GUARANTY AGREEMENT

         GUARANTY  AGREEMENT  dated as of November  16,  1998 from Star  Medical
Technologies, Inc., a California corporation (the "Guarantor") to Fleet National
Bank (the "Bank").

                                   WITNESSETH:

         WHEREAS,  Palomar Medical  Technologies,  Inc., a Delaware  corporation
(the  "Borrower")  wishes to enter into a letter agreement of even date herewith
(as same may be from time to time amended,  the "Loan Agreement") with the Bank;
and

         WHEREAS,  pursuant  to the Loan  Agreement,  the Bank will  establish a
revolving credit facility for the Borrower and may make Revolving Loans (defined
below) to the  Borrower on the terms and  conditions  set forth  therein and may
also extend other credit facilities for the Borrower on the terms and conditions
set forth therein; and

         WHEREAS,  in order to induce the Bank to enter into the Loan  Agreement
and to make Revolving Loans under the Loan Agreement, the Borrower has agreed to
obtain and deliver this Agreement; and

         WHEREAS,  the  Guarantor is a  Subsidiary  of the Borrower and benefits
from the management,  accounting and financial  services  provided the Borrower;
and

         WHEREAS,  the Bank's  agreement to make  Revolving  Loans in accordance
with the Loan  Agreement is and will be beneficial to the Guarantor  inasmuch as
the Guarantor may receive  certain  proceeds  thereof from the Borrower and will
benefit from the financial strength of the Borrower;

         NOW, THEREFORE,  for good and valuable  consideration,  the receipt and
sufficiency  of which are hereby  acknowledged,  the Guarantor  hereby agrees as
follows:

                                    ARTICLE I

                               CERTAIN DEFINITIONS

         Section 1.01.  Defined Terms. As used in this Agreement,  the following
terms shall have the meanings set out respectively after each:

         "Agreement" - This Guaranty Agreement, as same may be from time to time
amended.

         "Collateral" - As defined in the Loan Agreement.

         "Event of Default" - As defined in Section 5.01 below

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         "Guaranteed  Obligations"  - Any and all  indebtedness,  liabilities or
obligations  of the  Borrower,  whether  joint or several,  direct or  indirect,
absolute or contingent, due or to become due, now existing or hereafter arising,
to or for the benefit of the Bank, including,  without limitation,  those now or
hereafter arising under any Loan Document.

         "Guarantor's Documents" - Collectively, this Agreement, the Guarantor's
Security   Agreement  and  the  Guarantor's   Intellectual   Property   Security
Agreements.

         "Guarantor's Intellectual Property Security Agreements" - Collectively,
the  collateral  assignments  and  notices  of  collateral  assignment  from the
Guarantor to the Bank relating to the Guarantor's registered trademarks, patents
and copyrights, if any.

         "Guarantor's   Security   Agreement"  -   Collectively,   that  certain
Inventory,  Accounts  Receivable  and  Intangibles  Security  Agreement and that
certain  Supplementary  Security  Agreement  -  Security  Interest  in Good  and
Chattels, each of even date herewith, from the Guarantor to the Bank.

         "Guaranty" - The guaranty of the Guarantor set forth in Article II.

         "Indebtedness" - As defined in the Loan Agreement.

         "Intellectual Property" - As defined in Subsection 3.01(j).

         "Loan Documents" - The Loan Agreement, the Revolving Note, the Security
Agreements and any other  instrument,  document or other  agreement  relating to
extension of financial  accommodations  or other  banking  services  between the
Borrower and the Bank or made by the Borrower in favor of the Bank,  all whether
now existing or hereafter entered into or delivered.

         "Person" - As defined in the Loan Agreement.

         "Prime Rate" - That variable  rate of interest per annum  designated by
Fleet  National  Bank,  from time to time,  as being its prime rate of interest,
with a change in the Prime Rate to take effect  simultaneously  with each change
in such designated  rate. It is understood  that such  designated  prime rate is
merely a reference  rate and does not  necessarily  represent the lowest or best
rate being charged to any customer.

         "Revolving Loans" - As defined in the Loan Agreement.

         "Revolving Note" - As defined in the Loan Agreement.

         "Security Agreements" - As defined in the Loan Agreement.


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         "Subsidiary" - As defined in the Loan Agreement, except that references
in such  definition to the "Borrower"  will be deemed,  for the purposes of this
Agreement, to refer to the Guarantor.

         Section 1.02. Use of Defined Terms. Any defined term used in the plural
preceded by the definite  article shall be taken to encompass all members of the
relevant class. Any defined term used in the singular preceded by "any" shall be
taken to indicate any number of the members of the relevant class.

                                   ARTICLE II

                                    GUARANTY

         Section 2.01. Guaranty.  In consideration of the Bank entering into the
Loan Agreement and making  Revolving Loans to the Borrower  pursuant to the Loan
Agreement,  the  Guarantor  hereby  guaranties  to the Bank the due and punctual
payment and  performance of all of the Guaranteed  Obligations,  as and when the
same  shall  become  due and  payable,  whether  on  demand or at  maturity,  by
declaration or otherwise, according to the terms thereof, and all losses, costs,
expenses and reasonable attorneys' fees and disbursements  incurred by reason of
a default under any of said  Guaranteed  Obligations.  In case of failure by the
Borrower  punctually  to pay any of the  Guaranteed  Obligations,  the Guarantor
unconditionally  agrees to cause such payment to be made  punctually as and when
the same shall become due and payable,  whether at maturity or by declaration or
otherwise, and as if such payment were made by the Borrower. This Guaranty is an
absolute,  unconditional,  unlimited  and  continuing  guaranty  of the full and
punctual  payment and performance by the Borrower of the Guaranteed  Obligations
and not merely of their  collectibility  and is in no way  conditioned  upon any
requirement  that the Bank first  collect or attempt to collect  the  Guaranteed
Obligations or any portion thereof from the Borrower or from any other guarantor
of any of same or resort to any security or other means of obtaining  payment of
any of the  Guaranteed  Obligations  which the Bank now has or may acquire after
the date hereof, or upon any other contingency  whatsoever.  Upon and during the
continuance of any Event of Default (as defined  herein),  all  liabilities  and
obligations of the Guarantor to the Bank,  hereunder or otherwise,  shall at the
option of the Bank, become forthwith due and payable to the Bank without further
demand  or  notice  of any  nature,  all of which  are  expressly  waived by the
Guarantor.  Payments by the  Guarantor  hereunder may be required by the Bank on
any number of occasions.

