<PAGE>

                                                                   EXHIBIT 10.10

                              CANDELA CORPORATION
                             530 Boston Post Road
                              Wayland, MA  01778


                                                               February 13, 1997


Fleet National Bank
75 State Street
Boston, MA 02109

Gentlemen:

     This letter agreement will set forth certain understandings between Candela
Corporation, a Delaware corporation (the "Borrower") and Fleet National Bank
(the "Bank") with respect to Revolving Loans (hereinafter defined) to be made by
the Bank to the Borrower and with respect to letters of credit which may
hereafter be issued by the Bank for the account of the Borrower.  In
consideration of the mutual promises contained herein and in the other documents
referred to below, and for other good and valuable consideration, receipt and
sufficiency of which are hereby acknowledged, the Borrower and the Bank agree as
follows:

     I.  AMOUNTS AND TERMS
         -----------------

     1.1.  Reference to Documents.  Reference is made to (i) that certain
           ----------------------
$3,500,000 face principal amount promissory note (the "Revolving Note") of even
date herewith made by the Borrower and payable to the order of the Bank, (ii)
that certain Inventory and Accounts Receivable Security Agreement of even date
herewith from the Borrower to the Bank (the "Security Agreement"), and (iii)
those certain Pledge Agreements of even date herewith (the "Pledges") from the
Borrower to the Bank relating to stock of Candela Skin Care Centers, Inc. and
related entities (the "Candela Skin Care Entities").

     1.2.  The Borrowing; Revolving Note.  Subject to the terms and conditions
           -----------------------------
hereinafter set forth, the Bank will make loans ("Revolving Loans") to the
Borrower, in such amounts as the Borrower may request, on any Business Day prior
to the first to occur of (i) the Expiration Date, or (ii) the earlier
termination of the within described revolving financing arrangements pursuant to
(S).2 or (S).7; provided, however, that (1) the aggregate principal amount of
Revolving Loans outstanding shall at no time exceed the Maximum Revolving Amount
(hereinafter defined) and (2) the Aggregate Bank Liabilities (hereinafter
defined) shall at no time exceed the Borrowing Base (hereinafter defined).
Within such limits, and subject to the terms and conditions hereof, the Borrower
may obtain Revolving, Loans, repay Revolving Loans and obtain Revolving Loans
again on one or more occasions.  The Revolving Loans shall be evidenced by the
Revolving Note and interest thereon shall be payable at the times and at the
rate provided for in the Revolving
<PAGE>

                                      -2-

Note. Overdue principal of the Revolving, Loans and, to the extent permitted by
law, overdue interest shall bear interest at a fluctuating rate per annum which
at all times shall be equal to the sum of (i) two (2%) percent per annum Plus
(ii) the per annum rate otherwise payable under the Revolving Note (but in no
event in excess of the maximum rate from time to time permitted by then
applicable law), compounded monthly and payable on demand. The Borrower hereby
irrevocably authorizes the Bank to make or cause to be made, on a schedule
attached to the Revolving Note or on the books of the Bank, at or following the
time of making each Revolving Loan and of receiving any payment of principal, an
appropriate notation reflecting such transaction and the then aggregate unpaid
principal balance of the Revolving Loans. The amount so noted shall constitute
presumptive evidence as to the amount owed by the Borrower with respect to
principal of the Revolving Loans. Failure of the Bank to make any such notation
shall not, however, affect any obligation of the Borrower or any right of the
Bank hereunder or under the Revolving Note. All payments of interest, principal
and any other sum payable hereunder and/or under the Revolving Note shall be
made to the Bank, in immediately available funds, at its office at 75 State
Street, Boston, MA 02109 or to such other address as the Bank may from time to
time direct. All payments received by the Bank after 2:00 p.m. on any day shall
be deemed received as of the next succeeding Business Day. All monies received
by the Bank shall be applied first to fees, charges, costs and expenses payable
to the Bank under this letter agreement, the Revolving Note and/or any of the
other Loan Documents, next to interest then accrued on account of any Revolving
Loans or letter of credit reimbursement obligations and only thereafter to
principal of the Revolving Loans and letter of credit reimbursement obligations.
All interest and fees payable hereunder and/or under the Revolving Note shall be
calculated on the basis of a 360-day year for the actual number of days elapsed.

     1.3.  Repayment; Renewal.  The Borrower shall repay in full all Revolving
           ------------------
Loans and all interest thereon upon the first to occur of. (i) the Expiration
Date or (ii) an acceleration under (S).2(a) following an Event of Default.  The
Borrower may repay, at any time, without penalty or premium, the whole or any
portion of any Revolving Loan.  In addition, if at any time the Borrowing Base
is in an amount which is less than the then outstanding Aggregate Bank
Liabilities, the Borrower will forthwith prepay so much of the Revolving Loans
as may be required (or arrange for the termination of such letters of credit as
may be required) so that the Aggregate Bank Liabilities will not exceed the
Borrowing Base.  The Bank may, at its sole discretion, renew the financing
arrangements described in this letter agreement by extending the Expiration Date
in a writing signed by the Bank and accepted by the Borrower.  Neither the
inclusion in this letter agreement or elsewhere of covenants relating to periods
of time after the Expiration Date, nor any other provision hereof, nor any
action (except a written extension pursuant to the immediately preceding
sentence), non-action or course of dealing on the part of the Bank will be
deemed an extension of, or agreement on the part of the Bank to extend, the
Expiration Date.

     1.4.  Advances and Payments.  The proceeds of all Revolving Loans shall be
           ---------------------
credited by the Bank to a general deposit account maintained by the Borrower
with the Bank.  The proceeds of each Revolving Loan will be used by the Borrower
solely for working capital purposes.
<PAGE>

                                      -3-

     The Bank may charge any general deposit account of the Borrower at the Bank
with the amount of all payments of interest, principal and other sums due, from
time to time, under this letter agreement and/or the Revolving Note and/or with
respect to any letter of credit; and will thereafter notify the Borrower of the
amount so charged.  The failure of the Bank so to charge any account or to give
any such notice shall not affect the obligation of the Borrower to pay interest,
principal or other sums as provided herein or in the Revolving Note or with
respect to any letter of credit.

     Whenever any payment to be made to the Bank hereunder or under the
Revolving Note or with respect to any letter of credit shall be stated to be due
on a day which is not a Business Day, such payment may be made on the next
succeeding Business Day, and interest payable on each such date shall include
the amount thereof which shall accrue during the period of such extension of
time.  All payments by the Borrower hereunder and/or in respect of the Revolving
Note and/or with respect to any letter of credit shall be made net of any
impositions or taxes and without deduction, setoff or counterclaim,
notwithstanding any claim which the Borrower may now or at any time hereafter
have against the Bank.

     1.5.  Letters of Credit.  At the Borrower's request, the Bank may, from
           -----------------
time to time, in its sole discretion issue one or more letters of credit for the
account of the Borrower; provided that at the time of such issuance and after
giving effect thereto the Aggregate Bank Liabilities will in no event exceed the
lesser of (i) $3,500,000 or (ii) the then effective Borrowing Base.  Any such
letter of credit will be issued for such fee and upon such terms and conditions
as may be agreed to by the Bank and the Borrower at the time of issuance.  The
Borrower hereby authorizes the Bank, without further request from the Borrower,
to cause the Borrower's liability to the Bank for reimbursement of funds drawn
under any such letter of credit to be repaid from the proceeds of a Revolving
Loan to be made hereunder.  The Borrower hereby irrevocably requests that such
Revolving Loans be made.

     1.6.  Conditions to Advance.  Prior to the making of the initial Revolving
           ---------------------
Loan or the issuance of any letter of credit hereunder, the Borrower shall
deliver to the Bank duly executed copies of this letter agreement, the Security
Agreement, the Pledges, the Revolving Note and the documents and other items
listed on the Closing Agenda delivered herewith by the Bank to the Borrower, all
of which, as well as all legal matters incident to the transactions contemplated
hereby, shall be satisfactory in form and substance to the Bank and its counsel.

