SPECTRATEK TECHNOLOGIES INC, S-1, 1997-10-22

SPECTRATEK TECHNOLOGIES INC
S-1, 1997-10-22

Previous: AMKOR TECHNOLOGY INC, 8-A12G, 1997-10-22

Next: ISLE OF CAPRI BLACK HAWK LLC, DEL AM, 1997-10-22

<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 22, 1997
REGISTRATION NO. 333-
================================================================================

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------

SPECTRATEK TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S> <C> <C>
CALIFORNIA 2671 95-3541556
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>

------------------------

5405 JANDY PLACE
LOS ANGELES, CALIFORNIA 90066
(310) 822-2400
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------

TERRENCE CONWAY
CHIEF EXECUTIVE OFFICER AND PRESIDENT
SPECTRATEK TECHNOLOGIES, INC.
5405 JANDY PLACE
LOS ANGELES, CALIFORNIA 90066
(310) 822-2400
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)

COPIES TO:

<TABLE>
<S> <C>
BRUCE R. HALLETT, ESQ. DANA M. WARREN, ESQ.
ELLEN S. BANCROFT, ESQ. THOMAS M. CLEARY, ESQ.
MATTHEW V. WATERMAN, ESQ. ASHLEY S. NEWSOM, ESQ.
BROBECK, PHLEGER & HARRISON LLP RIORDAN & McKINZIE
4675 MacARTHUR COURT, SUITE 1000 300 SOUTH GRAND AVENUE, 29TH FLOOR
NEWPORT BEACH, CALIFORNIA 92660 LOS ANGELES, CALIFORNIA 90071
(714) 752-7535 (213) 629-4824
</TABLE>

------------------------

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
------------------------

If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------

CALCULATION OF REGISTRATION FEE

<TABLE>
<S> <C> <C>
==================================================================================================================
TITLE OF EACH CLASS OF PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED AGGREGATE OFFERING PRICE(1) REGISTRATION FEE(1)
- ------------------------------------------------------------------------------------------------------------------
Common Stock, no par value.................... $25,000,000 $7,576
==================================================================================================================
</TABLE>

(1) Estimated solely for the purpose of calculating the Registration Fee
pursuant to Rule 457(o).
------------------------

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.

SUBJECT TO COMPLETION, DATED OCTOBER 22, 1997
PROSPECTUS

LOGO
COMMON STOCK
------------------------

Of the shares of common stock, no par value (the "Common
Stock") of Spectratek Technologies, Inc. ("Spectratek" or the "Company") being
offered, shares are being sold by the Company and shares are being
sold by the Selling Stockholders. The Company will not receive any proceeds from
the sale of Common Stock by the Selling Stockholders. See "Principal and Selling
Stockholders." Prior to this Offering, there has been no public market for the
Common Stock. It is currently estimated that the initial public offering price
will be between $ and $ per share. See "Underwriting" for
information relating to the factors to be considered in determining the initial
public offering price. The Company will apply to have the Common Stock approved
for quotation on the Nasdaq National Market under the symbol "SPTK."
------------------------

SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
------------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

<TABLE>
<S> <C> <C> <C> <C>
=====================================================================================================
PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO PROCEEDS TO SELLING
PUBLIC AND COMMISSIONS(1) COMPANY(2) STOCKHOLDERS(2)
- -----------------------------------------------------------------------------------------------------
Per Share....................... $ $ $ $
- -----------------------------------------------------------------------------------------------------
Total(3)........................ $ $ $ $
=====================================================================================================
</TABLE>

(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."

(2) Before deducting expenses payable by the Company, estimated at $575,000.

(3) The Company and the Selling Stockholders have granted to the Underwriters an
option, exercisable within 30 days hereof, to purchase up to an aggregate of
additional shares of Common Stock at the Price to Public less
Underwriting Discounts and Commissions for the purpose of covering
over-allotments, if any. If the Underwriters exercise such option in full,
the total Price to Public, Underwriting Discounts and Commissions, Proceeds
to the Company and Proceeds to the Selling Stockholders will be $ ,
$ , $ and $ , respectively. See "Underwriting."
------------------------

The shares of Common Stock are offered by the Underwriters named herein,
subject to prior sale, when, as and if issued by the Company and delivered to
and accepted by the Underwriters and subject to certain prior conditions,
including the right of the Underwriters to reject any order in whole or in part.
It is expected that delivery of the shares of Common Stock will be made through
the facilities of The Depository Trust Company in New York, New York on or about
, 1997.

EVEREN SECURITIES, INC.

The date of this Prospectus is , 1997
<PAGE> 3

[COLOR PHOTOS AND ART WORK TO COME]

The Company intends to distribute to its stockholders annual reports
containing financial statements audited by its independent auditors and will
make available copies of quarterly reports for the first three quarters of each
fiscal year containing unaudited financial information.

Geometric Pigment(TM), Spectratek(TM), Spectrasheen(TM), Holosheen(TM) and
Hyperplaid(TM) are trademarks of the Company. This Prospectus also includes
trade names and trademarks of other companies.

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE OFFER AND
MAY BID FOR AND PURCHASE SHARES OF THE COMMON STOCK IN THE OPEN MARKET. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."

2
<PAGE> 4

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and financial statements (including the notes thereto) appearing
elsewhere in this Prospectus. Unless otherwise indicated, the information in
this Prospectus (i) assumes no exercise of the Underwriters' over-allotment
option, (ii) assumes no exercise of options to purchase 91,500 shares of Common
Stock outstanding as of October 21, 1997, (iii) gives effect to a 300-for-1
stock split of the Common Stock effected in June 1997 and (iv) gives effect to
the reincorporation of the Company in the State of Delaware to occur in November
1997.