         Section  2.02.  Guarantor's  Further  Agreements  to Pay. The Guarantor
further agrees,  as principal  obligor and not as guarantor,  to pay to the Bank
forthwith upon demand, in funds immediately available to the Bank, all costs and
expenses   (including   court   costs  and   reasonable   attorneys'   fees  and
disbursements) incurred or expended by the Bank in connection with this Guaranty
and the enforcement  hereof,  together with interest on any sum now or hereafter
payable by the Guarantor under this Agreement,  such interest to accrue from the
date of any demand for payment of such sum to the date of payment. Such interest
will be payable at the rate set forth in Section 6.04 below.

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         Section 2.03.  Bank's  Freedom to Deal with Borrower and Other Parties.
The Bank shall be at liberty,  without  giving notice to or obtaining the assent
of the Guarantor and without relieving the Guarantor of any liability hereunder,
to deal with the Borrower and with each other party who now is or after the date
hereof  becomes  liable in any manner for any of the  Guaranteed  Obligations in
such  manner as the Bank in its sole  discretion  deems  fit.  The Bank has full
authority in its sole discretio to do any or all of the following  things,  none
of which shall  discharge or affect the  Guarantor's  liability  hereunder:  (i)
extend  credit,  make loans and afford  other  financial  accommodations  to the
Borrower  at such  times,  in such  amounts  and on such  terms  as the Bank may
approve;  (ii) modify, amend, vary the terms and grant extensions or renewals of
any  present  or  future  indebtedness  or of  all  or  any  of  the  Guaranteed
Obligations  or any  instrument  relating  to or  securing  same,  and,  without
limitation,  this Guaranty shall survive  payment of the Revolving  Note;  (iii)
grant  time,  waivers  and other  indulgences  in  respect  thereto;  (iv) vary,
exchange,  release or discharge,  wholly or partially,  or delay or abstain from
perfecting  and  enforcing  any security or guaranty or other means of obtaining
payment of any of the Guaranteed  Obligations which the Bank now has or acquires
after the date hereof;  (v) take or omit to take any of the actions  referred to
in any Loan Document or other instrument evidencing, securing or relating to any
of the Guaranteed  Obligations  or any actions under this  Guaranty;  (vi) fail,
omit or  delay to  enforce,  assert  or  exercise  any  right,  power or  remedy
conferred  on the Bank in this  Guaranty or in any other Loan  Document or other
instrument evidencing, securing or relating to any of the Guaranteed Obligations
or take or refrain from taking any other action;  (vii) accept partial  payments
from the Borrower or any other party;  (viii)  release or  discharge,  wholly or
partially,  the Borrower,  any endorser or any guarantor,  or accept  additional
collateral for the payment of any  Guaranteed  Obligations;  (ix)  compromise or
make any  settlement  or other  arrangement  with the Borrower or any such other
party;  and (x) consent to and  participate  in the proceeds of any  assignment,
trust or mortgage for the benefit of creditors.

         Section 2.04. Unenforceability of Guaranteed Obligations; Invalidity of
Security or Other  Guaranties.  If for any reason now or hereafter  the Borrower
has no legal  existence or is under no legal  obligation to discharge any of the
Guaranteed  Obligations undertaken or purported to be undertaken by it or on its
behalf,  or if any of the moneys  included in the  Guaranteed  Obligations  have
become  irrecoverable  from the  Borrower by  operation  of law or for any other
reason, this Guaranty shall nevertheless be binding on the Guarantor to the same
extent as if the  Guarantor  at all times had been the  principal  debtor on all
such  Guaranteed  Obligations.  This Guaranty  shall be in addition to any other
guaranty or other security for the Guaranteed  Obligations,  and it shall not be
prejudiced  or  rendered  unenforceable  by the  invalidity  of any  such  other
guaranty or security.  The liability of the Guarantor  under this Guaranty shall
remain in full force and effect until payment and  performance in full of all of
the Guaranteed  Obligations.  This Guaranty shall continue to be effective or be
reinstated,  as the  case  may be,  if at any  time  any  payment  of any of the
Guaranteed Obligations is rescinded or must otherwise be restored or returned by
the Bank, upon the insolvency,  bankruptcy or  reorganization of the Borrower or
otherwise, all as though such payment had not been made.

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         Section 2.05.  Waivers by Guarantor.  The Guarantor  waives:  notice of
acceptance hereof and reliance hereon,  notice of any action taken or omitted by
the Bank in reliance hereon, any requirement that the Bank be diligent or prompt
in making demands  hereunder,  any  requirement as to any  presentment,  demand,
protest,  giving  notice of any default by the Borrower or  asserting  any other
right of the Bank hereunder and all demands, notices (other than any demands and
notices  which are  specifically  provided  for in the Loan  Agreement)  and all
suretyship  defenses  generally.  The Guarantor also irrevocably  waives, to the
fullest extent permitted by law, all defenses which at any time may be available
in respect of the Guarantor's  obligations hereunder by virtue of any statute of
limitations,  valuation,  stay, homestead or moratorium law or other similar law
now or hereafter in effect.

         Without  limiting the  generality of the  foregoing  provisions of this
Guaranty,  the liability of the Guarantor  shall not be released,  discharged or
otherwise affected by:

         (i) any extension,  renewal, settlement,  compromise, waiver or release
in respect of any  obligation  of the Borrower or any other  guarantor of any of
the Guaranteed Obligations;

         (ii) any change in the time, manner,  amount or place of payment of any
Guaranteed  Obligation or any  modification or amendment of or supplement to any
Loan Document or this Agreement;

         (iii)  any  release,  non-perfection  or  invalidity  of any  direct or
indirect security for any obligation of the Borrower, the Guarantor or any other
guarantor of any of the Guaranteed Obligations;

         (iv) any change in the legal existence, structure, record or beneficial
ownership or control of the Borrower or the Guarantor or any other  guarantor of
any of the Guaranteed Obligations, or any insolvency, bankruptcy, reorganization
or other similar proceeding affecting any such Person or its assets;

         (v) the  existence  of any  claim,  set-off or other  rights  which the
Guarantor  may have at any time  against  the  Borrower,  the Bank or any  other
guarantor of any of the Guaranteed  Obligations or any other Person,  whether or
not arising in connection with this Agreement;

         (vi) any  invalidity  or  unenforceability  relating  to or against the
Borrower or the  Guarantor  for any reason under any Loan Document or under this
Agreement;  or any  provision of  applicable  law or  regulation  purporting  to
prohibit  the  payment  by any Person of the  principal  of or  interest  on the
Revolving  Note or any other  amount  payable  under any Loan  Document  or this
Agreement; or

         (vii)  any  other  act or  omission  to act or delay of any kind by the
Borrower,  the Bank or any other  Person or any other  circumstances  whatsoever
which might,  but for the  provisions of this  paragraph,  constitute a legal or
equitable discharge of the Guarantor's obligations hereunder.

