SECURITY AGREEMENT - STOCK PLEDGE

     This  SECURITY  AGREEMENT - STOCK  PLEDGE (this  "Agreement"),  dated as of
December 31, 1997, is entered into by and between PALOMAR MEDICAL  TECHNOLOGIES,
INC., a Delaware  corporation  ("Pledgor"  or  "Borrower"),  and COAST  BUSINESS
CREDIT,  a  division  of  Southern   Pacific  Bank,  a  California   corporation
("Pledgee"), with reference to the following facts:

                                    RECITALS

     A. Pledgor is contemporaneously herewith entering into that certain Secured
Promissory  Note,  dated as of even date (as the same may be amended,  restated,
modified or  supplemented  from time to time in accordance  with its terms,  the
"Secured Note").

     B. In order to induce  Pledgee to enter into the Secured Note,  Pledgor has
agreed to execute and deliver  this  Agreement  to Pledgee,  securing  Pledgor's
obligations  owing to Pledgee  under the Secured Note with a pledge of Pledgor's
right,  title and interest in and to  sufficient  unrestricted  capital stock of
Pledgor,  which shall be wholly  owned by Pledgor at the time of the delivery of
the stock,  such that seventy  percent (70%) of the value of said stock shall at
all times be equal to or greater than the principal amount due and payable under
the Secured Note.

                                    AGREEMENT

     NOW  THEREFORE,  in  consideration  of  the  mutual  promises,   covenants,
conditions,  representations and warranties  hereinafter set forth and for other
good and valuable consideration, the parties hereto mutually agree as follows:

     1.   DEFINITIONS AND CONSTRUCTION.

          (A)  DEFINITIONS. All initially capitalized terms used but not defined
               in this Agreement shall have the meanings  assigned to such terms
               in the Secured Note. In addition, the following terms, as used in
               this Agreement, have the following meanings:

               "BORROWER" has the meaning set forth in the introduction hereto.

               "CODE" means the California  Uniform  Commercial  Code as amended
               and  supplemented  from time to time, and any successor  statute;
               PROVIDED,  HOWEVER,  with respect to any Collateral consisting of
               "uncertified  securities" (as defined in Division 8 of the Code),
               "Code" shall mean the Uniform  Commercial  Code as adopted in the
               States  of  incorporation  of  each  Borrower,   as  amended  and
               supplemented from time to time, and any successor statue.

               "COLLATERAL" means all of the following:

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               (i)  Upon  execution  and return of this  Agreement,  Coast shall
                    accept as the Collateral sufficient  unrestricted marketable
                    securities in Pledgor such that seventy percent (70%) of the
                    market price of said securities shall be equal to or greater
                    than the  principal  amount due and owing  under the Secured
                    Note.  Pledgor  shall  use it best  efforts  to  obtain  the
                    authority  to issue,  and to issue  sufficient  unrestricted
                    marketable  securities in Pledgor such that seventy  percent
                    (70%)  of  the  market  price  of  the  Pledgor   marketable
                    securities  shall be equal to or greater than the  principal
                    amount  due and  owing  under  the  Secured  Note  ("Pledgor
                    Shares").  If at any time that Coast is holding  the Pledgor
                    Shares,  and  the  market  price  decreases  such  that  the
                    coverage ratio (Market Price of the Pledgor  Shares,  to the
                    outstanding  principal  balance  under the Secured  Note) is
                    eighty-five percent (85%) or greater,  Pledgor shall provide
                    Coast, upon demand,  with additional Pledgor Shares to reach
                    a 70% coverage  ratio.  Coast will release Pledgor Shares to
                    Pledgor  upon  collection  of principal  payments  under the
                    Secured  Note  provided  that  the  seventy   percent  (70%)
                    coverage ratio is maintained.

               (ii) The proceeds of each of the foregoing, including any and all
                    dividends, cash, stock, instruments, and other property from
                    time to time received,  receivable, or otherwise distributed
                    in  respect  of or in  exchange  for  any of the  Shares  or
                    Options (the "Proceeds").

               "SECURED NOTE" has the meaning set forth in Recital A hereto

               "EVENT OF DEFAULT" has the meaning  given to such term in Section
               10.

