KEY EMPLOYEE AGREEMENT






To:   Joseph P. Caruso


      The   undersigned,   Palomar  Medical   Technologies,   Inc.,  a  Delaware
corporation  (the  "Company" or "PMTI"),  with its  principal  place of business
located at 66 Cherry Hill Drive,  Beverly,  MA 01915,  hereby agrees with you as
follows:

l.    POSITION AND RESPONSIBILITIES.

      1.1 You shall serve as Chief Financial Officer of the Company,  or in such
other  executive  capacity as shall be  designated  by the Board of Directors or
Executive Committee of the Company.

      1.2 You will devote your full time and best efforts to the  performance of
your duties hereunder and the business and affairs of the Company.  You agree to
perform  such  executive  duties as may be assigned to you by or on authority of
the Company's  Chief  Executive  Officer  ("CEO"),  President or Chairman of the
Board  from  time to time.  After  receipt  of  notice  of  termination  of your
employment  hereunder,  you shall  continue to be  available to the Company on a
part-time  basis at  reasonable  and  customary  hourly  rates to  assist in any
necessary transition, lawsuits, or other carry-over issues.

      1.3 You will duly, punctually,  and faithfully perform and observe any and
all rules and regulations that the Company may now or shall hereafter reasonably
establish governing your conduct as an employee and the conduct of its business.

2.    TERM OF EMPLOYMENT.

      2.1 The initial  term of this  Agreement  shall be for the period of years
set  forth on  Exhibit  A  annexed  hereto  commencing  with  the  date  hereof.
Thereafter, this Agreement shall be automatically renewed for successive periods
of one (1) year,  unless you or the Company  shall give the other party not less
than two (2) months prior written notice of non-renewal. During the initial term
of this  Agreement,  your  employment  with the  Company  may be  terminated  as
provided in Sections 2.2 or 2.3.

                                       1
<PAGE>

      2.2 The Company shall have the right to terminate  your  employment at any
time under this Agreement prior to the stated term in any of the following ways:

      (a) on ten (10) days  prior  written  notice  to you upon your  disability
      (disability  shall be defined as your inability to perform with or without
      reasonable   accommodation   all  of  your  essential  duties  under  this
      Agreement)  (if any question  shall arise as to whether  during any period
      you are  disabled,  so as to be unable to  perform  all of your  essential
      duties hereunder, you may, and at the request of the Company shall, submit
      to a medical  examination  by a physician  selected by the Company to whom
      you or your duly appointed guardian, if any, have no reasonable objections
      to determine whether you are so disabled, and such determination shall for
      the  purposes  of this  Agreement  be  conclusive  of the  issue;  if such
      question  shall  arise  and you  shall  fail  to  submit  to such  medical
      examination,  the Company's determination of the issue shall be binding on
      you);

      (b)  immediately  without  prior  notice to you upon your  death;  if your
      employment is terminated because of your death, pursuant to subsection 2.2
      (a), all obligations of the Company  hereunder cease,  except with respect
      to amounts and obligations  accrued to you,  through 30 days from the date
      during which your death has occurred;

      (c)  immediately  without prior notice to you by the Company for Cause, as
      hereinafter defined;

      (d) immediately  without prior notice to you or Cause, in the event of the
      liquidation or reorganization of the Company under the federal  Bankruptcy
      Act or any state insolvency or bankruptcy law;

      (e) at any time without prior notice to you or Cause, provided that during
      the initial term of this  Agreement  the Company shall be obligated to pay
      to you upon notice of  termination,  as severance pay, your Base Salary as
      then in effect in a lump sum payment in  addition to all earned  incentive
      compensation in accordance with Exhibit A attached,  less applicable taxes
      and other required withholdings and any amounts you may owe to the Company
      and  continuation  of all  benefits and  insurance  payments to the extent
      permitted  by the  Company's  plans  or  policies  for one  year.  If your
      employment is terminated  without Cause at anytime after the initial term,
      the Company  shall be obligated to pay a lump sum amount equal to one-half
      your Base  Salary as then in effect in  addition  to all earned  incentive
      compensation in accordance with Exhibit A attached,  less applicable taxes
      and other required  withholdings and any amount you may owe to the Company
      and continuation of all benefits and insurance  payments by the Company to
      the extent  permitted by the  Company's  plans or policies for six months.
      If,  however,  a change in control of the  Company  should  occur  causing
      termination of your  employment  without Cause at any time during the term
      of this Agreement,  then you shall be entitled to receive as severance pay
      four  times  your Base  Salary as then in effect in a lump sum  payment in
      addition to all earned incentive compensation in accordance with Exhibit A
      attached.  For  purposes of this  Agreement  "change in control"  shall be
      deemed  to be the sale of all or  substantially  all of the  assets of the
      Company or the merger of the Company with  another  entity where the other
      entity survives the merger.

