PALOMAR MEDICAL TECHNOLOGIES, INC.
                               45 Hartwell Avenue
                               Lexington, MA 02421


                                                               November 16, 1998


Fleet National Bank
One Federal Street
Boston, MA  02110

Gentlemen:

         This letter  agreement  will set forth certain  understandings  between
Palomar Medical Technologies,  Inc., 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;  Star Sale.  Reference is made to (i) that
certain $10,000,000 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,  Accounts  Receivable  and  Intangibles  Security
Agreement and that certain Supplementary Security Agreement Security Interest in
Goods and Chattels,  each of even date  herewith,  from the Borrower to the Bank
(collectively,   the  "Borrower's   Security   Agreement"),   (iii)   collateral
assignments and notices of collateral assignment (collectively,  the "Borrower's
Intellectual  Property  Security  Agreements")  from  the  Borrower  to the Bank
relating to the Borrower's  registered  trademarks,  patents and copyrights,  if
any, (iv) that certain  Guaranty  Agreement of even date herewith (the "Personal
Guaranty") from A. Neil  Pappalardo (the "Personal  Guarantor") to the Bank, (v)
that certain Inventory,  Accounts Receivable and Intangibles  Security Agreement
and that certain  Supplementary  Security Agreement - Security Interest in Goods
and Chattels, each of even date herewith,  from Star Medical Technologies,  Inc.
("Star")  to  the  Bank  (collectively,   "Star's  Security  Agreement"),   (vi)
collateral  assignments  and  notices of  collateral  assignment  (collectively,
"Star's  Intellectual  Property  Security  Agreements")  from  Star to the  Bank
relating to Star's registered  trademarks,  patents and copyrights,  if any, and
(vii)  that  certain  Guaranty  Agreement  of  even  date  herewith  (the  "Star
Guaranty")  from Star to the Bank.  The Bank  acknowledges  that nothing in this
letter agreement or in any Security  Agreement or in any  Intellectual  Property
Security Agreement will in any event be deemed to prevent the sale of Star on or
prior to March 31, 1999 for cash  consideration  which shall  result,  after all
payments owed to Coherent,  Inc., in at least $40,000,000 in net proceeds to the
Borrower on a pre-tax 

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basis,  provided  that proceeds of such sale are applied to reduce the Aggregate
Bank  Liabilities to the extent  necessary so that,  after giving effect to such
sale  and the  release  of the  Star  Security  Agreement,  the  Aggregate  Bank
Liabilities  will not exceed the then remaining  Borrowing  Base. As provided in
ss.3.11 below,  the security  interest of the Bank in the assets of Star will be
released in order to permit the aforesaid sale on the terms described above.

        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
ss.5.2 or ss.6.7; 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  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) four (4%) 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 lawful  money of the United
States in  immediately  available  funds,  at its office at One Federal  Street,
Boston,  MA 02110 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 

<PAGE>

section  5.2(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 (i) for working capital  purposes,  (ii) to pay principal of and interest
on the  Coherent  Notes when same  becomes  due,  (iii) to pay  interest  on the
Restructured Subordinated Notes as same becomes due and (iv) to pay when due the
5% per annum fee described in clause (i) of ss.4.4 below to the extent (but only
to the extent) that such fee is classified as  indebtedness  in accordance  with
generally accepted accounting principles and is not deemed to be a dividend.

         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,   set-off  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)  $10,000,000 or (ii) the then effective  Borrowing  Base. 

<PAGE>

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
Agreements,  the Guaranties,  the Intellectual Property Security Agreements, 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
and/or Star made in this letter agreement and/or in any 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.

         (b) All covenants and agreements of the Borrower  and/or Star 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  and/or Star 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 each of the Borrower and Star 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 ss.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,  

<PAGE>

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 20 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 Borrower's Security Agreement and the
Borrower's  Intellectual  Property  Security  Agreements  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 is not a member of any partnership or joint venture, except as shown on
said item 2.1(a) of the attached Disclosure Schedule.

         (b) At the date of this  letter  agreement,  no  Person is known by the
Borrower to own, of record and/or  beneficially,  5% or more of the  outstanding
shares of any class of  capital  stock of the  Borrower,  except as set forth on
item 2.1(b) of the attached Disclosure Schedule.

         (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


<PAGE>

            (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, except as enforceability may be limited by
laws of general application relating to bankruptcy, insolvency and the relief of
debtors and by rules of law governing  specific  performance,  injunctive relief
and other equitable remedies.

         (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.  Except as  described  on item 2.1(f) of the  attached
Disclosure Schedule,  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
or 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 have been completed in accordance with applicable
law and the Borrower or the relevant Subsidiary has paid all taxes, assessments,
impositions,  fees and other 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,  

<PAGE>

certificates and  authorizations  needed for the conduct of its business and the
use of its properties and all premises  occupied by it, as now conducted,  owned
and used.