     Without limiting the foregoing, any Revolving Loan or letter of credit
issuance (including the initial Revolving Loan or letter of credit issuance) is
subject to the further conditions precedent that on the date on which such
Revolving Loan is made or such letter of credit is issued (and after giving
effect thereto):

     (a) All statements, representations and warranties of the Borrower made in
this letter agreement and/or in the Security Agreement shall continue to be
correct in all material respects as of the date of such Revolving Loan or the
date of issuance of such letter of credit, as the case may be.
<PAGE>

                                      -4-

     (b) All covenants and agreements of the Borrower contained herein and/or in
any of the other Loan Documents shall have been complied with in all material
respects on and as of the date of such Revolving Loan or the date of issuance of
such letter of credit, as the case may be.

     (c) No event which constitutes, or which with notice or lapse of time or
both could constitute, an Event of Default shall have occurred and be
continuing.

     (d) No material adverse change shall have occurred in the financial
condition of the Borrower from that disclosed in the financial statements then
most recently furnished to the Bank.

     Each request by the Borrower for any Revolving Loan or for the issuance of
any letter of credit, and each acceptance by the Borrower of the proceeds of any
Revolving Loan or delivery of a letter of credit, will be deemed a
representation and warranty by the Borrower that at the date of such Revolving
Loan or the date of issuance of such letter of credit, as the case may be, and
after giving effect thereto all of the conditions set forth in the foregoing
clauses (a)-(d) of this (S)1.6 will be satisfied.  Each request for a Revolving
Loan or letter of credit issuance will be accompanied by a borrowing base
certificate on a form satisfactory to the Bank, executed by the chief financial
officer of the Borrower, unless such a certificate shall have been previously
furnished setting forth the Borrowing Base as at a date not more than 30 days
prior to the date of the requested borrowing or the requested letter of credit
issuance, as the case may be.

     II.  REPRESENTATIONS AND WARRANTIES
          ------------------------------

     2.1.  Representations and Warranties.  In order to induce the Bank to enter
           ------------------------------
into this letter agreement and to make Revolving Loans hereunder and/or issue
letters of credit hereunder, the Borrower warrants and represents to the Bank as
follows:

     (a) The Borrower is a corporation duly organized, validly existing and in
good standing under the laws of Delaware.  The Borrower has full corporate power
to own its property and conduct its business as now conducted, to grant the
security interests contemplated by the Security Agreement and the Pledges and to
enter into and perform this letter agreement and the other Loan Documents.  The
Borrower is duly qualified to do business and is in good standing in
Massachusetts and is also duly qualified to do business in and is in good
standing in each other jurisdiction in which the Borrower maintains any
facility, sales office, warehouse or other location, and in each other
jurisdiction where the failure so to qualify could (singly or in the aggregate
with all other such failures) have a material adverse effect on the financial
condition, business or prospects of the Borrower, all such jurisdictions being
listed on item 2. 1 (a) of the attached Disclosure Schedule.  At the date
hereof, the Borrower has no Subsidiaries, except as shown on said item 2.1(a) of
the attached Disclosure Schedule.  The Borrower owns, directly or indirectly,
100% of the capital stock of each of such Subsidiaries, including without
limitation, the Candela Skin Care Entities.  The Borrower is not a member of any
partnership or joint venture.
<PAGE>

                                      -5-

     (b) Item 2. 1 (b) of the attached Disclosure Schedule sets forth
information as to each Person who owns, of record and/or beneficially, 5% or
more of any class of equity securities of the Borrower.

     (c) The execution, delivery and performance by the Borrower of this letter
agreement and each of the other Loan Documents have been duly authorized by all
necessary corporate and other action and do not and will not:

          (i) violate any provision of, or require any filings (other than
     filings under the Uniform Commercial Code), registration, consent or
     approval under, any law, rule, regulation, order, writ, judgment,
     injunction, decree, determination or award presently in effect having
     applicability to the Borrower;

          (ii) violate any provision of the charter or by-laws of the Borrower,
     or result in a breach of or constitute a default or require any waiver or
     consent under any indenture or loan or credit agreement or any other
     material agreement, lease or instrument to which the Borrower is a party or
     by which the Borrower or any of its properties may be bound or affected or
     require any other consent of any Person; or

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

     (d) This letter agreement and each of the other Loan Documents has been
duly executed and delivered by the Borrower and each is a legal, valid and
binding obligation of the Borrower, enforceable against the Borrower in
accordance with its respective terms.

     (e) Except as described on item 2.1(e) of the attached Disclosure Schedule,
there are no actions, suits, proceedings or investigations pending or, to the
knowledge of the Borrower, threatened by or against the Borrower or any
Subsidiary before any court or governmental department, commission, board,
bureau, agency or instrumentality, domestic or foreign, which could hinder or
prevent the consummation of the transactions contemplated hereby or call into
question the validity of this letter agreement or any of the other Loan
Documents or any action taken or to be taken in connection with the transactions
contemplated hereby or thereby or which in any single case or in the aggregate
might result in any material adverse change in the business, prospects,
condition, affairs or operations of the Borrower or any Subsidiary.

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

     (g) The Borrower has filed (and has caused each of its Subsidiaries to
file) all federal, state and local tax returns, reports and estimates required
to be filed by the Borrower and/or by any such Subsidiary.  All such filed
returns, reports and estimates are proper and accurate and the Borrower or the
relevant Subsidiary has paid all taxes, assessments, impositions, fees and other
<PAGE>

                                      -6-

governmental charges required to be paid in respect of the periods covered by
such returns, reports or estimates.  No deficiencies for any tax, assessment or
governmental charge have been asserted or assessed, and the Borrower knows of no
material tax liability or basis therefor.

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

     (i) The audited financial statements of the Borrower as at June 30, 1996
and the management-generated statements of the Borrower as at September 30,
1996, each heretofore delivered to the Bank, are complete and accurate and
fairly present the financial condition of the Borrower as at the respective
dates thereof and for the periods covered thereby, except that the management-
generated statements do not have footnotes and thus do not present the
information which would normally be contained in footnotes to financial
statements.  The Borrower has no liability, contingent or otherwise, not
disclosed in the aforesaid financial statements or in any notes thereto that
could materially affect the financial condition of the Borrower.  Since December
31, 1995, there has been no material adverse development in the business,
condition or prospects of the Borrower, and the Borrower has not entered into
any transaction other than in the ordinary course.

     (j) The principal place of business and chief executive offices of the
Borrower are located at 530 Boston Post Road, Wayland, MA 01778 (the
"Premises").  All of the books and records of the Borrower are located at said
address.  Except as described on item 2.1(j) of the attached Disclosure
Schedule, no assets of the Borrower are located at any other address.  Said item
2.1(j) of the attached Disclosure Schedule sets forth the names and addresses of
all record owners of the Premises.

     (k) The Borrower owns or has a valid right to use all of the patents,
licenses, copyrights, trademarks, trade names and franchises now being used to
conduct its business.  The conduct of the Borrower's business as now operated
does not conflict with valid patents, licenses, copyrights, trademarks, trade
names or franchises of others in any manner that could materially adversely
affect the business, prospects, assets or condition, financial or otherwise, of
the Borrower.

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

                                      -7-

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

     III.  AFFIRMATIVE COVENANTS AND REPORTING REQUIREMENTS
           ------------------------------------------------

     Without limitation of any covenants and agreements contained in the
Security Agreement or elsewhere, the Borrower agrees that so long as the
financing arrangements contemplated hereby are in effect or any Revolving Loan
or any of the other Obligations shall be outstanding or any letter of credit
issued hereunder shall be outstanding:

     3.1.  Legal Existence:  Qualification.  Compliance.  The Borrower will
           --------------------------------------------
maintain (and will cause each Subsidiary of the Borrower to maintain) its
corporate existence and good standing in the jurisdiction of its incorporation.
The Borrower will remain qualified to do business and in good standing in
Massachusetts.  Further, the Borrower will qualify to do business and will
remain qualified and in good standing (and the Borrower will cause each
Subsidiary of the Borrower to qualify and remain qualified and in good standing)
in each other jurisdiction where the Borrower or such Subsidiary, as the case
may be, maintains any facility, sales office, warehouse or other location and in
each other jurisdiction in which the failure so to qualify could (singly or in
the aggregate with all other such failures) have a material adverse effect on
the financial condition, business or prospects of the Borrower or any such
Subsidiary.  The Borrower will comply (and will cause each Subsidiary of the
Borrower to comply) with its charter documents and by-laws.  The Borrower will
comply with (and will cause each Subsidiary of the Borrower to comply with) all
applicable laws, rules and regulations (including, without limitation, ERISA and
those relating to environmental protection) other than (i) laws, rules or
regulations the validity or applicability of which the Borrower or such
Subsidiary shall be contesting in good faith by proceedings which serve as a
matter of law to stay the enforcement thereof and (ii) those laws, rules and
regulations the failure to comply with any of which could not (singly or in the
aggregate) have a material adverse effect on the financial condition, business
or prospects of the Borrower or any such Subsidiary.  The Borrower will at all
times own all of the outstanding capital stock of each of the Candela Skin Care
Entities.

