses:
     Research and development     16.8%                      4.3%          4.6%
     Selling and Marketing        93.9%                     25.8%         21.7%
     General and administrative  261.9%                     22.4%         16.1%
Total operating expenses         372.5%                     52.5%         42.4%

Interest Income                    0.0%                      0.0%         20.5%

     Net Loss                   (365.3%)                   (40.2%)       (39.7%)
</TABLE>


     The Company has generated significant operating losses since inception.
During the fourth quarter of 1996 and the third quarter of 1997 the Company
experienced revenue shortfalls due to delays in receiving certain key components
necessary to meet outstanding purchase orders. In addition, the Company
increased its spending year to year in its continuing effort to develop and
bring new products to market.

YEAR ENDED DECEMBER 31, 1997 AND THE YEAR ENDED DECEMBER 31, 1996

NET REVENUES

     Net revenues increased 79.8% to $33.6 million for the year ended December
31, 1997 from $18.7 million for the comparable period ended December 31, 1996.
The increase in net revenues was attributed to increase unit shipments of the
Company's second generation upgradeable XPA PCs. Unit shipments increased 102.7%
to approximately 37,500 from 18,500 for the same comparable year ended December
31, 1996. The increase in both net revenues and unit shipments reflects the
growing acceptance and validation of the Company's proprietary technology.

     The unit volume growth that the Company experienced during 1997 was the
result of the increased demand for the Company's product and the sales efforts
aimed at establishing a broader customer base and increasing the penetration of
existing customer accounts. The Company began shipping its patent-pending XPA
systems in volume in November 1997.

                                      21
<PAGE>

GROSS PROFIT

     Gross profit as a percentage of net revenues was 2.2% in 1997, down from
12.3% in 1996. This decrease was due in part to an interruption in the supply of
essential components from the Company's key supplier of its proprietary
technology which resulted in lower than anticipated shipment levels and
unabsorbed factory overhead cost attributed to the lower revenues during the
third quarter of 1997, as well as the higher cost of components. The Company
resumed full scale production in the fourth quarter with the sourcing of
proprietary components from two new manufacturers.

OPERATING EXPENSES

     Operating expenses for the year ended December 31, 1997 decreased by 10.1%
as a percentage of revenues. Operating expenses increased by 45.4% year to year
as a result of the Company supporting its new products through advertising and
promotional programs, and increased investment in the area of engineering,
service and support of its increased product development efforts and growing
customer base.

     Research and development costs increased as a percentage of revenues, to
4.6% for the year ended December 31, 1997 as compared to 4.3% for the year ended
December 31, 1996. These expenses increased $0.7 million, or 93.2%, year to year
as a result of the Company's introduction of its XPA PC in 1997.

     Sales and marketing expenses decreased, as a percentage of revenues, for
the period ended December 31, 1997 to 21.7% as compared to 25.8% for the same
period in 1996. These expenses increased $2.5 million, or 51.3%, from year to
year as a result of increased efforts to establish its markets, distribution and
reseller channels. The Company increased its presence in the market through
increased spending in advertising, promotional programs and trade show
attendance. During 1997, the sales organization was increased in an effort to
generate and meet product demand and to increase regional coverage throughout
the United States and Canada. The Company also established a relationship with
an overseas distributor to market and sell its product in Europe. The Company
anticipates its selling and marketing efforts will increase in connection with
the introductions of new products, entry into new markets, expansion of its
reseller channels, and more emphasis on its technical support and service.

     General and administrative expenses decreased, as a percentage of revenues,
to 16.1% as compared to 22.4% for the years ended December 31, 1997 and 1996,
respectively. However, general and administrative expenses increased 29.3% year
to year in support of the Company's growth. These expenses included the hiring
of additional staff, operating costs associated with managing the growth of the
Company and a non-cash deferred compensation charge associated to employment
contracts of certain key company executives.

YEAR ENDED DECEMBER 31, 1996 AND PERIOD FROM INCEPTION (MARCH 7, 1995) TO
DECEMBER 31, 1995

NET REVENUES

     Net Revenues increased to $18.7 million for the year ended December 31,
1996 from $0.6 million for the period from inception to December 31, 1995. The
majority of the revenues generated in 1995 were from the sale of non-proprietary
PCs. The Company ceased the production of these PCs in June of 1995 to
concentrate on the development of its upgradeable PCs. The increase in revenues
during the year ended December 31, 1996 from the period ended December 31, 1995
was principally due to the introduction of the Company's first generation
upgradeable PC in April 1996.


                                      22
<PAGE>

GROSS PROFIT

     Gross profit was $2.3 million, or 12.3% of net revenues, for the year ended
December 31, 1996 as compared to $45,000, or 7.3% of net revenues, for the
period ended December 31, 1995. The Company began full scale production of its
initial upgradeable PCs during the second quarter of 1996. The increase in gross
profit was primarily attributable to this introduction and initial volume
shipments of the first generation upgradeable PC in April 1996.

OPERATING EXPENSES

     Research and development expenses consisted primarily of expenses incurred
for the design and development of the Company's upgradeable PCs and a charge for
management bonuses. Research and development expenses increased to $0.8 million
or 672.1%, during the year ended December 31, 1996 as compared to $0.1 million
for the period ended December 31, 1995. The primary reason for this increase was
$0.4 million of management bonuses for 1996 which was funded by an affiliate of
the Company.

     Selling and marketing expenses consisted primarily of salaries,
commissions, consulting fees, trade show expenses, advertising and marketing
costs and a charge for the management bonuses described above. Selling and
marketing expenses increased 729.4% to $4.8 million for the year ended December
31, 1996 from $0.6 million for the period ended December 31, 1995. This increase
in selling and marketing expenses was the result of the addition of sales and
marketing personnel, related to establishing the Company's distribution
channels, supporting the introduction of the Company's first generation
upgradeable PC, and attendance at various trade shows.

     General and administrative expenses consisted primarily of expenses for
finance, office operations, administration and general management activities
including legal, accounting and other professional fees. General and
administrative expenses increased 158.5% to $4.2 million for the year ended
December 31, 1996 from $1.6 million for the period ended December 31, 1995. This
increase in expenses during the year ended December 31, 1996 was attributable to
additional expenditures for general and administrative expenses as a result of
the Company's anticipated growth and a charge for management bonuses which was
funded by an affiliate of the Company. For the years ended December 31, 1995 and
1996 litigation costs of $0.5 million and $1.4 million, respectively were
included in the general and administrative expenses. These expenses represented
the costs to settle potential claims against the Company.

LIQUIDITY AND CAPITAL RESOURCES

     On April 14, 1997, the Company completed its initial public offering (IPO)
of 2,500,000 shares of common stock at a price of $9.00 per share. The proceeds
raised amounted to approximately $18,687,000, net of the underwriter commissions
and other offering costs totaling approximately $3,813,000. Subsequent to this
offering the Company used a significant portion of these proceeds and issued
additional common and preferred stock to Palomar (its parent prior to the IPO)
to liquidate itself of all of its long term debt.

     The Company has been operating from its own working capital balance since
the IPO. The Company's working capital for the year ended December 31, 1997
decreased to $9.9 million from $10.4 million for the comparable period ended
December 31, 1996 primarily due to an unanticipated lower gross profit and its
negative impact on the cash flow from operating activities. The Company's cash
and cash equivalents position was $1.2 million, accounts receivables of $8.8
million and inventory of $5.0 million at December 31, 1997 as compared to cash
and cash equivalents of $2.7 million, accounts receivables of $7.7 million and
inventory of $6.1 million at December 31, 1996.

     On March 20, 1998 the Company issued 32,000 shares of Series B Convertible
Preferred Stock at $100 per share for total gross proceeds of $3,200,000. The
Series B Convertible Preferred Stock may be converted, in whole or in part, into
a number of shares of the Company's common stock equal to $100 per

                                       23
<PAGE>

share converted by a conversion price equal to the lesser of $3.25 per share or
75% of the average closing bid price of the Company's common stock in the five
trading days prior to the date of conversion.

     The Company's capital requirements in connection with its development and
marketing activities have been and will continue to be significant. The Company
believes that amounts available from cash generated from operations and the
recent sale of securities and future financing transaction which the Company
believes it can consummate as necessary will be sufficient to meet the Company's
cash requirements through at least the next twelve months. Cash requirements for
periods beyond the next twelve months depend on the Company's ability to manage
working capital requirements and its growth rate. The Company may need to raise
additional funds sooner in order to fund more rapid expansion, to develop new or
enhanced products, or to respond to competitive pressures (see "Recent
Developments" below). There can be no assurance that additional financing will
be available when needed on terms favorable to the Company or at all. If
adequate funds are not available or are not available on acceptable terms, the
Company may be unable to develop or enhance products or services, take advantage
of future opportunities, or respond to competitive pressures, which could have a
material adverse effect on the Company's business, financial condition or
operating results.

RECENT DEVELOPMENTS

     During 1997 many computer manufacturers, including industry leader Compaq
Computer, began offering PCs to home customers for less than $1,000. This has
led to growth in the home PC market, but also increased pressure on price
margins in the corporate, government and educational PC markets in which the
Company primarily competes. Industry forecasters are predicting that prices for
a wide range of PC hardware products will fall significantly during 1998 and
profit margins for makers of corporate PC systems will generally decline.
Although the Company believes that its relationships with its customers are good
and that its focus on increasing sales through private brand OEM agreements and
other strategic distribution agreements is a sound strategy for growth, there
can be no assurance that the recent trends in the industry identified above will
not have a material adverse effect on the Company and preclude it from achieving
profitability in the foreseeable future. Due to these factors, management of the
Company has determined that it is in the best interests of the Company and its
stockholders to explore the possibility of entering into strategic alliances
with larger industry participants. In March 1998, the Company engaged Southport
Partners, L.P., an investment banking firm based in Southport, Connecticut, to
provide advisory services to the Company concerning possible joint venture,
licensing and other potential transactions. The Company is not currently engaged
in any negotiations with respect to any such potential transaction nor has any
determination been made by the Company whether to enter into any such
transaction.

YEAR 2000

     Many computer systems experience problems handling dates beyond the year
1999. Therefore, some computer hardware and software will need to be modified
prior to the year 2000 in order to remain functional. The Company is assessing
 both the internal readiness of its computer systems and the compliance of its
computer products sold to customers for handling the year 2000. The Company
expects to implement successfully the systems and programming changes necessary
to address year 2000 issues, and does not believe that the cost of such actions
will have a material effect on the Company's results of operations or financial
condition. There can be no assurance, however, that there will not be a delay
in, or increased costs associated with, the implementation of such changes, and
the Company's inability to implement such changes could have an adverse effect
on future results of operations.

     The Company is also assessing the possible effects on the Company's
operations of the year 2000 readiness of key suppliers and subcontractors. The
Company's reliance on suppliers and subcontractors, and, therefore, on the pro-
per functioning of their information systems and software, means that failure to

                                       24
<PAGE>

address year 2000 issues could have a material impact on the Company's
operations and financial results; however, the potential impact and related
costs are not known at this time.

ITEM 7A.  QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.
---------------------------------------------------------------------

     Not applicable.


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
-----------------------------------------------------

     The response to this section is set forth in a separate section of this
report. See page F-1.


ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
-----------------------------------------------------------------------
FINANCIAL DISCLOSURE.
---------------------

     Not applicable, but see Item 14(b) of this report regarding the filing
with the Commission of current reports on Form 8-Ks by the Company with respect
to the change in the Company's independent auditors in 1997.

