PALOMAR MEDICAL TECHNOLOGIES, INC.

                 THIRD AMENDED 1996 EMPLOYEE STOCK PURCHASE PLAN

1.       Purpose of the Plan

         The purpose of the Palomar Medical  Technologies,  Inc.  Employee Stock
Purchase Plan is to encourage  ownership of the common stock of Palomar  Medical
Technologies, Inc. ("Palomar") by its eligible employees and any and each of its
participating subsidiaries,  thereby enhancing such employees' personal interest
in the  continued  success  and  progress  of  Palomar.  The plan is intended to
facilitate  regular  investment  in the  common  stock of  Palomar  by  offering
employees a convenient  means to make  purchases at a discounted  price  through
payroll  deductions.  The Plan is  intended  to comply  with the  provisions  of
Section 423 of the Internal Revenue Code of 1986, as amended.

2.       Definitions

         For purposes of the Plan,  the following  terms shall have the meanings
indicated below:

         (a)  "Business  Day" shall mean a day on which  there is trading on the
New York Stock Exchange.

         (b) "Code" shall mean the Internal  Revenue Code of 1986,  as it may be
amended from time to time.

         (c) "Committee"  shall mean the Compensation  Committee of the Board of
Directors of Palomar.

         (d) "Common  Stock" shall mean Palomar's  common stock,  par value $.01
per share.

         (e) "Company"  shall mean Palomar and any of its  subsidiaries  (within
the meaning of Section  424(f) of the Code) whose Board of Directors has adopted
the Plan, with approval of the Board of Directors of Palomar,  and which has not
terminated  participation  in or  withdrawn  from  the  Plan by  action  of such
subsidiary's Board of Directors or the Board of Directors of Palomar.

         (f) "Compensation" shall mean the amount of a Participant's base wages,
overtime, commissions, cash bonuses, premium pay and shift differential,  before
giving effect to any  compensation  reductions made in connection with any plans
described in Section 401(k) or Section 125 of the Code.

         (g)  "Custodian"  shall mean the  custodian  appointed by the Committee
pursuant to Section 7 hereof to hold the shares of Common Stock  purchased under
the Plan and subsequent Dividends reinvested or paid to Participant in cash.

         (h) "Dividends"  shall mean all cash dividends paid on shares of Common
Stock held in any Employee's Account.

         (i) "Account" shall mean a separate account maintained by the Custodian
for each Participant which reflects, at any time, the number of shares of Common
Stock  purchased  under  the  Plan by  such  Participant  as well as  reinvested
Dividends held by the Custodian.

                                                              REVISED:  5/21/99
                                       1
<PAGE>


         (j) "Entry  Date" shall mean the first  Business  Day of each  Purchase
Period.

         (k)  "Eligible  Employee"  shall  mean,  with  respect to any  Purchase
Period, an employee of the Company who is eligible to participate in the Plan in
such Purchase Period under the rules set forth in Sections 5 and 8 hereof.

         (l) The "Fair Market  Value" of a share of Common Stock on any Business
Day  shall be the  closing  bid price  for such day of the  Common  Stock on the
principal  securities market on which the Common Stock is traded. If on the date
for which Fair Market Value is to be determined the Common Stock is not eligible
for trading on any securities market, the Fair Market Value of a share of Common
Stock shall be determined by the Committee.

         (m) "Participant" shall mean, with respect to any Purchase Period, each
Eligible  Employee  who has  elected to have  amounts  deducted  from his or her
Compensation pursuant to Section 6 hereof for such Purchase Period.

         (n) "Plan" shall mean this 1996 Employee  Stock  Purchase  Plan, as the
same may be amended from time to time.

         (o)  "Purchase  Date" shall mean the last Business Day of each Purchase
Period.

         (p) "Purchase Period" shall mean each of the three month periods ending
on the last days of March,  June,  September and December during the period when
the Plan is in effect.  The first Purchase Period shall begin on October 1, 1996
and end on December 31, 1996.