     3.2.  Maintenance of Property: Insurance.  The Borrower will maintain and
           ----------------------------------
preserve (and will cause each Subsidiary of the Borrower to maintain and
preserve) all of its fixed assets in good working order and condition, making
all necessary repairs thereto and replacements thereof.  The Borrower, will
maintain all such insurance as may be required under the Security Agreement and
will also maintain, with financially sound and reputable insurers, insurance
with respect to its property and business against such liabilities, casualties
and contingencies and of such types and in such amounts as shall be reasonably
satisfactory to the Bank from time to time and in any event all such insurance
as may from time to time be customary for companies conducting a business
similar to that of the Borrower in similar locales.

     3.3.  Payment of Taxes and Charges.  The Borrower will pay and discharge
           ----------------------------
(and will cause each Subsidiary of the Borrower to pay and discharge) all taxes,
assessments and governmental charges or levies imposed upon it or upon its
income or property, including,
<PAGE>

                                      -8-

without limitation, taxes, assessments, charges or levies relating to real and
personal property, franchises, income, unemployment, old age benefits,
withholding, or sales or use, prior to the date on which penalties would attach
thereto, and all lawful claims (whether for any of the foregoing or otherwise)
which, if unpaid, might give rise to a lien upon any property of the Borrower or
any such Subsidiary, except any of the foregoing which is being contested in
good faith and by appropriate proceedings which serve as a matter of law to stay
the enforcement thereof and for which the Borrower has established and is
maintaining adequate reserves. The Borrower will pay, and will cause each of its
Subsidiaries to pay, in a timely manner, all lease obligations, all trade debt,
purchase money obligations, equipment lease obligations and all of its other
material Indebtedness. The Borrower will perform and fulfill all material
covenants and agreements under any leases of real estate, agreements relating to
purchase money debt, equipment leases and other material contracts. The Borrower
will maintain in full force and effect, and comply with the terms and conditions
of, all permits, permissions and licenses necessary or desirable for its
business.

     3.4.  Accounts.  The Borrower will maintain its principal depository and
           --------
operating accounts with the Bank.

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

     3.6.  Reporting Requirements.  The Borrower will furnish to the Bank:
           ----------------------

          (i) Within 90 days after the end of each fiscal year of the Borrower,
     a copy of the annual audit report for such fiscal year for the Borrower,
     including therein consolidated and consolidating balance sheets of the
     Borrower and Subsidiaries as at the end of such fiscal year and related
     consolidated and consolidating statements of income, stockholders' equity
     and cash flow for the fiscal year then ended.  The annual consolidated
     financial statements shall be certified by independent public accountants
     selected by the Borrower and reasonably acceptable to the Bank, such
     certification to be in such form as is generally recognized as
     "unqualified".

          (ii) Within 45 days after the end of each fiscal quarter of the
     Borrower, consolidated and consolidating balance sheets of the Borrower and
     its Subsidiaries and related consolidated and consolidating statements of
     income and stockholders' equity and cash flow, unaudited but complete and
     accurate and prepared in accordance with generally accepted accounting
     principles consistently applied fairly presenting the financial condition
     of the Borrower as at the dates thereof and for the periods covered thereby
     (except that such quarterly statements need not contain footnotes) and
     certified as accurate (subject to normal year-end audit adjustments, which
     shall not be material) by the chief financial officer of the Borrower, such
     balance sheets to be as at the end of such fiscal quarter and such
     statements of income and stockholders' equity and cash flow to be
<PAGE>

                                      -9-


     for such fiscal quarter and for the year to date, in each case together
     with a comparison to budget.

          (iii)  At the time of delivery of each annual or quarterly statement
     of the Borrower, a certificate executed by the chief financial officer of
     the Borrower stating that he or she has reviewed this letter agreement and
     the other Loan Documents and has no knowledge of any default by the
     Borrower in the performance or observance of any of the provisions of this
     letter agreement or of any of the other Loan Documents or, if he or she has
     such knowledge, specifying each such default and the nature thereof.  Each
     financial statement given as at the end of any fiscal quarter of the
     Borrower will also set forth the calculations necessary to evidence
     compliance with (S)(S)3.73. 1 0, and each annual financial statement will
     be accompanied by calculations necessary to determine compliance with
     (S)3.11.

          (iv) Monthly, within 15 days after the end of each month, (A) an aging
     report in form satisfactory to the Bank covering all Receivables of the
     Borrower outstanding as at the end of such month, and (B) a certificate of
     the chief financial officer of the Borrower setting forth the Borrowing
     Base as at the end of such month, all in form reasonably satisfactory to
     the Bank.  Notwithstanding the foregoing, the Borrower need not provide
     such an aging report and Borrowing Base Certificate as at any month-end if,
     at such month-end, there is no Revolving Loan outstanding and no letter of
     credit issued hereunder is outstanding; provided that if the Borrower does
     not deliver a Borrowing Base Certificate and aging report as at any month-
     end in reliance on the foregoing provisions of this sentence, then at the
     time of any subsequent borrowing of a Revolving Loan or issuance of a
     Letter of Credit, as the case may be, the Borrower will provide such
     Borrowing Base Certificate and aging report.

          (v) Promptly after receipt, a copy of all audits or reports submitted
     to the Borrower by independent public accountants in connection with any
     annual, special or interim audits of the books of the Borrower and any
     letter of comments directed by such accountants to the management of the
     Borrower.

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

          (vii)  Promptly after the commencement thereof, notice of all actions,
     suits and proceedings before any court or governmental department,
     commission, board, bureau, agency or instrumentality, domestic or foreign,
     to which the Borrower or any Subsidiary of the Borrower is a party.

          (viii)  Promptly upon filing any registration statement or listing
     application (or any supplement or amendment to any registration statement
     or listing application) with
<PAGE>

                                      -10-

     the Securities and Exchange Commission ("SEC") or any successor agency or
     with any stock exchange or with the National Association of Securities
     Dealers quotations system, a copy of same.

          (ix) For so long as the Borrower is a publicly-traded company, a copy
     of each periodic or current report filed with the SEC or any successor
     agency and each annual report, proxy statement and other communication sent
     to shareholders or other securityholders generally, such copy to be
     provided to the Bank promptly upon such filing with the SEC or such
     communication with shareholders or securityholders, as the case may be.

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

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

     3.7.  Debt to Worth.  The Borrower will maintain as at the end of each
           -------------
fiscal quarter (commencing with its results as at December 31, 1996) on a
consolidated basis a Leverage Ratio of not more than 1.0 to 1. As used herein,
"Leverage Ratio" means, as at any date when same is to be determined, the ratio
of (x) the Adjusted Debt of the Borrower and/or its Subsidiaries then
outstanding to (y) the Borrower's then consolidated Tangible Net Worth.

