-102-

                                OPTION AGREEMENT

        THIS OPTION AGREEMENT, dated as of December 31, 1996 (this "Agreement"),
by and between PALOMAR MEDICAL  TECHNOLOGIES,  INC., a Delaware corporation (the
"Company"), and GFL ADVANTAGE FUND LIMITED, a British Virgin Islands corporation
("GFL").

                              W I T N E S S E T H:

        WHEREAS,  GFL,  the  Company  and  Palomar  Electronics  Corporation,  a
Delaware  corporation  ("PEC"),  are  contemporaneously  with the  execution and
delivery  of this  Agreement  executing  and  delivering,  one to the  other,  a
Securities  Purchase  Agreement,  dated as of the date hereof  (the  "Securities
Purchase  Agreement"),  which provides,  among other things, for the purchase by
GFL from PEC of 200,000  shares of Common  Stock,  $.01 par value per share,  of
Nexar Technologies, Inc. (the "Nexar Shares"), a Delaware corporation ("Nexar"),
which is a subsidiary  of the Company,  at a purchase  price of $10.00 per share
for an aggregate purchase price of $2,000,000.00.

        WHEREAS,  contemporaneously  with  the  execution  and  delivery  of the
Securities Purchase Agreement, Nexar and GFL have executed and delivered, one to
the other, a  Registration  Rights  Agreement,  dated as of the date hereof (the
"Registration Rights Agreement"); and

        WHEREAS,  in  consideration  of the purchase by GFL of the Nexar Shares,
the Company wishes to grant to GFL the option to require the Company to exchange
the Nexar  Shares  for  shares of Common  Stock,  $.01 par value per share  (the
"Company  Common  Stock"),  of the  Company  upon the terms and  subject  to the
conditions of this Agreement;

        NOW  THEREFORE,  in  consideration  of the  premises  and other good and
valuable  consideration,  the  receipt  and  sufficiency  of  which  are  hereby
acknowledged, the parties hereto hereby agree as follows:

        1. Grant of Option.  The Company hereby grants GFL an irrevocable option
(the "Option") which shall entitle GFL, if an Option  Exercise Event occurs,  to
require the Company to issue upon each exercise of the Option a number of shares
of Company  Common Stock in exchange for the number of Nexar Shares  surrendered
for exchange by GFL in connection  with such exercise of the Option equal to the
quotient  obtained by dividing (1) the product  obtained by multiplying  (A) the
number of Nexar  Shares to be exchanged  upon such  exercise of the Option times
(B) $10.00 by (2) the Exchange Value on the date of such exercise of the Option.

        As used in this Agreement,  the following terms shall have the following
meanings:

<PAGE>
                                     -103-

                "Closing  Bid Price" of any  security on any date shall mean the
        closing  bid  price  of  such  security  on such  date on the  principal
        securities  exchange  or  market  on which  such  security  is traded as
        reported by such exchange or market.

                "Computation Date" means (1) the date which is 60 days after the
        First  Option  Closing  (as  defined  herein),  unless the  Registration
        Statement  theretofore has been declared  effective by the SEC, (2) each
        date  which is 30 days after a  Computation  Date,  if the  Registration
        Statement has not been declared  effective by the SEC prior to such 30th
        day, (3) if the Registration  Statement has not been declared  effective
        by the SEC within 60 days after the First  Option  Closing,  the date on
        which the Registration  Statement is declared  effective by the SEC, (4)
        the date  which is 30 days  after  the  date on which  the  Registration
        Statement  ceases to be available for use by GFL, if, at any time during
        which the Registration  Statement is required by the Registration Rights
        Agreements to remain  available  for such,  the  Registration  Statement
        ceases to be so available for any reason (including, without limitation,
        by reason of an SEC stop  order,  a material  misstatement  or  omission
        therein  not  caused  by the  information  provided  in  writing  by GFL
        expressly  for  use  therein  or  the   information   contained  in  the
        Registration  Statement  having  become  outdated)  and shall  remain so
        unavailable  on such  30th day,  (5) the date on which the  Registration
        Statement  becomes  available  for  use  by  GFL,  if  the  Registration
        Statement shall have become unavailable for such use as described in the
        preceding  clause (4) of this  paragraph,  (6) the date which is 30 days
        after the date on which GFL shall have become  unable to obtain  Company
        Common  Stock upon  exercise of the Option or the  Company  Call for any
        reason (other than by reason of the 4.9% limitation set forth in Section
        9), if GFL shall  remain  unable so to obtain  shares of Company  Common
        Stock on such 30th day,  and (7) the date on which GFL become able to so
        obtain  Company  Common  Stock,  if GFL shall have  become  unable so to
        obtain Company Common Stock as described in the preceding  clause (6) of
        this paragraph.