                                       25
<PAGE>

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
-------------------------------------------------------------

EXECUTIVE OFFICERS AND DIRECTORS

         The executive officers and directors of the Company and their ages as
of December 31, 1997 are as follows:

<TABLE>
<CAPTION>
<S>                                                       <C>       <C>
Name                                                       Age       Position
----                                                       ---       --------

Albert J. Agbay.....................................       49        Chairman of the Board, Chief Executive
                                                                     Officer and President

Gerald Y. Hattori...................................       46        Vice President of Finance, Chief Financial
                                                                     Officer and Treasurer

Michael J. Paciello.................................       46        Executive Vice President of Sales

Liaqat Y. Khan......................................       46        Executive Vice President of Manufacturing

E. Craig Conrad.....................................       39        Vice President of Marketing

Steven Georgiev.....................................       63        Director

Joseph E. Levangie..................................       52        Director

Buster C. Glosson...................................       55        Director
</TABLE>

         Albert J. Agbay has been Chief Executive Officer and President of the
Company since March 1995 and its Chairman of the Board of Directors since
October 1995. From July 1994 to February 1995, Mr. Agbay served as Chief
Executive Officer of Columbia Advanced Systems Corporation (Columbia Advanced
Systems), a manufacturer of PCs and a subsidiary of Apaq, Inc., also a
manufacturer of PCs. From August 1993 to July 1994, Mr. Agbay served as Chairman
and Chief Executive Officer of Swan Technologies, Inc. (Swan), a direct response
supplier of PCs and peripheral computer products. Swan filed a petition for
reorganization under Chapter 11 of the United States Bankruptcy Code in December
1994. From January 1990 to March 1993, Mr. Agbay served as President and Chief
Executive Officer of Leading Edge Products, Inc. (Leading Edge), a manufacturer
of PCs. From April 1988 to January 1990, Mr. Agbay served in senior management
as Northeast Region General Manager for Panasonic Communications and Systems
Company, a manufacturer of electronics and telecommunications products. From
August 1985 to April 1989, Mr. Agbay worked for Panasonic Industrial Company, in
its Computer Products Division as Northeast Region Manager and later assumed
more territorial responsibility as Group General Manager, Eastern Region.

         Gerald Y. Hattori has been Vice President of Finance, Chief Financial
Officer and Treasurer of the Company since October 1996. Prior to joining the
Company, from September 1987 to September 1996, Mr. Hattori served as
corporate controller at SIPEX Corporation, a manufacturer of analog
semiconductors. Mr. Hattori previously held various corporate and divisional
financial management positions from January 1974 to August 1987 at Sanders, a
Lockheed Martin Company.

         Michael J. Paciello has been an Executive Vice President of the
Company since March 1995 and Executive Vice President of Sales since March 1998.
From July 1994 to March 1995, Mr. Paciello served as Executive Vice President of
Columbia Advanced Systems. From August 1993 to July 1994, Mr. Paciello

                                       26
<PAGE>

served as Executive Vice President of Swan. Before joining Swan, Mr. Paciello
served from October 1991 to August 1993 as Executive Vice President, and from
January 1990 to October 1991 as Vice President of Sales, of Leading Edge.

         Liaqat Y. Khan has been Executive Vice President of Manufacturing for
the Company since December 1996. He was Vice President of Manufacturing from
September 1995 to November 1996. From May 1993 to August 1995, Mr. Khan served
as Executive Vice President at Intelligent Computers and Technologies, Inc., a
PC manufacturer which filed a petition for reorganization under Chapter 11 of
the Bankruptcy Code in May 1995. From February 1991 to May 1993, he was Vice
President of Manufacturing for Asina, Inc., which subsequently changed its name
to Apaq, Inc., a computer products manufacturer. From August 1991 to February
1992 Mr. Khan served as Director of Manufacturing for Synergistic Computers,
Inc., a desktop computer manufacturer. During this period, Mr. Khan was also
President of A&M Research, a manufacturer of mechanical components for high tech
applications.

         E. Craig Conrad is Vice President of Marketing for the Company, a
position he has held since joining the Company in April 1996. From May 1995 to
April 1996, Mr. Conrad served as the Director of Consumer Marketing for Digital
Equipment Corporation in Maynard, Massachusetts. From May 1993 to April 1995,
Mr. Conrad worked at IBM as Program Director of Consumer Desktop Brand
Management for the Aptiva line of PCs and was a Director of Marketing
Communications for AMBRA Computer Corporation, a subsidiary of IBM formed in
1993. From February 1990 to April 1993, Mr. Conrad was Director of Marketing at
Leading Edge.

         Steven Georgiev has been a director of the Company since March 1995
and was Chairman of the Board of Directors from March 1995 to September 1995. He
served as Chief Executive Officer of Palomar Medical Technologies, Inc.
("Palomar") from November 12, 1993 until May 1997. He was Chairman of the Board
of Directors of Palomar from September 1991 to September 1997. Mr. Georgiev was
a consultant to Dymed Corporation, (Dymed), Palomar's predecessor, from June
1991 until the September 1991 merger of Dymed with Palomar. Mr. Georgiev is a
financial and business consultant to a variety of emerging, high growth
companies. Mr. Georgiev has been a director of Excel Technology, Inc., a
publicly-held company located in Hauppauge, New York, since October 1992, and
was a director of Cybernetics Products, Inc., a publicly-held company, from
August 1988 until January 1992. Mr. Georgiev was Chairman of the Board of
Directors of Dynatrend, Inc. a publicly-traded consulting firm that he
co-founded in 1972, until February 1989. Dynatrend, Inc. was subsequently
acquired by EG&G, Inc., a publicly-held company. Mr. Georgiev is also Chairman
of the Board of The American Materials and Technologies, Inc., a publicly-held
company, a director of Senetek, Plc, a publicly held company, and a director of
DynaGen, Inc., a publicly held-company.

         Joseph E. Levangie has been a director of the Company since March
1995. He was a consultant to Dymed from June 1991, until its merger with
Palomar, at which time he became Palomar's part-time Chief Financial Officer, a
position he held until December 1992. Mr. Levangie was a director of Palomar
from 1991 to February 1997. Mr. Levangie is also Chief Executive of JEL &
Associates, a private financial consulting firm which he founded in 1980.
Currently Mr. Levangie serves as a director for GreenMan Technologies, Inc., a
publicly-held company.

         Buster C. Glosson has been a director of the Company since December
1996. From 1965 until June 1994, he was an officer in the United States Air
Force (USAF). Most recently, he served as a Lieutenant General and Deputy Chief
of Staff for plans and operations, Headquarters USAF, Washington, D.C. Mr.
Glosson is a veteran of combat missions in Vietnam and, during the Gulf War, he
commanded the 14th Air Force Division and was the architect of the Gulf War Air
Campaign. In 1994 he founded and has since served as President of Eagle Ltd., a
consulting firm concentrating on international business opportunities in the
high-technology arena. He is also Chairman and CEO of Alliance Partners Inc.,
an

                                       27
<PAGE>

investment holding company developing international oil and power projects. He
has also served as a director of GreenMan Technologies, Inc., a publicly-held
company, since August 1994, of The American Materials and Technologies, Inc.,
and of Skysat Communications Network Corporation, a publicly-held
company, since July 1996.


EXECUTIVE OFFICERS

         Executive officers of the Company are elected by the Board of
Directors on an annual basis. There are no family relationships among any of the
executive officers or directors of the Company.

SECTION 16(A) COMPLIANCE

         This information is incorporated by reference to the "Compliance with
Section 16(a) of the Exchange Act" section of the Proxy Statement.

ITEM 11.  EXECUTIVE COMPENSATION.
---------------------------------

         This information is incorporated by reference to the "Executive
Compensation" section of the Proxy Statement.


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
-------------------------------------------------------------------------

         This information is incorporated by reference to the "Stock Ownership
of Directors and Executive Officers" section of the Proxy Statement.



                                       28

<PAGE>

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
---------------------------------------------------------


CONVERSION OF PALOMAR DEBT AND ESCROW OF CONTINGENT SHARES

     The net income after taxes, total revenues and per share value of the
Common Stock milestones set forth below are not intended to and do not in any
manner constitute a forecast, projection or expectation of the Company or its
management for the Company's future results of operations or appreciation in the
value of Common Stock. See Item 1. "Business--Forward Looking Statements;
Cautionary Statement" and "Business-Risk Factors."

     Palomar and its wholly-owned subsidiary Palomar Electronics Corporation
("PEC") provided all of the Company's funds for operations prior to the IPO in
the form of non-interest bearing loans. The total amount of funds provided by
Palomar and PEC was $20,792,998 and $2,025,000, respectively, through December
31, 1996.

     On March 31, 1997 the Company entered into an agreement with Palomar (the
"Agreement") whereby upon the closing of the IPO, $8,249,549 of such
indebtedness was to be repaid to Palomar, $4,568,449 converted into 45,684
shares of Convertible Preferred Stock with the terms described below, and
$10,000,000 converted into 1,900,000 shares of the Common Stock, of which
700,000 shares were issued without restriction.  During 1997 Palomar agreed to
pay $1,000,000 of management bonuses for services rendered to the Company in
1996, which was treated as a contribution to the Company's capital by offset of
the amounts due Palomar under the Agreement.  The Company contends that
subsequent to the date of the Agreement, Palomar agreed to a modification to the
Agreement to the effect that Palomar would make, by reduction of the amounts due
Palomar in cash, additional capital contributions to the Company in the
aggregate amount of $3,132,654.  Palomar has claimed that such modification was
unauthorized and therefore not binding.  Although the Company believes it has
strong grounds to support its position, the $3,132,654 was not recorded as of
December 31, 1997.  Nexar paid Palomar $6,700,000 during 1997 pending
resolution of this matter.

     Pursuant to the Agreement, the balance of 1,200,000 shares of the Common
Stock (the "Contingent Shares") are subject to mandatory repurchase, in whole or
in part, by the Company at $0.01 per share after the 48 month anniversary of the
IPO unless earlier released from escrow as described below.  Palomar sold the
Contingent Shares for $5,000 in December 1997 subject to the Company's
repurchase rights described below.  The Contingent Shares were placed in escrow,
subject to release to the holder thereof in installments of 400,000 shares each
(upon achievement of any 3 of the 4 milestones specified below; none, some, or
all (other than with respect to 1997 which were not achieved) of which may
occur) as follows: (a) if the Company achieves $7,000,000 in net income after
taxes or $100 million in total revenues for the fiscal year ended December 31,
1997; (b) if the Company achieves $14,000,000 in net income after taxes or $200
million in total revenues for the fiscal year ended December 31, 1998; (c) if
the Company achieves $21,000,000 in net income after taxes or $300 million in
total revenues for the fiscal year ended December 31, 1999; and (d) if the
Company achieves $28,000,000 in net income after taxes or $400 million in total
revenues for the fiscal year ended December 31, 2000.

     Alternatively, all of the Contingent Shares will be released to the holder
thereof immediately upon the happening of any one of the following: (x) if the
average per share market value closing bid price of the  Company's Common Stock
is (i) $20.25 for ten consecutive trading days at any time prior to the 24-month
anniversary of the IPO, or (ii) $24.75 for ten consecutive trading  days at any
time prior to the 36-month anniversary of the IPO, or (iii) $29.25 for ten
consecutive trading days at any time prior to the 48-month anniversary of the
IPO; or (y) if the Company achieves $70,000,000 in cumulative net income after
taxes for the four fiscal years ended December 31, 2000, or if the Company is
party to any merger (other than a merger with a subsidiary or in which the
Company is the survivor and "acquiror"), a sale of substantially all assets of
the Company or similar change in control transaction.

     If any or all of the alternative conditions for release of the Contingent
Shares has not occurred by the 48-month anniversary of the IPO, the balance of
the Contingent Shares in escrow at such time shall be repurchased by the Company
as described above.

     The 45,684 shares of Convertible Preferred Stock issued to Palomar upon the
closing of the IPO are convertible into an aggregate of 406,080 shares of Common
Stock at the option of the holder thereof. Prior to any such conversion, the
holders of shares of such Convertible Preferred Stock shall have voting rights
equal to the number of shares of Common Stock on an "as-converted" basis on the
record date of any matter voted on by the stockholders of the Company.

OTHER RELATED PARTY TRANSACTIONS

  The Company's initial upgradable PCs were shipped with motherboards based on
technology previously licensed from Technovation Computer Labs, Inc.
(Technovation), a Nevada corporation which, to the best of the Company's
knowledge, was owned by Babar I. Hamirani, a former executive officer of the
Company whose employment was terminated by the Company on November 29, 1996.
The Company acquired all such technology and a patent application related
thereto, and settled all claims between Mr. Hamirani and the Company, on April
1, 1997 pursuant to an Asset Purchase and Settlement Agreement by and among Mr.
Hamirani, Technovation, the Company and Palomar dated as of February 28, 1997
(the "Asset Purchase and Settlement Agreement"). Pursuant to the Asset Purchase
and Settlement Agreement and a separate asset purchase agreement between the
Company and Palomar, Palomar acquired the subject technology and then conveyed
such technology to the Company.