     3.8.  Net Worth.  The Borrower will maintain as at the end of each fiscal
           ---------
quarter (commencing with its results as at December 31, 1996) a consolidated
Tangible Net Worth of not less than the then-effective TNW Requirement.  As used
herein, the "TNW Requirement" for December 31, 1996 is deemed to be the sum of
(i) $9,500,000 plus (ii) 80% of the consolidated Net Income of the Borrower and
               ----
Subsidiaries during the fiscal quarter ended December 31, 1996, plus (iii) 100%
                                                                ----
of the net proceeds of any equity securities sold by the Borrower during the
six-month period July 1 - December 31, 1996.  As at the last day of each fiscal
quarter thereafter (commencing with March 31, 1997) (each, a "Determination
Date"), the TNW Requirement will be deemed to become an amount equal to the sum
of: (i) that TNW Requirement which had been in effect at the last day of the
immediately preceding fiscal quarter, plus (ii) 100% of the net proceeds of any
                                      ----
equity securities sold by the Borrower during the fiscal quarter ending at such
Determination Date, plus (iii) 80% of the consolidated Net Income of the
                    ----
Borrower and Subsidiaries during the fiscal quarter ending at such Determination
Date (but without giving effect to any Net Income which is less than zero for
any fiscal quarter).

     3.9.  Profitability.  The Borrower will achieve consolidated quarterly Net
           -------------
Income of at least $250,000 for each of its fiscal quarter ended December 31,
1996 and its fiscal quarter ending March 31, 1997.  The Borrower will achieve
consolidated quarterly Net Income of at least $500,000 for its fiscal quarter
ending June 30, 1997 and for each fiscal quarter thereafter.
<PAGE>

                                      -11-

Without limitation of the foregoing, the Borrower will achieve annual
consolidated Net Income of at least $1,000,000 for each fiscal year, commencing
with its fiscal year ending June 30, 1997.

     3.10.  Liquidity.  The Borrower will maintain as at the end of each fiscal
            ---------
quarter of Borrower (commencing with its results as at December 31, 1996) a
ratio of Net Quick Assets to Current Liabilities, which ratio shall be not less
than 1.2 to 1.

     3.11  Capital Expenditures.  The Borrower will not incur Capital
           --------------------
Expenditures in excess of $900,000 for any fiscal year, commencing with its
results for the fiscal year ended December 31, 1996.

     3.12.  Books and Records.  The Borrower will maintain (and will cause each
            -----------------
of its Subsidiaries to maintain) complete and accurate books, records and
accounts which will at all times accurately and fairly reflect all of its
transactions in accordance with generally accepted accounting principles
consistently applied.  The Borrower will, at any reasonable time and from time
to time upon reasonable notice and during normal business hours (and at any time
and without any necessity for notice following the occurrence of an Event of
Default), permit the Bank, and any agents or representatives thereof, to examine
and make copies of and take abstracts from the records and books of account of,
and visit the properties of the Borrower and any of its Subsidiaries, and to
discuss its affairs, finances and accounts with its officers, directors and/or
independent accountants, all of whom are hereby authorized and directed to
cooperate with the Bank in carrying out the intent of this (S)3.12. Each
financial statement of the Borrower hereafter delivered pursuant to this letter
agreement will be complete and accurate and will fairly present the financial
condition of the Borrower as at the date thereof and for the periods covered
thereby.

     3.13.  Landlord's Waiver.  Prior to the Bank making the first Revolving
            -----------------
Loan, the Borrower will obtain, and will thereafter maintain in effect at all
time, waivers from the owners of all premises in which any material amount of
Collateral is located, such waivers to be in form and substance satisfactory to
the Bank.

     IV. NEGATIVE COVENANTS
         ------------------

     Without limitation of any covenants and agreements contained in the
Security Agreement or elsewhere, the Borrower agrees that so long as the
financing arrangements contemplated hereby are in effect or any Revolving Loan
or any of the other Obligations shall be outstanding or any letter of credit
issued hereunder shall be outstanding:

     4.1. Indebtedness.  The Borrower will not create, incur, assume or suffer
          ------------
to exist any Indebtedness (nor allow any of its Subsidiaries to create, incur,
assume or suffer to exist any Indebtedness), except for:

          (i) Indebtedness owed to the Bank, including, without limitation, the
     Indebtedness represented by the Revolving Note and any Indebtedness in
     respect of letters of credit issued by the Bank;
<PAGE>

                                      -12-

          (ii) Indebtedness of the Borrower or any Subsidiary for taxes,
     assessments and governmental charges or levies not yet due and payable;

          (iii)  unsecured current liabilities of the Borrower or any Subsidiary
     (other than for money borrowed or for purchase money Indebtedness with
     respect to fixed assets) incurred upon customary terms in the ordinary
     course of business;

          (iv) purchase money Indebtedness (including, without limitation,
     Indebtedness in respect of capitalized equipment leases) owed to equipment
     vendors and/or lessors for equipment purchased or leased by the Borrower
     for use in the Borrower's business, provided that the total of Indebtedness
     permitted under this clause (iv) plus presently-existing equipment
     financing permitted under clause (v) of this (S)4.1 will not exceed
     $900,000 in the aggregate outstanding at any one time;

          (v) Indebtedness of [                 ] (the Borrower's Japanese
     Subsidiary) representing borrowings from Japanese financial institutions,
     so long as the credit of the Borrower is not pledged to the payment
     thereof;

          (vi) other Indebtedness existing at the date hereof, but only to the
     extent set forth on item 4.1 of the attached Disclosure Schedule; and

          (vii)  any guaranties or other contingent liabilities expressly
     permitted pursuant to (S)4.3.

     4.2.  Liens . The Borrower will not create, incur, assume or suffer to
           -----
exist (nor allow any of its Subsidiaries to create, incur, assume or suffer to
exist) any mortgage, deed of trust, pledge, lien, security interest, or other
charge or encumbrance (including the lien or retained security title of a
conditional vendor) of any nature (collectively, "Liens"), upon or with respect
to any of its property or assets, now owned or hereafter acquired, except that
the foregoing restrictions shall not apply to:

          (i) Liens for taxes, assessments or governmental charges or levies on
     property of the Borrower or any of its Subsidiaries if the same shall not
     at the time be delinquent or thereafter can be paid without interest or
     penalty;

          (ii) Liens imposed by law, such as carriers', warehousemen's and
     mechanics' liens and other similar Liens arising in the ordinary course of
     business for sums not yet due or which are being contested in good faith
     and by appropriate proceedings which serve as a matter of law to stay the
     enforcement thereof and as to which adequate reserves have been made;

          (iii)  pledges or deposits under workmen's compensation laws,
     unemployment insurance, social security, retirement benefits or similar
     legislation;

          (iv)  Liens in favor of the Bank;
<PAGE>

                                      -13-

          (v) Liens in favor of equipment vendors and/or lessors securing
     purchase money Indebtedness to the extent permitted by clause (iv) of
     (S)4.1; provided that no such Lien will extend to any property of the
     Borrower other than the specific items of equipment financed; or

          (vi) other Liens existing at the date hereof, but only to the extent
     and with the relative priorities set forth on item 4.2 of the attached
     Disclosure Schedule.

     4.3.  Guaranties. The Borrower will not, without the prior written consent
           ----------
of the Bank, assume, guarantee, endorse or otherwise become directly or
contingently liable (including, without limitation, liable by way of agreement,
contingent or otherwise, to purchase, to provide funds for payment, to supply
funds to or otherwise invest in any debtor or otherwise to assure any creditor
against loss) (and will not permit any of its Subsidiaries so to assume,
guaranty or become directly or contingently liable) in connection with any
indebtedness of any other Person, except (i) guaranties by endorsement for
deposit or collection in the ordinary course of business and (ii) guaranties
existing at the date hereof and described on item 4.3 of the attached Disclosure
Schedule.

     4.4.  Dividends.  The Borrower will not, without the prior written consent
           ---------
of the Bank, make any distributions to its shareholders, pay any dividends
(other than dividends payable solely in capital stock of the Borrower) or
redeem, purchase or otherwise acquire, directly or indirectly any of its capital
stock.

     4.5. Loans and Advances.  The Borrower will not make (and will not permit
          ------------------
any Subsidiary to make) any loans or advances to any Person, including, without
limitation, the Borrower's directors, officers and employees, except advances to
such directors, officers or employees with respect to expenses incurred by them
in the ordinary course of their duties and advances against salary, all of which
advances will not exceed, in the aggregate, $100,000 outstanding at any one
time.