                                       2
<PAGE>

      2.3 During the initial term of this Agreement, you shall have the right to
terminate your  employment  hereunder for any reason,  upon not less than ninety
(90) days' prior written notice to the Company.

      2.4 "Cause" for the purpose of Section 2 of this Agreement shall mean: (i)
the   falseness  or  material   inaccuracy   of  any  of  your   warranties   or
representations herein; (ii) your failure,  refusal or inability  satisfactorily
to perform the  services  required of you hereby,  or to comply with  reasonable
explicit directives of the President,  Board of Directors or Executive Committee
with  respect  to  the  services  to  be  rendered  hereunder;  (iii)  fraud  or
embezzlement  involving  assets of the  Company,  its  customers,  suppliers  or
affiliates or other misappropriation of the Company's assets or funds; (iv) your
conviction of a criminal  felony  offense;  (v) any material breach of the terms
hereof;  provided  however,  that the Company  provides you with 20 days written
notice  specifying the breach relied on for such  termination,  and only if such
breach has not been cured within such 20-day period; (vi) habitual use of drugs;
or (vii) conduct by you that is materially  harmful to the business  interest or
reputation of the Company or any of its affiliates.

      Any dispute,  controversy, or claim arising out of, in connection with, or
in relation to this  definition  of "Cause" shall be settled by  arbitration  as
provided in Section 9 hereof. The cost of arbitration,  exclusive of the cost of
each  party's  legal  representation  (which,  except as  hereinafter  otherwise
provided,  shall be borne by the party incurring the expense), shall be borne by
the  instigating  party;  provided,  however,  that the  arbitrators'  award may
require  either party to reimburse  the other for the  reasonable  cost of legal
representation in the arbitration proceedings.

3.    COMPENSATION.

      You shall  receive the  compensation  and  benefits set forth on Exhibit A
attached  hereto  ("Compensation")  for  all  services  to be  rendered  by  you
hereunder  and for your  transfer of property  rights  pursuant to an  agreement
relating  to  proprietary  information  and  inventions  of even  date  herewith
attached  hereto as  Exhibit C between  you and the  Company  (the  "Proprietary
Information and Inventions Agreement").

4.    OTHER ACTIVITIES DURING EMPLOYMENT.

      4.1 Except for any outside employment and directorships  currently held by
you as listed on Exhibit B attached  hereto,  and except with the prior  written
consent of a disinterested  majority of the Company's Board of Directors,  which
consent will not be unreasonably withheld, you will not, during the term of this
Agreement,  undertake or engage in any other employment,  occupation or business
enterprise other than one in which you are an inactive investor.

      4.2 You  hereby  agree  that,  except as  disclosed  on Exhibit B attached
hereto, during your employment hereunder,  you will not, directly or indirectly,
engage (i)  individually,  (ii) as an officer,  (iii) as a director,  (iv) as an
employee, (v) as a consultant,  (vi) as an advisor, (vii) as an agent (whether a
salesperson or otherwise), (viii) as a broker, or (ix) as a partner, covenanter,
stockholder or other  proprietor  owning  directly or indirectly  more than five
percent (5) interest in any firm, corporation,  partnership, trust, association,
or other organization which is engaged in the planning,  research,  development,
production,   manufacture,   marketing,  sales,  or  distribution  of  products,
equipment,  or services  similar to those  produced by the Company,  (such firm,
corporation,  partnership,  trust,  association,  or  other  organization  being
hereinafter referred 

                                       3
<PAGE>

      to as a  "Prohibited  Enterprise").  Except  as may be shown on  Exhibit B
      attached  hereto,  you hereby represent that you are not engaged in any of
      the foregoing capacities (i) through (ix) in any Prohibited Enterprise.

5.    FORMER EMPLOYERS.

      5.1 You represent and warrant that your employment by the Company will not
conflict with and will not be  constrained  by any prior or current  employment,
consulting, confidentiality, non-competition or other agreement or relationship,
whether  oral or written.  You  represent  and  warrant  that you do not possess
confidential  information  arising  out  of  any  such  employment,   consulting
agreement or  relationship  which,  in your best judgment,  would be utilized in
connection with your employment by the Company in the absence of Section 5.2.