THE COMPANY

Spectratek Technologies, Inc. is a leading manufacturer of microreplicated
holographic films that are used in a wide range of value added applications in
consumer products, packaging materials and industrial products. Using its
proprietary technologies, the Company records coherent light onto continuous
rolls of polymer film. This process adds unique optical characteristics to the
film, creating color, motion and the appearance of depth in natural light. The
Company's films are used in consumer applications including stickers, magazines,
glitter and cosmetics; in packaging applications and labels for toys, food,
beverages, computer games and displays; and in industrial applications such as
paint, fabrics, flooring and architectural materials. The Company has refined
its proprietary technology to create virtually seamless holographic patterns
which the Company believes offer superior brightness, clarity and consistency
when compared with competing holographic films. The Company's holographic films
have been incorporated into products marketed by numerous companies in a broad
range of industries, including Coors Bottling Company, Kraft General Foods,
Mattel, Inc. and PPG Industries, Inc.

All of the Company's films utilize holographic technology. Holograms are
visual recordings of light wave patterns in a compacted form that enable three
dimensional information to be condensed onto a flat surface. Microscopic grooves
and bumps on the surface of film facilitate the dispersion of white light into
its component spectral colors to create the holographic effect. By arranging
areas of different grating angles and groove spacing, holographic images or
patterns are created that when viewed from different angles, reveal features
(color and depth) of the hologram that are not otherwise visible in a
conventionally printed image.

A key step in the manufacture of holographic films is the microreplication
process, which involves the transfer of a master holographic image or pattern
onto the surface of thin film. The Company has developed proprietary remastering
methodologies that enable the Company to enhance and refine the shape, size and
position of the grooves and bumps on the existing custom holographic master. The
specific pattern of grooves and bumps determines the effect created by the
interaction of light with the thin films. By adjusting the depth and spacing of
the grooves (as many as 44,000 lines per linear inch) and bumps (often only .25
micron deep), the Company is able to increase the brightness and clarity of the
hologram. The Company is not aware of any competitor who is able to modify or
enhance an existing master. In addition, the elimination of virtually all seams
and breaks within most of the Company's patterns make the Company's products
more attractive and economical for its customers.

The Company currently manufactures and markets 14 custom stock patterns,
which are typically sold in finished rolls of film in widths of 24 or 40 inches,
or as glitter or geometric pigment (precision cut particles of the Company's
films) and are generally forwarded to converters, cutters or finishers who
create the final product for end users. The Company is currently constructing a
new microreplication machine to manufacture film in widths of 55 inches, which
should enable the Company to meet demand in new markets requiring wider films.
During 1996, the Company manufactured more than 80 million square feet of
holographic thin films.

The Company sells both microreplicated holographic films as well as
converted products which incorporate the Company's holographic films. Converted
products include film that is permanently laminated to paper or board stock or
pressure sensitive backing, that is coated or tinted, or that is cut into
particles ranging from 1/16 inch to 1/500 inch. The Company does not engage in
such conversion processes internally, but rather contracts with a number of
third party vendors to perform these processes. Such vendors also act as value
added resellers who add conversion steps to these films and sell the converted
products directly.

3
<PAGE> 5

The Company believes that significant growth opportunities exist for
holographic films in the markets for both rigid and flexible packaging materials
and for industrial applications due to the visual appeal, impact and uniqueness
of holographic films. According to the Flexible Packaging Association, the size
of the flexible packaging (bags and pouches) market is estimated to reach $16.4
billion in 1997. Packages utilizing holographic materials currently represent a
very small share of the packaging materials market due to their higher cost when
compared with traditional packaging materials. The Company's new
microreplication machine should enable it to produce films 55 inches wide in
order to better address the requirements of the packaging industry.

The Company is also taking steps to expand the industrial applications for
its products, particularly by marketing the Company's geometric pigment for use
in paints and coatings in the automobile OEM and refinish paint markets. In July
1997, PPG Industries, Inc. launched its Prizmatique(TM) automobile paint line,
featuring the Company's geometric pigment, for use in the automobile refinishing
market. In addition, BASF and Englehard are each beta testing the Company's
geometric pigment for use in their OEM paint products. In addition, Vegla, a
large European glass manufacturer, is marketing the Company's holographic films
for use in residential and commercial decorative glass applications. The
Company's objective is to leverage its proprietary microreplication technology
to expand its product offerings in existing markets, maximize economies of
scale, and develop new markets for its holographic films.

The Company was incorporated in California in October 1980 as Spectratek
and changed its name to Spectratek Technologies, Inc. in June 1997. The Company
will be reincorporated in Delaware prior to the consummation of the Offering.
The Company's executive offices are located at 5405 Jandy Place, Los Angeles,
California 90066, and its telephone number at that location is (310) 822-2400.

THE OFFERING

<TABLE>
<S> <C>
Common Stock Offered
By the Company.......................... shares
By the Selling Stockholders............. shares
Total.............................. shares
Common Stock to be outstanding after the
Offering................................... shares(1)
Use of Proceeds.............................. The Company intends to use the net proceeds
from the Offering to repay indebtedness,
including indebtedness incurred in connection
with the S Corporation Distribution (as
defined herein) and under the Company's bank
line of credit, to purchase additional
capital equipment (primarily for the
Company's laser laboratory and mastering
facility), to fund the relocation of the
Company's manufacturing facilities to its new
facility, to expand the Company's marketing
capabilities, and for general corporate
purposes (including additions to working
capital). See "Use of Proceeds."
Proposed Nasdaq National Market symbol....... SPTK
</TABLE>

- ---------------
(1) Excludes 303,000 shares of Common Stock reserved for issuance under the
Company's 1997 Stock Incentive Plan (the "1997 Plan"). As of October 21,
1997, options to purchase 91,500 shares of Common Stock were outstanding
under the 1997 Plan at a weighted average exercise price of $16.73 per
share. See "Management -- 1997 Stock Incentive Plan" and Note 10 of Notes to
Financial Statements.

4
<PAGE> 6

SUMMARY FINANCIAL INFORMATION

The following summary financial information for the Company is qualified in
its entirety by, and should be read in conjunction with, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's Financial Statements and Notes thereto included elsewhere in this
Prospectus.