                "Exchange  Value"  for  any  date  means  85% of the  arithmetic
        average of the Closing Bid Prices of the  Company  Common  Stock for the
        five consecutive trading days ending one trading day prior to such date,
        except that, if (x) the Registration  Statement is not ordered effective
        by the SEC  within  60 days  after  the First  Option  Closing,  (y) the
        Registration  Statement  shall cease to be available  for use by GFL for
        any reason (including,  without limitation, by reason of a stop order of
        the SEC, a material  misstatement or omission in the Nexar  Registration
        Statement  not  caused by the  information  provided  in  writing by GFL
        expressly  for  use  therein  or  the   information   contained  in  the
        Registration  Statement having become outdated) or (z) GFL having become
        unable to obtain shares of Company  Common Stock from the Company as and
        when  required  by this  Agreement  upon  exercise  of the Option or the
        Company Call in accordance with this Agreement  (other than by reason of
        the 4.9%  Limitation set forth in Section 9), then in 

<PAGE>
                                     -104-

        each such case the percentage  stated above in this  paragraph  shall be
        reduced by two percentage points on each Computation Date (not to exceed
        2% on any  Computation  Date in case more than one event  resulting in a
        Computation  Date  occurs  during the same period of time) (pro rated in
        the case of any  Computation  Date  which is less  than 30 days  after a
        Computation Date).

                "Registration  Statement" shall mean the Registration  Statement
        required  to be filed by the  Company  with the SEC  pursuant to Section
        2(a) of the Company Registration Rights Agreement (as defined herein).

                "SEC"  shall  mean the United  States  Securities  and  Exchange
        Commission.

        2. Exercise of Option.  (a) Subject to the provisions of Section 7, upon
the occurrence of an Option Exercise Event,  the Option may be exercised by GFL,
in whole or in increments  of at least 20,000 of the Nexar  Shares,  at any time
prior to June 30, 1997.

                (b) If GFL  wishes  to  exercise  the  Option,  it shall  send a
        written  notice to the Company  specifying  the number of Company Common
        Stock to be issued in exchange for Nexar Shares upon such exercise and a
        place and date (not  later  than ten (10)  business  days after the date
        such notice is given) for the  closing of such  issuance  and  exchange.
        Each  exercise  of the  Option  shall be deemed to have been made on the
        date such notice is given with respect to such exercise.

        3. Exchange and Delivery of Certificate(s),  Etc. Each closing hereunder
pursuant to the  exercise of the Option by GFL pursuant to Section 2 shall occur
at the time and  place set  forth in the  notice  referred  to in  Section  2(b)
hereof.  At each such closing  hereunder,  (a) GFL will surrender to the Company
the  certificates  for the number of Nexar  Shares to be  exchanged  for Company
Common Stock by reason of such exercise of the Option,  and (b) the Company will
deliver to GFL a certificate or certificates  representing the number of Company
Common Stock so purchased in the  denominations  designated by GFL in its notice
of exercise.

        4. Call of the  Option.  The  Company  shall have the right to call (the
"Company  Call")  all but not  less  than all of the  Option  and  force  GFL to
exchange all Nexar Shares owned by GFL at the time of closing of the exercise by
the Company of the Company  Call for shares of Company  Common Stock on the same
basis  provided  in Section 1 for  exercise of the Option by GFL at any time (i)
before April 1, 1997 provided that the Company  reasonably  concludes that Nexar
will not complete an initial public offering pursuant to the Nexar  Registration
Statement  or (ii)  after  June  30,  1997 so  long  as the  Nexar  Registration
Statement  (as  defined  herein)  shall be  effective  at the  time the  Company
exercises  the Company  Call and at the time the Company  delivers the shares of
Company  

<PAGE>
                                     -105-

Common  Stock to GFL in  connection  with the  exercise  by the  Company  of the
Company Call.