<PAGE>

         Section  2.06.  Subrogation.  Unless  and until  all of the  Guaranteed
Obligations  shall have been  indefeasibly  paid in full and all commitments for
further  extensions  of  credit  to the  Borrower  by the Bank  shall  have been
terminated,   the  Guarantor  hereby  irrevocably  and  unconditionally   waives
enforcement of any and all rights of subrogation, contribution or similar rights
which, but for this Section 2.06, the Guarantor might otherwise have in relation
to the Borrower or any other guarantor as a result of this  Agreement.  No right
of subrogation, contribution or any similar right will in any event be deemed to
give the Guarantor any claim against the Bank on account of the Bank's  release,
failure to perfect or other  dealing or failing to deal with any  collateral  or
with any Person, even if the value of such subrogation,  contribution or similar
rights is thereby diminished or jeopardized.

         Section 2.07. No Contest with Bank. No set-off, counterclaim, reduction
or diminution of any  obligation,  or any claim or defense of any kind or nature
which the Guarantor has or may have against the Borrower, any other guarantor or
the Bank shall be available hereunder to the Guarantor.  The Guarantor will not,
in any proceedings  under the Bankruptcy  Code or insolvency  proceedings of any
nature,  prove in competition with the Bank in respect of any payment  hereunder
or be  entitled  to have the  benefit of any  counterclaim  or proof of claim or
dividend or payment by or on behalf of the  Borrower or the benefit of any other
security for any Guaranteed  Obligation  which, now or hereafter,  the Guarantor
may hold in competition with the Bank.

         Section 2.08.  Stay of  Acceleration.  If  acceleration of the time for
payment of any amount  payable by the Borrower under any Loan Document is stayed
upon the  insolvency,  bankruptcy or  reorganization  of the Borrower,  all such
amounts otherwise subject to acceleration under the terms of this Guaranty shall
nonetheless  be payable by the  Guarantor  hereunder  forthwith on demand by the
Bank.

                                   ARTICLE III

                         REPRESENTATIONS AND WARRANTIES

         Section 3.01.  General  Representations  and Warranties.  The Guarantor
hereby represents and warrants that:

         (a) The  Guarantor  (i) is a  corporation  duly  incorporated,  validly
existing  and in good  standing  under  the  laws of  California,  (ii) has full
corporate  power and authority to own its assets and to transact the business in
which it is now engaged,  to grant the security  interests  contemplated  by the
Guarantor's  Security  Agreement  and  the  Guarantor's   Intellectual  Property
Security Agreements,  and to enter into and perform this Agreement and the other
Guarantor's  Documents,  and (iii) is duly  qualified to do business and in good
standing under the laws of each jurisdiction in which failure to be so qualified
could have a material adverse effect on the business,  prospects or condition of
the  Guarantor,  all such  jurisdictions  being  listed on item  3.01(a)  of the
attached  Disclosure  Schedule.  At  the  date  hereof,  the  Guarantor  has  no
Subsidiaries.  The  Guarantor  is not a  member  of any  partnership  or a joint
venture,  except  as shown  on said  item  3.01(a)  of the  attached  Disclosure
Schedule. The Guarantor is a Subsidiary 

<PAGE>

of the  Borrower  and, at the date of this  Agreement,  is  wholly-owned  by the
Borrower  (save for certain  stock options held by officers and employees of the
Guarantor and shares issued upon the exercise of stock options).

         (b) The  execution,  delivery and  performance by the Guarantor of this
Agreement do not and will not:

                  (i)  require  any  consent  or  approval  of  the  Guarantor's
         stockholders;

                  (ii) contravene its charter documents or by-laws;

                  (iii)  violate  any  provision  of,  or  require  any  filing,
         registration,  consent or approval  under,  any law, rule,  regulation,
         order,  writ,  judgment,  injunction,  decree,  determination  or award
         presently in effect having applicability to the Guarantor;

                  (iv) result in a breach of or  constitute a default or require
         any consent  under any  indenture  or loan or credit  agreement  or any
         other agreement,  lease or instrument to which the Guarantor is a party
         or by which the Guarantor or any of the  Guarantor's  properties may be
         bound or affected; or

                  (v) result in, or require,  the creation or  imposition of any
         lien,  security interest or other  encumbrance  (other than in favor of
         the Bank) upon or with  respect to any of the  properties  now owned or
         hereafter acquired by the Guarantor.

         (c) This Agreement and the other  Guarantor's  Documents have been duly
authorized by the Guarantor by all appropriate corporate proceedings,  have been
duly  executed  and  delivered on behalf of the  Guarantor  and each is a legal,
valid and binding obligation of the Guarantor, enforceable against the Guarantor
in accordance with its respective terms, except as enforceability may be limited
by laws of general application relating to bankruptcy, insolvency and the relief
of debtors and by rules of law governing specific performance, injunctive relief
and other equitable remedies.

         (d) Except as  described  on item  3.01(d) of the  attached  Disclosure
Schedule, there are no actions, suits, proceedings or investigations pending or,
to the knowledge of the Guarantor, threatened by or against the Guarantor or any
Subsidiary  of the  Guarantor  before  any  court  or  governmental  department,
commission, board, bureau, agency or instrumentality, domestic or foreign, which
could hinder or prevent the consummation of the transactions contemplated hereby
or call  into  question  the  validity  of this  Agreement  or any of the  other
Guarantor's  Documents or any other  instrument  provided for or contemplated by
this Agreement or any of the other Guarantor's  Documents or any action taken or
to be taken in connection with the transactions  contemplated  hereby or thereby
or which in any single case or in the  aggregate  

<PAGE>

might  result  in  any  material  adverse  change  in the  business,  prospects,
condition, affairs or operations of the Guarantor or any such Subsidiary.

         (e) The  Guarantor  is not in  violation  of any term of its charter or
by-laws  as now in effect.  Neither  the  Guarantor  nor any  Subsidiary  of the
Guarantor  is in material  violation of any term of any  mortgage,  indenture or
judgment,  decree or order,  or any other  instrument,  contract or agreement to
which it is a party or by which any of its property is bound.

         (f) The  Guarantor  has filed (and has caused  each  Subsidiary  of the
Guarantor  to file)  all  federal,  state and local  tax  returns,  reports  and
estimates  required to be filed by the Guarantor or by any such Subsidiary.  All
such filed returns,  reports and estimates and have been completed in accordance
with applicable law and the Guarantor (or the Subsidiary concerned,  as the case
may  be)  has  paid  all  taxes,  assessments,   impositions,   fees  and  other
governmental  charges  required to be paid in respect of the periods  covered by
such returns,  reports or estimates.  No deficiencies for any tax, assessment or
governmental  charge have been asserted or assessed,  and the Guarantor knows of
no material tax liability or basis therefor.