         (i) The audited financial statements of the Borrower as at December 31,
1997 and the  management-generated  statements  of the  Borrower  as at June 30,
1998,  each  heretofore  delivered  to the Bank,  are  complete and accurate and
fairly present in all material respects the financial  condition of the Borrower
as at the respective dates thereof and for the periods covered thereby.  Neither
the  Borrower  nor  any  of  the  Borrower's  Subsidiaries  has  any  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 June 30, 1998, 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 45 Hartwell  Avenue,  Lexington,  MA 02421.  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 the record owners of
all premises where any material amount of Collateral is located.

         (k) The  Borrower  owns or has a valid right to use all of the patents,
licenses,  copyrights,  trademarks,  trade names and  franchises  ("Intellectual
Property")  now being used to conduct its business,  described on item 2.1(k) of
the attached Disclosure Schedule. None of the Intellectual Property owned by the
Borrower is represented by a registered  copyright,  trademark,  patent or other
federal or state registration,  except as shown on said item 2.1(k). To the best
knowledge  of the  Borrower,  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.

         (m) The Borrower is not a party to any contract or agreement  which now
has or, as far as can reasonably 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
Borrower's Security Agreement or elsewhere,  the Borrower agrees that so long as
the financing  arrangements  

<PAGE>

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.  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
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.

        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  Borrower's  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, with the Bank to be
named as first loss payee on all policies relating to any Collateral;  provided,
however, that so long as no Event of Default has occurred and is continuing, (i)
returned  and unearned  premiums may be paid  directly to and may be retained by
the Borrower and (ii)  insurance  proceeds from any casualty  damages  totalling
$50,000 or less may be paid directly to and may be retained by the Borrower.

        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, 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 

<PAGE>

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" (except that the annual audit may
         be subject to a "going concern" qualification  substantially similar to
         that  issued  by the  Borrower's  accountants  in  connection  with the
         Borrower's fiscal 1997 financial statements).

                     (ii)   Within  30  days  after  the  end  of  each   month,
         consolidated and  consolidating  balance sheets of the Borrower and its
         Subsidiaries  and  related   consolidated  and   consolidating   income
         statements,  unaudited  but complete and fairly  stated 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
         monthly  statements need not contain  footnotes) and certified as being
         fairly stated  (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 month and such income
         statements  to be for such  month and for the fiscal  year to date,  in
         each case together with a comparison to budget.


<PAGE>

                     (iii) At the time of  delivery  of each  annual or  monthly
         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 ss.3.7.

                     (iv)  Monthly,  within 20 days after the end of each month,
         (A) an aging  report  in form  satisfactory  to the Bank  covering  all
         Receivables of the Borrower and (prior to the  consummation of the Star
         Transaction)  all Receivables of Star 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.

                     (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 "management letter" prepared by such accountants.

                     (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  (and in any event  within  30 days)  after
         service of legal  process upon the  Borrower or the Borrower  otherwise
         having knowledge 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;  provided,  however, that
         the Borrower  will not be deemed  required by this clause (vii) to give
         notice  of any  such  action,  suit or  proceeding  filed  against  the
         Borrower or any such Subsidiary which seeks monetary damages only in an
         amount of $100,000 or less.

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

<PAGE>

         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 upon applying for, or being granted, a federal
         or  state  registration  for any  copyright,  trademark  or  patent  or
         purchasing  any  registered  copyright,  trademark  or patent,  written
         notice to the Bank describing same, together with all such documents as
         may be  required  to give the  Bank a fully  perfected  first  priority
         security interest in each such copyright, trademark or patent.

                     (xi)  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.

                     (xii)  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. Profitability. The Borrower's results for its fiscal quarter ended
September 30, 1998 will show a  consolidated  quarterly Net Loss not to equal or
exceed $3,500,000. The Borrower will incur a consolidated quarterly Net Loss not
to equal or exceed  $2,000,000 for its fiscal quarter ending  December 31, 1998.
The Borrower  will  achieve  consolidated  quarterly  Net Income of greater than
$1.00 for each of its fiscal  quarters  ending March 31, 1999 and June 30, 1999.
The Borrower  will  achieve  consolidated  quarterly  Net Income of greater than
$500,000 for its fiscal  quarter  ending  September 30, 1999.  The Borrower will
achieve  consolidated  quarterly  Net Income of greater  than  $750,000  for its
fiscal quarter ending December 31, 1999 and for each fiscal quarter thereafter.

         3.8. Books and Records. The Borrower will maintain (and will cause each
of its Subsidiaries to maintain)  complete and fairly stated books,  records and
accounts  which will at all times  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 ss.3.8.  Each financial statement of
the  Borrower  hereafter  delivered  pursuant to this letter  agreement  will be
complete and will fairly  present the financial  condition of the Borrower as at
the date thereof and for the periods covered thereby.


<PAGE>

         3.9.  Landlord's  Waiver.  Prior to the Bank making the first Revolving
Loan, the Borrower will obtain,  and will  thereafter  maintain in effect at all
times,  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.