  Comtel Corporation ("Comtel"), formerly a wholly-owned subsidiary of Dynaco
Corporation (a wholly-owned subsidiary of Palomar), is a contract manufacturer
of PC modem cards and PC boards. In the year ended December 31, 1997, the
Company purchased components from Comtel for consideration in the approximate
amount of approximately $2,600,000. The Company believes that all of its
transactions with Comtel were on terms no less favorable to the Company than
could be obtained from unaffiliated parties.


                                     PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
---------------------------------------------------------------------------

(a)  Financial Statements, Schedules and Exhibits

1.       Financial Statements:

<TABLE>
<CAPTION>


                                                                                                            Page
                                                                                                            ----
<S>                                                                                                        <C>

Reports of Independent Certified Public Accountants                                                         F-2 to F-3

Consolidated Balance Sheets as of December 31, 1997 and 1996                                                F-4


Consolidated Statements of Operations for the Period from Inception (March 7,
1995) to December 31, 1995 and for the Years Ended December 31, 1996 and 1997                               F-5



Consolidated Statements of Stockholders' Equity (Deficit) for the Period from
Inception (March 7, 1995) to December 31, 1995 and for the Years Ended
December 31, 1996 and 1997                                                                                  F-6

Consolidated Statements of Cash Flows for the Period from Inception (March 7,
1995) to December 31, 1995 and for the Years Ended December 31, 1996 and 1997                               F-7

Notes to Consolidated Financial Statements                                                                  F-8 to F-34

</TABLE>


2.       Financial Statement Schedule:

Not applicable

3.       Exhibits:  See Index to Exhibits and Financial Statement Schedules
appearing in (c) below.


(b)      Reports on Form 8-K:

         (i)      The Company filed a Form 8-K with the Commission on
November 17, 1997 reporting the resignation of Arthur Andersen LLP as its
independent auditors.

         (ii)     The Company filed a Form 8-K with the Commission on
December 29, 1997 reporting the appointment of BDO Seidman, LLP as its new
independent auditors.



                                       29
<PAGE>

(C)      EXHIBITS

               INDEX TO EXHIBITS AND FINANCIAL STATEMENT SCHEDULES


         Certain of the following exhibits are filed herewith.  Certain other
of the following exhibits (denoted by *, **, or ***) have heretofore been filed
with the Commission and are incorporated herein by reference.

<TABLE>
<CAPTION>


No.      Document
---      --------
<S>     <C>

3.1      Restated Certificate of Incorporation of the Registrant

3.2      Certificate of Designation of the Series B Convertible Preferred Stock

*3.3     Amended and Restated By-laws of the Registrant

4.1      Articles Fourth, Seventh, Eight, Ninth, Tenth, Eleventh, Twelfth and
         Fifteenth of the Restated Certificate of Incorporation of the
         Registrant (included in Exhibit 3.1)

*4.2     Articles II, III, IV, V, VI, VII, VIII, IX, X, XIV, XXII, XXVI,
         XXVII, of the Registrant's By-laws, as amended (included in Exhibit
         3.3)

*4.3     Registration Rights Agreement dated as of December 18, 1996 between
         the Registrant and the Travelers Insurance Company

*4.4     Registration Rights Agreement dated as of December 31, 1996 between
         the Registrant and GFL Advantage Fund Limited.

**10.1   Lease dated as of July 28, 1995 between the Registrant and Deerfoot
         LLC.

*10.2    Lease dated as of August 9, 1996 between the Registrant and IBG
         Huntwood Associates, a California general partnership

*10.3    International Service Agreement between the Registrant and Wang
         Laboratories, Inc. dated September 1, 1996

*10.4    On-Site Maintenance & Service Agreement between the Registrant and
         Wang Laboratories, Inc. dated October 2, 1995

+*10.5   1995 Stock Option Plan, as amended

+*10.6   1996 Employee Stock Purchase Plan

+*10.7   1996 Non-Employee Directors Stock Option Plan

+*10.8   Key Employee Agreement between the Registrant and Albert J. Agbay

+*10.9   Key Employee Agreement between the Registrant and Gerald Y. Hattori

+*10.10  Key Employee Agreement between the Registrant and Michael J. Paciello
</TABLE>


                                       30
<PAGE>

+*10.11    Key Employee Agreement between the Registrant and Liaqat Y. Khan

+*10.12    Amendment to Key Employee Agreement between the Registrant and
           Albert J. Agbay

+***10.13  Key Employee Agreement between the Registrant and E. Craig Conrad

+***10.14  Amendment to Key Employee Agreement between the Registrant and
           Gerald Y. Hattori

+*10.15    Amendment to Key Employee Agreement between the Registrant and
           Michael J. Paciello

+*10.16    Amendment to Key Employee Agreement between the Registrant and
           Liaqat Y. Khan

*10.17     Warrant Agreement between the Registrant and Sands Brothers & Co.,
           Ltd.

21.1       List of Registrant's subsidiaries

23.1       Consent of Arthur Andersen LLP

27.1       Financial Data Schedule for the Year Ended December 31, 1997

27.2       Restated Financial Data Schedule for the Nine Months Ended September
           30, 1997

27.3       Restated Financial Data Schedule for the Six Months Ended June 30,
           1997

27.4       Restated Financial Data Schedule for the Three Months Ended March 31,
           1997

27.5       Restated Financial Data Schedule for the Year Ended December 31, 1996

27.6       Restated Financial Data Schedule for the Nine Months Ended September
           30, 1996
___________________

+          Management compensatory plan or arrangement.
*          Incorporated by reference to exhibit filed with Registrant's
           Registration Statement on Form S-1 (File No. 333-18489).
**         Incorporated by reference to exhibit filed with Registrant's
           quarterly report on Form 10-Q filed on August 13, 1997.
***        Incorporated by reference to exhibit filed with Registrant's
           quarterly report on Form 10-Q filed on November 13, 1997.


(D)      FINANCIAL STATEMENT SCHEDULES:


                                       31
<PAGE>

                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized on March
30, 1998.


                                     NEXAR TECHNOLOGIES, INC.

                                     By  /s/ Albert J. Agbay
                                         --------------------------------------
                                         Albert J. Agbay
                                         Chief Executive Officer, President and
                                         Chairman of the Board



         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the capacities on
the dates indicated.

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

Signature                                    Title(s)                                            Date
---------                                    --------                                            ----

/s/ Albert J. Agbay                          Chief Executive Officer (Principal                  March 30, 1998
--------------------------                   Executive Officer), President and
Albert J. Agbay                              Chairman of the Board of Directors

/s/ Gerald Y. Hattori                        Vice President of Finance, Chief Financial          March 30, 1998
--------------------------                   Officer (Principal Financial and
Gerald Y. Hattori                            Accounting Officer) and Treasurer

/s/ Steven Georgiev                          Director                                            March 30, 1998
--------------------------
Steven Georgiev

/s/ Joseph E. Levangie                       Director                                            March 30, 1998
--------------------------
Joseph E. Levangie

/s/ Buster C. Glosson                        Director                                            March 30, 1998
--------------------------
Buster C. Glosson
</TABLE>
<PAGE>

                                                        NEXAR TECHNOLOGIES, INC.
                                                                  AND SUBSIDIARY

                                                                        CONTENTS
================================================================================


Reports of independent public accountants                             F-2 to F-3

Consolidated balance sheets as of December 31, 1996 and 1997                 F-4

Consolidated statements of operations for the period from
 inception (March 7, 1995) to December 31, 1995 and for the
 years ended December 31, 1996 and 1997                                      F-5

Consolidated statements of stockholders' equity (deficit)
 for the period from inception (March 7, 1995) to December 31,
 1995 and for the years ended December 31, 1996 and 1997                     F-6

Consolidated statements of cash flows for the period from
 inception (March 7, 1995) to December 31, 1995 and for the
 years ended December 31, 1996 and 1997                                      F-7

Notes to consolidated financial statements                           F-8 to F-34





                                       F-1
<PAGE>

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


To the Board of Directors and Stockholders
of Nexar Technologies, Inc.
Southborough, Massachusetts

We have audited the accompanying consolidated balance sheet of Nexar
Technologies, Inc. and subsidiary as of December 31, 1997, and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Nexar Technologies, Inc. and
subsidiary as of December 31, 1997 and the results of their operations and their
cash flows for the year then ended in conformity with generally accepted
accounting principles.




                                                                BDO Seidman, LLP




Boston, Massachusetts
February 13, 1998 (except for
Note 10 which is as of
March 20, 1998)
<PAGE>

                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To Nexar Technologies, Inc.:

We have audited the accompanying consolidated balance sheet of Nexar
Technologies, Inc. (a Delaware corporation and majority-owned subsidiary of
Palomar Medical Technologies, Inc.) and subsidiary as of December 31, 1996, and
the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for the period from inception (March 7, 1995) to
December 31, 1995 and for the year ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Nexar Technologies, Inc. and
subsidiary as of December 31, 1996, and the results of their operations and
their cash flows for the period from inception (March 7, 1995) to December 31,
1995 and for the year ended December 31, 1996, in conformity with generally
accepted accounting principles.




                                                             ARTHUR ANDERSEN LLP



Boston, Massachusetts
January 24, 1997 (except with respect
to the purchased technology matter
discussed in Note 2 as to which
the date is February 28, 1997)



<PAGE>

<TABLE>
<CAPTION>
                                                                                              Nexar Technologies, Inc.
                                                                                                        and Subsidiary

                                                                                           Consolidated Balance Sheets
                                                                                                              (Note 2)

======================================================================================================================

December 31,                                                                                 1996                 1997
----------------------------------------------------------------------------------------------------------------------
<S>                                                                                          <C>                 <C>
ASSETS
   Cash and cash equivalents                                                            2,738,983            1,184,333
   Restricted cash                                                                              -              630,000
   Accounts receivable, net of allowances of $604,000 and
    of $1,970,000 in 1996 and 1997, respectively (Note 4)                               7,747,007            8,832,312
   Inventories                                                                          6,112,821            4,973,272
   Prepaid expenses and other                                                             368,040            2,190,647
----------------------------------------------------------------------------------------------------------------------

     Total current assets                                                              16,966,851           17,810,564

Property and equipment, net                                                               254,812              809,763

Purchased technology, less accumulated amortization of $458,340 in 1997                 1,375,000              916,660

Other assets                                                                              992,458              372,072

                                                                                      $19,589,121         $ 19,909,059
----------------------------------------------------------------------------------------------------------------------

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)


Current liabilities:
   Accounts payable (Note 4)                                                            4,537,052            6,177,166
   Accrued expenses (Note 5)                                                            2,005,244            1,189,352
   Due to related parties (Note 4)                                                              -              461,584
   Current maturities of obligations under capital lease (Note 7)                               -               58,492
----------------------------------------------------------------------------------------------------------------------

     Total current liabilities                                                          6,542,296            7,886,594

Due to related parties (Note 4)                                                        22,817,998                    -

Deferred compensation (Note 7)                                                                  -              750,000

Obligations under capital lease, less current maturities (Note 7)                               -              133,613
----------------------------------------------------------------------------------------------------------------------
     Total liabilities                                                                 29,360,294            8,770,207
----------------------------------------------------------------------------------------------------------------------

Commitments and contingencies (Notes 3, 7, 8, 9 and 10)

Stockholders' equity (deficit) (Notes 3, 4 and 10):
   Preferred stock, $.01 par value; authorized 10,000,000
    shares; no shares issued at December 31, 1996 and 45,684 shares issued
    and outstanding at December 31, 1997 stated at liquidation preference value                 -            4,568,400
    Common stock, $.01 par value; authorized 30,000,000 shares;
    4,800,000 and 9,488,715 shares issued and outstanding at
    December 31, 1996 and 1997, respectively                                               48,000               94,887
   Additional paid-in capital                                                             (47,600)          29,593,518
   Accumulated deficit                                                                 (9,771,573)         (23,117,953)
-----------------------------------------------------------------------------------------------------------------------

     Total stockholders' equity (deficit)                                              (9,771,173)          11,138,852
----------------------------------------------------------------------------------------------------------------------

                                                                                      $19,589,121         $ 19,909,059
------------------------------------------------------------------------------------------------------------------------
                                                            See accompanying notes to consolidated financial statements.