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------------------------- ---------------------
1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................. $ 4,536 $ 7,387 $ 9,052 $ 10,320 $ 12,003 $ 5,452 $ 7,622
Gross profit.............................. 1,458 4,485 3,809 4,747 4,889 2,221 3,096
Income from operations ................... 72 2,720 1,702 2,396 2,243 1,073 1,609
Income before provision for income
taxes................................... 74 2,725 1,804 2,395 2,145 1,060 1,547
Provision for income taxes................ 30 701 791 1,021 851 421 643(2)
Net income................................ $ 44 $ 2,024 $ 1,013 $ 1,374 $ 1,294 $ 639 $ 904
Net income per common and common
equivalent share........................ $ 0.01 $ 0.66 $ 0.33 $ 0.45 $ 0.42 $ 0.21

Weighted average common and common
equivalent shares(1).................... 3,048,273 3,048,273 3,048,273 3,048,273 3,049,636 3,048,273

Pro forma provision for income taxes(3)... $ 697
Pro forma net income(3)................... $ 850
Pro forma net income per share(3).........
Pro forma weighted average common and
common equivalent shares(1)(4)

OPERATING AND OTHER DATA:
Capital expenditures...................... $ 171 $ 167 $ 404 $ 634 $ 103 $ 78 $ 207
Research and development.................. 238 397 576 571 504 255 172
Depreciation and amortization............. 79 214 107 165 310 163 199
EBITDA(5)................................. 158 2,971 1,945 2,628 2,612 1,301 1,801
Cash flow provided by (used in) operating
activities.............................. (424) 464 164 (5) 1,346 139 908
</TABLE>

<TABLE>
<CAPTION>
AT JUNE 30, 1997
-------------------------------------
PRO PRO FORMA
ACTUAL FORMA(6) AS ADJUSTED(6)(7)
------ -------- -----------------
(UNAUDITED)
<S> <C> <C> <C>
Working capital............................................................... $5,120 $ 5,066
Total assets.................................................................. 9,182 9,128
Notes payable................................................................. 1,076 1,076
Retained earnings............................................................. 7,076 4,022
Stockholders' equity.......................................................... 7,146 7,092
</TABLE>

- ---------------

(1) See Note 2 of Notes to Financial Statements.

(2) The Company has been taxed as an S Corporation for federal and state income
tax purposes since January 1, 1997. Provision for income taxes for the six
months ended June 30, 1997 consists primarily of net deferred tax assets
which were written-off in January 1997 upon the Company's election to be
taxed as an S Corporation.

(3) Pro forma provision for income taxes, pro forma net income and pro forma net
income per share reflect the pro forma effect of income taxes as if the
Company had been taxed as a C Corporation for the six months ended June 30,
1997. Upon consummation of the Offering, the Company will be subject to
federal and state income taxes. See "Prior S Corporation Status."

(4) Also assumes as outstanding during each of the periods presented,
shares of the Common Stock offered by the Company in this Offering, which
represent the approximate number of shares deemed to be sold by the Company
to fund the repayment of the Stockholder Notes (as defined herein). See
"Prior S Corporation Status," "Use of Proceeds" and Note 2 of Notes to
Financial Statements.

(footnotes continued on next page)

5
<PAGE> 7

(5) EBITDA represents earnings before taking into consideration interest
expense, income tax expense and depreciation and amortization expense and is
not a generally accepted accounting principle ("GAAP") measurement of
income. EBITDA may not provide an accurate comparison among companies
because it is not necessarily computed by all companies in an identical
manner. The use of such information is intended only to supplement the
conventional income statement presentation, and is not to be considered as
an alternative to net income, cash flows or any other indicator of the
Company's operating performance which is presented in accordance with GAAP
above.

(6) Presented to give pro forma effect to (i) the distribution of previously
undistributed retained earnings of the Company (which were approximately
$3.0 million at September 30, 1997) from January 1, 1997 through the date of
the termination of the Company's S Corporation status (the "S Corporation
Distribution"), and (ii) the termination of the Company's S Corporation
status.

(7) As adjusted to give effect to the sale by the Company and the Selling
Stockholders of shares of Common Stock at an assumed initial public
offering price of $ per share and the application of the estimated net
proceeds therefrom (including the repayment of indebtedness incurred under
the Company's bank line of credit and the Stockholder Notes). See "Prior S
Corporation Status" and "Use of Proceeds."

6
<PAGE> 8

RISK FACTORS

In addition to the other information contained in this Prospectus, the
following risk factors should be considered carefully in evaluating the Company
and its business before purchasing the Common Stock offered hereby.

DEPENDENCE ON MARKET ACCEPTANCE OF HOLOGRAPHIC PRODUCTS; LIMITATION ON ABILITY
TO IDENTIFY AND PENETRATE NEW MARKETS

All of the Company's products are based on holography and, as a result, the
Company's operating results will depend substantially on the continued market
acceptance of holographic products. Any decline in the applications for the
Company's products or the emergence of a new technology for the production of
high quality holographic materials at reduced prices would have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, the Company believes that its growth prospects depend
in large part on its ability to identify and penetrate new markets and to gain
greater acceptance of the Company's products in its existing markets.
Holographic materials currently constitute only a small percentage of the
materials used in the large and highly competitive markets in which the
Company's products are currently sold. In particular, the Company faces
significant challenges in penetrating the packaging market due to material size
constraints and cost considerations resulting from the availability of less
expensive packaging materials. Additional challenges to the Company's expansion
into new markets and within existing markets include, among others, adapting to
specialized marketing needs, technological requirements and new product
compositions. In addition, the Company sells a significant portion of its
products to value added resellers, and accordingly, is often unable to identify
the end user for such products. This limits the Company's ability to identify
and penetrate new markets and to pursue additional opportunities within its
existing markets. The inability of the Company to identify and penetrate new
markets or to gain broader acceptance of its products in the markets it
currently serves could have a material adverse effect on the Company's business,
results of operations and prospects for growth. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations,"
"Business -- Existing Markets" and "Business -- Competition."

