LOAN AGREEMENT

         This Loan Agreement is made and entered into this 22nd day of May, 1998
by and between Coherent, Inc., a Delaware corporation ("Coherent"),  and Palomar
Medical Technologies, Inc., a Delaware corporation ("PMTI").

         Subject to the terms and conditions contained herein, the parties agree
as follows:

         1.  LOAN.  Coherent  shall  loan  PMTI a total of  $4,000,000,  to help
finance PMTI's working capital requirements (the "Loans"),  which loans shall be
evidenced  by one or more  promissory  notes in the form set forth in Exhibit A.
The  parties  agree that the initial  loan shall be  $3,000,000.  The  remaining
$1,000,000 shall be loaned to PMTI at its request at any time during the next 30
days. The promissory  notes,  together with any other promissory notes issued by
PMTI to  Coherent  that  recite  that they are  secured by this  Agreement,  are
collectively  referred to herein as the "Notes". The Note shall bear interest at
8.5 % per  annum.  The  principal  balance  shall be due on or before  5:00 p.m.
California time on September 15, 1998. [By a side letter  agreement  between the
parties,  dated June 25, 1998, this date has been extended to October 15, 1998.]
Interest  shall be paid  monthly.  Should the  principal not be paid in a timely
manner, interest shall accrue on the outstanding principal balance at the lesser
of 1 1/2 % per month or the highest rate permitted by law.

         2.  SECURITY  INTEREST.  PMTI  hereby  creates and grants to Coherent a
security interest in the collateral  described in Section 3 hereof to secure the
payment and performance of the following obligations of PMTI to Coherent:

         (a) Payment of the  indebtedness  evidenced by the Note and any and all
modifications, extensions or renewals thereof,

         (b) Performance and discharge of each and every  obligation,  covenant,
condition and agreement of PMTI herein contained.

         3. COLLATERAL. The collateral in which the security interest is created
(the  "Collateral")  shall consist of all of the inventory owned by Star Medical
Technologies,  a wholly-owned  subsidiary of PMTI ("Star  Medical") from time to
time during the term of this  Agreement.  Coherent  agrees that PMTI and/or Star
Medical may sell such  inventory  to its  customers  in the  ordinary  course of
business,  provided that Coherent is granted a security interest in the proceeds
thereof to the extent  that the book  value of the  Collateral  is less than the
total indebtedness represented by the Note.

         4.  RECORDING.  PMTI will  execute (or cause Star  Medical to execute),
deliver and cause to be  recorded  or filed in the manner and place  required by
law, any  document or  instrument  that may be requested by Coherent,  including
financing  statements or other instruments of similar character,  to perfect and
protect the lien of this Loan Agreement upon any and all of the Collateral.


<PAGE>

         5. EVENTS OF DEFAULT.  An Event of Default (as hereinafter  defined) of
any Note issued under this Agreement  shall cause all Note to be immediately due
and  payable.  As  used  herein,  an  "Event  of  Default"  shall  be any of the
following:

         (a) The failure of PMTI to punctually and properly pay the indebtedness
evidenced by the Note in accordance with its terms.

         (b) The failure of PMTI  punctually  and  properly to observe,  keep or
perform any covenant,  agreement or condition  required to be observed,  kept or
performed by this Loan Agreement.

         6.  RIGHTS OF SECURED  PARTY.  Coherent  shall have all the rights as a
secured party under the laws of California, including the right to sell any part
of the  Collateral  at a public or  private  sale or bid as a  purchaser  of the
Collateral.

         7.  APPLICATION  OF PROCEEDS OF SALE.  The  proceeds of the sale of any
Collateral sold pursuant to Section 6 hereof shall be applied as follows:

                  FIRST:  To the  payment  of costs and  expenses  of such sale,
including the fees and out-of-pocket  expenses of counsel employed in connection
therewith,  and the payment of all other costs and expenses incurred by Coherent
and in connection with the administration and enforcement of this Agreement;

                  SECOND:   To  the  payment  and   discharge  in  full  of  all
obligations  described in Section 2 hereof including,  without  limitation,  the
unpaid  principal and interest and other sums then owing in respect of the Note;
and

                  THIRD:  The balance (if any) of such proceeds shall be paid to
PMTI, its successors and assigns,  or as a court of competent  jurisdiction  may
direct.

         8.  COVENANTS  OF  PMTI.  PMTI  covenants  and  warrants  that,  unless
compliance is waived by Coherent in writing:

         (a)  PMTI  will  not  further  encumber,  sell,  contract  for  sale or
otherwise  dispose  of any of the  Collateral  until  such time as the  security
interest  created by this  Agreement has  terminated.  PMTI will not permit Star
Medical to further encumber, sell, contract for sale or otherwise dispose of any
of the  Collateral  until  such time as the  security  interest  created by this
Agreement has terminated.

         (b) PMTI will take all actions necessary or appropriate to preserve and
defend its title to the  Collateral and the validity of the lien created by this
Agreement.

         (c) PMTI will  promptly  notify  Coherent in writing of any event which
materially  and adversely  affects the ability of PMTI or Coherent to dispose of
the  Collateral,  or the rights or remedies  of  Coherent  in relation  thereto,
including,  but not  limited  to,  the levy of any  legal  process  against  the
Collateral.

         (d) PMTI will,  without expense to Coherent,  do, execute,  acknowledge
and deliver, or cause to be done, executed, acknowledged and delivered, all such
further  acts and  instruments  as Coherent  shall from time to time  require in
order to facilitate the performance of this Agreement.