        5.  Exercise  of Company  Call.  If the Company  wishes to exercise  the
Company Call, it shall send a written  notice to GFL stating that the Company is
exercising  the Company Call and specifying a place and date (not later than ten
(10)  business  days after the date such notice is given) for the closing of the
issuance of shares of Company  Common  Stock in exchange for Nexar  Shares.  The
Company's  exercise of the Company Call pursuant to Section 4 shall be deemed to
have been made on the date such  notice is given with  respect  to such  Company
Call.

        6. Exchange and Delivery of Certificate(s),  Etc. Each closing hereunder
pursuant to the exercise of the Company Call by the Company  pursuant to Section
5 shall  occur at the time and  place  set forth in the  notice  referred  to in
Section 5 hereof. At each such closing hereunder,  (a) GFL will surrender to the
Company the  certificates  for the number of Nexar  Shares to be  exchanged  for
Company Common Stock by reason of such exercise of the Company Call, and (b) the
Company will  deliver to GFL a  certificate  or  certificates  representing  the
number of shares of  Company  Common  Stock so  purchased  in the  denominations
designated by GFL prior to such closing.

        7. Option Exercise  Events.  As used in this Agreement,  the term Option
Exercise Event shall mean:

                (a) the  Registration  Statement of Nexar on Form S-1 filed with
        the Securities and Exchange  Commission (the "SEC") on December 20, 1996
        (as  amended  to the date the same is  declared  effective,  the  "Nexar
        Registration  Statement") shall not be declared  effective by the SEC on
        or before April 1, 1997;

                (b) the Nexar  Registration  Statement shall fail to name GFL as
        selling stockholder of the Nexar Shares;

                (c) the initial public  offering price of the Nexar Common Stock
        in the offering  covered by the Nexar  Registration  Statement  shall be
        $11.75 or less;

                (d) Nexar shall fail to comply in any material  respect with the
        Registration Rights Agreement; or

                (e) the Underwriter or Underwriters' Representatives (as defined
        in the Securities  Purchase  Agreement)  shall request GFL to enter into
        any  agreement  contemplated  by  Section 8 of the  Securities  Purchase
        Agreement which restricts the sale by GFL of the Nexar Shares.

        Notwithstanding  the  foregoing,  if GFL  shall not have  exercised  the
Option prior to the closing of Nexar's initial public  offering,  GFL shall have
no right to  exercise  the  Option  

<PAGE>
                                     -106-

after the closing of such  initial  public  offering  and this Option  Agreement
shall thereupon terminate.

        8. Registration  Rights. At the first closing under Section 3 or Section
6 (the  "First  Option  Closing"),  the  Company  and GFL agree to  execute  and
deliver,  one to the  other,  a  Registration  Rights  Agreement  (the  "Company
Registration  Rights Agreement")  relating to the shares of Company Common Stock
issuable  upon  exercise of the Option or the Company  Call, as the case may be,
which Company  Registration  Rights Agreement shall be in substantially the same
form as the Registration  Rights  Agreement,  dated as of September 26, 1996, by
and between the Company and Genesee Fund Limited ("Genesee"), rights under which
have been  transferred to GFL pursuant to the Stock Purchase and Sale Agreement,
dated as of October 31,  1996,  by and between  Genesee GFL and GFL  Performance
Fund Limited, except that the Company Registration Rights Agreement will provide
as follows:

                1.  The  Company  shall  be  obligated  to  file a  Registration
        Statement on Form S-3 relating to 415,000 shares of Company Common Stock
        as Registrable Securities (as defined in the Company Registration Rights
        Agreement) within 30 days after the First Option Closing;

                2. Section 2(c) thereof shall be deleted; and

                3. The  transfer of  registration  rights  pursuant to Section 9
        thereof shall not be restricted based on the number of shares of Company
        Common Stock transferred.