PROTECTION OF PROPRIETARY TECHNOLOGIES; RELIANCE ON TRADE SECRETS

The Company's ability to compete effectively depends in part on its ability
to develop and maintain the proprietary aspects of its technologies. The Company
believes that its proprietary processes are significantly different from and
superior to those used by competitors to produce similar materials. To date, the
Company has relied primarily upon trade secret laws and nondisclosure agreements
to protect its proprietary rights and has not sought patent protection. There
can be no assurance that such trade secrets will remain confidential, that any
patents will be applied for or granted or that other intellectual property
rights of the Company will provide meaningful protection for the Company's
proprietary rights. If the processes employed by the Company become known to
competitors, it is likely that they could be used to produce materials of the
quality and durability produced by the Company, and that such competitors could
gain market share and become more successful in the markets in which the Company
operates. There can be no assurance that the steps taken by the Company will be
adequate to deter the misappropriation of its proprietary information and
technologies, that the Company will be able to prevent the assertion of an
adverse claim to its technologies, that the Company will be able to detect
unauthorized use and take effective steps to enforce its intellectual property
rights, or that the Company's competitors will not independently develop
technologies that are similar or superior to the Company's technologies.

7
<PAGE> 9

seek licenses from third parties, which might not be available on terms
acceptable to the Company, if at all, and possibly prevent the Company from
manufacturing and selling its products, any of which could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- The Spectratek Advantage" and "-- Proprietary
Rights."

RELIANCE ON KEY PERSONNEL

The Company creates its products using proprietary technologies that the
Company's founders, particularly Michael Foster, have developed over the past
twenty-six years. Only four of the Company's executive officers are aware of all
of the proprietary techniques employed by the Company and the Company does not
have employment contracts with any of such officers. In particular, Mr. Foster
has had the primary responsibility for the development of the holographic
technologies currently used by the Company, and his absence or loss would make
it significantly more difficult for the Company to address evolving market needs
and to expand the applications for the Company's products, either of which could
have a material adverse effect on the Company's business, financial condition
and results of operations.

The Company's future performance will also depend in significant part on
the efforts and contributions of Terrence Conway, James Wanlass and Michael
Wanlass, as well as certain other key technical personnel. While the Company
maintains key employee life insurance on Messrs. Conway and Foster in the
amounts of $1.0 million and $5.0 million, respectively, the Company does not
maintain key employee life insurance on any other employee. The loss of the
services of either Mr. Conway or Mr. Foster could have a material adverse effect
on the Company's operations beyond the value of such insurance policies. See
"Business -- Employees" and "Management -- Executive Officers and Directors."

MANAGEMENT OF GROWTH

The Company's sales and marketing efforts have historically been
application specific, with less emphasis directed to the particular industries
in which the Company's customers operate. As a consequence, the Company's sales
and marketing activities to date primarily have been reactive. Upon consummation
of the Offering, the Company intends to hire additional technical and sales
personnel as part of its efforts to expand its sales, marketing and
manufacturing capabilities. The competition for such personnel is intense. The
Company faces the task of quickly identifying, recruiting, training and
integrating these new employees. As the Company expands its operations, the
Company will also be required to upgrade its financial and management
information systems. There can be no assurance that the Company will be able to
upgrade such systems on a timely basis, if at all. In addition, the Company is
currently in the process of expanding its manufacturing capabilities to include,
among other things, a laser laboratory and a 55 inch wide microreplication
machine, as well as additional quality control and testing equipment. The
failure of the Company's management to attract and retain qualified employees,
to successfully expand the Company's sales, marketing and manufacturing
capabilities or to upgrade its financial and management information systems
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Business Strategy."

DEPENDENCE ON CONVERTERS AND OTHER THIRD PARTIES

The Company manufactures microreplicated holographic films that are
purchased by customers and value added resellers who incorporate the Company's
films into a wide variety of finished products. The holographic films
manufactured by the Company must undergo a metallization process and, in many
cases, other converting processes before the Company can deliver the films to
such customers and value added resellers. These other converting processes may
include the slitting, coating, laminating or cutting of the holographic films.
The Company generally relies on third parties for coating, laminating, cutting
and certain other converting or finishing processes. Certain of the Company's
converting steps are highly specialized and can only be provided by a limited
number of vendors. For example, the Company is aware of only two high quality
glitter and geometric pigment cutters in the United States. Because these
vendors themselves may have capacity constraints and do not work exclusively for
the Company, the Company cannot always ensure the timely delivery of materials
ordered by its customers or the quality of the finished product. The Company

8
<PAGE> 10

has not entered into long-term contracts with any of such vendors for the
Company's converting requirements. The inability of the Company to continue to
obtain quality services from these vendors in a timely manner and at attractive
prices could have a material adverse effect on the Company's business, financial
condition and results of operations.

In certain instances, third party vendors to the Company are also
purchasers and resellers of the Company's materials, and often resell to the
same customers to which the Company sells directly. This competition may affect
such vendors' incentive to provide quality service to the Company. While as a
matter of policy, the Company does not wish to undertake converting processes
that are readily available and attractively priced from third parties, it may do
so if necessary to ensure or improve the quality of its products or the
availability of supply. Any expansion by the Company into areas traditionally
served by third party converters could, during that expansion, disrupt
relationships with those converters or interfere with the Company's ability to
meet its obligations to its customers, either of which could have a material
adverse effect on the Company's business, financial condition and results of
operations.

A large percentage of the Company's sales consists of holographic films
that are sold to value added resellers, who then convert such films into their
own end products. The Company also sells its holographic films to distributors,
who resell these films to value added resellers and end users. The inability of
such value added resellers or distributors to convert the Company's holographic
films successfully or to create attractive and saleable products from the
Company's materials would adversely affect their demand for the Company's films,
which in turn could have a material adverse effect on the Company's business,
financial condition and results of operations.

The Company intends to use a portion of the proceeds of this Offering to
design and install a laser laboratory and mastering facility in an effort to
reduce its reliance on third party customer holographers and to provide added
flexibility for its customers. There can be no assurance that the Company will
be able to design and develop such a facility successfully, or that the Company
will be able to produce high quality custom imagery cost-effectively in such
facility. The inability of the Company to develop and utilize such a facility
successfully could increase its dependence on converters and other third parties
as described above. See "-- Dependence on Market Acceptance of Holographic
Products" and "Business -- Manufacturing."

