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                                                           EXHIBIT 10.3

                                 COHERENT, INC.

                            1998 DIRECTOR OPTION PLAN


         1. PURPOSES OF THE PLAN. The purposes of this 1998 Director Option
Plan are to attract and retain the best available personnel for service as
Outside Directors (as defined herein) of the Company, to provide additional
incentive to the Outside Directors of the Company to serve as Directors and
to encourage their continued service on the Board.

                  All options granted hereunder shall be nonstatutory stock
options.

         2. DEFINITIONS. As used herein, the following definitions shall
apply:

                  (a)   "BOARD" means the Board of Directors of the Company.

                  (b)   "CODE" means the Internal Revenue Code of 1986, as
amended.

                  (c)   "COMMON STOCK" means the common stock of the Company.

                  (d)   "COMPANY" means Coherent, Inc.

                  (e)   "DIRECTOR" means a member of the Board.

                  (f)   "DISABILITY"  means total and  permanent  disability
as defined in Section  22(e)(3) of Code.

                  (g)   "EMPLOYEE" means any person, including officers and
Directors, employed by the Company or any Parent or Subsidiary of the
Company. The payment of a Director's fee by the Company shall not be
sufficient in and of itself to constitute "employment" by the Company.

                  (h)   "EXCHANGE ACT" means the Securities Exchange Act of
1934, as amended.

                  (i)   "FAIR MARKET  VALUE"  means,  as of any date,  the
value of Common Stock  determined  as follows:

                        (i)       If the Common Stock is listed on any
established  stock exchange or a national market system, including without
limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The
Nasdaq Stock Market, its Fair Market Value shall be the closing sales price
for such stock (or the closing bid, if no sales were reported) as quoted on
such exchange or system for the last market trading day prior to the time of
determination as reported in THE WALL STREET JOURNAL or such other source as
the Administrator deems reliable;

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                        (ii)      If the Common Stock is regularly quoted by
a recognized securities dealer but selling prices are not reported, the Fair
Market Value of a Share of Common Stock shall be the mean between the high
bid and low asked prices for the Common Stock for the last market trading day
prior to the time of determination, as reported in THE WALL STREET JOURNAL or
such other source as the Board deems reliable; or

                        (iii)     In the absence of an established market for
the Common Stock, the Fair Market Value thereof shall be determined in good
faith by the Board.

                  (j)   "INSIDE DIRECTOR" means a Director who is an Employee.

                  (k)   "OPTION" means a stock option granted pursuant to the
Plan.

                  (l)   "OPTIONED STOCK" means the Common Stock subject to an
Option.

                  (m)   "OPTIONEE" means a Director who holds an Option.

                  (n)   "OUTSIDE DIRECTOR" means a Director who is not an
Employee.

                  (o)   "PARENT" means a "parent corporation," whether now or
hereafter existing, as defined in Section 424(e) of the Code.

                  (p)   "PLAN" means this 1998 Director Option Plan.

                  (q)   "SHARE"  means a share of the Common Stock,  as
adjusted in  accordance  with Section 10 of the Plan.

                  (r)   "SUBSIDIARY" means a "subsidiary corporation,"
whether now or hereafter existing, as defined in Section 424(f) of the
Internal Revenue Code of 1986.

         3.       STOCK SUBJECT TO THE PLAN. Subject to the provisions of
Section 10 of the Plan, the maximum aggregate number of Shares that may be
optioned and sold under the Plan is 100,000 Shares (the "POOL") (the Shares
may be authorized, but unissued, or reacquired Common Stock), plus an annual
increase to be added on each anniversary date of the adoption of the Plan
equal to (i) the number of Shares needed to restore the maximum aggregate
number of Shares that may be optioned and sold under the Plan to 100,000 or
(ii) a lesser amount determined by the Board of Directors.