         3.10.  Y2K  Compliance.  The Borrower will review the software which it
uses in its  business  (and  which  its  Subsidiaries  use in  their  respective
businesses) for "Year 2000" compliance. The Borrower will, on or before June 30,
1999,  have  completed  all steps  necessary to assure that such  software  will
continue to function in the manner intended  without  interruption of service or
other difficulty  resulting from the "Year 2000 problem".  The Borrower will, at
the request of the Bank,  provide such reports and such other information as the
Bank may reasonably  request in respect of the Borrower's program to assure such
Year 2000 compliance.

         3.11.   Agreements  as  to  Star.  As  used  herein,   the  term  "Star
Transaction"  means the sale by the Borrower of all or substantially  all of the
stock  or  assets  of  Star to a  Person  unrelated  to the  Borrower  for  cash
consideration  which  results  (after  payment of all amounts  owed to Coherent,
Inc.) in at least  $40,000,000  in net  proceeds  to the  Borrower  on a pre-tax
basis.  The Borrower  presently  intends to complete the Star Transaction and to
receive such  proceeds on or before March 31, 1999.  The Bank agrees that if the
Star  Transaction is consummated and such net proceeds are received on or before
March 31,  1999,  the Bank will,  upon the  payment of so much of the  Revolving
Loans as may be required so that the Aggregate Bank  Liabilities will not exceed
the Borrowing  Base  calculated  without  reference to any  Receivables of Star,
release the Star Security Agreement and the Star Intellectual  Property Security
Agreement and terminate the Star Guaranty.

         3.12.  Agreements  as to  CTI.  At all  times  on  and  after  the  CTI
Compliance  Date, all of the affirmative and negative  covenants in Articles III
and IV will be deemed to apply to CTI as a  "Subsidiary"  of the  Borrower.  The
Borrower will promptly  notify the Bank of the  occurrence of the CTI Compliance
Date.  Immediately  following the CTI Compliance  Date, the Borrower will obtain
from CTI and deliver to the Bank (i) a guaranty by CTI of the obligations of the
Borrower  under this letter  agreement,  the  Revolving  Note and the other Loan
Documents,  (ii) security agreements granting to the Bank a security interest in
all assets of CTI,  together  with all filings  needed to perfect such  security
interest and appropriate  landlord's waivers,  (iii) certificates of appropriate
governmental  authorities  as to the  legal  existence,  qualification  and good
standing of CTI, (iv) a Secretary's  Certificate  as to CTI's charter  documents
and  by-laws,  the  incumbency  and  signatures  of  CTI's  officers,   and  the
resolutions  of CTI's  Board of  Directors  (and,  if  necessary,  stockholders)
approving the aforesaid guaranty and security agreements,  and (v) an opinion of
CTI's  counsel  in form  and  substance  satisfactory  to the  Bank,  all of the
documents  described in clauses (i) - (v) of this sentence to be satisfactory in
form and substance to the Bank.

         3.13.  Agreements  as to  PEC.  At all  times  on  and  after  the  PEC
Compliance  Date, all of the affirmative and negative  covenants in Articles III
and IV will be deemed to apply to PEC as a  "Subsidiary"  of the  Borrower.  The
Borrower will promptly  notify the Bank of the  occurrence of the PEC Compliance
Date.  Immediately  following the PEC Compliance  Date, the Borrower will 

<PAGE>

obtain from PEC and deliver to the Bank (i) a guaranty by PEC of the obligations
of the Borrower  under this letter  agreement,  the Revolving Note and the other
Loan  Documents,  (ii)  security  agreements  granting  to the  Bank a  security
interest in all assets of PEC,  together with all filings needed to perfect such
security  interest and appropriate  landlord's  waivers,  (iii)  certificates of
appropriate  governmental  authorities as to the legal existence,  qualification
and good  standing of PEC, (iv) a  Secretary's  Certificate  as to PEC's charter
documents and by-laws, the incumbency and signatures of PEC's officers,  and the
resolutions  of PEC's  Board of  Directors  (and,  if  necessary,  stockholders)
approving the aforesaid guaranty and security agreements,  and (v) an opinion of
PEC's  counsel  in form  and  substance  satisfactory  to the  Bank,  all of the
documents  described in clauses (i) - (v) of this sentence to be satisfactory in
form and substance to the Bank.