COMPETITION

The markets targeted by the Company for its products are highly competitive
and are dominated by manufacturers of non-holographic materials, particularly in
the markets for flexible packaging materials and folding cartons, pigments and
fabrics. The applications for holographic films within these markets
historically have been limited and have only recently begun to develop. Due to
the higher cost of holographic films, the Company's products often are at a
price disadvantage when compared with many non-holographic alternatives. As a
result, the Company expects to continue to encounter significant competition
from manufacturers of non-holographic materials in its markets, particularly as
it seeks to expand the applications for its products.

The market for holographic films is characterized by intense competition,
changing technology and evolving standards. Competitors vary based upon the type
of raw materials used, the quality and consistency of the holographic films they
produce, and the variety of stock patterns that they offer. Many of the
Company's current and potential competitors within the holographic materials
market have significantly greater financial, manufacturing, marketing and other
resources than the Company. These competitors may be able to use these resources
to expand the applications and market acceptance for their products and to
capture a greater share of the holographic films market or other non-holographic
markets. At the lower quality or "commodity" end of the holographic materials
market, the Company also faces potential competition from new entrants, since
basic holographic technology is well known and there are relatively low barriers
to entry. The Company also anticipates increased competition in this portion of
the market from other established and emerging companies. Increased competition
may result in price reductions, lower gross margins or loss of market share, any
of which could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Competition."

9
<PAGE> 11

FLUCTUATIONS OF QUARTERLY OPERATING RESULTS

The Company's operating results have in the past fluctuated and may
continue to fluctuate in the future, based on a number of factors, not all of
which are under the Company's control. These factors include, without
limitation, the size and timing of significant customer orders, changes in
pricing policies or price reductions by the Company or its competitors,
variations in the Company's sales channels or the mix of product sales, market
acceptance of product applications, the Company's ability to control costs,
possible delays in the shipment of products, currency fluctuations, personnel
changes, and general economic and market conditions. The Company generally ships
its products as orders are received, and accordingly, the Company historically
has had very little backlog. As a result, sales in any quarter are dependent
upon orders booked and shipped in that quarter and are not predictable with any
degree of certainty. Consequently, there may be significant variations in the
Company's operating results, and the results achieved in any quarter should not
be viewed as necessarily indicative of the results that will be achieved for a
full fiscal year or any future quarter. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Quarterly Results."

RISKS ASSOCIATED WITH INTERNATIONAL SALES

International product sales represented approximately 44% and 39% of the
Company's net sales during the year ended December 31, 1996 and the six months
ended June 30, 1997, respectively. The Company believes that international sales
will continue to represent a significant portion of its net sales, and that
continued growth will require increased international sales. Currently, all of
the Company's sales are denominated in United States dollars. The Company's
international sales may be adversely affected by currency exchange rate
fluctuations, changes in regulatory requirements, tariffs and other trade
barriers, varying technical standards, longer accounts receivable payment
cycles, difficulties in managing international operations and retaining
qualified international distributors and marketing representatives, potentially
adverse tax consequences, the burdens of compliance with a wide variety of
foreign laws, or political and economical instability, any of which could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business -- Sales and Marketing;
Principal Customers."

AVAILABILITY AND PRICE OF POLYESTER

Polyester, a petroleum based polymer, is the basic raw material used in
substantially all of the Company's products and constitutes a significant
component of the Company's cost of sales. Historically, the price of polyester
has experienced significant fluctuations as a result of changes in worldwide
manufacturing capacity and the demand for and prices of petrochemicals. The
Company has never entered into long-term contracts for the purchase of
polyester. Consequently, no assurance can be given that polyester will continue
to be available on a timely basis, at acceptable prices or in quantities or
thicknesses required by the Company. Large price increases in or a shortage of
supply of polyester could have a material adverse effect on the Company's
business, financial condition and results of operations.

While the Company does not rely on any single source of supply for
polyester, the loss of any of the Company's suppliers could slow production and
adversely affect the Company's business until alternative supply arrangements
could be secured. In addition, there can be no assurance that any new supply
arrangement would be available to the Company on a timely basis or on terms
comparable with its existing supply arrangements. See
"Business -- Manufacturing."

CONCENTRATION OF CUSTOMER SALES

The Company has in the past derived, and expects in the future to continue
to derive, a significant portion of its net sales from a relatively small number
of customers, the identity of which have varied historically from period to
period. Approximately 24%, 17% and 30% of the Company's net sales for the years
ended December 31, 1995 and 1996 and the six months ended June 30, 1997,
respectively, were derived from sales of products to the Company's three largest
customers in each of these periods. No single customer accounted for

10
<PAGE> 12

10% or more of the Company's net sales during each of these periods, other than
Labelad/Sandylion, which accounted for 13%, 10% and 19% of the Company's net
sales for the years ended December 31, 1995 and 1996 and the six months ended
June 30, 1997, respectively. The Company expects that it will continue to be
dependent upon a limited number of customers that place large orders for a
significant part of its net sales in any future period. There can be no
assurance that any sales to the Company's existing customers, individually or as
a group, will continue or, if continued, will reach or exceed historical levels
in any future period. In addition, the loss of any significant customer could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business -- Sales and Marketing; Principal
Customers."

RISK OF DISASTER

The Company currently manufactures all of its products at two facilities
located in Los Angeles, California. Substantially all of the equipment used in
these facilities was designed and built by the Company and is not available for
purchase elsewhere. Due to the need for substantial security to protect the
Company's proprietary rights, the Company's manufacturing processes cannot
readily be moved to replacement facilities. Accordingly, if a disaster (such as
an earthquake or fire) were to destroy or significantly damage either of these
facilities, the Company would need to acquire new facilities and rebuild its
machinery and custom microreplication equipment, which could take six months or
longer. Customer orders would have to be supplied from existing inventory, which
likely would not be sufficient to cover customers' needs. The loss of the
Company's manufacturing capability would have a material adverse effect on the
Company's business, financial condition and results of operations. See
"-- Reliance on Key Personnel" and "Business -- Manufacturing."