                  If an Option expires or becomes unexercisable without
having been exercised in full, the unpurchased Shares which were subject
thereto shall become available for future grant or sale under the Plan
(unless the Plan has terminated). Shares that have actually been issued under
the Plan shall not be returned to the Plan and shall not become available for
future distribution under the Plan.

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         4.       ADMINISTRATION AND GRANTS OF OPTIONS UNDER THE PLAN.

                  (a)   PROCEDURE FOR GRANTS. All grants of Options to
Outside Directors under this Plan shall be automatic and nondiscretionary and
shall be made strictly in accordance with the following provisions:

                        (i)       No person shall have any discretion to
select which Outside  Directors shall be granted Options or to determine the
number of Shares to be covered by Options.

                        (ii)      Each Outside Director shall be automatically
granted an Option to purchase 20,000 Shares (the "FIRST OPTION") on the date
on which such person first becomes an Outside Director, whether through
election by the stockholders of the Company or appointment by the Board to
fill a vacancy; PROVIDED, HOWEVER, that an Inside Director who ceases to be
an Inside Director but who remains a Director shall not receive a First
Option.

                        (iii)     Each Outside Director shall be automatically
granted an Option to purchase 5,000 Shares (a "SUBSEQUENT OPTION")
immediately following each annual meeting of stockholders at which such
Outside Director is re-elected (beginning with the 2000 annual meeting of
stockholders) provided he or she is then an Outside Director and if as of
such date, he or she shall have served on the Board for at least the
preceding three (3) months.

                        (iv)      Notwithstanding  the  provisions  of
subsections  (ii) and (iii)  hereof,  any exercise of an Option granted
before the Company has obtained stockholder approval of the Plan in
accordance with Section 16 hereof shall be conditioned upon obtaining such
stockholder approval of the Plan in accordance with Section 16 hereof.

                        (v)       The terms of an Option granted hereunder
shall be as follows:

                                  (A) the term of the Option shall be six (6)
years.

                                  (B) the Option shall be exercisable only
while the Outside Director remains a Director of the Company, except as set
forth in Sections 8 and 10 hereof.

                                  (C) the exercise price per Share shall be
100% of the Fair Market Value per Share on the date of grant of the First
Option.

                                  (D) subject to Section 10 hereof, the First
Option shall become exercisable cumulatively to the extent of twenty-five
percent (25%) of the Shares subject to such option on each of the first four
anniversaries of the date of grant, provided that the Optionee continues to
serve as a Director on such dates.

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                                  (E) subject to Section 10 hereof, each
Subsequent Option shall become exercisable with respect to 100% of the Shares
subject to such option on the fourth anniversary of the date of grant,
provided that the Optionee continues to serve as a Director on such date.

                        (vi)      In the event that any Option granted under
the Plan would cause the number of Shares subject to outstanding Options plus
the number of Shares previously purchased under Options to exceed the Pool,
then the remaining Shares available for Option grant shall be granted under
Options to the Outside Directors on a pro rata basis. No further grants shall
be made until such time, if any, as additional Shares become available for
grant under the Plan through action of the Board or the stockholders to
increase the number of Shares that may be issued under the Plan or through
cancellation or expiration of Options previously granted hereunder.

                  (b)   SUSPENSION OR TERMINATION OF OPTION. If the Chief
Executive Officer or his designee reasonably believes that an Optionee has
committed an act of misconduct, the Chief Executive Officer may suspend the
Optionee's right to exercise any option pending a determination by the Board
of Directors (excluding the Outside Director accused of such misconduct). If
the Board of Directors (excluding the Outside Director accused of such
misconduct) determines an Optionee has committed an act of embezzlement,
fraud, dishonesty, nonpayment of an obligation owed to the Company, breach of
fiduciary duty or deliberate disregard of the Company rules resulting in
loss, damage or injury to the Company, or if an Optionee makes an
unauthorized disclosure of any Company trade secret or confidential
information, engages in any conduct constituting unfair competition, induces
any Company customer to breach a contract with the Company or induces any
principal for whom the Company acts as agent to terminate such agency
relationship, neither the Optionee nor his estate shall be entitled to
exercise any option whatsoever. In making such determination, the Board of
Directors (excluding the Outside Director accused of such misconduct) shall
act fairly and shall give the Optionee an opportunity to appear and present
evidence on Optionee's behalf at a hearing before the Board or a committee of
the Board.