         (g) The  Guarantor is in  compliance  with (and each  Subsidiary of the
Guarantor is in compliance  with) all  requirements of law,  federal,  state and
local,  and all  requirements  of all  governmental  bodies or  agencies  having
jurisdiction over it, the conduct of its business, the use of its properties and
assets,  and all  premises  occupied  by it,  failure to comply with which could
(singly  or in the  aggregate  with all other  such  failures)  have a  material
adverse effect upon the assets,  business,  financial  condition or prospects of
the  Guarantor  or any such  Subsidiary.  Without  limiting the  foregoing,  the
Guarantor has all the franchises,  licenses,  leases, permits,  certificates and
authorizations  needed  for  the  conduct  of its  business  and  the use of its
properties and all premises occupied by it, as now conducted, owned and used and
as proposed to be conducted, owned and used.

         (h)  The  Guarantor  is a  Subsidiary  of  the  Borrower  and  receives
management,  accounting and financial services from the Borrower and may receive
funding from the Borrower. The continued financial strength of the Borrower and,
in particular,  its financing  arrangements with the Bank are thus of direct and
substantial  benefit to the  Guarantor  and the  execution  and delivery of this
Agreement is a  substantial  inducement  for the Bank to continue and amend such
financing arrangements. The Guarantor has determined the execution, delivery and
performance  of this  Agreement to be necessary  and  convenient to the conduct,
promotion and attainment of the business of the Guarantor and the Borrower.

         (i) The principal place of business and chief executive  offices of the
Guarantor  are located at 1249 Quarry  Lane,  Pleasanton,  CA 94566.  All of the
books and  records  of the  Guarantor  are  located at said  address.  Except as
described on item 3.01(i) of the attached Disclosure Schedule,  no assets of the
Guarantor  are located at any other  address.  Said item 3.01(i) of the attached
Disclosure  Schedule  sets forth the names and addresses of the record owners of
all premises where any material  amount of Collateral  owned by the Guarantor is
located.

<PAGE>

         (j) The Guarantor  owns or has a valid right to use all of the patents,
licenses,  copyrights,  trademarks,  trade names and  franchises  ("Intellectual
Property") now being used to conduct its business,  as described on item 3.01(j)
of the attached Disclosure Schedule.  None of the Intellectual Property owned by
the Guarantor is represented  by a registered  copyright,  trademark,  patent or
other federal or state  registration,  except as shown on said item 3.01(j).  To
the best knowledge of the Guarantor,  the conduct of the Guarantor's business as
now  operated  does not  conflict  with  valid  patents,  licenses,  copyrights,
trademarks,  trade  names or  franchises  of others  in any  matter  that  could
materially  adversely  affect  the  business,  prospects,  assets  or  donation,
financial or otherwise, of the Guarantor.

         (k) None of the executive officers or key employees of the Guarantor is
subject  to any  agreement  in favor of anyone  other than the  Guarantor  which
limits or  restricts  that  person's  right to  engage  in the type of  business
activity  conducted or proposed to be conducted by the Guarantor or which grants
to anyone other than the Guarantor  any rights in any  inventions or other ideas
susceptible  to legal  protection  developed or conceived by any such officer or
key employee.

         (l) The Guarantor is not a party to any contract or agreement which now
has or,  as far as can  reasonably  be  foreseen  by the  Guarantor  at the date
hereof, may have a material adverse effect on the financial condition, business,
prospects or properties of the Guarantor.

         (m)  After  giving  effect  to  this  Agreement  and  the  transactions
contemplated  hereby,  the Guarantor (A) is and will be able to pay its debts as
they become due, (B) has and will have funds and capital  sufficient to carry on
its  business as now  conducted or as  contemplated  to be  conducted,  (C) owns
property  having a value both at fair  valuation  and at present  fair  saleable
value greater than the amount  required to pay its debts as they become due, and
(D) is not  insolvent  and will  not be  rendered  insolvent  as  determined  by
applicable law, after taking into account the reasonable  likelihood of payments
being required hereunder.

                                   ARTICLE IV

                                    COVENANTS

         Section 4.01. Affirmative Covenants and Reporting Requirements. So long
as the Loan  Agreement  is in effect  and/or any of the  Guaranteed  Obligations
remain  outstanding,  the Guarantor  will duly and promptly  perform and observe
each provision  contained in Article III of the Loan Agreement  which may relate
to the  Guarantor as a Subsidiary of the Borrower  (said  Article III,  together
with  any  related  definitions,   being  deemed  incorporated  herein  by  this
reference).  Further,  and without  limitation of the foregoing,  so long as the
Loan  Agreement is an effect  and/or any of the  Guaranteed  Obligations  remain
outstanding:

         (a) The  Guarantor  will  maintain  and  preserve  (and will cause each
Subsidiary of the  Guarantor to maintain and preserve) all of its  properties in
good working  order and  condition,  

<PAGE>

making all necessary  repairs thereto and  replacements  thereof.  The Guarantor
will maintain,  with financially  sound and reputable  insurers,  insurance with
respect to its property and business  against such  liabilities,  casualties and
contingencies  and of such  types  and in such  amounts  as shall be  reasonably
satisfactory  to the Bank from time to time and in any event all such  insurance
as may from  time to time be  customary  for  companies  conducting  a  business
similar to that of the Guarantor in similar  locales,  with the Bank to be named
as first  loss  payee on all  policies  relating  to any  Collateral;  provided,
however,  that so long as no Event of  Default  under  the  Loan  Agreement  has
occurred and is  continuing,  (i)  returned  and  unearned  premiums may be paid
directly to and may be retained by the  Guarantor  and (ii)  insurance  proceeds
from any casualty damages  totalling $50,000 or less may be paid directly to and
may be retained by the Guarantor.

         (b) The Guarantor  will perform and fulfill all material  covenants and
agreements under any lease or real estate, agreements relating to purchase money
debt, equipment leases and other material contracts. The Guarantor will maintain
in full force and  effect,  and  comply  with the terms and  conditions  of, all
permits, permissions and licenses necessary or desirable for its business.

         (c) The Guarantor will conduct, in the ordinary course, the business in
which it is presently engaged. The Guarantor will not, without the prior written
consent of the Bank,  directly or indirectly (itself or through any Subsidiary),
enter into any other lines of business or business ventures.

         (d) The Guarantor will furnish to the Bank:

                  (i) Promptly  after  receipt,  a copy of all audits or reports
         submitted  to  the  Guarantor  by  independent  public  accountants  in
         connection  with any annual,  special or interim  audit of the books of
         the Guarantor and any "management letter" prepared by such accountants.