               "LOAN  DOCUMENTS"  means this Agreement,  the Secured  Promissory
               Note and the other agreements, instruments and documents executed
               in connection herewith and therewith.

               "PLEDGEE" has the meaning set forth in the introduction hereto.

               "PLEDGOR" has the meaning set forth in the introduction hereto.

               "SECURED  OBLIGATIONS" means Pledgor's obligations under the Loan
               Documents and the obligations of Pledgor under this Agreement.

               "SHARES" means all of the Pledgor Shares.

               "33 ACT"  means  the  Securities  Act of  1933,  as  amended  and
               supplemented  from time to time, and any successor  statute,  and
               any and all rules promulgated in connection therewith.

          (B)  CONSTRUCTION.  Unless  the  context  of  this  Agreement  clearly
               requires   otherwise,   references  to  the  plural  include  the
               singular,  references to the singular include the plural, and the
               term "including" is not limiting.  The words "hereof,"  "herein,"
               "hereby,"  "hereunder"  and  other  similar  terms  refer to this
               Agreement as a whole and not to any particular  provision of this
               Agreement.  Any reference herein to any document includes any and
               all alterations, amendments, extensions, modifications, renewals,
               or supplements  thereto or thereof,  as applicable.  Neither this
               agreement  nor any  uncertainty  or  ambiguity  herein  shall  be
               construed

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               or resolved against Pledgee or Pledgor, whether under any rule of
               construction  or otherwise.  On the contrary,  this Agreement has
               been reviewed by Pledgor,  Pledgee, and their respective counsel,
               and shall be construed and interpreted  according to all ordinary
               meanings of the words used so as to fairly accomplish the purpose
               and intentions of Pledgee and Pledgor.

     2. PLEDGE.  As security for the prompt and complete payment and performance
of the Secured  Obligations,  Pledgor hereby,  except as otherwise  provided for
herein, delivers,  pledges, and grants to Pledgee a continuing security interest
in Pledgor's  right,  title,  and interest in and to the Collateral.  Sufficient
certificates or instruments  representing or evidencing the Collateral  shall be
delivered  promptly  to and held by  Pledgee  pursuant  hereto  and  shall be in
suitable  form for transfer or  assignment  in blank,  all in form and substance
satisfactory  to Pledgee.  In the event that the  securities  that  comprise the
Collateral are  uncertified or in book entry form,  then Pledgor shall take such
actions  as may be  required  to  register  or enter,  as the case may be,  such
Collateral in the name of Pledgee,  and  otherwise  take such actions as Pledgee
may  require  for  Pledgee's  security  interest  therein  to  be  perfected  in
accordance  with Section 8313 and 8321 of the Code.  In addition,  Pledgor shall
provide  Pledgee  with an opinion of counsel  satisfactory  to  Pledgee,  to the
effect that Pledgee has a perfected  security  interest in the Collateral,  that
the Collateral  accurately states ownership and capital structure of Pledgor and
such other opinions as Pledgee may require,  in form and substance  satisfactory
to Pledgee.

     3. FURTHER ASSURANCES.  Pledgor agrees that it shall cooperate with Pledgee
and shall execute and deliver, or cause to be executed and delivered, to Pledgee
all stock powers, proxies,  assignments,  financing statements,  instruments and
other documents,  and shall take all further action,  at the expense of Pledgor,
from time to time  requested  by  Pledgee,  in order to  maintain a  continuing,
first-priority,  perfected  security  interest  in the  Collateral  in  favor of
Pledgee,  and to enable  Pledgee to exercise and enforce its rights and remedies
hereunder  with  respect to the  Collateral,  and  Pledgor  agrees that it shall
execute and deliver to Pledgee at  Pledgee's  request any further  applications,
agreements, documents and instruments, and shall perform any and all acts deemed
necessary by Pledgee to carry into effect the terms, conditions,  and provisions
of this Agreement and the transactions  connected herewith.  Should Pledgor fail
to execute or deliver any such applications,  agreements,  documents,  financing
statements and instruments,  or to perform any such acts,  Pledgor  acknowledges
that  Pledgee may execute and deliver the same and perform such acts in the name
of Pledgor and on its behalf as its  attorney-in-fact in accordance with Section
12 hereof.