         5.       ELIGIBILITY. Options may be granted only to Outside
Directors. All Options shall be automatically granted in accordance with the
terms set forth in Section 4 hereof.

                  The Plan shall not confer upon any Optionee any right with
respect to continuation of service as a Director or nomination to serve as a
Director, nor shall it interfere in any way with any rights which the
Director or the Company may have to terminate the Director's relationship
with the Company at any time.

         6.       TERM OF PLAN. The Plan shall become effective upon the
earlier to occur of its adoption by the Board or its approval by the
stockholders of the Company as described in Section 16 of the Plan. It shall
continue in effect for a term of ten (10) years unless sooner terminated
under Section 11 of the Plan.

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         7.       FORM OF CONSIDERATION. The consideration to be paid for the
Shares to be issued upon exercise of an Option, including the method of
payment, shall consist of (i) cash, (ii) check, (iii) other shares which (x)
in the case of Shares acquired upon exercise of an option, have been owned by
the Optionee for more than six (6) months on the date of surrender, and (y)
have a Fair Market Value on the date of surrender equal to the aggregate
exercise price of the Shares as to which said Option shall be exercised, (iv)
consideration received by the Company under a cashless exercise program (if
any) implemented by the Company in connection with the Plan, or (v) any
combination of the foregoing methods of payment.

         8.       EXERCISE OF OPTION.

                  (a)   PROCEDURE FOR EXERCISE; RIGHTS AS A STOCKHOLDER. Any
Option granted hereunder shall be exercisable at such times as are set forth
in Section 4 hereof; PROVIDED, HOWEVER, that no Options shall be exercisable
until stockholder approval of the Plan in accordance with Section 16 hereof
has been obtained.

                  An Option may not be exercised for a fraction of a Share.

                  An Option shall be deemed to be exercised when written
notice of such exercise has been given to the Company in accordance with the
terms of the Option by the person entitled to exercise the Option and full
payment for the Shares with respect to which the Option is exercised has been
received by the Company. Full payment may consist of any consideration and
method of payment allowable under Section 7 of the Plan. Until the issuance
(as evidenced by the appropriate entry on the books of the Company or of a
duly authorized transfer agent of the Company) of the stock certificate
evidencing such Shares, no right to vote or receive dividends or any other
rights as a stockholder shall exist with respect to the Optioned Stock,
notwithstanding the exercise of the Option. A share certificate for the
number of Shares so acquired shall be issued to the Optionee as soon as
practicable after exercise of the Option. No adjustment shall be made for a
dividend or other right for which the record date is prior to the date the
stock certificate is issued, except as provided in Section 10 of the Plan.

                  Exercise of an Option in any manner shall result in a
decrease in the number of Shares which thereafter may be available, both for
purposes of the Plan and for sale under the Option, by the number of Shares
as to which the Option is exercised.

                  (b)   TERMINATION OF CONTINUOUS STATUS AS A DIRECTOR.
Subject to Section 10 hereof, in the event an Optionee's status as a Director
terminates (other than upon the Optionee's death or Disability), the Optionee
may exercise his or her Option, but only within 210 days following the date
of such termination, and only to the extent that the Optionee was entitled to
exercise it on the date of such termination (but in no event later than the
expiration of its six (6) year term). To the extent that the Optionee was not
entitled to exercise an Option on the date of such termination, and to the
extent that the Optionee does not exercise such Option (to the extent
otherwise so entitled) within the time

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specified herein, the Option shall terminate.