     4.6.  Investments.  The Borrower will not, without the Bank's prior written
           -----------
consent, invest in, hold or purchase any stock or securities of any Person (nor
will the Borrower permit any of its Subsidiaries to invest in, purchase or hold
any such stock or securities) except (i) readily marketable direct obligations
of, or obligations guarantied by, the United States of America or any agency
thereof, (ii) other investment grade debt securities, (iii) mutual funds, the
assets of which are primarily invested in items of the kind described in the
foregoing clauses (i) and (ii) of this (S)4.6, (iv) deposits with or
certificates of deposit issued by the Bank and any other obligations of the Bank
or the Bank's parent, (v) deposits in any other bank organized in the United
States having capital in excess of $100,000,000, and (vi) investments in any
Subsidiaries now existing or hereafter created by the Borrower pursuant to
(S)4.7 below; provided that in any event the Tangible Net Worth of the Borrower
alone (exclusive of its investment in Subsidiaries and any debt owed by any
Subsidiary to the Borrower) will not be less than 90% of the consolidated
Tangible Net Worth of the Borrower and Subsidiaries.

     4.7.  Subsidiaries: Acquisitions.  Except as otherwise expressly permitted
           --------------------------
by (S)4.8, the Borrower will not, without the prior written consent of the Bank,
form or acquire any Subsidiary
<PAGE>

                                      -14-

or make any other acquisition of the stock of any other Person or of all or
substantially all of the assets of any other Person. The Borrower will not
become a partner in any partnership.

     4.8.  Merger.  Except as otherwise expressly permitted by the following
           ------
provisions of this (S)4.8, the Borrower will not, without the prior written
consent of the Bank, merge or consolidate with any Person or sell, lease,
transfer or otherwise dispose of any material portion of its assets (whether in
one or more transactions), other than the sale of inventory in the ordinary
course.  Notwithstanding the provisions of (S)4.7 and the foregoing provisions
of this (S)4.8, the Borrower may acquire any other Person (in a stock
transaction or an asset purchase transaction) and/or may merge with any such
Person; provided that all of the following conditions have been met: (i) no such
acquisition or merger may be consummated unless, at the time of such acquisition
or merger and after giving effect thereto, there is no Event of Default nor any
event or circumstance which, with the passage of time or the giving of notice or
both, could become an Event of Default; (2) the Borrower will be the surviving
entity in each such merger; (3) the Borrower will give the Bank at least 30
days' prior written notice of each such acquisition or merger and will provide
the Bank with pro forma financial statements, prepared in a manner reasonably
              --- -----
satisfactory to the Bank, demonstrating to the Bank's satisfaction that such
acquisition or merger will not violate any of Sections 3.7-3.11 (compliance with
each of Sections 3.7, 3.8 and 3.10 being measured as at the date of such
acquisition or merger, even if not a fiscal quarter-end and compliance with each
of Sections 3.9 and 3.11 being determined as at the date of such acquisition or
merger, even if not a fiscal quarter-end or fiscal year-end, on the basis of the
results of the Borrower and its Subsidiaries and the target company, combined on
a pro forma basis, for the 12-month period (or 3-month period, as the case may
  --- ------
be) then ended; (4) any entity so acquired by the Borrower or merged into the
Borrower must have had at least $1.00 in Net Income for the 12 months
immediately preceding such acquisition or merger; (5) the Borrower may not
assume or incur, pursuant to any or all of such acquisitions or mergers,
Indebtedness in excess of $500,000 per acquisition or merger transaction nor
Indebtedness in excess of $1,000,000 in the aggregate for all acquisitions and
merger transactions consummated after the date of this letter agreement; and (6)
cash acquisitions shall not exceed $500,000 per transaction unless the prior
written consent of the Bank has been obtained.

     4.9.  Affiliate Transactions.  The Borrower will not, without prior written
           ----------------------
consent of the Bank, enter into any transaction, including, without limitation,
the purchase, sale or exchange of any property or the rendering of any service,
with any affiliate of the Borrower, except in the ordinary course of and
pursuant to the reasonable requirements of the Borrower's business and upon fair
and reasonable terms no less favorable to the Borrower than would be obtained in
a comparable arms'-length transaction with any Person not an affiliate; provided
that nothing in this (S)4.9 shall be deemed to prohibit the payment of salary or
other similar payments to any officer or director of the Borrower at a level
consistent with the salary and other payments being paid at the date of this
letter agreement and heretofore disclosed in writing to the Bank, nor to prevent
the hiring of additional officers at a salary level consistent with industry
practice, nor to prevent reasonable periodic increases in salary.  For the
purposes of this letter agreement, "affiliate" means any Person which, directly
or indirectly, controls or is controlled by or is under common control with the
Borrower; any officer or director or former officer or director of the Borrower;
any Person owning of record or beneficially, directly or indirectly, 5% or more
of any
<PAGE>

                                      -15-

class of capital stock of the Borrower or 5% or more of any class of capital
stock or other equity interest having voting power (under ordinary
circumstances) of any of the other Persons described above; and any member of
the immediate family of any of the foregoing. "Control" means possession,
directly or indirectly, of the power to direct or cause the direction of the
management or policies of any Person, whether through ownership of voting
equity, by contract or otherwise.

     4.10.  Change of Address. etc.  The Borrower will not change its name or
            ----------------------
legal structure, nor will the Borrower move its chief executive offices or
principal place of business from the address described in the first sentence of
(S)2.1(j) above, nor will the Borrower remove any books or records from such
address, nor will the Borrower keep any Collateral at any location other than
the Premises without, in each instance, giving the Bank at least 30 days' prior
written notice and providing all such financing statements, certificates and
other documentation as the Bank may request in order to maintain the perfection
and priority of the security interests granted or intended to be granted
pursuant to the Security Agreement.  The Borrower will not change its fiscal
year or methods of financial reporting unless, in each instance, prior written
notice of such change is given to the Bank and prior to such change the Borrower
enters into amendments to this letter agreement in form and substance
satisfactory to the Bank in order to preserve unimpaired the rights of the Bank
and the obligations of the Borrower hereunder.

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

                                      -16-

Subsidiary (as the case may be) would follow, and disposes of such materials
(not consumed in the ordinary course) only through licensed providers of
hazardous waste removal services.

     4.12.  No Margin Stock.  No proceeds of any Revolving Loan shall be used
            ---------------
directly or indirectly to purchase or carry any margin security.

     4.13.  Subordinated Debt.  The Borrower will not directly or indirectly
            -----------------
make any optional or voluntary prepayment or purchase of Subordinated Debt or
modify, alter or add any provisions with respect to payment of Subordinated
Debt.  In any event, the Borrower will not make any payment of any principal of
or interest on any Subordinated Debt at any time when there exists, or if there
would result therefrom, any Event of Default hereunder.

     V.  DEFAULT AND REMEDIES
         --------------------

     5.1.  Events of Default.  The occurrence of any one of the following events
           -----------------
shall constitute an Event of Default hereunder:

     (a) The Borrower shall fail to make any payment of principal of or interest
on the Revolving Note on or before the date when due; or the Borrower shall fail
to pay when due any amount owed to the Bank in respect of any letter of credit
now or hereafter issued by the Bank; or

     (b) Any representation or warranty of the Borrower contained herein shall
at any time prove to have been incorrect in any material respect when made or
any representation or warranty made by the Borrower in connection with any
Revolving Loan or letter of credit shall at any time prove to have been
incorrect in any material respect when made; or

     (c) The Borrower shall default in the performance or observance of any
agreement or obligation under any of (S)(S)3.1, 3.3, 3.6, 3.7, 3.8, 3.9, 3.10 or
3.11 or Article IV; or

     (d) The Borrower shall default in the performance of any other term,
covenant or agreement contained in this letter agreement and such default shall
continue unremedied for 30 days after notice thereof shall have been given to
the Borrower; or

     (e) Any default on the part of the Borrower or any Subsidiary of the
Borrower shall exist, and shall remain unwaived or uncured beyond the expiration
of any applicable notice and/or grace period, under any other contract,
agreement or undertaking now existing or hereafter entered into with or for the
benefit of the Bank (or any affiliate of the Bank); or