     4. PLEDGEE'S DUTIES.  Pledgee shall not have any duties with respect to the
Collateral  other than the duty to use  reasonable  care if the Collateral is in
its possession.  In accordance  with Section 9207 of the Code,  Pledgee shall be
deemed  to have  used  reasonable  care if it  observes  substantially  the same
standard of care with respect to the custody or protection of the  Collateral as
it observes with respect to similar  assets owned by Pledgee.  Without  limiting
the  generality of the  foregoing,  Pledgee shall be under no obligation to take
any steps  necessary  to  preserve  rights in the  Collateral  against any other
parties,  to sell the same if it threatens  to decline in value,  or to exercise
any  rights  represented  thereby  (including  rights  with  respect  to  calls,
conversions, exchanges, maturities, or tenders); provided, however, that Pledgee
may,  at its option,  do so, and any and all  expenses  incurred  in  connection
therewith shall be for the account of Pledgor.

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     5. VOTING RIGHTS; DIVIDENDS; ETC..

          5.1  During  the  term of this  Agreement,  and as long as no Event of
               Default is continuing:

               (a)  Pledgor shall be entitled to exercise any and all voting and
                    other consensual rights pertaining to the Shares or any part
                    thereof;  provided,  however,  no vote  shall be cast or any
                    consent,  waiver or  ratification  given or any action taken
                    which  would  violate or be  inconsistent  with the terms of
                    this Agreement,  the Loan Documents or any other  instrument
                    or agreement  referred to therein or herein,  or which could
                    have effect of impairing the value of the  Collateral or any
                    part thereof or the position or interest of Pledgee therein.

               (b)  Pledgor  shall be entitled to receive and retain any and all
                    dividends  and  distributions  paid in respect of the Shares
                    not otherwise  prohibited by the Loan  Documents;  provided,
                    HOWEVER, that any and all:

                    (i)  dividends and distributions  paid or payable other than
                         in  cash in  respect  of,  and  any and all  additional
                         Shares  or  instruments  or  other  property  received,
                         receivable,  or otherwise distributed in respect of, or
                         in exchange for, any Shares;

                    (ii) dividends and distributions  paid or payable in cash in
                         respect of any Shares in  connection  with a partial or
                         total liquidation or dissolution, merger, consolidation
                         of any of the  Borrowers,  or any  exchange  of  stock,
                         conveyance    of   assets,    or   similar    corporate
                         reorganization; and

                    (iii)cash  paid  with  respect  to,  payable,  or  otherwise
                         distributed  on redemption  of, or in exchange for, any
                         Shares, shall be forthwith delivered to Pledgee to hold
                         as  Collateral  and shall,  if received by Pledgor,  be
                         received  in  trust  for the  benefit  of  Pledgee,  be
                         segregated from the other property or funds of Pledgor,
                         and be forthwith  delivered to Pledgee as Collateral in
                         the  same  form  as so  received  (with  any  necessary
                         endorsement),  and, if deemed  appropriate  by Pledgee,
                         Pledgor shall take such actions,  including the actions
                         described in Section 2, as Pledgee may require.

          5.2  If an Event of Default  shall be  continuing or any amounts shall
               be  due  and  payable  (whether  by  acceleration,  maturity,  or
               otherwise)  under any of the Secured  Obligations,  all rights of
               Pledgor to exercise the voting and other  consensual  rights that
               it would  otherwise  be entitled to exercise  pursuant to Section
               5.1(a) and to receive the  dividends  and  distributions  that it
               would be otherwise be authorized  to receive and retain  pursuant
               to Section 5.1(b) shall, at Pledgee's option, cease, and all such
               rights  shall at Pledgee's  option,  thereupon  become  vested in
               Pledgee,  and Pledgee  shall,  at its option,  thereupon have the
               sole right to exercise  such voting and other  consensual  rights
               and to receive and hold as Collateral such dividends and interest
               payments.  Any  payments  received  by  Pledgor  contrary  to the
               provisions  of this section 5.2 shall be held in trust by Pledgor
               for the benefit of Pledgee,  shall be segregated from other funds
               of Pledgor, and shall be promptly paid over to Pledgee,  with any
               necessary endorsement.