                                       F-4
</TABLE>
<PAGE>

<TABLE>
<CAPTION>
                                                                                              Nexar Technologies, Inc.
                                                                                                        and Subsidiary

                                                                                  Consolidated Statements of Operations
                                                                                                                (Note 2)

========================================================================================================================
                                                          Period from
                                                           Inception
                                                        (March 7, 1995) to                      Year Ended
                                                           December 31,               December 31,        December 31,
                                                            1995                        1996                 1997
--------------------------------------------------------------------------------------------------------------------------
<S>                                                      <C>                         <C>                 <C>
Net revenues (Note 4)                                           619,629              $18,695,364          $ 33,608,063

Cost of revenues (Note 4)                                       574,611               16,392,483            32,867,912
--------------------------------------------------------------------------------------------------------------------------
     Gross profit                                                45,018                2,302,881               740,151
--------------------------------------------------------------------------------------------------------------------------

Operating expenses:
   Research and development                                     104,383                  803,186             1,551,418
--------------------------------------------------------------------------------------------------------------------------
   Selling and marketing                                        581,482                4,819,379             7,290,766
   General and administrative                                 1,620,587                4,190,455             5,422,381
--------------------------------------------------------------------------------------------------------------------------

     Total operating expenses                                 2,306,452                9,813,020            14,264,565
--------------------------------------------------------------------------------------------------------------------------

Operating loss                                               (2,261,434)             (7,510,139)           (13,524,414)

Interest income, net of interest expense
 of $2,338 in 1997                                                    -                        -               178,034
--------------------------------------------------------------------------------------------------------------------------
Net loss                                                    $(2,261,434)             (7,510,139)          $(13,346,380)
--------------------------------------------------------------------------------------------------------------------------


Net loss per share of common stock:
 Basic                                                            $(.47)                 $(1.56)                $(1.84)
 Diluted                                                          $(.29)                 $ (.98)                $(1.32)
--------------------------------------------------------------------------------------------------------------------------
                                                              See accompanying notes to consolidated financial statements.
</TABLE>

                                       F-5
<PAGE>

<TABLE>
<CAPTION>


                                                                                                            Nexar Technologies, Inc.
                                                                                                                      and Subsidiary


                                                                           Consolidated Statements of Stockholders' Equity (Deficit)
                                                                                                                 (Notes 3, 4 and 10)

===================================================================================================================================

                                                 Preferred Stock       Common Stock                                      Total
                                             ---------------------   -------------------   Additional                 Stockholders'

                                             Number of     $0.01     Number of    $0.01     Paid-in      Accumulated     Equity
                                              Shares     Par Value    Shares    Par Value   Capital       Deficit       (Deficit)
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                         <C>          <C>         <C>        <C>         <C>          <C>
Initial issuance of common stock,
 March 7, 1995                                  -         $  -      4,800,000   $48,000   $  (47,600) $         -               400
   Net loss                                                             -           -            -       (2,261,434)     (2,261,434)

------------------------------------------------------------------------------------------------------------------------------------

Balance, December 31, 1995                                          4,800,000    48,000      (47,600)    (2,261,434)     (2,261,034)

   Net loss                                                             -           -              -     (7,510,139)     (7,510,139)

------------------------------------------------------------------------------------------------------------------------------------

Balance, December 31, 1996                      -            -      4,800,000    48,000      (47,600)    (9,771,573)     (9,771,173)


   Initial public offering of 2,500,000
    shares of common stock at $9.00 per share,
    net of $3,812,716 in offering costs         -            -       2,500,000   25,000   18,662,284           -         18,687,284

   Contribution of capital                      -            -           -          -      1,000,000           -          1,000,000

   Conversion of $4,568,449 of related party
    debt to 45,684 shares preferred stock    45,684     4,568,400        -           -              49         -          4,568,449

   Conversion of $10,000,000 of related
    party debt to 700,000 shares common stock    -           -        700,000     7,000      9,993,000         -         10,000,000

   Issuance of 1,200,000 shares of common
    stock to be held in escrow                   -           -      1,200,000    12,000        (12,000)        -                -

   Issuance of 288,715 shares of common stock
    exercised under incentive stock options      -           -        288,715     2,887         (2,215)        -               672

   Net loss                                      -           -           -          -              -      (13,346,380)  (13,346,380)

------------------------------------------------------------------------------------------------------------------------------------

Balance, December 31, 1997                   45,684  $4,568,400     9,488,715  $ 94,887    $29,593,518   $(23,117,953) $ 11,138,852
-----------------------------------------------------------------------------------------------------------------------------------

                                                                        See accompanying notes to consolidated financial statements.

</TABLE>
                                                            F-6
<PAGE>

<TABLE>
<CAPTION>
                                                                                                            Nexar Technologies, Inc.
                                                                                                                      and Subsidiary

                                                                                               Consolidated Statements of Cash Flows

====================================================================================================================================

                                                                                                          Year Ended
                                                                   Period From Inception   -----------------------------------------
                                                                    (March 7, 1995) to       December 31,          December 31,
                                                                    December 31, 1995            1996                  1997
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                    <C>                    <C>                  <C>
Cash flows from operating activities:
   Net loss                                                            $(2,261,434)           (7,510,139)         $ (13,346,380)
   Adjustments to reconcile net loss to net
    cash used in operating activities:
       Litigation costs                                                    500,000             1,375,000                  -
       Management bonuses to be paid by Palomar                             -                  1,000,000                  -
       Depreciation and amortization                                         2,119                33,166                616,799
       Deferred compensation                                                -                     -                     750,000
       Provision for doubtful accounts                                      -                     -                   1 366,000
       Loss on barter transaction                                           -                     -                      69,000
       Changes in operating assets and liabilities:
          Restricted cash                                                   -                     -                    (630,000)
          Accounts receivable                                             (327,471)           (7,419,536)            (2,451,305)
          Inventories                                                       (8,432)           (6,104,389)              (656,080)
          Prepaid expenses and other current assets                        (52,150)             (315,890)               (96,578)
          Accounts payable                                                 178,154             4,358,898              1,640,114
          Accrued expenses                                                 109,333             1,162,911               (129,433)
------------------------------------------------------------------------------------------------------------------------------------

              Net cash used in operating activities                     (1,859,881)          (13,419,979)           (12,867,863)
------------------------------------------------------------------------------------------------------------------------------------

Cash flow from investing activities:
   Purchases of property and equipment                                    (102,793)             (187,304)              (662,110)
   Inrease in other assets                                                   -                  (306,000)              (116,773)
------------------------------------------------------------------------------------------------------------------------------------

          Net cash used in investing activities                           (102,793)             (493,304)              (778,883)
------------------------------------------------------------------------------------------------------------------------------------

Cash flows from financing activities:
   Capital lease obligation                                                   -                     -                   192,105
   Due to related parties                                                2,942,892             15,671,648            (6,787,965)
   Net proceeds from issuance of common stock                                  400                  -                18,687,956
------------------------------------------------------------------------------------------------------------------------------------

          Net cash provided by financing activities                      2,943,292             15,671,648            12,092,096
------------------------------------------------------------------------------------------------------------------------------------

Net increase (decrease) in cash and cash equivalents                       980,618              1,758,365            (1,554,650)
Cash and cash equivalents, beginning of period                              -                     980,618             2,738,983
------------------------------------------------------------------------------------------------------------------------------------

Cash and cash equivalents, end of period                                $  980,618             $2,738,983            $1,184,333
------------------------------------------------------------------------------------------------------------------------------------

Supplemental disclosure of noncash investing
 and financing activities:
   Deferred offering costs                                              $      -               $  686,459           $  (686,459)
   Purchase of technology                                               $      -               $1,375,000           $      -
   Conversion of related party debt to common and preferred stock       $      -               $     -              $14,568,449
   Contribution of capital recorded as reduction to related party debt  $      -               $     -              $ 1,000,000
------------------------------------------------------------------------------------------------------------------------------------

Cash paid for:
   Interest                                                             $      -               $     -              $     2,338
   Income taxes                                                         $      -               $     -              $      -
------------------------------------------------------------------------------------------------------------------------------------

                                                                        See accompanying notes to consolidated financial statements.
</TABLE>

                                                          F-7
<PAGE>

                                                  Nexar Technologies, Inc.
                                                            and Subsidiary

                                Notes to Consolidated Financial Statements

==========================================================================
1.     Operations and    Nexar Technologies, Inc. (the Company or Nexar)
       Organization      manufactures and markets a new category of high-
                         quality personal computer systems that offer
                         consumer and business users flexibility and
                         investment protection through customization and
                         upgradeability. Headquartered in Southborough,
                         Massachusetts, Nexar sells its systems
                         through national and regional value-added
                         resellers (VARs), distributors and system
                         integrators.

                         Nexar was incorporated in Delaware on March 7, 1995.
                         The Company was a majority-owned subsidiary of Palomar
                         Electronics Corporation (PEC) through December 10,
                         1997. PEC is a subsidiary of Palomar Medical
                         Technologies, Inc. (Palomar).

                         The Company is in the early stage of development, and
                         as such, success of future operations is subject to a
                         number or risks similar to those of other companies in
                         the same stage of development. Principal among these
                         risks are the successful development and marketing of
                         its products, short product life cycles, reliance on a
                         significant customer the need to achieve profitable
                         operations, intense competition from substitute
                         products and significantly larger companies, and the
                         ability to obtain additional financing to fund future
                         operations.

2.     Summary of        The accompanying consolidated financial statements
       Significant       reflect the application of certain accounting policies
       Accounting        described below in the accompanying notes to
       Policies          consolidated financial statements.

       Cash Equivalents  The Company considers all investments with an original
                         maturity of three months or less to be cash
                         equivalents. The Company invests its excess cash in
                         certificates of deposit and money market funds.

       Restricted Cash   Restricted cash of $630,000 at December  31, 1997
                         relates to funds held in connection with letters of
                         credit for certain international purchase commitments.

       Net Loss per      The Company follows, Statement of Financial Accounting
       Share of Common   Standards (SFAS) No. 128, Earnings per Share, issued by
       Stock             the Financial Accounting Standards Board. Under SFAS
                         No. 128, the basic and diluted net loss pershare of
                         common stock for the year ended December 31, 1996 and
                         1997 is computed by dividing the net loss by the
                         weighted average number of common shares outstanding
                         during the period, including stock options issued at
                         nominal amounts within 12 months of the Company's
                         initial public offering.

                                       F-8


<PAGE>

                                                        Nexar Technologies, Inc.
                                                                 and Subsidiary

                                      Notes to Consolidated Financial Statements

================================================================================
<TABLE>
<CAPTION>
2.     Summary of
       Significant
       Accounting
       Policies
       (Continued)

       Net Loss per                 The weighted average number of common shares
       Share of Common              outstanding is summarized as follows:
       Stock
       (Continued)                  December 31,                                  1995            1996            1997
                                    -------------------------------------------------------------------------------------
<S>                                 <C>                                       <C>              <C>           <C>
                                    Denominator for basic loss per share:
                                     Weighted average common stock
                                      shares outstanding                         4,800,000     4,800,000       7,264,320

                                    Potential dilutive Common Shares:
                                     Common stock stock options issued at
                                      nominal amounts within 12 months of IPO    2,872,920     2,872,920       2,852,280
                                    -------------------------------------------------------------------------------------
                                    Denominator for diluted
                                     loss per share                              7,672,920     7,672,920      10,116,600
                                    -------------------------------------------------------------------------------------
</TABLE>
                                    Stock options issued at nominal amounts
                                    within 12 months prior to the Company's
                                    Initial Public Offering (IPO) are considered
                                    outstanding for all periods presented for
                                    the diluted calculation in accordance with
                                    the Securities and Exchange Commission's
                                    Staff Accounting Bulletin No. 98. The
                                    Company's convertible preferred stock and
                                    other convertible instruments are not
                                    considered outstanding for the diluted
                                    calculation since their effect is
                                    antidilutive. The weighted average number of
                                    common shares outstanding excludes 1,200,000
                                    shares of common stock subject to a
                                    contingent repurchase right of the Company.
                                    The 1,200,000 shares will only be released
                                    upon the attainment of certain revenue, net
                                    income and stock price milestones, as
                                    defined in an agreement between Palomar and
                                    the Company. At December 31, 1997, such
                                    conditions were not satisfied.