     (f) Any default shall exist and remain unwaived or uncured with respect to
any other Indebtedness of the Borrower or any Subsidiary of the Borrower in
excess of $50,000 in aggregate principal amount or with respect to any
instrument evidencing, guaranteeing, securing or otherwise relating to any such
Indebtedness, or any such Indebtedness in excess of $50,000 in aggregate
principal amount shall not have been paid when due, whether by acceleration or
otherwise, or shall have been declared to be due and payable prior to its stated
maturity, or any event or circumstance shall occur which permits, or with the
lapse of time or the giving of notice
<PAGE>

                                      -17-

or both would permit, the acceleration of the maturity of any such Indebtedness
by the holder of holders thereof, or

     (g) The Borrower shall be dissolved, or the Borrower or any Subsidiary of
the Borrower shall become insolvent or bankrupt or shall cease paying its debts
as they mature or shall make an assignment for the benefit of creditors, or a
trustee, receiver or liquidator shall be appointed for the Borrower or any
Subsidiary of the Borrower or for a substantial part of the property of the
Borrower or any such Subsidiary, or bankruptcy, reorganization, arrangement,
insolvency or similar proceedings shall be instituted by or against the Borrower
or any such Subsidiary under the laws of any jurisdiction (except for an
involuntary proceeding filed against the Borrower or any Subsidiary of the
Borrower which is dismissed within 60 days following the institution thereof; or

     (h) Any attachment, execution or similar process shall be issued or levied
against any of the property of the Borrower or any Subsidiary and such
attachment, execution or similar process shall not be paid, stayed, released,
vacated or fully bonded within 10 days after its issue or levy; or

     (i) Any final uninsured judgment in excess of $50,000 shall be entered
against the Borrower or any Subsidiary of the Borrower by any court of competent
jurisdiction; or

     (j)   The Borrower or any Subsidiary of the Borrower shall fail to meet its
minimum funding requirements under ERISA with respect to any employee benefit
plan (or other class of benefit  which the PBGC has elected to insure) or any
such plan shall be the subject of termination proceedings (whether voluntary or
involuntary) and there shall result from such termination proceedings a
liability of the Borrower or any Subsidiary of the Borrower to the PBGC which in
the reasonable opinion of the Bank may have a material adverse effect upon the
financial condition of the Borrower or any such Subsidiary; or

     (k) The Security Agreement or any other Loan Document shall for any reason
(other than due to payment in full of all amounts secured or evidenced thereby
or due to discharge in writing by the Bank) not remain in full force and effect;
or

     (l) The security interests and liens of the Bank in and on any of the
Collateral shall for any reason (other than due to payment in full of all
amounts secured thereby or due to written release by the Bank) not be fully
perfected liens and security interests; or

     (m) At any time, 50% or more of the outstanding shares of any class of
equity securities of the Borrower shall be owned by any Person or by any "group"
(as defined in the Securities Exchange Act of 1934, as amended, and the
regulations thereunder), other than by one or more of the Persons listed on item
5.1(m) of the attached Disclosure Schedule; or

     (n) Gerard E. Puorro shall for any reason not be an executive officer of
the Borrower actively involved in the management of the Borrower; or
<PAGE>

                                      -18-

     (o) There shall occur any other material adverse change in the condition
(financial or otherwise), operations, properties, assets, liabilities or
earnings of the Borrower.

     5.2.  Rights and Remedies on Default.  Upon the occurrence of any Event of
           ------------------------------
Default, in addition to any other rights and remedies available to the Bank
hereunder or otherwise, the Bank may exercise any one or more of the following
rights and remedies (all of which shall be cumulative):

     (a) Declare the entire unpaid principal amount of the Revolving Note then
outstanding, all interest accrued and unpaid thereon and all other amounts
payable under this letter agreement, and all other Indebtedness of the Borrower
to the Bank, to be forthwith due and payable, whereupon the same shall become
forthwith due and payable, without presentment, demand, protest or notice of any
kind, all of which are hereby expressly waived by the Borrower.

     (b) Terminate the revolving financing arrangements provided for by this
letter agreement.

     (c) Exercise all rights and remedies hereunder, under the Revolving Note,
under the Security Agreement, under each of the Pledges and under each and any
other agreement with the Bank; and exercise all other rights and remedies which
the Bank may have under applicable law.

     5.3.  Set-off.  In addition to any rights now or hereafter granted under
           -------
applicable law and not by way of limitation of any such rights, upon the
occurrence of any Event of Default, the Bank is hereby authorized at any time or
from time to time, without presentment, demand, protest or other notice of any
kind to the Borrower or to any other Person, all of which are hereby expressly
waived, to set off and to appropriate and apply any and all deposits and any
other Indebtedness at any time held or owing by the Bank or any affiliate
thereof to or for the credit or the account of the Borrower against and on
account of the obligations and liabilities of the Borrower to the Bank under
this letter agreement or otherwise, irrespective of whether or not the Bank
shall have made any demand hereunder and although said obligations, liabilities
or claims, or any of them, may then be contingent or unmatured and without
regard for the availability or adequacy of other collateral.  As further
security for the Obligations, the Borrower also grants to the Bank a security
interest with respect to all its deposits and all securities or other property
in the possession of the Bank or any affiliate of the Bank from time to time,
and, upon the occurrence of any Event of Default, the Bank may exercise all
rights and remedies of a secured party under the Uniform Commercial Code.

     5.4.  Letters of Credit.  Without limitation of any other right or remedy
           -----------------
of the Bank, (i) if an Event of Default shall have occurred and the Bank shall
have accelerated the Revolving Loans or (ii) if this letter agreement and/or the
revolving financing arrangements described herein shall have expired or shall
have been earlier terminated by either the Bank or the Borrower for any reason,
the Borrower will forthwith deposit with the Bank in cash a sum equal to the
total of all then undrawn amounts of all outstanding letters of credit issued by
the Bank for the account of the Borrower.

<PAGE>

                                      -19-


     VI.  MISCELLANEOUS
          -------------

     6.1.  Costs and Expenses.  The Borrower agrees to pay on demand all costs
           ------------------
and expenses (including, without limitation, reasonable legal fees) of the Bank
in connection with the preparation, execution and delivery of this letter
agreement, the Security Agreement, the Revolving Note and all other instruments
and documents to be delivered in connection with any Revolving Loan or any
letter of credit issued hereunder and any amendments or modifications of any of
the foregoing, as well as the costs and expenses (including, without limitation,
the reasonable fees and expenses of legal counsel) incurred by the Bank in
connection with preserving, enforcing or exercising, upon default, any rights or
remedies under this letter agreement, the Security Agreement, the Revolving Note
and all other instruments and documents delivered or to be delivered hereunder
or in connection herewith, all whether or not legal action is instituted.  In
addition, the Borrower shall be obligated to pay any and all stamp and other
taxes payable or determined to be payable in connection with the execution and
delivery of this letter agreement, the Security Agreement, the Revolving Note
and all other instruments and documents to be delivered in connection with any
Obligation.  Any fees, expenses or other charges which the Bank is entitled to
receive from the Borrower under this Section shall bear interest from the date
of any demand therefor until the date when paid at a rate per annum equal to the
per annum rate otherwise payable under the Revolving Note (but in no event in
excess of the maximum rate permitted by then applicable law).

     6.2.  Capital Adequacy.  If the Bank shall have determined that the
           ----------------
adoption or phase-in after the date hereof of any applicable law, rule or
regulation regarding capital requirements for banks or bank holding companies,
or any change therein after the date hereof, or any change in the interpretation
or administration thereof by any governmental authority, central bank or
comparable agency charged with the interpretation or administration thereof, or
compliance by the Bank with any request or directive of such entity regarding
capital adequacy (whether or not having the force of law) has or would have the
effect of reducing the return on the Bank's capital with respect to the
Revolving Loans, the within-described revolving loan facility and/or letters of
credit issued for the account of the Borrower to a level below that which the
Bank could have achieved (taking into consideration the Bank's policies with
respect to capital adequacy immediately before such adoption, phase-in, change
or compliance and assuming that the Bank's capital was then fully utilized) but
for such adoption, phase-in, change or compliance by any amount deemed by the
Bank to be material: (i) the Bank shall promptly after its determination of such
occurrence give notice thereof to the Borrower; and (ii) the Borrower shall pay
forthwith to the Bank as an additional fee such amount as the Bank certifies to
be the amount that will compensate it for such reduction with respect to the
Revolving Loans, the within-described revolving loan facility and/or such
letters of credit.