CONTROL BY EXISTING STOCKHOLDERS

Immediately following this Offering, Messrs. Conway, Foster, J. Wanlass and
M. Wanlass will beneficially own approximately % of the Company's
outstanding shares of Common Stock. As a result, these four individuals, who
have functioned together as the Company's management team for more than fifteen
years, will be able to significantly influence the use of the Company's proceeds
from this Offering, the election of the Company's directors, and the outcome of
corporate actions requiring stockholder approval, regardless of how other
stockholders of the Company may vote. If, for example, they were to act in
concert, they would be able to elect all of the directors and approve any
proposal submitted to the stockholders that requires the approval only of a
majority of a quorum of the stockholders at a valid meeting. Such a high level
of ownership by such persons may have a significant effect in delaying,
deferring or preventing a change in control of the Company. See
"Management -- Executive Officers and Directors" and "Principal and Selling
Stockholders."

NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE

Prior to this Offering, there has been no public market for the Common
Stock. There can be no assurance that an active trading market will develop or
be sustained after this Offering or that the market price of the Common Stock
will not decline below the initial public offering price. The Company believes
that the price of its Common Stock could fluctuate, perhaps substantially, as a
result of the following factors: announcements of developments related to the
Company's business; fluctuations in operating results; failure to meet
securities analysts' expectations; the gain or loss of significant orders or
customers; changes in management; announcements of technological innovations or
new products by the Company, its customers or its competitors; general trends in
the industry and other events. In addition, in recent years, the stock market
has experienced extreme price and volume fluctuations which have affected the
market price for the securities of companies similar to the Company, and which
have often been unrelated to the operating performance of the companies whose
stocks were affected. Such fluctuations could adversely affect the market price
of the Company's Common Stock.

11
<PAGE> 13

BROAD DISCRETION OVER USE OF PROCEEDS

A significant portion of the estimated net proceeds of this Offering has
not been allocated to a particular purpose, and management's allocation
decisions concerning such net proceeds are dependent on a variety of factors,
including the Company's ability to find additional applications for its products
and the timing and status of new product developments. Accordingly, management
will have broad discretion in allocating the net proceeds of this Offering, and
no stockholder approval will be required for such allocations. See "Use of
Proceeds."

ENVIRONMENTAL CONCERNS

The Company is subject to a variety of governmental regulations related to
the discharge and disposal of toxic, volatile or otherwise hazardous substances
used on the Company's premises, including state and local ordinances prohibiting
or restricting the use or disposal of solvents, polyester and certain other
materials used by the Company. Widespread adoption of such restrictions and a
resulting decline in consumer preference for polyester or other polymer products
due to environmental considerations could adversely effect demand for the
Company's products. The adoption of laws prohibiting or restricting the use or
disposal of aluminum dust or other waste products of the Company's metallizing
processes could substantially increase the Company's manufacturing costs or make
metallizing impractical, either of which would have a material adverse effect on
the Company's business, financial condition and results of operations. If the
Company fails to comply with environmental laws and regulations, it could be
subject to liability ranging from monetary damages to injunctions, any of which
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Manufacturing."

SHARES ELIGIBLE FOR FUTURE SALE

Sales of substantial amounts of Common Stock in the public market after
this Offering could adversely affect the market price of the Common Stock. Upon
the completion of this Offering, the Company will have a total of shares
of Common Stock outstanding, of which the shares offered hereby will
be freely tradeable without restriction under the Securities Act of 1933, as
amended (the "Securities Act"). The remaining 3,012,035 shares are "restricted
securities" as defined by Rule 144 promulgated under the Securities Act and will
be eligible for sale in the public market 180 days after the date of this
Prospectus in reliance on Rule 144 (subject to the volume and other applicable
restrictions of Rule 144) following expiration of lock-up agreements to be
entered into by the holders of such shares with the representatives of the
Underwriters. In addition, following this Offering, the Company intends to file
a registration statement covering 303,000 shares of Common Stock reserved for
issuance under the Company's 1997 Stock Incentive Plan, of which options to
purchase 91,500 shares of Common Stock were outstanding at October 21, 1997.
None of these options vest until April 1998. Subject to Rule 144 volume
limitations applicable to affiliates, such shares will be available for sale in
the open market at the time they are exercised by the holders thereof. The
Company is unable to estimate the number of shares of the Company's Common Stock
that will be sold under Rule 144 or under the planned registration statement,
since such sales will depend in part on the market price for the Common Stock,
the personal circumstances of the sellers and other factors not susceptible of
being known in advance. Prior to this Offering, there has been no public market
for the Common Stock, and any sale of substantial amounts of restricted shares
in the open market, or the availability of such shares for sale, could adversely
affect the market price of the Common Stock offered hereby. See
"Management -- 1997 Stock Inventive Plan," "Principal and Selling Stockholders"
and "Shares Eligible for Future Sale."

ANTI-TAKEOVER EFFECTS OF CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE LAW;
POTENTIAL ADVERSE EFFECT OF UNISSUED PREFERRED STOCK

Certain provisions of the Company's Certificate of Incorporation and Bylaws
and of the Delaware General Corporation Law, together or separately, could have
the effect of discouraging potential acquisition proposals or delaying or
preventing changes in the control or management of the Company, and may limit
the price that certain investors might be willing to pay in the future for
shares of the Common Stock. These provisions include the ability to issue,
without further stockholder approval, preferred stock with voting rights,

12
<PAGE> 14

liquidating preferences, redemption rights and other rights and privileges
senior to the Common Stock. See "Description of Securities."

DILUTION

Purchasers of the Common Stock of the Company in this Offering will
experience immediate and substantial dilution in the net tangible book value of
the Common Stock from the initial public offering price. See "Dilution."

ABSENCE OF DIVIDENDS

Other than the S Corporation Distribution, the Company has never declared
or paid cash dividends on shares of its capital stock. The Company currently
intends to retain any future earnings in its business and does not anticipate
paying any cash dividends in the foreseeable future. See "Dividend Policy."