                                                          F-9
<PAGE>

                                                        Nexar Technologies, Inc.
                                                                 and Subsidiary

                                      Notes to Consolidated Financial Statements

================================================================================

2.     Summary of
       Significant
       Accounting
       Policies
       (Continued)

       Principles of     The accompanying consolidated financial statements
       Consolidation     include the accounts of the Company and its wholly
                         owned subsidiary, Intelesys Corporation (a Delaware
                         corporation).  All significant intercompany balances
                         and transactions have been eliminated in consolidation.

       Use of Estimates  The preparation of financial statements in conformity
                         with generally accepted accounting principles requires
                         management to make estimates and assumptions that
                         affect the reported amounts of assets and liabilities
                         and disclosure of contingent assets and liabilities at
                         the date of the financial statements and the reported
                         amounts of revenues and expenses during the reporting
                         period.  Actual results could differ from those
                         estimates.

       Revenue           The Company generally recognizes product revenue upon
       Recognition       shipment. The Company has established programs which,
                         under specified conditions, provide price protection
                         and or enable customers to return products. The effects
                         of these programs are estimated and current period
                         revenue and cost of revenue are reduced accordingly.

                         During the year ended December 31, 1996, the Company
                         recognized revenue totaling approximately $2,500,000
                         for products whose title passed to a customer and such
                         customer instructed the Company to hold the product at
                         its manufacturing facility on the customer's behalf.
                         Subsequent to December 31, 1996 all of this product had
                         been shipped to this customer. Included in accounts
                         receivable at December 31, 1996 is approximately
                         $160,000 due from this customer related to this
                         transaction. The Company has recognized this revenue
                         in accordance with the SEC Accounting and Auditing
                         Enforcement Release No. 108.

       Warranty Cost     Provisions are made at the time of sale for warranty
                         costs expected to be incurred.


                                                          F-10
<PAGE>

                                                        Nexar Technologies, Inc.
                                                                 and Subsidiary

                                      Notes to Consolidated Financial Statements

================================================================================


2.     Summary of
       Significant
       Accounting
       Policies
       (Continued)

       Inventories                  Inventories are stated at the lower of cost
                                    (first-in, first-out) or market and consist
                                    of the following:

<TABLE>
<CAPTION>
                                    December 31,                                          1996                 1997
                                    ----------------------------------------------------------------------------------
                                    <S>                                                <C>                  <C>
                                    Raw materials                                      $4,739,097           $4,519,241
                                    Work-in-process                                       244,230              110,364
                                    Finished goods                                      1,129,494              343,667
                                    ----------------------------------------------------------------------------------
                                                                                       $6,112,821           $4,973,272
                                    ----------------------------------------------------------------------------------
</TABLE>

                                    Work-in-process and finished goods
                                    inventories consist of material, labor and
                                    manufacturing overhead.


                                      F-11
<PAGE>

                                                        Nexar Technologies, Inc.
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements

================================================================================



2.     Summary of
       Significant
       Accounting
       Policies
       (Continued)

       Property and                 Property and equipment are stated at cost.
       Equipment                    The Company provides for depreciation and
                                    amortization on property and equipment using
                                    the straight-line method over the assets
                                    estimated useful lives. The cost of property
                                    and equipment and their estimated useful
                                    lives are summarized as follows:

<TABLE>
<CAPTION>
                                                                               Estimated
                                    December 31,                               Useful Life          1996          1997
                                    ----------------------------------------------------------------------------------
                                    <S>                                      <C>                <C>           <C>
                                    Machinery and equipment                        5 years      $112 705      $152 237
                                    Computer equipment                             5 years        80 744       127 837
                                    Furniture and fixtures                         5 years        47 718       212 331
                                    Leasehold improvements                   Life of lease        48 930       279 548
                                    Furniture under capital lease             5 to 7 years             -       180 254
                                    ----------------------------------------------------------------------------------
                                                                                                 290 097       952 207
                                    Less accumulated depreciation
                                     and amortization                                             35 285       142 444
                                    ----------------------------------------------------------------------------------
                                                                                                $254 812      $809 763
                                    ----------------------------------------------------------------------------------

</TABLE>
       Purchased                   On February 28, 1997, Palomar and the Company
       Technology                  entered into an Asset Purchase and Settlement
                                   Agreement (the Agreement) with a former
                                   executive and technology Licensor. Under the
                                   terms of the Agreement, Palomar agreed to
                                   pay the former executive and certain of his
                                   affiliates $1,250,000 in cash and deliver
                                   $1,500,000 worth of Palomar's common stock
                                   in exchange for all right, title and
                                   interest in and to all the technology
                                   licensed under the Company's license
                                   agreement with the Licensor, a patent
                                   application related thereto, and a complete
                                   release and settlement of all claims between
                                   this former executive and the Company.

                                                           F-12
<PAGE>

                                                        Nexar Technologies, Inc.
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements

================================================================================


2.     Summary of
       Significant
       Accounting
       Policies
       (Continued)

       Purchased                    Palomar acquired the subject technology
       Technology                   and conveyed such technology to the Company
       (Continued)

                                    Palomar assigned to the Company all of its
                                    rights and title in the technology received
                                    under the Agreement and charged to the
                                    Company the costs totalling $2,750,000
                                    associated with the purchase of the
                                    technology. The Company allocated $1,375,000
                                    of the consideration to litigation expense,
                                    which is included in general and
                                    administrative expenses in the accompanying
                                    statement of operations for the year ended
                                    December 31, 1996. The remaining
                                    consideration totaling $1,375,000 was
                                    allocated to the purchase of the technology
                                    as of December 31, 1996 and is being
                                    amortized over the technology's estimated
                                    useful life of three years. The allocation
                                    of the purchased technology was based on the
                                    value of anticipated royalty payments due to
                                    the Licensor over a three year period ending
                                    December 31, 1999.

                                    The Company has included $2,750,000 in due
                                    to related parties at December 31, 1996 in
                                    connection with this settlement.

       Other Assets                 At December 31, 1996, the Company had
                                    incurred costs of approximately $686,000 in
                                    connection with the proposed initial public
                                    offering of the Company's common stock.
                                    Upon the consummation of the initial public
                                    offering on April 14, 1997, the deferred
                                    offering costs were charged to stockholders'
                                    equity as a reduction of the gross proceeds.

       Prepaid Expenses             At December 31, 1997, prepaid expenses and
       and Other                    other includes approximately $1,795,000 of
                                    advertising credits received in connection
                                    with certain barter transactions. During
                                    1997, the Company entered into two separate
                                    barter transactions which involved the
                                    transfer of approximately $1,864,000 of
                                    inventory at cost in exchange for
                                    approximately $1,795,000 of advertising
                                    services. The barter transactions were
                                    recorded at the market value of the
                                    advertising services

                                                          F-13
<PAGE>

                                                        Nexar Technologies, Inc.
                                                                 and Subsidiary

                                      Notes to Consolidated Financial Statements

================================================================================


2.     Summary of
       Significant
       Accounting
       Policies
       (Continued)

       Prepaid Expenses           to be received which approximated the market
       and Other                  value of the Company's inventory exchanged.
       (Continued)                A loss on barter transactions of $69,000 is
                                  included in operating expenses in the
                                  accompanying consolidated statements of
                                  operations for the year ended December 31,
                                  1997.

       Concentration of           SFAS No. 105, Disclosure of Information
       Credit Risk                About Financial Instruments with
                                  Off-balance-sheet Risk and Financial
                                  Instruments with Concentrations of Credit
                                  Risk, requires disclosures of any significant
                                  off-balance-sheet and credit risk
                                  concentrations. The Company has no
                                  significant off-balance-sheet concentrations
                                  of credit risk such as foreign currency
                                  exchange contracts, options contracts or
                                  other foreign hedging arrangements.
                                  Financial instruments that subject the
                                  Company to credit risk consist primarily of
                                  cash and trade accounts receivable. Certain
                                  cash accounts at December 31, 1997 and 1996
                                  include balances above the FDIC insured
                                  limit of $100,000. However, the Company
                                  places its cash in highly rated financial
                                  institutions. The Company's accounts
                                  receivable included the following
                                  significant customer credit risk:
<TABLE>
<CAPTION>

                                                                                      Percent of            Percent of
                                                                 Number of              Accounts              Total
                                    December 31,                Customers              Receivable             Revenue
                                    ----------------------------------------------------------------------------------
<S>                                 <C>                             <C>                    <C>                  <C>
                                    1996                            1                      55%                  66%
                                    1997                            2                      36%                  53%
</TABLE>

                                    To reduce risk, the Company routinely
                                    assesses the financial strength of its
                                    customers and maintains an allowance for
                                    potential credit losses. During the year
                                    ended December 31, 1996, the Company sold
                                    approximately $430,000 of product to a
                                    company owned by a current and former
                                    officer of Nexar. The Company collected
                                    $210,000 of this amount and wrote off the
                                    remaining balance, approximately $220,000,
                                    as uncollectible during the year ended
                                    December 31, 1996.

                                                          F-14
<PAGE>

                                                        Nexar Technologies, Inc.
                                                                 and Subsidiary

                                     Notes to Consolidated Financial Statements

================================================================================



2.     Summary of
       Significant
       Accounting
       Policies
       (Continued)

       Financial                  The estimated fair values of the Company's
       Instruments                financial instruments, which  include cash
                                  and cash equivalents, accounts receivable,
                                  accounts payable, capital leases, and amounts
                                  due to related parties, approximate their
                                  carrying value based on their short term
                                  maturity.

       Research and               The Company charges research and development
       Development                expenses to operations as incurred.
       Expenses

       Advertising                The Company expenses advertising costs as
                                  incurred. Advertising expense was
                                  approximately $2,021,000 and $3,724,000 for
                                  the year ended December 31, 1996 and 1997,
                                  respectively.

       New Accounting             In June 1997, the Financial Accounting
       Pronouncements             Standards Board issued two new disclosure
                                  standards.  Results of operations and
                                  financial position will be unaffected by
                                  implementation of those new standards.

                                  SFAS No. 130, Reporting Comprehensive
                                  Income, establishes standards for reporting
                                  and display of comprehensive income, its
                                  components, and accumulated balances.
                                  Comprehensive income is defined to include
                                  all changes in equity except those resulting
                                  from investments by owners and distributions
                                  to owners. Among other disclosures, SFAS No.
                                  130 requires that all items that are
                                  required to be recognized under current
                                  accounting standards as components of
                                  comprehensive income be reported in a
                                  financial statement that is displayed with
                                  the same prominence as other financial
                                  statements.


                                                          F-15
<PAGE>

                                                        Nexar Technologies, Inc.
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements

================================================================================


2.     Summary of
       Significant
       Accounting
       Policies
       (Continued)

       New Accounting               SFAS No. 131, Disclosure about Segments of
       Pronouncements               an Enterprise and Related Information, which
                                    supersedes SFAS No. 14, Financial Reporting
                                    for Segments of a Business Enterprise,
                                    establishes standards for the way that
                                    public enterprises report information about
                                    operating segments in annual financial
                                    statements and requires reporting of
                                    selected information about operating
                                    segments in interim financial statements
                                    issued to the public. It also establishes
                                    standards for disclosures regarding products
                                    and services, geographic areas, and major
                                    customers. SFAS No. 131 defines operating
                                    segments as components of an enterprise
                                    about which separate financial information
                                    is available that is evaluated regularly by
                                    the chief operating decision maker in
                                    deciding how to allocate resources and in
                                    assessing performance.