<PAGE>
   
        (e) PMTI  agrees to  promptly  enter into good faith  negotiations  with
Coherent  regarding  the sale of Star  Medical  for a price of no less  than $42
million, on terms to be agreed upon between PMTI and Coherent. The parties agree
to use  reasonable  diligence  to  negotiate  and enter  into a letter of intent
containing  the material terms of the  transaction  within the next 30 days. The
letter of intent shall  include  provisions  providing  for a closing date on or
before September 15, 1998 and standard  language  prohibiting PMTI from entering
into discussions with third parties  regarding the possible sale of Star Medical
or any of Star Medical's assets,  subject to the fiduciary  responsibilities  of
PMTI's  board of  directors.  PMTI agrees to  discontinue  and/or  refrain  from
discussing  the sale of Star Medical,  or the licensing of any of Star Medical's
technology,  with any third party until the earlier of (i) the  expiration of 30
days, or (ii) both parties agree that negotiations are finished,  subject to the
fiduciary responsibilities of PMTI's board of directors.
    

         9.  MISCELLANEOUS.

         (a) No failure or delay by Coherent in exercising  any right,  power or
privilege hereunder shall operate as a waiver thereof,  and no single or partial
exercise thereof shall preclude any other of further exercise of the exercise of
any other right, power or privilege.

         (b) Should any one or more of the provisions hereof be determined to be
illegal or  unenforceable,  all other  provisions  hereof  shall be give  effect
separately therefrom and shall not be affected thereby.

         (c) The security  interest  created by this Loan Agreement  shall fully
terminate  immediately upon the full and complete  satisfaction and discharge of
all of the Obligations set forth in paragraph 3 hereof.  Upon such  termination,
Coherent shall execute and deliver to PMTI such termination statements and other
instruments of release of such security interest as PMTI may reasonably require.

         (d) All notices,  requests,  demands and other communications hereunder
shall be in writing and shall be deemed to have been duly given if  delivered or
mailed first class,  postage prepaid,  to the parties at the following addresses
(or such  other  address  as shall be given in  writing  by either  party to the
other):

         To Coherent:

                  Coherent, Inc.
                  5100 Patrick Henry Drive
                  Santa Clara, CA  95054
                  Attn:  General Counsel
                  Facsimile No.:  (408) 970-9998

<PAGE>

         To PMTI:

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

         (e) This Loan  Agreement  and security  interest  created  hereby shall
inure  to the  benefit  of the  Coherent,  its  successor  and  assigns  and any
transferee of any of the Obligations  secured hereby,  and shall be binding upon
PMTI and its successors and heirs.

         (f) The laws of the State of  California  shall  govern the validity of
this  Agreement,  the  construction of its terms and the  interpretation  of the
rights and duties of the parties.

         The foregoing  Agreement is hereby  executed as of the date first above
written.

                                    COHERENT, INC.
                                    a Delaware corporation



                                    By:      /s/
                                        -------------------------------
                                             Scott H. Miller
                                    Title:   Sr. VP and General Counsel

                                    PALOMAR MEDICAL TECHNOLOGIES, INC.
                                    a Delaware corporation



                                     By:     /s/
                                        --------------------------------
                                             Louis P. Valente
                                     Title:  Chairman & Chief Executive Officer


<PAGE>



                                    EXHIBIT A

                                 PROMISSORY NOTE

$3,000,000                                               Santa Clara, California
                                                                    May 22, 1998

         FOR VALUE RECEIVED,  the  undersigned,  Palomar  Medical  Technologies,
Inc., a Delaware  corporation  ("PMTI"),  promises to pay to  Coherent,  Inc., a
Delaware corporation ("Coherent"),  or order, the principal sum of Three Million
Dollars ($3,000,000). Interest shall accrue on the outstanding principal balance
at a rate of 8.5% per annum and shall be payable  monthly.  The principal amount
shall be due and payable on or before 5:00 p.m. California time on September 15,
1998.

         Should  the  principal  and  interest  not be paid in a timely  manner,
interest shall accrue on the outstanding  principal and interest  balance at the
lesser  of 1 1/2 % per  month  or  the  highest  rate  permitted  by  law.  This
promissory note shall be immediately due and payable in the Event of Default (as
defined in the Loan  Agreement  between PMTI and Coherent of even date  herewith
(the "Loan Agreement")).

         This note may be prepaid by PMTI at any time without penalty.

         PMTI shall reimburse Coherent for all costs and expenses incurred by it
and shall pay the reasonable  fees and  disbursements  of counsel to Coherent in
connection with the enforcement of Coherent's rights hereunder.

         No amendment,  modification or waiver of any provision of this Note nor
consent to any departure by PMTI  therefrom  shall be effective  unless the same
shall be in writing and signed by Coherent and then such waiver or consent shall
be  effective  only in the specific  instance  and for the specific  purpose for
which given.

         PMTI hereby  waives any  requirement  of notice of dishonor,  notice of
protest and protest.

         This Note shall be deemed to be a  contract  made under the laws of the
State of California  and shall be construed in accordance  with the laws of said
State.  This Note shall be binding upon PMTI and its  successors and assigns and
the terms hereof shall inure to the benefit of Coherent and its  successors  and
assigns,  including  subsequent  holders hereof. The holding of any provision of
this Note to be invalid or  unenforceable  by a court of competent  jurisdiction
shall not  affect any other  provisions  and the other  provisions  of this Note
shall remain in full force and effect.

         This Note is secured with all of the  inventory of PMTI's  wholly-owned
subsidiary,  Star  Medical  Technologies,  pursuant  to the  terms  of the  Loan
Agreement.

                                            PALOMAR MEDICAL TECHNOLOGIES, INC.



                                            By:   /s/
                                               -------------------------------