FORWARD LOOKING STATEMENTS

This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act. Discussions containing such forward-looking
statements may be found in the material set forth under "Prospectus Summary,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business," as well as within the Prospectus generally. Such
statements are subject to a number of risks and uncertainties. Actual results in
the future could differ materially from those described in the forward-looking
statements as a result of the risk factors set forth above and the matters set
forth in this Prospectus generally. The Company undertakes no obligation to
publicly release the result of any revisions of these forward-looking statements
that may be made to reflect any future events or circumstances.

13
<PAGE> 15

PRIOR S CORPORATION STATUS

On January 1, 1997, the Company elected to be treated as an S Corporation
under Subchapter S of the Internal Revenue Code of 1986, as amended, and
comparable state tax laws. As a result, substantially all of the Company's
earnings from January 1, 1997 until the date of termination of the Company's S
Corporation status (the "Termination Date") have been or will be included in the
taxable income of its stockholders for federal and certain state income tax
purposes, and the Company has not and will not be subject to tax on such
earnings, other than California franchise taxes. Deferred income taxes recorded
when the Company was taxed as a C Corporation were written-off on January 1,
1997. Following the Termination Date, the Company will no longer be treated as
an S Corporation, and accordingly, will be fully subject to federal and state
income taxes. The Termination Date will be on or immediately prior to the
consummation of the Offering.

In October 1997, the Company made a distribution to its existing
stockholders consisting of promissory notes (the "Stockholder Notes") in an
aggregate amount equal to the undistributed retained earnings of the Company
(which is estimated to be approximately $3.0 million at September 30, 1997) from
January 1, 1997 through the Termination Date (the "S Corporation Distribution").
The Stockholders Notes are due and payable on April 1, 1998, and bear interest
at the rate of 5.5% per annum. The Company intends to use a portion of the
proceeds of this Offering to repay all amounts due under the Stockholder Notes
upon consummation of this Offering. See "Use of Proceeds" and "Certain
Transactions."

On the Termination Date, as a result of its conversion to a C Corporation,
the Company will record an estimated $ increase in earnings to
establish deferred income taxes which were previously the responsibility of the
existing stockholders. See Note 6 of Notes to Financial Statements.

Prior to the consummation of this Offering, the Company intends to enter
into a tax indemnity agreement with its existing stockholders pursuant to which
the Company will indemnify such stockholders, and such stockholders will
indemnify the Company, against unexpected tax consequences resulting from
adjustments to allocations of income.

14
<PAGE> 16

USE OF PROCEEDS

The net proceeds to be received by the Company from the sale of the Common
Stock are estimated to be approximately $ million ($ million if the
Underwriters' over-allotment option is exercised in full), after deducting the
estimated underwriting discounts and commissions, and estimated offering
expenses.

The Company intends to use approximately $3.0 million of the net proceeds
of this Offering to repay the Stockholder Notes (representing the S Corporation
Distribution) and approximately $350,000 to repay the indebtedness outstanding
under the Company's bank line of credit. The proceeds from this line of credit
were used to repay all outstanding indebtedness under the Company's former line
of credit and for general working capital purposes. All outstanding indebtedness
under the Company's current line of credit and the Stockholder Notes is due and
payable on April 1, 1998. Interest accrues on the Stockholder Notes at 5.5% per
annum and on the current line of credit at the base rate announced by the
Company's senior lender from time to time, plus .75% (9.25% at June 30, 1997).

The balance of the net proceeds of this Offering will be used to purchase
capital equipment (primarily for the Company's laser laboratory and mastering
facility), to fund the relocation of the Company's manufacturing facilities to
its new facility, to expand the Company's marketing and packaging capabilities
and for other general corporate purposes, including working capital
requirements. The Company may also use a portion of the net proceeds of this
Offering for acquisitions of complementary businesses and technologies, although
the Company currently has no agreement or understanding with respect to any such
acquisitions at this time. Pending the use thereof, the Company intends to
invest the net proceeds in short-term, interest bearing, investment grade
securities.

The Company will not receive any of the proceeds from the sale of the
shares of Common Stock being sold by the Selling Stockholders.

DIVIDEND POLICY

Other than the S Corporation Distribution, the Company has never declared
or paid cash dividends on its Common Stock. The Company anticipates that all
future earnings, if any, will be retained for use in the Company's business and
does not anticipate paying any cash dividends in the foreseeable future.

15
<PAGE> 17

CAPITALIZATION

The following table sets forth (i) the Company's actual capitalization as
of June 30, 1997, (ii) pro forma to give effect to the S Corporation
Distribution as if it had been made at June 30, 1997 and an increase of $540,000
to earnings to establish the net deferred taxes of the Company that would have
been recorded had the Company's S Corporation status terminated on June 30,
1997, and (iii) pro forma as adjusted to reflect the sale of shares of
Common Stock offered hereby (assuming an initial offering price of $ per
share) and the application of the net proceeds therefrom (including the
repayment of indebtedness incurred under the Company's bank line of credit and
the Stockholders Notes).

<TABLE>
<CAPTION>
AT JUNE 30, 1997
------------------------------------
PRO FORMA
ACTUAL PRO FORMA(1) AS ADJUSTED
------- ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Notes payable................................................ $ 1,076 $ 1,076 $
Stockholders' equity:
Preferred Stock, no par value; 5,000,000 shares authorized;
no shares issued or outstanding.........................
Common Stock, no par value; 20,000,000 shares authorized;
3,030,000 shares issued and outstanding, actual(2);
shares issued and outstanding, pro
forma(2)(3); and shares issued and
outstanding, pro forma as adjusted (2)(3)............... 10 10
Additional paid in capital................................. 60 3,060
Retained Earnings.......................................... 7,076 4,022
------- ------- -------
Total stockholders' equity.............................. 7,146 7,092
------- ------- -------
Total capitalization.................................... $ 8,222 $ 8,168 $
======= ======= =======
</TABLE>

- ---------------

(1) See "Prior S Corporation Status" and Note 2 to Notes to Financial
Statements.