        9. Option and Call  Limitation.  Notwithstanding  any other provision of
this  Agreement,  in no event shall GFL be  entitled  to exercise  the Option or
shall the  Company be entitled  to  exercise  the Company  Call in respect of in
excess of that  number of Nexar  Shares in excess of the number of Nexar  Shares
upon  exchange  of which the sum of (1) the number of shares of  Company  Common
Stock  beneficially  owned by GFL and any person whose  beneficial  ownership of
shares of  Company  Common  Stock  would be  aggregated  with  GFL's  beneficial
ownership of shares of Company Common Stock for purposes of Section 13(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Regulation
13D-G  thereunder  (each a "GFL  Person" and  collectively,  the "GFL  Persons")
(other  than  shares of Common  Stock  deemed  beneficially  owned  through  the
ownership of unconverted  shares of  Convertible  Preferred  Stock,  unexercised
Common Stock Purchase Warrants which contain  provisions similar to this Section
9) and (2) the number of shares of Company  Common Stock  issuable upon exercise
of the Option or the Company Call, as the case may be, with respect to which the
determination  in this  Section 9 is being  made,  would  result  in  beneficial
ownership  by any GFL  Person  of more than  4.9% of the  outstanding  shares of
Common  Stock.  For purposes of this Section 9,  beneficial  ownership  shall be
determined in accordance  with Section 13(d) of the Exchange Act 

<PAGE>
                                     -107-

and Regulation 13D-G thereunder,  except as otherwise  provided in clause (1) of
the first sentence of this Section.

        10. Representations,  Warranties Etc. of the Company. The Company hereby
represents and warrants to, and covenants and agrees with, GFL as follows:

                (a)  Due   Authorization.   This   Agreement   and  the  Company
        Registration Rights Agreement have been duly authorized by all necessary
        corporate action on the part of the Company and this Agreement has been,
        and on or before  the First  Option  Closing  the  Company  Registration
        Rights Agreement will be, duly executed by a duly authorized  officer of
        the Company.

                (b) Company  Common  Stock.  The Company has taken all necessary
        corporate  action to authorize and reserve for issuance upon exercise of
        the Option or the Company Call 415,000 authorized but unissued shares of
        Company  Common Stock and any shares of Company  Common Stock issued and
        delivered  upon exercise of the Option or the Company Call,  when issued
        and  in  accordance  with  this  Agreement,   will  be  fully  paid  and
        nonassessable.

                (c) Conflicting Instruments.  Neither the execution and delivery
        of this Agreement or the Company Registration Rights Agreement,  nor the
        consummation  of the  transactions  contemplated  hereby or thereby will
        violate  or  result  in  any  violation  of or be in  conflict  with  or
        constitute a default under any term of the Certificate of  Incorporation
        or  By-laws  of the  Company  or of any  agreement  or other  instrument
        applicable to the Company or any of its subsidiaries.

                (d)  Due  Organization.   The  Company  is  a  corporation  duly
        organized, validly existing in good standing under the laws of the State
        of  Delaware  and has the  requisite  corporate  power to enter into and
        perform this Agreement and the Company Registration Rights Agreement.

                (e) Purchase for Investment. The Company is purchasing any Nexar
        Shares  acquired  pursuant  to this  Agreement  for its own  account for
        investment  only  and  not  with a  view  towards  the  public  sale  or
        distribution thereof,  unless registered under the Security Act of 1933,
        as amended, (the "1933 Act"), or except from such registration.

                (f) Accredited Investor. The Company is an "accredited investor"
        as that term is defined in Rule 501 of the General Rules and Regulations
        under the 1933 Act by reason of Rule 501(a)(3).

                (g) Resales.  All subsequent  offers and sales of the Securities
        by the  Company  shall be made  pursuant to  registration  of the shares
        being  offered  and sold under the 1933 Act  acquired  

<PAGE>
                                     -108-

        pursuant  to  this   Agreement   or  pursuant  to  an   exemption   from
        registration.

        11. Representations, Warranties Etc. of GFL. GFL represents and warrants
to, and covenants and agrees with, the Company as follows:

                (a) Purchase for  Investment.  GFL is  purchasing  any shares of
        Company  Common Stock  acquired  pursuant to this  Agreement for its own
        account for investment  only and not with a view towards the public sale
        or distribution  thereof,  unless  registered  under the Security Act of
        1933, as amended, (the "1933 Act"), or except from such registration.