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     6.   REPRESENTATIONS,   WARRANTIES,   AND  COVENANTS.   Pledgor   warrants,
          represents, and covenants that:

          6.1  Pledgor is and will continue to be a corporation  duly organized,
               validly  existing  and in good  standing  under  the  laws of the
               jurisdiction of its  incorporation.  Pledgor is and will continue
               to be qualified and licensed to do business in all  jurisdictions
               in which  any  failure  to do so wou1d  have a  Material  Adverse
               Effect.  The  execution,  delivery and  performance by Pledgor of
               this  Agreement,  Secured  Promissory  Note  and the  other  Loan
               Documents  (a) have been  duly and  validly  authorized,  (b) are
               enforceable  against  Pledgor  in  accordance  with  their  terms
               (except as enforcement may be limited by equitable principles and
               by bankruptcy, insolvency, reorganization,  moratorium or similar
               laws relating to  creditors'  rights  generally),  and (c) do not
               violate Pledgor's  articles or certificate of  incorporation,  or
               Pledgor's  by-laws,  or  any  law or any  material  agreement  or
               instrument which is binding upon Pledgor or its property, and (d)
               do not  constitute  grounds  for  acceleration  of  any  material
               indebtedness  or  obligation  under  any  material  agreement  or
               instrument which is binding upon Pledgor or its property.

          6.2  EXCEPT   WITH   RESPECT  TO   APPLICABLE   SECURITIES   LAWS  AND
               REGULATIONS,  ESTABLISHED BY THE SEC,  THERE are no  restrictions
               upon the transfer of any of the  Collateral  to or by Pledgee and
               Pledgor is the sole  beneficial  owner of the  Collateral and has
               the right to pledge and grant a security interest in or otherwise
               transfer,  SUBJECT TO APPLICABLE SECURITIES LAWS, such Collateral
               free of any encumbrances or rights of third parties.

          6.3  All of the  Collateral  is and shall  remain free from all liens,
               claims,  encumbrances,   and  purchase-money  or  other  security
               interests  except as created hereby.  Pledgor shall not,  without
               Pledgee's prior written consent sell or otherwise  dispose of any
               of the Collateral.

          6.4  The execution and delivery of this Agreement, and the delivery to
               Pledgee  of  the   Shares   creates  a  valid,   perfected,   and
               first-priority  security  interest in the  Collateral in favor of
               Pledgee,   and  all  actions   necessary  or  desirable  to  such
               perfection have been duly taken.

          6.5  No  authorization  or other action by, and no notice to or filing
               with, any  governmental  authority or regulatory body is required
               either:  (a) for the grant by  Pledgor of the  security  interest
               granted hereby or for the execution,  delivery, or performance of
               this Agreement by Pledgor,  (b) for the perfection of or exercise
               by Pledgee of its rights and  remedies  hereunder  (except as may
               have been  taken by or at the  direction  of  Pledgor or as maybe
               required in connection  with a disposition  of the  Collateral by
               laws affecting the offering and sale of securities generally); or
               (c) for the  exercise  by Pledgee  of the voting or other  rights
               provided for in this  Agreement or the remedies in respect of the
               Collateral  pursuant to this Agreement  (except as maybe required
               in  connection  with a  disposition  of the  Collateral  by  laws
               affecting the offering and sale of securities generally).

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          6.6  All of the issued and outstanding  shares of Common Stock pledged
               pursuant to this  Agreement are owned by Pledgor and shall at all
               times  during the term of the Loan  Documents  bear a  restricted
               legend confirming their pledged status hereunder.

          6.7  Pledgor shall, upon execution  hereof,  commence its best efforts
               to obtain  the  authority  to issue  and to issue  the  necessary
               number of  unrestricted  shares in Pledgor as required under this
               Agreement.

          6.8  At the time of delivery to Pledgee, all of the outstanding Shares
               shall  have been duly and  validly  issued and will be fully paid
               and non-assessable.

          6.9  Pledgor has made its own  arrangements  for  keeping  informed of
               changes or potential changes affecting the Collateral (including,
               but not  limited  to,  rights to  convert,  rights to  subscribe,
               payment of dividends,  reorganization or other exchanges,  tender
               offers, and voting rights), and Pledgor agrees that Pledgee shall
               not have any responsibility or liability for informing Pledgor or
               any such changes or for taking any action or omitting to take any
               such action with respect thereto.