      5.2 If, in spite of the second  sentence of Section  5.1,  you should find
that confidential  information  belonging to any other person or entity might be
usable in connection  with the Company's  business,  you will not  intentionally
disclose  to the  Company  or use on  behalf  of the  Company  any  confidential
information  belonging  to  any  of  your  former  employers;  but  during  your
employment  by the  Company you will use in the  performance  of your duties all
information  which is  generally  known and used by persons  with  training  and
experience  comparable to your own all information  which is common knowledge in
the industry or otherwise legally in the public domain.

6.    PROPRIETARY INFORMATION AND INVENTIONS.

      You  agree to  execute,  deliver  and be bound  by the  provisions  of the
Proprietary Information and Inventions Agreement attached hereto as Exhibit C.

7.    POST-EMPLOYMENT ACTIVITIES.

      7.1 For a period of one (1) year after the  termination  or  expiration of
your employment,  for cause or if you terminated the employment with the Company
hereunder (the "Non-Competition  Period"),  absent the Board of Directors' prior
written  approval,  you will not  directly or  indirectly  engage in  activities
similar to those  described  in Section  4.2,  nor  render  services  similar or
reasonably  related to those  which you shall have  rendered  hereunder  to, any
person or entity  whether now existing or hereafter  established  which directly
competes  with (or  proposes  or plans to  directly  compete  with) the  Company
("Direct Competitor") in the same or similar business. Nor shall you (i) entice,
induce  or  encourage  any of the  Company's  other  employees  to engage in any
activity  which,  were it  done  by you,  would  violate  any  provision  of the
Proprietary  Information  and  Inventions  Agreement  or this Section 7, or (ii)
directly or indirectly  solicit or accept  business or orders from  customers of
the Company  (including  end users whom the  Company's  products or services are
sold through  distributors,  licensees  and the like) for any business  which is
similar  to or  competitive  with the  business  of the  Company  as then  being
conducted. As used in this Agreement,  the term "any line of business engaged in
or under  demonstrable  development  by the Company"  shall be applied as at the
date  of  termination  of your  employment,  or,  if  later,  as at the  date of
termination of any post-employment consultation.

      7.2 During the Non-Competition Period, the provisions of Section 4.2 shall
be applicable to you and you shall comply therewith.

                                       4
<PAGE>

      7.3 Until the  conclusion of the  Non-Competition  Period,  you shall give
notice to Company of each new business activity you plan to undertake,  at least
fourteen (14) days prior to beginning any such activity. Such notice shall state
the name and address of the person for whom such activity is undertaken  and the
nature of your business  relationship(s) and position(s) with such persons.  You
shall provide the Company with such other pertinent information  concerning such
business  activity as the Company may  reasonably  request in order to determine
your continued compliance with your obligations hereunder.

      7.4 No provision of this Agreement shall be construed to preclude you from
performing the same services which the Company hereby retains you to perform for
any person or entity  which is not a Direct  Competitor  of the Company upon the
expiration  or   termination  of  your   employment   (or  any   post-employment
consultation)  so long as you do not thereby  violate any term of this Agreement
or the Proprietary Information and Inventions Agreement.

      7.5 You and the  Company  are of the belief  that the period of time,  the
area specified and the nature and scope of the  restrictions  in Section 7.1 are
reasonable in view of the nature of the business in which the Company is engaged
and proposes to engage, the state of its business development and your knowledge
of this business.  However, if such period, such area or the nature and scope of
the  restrictions  should be adjudged  unreasonable in any judicial  proceeding,
then the period of time shall be  reduced  by such  number of months,  such area
shall be reduced by elimination of such portion of such area, or such nature and
scope of the restrictions shall be modified, as are deemed unreasonable, so that
this  covenant may be enforced in such area and during such period of time as is
adjudged to be reasonable.

      7.6 You  agree and  covenant  that you will not,  unless  acting  with the
Company's   express  written  consent,   directly  or  indirectly,   during  the
Non-Competition  Period,  solicit,  entice away or interfere  with the Company's
contractual relationships with any customer,  client, officer or employee of the
Company.

      7.7 You  recognize  and agree that the injury that the Company will suffer
in the event of your  breach of any  covenant  or  agreement  contained  in this
Section 7 cannot be  compensated by monetary  damages  alone,  and you therefore
agree that the Company,  in addition to and without  limiting any other remedies
or rights that it may have, either under this Agreement or otherwise, shall have
the right to obtain an injunction  against you,  enjoining any such breach,  and
that you shall  reimburse the Company for its costs and attorneys'  fees of such
action.