                  (c)   DISABILITY OF OPTIONEE. In the event Optionee's
status as a Director terminates as a result of Disability, the Optionee may
exercise his or her Option, but only within twelve (12) months following the
date of such termination, and only to the extent that the Optionee would have
been entitled to exercise the Option had the Optionee not been disabled and
remained an Outside Director for six (6) months after such termination (but
in no event later than the expiration of its six (6) year term). To the
extent that the Optionee would not have been entitled to exercise an Option
had the Optionee not been disabled and remained an Outside Director for six
(6) months after such termination, or if he or she does not exercise such
Option (to the extent otherwise so entitled) within the time specified
herein, the Option shall terminate.

                  (d)   DEATH OF OPTIONEE. In the event of an Optionee's
death, the Optionee's estate or a person who acquired the right to exercise
the Option by bequest or inheritance may exercise the Option, but only within
twelve (12) months following the date of death, and only to the extent that
the Optionee would have been entitled to exercise the Option had the Optionee
continued living and remained an Outside Director for six (6) months after
the date of death (but in no event later than the expiration of its six (6)
year term). To the extent that the Optionee would not have been entitled to
exercise an Option had the Optionee continued living and remained an Outside
Director for six (6) months after the date of death, and to the extent that
the Optionee's estate or a person who acquired the right to exercise such
Option does not exercise such Option (to the extent otherwise so entitled)
within the time specified herein, the Option shall terminate.

         9.       NON-TRANSFERABILITY OF OPTIONS. The Option may not be sold,
pledged, assigned, hypothecated, transferred, or disposed of in any manner
other than by will or by the laws of descent or distribution and may be
exercised, during the lifetime of the Optionee, only by the Optionee.

         10.      ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, DISSOLUTION,
MERGER OR ASSET SALE.

                  (a)   CHANGES IN CAPITALIZATION. Subject to any required
action by the stockholders of the Company, the number of Shares covered by
each outstanding Option, the number of Shares which have been authorized for
issuance under the Plan but as to which no Options have yet been granted or
which have been returned to the Plan upon cancellation or expiration of an
Option, as well as the price per Share covered by each such outstanding
Option, and the number of Shares issuable pursuant to the automatic grant
provisions of Section 4 hereof shall be proportionately adjusted for any
increase or decrease in the number of issued Shares resulting from a stock
split, reverse stock split, stock dividend, combination or reclassification
of the Common Stock, or any other increase or decrease in the number of
issued Shares effected without receipt of consideration by the Company;
PROVIDED, HOWEVER, that conversion of any convertible securities of the
Company shall not be deemed to have been "effected without receipt of
consideration." Except as expressly provided herein, no issuance by the
Company of shares of stock of any class, or securities convertible into
shares of stock of any class, shall affect, and no adjustment by reason
thereof shall be made with respect to,

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the number or price of Shares subject to an Option.

                  (b)   DISSOLUTION OR LIQUIDATION. In the event of the
proposed dissolution or liquidation of the Company, to the extent that an
Option has not been previously exercised, it shall terminate immediately
prior to the consummation of such proposed action.

                  (c)   MERGER OR ASSET SALE. In the event of a proposed
merger of the Company with or into another corporation where following such
merger the stockholders of the Company prior to such merger own less than 50%
of the voting securities of the surviving corporation (a "change of
control"), or the sale of all or substantially all of the assets of the
Company, each outstanding Option shall be assumed or an equivalent option
shall be substituted by such successor corporation or a parent or subsidiary
of such successor corporation. If an Option is assumed or substituted for,
the Option or equivalent option shall continue to be exercisable as provided
in Section 4 hereof for so long as the Optionee serves as a Director or a
director of the successor corporation. Following such assumption or
substitution, if the Optionee's status as a Director or director of the
successor corporation, as applicable, is terminated other than upon a
voluntary resignation by the Optionee, the Option or option shall become
fully exercisable, including as to Shares for which it would not otherwise be
exercisable. Thereafter, the Option or option shall remain exercisable in
accordance with Section 8 above. In the event that such successor corporation
refuses to assume the Option or to substitute an equivalent option, the Board
shall, in lieu of such assumption or substitution, provide for the Optionee
to have the right to exercise the Option as to all of the Optioned Stock,
including Shares as to which the Option would not otherwise be exercisable.
If an Option becomes fully exercisable in lieu of assumption or substitution
in the event of a merger or sale of assets, the Board shall notify the
Optionee that the Option shall be fully exercisable for a period of twenty
(20) days from the date of such notice, and the Option will terminate upon
the expiration of such period.