     7.   SHARE ADJUSTMENTS. In the event that during the term of this Agreement
          any  reclassification,  readjustment,  or other  change is declared or
          made in the capital  structure  of Pledgor,  all new  substituted  and
          additional shares,  options, or other securities issued or issuable to
          Pledgor by reason of any such change or exercise shall be delivered to
          or held by  Pledgee  under  the  terms of this  Agreement  in the same
          manner as the Collateral originally Pledged hereunder.

     8.   OPTIONS.  In the event that during the term of this Agreement  Options
          shall be issued or exercised in connection with the  Collateral,  such
          Options  acquired by Pledgor shall be immediately  assigned by Pledgor
          to Pledgee and all new shares or other securities  acquired by Pledgor
          shall also be immediately  assigned to Pledgee to be held under to the
          same  terms of this  Agreement  in the same  manner as the  Collateral
          originally pledged hereunder.

     9.   CONSENT.  Pledgor hereby consents that,  from time to time,  before or
          after the  occurrence  or  existence  of any Event of Default  with or
          without  notice to or assent from Pledgor,  any other  security at any
          time  held  by  or  available  to  Pledgee  for  any  of  the  Secured
          Obligations  or any other security at any time held by or available to
          Pledgee of any other  person,  firm,  or  corporation  secondarily  or
          otherwise liable for any of the Secured Obligations,  may be exchanged
          surrendered,  or released  and any of the Secured  Obligations  may be
          changed,   altered,   renewed,   extended,   continued,   surrendered,
          compromised,  waived, or released, in whole or in part, as Pledgee may
          see  fit.   Pledgor  shall  remain  bound  under  this  Agreement  not
          withstanding any such change, surrender, release, alteration, renewal,
          extension, continuance,  compromise, waiver, or inaction, or extension
          of further credit.

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     10.  EVENTS  OF  DEFAULT.  The  occurrence  of any of the  following  shall
          constitute  an  event of  default  ("Event  of  Default")  under  this
          Agreement;

          10.1 The Occurrence of an Event of default under the Secured Note.

          10.2 Pledgor shall breach, or be in default of, any of its agreements,
               covenants and  obligations  under this Agreement or the Guaranty;
               or;

          10.3 Any  representation  or  warranty  made  by  Pledgor  under  this
               Agreement  or the  Secured  Note shall  prove to have been untrue
               when made.

     11.  REMEDIES UPON DEFAULT.

     11.1 Upon the  occurrence  of an Event of Default,  Pledgee  shall have, in
          addition to any other rights given by law or in this Agreement, in the
          Loan Documents, or in any other agreement between Pledgee and Pledgor,
          all of the rights and  remedies  with respect to the  Collateral  of a
          secured Party under the code, and also shall have,  without limitation
          the following  rights,  which Pledgor hereby agrees to be commercially
          reasonable.

          (a)  to  receive an amounts  payable in respect of the  Collateral  to
               Pledgor under Section 5.1(b) hereof;

          (b)  to  register  all or any part of the  Collateral  on the books of
               each  of the  Borrowers  in  Pledgee's  name  or the  name of its
               nominee or nominees;

          (c)  to vote all or part of the  Shares  (whether  or not  transferred
               into the name of the  Pledgee)  in  accordance  with  Section 5.2
               hereof,  and give all  consents,  waivers  and  ratifications  in
               respect of the Collateral and otherwise act with respect  thereto
               as though it were the  outright  owner  thereof;  PLEDGOR  HEREBY
               IRREVOCABLY  CONSTITUTES  AND  APPOINTS  PLEDGEE  THE  PROXY  AND
               ATTORNEY-IN-FACT OF PLEDGOR,  COUPLED WITH AN INTEREST, WITH FULL
               POWER OF  SUBSTITUTION  FOR ANY AND ALL OF SUCH  PURPOSES;  WHICH
               PROXY AND POWER OF  ATTORNEY  SHALL  CONTINUE  IN FULL  FORCE AND
               EFFECT  AND  TERMINATE  UPON  THE  EARLIER  TO  OCCUR  OF (A) THE
               INDEFEASIBLE PAYMENT IN FULL OF THE SECURED OBLIGATIONS,  AND (B)
               TEN (10) YEARS FROM THE DATE HEREOF.