                                       5
<PAGE>

8.    SURVIVAL OF TERMS AND REMEDIES.

      Your  obligations   under  the  Proprietary   Information  and  Inventions
Agreement and the  provisions of Sections 7, 8, 9, and 11 of this  Agreement (as
modified  by  Section  4,  if  applicable)   shall  survive  the  expiration  or
termination of your employment  (whether  through your resignation or otherwise)
with the  Company.  You  acknowledge  that a  remedy  at law for any  breach  or
threatened  breach by you of the provisions of the  Proprietary  Information and
Inventions  Agreement  or  Sections 4 or 7 hereof  would be  inadequate  and you
therefore agree that the Company shall be entitled to such injunctive  relief in
case  of any  such  breach  or  threatened  breach.  Should  you  engage  in any
activities  prohibited by this  Agreement,  you agree to pay over to the Company
all  compensation,  remuneration  or monies or property of any sort  received in
connection with such activities;  such payment shall not impair any other rights
or remedies of the Company or your obligations or liabilities  which you and the
Company may have under this Agreement or applicable law.

9.    ARBITRATION.

      Any dispute concerning this Agreement  including,  but not limited to, its
existence,  validity,  interpretation,  performance or non-performance,  arising
before or after termination or expiration of this Agreement, shall be settled by
a single arbitrator in Boston,  Massachusetts,  in accordance with the expedited
procedures of the  commercial  rules then in effect of the American  Arbitration
Association;  provided,  however,  that  claims or  disputes  involving  the (i)
unauthorized  use or  disclosure  of  Confidential  Information  (as  defined in
Exhibit C), or (ii) the breach or alleged breach by you of any  obligations  set
forth in Section 7, shall be settled by either a Federal or state court  sitting
in  Massachusetts  and shall not be  decided  by  arbitration  pursuant  to this
Section,  unless you and the  company  expressly  agree  otherwise  in  writing.
Judgment upon any arbitration  award may be entered in the highest court,  state
or federal,  having  jurisdiction.  Except as otherwise provided in Section 2.4,
the cost of such arbitration  shall be borne equally between the parties thereto
unless otherwise determined by such arbitrator;  each party shall separately pay
its or his own counsel fees and other costs in connection with the arbitration.

10.   ASSIGNMENT.

      This Agreement and the rights and  obligations of the parties hereto shall
bind and inure to the benefit of any  successor or  successors of the Company by
reorganization, merger or consolidation and any assignee of all or substantially
all of its  business and  properties,  but,  except as to any such  successor or
assignee  of the  Company,  neither  this  Agreement  nor any rights or benefits
hereunder  may be assigned by the Company or by you,  except by operation of law
or by a further written agreement by the parties hereto.

11.   INTERPRETATION.

      IT IS THE  INTENT  OF THE  PARTIES  THAT  in  case  any one or more of the
provisions  contained in this  Agreement  shall,  for any reason,  be held to be
invalid, illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability  shall not affect the other  provisions of this Agreement,  and
this Agreement shall be construed as if such invalid,  illegal or  unenforceable
provision had never been  contained  herein.  MOREOVER,  IT IS THE INTENT 

                                       6
<PAGE>

OF THE  PARTIES  THAT if any one or more  of the  provisions  contained  in this
Agreement is or becomes or is deemed  invalid,  illegal or  unenforceable  or in
case any shall for any reason be held to be  excessively  broad as to  duration,
geographical  scope,  activity or subject,  such provision shall be construed by
amending,  limiting and/or reducing it to conform to applicable laws so as to be
valid and enforceable or, if it cannot be so amended without materially altering
the  intention  of the parties,  it shall be stricken and the  remainder of this
Agreement shall remain in full force and effect.

12.   NOTICES.

      Any  notice  which the  Company is  required  to or may desire to give you
shall be given by  registered  or  certified  mail,  return  receipt  requested,
addressed to you at your  address of record with the  Company,  or at such other
place as you may from time to time  designate  in writing.  Any notice which you
are  required or may desire to give to the Company  hereunder  shall be given by
registered  or  certified  mail,  return  receipt  requested,  addressed  to the
Chairman of the Board of the Company at its principal  office,  or at such other
office as the Company may from time to time designate in writing, with a copy to
the General  Counsel of Palomar  Medical  Technologies,  Inc.  at its  principal
office.