     A certificate of the Bank claiming compensation under this Section shall be
conclusive in the absence of manifest error.  Such certificate shall set forth
the nature of the occurrence giving rise to such compensation, the additional
amount or amounts to be paid to it hereunder and the method by which such
amounts were determined.  In determining such amounts, the Bank may use any
reasonable averaging and attribution methods.  No failure on the part of the
Bank to demand compensation on any one occasion shall constitute a waiver of its
right to demand such compensation on any other occasion and no failure on the
part of the Bank to deliver any
<PAGE>

                                      -20-

certificate in a timely manner shall in any way reduce any obligation of the
Borrower to the Bank under this Section.

     6.3.  Facility Fees.  With respect to the within arrangements for Revolving
           -------------
Loans, the Borrower will pay to the Bank, at the time of execution and delivery
of this letter agreement and on the first day of each calendar quarter
thereafter (commencing April 1, 1997), a non-refundable quarterly facility fee
of $4,375 per calendar quarter (appropriately pro-rated for any partial calendar
quarter).  In addition, if the within-described revolving financing arrangements
are terminated by the Borrower for any reason or by the Bank as the result of
the Borrower's default, the Borrower shall forthwith upon such termination pay
to the Bank a sum equal to all of the fees which would have become due pursuant
to the immediately preceding sentence from the date of such termination through
the Expiration Date.  The fees described in this Section are in addition to any
balances and fees required by the Bank or any of its affiliates in connection
with any other services now or hereafter made available to the Borrower.

     6.4.  Other Agreements.  The provisions of this letter agreement are not in
           ----------------
derogation or limitation of any obligations, liabilities or duties of the
Borrower under any of the other Loan Documents or any other agreement with or
for the benefit of the Bank.  No inconsistency in default provisions between
this letter agreement and any of the other Loan Documents or any such other
agreement will be deemed to create any additional grace period or otherwise
derogate from the express terms of each such default provision.  No covenant,
agreement or obligation of the Borrower contained herein, nor any right or
remedy of the Bank contained herein, shall in any respect be limited by or be
deemed in limitation of any inconsistent or additional provisions contained in
any of the other Loan Documents or any such other agreement.

     6.5.  Governing Law.  This letter agreement and the Revolving Note shall be
           -------------
governed by, and construed and enforced in accordance with, the laws of The
Commonwealth of Massachusetts.

     6.6.  Addresses for Notices, etc.  All notices, requests, demands and other
           --------------------------
communications provided for hereunder shall be in writing and shall be mailed or
delivered to the applicable party at the address indicated below:

     If to the Borrower:

     Candela Corporation
     530 Boston Post Road
     Wayland, MA  01778
     Attention: F. Paul Broyer, Chief Financial Officer

     If to the Bank:

     Fleet National Bank
     High Technology Group
     75 State Street
     Boston, MA 02109
     Attention: Olaperi Onipede, Vice President
<PAGE>

                                      -21-

or, as to each of the foregoing, at such other address as shall be designated by
such Person in a written notice to the other party complying as to delivery with
the terms of this Section.  All such notices, requests, demands and other
communications shall be deemed delivered on the earlier of (i) the date received
or (ii) the date of delivery, refusal or non-delivery indicated on the return
receipt if deposited in the United States mails, sent postage prepaid, certified
or registered mail, return receipt requested, addressed as aforesaid.

     6.7.  Binding Effect; Assignment; Termination.  This letter agreement shall
           ---------------------------------------
be binding upon the Borrower, its successors and assigns and shall inure to the
benefit of the Borrower and the Bank and their respective permitted successors
and assigns.  The Borrower may not assign this letter agreement or any rights
hereunder without the express written consent of the Bank.  The Bank may, in
accordance with applicable law, from time to time assign or grant participation
in this letter agreement, the Revolving Loans, the Revolving Note and/or the
letters of credit issued hereunder.  The Borrower may terminate this letter
agreement and the financing arrangements made herein by giving written notice of
such termination to the Bank together with payment of the sum described in the
second sentence of (S)6.3; provided that no such termination will release or
waive any of the Bank's rights or remedies or any of the Borrower's obligations
under this letter agreement or any of the other Loan Documents unless and until
the Borrower has paid in full the Revolving Loans and all interest thereon and
all fees and charges payable in connection therewith and all letters of credit
issued hereunder have been terminated.

     6.8.  Consent to Jurisdiction.  The Borrower irrevocably submits to the
           -----------------------
non-exclusive jurisdiction of any Massachusetts court or any federal court
sitting within The Commonwealth of Massachusetts over any suit, action or
proceeding arising out of or relating to this letter agreement and/or the
Revolving Note.  The Borrower irrevocably waives, to the fullest extent
permitted by law, any objection which it may now or hereafter have to the laying
of venue of any such suit, action or proceeding brought in such a court and any
claim that any such suit, action or proceeding has been brought in an
inconvenient forum.  The Borrower agrees that final judgment in any such suit,
action or proceeding brought in such a court shall be enforced in any court of
proper jurisdiction by a suit upon such judgment, provided that service of
process in such action, suit or proceeding shall have been effected upon the
Borrower in one of the manners specified in the following paragraph of this
(S)6.8 or as otherwise permitted by law.

     The Borrower hereby consents to process being served in any suit, action or
proceeding of the nature referred to in the preceding paragraph of this (S)6.8
either (i) by mailing a copy thereof by registered or certified mail, postage
prepaid, return receipt requested, to it at its address set forth in (S)6.6 (as
such address may be changed from time to time pursuant to said (S)6.6) or (ii)
by serving a copy thereof upon it at its address set forth in (S)6.6 (as such
address may be changed from time to time pursuant to said (S)6.6).

     6.9.  Severability.  In the event that any provision of this letter
           ------------
agreement or the application thereof to any Person, property or circumstances
shall be held to any extent to be
<PAGE>

                                      -22-

invalid or unenforceable, the remainder of this letter agreement, and the
application of such provision to Persons, properties or circumstances other than
those as to which it has been held invalid and unenforceable, shall not be
affected thereby, and each provision of this letter agreement shall be valid and
enforced to the fullest extent permitted by law.

     VII.  DEFINED TERMS
           -------------

     7.1.  Definitions.  In addition to terms defined elsewhere in this letter
           -----------
agreement, as used in this letter agreement, the following terms have the
following respective meanings:

     "Adjusted Debt" - All Indebtedness of the Borrower and/or any of its
Subsidiaries, other than any such Indebtedness which consists of Deferred
Revenue.

     "Aggregate Bank Liabilities" - At any time, the sum of (i) the principal
amount of all Revolving Loans then outstanding, plus (ii) all then undrawn
                                                ----
amounts of letters of credit issued by the Bank for the account of the Borrower,

plus (iii) all amounts then drawn on any such letter of credit which at said
----
date shall not have been reimbursed to the Bank by the Borrower.

     "Borrowing Base" - As determined at any date, 80% of the aggregate
principal amount of the Qualified Receivables of the Borrower then outstanding.

     "Business Day" - Any day which is not a Saturday, nor a Sunday nor a public
holiday under the laws of the United States of America or The Commonwealth of
Massachusetts applicable to a national bank.

     "Capital Expenditures" - All acquisitions of machinery, equipment, land,
leaseholds, buildings, leasehold improvements and all other expenditures for
purposes which are considered to be fixed assets under generally accepted
accounting principles consistently applied.  When a fixed asset is acquired by a
lease which is required to be capitalized pursuant to generally accepted
accounting principles, the amount required to be so capitalized shall be
considered to be an expenditure in the year such asset is first leased.

     "Collateral" - All property now or hereafter owned by the Borrower or in
which the Borrower now or hereafter has any interest which is described as
"Collateral" in the Security Agreement or in (S)7.2(b) below.