          (d)  at any time or from time to time, to sell, assign and deliver, or
               grant options to purchase, all or any part of the Collateral,  or
               any  interest  therein,  at any public or private  sale,  without
               demand of  performance,  advertisement  or notice of intention to
               sell or of the time or place of sale or adjournment thereof or to
               redeem or otherwise  (all of which are hereby waived by Pledgor),
               for  cash,  on credit or for other  property,  for  immediate  or
               future  delivery  without any  assumption of credit risk, and for
               such  price or prices  and on such  terms as the  Pledgee  in its
               absolute  discretion may  determine;  PROVIDED that at least five
               (5) days  notice of the time and place of any such sale  shall be
               given to Pledgor. Pledgee shall not be 

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               obligated  to make  any such  sale of  Collateral  regardless  of
               whether any such notice of sale has therefore been given. Pledgor
               hereby  waives  any  other  requirement  of  notice,  demand,  or
               advertisement  for sale, to the extent  permitted by law. Pledgor
               hereby waives and releases to the fullest extent permitted by law
               any right or equity of redemption with respect to the Collateral,
               before  or after  sale  hereunder,  and all  rights,  if any,  of
               marshaling  the Collateral and any other security for the Secured
               Obligations or otherwise.  At any such sale, unless prohibited by
               applicable law,  Pledgee may bid for and purchase all or any part
               of the  Collateral  so sold free from any such right of equity or
               redemption. Pledgee shall not be liable for failure to collect or
               realize upon any or all of the  Collateral or for any delay in so
               doing  nor shall  Pledgee  be under  any  obligation  to take any
               action whatsoever with regard thereto;

          (e)  to buy  the  Collateral  in its  own  name,  or in the  name of a
               designee or nominee.  Pledgee shall have the right to execute any
               document or form, in its name or in the name of the Pledgor, that
               may be necessary or desirable in connection with such sale of the
               Collateral.

          (f)  to  sell  all  of or any  part  of the  Collateral  by a  private
               placement,  restricting  bidders and  prospective  purchasers  to
               those who will  represent and agree that they are  purchasing for
               investment only and not for  distribution.  In so doing,  Pledgee
               may solicit offers to buy the  Collateral,  or any part of it for
               cash, for a limited number of investors deemed by Pledgee, in its
               reasonable  judgment,  to be  responsible  parties  who  might be
               interested in purchasing the Collateral. If Pledgee shall solicit
               such offers from not less than four (4) such investors,  then the
               acceptance  by Pledgee of the highest  offer  obtained  therefore
               shall  be  deemed  to  be a  commercially  reasonable  method  of
               disposition  of such  Collateral,  even  though  the sales  price
               established  and/or obtained may be  substantially  less than the
               price  that  would be  obtained  pursuant  to a public  offering.
               Notwithstanding  the foregoing,  should Pledgee  determine  that,
               prior to any public  offering of any securities  contained in the
               Collateral,  such securities  should be registered  under the '33
               Act and/or  registered  or qualified  under any other  federal or
               state law, and that such registration and/or qualification is not
               practical, Pledgor agrees that it will be commercially reasonable
               if a private  sale is arranged  so as to avoid a public  offering
               even if offers are solicited  from fewer than four (4) investors,
               and even though at sales price established and/or obtained may be
               substantially less than the price that would be obtained pursuant
               to a public offering.

               NOTWITHSTANDING  ANYTHING  CONTAINED  TO  THE  CONTRARY  IN  THIS
               PARAGRAPH 11, should the Event of Default be Pledgor's failure to
               make a payment  within ten (10) days of its due date,  Coast will
               be permitted to exercise it rights as  described  herein  against
               only that  amount of the  Collateral  sufficient  to satisfy  the
               amount of the past due payment plus all costs,  fees and expenses
               in  connection  with the  exercise  of said  rights  against  the
               Collateral.  However, in the event Pledgor falls three (3) months
               in arrears  under the Secured  Note,  upon ten (10) days  written
               notice prior to the sale,  Coast will be permitted to exercise it
               rights as  described  herein  against  only that  portion  of the
               Collateral sufficient to obtain any and all amounts due under the
               Secured Note plus all costs, fees and expenses in connection with
               the exercise of said rights against the Collateral.