                  (ii) As soon as possible  and in any event within five days of
         the  occurrence  of any Event of Default or any event  which,  with the
         giving of notice or passage of time or both,  would constitute an Event
         of Default,  the  statement of the  Guarantor  setting forth details of
         such  Event of  Default  or event and the  action  which the  Guarantor
         proposes to take with respect thereto.

                  (iii) Promptly (and in any event within 30 days) after service
         of legal process upon the Guarantor or the Guarantor  otherwise  having
         notice thereof, notice of all actions, suits and proceedings before any
         court or governmental department,  commission, board, bureau, agency or
         instrumentality,  domestic or foreign,  to which the  Guarantor  or any
         Subsidiary of the  Guarantor is a party;  provided,  however,  that the
         Guarantor  will not be deemed  required  by this  clause  (iii) to give
         notice  of any  such  action,  suit or  proceeding  filed  against  the
         Guarantor or any such Subsidiary  which seeks monetary  damages only in
         an amount of $100,000 or less.

<PAGE>

                  (iv) Promptly upon applying for, or being  granted,  a federal
         or  state  registration  for any  copyright,  trademark  or  patent  or
         purchasing  any  registered  copyright,  trademark  or patent,  written
         notice to the Bank describing same, together with all such documents as
         may be  required  to give the  Bank a fully  perfected  first  priority
         security interest in each such copyright, trademark or patent.

                  (v)  Promptly  after  the  Guarantor  has  knowledge  thereof,
         written notice of any development or circumstance  which may reasonably
         be expected to have a material  adverse  effect on the Guarantor or its
         business,  properties,  assets, Subsidiaries or condition, financial or
         otherwise.

                  (vi) Promptly upon request, such other information  respecting
         the financial condition, operations,  receivables, inventory, machinery
         or equipment of the Guarantor or any Subsidiary of the Guarantor as the
         Bank may from time to time reasonably request.

         (e) The Guarantor will maintain (and cause each of its  Subsidiaries to
maintain)  complete and fairly stated books,  records and accounts which will at
all times fairly reflect all of its  transactions  in accordance  with generally
accepted accounting principles  consistently applied. The Guarantor will, at any
reasonable time and from time to time upon  reasonable  notice and during normal
business  hours (and at any time and without any necessity for notice  following
the  occurrence  of an Event of  Default),  permit  the Bank,  and any agents or
representatives  thereof,  to examine and make copies of and take abstracts from
the records and books of account of, and visit the  properties  of the Guarantor
and any of its Subsidiaries,  and to discuss its affairs,  finances and accounts
with its officers,  directors and/or  independent  accountants,  all of whom are
hereby  authorized  and directed to cooperate  with the Bank in carrying out the
intent of this  Subsection  3.01(e).  Each financial  statement of the Guarantor
hereafter  delivered pursuant to this Agreement will be complete and will fairly
present the financial  condition of the Guarantor as at the date thereof and for
the periods covered thereby.

         (f) Prior to the Bank making the first  Revolving  Loan,  the Guarantor
will obtain, and will thereafter  maintain in effect at all times,  waivers from
the  owners of all  premises  in which any  material  amount  of  Collateral  is
located, such waivers to be in form and substance satisfactory to the Bank.

         (g)  The  Guarantor  will  review  the  software  which  it uses in its
business (and which its  Subsidiaries  use in their  respective  businesses) for
"Year 2000"  compliance.  The Guarantor  will, on or before June 30, 1999,  have
completed  all steps  necessary to assure that such  software  will  continue to
function  in the  manner  intended  without  interruption  or  other  difficulty
resulting  from the "Year 2000 problem".  The Guarantor  will, at the request of
the Bank,  provide  such  reports  and such  other  information  as the Bank may
reasonably  request in respect of the  Guarantor's  program to assure  such Year
2000 compliance.

         (h) As used  herein,  the  term  "Star  Transaction"  has  the  meaning
ascribed to that term in the Loan Agreement.  The Guarantor presently intends to
complete the Star Transaction and to 

<PAGE>

receive the  proceeds  thereof (in the amount  described  in Section 3.11 of the
Loan  Agreement)  on or before March 31, 1999.  The Bank agrees that if the Star
Transaction is  consummated  and such proceeds are received on or prior to March
31, 1999, the Bank will,  upon the payment of so much of the Revolving  Loans as
may be required so that the Aggregate Bank  Liabilities  (as defined in the Loan
Agreement) will not exceed the Borrowing Base (as defined in the Loan Agreement)
calculated without reference to any receivables of Star, release the Guarantor's
Security Agreement and the Guarantor's Intellectual Property Security Agreements
and terminate the within  Guaranty and release any other  obligations of Star to
the Bank arising under or in connection with the Loan Agreement.

         Section 4.02. Negative  Covenants.  So long as the Loan Agreement is in
effect  and/or  any  of  the  Guaranteed  Obligations  remain  outstanding,  the
Guarantor  will not take or omit to take any action or suffer to exist any event
or  circumstance  which would be a breach of any of the provisions of Article IV
of the Loan  Agreement  which may relate to the Guarantor as a Subsidiary of the
Borrower (said Article IV, together with any related  definitions,  being deemed
incorporated herein by this reference).  Further,  and without limitation of the
foregoing,  so  long  as the  Loan  Agreement  is in  effect  and/or  any of the
Guaranteed Obligations remain outstanding:

         (a) The Guarantor  will not,  without the prior written  consent of the
Bank, form or acquire any Subsidiary or make any other  acquisition of the stock
of any Person or of all or substantially  all of the assets of any other Person.
The Guarantor will not become a partner in any partnership.

         (b) The Guarantor  will not,  without the prior written  consent of the
Bank, merge or consolidate with any Person or sell, lease, transfer or otherwise
dispose  of  any  material  portion  of its  assets  (whether  in  one  or  more
transactions), other than (i) sale of inventory in the ordinary course, (ii) the
sale of the Guarantor to Coherent,  Inc.  pursuant to the Star Transaction on or
before March 31, 1999 and (iii) a sale or transfer of any Intellectual  Property
of the  Guarantor  so long  as (A)  such  sale  or  transfer  could  not  have a
materially  adverse  effect  on the  business,  condition  or  prospects  of the
Guarantor  and (B) the  Guarantor  gives the Bank not less  than 20 days'  prior
written  notice  of each  such  sale or  transfer,  in such  detail  as shall be
reasonably acceptable to the Bank. The Bank specifically  acknowledges that this
Agreement  contemplates and permits the sale of the Guarantor to Coherent,  Inc.
pursuant to the Star  Transaction  on or before March 31, 1999,  with the Bank's
security   interests  in  the  Guarantor's  assets  to  be  released  under  the
circumstances described in Subsection 4.01(h).