IV.  NEGATIVE COVENANTS

         Without  limitation of any covenants  and  agreements  contained in the
Borrower's 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;

         (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)  incurred in
         the future to equipment vendors and/or lessors for equipment  hereafter
         purchased or leased by the Borrower for use in the Borrower's business,
         provided  that the total of  Indebtedness  permitted  under this clause
         (iv) (exclusive of presently-existing  financing permitted under clause
         (v)  of  this  ss.4.1)  will  not  exceed  $250,000  in  the  aggregate
         outstanding at any one time;

         (v) other Indebtedness existing at the date hereof (including,  without
         limitation,  the Coherent  Notes and certain  amounts owed to Coherent,
         Inc. in respect of prepaid 

<PAGE>

         invoices), but only to the extent set forth on item 4.1 of the attached
         Disclosure Schedule and without any increase thereof; and

         (vi) any guaranties or other contingent liabilities expressly permitted
pursuant to section 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;

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

         (vi) a Lien on inventory of Star securing the Coherent Notes;

         (vii) a Lien on certain specified  accounts  receivable of the Borrower
         (more  particularly  described on item 4.2 of the  attached  Disclosure
         Schedule)  securing  the amounts  owed to  Coherent,  Inc.  for prepaid
         invoices as described in clause (v) of ss.4.1; or

         (viii) 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,  

<PAGE>

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, except that (i) the Borrower may, without being deemed to be in violation
of this ss.4.4,  pay to certain of its  stockholders a fee at the rate of 5% per
annum  (payable   quarterly)  on  the  amount  invested  by  such   stockholders
($10,200,000  in the  aggregate)  in the equity of the Borrower in February 1998
and  July  1998,  and (ii) the  Borrower  may,  without  being  deemed  to be in
violation of this  ss.4.4,  complete the  presently-contemplated  redemption  of
Series H Preferred Stock of the Borrower for an aggregate  principal  amount not
in excess of  $450,000;  provided  that in no event will any  payment to be made
under clause (i) or clause (ii) of this sentence be funded, in whole or in part,
with the proceeds of any Revolving Loan.

        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 (i) travel
advances  and other  expense  advances  made to officers  and  employees  in the
ordinary  course and  repaid in the  ordinary  course  and (ii) other  loans and
advances to officers and employees in an aggregate  amount not to exceed $25,000
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  ss.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 ss.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.  The Borrower  will not,  without the
prior written  consent of the Bank,  form or acquire any  Subsidiary or make any
other  acquisition  of the stock of

<PAGE>

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;  Disposition of Assets.  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 (i) sale of inventory in the
ordinary course,  (ii) the sale of Star to Coherent,  Inc.  pursuant to the Star
Transaction  on or before  March 31,  1999 and (iii) a sale or  transfer  of any
Intellectual Property of the Borrower so long as (A) such sale or transfer could
not have a materially adverse effect on the business,  condition or prospects of
the Borrower  and (B) the  Borrower  gives the Bank not less than 20 days' prior
written  notice  of each  such  sale or  transfer,  in such  detail  as shall be
reasonably acceptable to the Bank. The Bank specifically  acknowledges that this
letter  agreement  contemplates  and permits the sale of Star to Coherent,  Inc.
pursuant to the Star  Transaction  on or before March 31, 1999,  with the Bank's
security  interests  in Star's  assets to be  released  under the  circumstances
described  in ss.3.11  above.  The Bank also  consents  to the  granting  by the
Borrower,  on commercially  reasonable  terms, of one or more sublicenses of the
Borrower's  rights under a certain  patent  license from  Massachusetts  General
Hospital to the Borrower with respect to laser hair removal.

        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 ss.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 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
ss.2.1(j)  above,  nor will the  Borrower  remove any books or records from such
address,  nor will the Borrower keep any Collateral belonging to 

<PAGE>

the  Borrower at any  location  other than the  premises  described in ss.2.1(j)
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 Borrower's 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  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 

<PAGE>

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.  Without limitation of the foregoing,  the Restructured  Subordinated
Notes shall contain subordination  provisions satisfactory to the Bank and shall
in any event provide that no payment (of  principal,  interest,  fees and/or any
put or repurchase  price) shall be made with respect to any of the  Restructured
Subordinated Notes at any time when there exists any Default or Event of Default
or any Default or Event of Default would result therefrom.

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 ss.ss.3.6 or 3.7 or Article IV; or

         (d) The Borrower shall default in the  performance or observance of any
agreement or obligation under any of ss.ss.3.1, 3.3, 3.11, 3.12 or 3.13 and such
default shall continue uncured for 30 days after the Borrower first knows of (or
reasonably should know of) such default or of the events or circumstances giving
rise to such default; or

         (e) The Borrower shall default in the  performance or observance of any
other term,  covenant or agreement  contained in this letter  agreement and such
default has not been cured within 30 days after notice  thereof  shall have been
given to the Borrower; or

         (f) 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

         (g) 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  $250,000  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  $250,000  

<PAGE>

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
then currently permits the acceleration of the maturity of any such Indebtedness
by the holder of holders thereof; or

         (h) The Borrower or Star shall be dissolved,  or the Personal Guarantor
shall die, or any  Guarantor  shall  become  insolvent,  or the  Borrower or any
Subsidiary of the Borrower or any Guarantor  shall cease paying its or his 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 for any
Subsidiary of the Borrower or for any Guarantor or for a substantial part of the
property  of the  Borrower or of any such  Subsidiary  or of any  Guarantor,  or
bankruptcy, reorganization, arrangement, insolvency or similar proceedings shall
be instituted by or against the Borrower or any such Subsidiary or any Guarantor
under the laws of any jurisdiction  (except for an involuntary  proceeding filed
against the Borrower or any Subsidiary of the Borrower or any Guarantor which is
dismissed within 60 days following the institution thereof); or