3.       Common Stock Available Under the Plan

         The maximum  number of shares of Common  Stock  which may be  purchased
under the Plan shall be 142,857  shares,  except as such  maximum  number may be
adjusted  as  provided in Section 12 hereof.  Shares of Common  Stock  purchased
under the Plan may be authorized and previously unissued shares, treasury shares
(including  shares  purchased from time to time by Palomar),  or any combination
thereof.

4.       Administration of Plan

         The Plan shall be  administered  by the Committee.  The Committee shall
have the authority,  consistent  with the Plan, to interpret the Plan, to adopt,
amend and rescind rules and regulations for the  administration  of the Plan and
to make all  determinations  in connection  therewith  which may be necessary or
advisable,  and all such  actions  shall be binding for all  purposes  under the
Plan. The Plan shall be administered at the expense of the Company.

5.       Eligibility

         Each  employee of the Company shall be eligible to  participate  in the
Plan  during each  Purchase  Period,  provided  that he or she is not, as of the
Entry Date for such Purchase Period:

         (a) An employee  who is  customarily  employed by the Company for fewer
than 20 hours per week, or for five or fewer months in any calendar year; or

         (b) An employee who owns  (within the meaning of Section  424(d) of the
Code) stock possessing 5% or more of the total combined voting power or value of
all classes of stock of Palomar,
                                                              REVISED:  5/21/99

                                       2
<PAGE>

treating as owned on Entry Date, for purposes of this clause, Common Stock which
such  employee  would be entitled to purchase on Purchase Date for such Purchase
Period but for this Section 5(c).

6.       Participation

         (a) On the Entry date for each Purchase Period,  Palomar shall grant to
each  Participant in the Plan for such Purchase  Period an option to purchase on
the Purchase Date for such Purchase Period, at the applicable price specified in
Section 7 hereof,  the number of shares of Common Stock which may be  purchased,
at such price, with such participant's  payroll deductions  received during such
Purchase Period, subject to the terms and conditions of the Plan.

         (b) Eligible Employees may elect to participate in the Plan as follows:

                  (i) Each  Eligible  Employee may elect to  participate  in the
Plan, effective on the Entry Date for any Purchase Period, by making an election
to  participate  at least 1 day prior to such Entry Date.  Such  election  shall
authorize  the Company to deduct an amount  chosen by the employee  equal to any
whole  percentage  between 1 and 15  percent,  inclusive  from  such  Employee's
Compensation paid during such Purchase Period.

                  (ii) After  making the  election  pursuant to Section  6(b)(i)
hereof, a Participant  shall  automatically  continue to participate in the Plan
during subsequent  Purchase Periods until the Participant  either withdraws from
the  Plan  or  ceases  to  be  an  Eligible  Employee.  The  percentage  of  the
Participant's  Compensation deducted in subsequent Purchase Periods shall be the
percentage specified in the election made pursuant to Section 6(b)(i), as it may
be changed from time to time pursuant to Section 6(b)(iii) or 6(b)(iv) hereof.

                  (iii) Except as provided in Section 6(b)(iv) hereof, after the
last date for making an election  described  in Section  6(b)(i)  hereof for the
Purchase Period, a Participant  shall not be permitted to increase or reduce the
percentage of  Compensation  deducted from his or her  Compensation  paid during
each  Purchase  Period.  A  Participant  may  elect to reduce  or  increase  the
percentage of his or her Compensation deducted pursuant to the Plan to any whole
percentage  between 1 and 15,  inclusive,  effective  for a subsequent  Purchase
Period by filing an  election  not later  than 1 day prior to the Entry Date for
such Purchase Period.

                  (iv) A  Participant  may  elect  at any  time  to  reduce  the
percentage of his  or her  Compensation  deducted  pursuant to the Plan to zero,
effective  commencing with the next payroll period  beginning  after the making
of such election.  All  cash amounts  already deducted during a Purchase  Period
prior to  the  effectiveness of  any  such  election  shall  be refunded  to the
Participant.

         (c) No interest will be paid to Participants on any payroll deductions.