13.   WAIVERS.

      Failure by the Company to insist upon  strict  compliance  with any of the
terms,  covenants,  or  conditions  hereof  shall not be deemed a waiver of such
terms,  covenants  or  conditions.  No waiver of any right under this  Agreement
shall be deemed  effective  unless  contained  in a writing  signed by the party
charged with such waiver,  and no waiver of any right arising from any breach or
failure to perform shall be deemed to be a waiver of any future such right or of
any other right arising under this Agreement.

14.   COMPLETE AGREEMENT; AMENDMENTS.

      The  foregoing,  including  Exhibits  A, B and C attached  hereto,  is the
entire  agreement  of the parties  with  respect to the subject  matter  hereof,
superseding  any  previous  oral  or  written  communications,  representations,
understandings,  or agreements with the Company or any officer or representative
thereof.  This Agreement may be amended or modified or certain provisions waived
only by a written  instrument  signed and agreed to by the parties hereto,  upon
authorization of the Company's Board of Directors.

15.   HEADINGS.

      The headings of the Sections  contained in this Agreement are inserted for
convenience and reference only and in no way define,  limit,  extend or describe
the scope of this Agreement,  the intent of any provisions hereof, and shall not
be  deemed  to  constitute  a part  hereof  nor to affect  the  meaning  of this
Agreement in any way.

16.   COUNTERPARTS.

      This Agreement may be signed in two  counterparts,  each of which shall be
deemed an original and both of which shall together constitute one agreement.

                                       7
<PAGE>

17.   GOVERNING LAW.

      This Agreement  shall be governed by and construed in accordance  with the
laws of the  Commonwealth of  Massachusetts  without regard to its principles of
conflict of laws.

18.   EFFECTIVE DATE.

      The effective Date of this Agreement is January 1, 1997.

      If you are in agreement  with the  foregoing,  please sign your name below
and also at the bottom of the Proprietary  Information and Inventions Agreement,
whereupon both  Agreements  shall become binding in accordance with their terms.
Please then  return  this  Agreement  to the  Company.  (You may retain for your
records the accompanying counterpart of this Agreement enclosed herewith.)


                                            Very truly yours,

                                            PALOMAR MEDICAL TECHNOLOGIES, INC.




                                            By:
                                                 Name:
                                                 Title:

Accepted and Agreed:





Joseph P. Caruso

<PAGE>



                                                                       EXHIBIT A


                   EMPLOYMENT TERM, COMPENSATION AND BENEFITS

                                       OF

                                Joseph P. Caruso
                             Chief Financial Officer



1.    TERM.

      The  term  of the  Agreement  to  which  this  Exhibit  A is  annexed  and
incorporated  shall be for  three  (3)  years  from the  effective  date of this
Agreement,  unless  renewed in  accordance  with Section 2.1 of the Agreement or
terminated prior thereto in accordance with Section 2.2 or 2.3 of the Agreement.

2.    COMPENSATION.

      (a) Base Salary.  Your Base Salary shall be TWO HUNDRED  THOUSAND  DOLLARS
      ($200,000) per annum, to be paid in accordance with the Company's  payroll
      policies,  and if the Agreement is renewed in accordance with Section 2.1,
      to be subject to increases thereafter as determined by the Company's Board
      of Directors or Compensation Committee.

      (b) Performance Compensation.  You will be eligible for a bonus at the end
      of each fiscal year as determined by the Board of Directors.

3.    VACATION.

      You shall be paid for and  entitled to all legal  holidays,  and three (3)
weeks paid  vacation per annum.  You shall  arrange for  vacations in advance at
such time or times as shall be mutually  agreeable to you and the  Company.  Any
vacation time not used in any  particular  year may be carried  forward into the
subsequent year. You may not receive pay in lieu of vacation.

4.    INSURANCE AND BENEFITS.

      You shall be  eligible  for  participation  in any  health or other  group
insurance  plan which may be  established by the Company or which the Company is
required to maintain by law.  You shall also be entitled to  participate  in any
employee  benefit  program which the Company may establish for its key employees
or for its employees generally, including, but in no way limited to, bonuses and
stock purchase or option plans. The Company may alter,  modify, add to or delete
its employee  benefit plans at any time as it, in its sole judgment,  determines
to  be  appropriate,   without  recourse  by  you.  The  Company  shall  provide
comprehensive  health  insurance  for  you  and  your  dependents.  Should  your
employment be terminated  for any reason,  the Company will use its best efforts
to allow you to assume these policies.