         (i) Any attachment,  execution or similar process relating to an amount
in excess of $250,000  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 20 days
after its issue or levy; or

         (j) Any final uninsured judgment in excess of $250,000 shall be entered
against the Borrower or any Subsidiary of the Borrower by any court of competent
jurisdiction  and shall not be paid,  vacated,  bonded or stayed  within 30 days
after its entry; or

         (k) 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

         (l) Any  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

         (m) 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

         (n) At any time, 50% or more of the outstanding  shares of voting stock
of the  Borrower  shall be owned by any Person or by any  "group" (as defined in
the  Securities   Exchange  

<PAGE>

Act of 1934, as amended, and the regulations  thereunder),  other than by one or
more of the Persons listed on item 5.1(n) of the attached  Disclosure  Schedule;
or

         (o) Any default  shall exist under any Guaranty or any  Guaranty  shall
for any reason not be in full force and effect (except, as to the Star Guaranty,
if same is terminated pursuant to ss.3.11 above); or

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

        5.2. Rights and Remedies on Default. Upon the occurrence of any Event of
Default  (continuing beyond the expiration of any applicable notice and/or grace
period,  if any), 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  Agreements,  under the Intellectual  Property Security
Agreements,  under the  Guaranties  or any of same 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  (continuing  beyond the  expiration  of any
applicable notice and/or grace period, if any), 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  

<PAGE>

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.  ANY AND ALL
RIGHTS TO REQUIRE THE BANK TO EXERCISE  ITS RIGHTS OR REMEDIES  WITH  RESPECT TO
ANY OTHER COLLATERAL WHICH SECURES ANY OF THE OBLIGATIONS  PRIOR TO THE EXERCISE
BY THE BANK OF ITS RIGHT OF SET-OFF  UNDER THIS  SECTION  ARE HEREBY  KNOWINGLY,
VOLUNTARILY AND IRREVOCABLY WAIVED.

        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.

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 Agreements, 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  Agreements,  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  Agreements,  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 sum of (i) four (4%) percent plus (ii) 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  

<PAGE>

(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  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, a non-refundable fee of $10,000. The Borrower
will also pay to the Bank with respect to the within  arrangements for Revolving
Loans,  on the last day of each  calendar  quarter  (commencing  on December 31,
1998) as long as the within-described  Revolving Loan arrangements are in effect
and on the Expiration Date or earlier date of termination of such Revolving Loan
arrangements,  a non-refundable  commitment fee computed quarterly in arrears on
the daily average unused portion of the Bank's total revolving commitment during
the calendar quarter (or partial calendar  quarter) then ended.  Such commitment
fee will be payable at a rate of 0.5% per annum based on such unused  portion of
the Bank's total revolving commitment and will be appropriately prorated for any
partial  calendar  quarter.   As  used  herein,   the  Bank's  "total  revolving
commitment"  will be deemed to be equal to the  Maximum  Revolving  Credit as in
effect from time to time and the  "unused  portion" on any day means that amount
by which (x) the then effective  Maximum  Revolving Credit exceeds (y) the total
of (1) the aggregate  principal  amounts of the Revolving  Loans  outstanding at
that day and (2) the then total undrawn  amounts of all letters of credit issued
hereunder and then  outstanding,  whether such excess  results from the Bank not
making Revolving Loans or issuing letters of credit up to the Maximum  Revolving
Credit,  from the repayment of Revolving  Loans or the termination of letters of
credit or from any other  circumstance.  In  addition,  if the  within-described
revolving  financing  arrangements are cancelled or terminated prior to November
16, 1999 by the Borrower for any reason (not  including  termination by the Bank
due  to  the  Borrower's  default),  the  Borrower  shall  forthwith  upon  such
cancellation or termination pay to the Bank a sum equal to all of the commitment
fees 

<PAGE>

which would have become due, absent such  cancellation or termination,  pursuant
to the  immediately  preceding  three  sentences  with  respect  to  the  period
beginning on the date of such cancellation or termination and continuing through
November  16, 1999,  assuming,  for the  purposes of this  calculation,  that no
Revolving  Loans or letters of credit would be  outstanding  during such period.
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 in 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:

                   Palomar Medical Technologies, Inc.
                   45 Hartwell Avenue
                   Lexington, MA  02421
                   Attention:  Paul S. Weiner, Director of Finance

                   with a copy so mailed or delivered to:

                   Palomar Medical Technologies, Inc.
                   45 Hartwell Avenue
                   Lexington, MA  02421
                   Attention:  General Counsel


<PAGE>

                   If to the Bank:

                   Fleet National Bank
                   High Technology Division
                   One Federal Street
                   Mail Code:  MA OF DO7A
                   Boston, MA  02110
                   Attention:  Lucie Burke, Vice President

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.  Without  limitation  of the
foregoing generality:

                  (i)      The Bank may at any time pledge all or any portion of
                           its rights under the Loan  Documents  (including  any
                           portion  of  the  Revolving  Note)  to  any of the 12
                           Federal  Reserve Banks  organized  under Section 4 of
                           the Federal  Reserve  Act, 12 U.S.C.  Section 341. No
                           such pledge or the enforcement  thereof shall release
                           the Bank from its  obligations  under any of the Loan
                           Documents.