                (b) Accredited Investor. GFL is an "accredited investor" as that
        term is defined in Rule 501 of the General Rules and  Regulations  under
        the 1933 Act by reason of Rule 501(a)(3).

                (c) Resales.  All subsequent  offers and sales of the Securities
        by GFL  shall be made  pursuant  to  registration  of the  shares  being
        offered and sold under the 1933 Act acquired  pursuant to this Agreement
        or pursuant to an exemption from registration.


        12. Miscellaneous.

                (a)   Severability.   If  any  term,   provision,   covenant  or
        restriction   of  this  Agreement  is  held  by  a  court  of  competent
        jurisdiction to be invalid, void or unenforceable,  the remainder of the
        terms,  provisions,  covenants and  restrictions of this Agreement shall
        remain  in full  force  and  effect  and  shall  in no way be  affected,
        impaired or invalidated.

                (b) Assignment. The Option shall not be assigned by GFL, without
        the prior  written  consent of the Company,  which  consent shall not be
        unreasonably  withheld.  The  Company  Call shall not be assigned by the
        Company.

                (c)  Amendments.  This  Agreement may not be modified,  amended,
        altered or  supplemented  except upon the  execution  and  delivery of a
        written instrument executed by the party to be charged with enforcement.

                (d) Notices. All notices,  requests,  claims,  demands and other
        communications  hereunder  shall be in  writing  and shall be given (and
        shall be deemed to have been  duly  given if so given) if  delivered  in
        person or by courier,  telephone line facsimile  transmission or by mail
        (certified  mail,  postage  prepaid,  return  receipt  requested) to the
        respective parties as follows:

<PAGE>
                                     -109-

                        If to the Company:

                        Palomar Medical Technologies,  Inc.
                        66 Cherry Hill Drive
                        Beverly, Massachusetts 01915

                        Attention: General Counsel

                        Facsimile No.: 508-921-5801

                        If to GFL:

                        GFL  Advantage  Fund Limited
                        c/o CITCO
                        Kaya  Flamboyan
                        9 Curacao

                        Attention:  Mr. A.P. deGroot

                        Facsimile No.:  599-9-322008

                        with a copy to:

                        Genesee Investments
                        10500 N.E. 8th Street
                        Suite 1920
                        Bellevue, Washington  98004-4332

                        Attention:  Mr. Christopher R. Purrier

                        Facsimile No.:  206-462-4645

and shall be effective on receipt in the case of delivery in person,  by courier
or by telephone  line  facsimile  transmission  or five day after mailing in the
case of  delivery  by mail,  or to such other  address as either  party may have
furnished to the other in writing in accordance herewith, except that notices of
change of address shall only be effective upon receipt.

                (e)  Governing  Law.  This  Agreement  shall be  governed by and
        construed in  accordance  with the  substantive  law of the State of New
        York  without  giving  effect  to the  principles  of  conflict  of laws
        thereof.

                (f)  Counterparts.  This  Agreement  may be  executed in several
        counterparts,  each of  which  shall  be an  original,  but all of which
        together shall constitute one and the same agreement.

                (g) Effect of  Headings.  The  section  headings  herein are for
        convenience only and shall not affect the construction thereof.

                (h)  Expenses.  All  reasonable  expenses  incurred  by  GFL  in
        connection  with this  Agreement  and the  Company  Registration  Rights
        Agreement, including but not limited to legal fees, shall be paid by the
        Company.

<PAGE>
                                     -110-

        IN WITNESS WHEREOF,  the parties hereto have caused this Agreement to be
duly executed by their respective  officers  thereunto duly authorized as of the
date first set forth above.

                                         PALOMAR MEDICAL TECHNOLOGIES, INC.



                                         By:                /s/
                                                  ------------------------------
                                         Name:       Joseph P. Caruso
                                         Title:      Chief Financial Officer

                                         GFL ADVANTAGE FUND LIMITED



                                         By:                /s/
                                                  ------------------------------
                                         Name:       A.P. de Groot
                                         Title:      President