                                       1
<PAGE>

5.    EXPENSES.

      The Company shall  reimburse you promptly for all  reasonable and ordinary
business  and  out-of-pocket  expenses  incurred by you in  connection  with the
Company's business and in the scope of your employment hereunder, as approved by
the Company,  including,  without  limitation,  reasonable and necessary  travel
expenses  incurred  by you  during  the  term of this  Agreement,  provided  the
expenses  are  incurred in  furtherance  of the  Company's  business  and at the
request of the Company.  You agree to keep and maintain records of the aforesaid
expenses  as may be  requested  by the Company and to account to the Company for
the expenses prior to reimbursement.

      The Company  shall lease an automobile on your behalf for the initial term
of this Agreement.

                                       2
<PAGE>



                                                                       EXHIBIT B




                      OUTSIDE EMPLOYMENTS AND DIRECTORSHIPS



                                       OF


                                JOSEPH P. CARUSO




                                      NONE




<PAGE>


                                                                       EXHIBIT C



                PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT




                              As of January 1, 1997

To:   Joseph P. Caruso


      The  undersigned,  in consideration of and as a condition of my employment
or continued  employment by you and/or by your parent company or companies which
you own,  control,  or are  affiliated  with or  their  successors  in  business
(collectively, the "Company"), hereby agrees as follows:

1.    ALL BUSINESS TO BE THE PROPERTY OF THE COMPANY.

      I agree that any and all  presently  existing  business of the Company and
all  business  developed  by me or any other  employee of the Company  including
without  limitation all contracts,  fees,  commissions,  compensation,  records,
customer or client  lists,  agreements  and any other  incident of any  business
developed,  earned  or  carried  on by me for the  Company  is and  shall be the
exclusive  property  of the  Company,  and (where  applicable)  shall be payable
directly to the Company.

2.    CONFIDENTIALITY.

      I recognize that my relationship with the Company is one of high trust and
confidence  by reason of my access to and  contact  with the trade  secrets  and
confidential  and  proprietary  information  of the  Company.  I  agree  to keep
confidential,  except to the extent authorized by the Company in writing for its
benefit,  not to  disclose  or make  any use of at any  time  either  during  or
subsequent to my  employment,  any Inventions (as  hereinafter  defined),  trade
secrets and confidential  information,  knowledge,  data or other information of
the  Company  which is either not  generally  known  outside  the  Company or is
proprietary and confidential  information of the Company or any of its customers
or suppliers relating to products,  processes,  know-how,  techniques,  methods,
designs,  formulas,  test data, customer,  employee and supplier lists, business
plans,  budgets,  costs,  markets,  marketing  plans  and  strategies,   pricing
strategies,  operations  or other subject  matter  pertaining to any existing or
contemplated  business  of the  Company  or any of its  affiliates,  which I may
produce,  obtain,  or  otherwise  acquire  during the  course of my  employment,
whether I have such  information  in my memory or  embodied  in writing or other
tangible  form,  except as herein  provided.  I  further  agree not to  deliver,
reproduce  or  in  any  way  allow  any  such  trade  secrets  and  confidential
information, knowledge, data or other information, or any documentation relating
thereto,  to be  delivered  to or used by any  third  parties  without  specific
direction or consent of a duly authorized representative of the Company.

                                       1
<PAGE>

3.    RETURN OF CONFIDENTIAL MATERIAL.

      In the event my  employment  with the  Company  terminates  for any reason
whatsoever,  I agree to promptly surrender and deliver to the Company all of the
tangible  forms of  Confidential  Information  listed in Section 2, all records,
information,  materials, equipment, drawings, computer disks, documents and data
of which I may obtain or produce during the course of my employment,  and I will
not take with me any  description  containing or pertaining to any  confidential
information,  knowledge  or data of the  Company  which I may  produce or obtain
during the course of my employment.

4.    ASSIGNMENT OF INVENTIONS.

      4.1 I hereby  acknowledge  and agree that the  Company is the owner of all
Inventions.  In order to protect the  Company's  rights to such  Inventions,  by
executing  this  Agreement  I hereby  irrevocably  assign to the  Company all my
right,  title  and  interest  in and to all  Inventions  (without  any  separate
remuneration or  compensation  other than that received from time to time in the
course of my employment).