         (c) The Guarantor  will not,  without the prior written  consent of the
Bank, enter into any transaction,  including,  without limitation, the purchase,
sale or  exchange of any  property or the  rendering  of any  service,  with any
affiliate of the Guarantor, except in the ordinary course of and pursuant to the
reasonable requirements of the Guarantor's business and upon fair and reasonable
terms no less  favorable to the Guarantor than would be obtained in a comparable
arms'-length transaction with any Person not an affiliate; provided that nothing
in this  Subsection  shall be deemed to prohibit  the payment of salary or other
similar  payments  to any  officer  or  director  of the  Guarantor  at a  level
consistent  with the  salary and other  payments  being paid at 

<PAGE>

the date of this Agreement,  nor to prevent the hiring of additional officers at
a salary level  consistent  with industry  practice,  nor to prevent  reasonable
periodic  increases in salary.  For the purposes of this Agreement,  "affiliate"
means any Person which, directly or indirectly,  controls or is controlled by or
is under common  control with the  Guarantor;  any officer or director or former
officer  or  director  of  the  Guarantor;   any  Person  owning  of  record  or
beneficially,  directly or indirectly,  5% or more of any class of capital stock
of the  Guarantor  or 5% or more of any class of capital  stock or other  equity
interest having voting power (under ordinary  circumstances) of any of the other
Persons  described  above;  and any member of the immediate family of any of the
foregoing.  "Control" means possession,  directly or indirectly, of the power to
direct or cause the  direction  of the  management  or  policies  of any Person,
whether through ownership of voting equity, by contract or otherwise.

         (d) The Guarantor will not change its name or legal structure, nor will
the Guarantor move its chief  executive  offices or principal  place of business
from the address  described in the first  sentence of Subsection  3.01(i) above,
nor will the Guarantor  remove any books or records from such address,  nor will
the  Guarantor  keep any  Collateral  belonging to the Guarantor at any location
other than the premises described in Subsection  3.01(i) above without,  in each
instance,  giving the Bank at least 30 days' prior written  notice and providing
all such financing statements,  certificates and other documentation as the Bank
may request in order to maintain  the  perfection  and  priority of the security
interests granted or intended to be granted pursuant to the Guarantor's Security
Agreement.

         (e) Except as  provided  below,  the  Guarantor  will not dispose of or
suffer or permit to exist any  hazardous  material  or oil on any site or vessel
owned, occupied or operated by the Guarantor or any Subsidiary of the Guarantor,
nor shall the Guarantor store (or permit any Subsidiary to store) on any site or
vessel owned,  occupied or operated by the Guarantor or any such Subsidiary,  or
transport or arrange the transport of, any hazardous  material or oil (the terms
"hazardous material", "oil", site" and "vessel", respectively, being used herein
with the  meanings  given  those  terms  in  Mass.  Gen.  Laws,  Ch.  21E or any
comparable  terms in any  comparable  statute  in effect  in any other  relevant
jurisdiction).  The Guarantor  shall provide the Bank with written notice of (i)
the  intended  storage or  transport  of any  hazardous  material  or oil by the
Guarantor or any  Subsidiary of the  Guarantor,  (ii) any known release or known
threat of release of any hazardous material or oil at or from any site or vessel
owned, occupied or operated by the Guarantor or any Subsidiary of the Guarantor,
and  (iii)  any  incurrence  of  any  expense  or  loss  by  any  government  or
governmental authority in connection with the assessment, containment or removal
of any hazardous  material or oil for which expense or loss the Guarantor or any
Subsidiary of the Guarantor may be liable.  Notwithstanding  the foregoing,  the
Guarantor and its Subsidiaries may use, store and transport, and need not notify
the  Bank of the  use,  storage  or  transportation  of,  (x) oil in  reasonable
quantities,  as fuel for heating of their respective  facilities or for vehicles
or machinery used in the ordinary course of their respective  businesses and (y)
hazardous  materials that are solvents,  cleaning agents or other materials used
in the ordinary  course of the respective  business  operations of the Guarantor
and its  Subsidiaries,  in  reasonable  quantities,  as long as in any  case the
Guarantor  or the  Subsidiary  concerned  (as the case may be) has  obtained and
maintains in effect any necessary governmental permits,  licenses 

<PAGE>

and approvals,  complies with all requirements of applicable federal,  state and
local  law  relating  to  such  use,  storage  or  transportation,  follows  the
protective  and safety  procedures  that a prudent  businessperson  conducting a
business the same as or similar to that of the Guarantor or such  Subsidiary (as
the case may be) would follow,  and disposes of such  materials (not consumed in
the ordinary course) only through licensed  providers of hazardous waste removal
services.

                                    ARTICLE V

                              DEFAULT AND REMEDIES

         Section 5.01. Events of Default.  An Event of Default will be deemed to
have occurred under this Agreement upon the occurrence of any one or more of the
following:

         (i) The  Guarantor  shall fail to make any monetary  payment  hereunder
when due; or

         (ii) Any  representation or warranty of the Guarantor  contained herein
shall at any time prove to have been  incorrect  in any  material  respect  when
made; or

         (iii) The Guarantor  shall fail to perform or observe any obligation or
agreement under Subsection 4.01(d) or any provision of Section 4.02; or

         (iv) The Guarantor  shall default in the  performance  or observance of
any  obligation  or agreement  under the first  sentence of Section 4.01 (to the
extent that same  incorporates  by reference  Section 3.1 and Section 3.3 of the
Loan  Agreement)  and such  failure  continues  uncured  for 30 days  after  the
Guarantor  first knows of (or reasonably  should know of) such default or of the
events or circumstances giving rise to such default; or

         (v) The Guarantor shall fail to perform or observe any other obligation
or agreement  contained  herein and such failure shall  continue  uncured for 30
days after notice thereof shall have been given to the Guarantor; or

         (vi) For any reason,  the Guarantor shall cease to be 100% owned by the
Borrower,  except  due to the  consummation  of the Star  Transaction  under the
conditions   contemplated  by  Subsection  4.01(h)  above  and  except  for  the
above-described  stock  options  held by officers and  employees  and any shares
issued upon exercise of same; or

         (vii) Any "Event of Default" (as defined in the Loan  Agreement)  shall
occur and shall continue uncured beyond the expiration of any applicable  notice
and/or grace period.

         Section 5.02. Rights and Remedies Upon Default.  Upon the occurrence of
any Event of Default and at any time thereafter during the continuance  thereof,
in addition to any other rights and remedies  available to the Bank hereunder or
otherwise,  the Bank may  exercise any one or more of the  following  rights and
remedies (all of which shall be cumulative):
<PAGE>

         (a) Enforce the provisions of this Agreement by legal  proceedings  for
the specific  performance of any covenant or agreement  contained  herein or for
the enforcement of any other appropriate legal or equitable remedy, and the Bank
may recover  damages  caused by any breach by the Guarantor of the provisions of
this  Agreement,  including  court costs,  reasonable  attorneys' fees and other
reasonable costs and expenses  incurred in the enforcement of the obligations of
the Guarantor hereunder.

