LOAN AGREEMENT

     This Loan Agreement is made and entered into this 20th day of January, 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. At Coherent's  sole election and  discretion,  Coherent shall loan
PMTI from time to time amounts to be agreed upon between  them,  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  $_________.  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".

          1.5.  PAYMENT.  In accordance  with the Sales Agency,  Development and
     License  Agreement  entered into between  parties on November 17, 1997 (the
     "Agreement"), Coherent will be using its reasonable best efforts to collect
     PMTI's  accounts  receivable  that are  Collateral  for this note.  As such
     accounts  receivable are collected by Coherent,  the amounts due PMTI under
     the Agreement shall be credited against the outstanding  principal  balance
     of the promissory  note. Any unpaid  principal shall be due and payable six
     months  after  the last due date of the  accounts  receivable  set forth on
     Schedule A to each promissory  note.  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 Notes 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 those PMTI's accounts receivable  identified
on  Schedule  A to each Note  where  Coherent  has acted as PMTI's  sales  agent
pursuant to the Agreement, together with all proceeds thereto.

     4. RECORDING.  PMTI will 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 Security  Agreement
upon any and all of the Collateral.

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<PAGE>

     5. EVENTS OF DEFAULT.  An Event of Default (as hereinafter  defined) of any
Note issued under this Agreement shall cause all Notes 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 Notes in accordance with their 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 Security 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 Notes; 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.

          (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.

     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



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<PAGE>

     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 Security  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

         To PMTI:

                  Palomar Medical Technologies, Inc.
                  45 Hartwell Avenue
                  Lexington, MA  02173
                  Attn:  General Counsel
                  Facsimile No.:  (781) 676-7377

          (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:
                                    Title:

                                    PALOMAR MEDICAL TECHNOLOGIES, INC.
                                    a Delaware corporation



                                    By:    /s/   Louis P. Valente
                                        --------------------------------
                                        Title:  President and Chief 
                                                Executive Officer


<PAGE>



                                    EXHIBIT A

                                 PROMISSORY NOTE

$2,210,638                                               Santa Clara, California
                                                                January 20, 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 Two  Million,  Two
Hundred  Ten  Thousand  Six Hundred  Thirty-Eight  Dollars  ($2,210,638.00).  No
interest shall accrue on this promissory note, except as set forth below.

     In accordance  with the Sales  Agency,  Development  and License  Agreement
entered into between  parties on November 17, 1997 (the  "Agreement"),  Coherent
will be using its reasonable best efforts to collect PMTI's accounts  receivable
that  collateralize  this note. As such accounts  receivable are collected,  the
amounts due PMTI under the Agreement  shall be credited  against the outstanding
principal balance of this promissory note. Any unpaid principal shall be due and
payable on July 26, 1998 (which  shall be a date six months after the latest due
date of the accounts  receivable  set forth on Schedule A). 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. This  promissory  note shall be immediately due and payable in
the Event of Default (as defined in the Agreement).

     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 certain  collateral  pursuant to the terms of an
agreement  between the undersigned and Coherent,  Inc. dated January __, 1998. A
description  of the accounts  receivables  constituting  the collateral for this
promissory note is set forth on the attached Schedule A.

                                            PALOMAR MEDICAL TECHNOLOGIES, INC.



                                            By:    /s/  Louis P. Valente