         (d) A  Participant  may at any time  elect  to  withdraw  from  further
participation in the Plan,  effective as of the next Business day following such
election.  Any Participant whose employment with the Company  terminates for any
reason  (including  without  limitation   termination  by  reason  of  death  or
disability)  shall be  deemed  to have  made a  withdrawal,  effective  the next
Business Day following such termination of employment.  Upon any withdrawal, (i)
no  further  amounts  shall be  deducted  from such  Participant's  Compensation
effective  for  any  payroll  period  beginning  after  the  effective  date  of
withdrawal,  (ii) any outstanding  option granted to such Participant  under the
Plan shall terminate as of the effective date of the withdrawal,  and no further
purchases of Common Stock under the Plan shall be made for such  Participant  or
after such date,  and (iii) as soon as possible the Company will refund all cash

                                                               REVISED:  5/21/99

                                       3
<PAGE>

deducted  during the Purchase  Period.  Following any such  withdrawal  from the
Plan, an employee's eligibility to participate again in the Plan will be subject
to all provisions of Section 5 and 8 hereof.

         (e)  Notwithstanding  any other  provision of the Plan, an employee who
has  withdrawn  from the Plan pursuant to Section 6(d) hereof shall be deemed to
have made an irrevocable  election not to participate in the Plan during the two
consecutive  Purchase  Periods  immediately  following  the  one in  which  such
withdrawal was made.

         (f) Any  election  permitted  by this Section 6 (other than an election
deemed  made  pursuant  to  Section  6(e))  shall be made in writing on the form
prescribed  for such  purpose  by the  Committee  from time to time and shall be
delivered  to the  person  or  persons  designated  by the  Committee.  Any such
election  shall be  deemed  made  when  such  form is  completed,  signed by the
Participant and received by such designee.

7.       Purchases of Common Stock

         On the Purchase  Date for each  Purchase  Period,  all options  granted
under the Plan on the first Business Day of such Purchase Period shall be deemed
to be exercised,  and all amounts deducted pursuant to Section 6 hereof from the
Participant's  Compensation during such Purchase Period shall be applied on such
date to purchase  whole  shares of Common  Stock from the  Company,  unless such
Participant has withdrawn from the Plan during such Purchase Period effective on
or prior  to such  Purchase  Date.  With  respect  to  shares  of  Common  Stock
purchased,  the purchase price per share shall be the lesser of (i)  eighty-five
percent  (85%) of the Fair Market  Value of a share of Common Stock on the Entry
Date of the  Purchase  Period,  or (ii)  eighty-five  percent  (85%) of the Fair
Market  Value of a share of Common  Stock on the  Purchase  Date of the Purchase
Period.  The Committee  shall appoint the Custodian for the Plan and to hold all
whole  shares  purchased  under the Plan and to maintain a separate  Account for
each Participant,  in which Common Stock purchased by such Participant under the
Plan shall be held and Dividends  received will be reinvested.  Each Participant
shall receive a statement as soon as practicable  after the end of each Purchase
Period  reflecting  purchases  for his or her account under the Plan through the
end of such Purchase Period.

8.       Limitation on Number of Shares purchased

         Notwithstanding  any other  provision  of the Plan, a  Participant  may
purchase up to a maximum of $25,000  worth of Common  Stock  during any calendar
year under the Plan and under all other  "employee stock purchase plans" (within
the  meaning  of  Section  423  of the  Code)  maintained  by  Palomar  and  its
subsidiaries  (within the meaning of Section  424(f) of the Code).  The value of
the shares of Common Stock  purchased shall be based on the Fair Market Value of
a share of Common Stock on the Entry Date for each Purchase Period. In the event
that the  amount of payroll  deductions  is  greater  than  $25,000 in any given
calendar year, the Company will refund the excess to the  Participant as soon as
practicable after such Purchase Date.