                                    Both of these new standards are effective
                                    for financial statements for periods
                                    beginning after December 15, 1997 and
                                    require comparative information for earlier
                                    years to be restated. Due to the recent
                                    issuance of these standards, management has
                                    been unable to fully evaluate the impact, if
                                    any, they may have on future financial
                                    statement disclosures.



                                                          F-16
<PAGE>

                                                        Nexar Technologies, Inc.
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements

================================================================================


3.     Stockholders'
       Equity
       (Deficit)

       Recapitalization             In December 1996, the Company amended its
                                    Certificate of Incorporation, increasing the
                                    number of authorized shares of the Company'
                                    capital stock to 40,000,000, of which
                                    30,000,000 shares are designated as common
                                    stock, $.01 par value, and 10,000,000 share
                                    are designated as preferred stock, $.01 par
                                    value, and also declared a 120-for-1 stock
                                    split of the Company's common stock,
                                    effected in the form of a stock dividend.
                                    This stock split has been retroactively
                                    reflected in the accompanying consolidated
                                    financial statements and notes to
                                    consolidated financial statements for all
                                    periods presented.

       Initial Public               On April 14, 1997, the Company completed its
       Offering                     initial public offering of 2,500,000 shares
                                    of common stock at a price of $9.00 per
                                    share.  The proceeds raised amounted to
                                    approximately $18,687,000, net of
                                    underwriter commissions and other offering
                                    costs totalling approximately $3,813,000.

       Milestone Agreement          In connection with the Company's initial
                                    public offering, Palomar received 1,200,000
                                    shares of the Company's common stock for the
                                    conversion of certain amounts due to Palomar
                                    and a subsidiary of Palomar which are held
                                    in escrow (see Note 4).  These shares will
                                    only be released from escrow upon the
                                    achievement by the Company of a minimum
                                    revenue or after tax net income milestones
                                    or minimum stock  price, as defined below.
                                    At December 31, 1997, such milestones were
                                    not satisfied.

                                    The following table summarizes net income
                                    and revenue milestones (in millions):
<TABLE>
<CAPTION>

                                    December 31,                                       Net Income             Revenues
                                    --------------------------------------------------------------------------------------
                                    <S>                                                   <C>                    <C>
                                    1998                                                  $14                    $200
                                    1999                                                  $21                    $300
                                    2000                                                  $28                    $400
</TABLE>


                                                          F-17
<PAGE>

                                                        Nexar Technologies, Inc.
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements

================================================================================


3.     Stockholders'
       Equity
       (Deficit)
       (Continued)

       Milestone Agreement        Alternatively, all of the contingent shares
       (Continued)                will be released immediately upon the
                                  occurrence of any one of the following:

                                  If the average per share market value
                                  closing bid price of Nexar's common stock is
                                  (i) 175% of the Initial Public Offering
                                  (IPO) price of $9.00 per share for ten
                                  consecutive trading days at any time prior
                                  to the 12 month anniversary of the IPO, or
                                  (ii) 225% of the IPO price for ten
                                  consecutive trading days at any time prior
                                  to the 24 month anniversary of the IPO, or
                                  (iii) 275% of the IPO price for ten
                                  consecutive trading days at any time prior
                                  to the 36 month anniversary of the IPO, or
                                  (iv) 325% of the IPO price for ten
                                  consecutive trading days at any time prior
                                  to the 48 month anniversary of the IPO; or
                                  (v) if Nexar achieves $70,000,000 in
                                  cumulative net income for the four fiscal
                                  years ended December 31, 2000.

       Preferred Stock            On April 14, 1997, the Company issued 45,684
                                  shares of Convertible Preferred Stock in
                                  exchange for $4,568,449 of debt with Palomar.
                                  Palomar is entitled to voting rights and
                                  dividends equal to the number of common shares
                                  into which the preferred stock may be
                                  converted. The holder of the Convertible
                                  Preferred Stock is able to convert each share
                                  of Convertible Preferred Stock into
                                  approximately 8.89 shares of common stock. The
                                  Convertible Preferred Shares also have a
                                  preference upon liquidation of $100 per share,
                                  resulting in a total liquidation preference of
                                  $4,568,400.

       Stock Option               In August 1995, the Company established the
       Plans                      1995 Stock Option Plan (the Plan), which
                                  provides for the issuance of a maximum of
                                  4,800,000 shares of common stock, which may
                                  be issued as incentive stock options (ISOs)
                                  or nonqualified stock options. During 1997,
                                  the Board of Directors increased the shares
                                  of common stock reserved for issuance under
                                  the Plan to 5,300,000. Under the terms of
                                  the Plan, ISOs may not be granted at less
                                  than the fair market value on the date of
                                  grant. ISO grants to holders of 10% or more
                                  of the combined voting power of all classes
                                  of the Company's stock must be granted at an
                                  exercise price

                                                          F-18
<PAGE>

                                                        Nexar Technologies, Inc.
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements

================================================================================


3.     Stockholders'
       Equity
       (Deficit)
       (Continued)

       Stock Option
       Plans                       of not less than 110% of the fair market
       (Continued)                 value at the date of grant. Pursuant to the
                                   Plan, options are generally exercisable at
                                   varying dates over one to three years, as
                                   determined by the Board of Directors, and
                                   must have terms not to exceed 10 years
                                   (five years for 10% or greater stockholders).

                                   On January 30, 1996 and July 19, 1996 the
                                   Company granted options to purchase
                                   3,234,480 and 83,000 respective shares of
                                   the Company's Common Stock at an exercise
                                   price of $0.0025 and $4.25 per share. On
                                   July 17, 1997 the Company granted options to
                                   purchase 1,368,000 shares at an exercise
                                   price of $5.50. The price per share was
                                   based on the fair market value of the
                                   Company's Common Stock at the grant date.

                                   In December 1996, The Director Plan was
                                   adopted by the Board of Directors. The
                                   Director Plan became effective upon the
                                   closing of the initial public offering.
                                   Under the terms of the Director Plan,
                                   initial options (the Initial Options) to
                                   purchase 15,000 shares of common stock will
                                   be granted to each person who becomes a
                                   non-employee director after April 14, 1997
                                   and who is not otherwise affiliated with the
                                   Company, effective as of the date of
                                   election to the Board of Directors. The
                                   Initial Options will vest in equal annual
                                   installments over three years after the date
                                   of grant. In addition, each non-employee
                                   director will receive annually options to
                                   purchase 10,000 shares (Annual Options) on
                                   the date of each annual meeting of the
                                   Company's stockholders held after the
                                   closing of the initial public offering. The
                                   Annual Options will vest one year from the
                                   date of grant. A total of 100,000 shares of
                                   common stock may be issued upon the exercise
                                   of stock options granted under the Director
                                   Plan. Unless sooner terminated pursuant to
                                   its terms, the Director Plan will terminate
                                   in December 2006. During 1997, the Company
                                   issued 15,000 options under the Director
                                   Plan to one director which expired upon the
                                   director's retirement on June 12, 1997.


                                                          F-19
<PAGE>

                                                        Nexar Technologies, Inc.
                                                                 and Subsidiary

                                      Notes to Consolidated Financial Statements

================================================================================


3.     Stockholders'
       Equity
       (Deficit)
       (Continued)

       Stock Option
       Plans                     The following table summarizes all stock
       (Continued)               option activity under the Plan:

<TABLE>
<CAPTION>
                                                                            Number           Exercise
                                                                          of Shares          Price
                                    ----------------------------------------------------------------------
                                    <S>                                   <C>              <C>       <C>
                                    Inception, March 7, 1995                      -                $     -
                                     Granted                                 20 640                   .001
                                    ----------------------------------------------------------------------
                                    Balance, December 31, 1995               20 640                   .001
                                     Granted                              3 396 840       .0025 -    10.00
                                     Terminated                            (361 560)                 .0025
                                    ----------------------------------------------------------------------
                                    Balance, December 31, 1996            3 055 920        .001 -    10.00
                                     Granted                              1 368 000                   5.50
                                     Exercised                             (288 715)       .001 -     0.33
                                     Terminated                            (198 640)       .001 -    10.00
                                   -----------------------------------------------------------------------
                                    Balance, December 31, 1997            3 936 565        .003 -     5.50
                                   -----------------------------------------------------------------------
                                    Exercisable, December 31, 1997        1 829 305       $.003 -   $ 5.50
                                   -----------------------------------------------------------------------

</TABLE>

                                 The weighted averge price per share for all
                                 options outstanding was $.001, $0.45 and $1.92
                                 at December 31, 1995, 1996 and 1997,
                                 respectively. The weighted average price per
                                 share for exercisable options at December 31,
                                 1997 was $0.43

                                 The Company accounts for its stock-based
                                 compensation plans under APB Opinion No. 25,
                                 Accounting for Stock Issued to Employees. In
                                 October 1995, the Financial Accounting
                                 Standards Board issued SFAS No.  123,
                                 Accounting for Stock-Based Compensation,
                                 which was effective for fiscal years
                                 beginning after December 15, 1995.  SFAS No.
                                 123 established a fair-value-based method of
                                 accounting for stock-based compensation
                                 plans.  The Company has adopted the
                                 disclosure-only alternative under SFAS
                                 No. 123, which requires disclosure of the
                                 pro forma effects on earnings and  earnings
                                 per share as if SFAS No. 123 had been
                                 adopted, as well as certain other information.

                                                          F-20
<PAGE>

                                                        Nexar Technologies, Inc.
                                                                 and Subsidiary

                                     Notes to Consolidated Financial Statements

================================================================================


3.     Stockholders'
       Equity
       (Deficit)
       (Continued)

       Stock Option
       Plans                        The Company has computed the pro forma
       (Continued)                  disclosures required under SFAS No. 123 for
                                    all stock options granted as of December 31,
                                    1997 using the Black-Scholes option pricing
                                    model prescribed by SFAS No. 123.

                                    The assumptions used and the weighted
                                    average information for the period from
                                    inception (March 7, 1995) to December 31,
                                    1995 and for the year ended December 31,
                                    1996 and 1997 are as follows:

<TABLE>
<CAPTION>
                                                               Period
                                                             from Inception
                                                           (March 7, 1995) to                   Year Ended
                                                                               ----------------------------------------------
                                                               December 31,         December 31,           December 31,
                                                                  1995                 1996                    1997
-----------------------------------------------------------------------------------------------------------------------------
       <S>                                                     <C>                  <C>                       <C>
       Risk-free interest rates                                    6.11%            5.23% - 6.51%              6.00%
       Expected dividend yield                                       -                    -                    -
       Expected lives                                            4.5 years            4.5 years              4.5 years
       Expected volatility                                          51%                  51%                  46.5%
       Weighted average fair value of
        options on date of grant                                   $.001                $.28                  $3.54
       Weighted-average exercise price                             $.001                $.45                  $1.92
       Weighed-average remaining
        contractual life of options
        outstanding                                             4.58 years           4.58 years              3.28 years
       Weighted average exercise price of
        5,733, 1,063,973 and 1,829,305 options
        exercisable at December 31, 1995,
        1996 and 1997, respectively                               $0.001               $0.0025                $0.44
</TABLE>

                                                          F-21
<PAGE>

                                                        Nexar Technologies, Inc.
                                                                 and Subsidiary

                                      Notes to Consolidated Financial Statements

================================================================================



3.     Stockholders'
       Deficit
       (Continued)

       Stock Option                 The effect of applying SFAS No. 123 would be
       Plans                        as follows:
       (Continued)

<TABLE>
<CAPTION>
                                                               Period
                                                           from Inception
                                                         (March 7, 1995) to                Year Ended
                                                                               -------------------------------------
                                                             December 31,         December 31,        December 31,
                                                                 1995                1996                 1997
--------------------------------------------------------------------------------------------------------------------
       <S>                                                   <C>                  <C>                 <C>
       Pro forma net loss                                    $(2 261 434)         $(7 646 716)        $(13 974 580)
       Pro forma net loss per share:
            Basic                                            $      (.47)         $     (1.59)        $      (1.92)
            Diluted                                          $      (.29)         $     (1.00)        $      (1.38)
</TABLE>

       Employee Stock             In December 1996, the Company's Board of
       Purchase Plan              Directors adopted the Company's 1996
                                  Employee Stock Purchase Plan (the Purchase
                                  Plan). The Purchase Plan became effective
                                  upon the closing of the proposed initial
                                  public offering and authorizes the issuance
                                  of up to a total of 200,000 shares of Common
                                  Stock to participating employees.