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     12.  PLEDGEE AS PLEDGOR'S  ATTORNEY-IN  FACT.  Pledgor  hereby  irrevocably
          appoints  Pledgee as its  attorney-in-fact,  coupled with an interest,
          (i) to arrange for the register,  at any time after the occurrence and
          during the  continuance  of an Event of Default,  of the Collateral on
          the books of each of the  Borrowers  to the name of  Pledgee or to the
          name of Pledgee's nominee and (ii) to receive, endorse and collect all
          instruments  made payable to Pledgor of any dividend,  distribution or
          other payment on account of the Collateral,  or any part thereof,  and
          to  give  full  discharge  for  the  same  and  to  execute  and  file
          governmental   notifications  and  reporting  forms.  Pledgor  further
          authorizes  Pledgee to perform  any and all acts which  Pledgee  deems
          necessary for the protection and  preservation of the Collateral or of
          the value of Pledgee's  security interest therein,  but not limited to
          receiving  income  thereon as additional  security  hereunder,  all at
          Pledgor's  expense,  and Pledgor agrees to repay Pledgee promptly upon
          demand any  amounts  expended  hereunder  by  Pledgee,  together  with
          interest  thereon.  Pledgor  further  grants  to  Pledgee  a power  of
          attorney  coupled with an interest to execute all  agreements,  forms,
          applications, documents and instruments and to take all actions and to
          do all  things  as could be  executed,  taken  or done by  Pledgor  in
          connection  with the protection and  preservation of the Collateral or
          this  Agreement.  This power of attorney is irrevocable and authorizes
          Pledgee to act for Pledgor in  connection  with the matters  described
          herein without notice to or demand upon Pledgor.

     13.  GENERAL PROVISIONS

          13.1 CUMULATIVE  REMEDIES:  NO  PRIOR  RECOURSE  TO  COLLATERAL.   The
               enumeration  herein  of  Pledgee's  rights  and  remedies  is not
               intended to be  exclusive,  and such rights and  remedies  are in
               addition to and not by way of  limitation  of any other rights or
               remedies  that the Pledgee may have under the Secured  Note,  the
               Loan Documents,  the Code, or other applicable law. Pledgee shall
               have the right, in its sole discretion, to determine which rights
               and remedies are to be exercised and in which order. The exercise
               of one right or remedy  shall not  preclude  the  exercise of any
               others, all of which shall be cumulative.

          13.2 NO IMPLIED WAIVERS.  No act,  failure,  or delay by Pledgee shall
               constitute a waiver of any of its rights and remedies.  No single
               or partial waiver by Pledgee of any provision of this  Agreement,
               or of a breach or  default  hereunder,  or of any right or remedy
               which the  Pledgee  may have,  shall  operate  as a waiver of any
               other provision,  breach, default, right or remedy or of the same
               provision, breach, default, right or remedy on a future occasion.
               No waiver by Pledgee  shall  effect its rights to require  strict
               performance of this Agreement.

          13.3 NOTICES.  All notices or demands by any party hereto to the other
               party and relating to this Agreement  shall be sent in accordance
               with the terms of Section 9.5 of the Secured Note as follows:

               If to Pledgor:             Palomar Medical Technologies, Inc.
                                          45 Hartwell Avenue
                                          Lexington, MA 02173
                                          Attn:  Director of Finance
                                          Facsimile No. (781) 676-7330

                                       9
<PAGE>

               With a copy to:            Palomar Medical Technologies, Inc.
                                          General Counsel
                                          45 Hartwell Avenue
                                          Lexington, MA 02173
                                          Facsimile No. (781) 676-7330

              If to Pledgee:              Coast Business Credit
                                          12121 Wilshire Blvd., Ste. 1111
                                          Los Angeles, CA 90025

                                          Attn:  Bay Fetner
                                          Facsimile No:  (310) 826-2884

          13.4 SEVERABILITY.  Should any provision,  clause or condition of this
               Agreement  be held by any court of competent  jurisdiction  to be
               void or unenforceable, such defect shall not affect the remainder
               of this Agreement.