      4.2 For purposes of this Agreement,  "Inventions"  shall mean all research
information,   inventions,   technical   innovations,   writings,   tabulations,
procedures, developments, know-how, plans, programs, trade secrets, discoveries,
processes, designs, methods, techniques, technology, devices, or improvements in
any of the foregoing or other ideas,  whether or not patentable or copyrightable
and whether or not reduced to practice,  made or conceived by me (whether solely
or jointly  with  others)  during the period of my  employment  with the Company
which relate in any manner to the actual or demonstrably  anticipated  business,
work,  or  research  and  development  of the  Company,  or  result  from or are
suggested  by any  task  assigned  to me or any work  performed  by me for or on
behalf of the Company.

      4.3 Any discovery, process, design, method, technique, technology, device,
or improvement in any of the foregoing or other ideas, whether or not patentable
or copyrightable and whether or not reduced to practice, made or conceived by me
whether  solely or jointly with others  which I develop  entirely on my own time
not using any of the Company' equipment,  supplies,  facilities, or trade secret
information ("Personal Invention") is excluded from this Agreement provided such
Personal Invention (i) does not relate to the actual or demonstrably anticipated
business,  research and  development  of the Company,  and (ii) does not result,
directly or  indirectly,  from any work  performed by me for or on behalf of the
Company.

5.    DISCLOSURE OF INVENTIONS.

      I agree that in connection  with any Invention,  I will promptly  disclose
such Invention to the President,  Board of Directors and the Executive Committee
of the Company in order to permit the Company to enforce its property  rights to
such  Invention  in  accordance  with this  Agreement.  My  disclosure  shall be
received in confidence by the Company.

                                       2
<PAGE>

6.    PATENTS AND COPYRIGHTS: EXECUTION OF DOCUMENTS.

      6.1 Upon  request,  I agree to assist the  Company or its  nominee (at its
expense) during and at any time subsequent to my employment in every  reasonable
way to obtain for its own benefit  patents and  copyrights for Inventions in any
and all countries.  Such patent and copyrights  shall be and remain the sole and
exclusive property of the Company or its nominee. I agree to perform such lawful
acts as the Company  deems to be  necessary  to allow it to exercise  all right,
title and interest in and to such patents and copyrights.

      6.2 In connection with this Agreement, I agree to execute, acknowledge and
deliver to the  Company or its  nominee  upon  request  and at its  expense  all
documents,  including  assignments of title,  patent or copyright  applications,
assignments  of such  applications,  assignments  of patents or copyrights  upon
issuance,  as the Company may  determine  necessary  or desirable to protect the
Company's or its nominee's  interest in  Inventions,  and/or to use in obtaining
patents or  copyrights in any and all countries and to vest title thereto in the
Company or its nominee to any of the foregoing.

7.    MAINTENANCE OF RECORDS.

         It is understood that all Personal  Inventions if any, whether patented
or unpatented,  which I made prior to my employment by the Company, are excluded
from this Agreement.  To preclude any possible uncertainty,  I have set forth on
Schedule  A  attached  hereto  a  complete  list  of  all of my  prior  Personal
Inventions, including numbers of all patents and patent applications and a brief
description of all unpatented  Personal Inventions which are not the property of
a previous  employer.  I represent  and  covenant  that the list is complete and
that, if no items are on the list, I have no such prior Personal  Inventions.  I
agree to notify the Company in writing  before I make any  disclosure or perform
any work on behalf of the Company  which  appears to  threaten or conflict  with
proprietary rights I claim in any Personal Invention. In the event of my failure
to give such notice,  I agree that I will make no claim against the Company with
respect to any such Personal Invention.

8.    OTHER OBLIGATIONS.

      I acknowledge  that the Company from time to time may have agreements with
other persons,  companies,  entities,  the U.S.  Government or agencies thereof,
which impose  obligations or  restrictions on the Company  regarding  Inventions
made during the course of work thereunder or regarding the  confidential  nature
of such work. I agree to be bound by all such  obligations and  restrictions and
to take all action necessary to discharge the Company's obligations.

9.    INJUNCTIVE RELIEF.

      You  recognize  and agree that the injury that the Company  will suffer in
the  event  of your  breach  of any  covenant  or  agreement  contained  in this
Proprietary  Information and Confidentiality  Agreement cannot be compensated by
monetary damages alone, and you therefore agree that the Company, in addition to
and without limiting any other remedies or rights that it may have, either under
this Proprietary Information and Confidentiality  Agreement or otherwise,  shall
have the right to obtain an injunction  against you,  enjoining any such breach,
and that you shall  reimburse the Company for its costs and  attorneys'  fees of
such action.