       Underwriter's              Upon the consummation of the initial public
       Warrant                    offering, the Company issued the underwriter,
                                  as part of their investment banking fee,
                                  warrants to purchase 250,000 shares of the
                                  Company's common stock at a price equal to
                                  165% of the initial public offering price
                                  per share of $9.00. None of these warrants
                                  were exercised as of December 31, 1997.



                                                          F-22
<PAGE>

                                                        Nexar Technologies, Inc.
                                                                  and Subsidiary

                                     Notes to Consolidated Financial Statements

================================================================================


4.     Related Party                Palomar and PEC funded all of the Company's
       Transactions                 operations up to April 14, 1997 (date of
                                    closing of initial public offering).  The
                                    total amount of funds provided by Palomar
                                    and PEC amounted to $20,792,998 and
                                    $2,025,000, respectively, through December
                                    31, 1996. At December 31, 1997, the amount
                                    due to Palomar was $461,584. The weighted
                                    average balance of the 1996 funding was
                                    approximately $9,791,000 for the period
                                    ended December 31, 1996. All of these loans
                                    have been non-interest-bearing. On March 31,
                                    1997, the Company entered into an agreement
                                    with Palomar (the Agreement) whereby
                                    $10,000,000 of advances from Palomar and PEC
                                    were converted into 1,900,000 shares of the
                                    Company's common stock upon the closing of
                                    the initial public offering. In addition,
                                    the Agreement provides that 1,200,000 of
                                    these shares are held in escrow subject to a
                                    contingent repurchase right of the Company,
                                    at a nominal price per share, and will only
                                    be released upon the attainment of certain
                                    revenue, net income and stock price
                                    milestones, (see Note 3). On December 10,
                                    1997, Palomar sold the 1,200,000 shares
                                    subject to such repurchase right to a third
                                    party for an aggregate purchase price of
                                    $5,000.

                                    As part of the Agreement the Company was to
                                    repay Palomar $8,249,549 upon the closing of
                                    the initial public offering and convert
                                    $4,568,449 due to Palomar and PEC into
                                    45,684 shares of Convertible Preferred Stock
                                    (see Note 3). During 1997, Palomar agreed to
                                    pay bonuses to the Company's management
                                    totaling $1,000,000 for services rendered
                                    during 1996. Pursuant to the Agreement, the
                                    Company offset the amount due to Palomar by
                                    $1,000,000 which is reflected as a
                                    contribution to additional paid-in capital
                                    at December 31, 1997. Nexar paid Palomar
                                    $6,700,000 during 1997 in repayment of
                                    indebtedness pending resolution of various
                                    intercompany accounts.

                                      F-23
<PAGE>

                                                       Nexar Technologies, Inc.
                                                                 and Subsidiary

                                     Notes to Consolidated Financial Statements

================================================================================


4.     Related Party                The accompanying 1996 and 1995 consolidated
       Transactions                 financial statements include the income and
       (Continued)                  expenses of the Company and the 1996 assets
                                    and liabilities of the Company, as included
                                    in Palomar's consolidated financial
                                    statements, but do not include PEC's general
                                    corporate debt, which is used to finance
                                    operations of all of PEC's respective
                                    business segments, or an allocation of PECs
                                    interest expense.

                                    Palomar incurred certain general and
                                    administrative expenses on behalf of Nexar
                                    totaling approximately $100,000 and $128,000
                                    for the period from inception (March 7,
                                    1995) to December 31, 1995 and for the year
                                    ended December 31, 1996, respectively.

                                    Included in accounts receivable in the
                                    accompanying consolidated balance sheet at
                                    December 31, 1996 and 1997 is approximately
                                    $197,000 and $405,000, respectively, due
                                    from Palomar and its affiliates for product
                                    purchases.

                                    During the year ended December 31, 1996 and
                                    1997, the Company purchased inventory
                                    components from affiliated companies
                                    totaling approximately $693,000 and
                                    $2,607,000, respectively, of which
                                    approximately $693,000 and $312,000 is
                                    included in accounts payable in the
                                    accompanying consolidated balance sheet as
                                    of December 31, 1996 and 1997, respectively.

                                    In 1995, as part of the Company's
                                    organization, the Company agreed to settle a
                                    complaint brought against the Company and
                                    its Chief Executive Officer. As part of the
                                    settlement, the Company was required to pay
                                    $525,000, and Palomar agreed to issue
                                    warrants to purchase 108,000 shares of
                                    Palomar's common stock at $5.00 per share,
                                    the fair value of Palomar common stock at
                                    that date. This warrant had minimal value.
                                    The Company recorded the $525,000 as
                                    litigation expense, which is included in
                                    general and administrative expenses in the
                                    accompanying consolidated statement of
                                    operations for the period ended December 31,
                                    1995.

                                      F-24
<PAGE>

                                                        Nexar Technologies, Inc.
                                                                 and Subsidiary

                                     Notes to Consolidated Financial Statements

================================================================================


5.     Accrued Expenses             Accrued expenses consist of the following:
<TABLE>
<CAPTION>

                                    December 31,                                             1996                  1997
                                    ---------------------------------------------------------------------------------------
                                    <S>                                                <C>                   <C>
                                    Accrued payroll and related costs                  $1 128 373           $   335 155
                                    Other accrued expenses                                876 871               854 197
                                    ---------------------------------------------------------------------------------------
                                                                                       $2 005 244           $ 1 189 352
                                    ---------------------------------------------------------------------------------------
</TABLE>

6.     Income Taxes                 The Company and Palomar filed a consolidate
                                    income tax return through December 31, 1996.
                                    The consolidated tax return reflected net
                                    operating losses for the year ended December
                                    31, 1995 and 1996.  Since Palomar's equity
                                    ownership was reduced to below 80% upon the
                                    Company's initial public offering, the
                                    Company will file its own income tax return
                                    for the year ended December 31, 1997.

                                    The Company accounts for income taxes in
                                    accordance with SFAS No. 109, Accounting for
                                    Income Taxes, on a separate Company basis.
                                    Under SFAS No. 109, deferred tax assets or
                                    liabilities are computed based on the
                                    differences between the financial statement
                                    and income tax basis of assets and
                                    liabilities using currently enacted tax
                                    rates. Deferred income tax expenses or
                                    credits are based on changes in the assets
                                    or liability from period to period.

                                    As of December 31, 1997, the Company had
                                    generated net operating loss carryforwards
                                    for federal and state income tax purposes of
                                    approximately $20,124,000 that expire
                                    through 2012. The Company also has certain
                                    tax credits available to offset future
                                    federal and state income taxes, if any. Net
                                    operating loss carryforwards and credits are
                                    subject to review and possible adjustment by
                                    the Internal Revenue Service and may be
                                    limited in the event of certain cumulative
                                    changes in ownership interests of
                                    significant stockholders over a three-year
                                    period in excess of 50%, as defined.

                                      F-25
<PAGE>

                                                        Nexar Technologies, Inc.
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements

================================================================================


6.     Income Taxes                 The approximate income tax effect of each
       (Continued)                  type of temporary difference and carry-
                                    forward is as approximately follows:
<TABLE>
<CAPTION>

                                    December 31,                                             1996                 1997
                                    -----------------------------------------------------------------------------------
                                    <S>                                             <C>                  <C>
                                    Net operating loss carryforwards                 $  2 567 000         $  8 150 000
                                    Litigation costs                                      550 000                    -
                                    Management bonuses                                    403 000                    -
                                    Allowance for doubtful accounts
                                     receivable                                           243 000              798 000
                                    Other temporary differences                           142 000              390 000
                                    -----------------------------------------------------------------------------------
                                    Gross deferred tax assets                           3 905 000            9 338 000
                                    Less valuation allowance                           (3 905 000)          (9 338 000)
                                    -----------------------------------------------------------------------------------
                                    Net deferred tax asset                            $          -        $          -
                                    -----------------------------------------------------------------------------------
</TABLE>

                                    Under SFAS No. 109, the Company cannot
                                    recognize a deferred tax asset for the
                                    future benefit of the net operating loss
                                    carryforwards unless it concludes that it is
                                    "more likely than not" that the deferred tax
                                    asset would be realized. Due to its early
                                    stage of development and history of
                                    operating losses, the Company has recorded a
                                    full valuation allowance against its
                                    otherwise recognizable deferred tax assets.

                                      F-26
<PAGE>

                                                        Nexar Technologies, Inc.
                                                                 and Subsidiary

                                      Notes to Consolidated Financial Statements

================================================================================


7.     Commitments and
       Contingencies

       Leases                       The Company leases its corporate office,
                                    manufacturing facility and certain equipment
                                    under operating lease arrangements expiring
                                    through September 2002. The Company also
                                    leases office furniture under a capital
                                    lease expiring in 2000.

                                    Future minimum lease payments under all
                                    leases are as follows:

<TABLE>
<CAPTION>
                                                                                         Capital             Operating
                                    December 31,                                          Leases              Leases
                                    ---------------------------------------------------------------------------------------
                                    <S>                                                <C>              <C>
                                    1998                                               $   72 500       $    1 043 000
                                    1999                                                   72 500              985 000
                                    2000                                                   72 500              956 000
                                    2001                                                        -              896 000
                                    2002                                                        -              422 000
                                    ---------------------------------------------------------------------------------------
                                    Total minimum lease payments                          217 500           $4 302 000
                                                                                                            ==========
                                    Less amount representing interest                      25 395
                                    -------------------------------------------------------------
                                    Present value of net minimum
                                     lease payments                                       192 105
                                    Less current maturities                                58 492
                                    -------------------------------------------------------------
                                    Total long term portion                              $133 613
                                    -------------------------------------------------------------
</TABLE>
                                    Rent expense related to all operating leases
                                    was approximately $85,000, $161,000 and
                                    $726,000 for the period from inception
                                    (March 7, 1995) to December 31, 1995 and for
                                    the year ended December 31, 1996 and 1997,
                                    respectively.

                                      F-27
<PAGE>

                                                        Nexar Technologies, Inc.
                                                                 and Subsidiary

                                      Notes to Consolidated Financial Statements

================================================================================


7.     Commitments and
       Contingencies
       (Continued)

       License Agreements           In March 1996, the Company entered into a
                                    software license agreement with 4-Home
                                    Productions (4-Home), a Division of Compute
                                    Associates International, Inc. The license
                                    agreement gave the Company the right to use,
                                    reproduce, display and distribute certain of
                                    4-Homes software application programs within
                                    the United States, Canada and Puerto Rico.
                                    In exchange for these rights, the Company
                                    paid 4-Home a nonrefundable fee of $25,000
                                    and was to pay a royalty on all units sold,
                                    as defined, that are bundled with 4-Homes'
                                    software applications. The initial term of
                                    the agreement if commenced was for one year
                                    subject to annual renewal. The Agreement was
                                    terminated in 1997. No royalties have been
                                    incurred under this agreement as of December
                                    31, 1996 and 1997.

       Service Agreement            In March 1996, the Company entered into a
                                    maintenance service agreement with Wang
                                    Laboratories, Inc. (Wang).  The agreement
                                    states that Wang will provide certain
                                    maintenance services for certain equipment
                                    manufactured by the Company for a term of
                                    three years and, thereafter, on a year-to-
                                    year basis at the option of the Company.
                                    The monthly fees are based on the greater of
                                    $12,500 or the failure rate, as defined,
                                    multiplied by the number of units sold per
                                    month.  The Company incurred and charged
                                    to operations approximately $126,000
                                    and $489,000 under this agreement for the
                                    years ended December 31, 1996 and 1997,
                                    respectively.

       Development                  In November 1996, the Company entered into a
       Agreement                    development agreement with another company
                                    (the Developer) whereby the Developer would
                                    develop certain technology for the Company.
                                    During 1997, the Company incurred and
                                    charged to expense approximately $379,000 of
                                    costs with the developer. In addition, the
                                    Company may be required to pay additional
                                    royalty amounts based on product sold, not
                                    to exceed $500,000. Royalties incurred under
                                    this agreement during 1997 amounted to
                                    $17,000. There were no royalties incurred in
                                    1996.