          13.5 INTEGRATION. This Agreement and such other agreements,  documents
               and  instruments as may be executed in connection  herewith shall
               be construed as the entire and complete agreement between Pledgor
               and Pledgee and shall  supersede all prior  negotiations,  all of
               which are merged and integrated herein.

          13.6 AMENDMENT.  The terms and provisions of this Agreement may not be
               waived or amended  except in a writing  executed by Pledgor and a
               duly authorized officer of Pledgee.

          13.7 TIME OF  ESSENCE.  Time is of the essence in the  performance  by
               Pledgor of each and every obligation under this Agreement.

          13.8 MUTUAL  WAIVER OF JURY TRIAL.  Pledgor  and  Pledgee  each hereby
               waive  the  right to trial by jury in any  action  or  proceeding
               based  upon,  arising  out of, or in any way  relating  to,  this
               Agreement,  or any conduct,  acts  omission of Pledgor or Pledgee
               any of their directors, officers, employees, agents, attorneys or
               any other persons affiliated with Pledgor or Pledgee.

          13.9 BENEFIT OF AGREEMENT.  The provisions of this Agreement  shall be
               binding  upon  and  inure  to  the  benefit  of  the   respective
               successors,  assigns, heirs, beneficiaries and representatives of
               the  parties  hereto;  provided,  however,  that  Pledgor may not
               assign or transfer any of its rights under this Agreement without
               the  prior  written  consent  of  Pledgee,   and  any  prohibited
               assignment shall be void. No consent by Pledgee to any assignment
               shall  relieve  Pledgor  or  any  guarantor  from  its  liability
               hereunder.

          13.10PARAGRAPH  HEADINGS;  CONSTRUCTION.  Paragraph  headings are used
               herein for convenience only.  Pledgor  acknowledges that the same
               may not describe  completely the subject matter of the applicable
               paragraph,  and the  same  shall  not be used  in any  manner  to
               construe,  limit,  define  or  interpret  any  term or  provision
               hereof.  This  Agreement has 

                                       10
<PAGE>

               been fully  reviewed  and  negotiated  between the parties and no
               uncertainty  or  ambiguity  in any  term  or  provision  of  this
               Agreement shall be construed  strictly against Pledgor or Pledgee
               under any rule of construction or otherwise.

         13.11 GOVERNING LAW;  JURISDICTION;  VENUE. This Agreement and all acts
               and  transactions  hereunder  and all rights and  obligations  of
               Pledgor and Pledgee SHALL be governed by and in  accordance  with
               the  laws of the  State of  California;  PROVIDED,  HOWEVER,  the
               respective  rights  of the  parties  hereto  in  the  Collateral,
               including voting, transfer and proxy rights, shall be governed by
               the laws of the state of  organization  of each of the Companies,
               respectively,  to the  extent  such laws are  applicable  to such
               rights. Any undefined term used in this Agreement that is defined
               in the California  Uniform Commercial Code shall have the meaning
               therein assigned to that term. As a part of the  consideration to
               Pledgee to enter into the Secured  Note,  Pledgor (i) agrees that
               all  actions and  proceedings  relating  directly  or  indirectly
               hereto shall, at Pledgee's option, be litigated in courts located
               within California, and that the exclusive venue therefor shall be
               Los Angeles County; (ii) consent to the jurisdiction and venue of
               any such  court and  consents  to  service of process in any such
               action or  proceeding  by personal  delivery or any other  method
               permitted by law; and (iii) waives any and all rights Pledgor may
               have to  object  to the  jurisdiction  of any such  court,  or to
               transfer or change the venue of any such action or proceeding.

     IN WITNESS  WHEREOF,  the parties have executed this  Agreement on the date
first written above.

                                        "PLEDGOR'

                                        PALOMAR MEDICAL TECHNOLOGIES, INC.


                                                  /s/ Louis P. Valente
                                        ---------------------------------------
                                        By:       Louis P. Valente
                                        Title:    CEO and President

                                        "PLEDGEE"

                                        COAST BUSINESS CREDIT, a division of 
                                        SOUTHERN PACIFIC BANK, a California 
                                        corporation


                                                  /s/ Philip Goessler
                                        -------------------------------------
                                        By:  Philip Goessler
                                        Title:  Vice President