                  (ii)     The Bank  shall  have the  unrestricted  right at any
                           time and from time to time,  and  without the consent
                           of or notice to the Borrower, to grant to one or more
                           banks  or  other  financial   institutions  (each,  a
                           "Participant")  participating interests in the Bank's
                           obligation to lend hereunder and/or any or all of the
                           Revolving  Loans held by the Bank  hereunder.  In the
                           event   of  any   such   grant   by  the  Bank  of  a
                           participating  interest to a Participant,  whether or
                           not upon  notice  to the  Borrower,  the  Bank  shall
                           remain   responsible   for  the  performance  of  its
                           obligations hereunder and the Borrower shall continue
                           to  deal  solely  and  directly   with  the  Bank  in
                           connection  with the Bank's  rights  and  obligations
                           hereunder.  The  Bank  may  furnish  any  information
                           concerning the Borrower in its  possession  from time
                           to time to  prospective  assignees and  Participants;
                           provided   that  the  Bank  shall  require  any  such
                           prospective  assignee  or  Participant  to  

<PAGE>

                           agree in writing to maintain the  confidentiality  of
                           such information to the same extent as the Bank would
                           be required to maintain such confidentiality.

         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 (if any)  due  under  the  penultimate
sentence of ss.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 ss.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 ss.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 ss.6.6 (as such  address  may be changed  from time to time  pursuant to said
ss.6.6) or (ii) by serving a copy  thereof  upon it at its  address set forth in
ss.6.6  (as such  address  may be  changed  from time to time  pursuant  to said
ss.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 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.

         6.10.  Replacement  Note. Upon receipt of an affidavit of an officer of
the Bank as to the loss, theft,  destruction or mutilation of the Revolving Note
or of any other Loan Document  which is not of public record and, in the case of
any such  mutilation,  upon surrender and cancellation of such Revolving Note or
other Loan  Document,  the Borrower will issue,  in lieu thereof,  a replacement
Revolving  Note or other Loan Document in the same  principal  amount (as to the
Revolving Note) and in any event of like tenor.


<PAGE>

         6.11.  Usury.  All  agreements  between the  Borrower  and the Bank are
hereby expressly limited so that in no contingency or event whatsoever,  whether
by reason of acceleration of maturity of the Revolving Note or otherwise,  shall
the amount paid or agreed to be paid to the Bank for the use or the  forbearance
of the  Indebtedness  represented  by the  Revolving  Note  exceed  the  maximum
permissible under applicable law. In this regard, it is expressly agreed that it
is the intent of the  Borrower  and the Bank,  in the  execution,  delivery  and
acceptance of the Revolving Note, to contract in strict compliance with the laws
of The Commonwealth of Massachusetts.  If, under any  circumstances  whatsoever,
performance  or fulfillment of any provision of the Revolving Note or any of the
other Loan  Documents at the time such provision is to be performed or fulfilled
shall involve exceeding the limit of validity prescribed by applicable law, then
the obligation so to be performed or fulfilled shall be reduced automatically to
the limits of such validity, and if under any circumstances  whatsoever the Bank
should ever receive as interest an amount which would exceed the highest  lawful
rate,  such amount  which would be  excessive  interest  shall be applied to the
reduction of the principal  balance  evidenced by the Revolving  Note and not to
the payment of interest.  The  provisions  of this ss.6.11  shall  control every
other provision of this letter agreement and of the Revolving Note.

         6.12. WAIVER OF JURY TRIAL. THE BORROWER AND THE BANK HEREBY KNOWINGLY,
VOLUNTARILY  AND  INTENTIONALLY  MUTUALLY  WAIVE THE RIGHT TO A TRIAL BY JURY IN
RESPECT OF ANY CLAIM BASED HEREON,  ARISING OUT OF, UNDER OR IN CONNECTION  WITH
THIS LETTER AGREEMENT,  THE REVOLVING NOTE OR ANY OTHER LOAN DOCUMENTS OR OUT OF
ANY COURSE OF CONDUCT,  COURSE OF DEALING,  STATEMENTS (WHETHER ORAL OR WRITTEN)
OR ACTIONS OF ANY PARTY. THIS WAIVER  CONSTITUTES A MATERIAL  INDUCEMENT FOR THE
BANK TO  ENTER  INTO  THIS  LETTER  AGREEMENT  AND TO MAKE  REVOLVING  LOANS  AS
CONTEMPLATED HEREIN.