                                       3
<PAGE>

10.   BINDING EFFECT.

      This  Agreement  shall be  binding  upon and inure to the  benefit  of the
parties hereto and their  respective  legal  representatives  and successors.  I
expressly  consent  to be  bound by the  provisions  of this  Agreement  for the
benefit of the Company or any parent,  subsidiary or affiliate  thereof to whose
employ I may be  transferred  without  the  necessity  that  this  Agreement  be
resigned at the time of such transfer.

11.   INTERPRETATION.

      IT IS THE  INTENT  OF THE  PARTIES  THAT  in  case  any one or more of the
provisions  contained in this  Agreement  shall,  for any reason,  be held to be
invalid, illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability  shall not affect the other  provisions of this Agreement,  and
this Agreement shall be construed as if such invalid,  illegal or  unenforceable
provision had never been  contained  herein.  MOREOVER,  IT IS THE INTENT OF THE
PARTIES  THAT if any  provision  of this  Agreement  is or  becomes or is deemed
invalid,  illegal or  unenforceable or in case any one or more of the provisions
contained in this Agreement shall for any reason be held to be excessively broad
as to duration, geographical scope, activity or subject, such provision shall be
construed by amending, limiting and/or reducing it to conform to applicable laws
so as to be valid  and  enforceable  or,  if it  cannot  be so  amended  without
materially  altering the intention of the parties,  it shall be stricken and the
remainder of this Agreement shall remain in full force and effect.

12.   WAIVERS.

      Failure by the Company to insist upon  strict  compliance  with any of the
terms,  covenants  or  conditions  hereof  shall  not be deemed a waiver of such
terms,  covenants  or  conditions.  No waiver of any right under this  Agreement
shall be deemed  effective  unless  contained  in a writing  signed by the party
charged with such waiver,  and no waiver of any right arising from any breach or
failure to perform shall be deemed to be a waiver of any future such right or of
any other right arising under this Agreement.

13.   ENTIRE AGREEMENT; MODIFICATION.

      This Agreement  constitutes the entire  agreement  between the parties and
supersedes   any  prior   oral  or  written   communications,   representations,
understandings  or  agreements  concerning  the subject  matter  hereof with the
Company or any  officer  or  representative  thereof.  This  Agreement  does not
constitute an employment agreement, and no changes in any compensation, title or
duties or any other terms or conditions  of my  employment,  including,  without
limitation,  the  termination of my  employment,  shall affect the provisions of
this  Agreement,  except  as  stated  herein.  This  Agreement  may be  amended,
modified,  or certain  provisions waived only by a written  instrument signed by
the parties hereto, upon authorization of the Company's Board of Directors.

                                       4
<PAGE>

14.   HEADINGS.

      The headings of the Sections  contained in this Agreement are inserted for
convenience and reference only and in no way define,  limit,  extend or describe
the scope of this Agreement,  the intent of any provisions hereof, and shall not
be  deemed  to  constitute  a part  hereof  nor to affect  the  meaning  of this
Agreement in any way.

15.   COUNTERPARTS.

      This Agreement may be signed in two  counterparts,  each of which shall be
deemed an original and both of which shall together constitute one agreement.

16.   GOVERNING LAW.

      This  Agreement  shall be  deemed to be a sealed  instrument  and shall be
governed  and  construed  in  accordance  with the laws of the  Commonwealth  of
Massachusetts, without regard to its principles of conflict of laws.

17.   NOTICES.

      Any  notice  which the  Company is  required  to or may desire to give you
shall be given by  registered  or  certified  mail,  return  receipt  requested,
addressed to you at your  address of record with the  Company,  or at such other
place as you may from time to time  designate  in writing.  Any notice which you
are  required or may desire to give to the Company  hereunder  shall be given by
registered  or  certified  mail,  return  receipt  requested,  addressed  to the
Chairman of the Board of the Company at its principal  office,  or at such other
office as the Company may from time to time designate in writing, with a copy to
the General  Counsel of Palomar  Medical  Technologies,  Inc.  at its  principal
office.

                                              EMPLOYEE



                                              Joseph P. Caruso

                                              Accepted and Agreed:

                                              PALOMAR MEDICAL TECHNOLOGIES, INC.



                                              By:
                                              Name:
                                              Title:

<PAGE>


                                                                      SCHEDULE A









                            LIST OF PRIOR INVENTIONS



                                       OF


                                JOSEPH P. CARUSO