9.       Rights as a Stockholder

         From and after the  Purchase  Date on which  shares of Common Stock are
purchased by the Participant  under the Plan, such Participant shall have all of
the rights and  privileges  of a  stockholder  of Palomar  with  respect to such
shares.  Prior to the  Purchase  Date on which  shares  of  Common  Stock may be
purchased  by a  Participant,  such  Participant  shall not have any rights as a
stockholder of Palomar.


                                                               REVISED:  5/21/99

                                       4
<PAGE>

10.      Notice of Disposition of Stock

         Each Participant  agrees,  by his or her  participation in the Plan, to
promptly  notify  Palomar  in  writing of any  disposition  of any Common  Stock
purchased  under the Plan  occurring  within 2 years after the Entry Date of the
Purchase Period in which such stock was purchased.

11.      Rights Not Transferable

         Rights  under the Plan are not  transferable,  except that the right to
receive  shares  pursuant to the Plan may be  transferred by will or the laws of
descent and  distribution.  Options  granted to a  Participant  hereunder may be
exercised only by such Participant.

12.      Adjustment for Capital Changes

         In the event of any capital  change by reason of any stock  dividend or
split,  recapitalization,  merger  in which  Palomar  is the  surviving  entity,
combination or exchange of shares or similar  corporate  change,  the number and
type of shares or other  securities of Palomar which  Participants  may purchase
under the Plan,  and the maximum  aggregate  number of such shares or securities
which may be purchased under the Plan,  shall be  appropriately  adjusted by the
Board of Directors of Palomar.

13.      Amendments

         The Board of  Directors  of  Palomar  may at any time,  or from time to
time, amend the Plan in any respect,  except that, without stockholder approval,
no  amendment  shall be made (a)  increasing  the number of shares  which may be
purchased  under the Plan (other  than as  provided  in Section 12 herein),  (b)
materially  increasing the benefits  accruing to  Participants or (c) materially
modifying the requirements as to eligibility for participation in the Plan.

14.      Laws and Regulations

         (a)  Notwithstanding  any other  provision  of the Plan,  the rights of
Participants  to purchase  Common Stock hereunder shall be subject to compliance
with all applicable  Federal,  state and foreign laws, rules and regulations and
the rules of each stock  exchange  upon  which the Common  Stock is from time to
time listed.

         (b) The  Plan and the  purchase  of  Common  Stock  hereunder  shall be
subject to additional  rules and regulations,  not  inconsistent  with the Plan,
that may be promulgated from time to time by the Committee  regarding  purchases
and sales of Common Stock.

15.      Employment

         The Plan shall not confer any right to  continued  employment  upon any
employee of the Company.

16.      Effective Date of the Plan; Termination

         (a) The Plan shall  become  effective  on  October 1, 1996,  subject to
approval by the  shareholders  of Palomar in accordance  with applicable law and
the requirements of Section 423 of the Code.

                                                               REVISED:  5/21/99

                                       5
<PAGE>


         (b) The Plan and all rights  hereunder  shall terminate on the earliest
to occur of:

                  (i) the date on which the  maximum  number of shares of Common
Stock available for purchase under the Plan as specified in Section 3 hereof has
been purchased;

                  (ii) the termination of the Plan by the Board of Directors  of
Palomar; or

                  (iii) the  effective  date of any  consolidation  or merger in
which  Palomar is not the  surviving  entity,  any  exchange  or  conversion  of
outstanding  shares of Palomar for or into securities of another entity or other
consideration, or any complete liquidation of Palomar.

         In the event that on any Purchase Date the  remaining  shares of Common
Stock  available for purchase under the Plan are  insufficient  to fully satisfy
Participants'  outstanding  options,  such remaining  available  shares shall be
apportioned  among and sold to such  Participant in proportion to the amounts of
payroll  deductions  and the excess payroll  deduction  shall be returned to the
Participant as soon as practicable thereafter.

         Upon any termination of the Plan, any shares in the employee's  Account
shall  be  delivered  by the  Custodian  to  the  employee  or his or her  legal
representative as soon as practicable following such termination.

                                                               REVISED:  5/21/99

                                       6