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:

         "ACH Transactions" - Any automated clearinghouse transactions which may
be initiated by the Bank for the Borrower.

         "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 time, the sum of (i) 80% of the
aggregate  principal amount of the Qualified  Receivables of the Borrower and/or
Star then  outstanding,  plus (ii) 90% of the aggregate  principal amount of the
L/C-Backed  Foreign  Receivables of the 

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Borrower and/or Star then outstanding, plus (iii) 85% of the aggregate principal
amount of the Insured  Receivables of the Borrower and/or Star then outstanding,
plus  (iv)  100% of the  principal  amount  of (A) any  certificate  of  deposit
hereafter  issued by the Bank and purchased  from the Bank by the Borrower which
is pledged to the Bank by instruments  satisfactory in form and substance to the
Bank  and in  which  the  Bank has a fully  perfected  first  priority  security
interest or (B) any deposit account now or hereafter established by the Borrower
with the Bank,  which account is blocked as to withdrawals  by the Borrower,  is
pledged to the Bank by  instruments  satisfactory  in form and  substance to the
Bank  and in  which  the  Bank has a fully  perfected  first  priority  security
interest.

         "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.

         "Coherent  Notes" - Promissory notes of the Borrower dated May 22, 1998
and June 19, 1998 in the  aggregate  original  principal  amount of  $4,000,000,
payable to the order of Coherent, Inc.

         "Collateral"  - All  property  now or  hereafter  owned by the Borrower
and/or Star (until the release of Star's  Collateral  pursuant to ss.3.11) or in
which the Borrower and/or Star (until the release of Star's Collateral  pursuant
to ss.3.11) now or hereafter has any interest which is described as "Collateral"
in any of the Security  Agreements or in ss.7.2(b) below or in Star's  Guaranty.
From and  after  the date when CTI  and/or  PEC has  executed  and  delivered  a
security  agreement  pursuant to ss.3.12 and/or ss.3.13,  the term  "Collateral"
shall also refer to all property  and  interests  now or hereafter  owned by CTI
and/or PEC, as the case may be.

         "CTI"  -   Cosmetic   Technology   International,   Inc.,   a  Delaware
corporation.

         "CTI  Compliance  Date" - The first to occur of: (i) that date when the
total assets of CTI (valued in accordance  with  generally  accepted  accounting
principles  consistently  applied)  are equal to or greater than 5% of the total
consolidated  assets (valued in accordance  with generally  accepted  accounting
principles  consistently  applied) of the Borrower and  Subsidiaries or (ii) the
end of any fiscal  quarter of the Borrower in which the net revenues  (exclusive
of any  extraordinary  items)  of CTI for such  fiscal  quarter  are equal to or
greater  than  5% of the  total  consolidated  net  revenues  (exclusive  of any
extraordinary items) of the Borrower and Subsidiaries for such fiscal quarter.

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

         "Expiration  Date" - March 31, 2000, unless extended by the Bank, which
extension may be given or withheld by the Bank in its sole discretion.

         "Guaranties"  -  Collectively,  (i) the Personal  Guaranty and (ii) the
Star  Guaranty  (but only  until  the Star  Guaranty  is  released  pursuant  to
ss.3.11).


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         "Guarantors" - Collectively,  (i) the Personal  Guarantor and (ii) Star
(but only until the release of the Star Guaranty pursuant to ss.3.11).

         "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.

         "Insured  Receivable"  - Any  Receivable  now or hereafter  owed to the
Borrower or Star which  satisfies  all of the  criteria  set forth below to be a
"Qualified  Receivable"  except that the relevant customer may be located inside
or outside the United States; provided that such Receivable is insured by credit
insurance in form and substance  satisfactory to the Bank and issued by Eximbank
or another insurer satisfactory to the Bank. In any event, "Insured Receivables"
shall not be deemed to include any of the Qualified  Receivables  nor any of the
L/C-Backed Foreign Receivables.

         "Intellectual Property" - As defined in ss.2.1(k).

         "Intellectual   Property  Security  Agreements"  -  Collectively,   the
Borrower's  Intellectual  Property Security  Agreements and Star's  Intellectual
Property Security Agreements.

         "L/C-Backed  Foreign Receivable" - Any Receivable now or hereafter owed
to the Borrower or Star which  satisfies  all of the criteria set forth below to
be a "Qualified Receivable" except that the relevant customer is located outside
the  United  States;  provided  that such  Receivable  is secured by a letter of
credit in form and substance satisfactory to the Bank and issued by a commercial
bank satisfactory to the Bank. In any event,  "L/C-Backed  Foreign  Receivables"
shall not be deemed to include any of the Qualified  Receivables  nor any of the
Insured Receivables.

         "Loan Documents" - Each of this letter  agreement,  the Revolving Note,
the Security  Agreements,  the Intellectual  Property Security  Agreements,  the
Guaranties  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) the Maximum Revolving Credit 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 

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

         "Maximum Revolving Credit" - $10,000,000.