     "Current Liabilities" - All liabilities of the Borrower and/or any
Subsidiary of the Borrower properly shown as "current liabilities" on a
consolidated balance sheet of the Borrower and Subsidiaries prepared in
accordance with generally accepted accounting principles consistently applied;
provided that "Current Liabilities" will in no event be deemed to include any
liabilities which represent Deferred Revenue.

     "Deferred Revenue" - Any liabilities of the Borrower which represent sums
actually received by the Borrower under software maintenance contracts and
which, in accordance with generally accepted accounting principles consistently
applied, are properly shown as "deferred revenue" on the Borrower's balance
sheet.
<PAGE>

                                      -23-

     "ERISA" - The Employee Retirement Income Security Act of 1974, as amended.

     "Expiration Date" - December 1, 1997, unless extended by the Bank, which
extension may be given or withheld by the Bank in its sole discretion.

     "Indebtedness" - All obligations of a Person, whether current or long-term,
senior or subordinated, which in accordance with generally accepted accounting
principles would be included as liabilities upon such Person's balance sheet at
the date as of which Indebtedness, is to be determined, and shall also include
guaranties, endorsements (other than for collection in the ordinary course of
business) or other arrangements whereby responsibility is assumed for the
obligations of others, whether by agreement to purchase or otherwise acquire the
obligations of others, including any agreement, contingent or otherwise, to
furnish funds through the purchase of goods, supplies or services for the
purpose of payment of the obligations of others.

     "Loan Documents" - Each of this letter agreement, the Revolving Note, the
Security Agreement, the Pledges and each other instrument, document or agreement
evidencing, securing, guaranteeing or relating in any way to any of the
Revolving Loans or any of the letters of credit issued hereunder, all whether
now existing or hereafter arising or entered into.

     "Maximum Revolving Amount" - At any date as of which same is to be
determined, the amount by which (x) $3,500,000 exceeds (y) the sum of (i) all
then undrawn amounts of letters of credit issued by the Bank for the account of
the Borrower plus (ii) all amounts then drawn on any such letter of credit which
at said date shall not have been reimbursed to the Bank by the Borrower.

     "Net Income" (or "Net Loss") - The book net income (or book net loss, as
the case may be) of a Person for any period, after all taxes actually paid or
accrued and all expenses and other charges determined in accordance with
generally accepted accounting principles consistently applied.

     "Net Quick Assets" - Such current assets of the Borrower as consist of
cash, cash-equivalents and Receivables (less an allowance for bad debt
consistent with the Borrower's prior experience).

     "Obligations" - All Indebtedness, covenants, agreements, liabilities and
obligations, now existing or hereafter arising, made by the Borrower with or for
the benefit of the Bank or owed by the Borrower to the Bank in any capacity.

     "PBGC" - The Pension Benefit Guaranty Corporation or any successor thereto.

     "Person" - An individual, corporation, company, partnership, joint venture,
trust or unincorporated organization, or a government or any agency or political
subdivision thereof.

     "Qualified Receivables" - Only those Receivables of the Borrower which
arise out of bona fide sales made to customers of the Borrower (which customers
             ---- ----
are located in the United States and are unrelated to the Borrower) in the
ordinary course of the Borrower's business and
<PAGE>

                                      -24-

which remain unpaid no more than 90 days past the respective invoice dates of
such Receivables, the payment of which is not in dispute. Unless the Bank in its
sole discretion otherwise determines with respect to any Receivable, a
Receivable which would otherwise be a Qualified Receivable shall be deemed not
to be a Qualified Receivable (i) if the Bank does not have a fully perfected
first priority security interest in such Receivable; (ii) if such Receivable is
not free and clear of all adverse interests in favor of any Person other than
the Bank; (iii) if such Receivable is subject to any deduction, offset, contra
account, counterclaim or condition; (iv) if a field examination made by the Bank
fails to confirm that such Receivable exists and satisfies all of the criteria
set forth herein to be a Qualified Receivable; (v) if such Receivable is not
properly invoiced at the date of sale; (vi) if the customer or account debtor
has disputed liability or made any claim with respect to the Receivable or the
merchandise covered thereby or with respect to any other Receivable due from
said customer to the Borrower; (vii) if the customer or account debtor has filed
a petition for bankruptcy or any other application for relief under the
Bankruptcy Code or has effected an assignment for the benefit of creditors, or
if any petition or any other application for relief under the Bankruptcy Code
has been filed against said customer or account debtor, or if the customer or
account debtor has suspended business, become insolvent, ceased to pay its debts
as they become due, or had or suffered a receiver or trustee to be appointed for
any of its assets or affairs; (viii) if the customer or account debtor has
failed to pay other Receivables so that an aggregate of 25% of the total
Receivables owing to the Borrower by such customer or account debtor has been
outstanding for more than 90 days past their respective due dates; (ix) if such
Receivable is owed by the United States government or any agency or department
thereof (unless assigned to the Bank under the Federal Assignment of Claims
Act); or (x) if the Bank reasonably believes that collection of such Receivable
is insecure or that it may not be paid by reason of financial inability to pay
or otherwise, or that such Receivable is not for any reason suitable for use as
a basis for borrowing hereunder.

     "Receivables" - All of the Borrower's present and future accounts, accounts
receivable and notes, drafts, acceptances and other instruments representing or
evidencing a right to payment for goods sold or for services rendered.

     "Subordinated Debt" - Any Indebtedness of the Borrower which is expressly
subordinated, pursuant to a subordination agreement in form and substance
satisfactory to the Bank, to all Indebtedness now or hereafter owed by the
Borrower to the Bank.

     "Subsidiary" - Any corporation or other entity of which the Borrower and/or
any of its Subsidiaries, directly or indirectly, owns, or has the right to
control or direct the voting of, fifty (50%) percent or more of the outstanding
capital stock or other ownership interest having general voting power (under
ordinary circumstances).

     "Tangible Net Worth" - An amount equal to the total assets of any Person
(excluding the (i) total intangible assets of such Person and (ii) any assets
representing amounts due from any officer or employee of such Person or from any
Subsidiary of such Person) minus the total liabilities of such Person.  Total
intangible assets shall be deemed to include, but shall not be limited to, the
excess of cost over book value of acquired businesses accounted for by the
purchase method, formulae, trademarks, trade names, patents, patent rights and
deferred
<PAGE>

                                      -25-

expenses (including, but not limited to, unamortized debt discount and expense,
organizational expense, capitalized software costs and experimental and
development expenses).

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

     7.2.  Security Agreement.  (a) The Borrower acknowledges and agrees that
           ------------------
the "Obligations" described in and secured by the Security Agreement include,
without limitation, all of the obligations of the Borrower under the Revolving
Note and/or this letter agreement and/or with respect to any letter of credit
which may be issued by the Bank for the account of the Borrower.

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

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

          (ii) That, upon the occurrence of any Event of Default (as defined in
     (S)5.1 of this letter agreement), the Bank may, at any time, notify account
     debtors that the Collateral has been assigned to the Bank and that payments
     by such account debtors shall be made directly to the Bank.  At any time
     after the occurrence of an Event of Default, the Bank may collect the
     Borrower's Receivables, or any of same, directly from account debtors and
     may charge the collection costs and expenses to the Borrower.
<PAGE>

                                      -26-

     This letter agreement is executed, as an instrument under seal, as of the
day and year first above written.

                                    Very truly yours,

                                    CANDELA CORPORATION


                                    By ___________________________
                                    Name:
                                    Title:

Accepted and agreed:
FLEET NATIONAL BANK


By ___________________________
  Its



By ___________________________
  Its
<PAGE>

                              DISCLOSURE SCHEDULE

Item 2.1(a)  Jurisdictions in which Borrower is qualified; Subsidiaries

Item 2.1(b)  5% Stockholders

Item 2.1(e)  Litigation

Item 2.1(j)  Location of Collateral; record owners of Premises

Item 4.1  Existing Indebtedness

Item 4.2  Existing Liens

Item 4.3  Existing Guaranties

Item 5.1(m)  Permitted Majority Owners