         (b)  Exercise  all  rights  and  remedies  hereunder,  under  the  Loan
Documents,  and under any other  agreement with the Bank, and exercise all other
rights and remedies which the Bank may have under applicable law.

         Section  5.03.  Set-off.  In  addition  to any rights now or  hereafter
granted  under  applicable  law and not by way of limitation of any such rights,
upon the occurrence of any Event of Default and during the continuance  thereof,
the  Bank  is  hereby  authorized  at any  time or from  time to  time,  without
presentment,  demand, protest or other notice of any kind to the Guarantor or to
any other Person,  all of which are hereby expressly  waived,  to set off and to
appropriate  and apply any and all  deposits and any other  Indebtedness  at any
time held or owing by the Bank or any affiliate of the Bank to or for the credit
or the account of the Guarantor  against and on account of the  obligations  and
liabilities  of the  Guarantor to the Bank,  under this  Agreement or otherwise,
irrespective  of whether or not the Bank shall have made any demand for  payment
and although said  obligations,  liabilities or claims, or any of them, may then
be contingent or unmatured and without regard for the  availability  or adequacy
of other  collateral.  ANY AND ALL RIGHTS TO REQUIRE  THE BANK TO  EXERCISE  ITS
RIGHTS OR REMEDIES WITH RESPECT TO ANY OTHER COLLATERAL WHICH SECURES ANY OF THE
GUARANTEED OBLIGATIONS PRIOR TO THE EXERCISE BY THE BANK OF ITS RIGHT OF SET-OFF
UNDER THIS SECTION ARE HEREBY KNOWINGLY, VOLUNTARILY AND IRREVOCABLY WAIVED.

                                   ARTICLE VI

                                  MISCELLANEOUS

         Section 6.01. No Waiver;  Cumulative  Remedies.  No failure or delay on
the part of any party in exercising any right,  power or remedy  hereunder shall
operate as a waiver  thereof,  nor shall any single or partial  exercise  of any
such right,  power or remedy preclude any other or further  exercise  thereof or
the exercise of any other right, power or remedy hereunder.  The remedies herein
provided are  cumulative  and not  exclusive of any remedies  provided by law or
otherwise  available to the Bank. Such remedies may be exercised  without resort
or  regard  to the  other  source  of  satisfaction  of any  liabilities  of the
Guarantor to the Bank.  The  provisions of this Agreement are not limited by nor
in the limitation of any additional or inconsistent  provisions contained in the
Loan  Agreement  or  elsewhere.  No right of  subrogation,  contribution  or any
similar  rights will in any event be deemed to give the  Guarantor  any cause of
action against the Bank or any of its officers,  employees or agents for any act
or omission on the part of the Bank; the Bank may, without liability, release or
fail to perfect any  security  interest  and may take or 

<PAGE>

omit to take any  action  under any of the Loan  Documents,  even if same  would
reduce the value of the Guarantor's subrogation or similar rights.

         Section 6.02. Amendments,  Waivers and Consents. Neither this Agreement
nor any  provision  hereof may be  amended,  waived,  discharged  or  terminated
orally. Any such amendment,  waiver, discharge or termination must be in writing
signed by the party against whom enforcement of the amendment, waiver, discharge
or  termination  is  sought.  Any  waiver or  consent  may be given  subject  to
satisfaction  of  conditions  stated  therein and any waiver or consent shall be
effective only in the specific  instance and for the specific  purpose for which
given.

         Section 6.03. Addresses for Notices, etc. Except as otherwise expressly
provided  in  this  Agreement,   all  notices,   requests,   demands  and  other
communications provided for hereunder shall be in writing and shall be mailed or
delivered to the applicable party at the address indicated below:

         If to the Guarantor:

              Star Medical Technologies, Inc.
              c/o Palomar Medical Technologies, Inc.
              45 Hartwell Avenue
              Lexington, MA  02421
              Attention:  Paul S. Weiner, Director of Finance

              with a copy so mailed or delivered to:

              Palomar Medical Technologies, Inc.
              45 Hartwell Avenue
              Lexington, MA  02421
              Attention:  General Counsel

         If to the Bank:

              Fleet National Bank
              High Technology Division
              One Federal Street
              Mail Stop:  MA OF DO7A
              Boston, MA  02110
              Attention:  Lucie Burke, Vice President

or, as to each of the foregoing, at such other address as shall be designated by
such Person in a written notice to the other party complying as to delivery with
the  terms of this  Section.  Except  as  otherwise  provided  herein,  all such
notices, requests, demands and other communications shall be deemed delivered on
the earlier of (i) the date  received or (ii) the date of  delivery,  refusal or

<PAGE>

non-delivery  indicated on the return  receipt if deposited in the United States
mails,  sent postage  prepaid,  registered  or certified  mail,  return  receipt
requested,  postage and registration or certification charges prepaid, addressed
as aforesaid.

         Section 6.04. Costs, Expenses and Taxes. The Guarantor agrees to pay on
demand all costs and expenses (including,  without limitation,  reasonable legal
fees) of the Bank in connection with the preparation,  execution and delivery of
this Agreement and all other instruments and documents to be delivered hereunder
and any amendments or  modifications  of any of the foregoing,  or in connection
with the examination,  review or administration of any of the foregoing, as well
as the costs and expenses  (including,  without limitation,  the reasonable fees
and  expenses  of  legal  counsel)  incurred  by the  Bank  in  connection  with
preserving,  enforcing or exercising any rights or remedies under this Agreement
and all other instruments and documents to be delivered  hereunder,  all whether
or not legal action is instituted. In addition, the Guarantor shall be obligated
to pay any and all stamp and other taxes  payable or determined to be payable in
connection  with the  execution  and  delivery of this  Agreement  and all other
instruments and documents to be delivered hereunder, and the Guarantor agrees to
save the Bank harmless from and against any and all liabilities  with respect to
or resulting  from any delay in paying or omission to pay such taxes.  Any fees,
expenses  or other  charges  which  the Bank is  entitled  to  receive  from the
Guarantor  hereunder  shall bear  interest  from the date of demand for  payment
until paid at the lesser of (i) a fluctuating  rate per annum which shall at all
times be equal to the sum of four (4%)  percent per annum plus the Prime Rate or
(ii) the maximum rate permitted by then applicable law.