         For the purposes of this Section 10(c), an Option shall be
considered assumed if, following the merger or sale of assets, the Option
confers the right to purchase or receive, for each Share of Optioned Stock
subject to the Option immediately prior to the merger or sale of assets, the
consideration (whether stock, cash, or other securities or property) received
in the merger or sale of assets by holders of Common Stock for each Share
held on the effective date of the transaction (and if holders were offered a
choice of consideration, the type of consideration chosen by the holders of a
majority of the outstanding Shares). If such consideration received in the
merger or sale of assets is not solely common stock of the successor
corporation or its Parent, the Board may, with the consent of the successor
corporation, provide for the consideration to be received upon the exercise
of the Option, for each Share of Optioned Stock subject to the Option, to be
solely common stock of the successor corporation or its Parent equal in fair
market value to the per share consideration received by holders of Common
Stock in the merger or sale of assets.

         11.      AMENDMENT AND TERMINATION OF THE PLAN.

                  (a)   AMENDMENT AND TERMINATION. The Board may at any time
amend, alter,

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suspend, or discontinue the Plan, but no amendment, alteration, suspension,
or discontinuation shall be made that would impair the rights of any Optionee
under any grant theretofore made, without his or her consent. In addition, to
the extent necessary and desirable to comply with any applicable law,
regulation or stock exchange rule, the Company shall obtain stockholder
approval of any Plan amendment in such a manner and to such a degree as
required.

                  (b)   EFFECT OF AMENDMENT OR TERMINATION. Any such
amendment or termination of the Plan shall not affect Options already granted
and such Options shall remain in full force and effect as if this Plan had
not been amended or terminated.

         12.      TIME OF GRANTING OPTIONS. The date of grant of an Option
shall, for all purposes, be the date determined in accordance with Section 4
hereof.

         13.      CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be
issued pursuant to the exercise of an Option unless the exercise of such
Option and the issuance and delivery of such Shares pursuant thereto shall
comply with all relevant provisions of law, including, without limitation,
the Securities Act of 1933, as amended, the Exchange Act, the rules and
regulations promulgated thereunder, state securities laws, and the
requirements of any stock exchange upon which the Shares may then be listed,
and shall be further subject to the approval of counsel for the Company with
respect to such compliance.

                  As a condition to the exercise of an Option, the Company
may require the person exercising such Option to represent and warrant at the
time of any such exercise that the Shares are being purchased only for
investment and without any present intention to sell or distribute such
Shares, if, in the opinion of counsel for the Company, such a representation
is required by any of the aforementioned relevant provisions of law.

                  Inability of the Company to obtain authority from any
regulatory body having jurisdiction, which authority is deemed by the
Company's counsel to be necessary to the lawful issuance and sale of any
Shares hereunder, shall relieve the Company of any liability in respect of
the failure to issue or sell such Shares as to which such requisite authority
shall not have been obtained.

         14.      RESERVATION OF SHARES. The Company, during the term of this
Plan, will at all times reserve and keep available such number of Shares as
shall be sufficient to satisfy the requirements of the Plan.

         15.      OPTION AGREEMENT. Options shall be evidenced by written
option agreements in such form as the Board shall approve.

         16.      STOCKHOLDER APPROVAL. The Plan shall be subject to approval
by the stockholders of

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the Company within twelve (12) months after the date the Plan is adopted.
Such stockholder approval shall be obtained in the degree and manner required
under applicable state and federal law and any stock exchange rules.