         "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.

         "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.
"Obligations" includes,  without limitation, any liabilities of the Borrower now
existing or hereafter arising with respect to any ACH Transactions.

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

         "PEC" - Palomar Electronics Corp., a Delaware corporation.

         "PEC  Compliance  Date" - The first to occur of: (i) that date when the
total assets of PEC (valued in accordance  with  generally  accepted  accounting
principles  consistently  applied)  are equal to or greater than 5% of the total
consolidated  assets (valued in accordance  with generally  accepted  accounting
principles  consistently  applied) of the Borrower and  Subsidiaries or (ii) the
end of any fiscal  quarter of the Borrower in which the net revenues  (exclusive
of any  extraordinary  items)  of PEC for such  fiscal  quarter  are equal to or
greater  than  5% of the  total  consolidated  net  revenues  (exclusive  of any
extraordinary items) of the Borrower and Subsidiaries for such fiscal quarter.

         "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 (or
Star,  while  the  Star  Guaranty,  the  Star  Security  Agreement  and the Star
Intellectual  Property Security  Agreements remain in effect) which arise out of
bona fide sales  made to  customers  of the  Borrower  (or Star,  while the Star
Guaranty,  the  Star  Security  Agreement  and the  Star  Intellectual  Property
Security Agreements remain in effect) (which customers are located in the United
States and are unrelated to the Borrower or Star) in the ordinary  course of the
Borrower's  (or Star's)  business and 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
(except  that  Coherent,  Inc.  may have a prior  security  interest  in certain
Receivables  of  Star);  (ii) if such  Receivable  is not free and  clear of all


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adverse  interests  in favor of any  Person  other  than the Bank  (except  that
Coherent,  Inc. may have a prior  security  interest in certain  Receivables  of
Star);  (iii) if such  Receivable is subject to any deduction,  off-set,  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 or Star;  (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 and/or Star 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. In no event will "Qualified
Receivables"  be deemed to include any L/C-Backed  Foreign  Receivables  nor any
Insured Receivables.

         "Receivables"  - All of the  Borrower's  (or  Star's,  while  the  Star
Guaranty,  the  Star  Security  Agreement  and the  Star  Intellectual  Property
Security  Agreements  remain in effect)  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.

         "Restructured  Subordinated  Notes" - The Company's  4.5%  Subordinated
Convertible  Debentures  due  2003,  denominated  in Swiss  Francs,  as same are
modified by the settlement of the litigation  entitled Banca Commerciale Lugano,
et al. v. Palomar  Medical  Technologies,  Inc.  described in item 2.1(e) of the
attached Disclosure Schedule.

         "Security Agreements" - Collectively, the Borrower's Security Agreement
and Star's Security Agreement.

         "Star" - Star Medical  Technologies,  Inc.,  a California  corporation,
being a Subsidiary of the Borrower.

         "Star Transaction" - As defined in ss.3.11.


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         "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);  provided,  however, that CTI will not be
deemed to be a  Subsidiary  of the  Borrower  for the  purposes  of this  letter
agreement (other than compliance with ss.3.6 and ss.3.7) until the occurrence of
the CTI Compliance Date, if same ever occurs, and PEC will not be deemed to be a
Subsidiary of the Borrower for the purposes of this letter agreement (other than
compliance  with ss.3.6 and ss.3.7) until the  occurrence of the PEC  Compliance
Date, if same ever occurs.

         "Tangible  Net  Worth" - An  amount  equal to the  total  assets of any
Person  (excluding (i) the 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 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. Borrower's Security  Agreement.  (a) The Borrower  acknowledges and
agrees  that  the  "Obligations"  described  in and  secured  by the  Borrower's
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 and/or with respect to any ACH Transaction.

         (b) The Borrower's  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 ss.5.1 of this letter agreement), the Bank may, at any time,
         notify  account  debtors of the Borrower 

<PAGE>

         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.

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

                                              Very truly yours,

                                              PALOMAR MEDICAL TECHNOLOGIES, INC.


                                              By:     /s/
                                                  -----------------------------
                                                  Name:  Joseph P. Caruso
                                                  Title: Chief Financial Officer
Accepted and agreed:

FLEET NATIONAL BANK


By                                                 
    Its



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                               DISCLOSURE SCHEDULE


Item 2.1(a)       Jurisdictions  in which  Borrower is qualified;  Subsidiaries;
                  partnerships and joint ventures

Item 2.1(b)       5% Stockholders

Item 2.1(e)       Litigation

Item 2.1(f)       Violation of mortgages, indentures, etc.

Item 2.1(j)       Locations of  Collateral  owned by Borrower;  record owners of
                  premises where Collateral owned by Borrower is located

Item 2.1(k)       Intellectual Property

Item 4.1          Existing Indebtedness

Item 4.2          Existing Liens

Item 4.3          Existing Guaranties

Item 5.1(n)       Permitted 50% Stockholders