         Section  6.05.   Representations   and   Warranties.   All   covenants,
agreements,  representations and warranties made herein or in any other document
delivered by or on behalf of the  Guarantor  pursuant to or in  connection  with
this  Agreement are material and shall be deemed to have been relied upon by the
Bank, notwithstanding any investigation heretofore or hereafter made by the Bank
and shall survive the making of the Revolving  Loans as contemplated in the Loan
Agreement,  and shall  continue  in full  force and effect so long as any of the
Guaranteed  Obligations  remain  outstanding  and unpaid or any facility for the
making of loans to the Borrower remains in effect.

         Section 6.06.  Binding  Effect;  Assignment.  This  Agreement  shall be
binding upon the Guarantor and its successors and assigns and shall inure to the
benefit of the Bank and its successors and assigns. The Guarantor may not assign
this Agreement or any rights  hereunder  without the express  written consent of
the Bank.

         Section 6.07.  Reproduction of Agreement.  This Agreement and all other
instruments, documents and papers which relate thereto which have been or may be
hereafter  furnished  to  the  Bank  may  be  reproduced  by  the  Bank  by  any
photographic,  photostatic,  micro-card, miniature photographic,  xerographic or
similar process.  Any such  reproduction  shall be admissible in evidence as the
original itself in any judicial or administrative proceeding (whether or not the
original is in  existence  and whether o not such  reproduction  was made in the
regular course of business).

<PAGE>

         Section  6.08.  Consent  to  Jurisdiction.  The  Guarantor  irrevocably
submits to the  non-exclusive  jurisdiction  of any  Massachusetts  court or any
federal court sitting within The  Commonwealth of  Massachusetts  over any suit,
action or proceeding arising out of or relating to this Agreement. The Guarantor
agrees that final  judgment in any such suit,  action or  proceeding  brought in
such a court  shall be enforced  in any court of proper  jurisdiction  by a suit
upon such  judgment,  provided  that service of process in such action,  suit or
proceeding  shall have been  effected  upon the  Guarantor in one of the manners
specified  in the  following  paragraph  of this  Section  6.08 or as  otherwise
permitted by law.

         The  Guarantor  hereby  consents to process  being  served in any suit,
action or  proceeding of the nature  referred to in the  preceding  paragraph of
this  Section  6.08  either  (i) by  mailing a copy  thereof  by  registered  or
certified mail, postage prepaid, return receipt requested, to its at its address
set  forth in  Section  6.03 or (ii) by  serving a copy  thereof  upon it at its
address set forth in Section 6.03. The Guarantor  agrees that such service shall
(x) be deemed in every respect effective service upon such Guarantor in any such
suit,  action or proceeding and (y) to the fullest  extent  permitted by law, be
taken and held to be valid  personal  service upon and personal  delivery to the
Guarantor.

         Section 6.09.  Governing Law. This Agreement  shall be governed by, and
construed in accordance with, the laws of The Commonwealth of Massachusetts.

         Section  6.10.  Severability.  In the event that any  provision of this
Agreement or the application  thereof to any Person,  property or  circumstances
shall be held to any extent to be invalid or  unenforceable,  the  remainder  of
this Agreement and the  application of such provision to Persons,  properties or
circumstances  other  than  those  as to  which  it has  been  held  invalid  or
unenforceable  shall  not be  affected  thereby,  and  each  provision  of  this
Agreement shall be valid and enforceable to the fullest extent permitted by law.

         Section 6.11. Headings.  Article and Section headings in this Agreement
are included herein for convenience of reference only and shall not constitute a
part of this Agreement for any other purpose.

         Section 6.12.  WAIVER OF JURY TRIAL.  THE GUARANTOR AND THE BANK HEREBY
KNOWINGLY,  VOLUNTARILY AND INTENTIONALLY MUTUALLY WAIVE THE RIGHT TO A TRIAL BY
JURY  IN  RESPECT  OF ANY  CLAIM  BASED  HEREON,  ARISING  OUT OF,  UNDER  OR IN
CONNECTION WITH THIS  AGREEMENT,  THE LOAN AGREEMENT OR ANY OTHER LOAN DOCUMENTS
OR OUT OF ANY COURSE OF CONDUCT, COURSE OF DEALING,  STATEMENTS (WHETHER ORAL OR
WRITTEN) OR ACTIONS OF ANY PARTY. THIS WAIVER CONSTITUTES A MATERIAL  INDUCEMENT
FOR THE BANK TO ENTER INTO THE LOAN  AGREEMENT AND TO MAKE LOANS TO THE BORROWER
AS CONTEMPLATED THEREIN.

<PAGE>

         Section  6.13.  Guarantor's  Security  Agreement.   (a)  The  Guarantor
acknowledges and agrees that the  "Obligations"  described in and secured by the
Guarantor's  Security  Agreement  include,   without  limitation,   all  of  the
obligations of the Guarantor under this Agreement.


         (b) The Guarantor's Security Agreement is hereby modified to provide as
follows:

                  (i) That the "Collateral"  subject thereto  includes,  without
         limitation and in addition to the Collateral  described therein, all of
         the  Guarantor's   files,   books  and  records   (including,   without
         limitation,  all electronically recorded data) all whether now owned or
         existing  or  hereafter  acquired,  created or arising.  The  Guarantor
         hereby grants to the Bank a security interest in all such Collateral in
         order to secure the full and prompt  payment and  performance of all of
         the aforesaid Obligations.

                  (ii) That,  upon the  occurrence of any Event of Default,  the
         Bank may, at any time, notify account debtors of the Guarantor that the
         Collateral  has been  assigned  to the Bank and that  payments  by such
         account  debtors  shall be made directly to the Bank. At any time after
         the  occurrence  of an Event of  Default,  the  Bank  may  collect  the
         Guarantor's receivables,  or any of same, directly from account debtors
         and may charge the collection costs and expenses to the Guarantor.

         IN WITNESS  WHEREOF,  the Guarantor has executed this Agreement,  as an
instrument under seal, as of the day and year first above written.


                                                 STAR MEDICAL TECHNOLOGIES, INC.


                                                 By:  /s/ Joseph P. Caruso
                                                      --------------------------
                                                      Name:   Joseph P.Caruso
                                                      Title:  Vice President of
                                                              Finance

<PAGE>


                               DISCLOSURE SCHEDULE


Item 3.01(a) - Jurisdictions where Guarantor is qualified;
               Subsidiaries; Partnerships

                  Star is qualified only in California.

Item 3.01(d) - Litigation

                  None.

Item 3.01(i) - Locations of Collateral; record owners

                  See Section 2.1(j) of Disclosure  Schedule  attached to Letter
                  Agreement between Palomar Medical Technologies, Inc. and Fleet
                  National Bank.

Item 3.01(j) - Intellectual Property

                  See Section 2.1(k) of Disclosure  Schedule  attached to Letter
                  Agreement between Palomar Medical Technologies, Inc. and Fleet
                  National Bank.