                                      F-28
<PAGE>

                                                        Nexar Technologies, Inc.
                                                                 and Subsidiary

                                      Notes to Consolidated Financial Statements

================================================================================


7.     Commitments and
       Contingencies
       (Continued)

       Employment and               The Company entered into an employment
       Severance                    agreement with its Chief Executive Officer
       Agreements                   (CEO) for a five year term expiring in March
                                    2002. Unless either party chooses otherwise
                                    by notice to the other, the agreement
                                    automatically extends at the end of each
                                    year for an additional year throughout the
                                    term of the agreement. The agreement
                                    provides for an annual base salary and is
                                    subject to annual increases by the Board of
                                    Directors and an annual incentive bonus upon
                                    the achievement of mutually agreed upon
                                    revenue and net income performance
                                    objectives. The employment agreement also
                                    provides that the CEO shall receive an
                                    additional bonus equal to $2.00 per personal
                                    computer sold by the Company throughout the
                                    term of his employment with the Company.

                                    Under the employment agreement, if the CEO
                                    is terminated by the Company without cause
                                    following a "change of control" (as defined
                                    in the agreement), the CEO will receive the
                                    following severance payments and further
                                    benefits: (i) $2,250,000, (ii) full payment
                                    of any accrued, unpaid salary, bonus and
                                    benefit payments; (iii) a sum equal to three
                                    years of his highest to date annual base
                                    pay; (iv) a sum equal to three times his
                                    highest to date annual bonus earned; (v)
                                    full immediate vesting of any issued but
                                    unvested stock options; (vi) three years of
                                    continuation of participation in the
                                    Company's benefits; and (vii) such
                                    additional sums as are necessary for the CEO
                                    to meet any additional federal taxes due to
                                    the payment of severance pay and other
                                    benefits having been contingent upon a
                                    change in control. If the CEO's employment
                                    is terminated by the Company without cause
                                    in the absence of such a change of control,
                                    the CEO will be entitled to all of the
                                    foregoing severance payments and other
                                    benefits, other than any additional sums
                                    required for the payment of federal taxes.

                                      F-29
<PAGE>

                                                       Nexar Technologies, Inc.
                                                                 and Subsidiary

                                     Notes to Consolidated Financial Statements

================================================================================


7.     Commitments and
       Contingencies
       (Continued)

       Employment and               Upon expiration of the CEO's term of
       Severance                    employment, the CEO will receive the
       Agreements                   following severance payments and further
       (Continued)                  benefits: (i)  $2,250,000, but only if the
                                    Company has achieved cumulative total
                                    revenues of $150,000,000 for the period
                                    commencing on January 1,  1997 to the date
                                    of expiration, (ii) full payment of any
                                    accrued, unpaid salary, bonus and benefit
                                    payments; (iii) a sum equal to eighteen
                                    months of his highest to date annual base
                                    pay; (iv) a sum equal to eighteen month of
                                    of his highest to date annual bonus earned;
                                    and (v) eighteen months of continuation of
                                    participation in the  Company's benefits.
                                    If the CEO were to resign prior to the
                                    expiration of the term of employment
                                    agreement and absent a reduction in his
                                    responsibilities or pay or change in
                                    location, the CEO will receive the
                                    following severance payments and further
                                    benefits: (i) $1,000,000 if he resigns on or
                                    after January 1, 2000, (ii) full payment of
                                    any accrued, unpaid salary, bonus and
                                    benefit payments; (iii) a sum equal to
                                    eighteen months of his highest to date
                                    annual base pay; (iv) a sum equal to
                                    eighteen months of his highest to date
                                    annual bonus earned; and (v) eighteen months
                                    of continuation of participation in the
                                    Company's benefits. If the CEO's employment
                                    were to be terminated for cause (as defined
                                    in the agreement), the CEO would be entitled
                                    only to full payment of any accrued, unpaid,
                                    salary, bonus and benefit payments and
                                    retention of any fully vested stock options
                                    and similar vested benefits.

                                      F-30
<PAGE>

                                                        Nexar Technologies, Inc.
                                                                 and Subsidiary

                                      Notes to Consolidated Financial Statements

================================================================================


7.     Commitments and
       Contingencies
       (Continued)
                                    The Company also entered into an employment
       Employment and               agreement with another executive for a five
       Severance                    year term expiring in October 2001.  Unless
       Agreements                   either party chooses otherwise by notice to
       (Continued)                  the other, the agreement automatically
                                    extends at the end of each year for an
                                    additional year throughout the term of the
                                    agreement.  The agreement provides for an
                                    annual base salary subject to annual
                                    increases by the Board of Directors and an
                                    annual incentive bonus upon the achievement
                                    of mutually agreed upon revenue and net
                                    income performance objectives. The
                                    employment agreement also provides for an
                                    additional bonus equal to $2.00 per personal
                                    computer sold by the Company throughout the
                                    term of his employment with the Company.

                                    Under this employment agreement, if the
                                    executive is terminated by the Company
                                    without cause following a "change of
                                    control" (as defined in the agreement), the
                                    executive will receive the following
                                    severance payments and further benefits: (i)
                                    $750,000, (ii) full payment of any accrued,
                                    unpaid salary, bonus and benefit payments;
                                    (iii) a sum equal to one year of his highest
                                    to date annual base pay; (iv) a sum equal to
                                    his highest to date annual bonus earned; (v)
                                    full immediate vesting of any issued but
                                    unvested stock options; (vi) one year of
                                    continuation of participation in the
                                    Company's benefits; and (vii) such
                                    additional sums as are necessary for any
                                    additional federal taxes and/or penalties
                                    due to the payment of severance pay and
                                    other benefits having been contingent upon a
                                    change in control.

                                    Upon expiration of the executive's
                                    employment, he will receive the following
                                    severance payments and further benefits: (i)
                                    $750,000, but only if the Company has
                                    achieved cumulative total revenues of
                                    $150,000,000 for the period commencing on
                                    January 1, 1997 to the date of expiration,
                                    (ii) full payment of any accrued, unpaid
                                    salary, bonus and benefit payments; (iii) a
                                    sum equal to one year of his highest to date
                                    annual base pay; (iv) a sum equal to his
                                    highest to date annual bonus earned; and (v)
                                    one year of continuation of participation in
                                    the Company's benefits. If employment were
                                    to be terminated for cause (as

                                      F-31
<PAGE>

                                                        Nexar Technologies, Inc.
                                                                 and Subsidiary

                                     Notes to Consolidated Financial Statements

================================================================================


7.     Commitments and
       Contingencies
       (Continued)

       Employment                   defined in the agreement), the executive
       Severance                    would be entitled only to full payment of
       Agreements                   any accrued, unpaid, salary, bonus and
       (Continued)                  benefit payments and retention of any fully
                                    vested stock options and similar vested
                                    benefits.  The minimum aggregate
                                    obligation of the above agreements amounts
                                    to approximately $3,740,000 of which
                                    $750,000 is recorded as deferred
                                    compensation at December 31, 1997.

                                    The Company is also party to substantially
                                    similar employment agreements with certain
                                    other executives. These agreements provide
                                    for annual base salaries as well as annual
                                    bonuses based upon the achievement of
                                    mutually agreed upon revenue and net income
                                    objectives. Each of these agreements is for
                                    a term expiring in March 2000 and provides
                                    for severance pay equal to twelve months of
                                    the highest monthly base pay if employment
                                    is terminated without cause. The Company's
                                    contingent obligation under these severance
                                    agreements amounted to approximately
                                    $575,000 at December 31, 1997.

       Litigation                   The Company is involved in various legal
                                    matters in the ordinary course of its
                                    business. Each of these matters is subject
                                    to various uncertainties, and some of these
                                    matters may be resolved unfavorably to the
                                    Company. Management believes that any
                                    liability that may ultimately result from
                                    the resolution of these matters will not
                                    have a material adverse effect on the
                                    financial position of the Company.

8.     401(k) Profit                In April 1996, the Company began
       Sharing Plan                 participating in a 401(k) plan established
                                    by Palomar.  The 401(k) plan covered
                                    substantially all employees who have
                                    satisfied a six-month service requirement
                                    and had attained the age of 18. Employees
                                    could contribute up to 15% of their salary,
                                    as defined, subject to restrictions defined
                                    by the Internal Revenue Service. Matching
                                    contributions equal to 50%  of all employee
                                    contributions were made in the form of
                                    Palomar's common stock. Upon the closing of
                                    the initial public offering, the Company
                                    established its

                                      F-32
<PAGE>

                                                        Nexar Technologies, Inc.
                                                                 and Subsidiary

                                     Notes to Consolidated Financial Statements

================================================================================


8.     401(k) Profit                own 401(k) plan.  The matching contributions
       Sharing Plan                 vest ratably over a six year period.  The
       (Continued)                  Company's expense under this matching
                                    contribution was immaterial through December
                                    31, 1996. The Company's matching expense
                                    amounted to approximately $12,000 for the
                                    year ended December 31, 1997.


9.     Financing                    In August 1996, the Company entered into a
       Arrangements                 financing program with IBM Credit
                                    Corporation (IBM) whereby IBM will finance
                                    all hardware, software and associated
                                    products sold or marketed by the Company to
                                    any entity (Remarketer) that has already
                                    executed a financing agreement with IBM to
                                    purchase products from the Company. This
                                    financing program gives title of the
                                    products sold by the Company to the
                                    Remarketer, and IBM finances the purchase
                                    price of the products. In addition, under
                                    certain circumstances, as defined, IBM has
                                    the right to require the Company to
                                    repurchase products upon default by the
                                    Remarketer. As of December 31, 1996 and
                                    1997, the Company has not received any
                                    proceeds under this agreement.

                                    In August 1996, the Company entered into a
                                    financing agreement with AT&T Capital
                                    Corporation (AT&T) whereby AT&T would
                                    provide to certain distributors or dealers,
                                    financing for the purchase of the Company's
                                    products. Under certain circumstances, as
                                    defined, AT&T has the right to require the
                                    Company to repurchase products upon default
                                    of payment by the distributor to AT&T. As of
                                    December 31, 1996 and 1997, the Company has
                                    not received any proceeds under this
                                    agreement.

                                      F-33
<PAGE>

                                                       Nexar Technologies, Inc.
                                                                 and Subsidiary

                                      Notes to Consolidated Financial Statements

================================================================================


10.    Subsequent Events

       Preferred Stock              On March 20, 1998, the Company issued
       Offering                     32,000 shares of Series B Convertible
                                    Preferred Stock at $100 per share for total
                                    proceeds of $2,944,000, net of $256,000 in
                                    transaction costs. The Series B Convertible
                                    Preferred Stock will accrue dividends at 5%
                                    per annum and may be converted, in whole or
                                    in part, into a number of shares of the
                                    Company's common stock equal to $100 per
                                    share converted by a conversion price equal
                                    to the lesser of $3.25 per share or 75% of
                                    the average closing bid price of the
                                    Company's common stock in the five trading
                                    days prior to the date of conversion.

       Recent
       Developments                 In March 1998, the Company engaged Southport
                                    Partners, an investment banking firm based
                                    in Southport Connecticut, to provide
                                    advisory services to the Company concerning
                                    possible joint venture, licensing and other
                                    potential transactions. The Company is not
                                    currently engaged in any negotiations with
                                    respect to any such potential transaction.

11.    Valuation Accounts           The following table sets forth the activity
                                    in the Company's valuation accounts for the
                                    years ending December 31, 1996 and 1997:


<TABLE>
<CAPTION>

                                                                    Increase in
                                                  Balance at         Provision
                                                  Beginning        for Estimated      Balance at
                                                   of Year           Bad Debts        End of Year
--------------------------------------------------------------------------------------------------
<S>                                              <C>              <C>                <C>
For the year ended December 31, 1996:
 Allowances for doubtful accounts                 $ 12,000          $   592,000         $  604,000

For the year ended December 31, 1997:
 Allowances for doubtful accounts                 $604,000           $1,366,000         $1,970,000

</TABLE>




                                      F-34