(2) Excludes 303,000 shares of Common Stock reserved for issuance under the 1997
Stock Incentive Plan, of which 91,500 shares of Common Stock were subject to
outstanding options at a weighted average exercise price of $16.73 at
October 21, 1997. See "Management -- 1997 Stock Incentive Plan."

(3) Also assumes as outstanding during each of the periods presented,
shares of the Common Stock offered by the Company, which represent the
approximate number of shares deemed to be sold by the Company to fund the
repayment of the Stockholder Notes. See "Prior S Corporation Status," "Use
of Proceeds" and Note 2 of Notes to Financial Statements.

16
<PAGE> 18

DILUTION

The net tangible book value of the Company at June 30, 1997 was $
million or $ per share of Common Stock. Net tangible book value per share is
equal to the Company's total assets less its total liabilities, divided by the
total number of outstanding shares of Common Stock. After giving effect to (i)
the sale of shares of Common Stock in this Offering and the
application of the net proceeds therefrom and (ii) the S Corporation
Distribution, the pro forma net tangible book value of the Company as adjusted
at June 30, 1997 would have been $ million or $ per share. See "Prior S
Corporation Status" and "Use of Proceeds." This represents an immediate increase
in the net tangible book value of $ to existing stockholders and an
immediate dilution of $ per share to new investors purchasing shares of
Common Stock in this Offering. The following table illustrates this per share
dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................... $
-------
Net tangible book value per share as of June 30, 1997............ $
-------
Decrease attributable to S Corporation Distribution.............. $
-------
Increase per share attributable to new investors................. $
-------
Pro forma net tangible book value per share as adjusted after this
Offering......................................................... $
-------
Dilution per share to new investors................................ $
=======
</TABLE>

The information with respect to net tangible book value per share in the
table set forth above does not include 91,500 shares of Common Stock which were
subject to outstanding options as of October 21, 1997 at a weighted average
exercise price of $16.73 per share under the 1997 Stock Incentive Plan. As of
October 21, 1997, 303,000 shares were reserved for issuance under the 1997 Plan
(inclusive of the 91,500 shares noted above) . See "Management -- 1997 Stock
Incentive Plan." To the extent such options are exercised, there will be further
dilution to the new investors.

The following table summarizes, on a pro forma basis as of June 30, 1997,
the difference between the number of shares of Common Stock purchased from the
Company, the total consideration paid and the average price per share paid by
existing stockholders and by new investors purchasing shares in this Offering
(assuming an initial public offering price of $ per share and before
deducting underwriting discounts and commissions and estimated offering
expenses).

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL
------------------- CONSIDERATION
------------------ AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- -------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1).......... 3,012,035 % $ % $
New investors..................... % $
--------- ----- --------- -----
Total........................ 100.0% $ %
========= ===== ========= =====
</TABLE>

- ---------------
(1) Sales by the Selling Stockholders in this Offering will cause the number of
shares held by existing stockholders in the table set forth above to be
reduced to shares or % of the total number of shares to be
outstanding after this Offering. If the Underwriters' over-allotment option
is exercised in full, the number of shares held by existing stockholders in
the table set forth above will be further reduced to shares,
or % of the total number of shares to be outstanding after this
Offering. See "Principal and Selling Stockholders."

17
<PAGE> 19

SELECTED FINANCIAL DATA

The following selected financial data as of December 31, 1995 and 1996 and
for the years ended December 31, 1994, 1995 and 1996 has been derived from the
financial statements of the Company which have been audited by Deloitte & Touche
LLP and are included elsewhere in this Prospectus. The following selected
financial data as of December 31, 1992, 1993 and 1994, and June 30, 1996 and
1997, and for the years ended December 31, 1992 and 1993 and the six months
ended June 30, 1996 and 1997 has been derived from the Company's unaudited
financial statements. The unaudited financial statements reflect, in the opinion
of management, all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the information set forth therein. The results for
the six months ended June 30, 1997 are not necessarily indicative of the results
to be expected for the full fiscal year ending December 31, 1997. The following
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Financial
Statements of the Company and the related notes thereto included elsewhere in
this Prospectus.

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------------- ---------------------
1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................. $ 4,536 $ 7,387 $ 9,052 $ 10,320 $ 12,003 $ 5,452 $ 7,622
Cost of goods sold........................ 3,078 2,902 5,243 5,573 7,114 3,231 4,526
--------- --------- --------- --------- --------- --------- ---------
Gross profit.............................. 1,458 4,485 3,809 4,747 4,889 2,221 3,096
Selling, general and administrative
expense................................. 1,148 1,368 1,531 1,780 2,142 893 1,315
Research and development expense.......... 238 397 576 571 504 255 172
--------- --------- --------- --------- --------- --------- ---------
Income from operations.................... 72 2,720 1,702 2,396 2,243 1,073 1,609
Interest expense.......................... 5 32 34 68 157 78 55
Other income (expense).................... 7 37 136 67 59 65 (7)
--------- --------- --------- --------- --------- --------- ---------
Income before provision for income
taxes................................... 74 2,725 1,804 2,395 2,145 1,060 1,547
Provision for income taxes................ 30 701 791 1,021 851 421 643(2)
--------- --------- --------- --------- --------- --------- ---------
Net income................................ $ 44 $ 2,024 $ 1,013 $ 1,374 $ 1,294 $ 639 $ 904
========= ========= ========= ========= ========= ========= =========
Net income per common and common
equivalent share........................ $ 0.01 $ 0.66 $ 0.33 $ 0.45 $ 0.42 $ 0.21
========= ========= ========= ========= ========= =========
Weighted average common and common
equivalent shares(1).................... 3,048,273 3,048,273 3,048,273 3,048,273 3,049,636 3,048,273

Pro forma provision for income taxes(3)... $ 697
=========
Pro forma net income(3)................... $ 850
=========
Pro forma net income per share(3)......... $
=========
Pro forma weighted average common and
common equivalent shares(1)(4)..........
OPERATING AND OTHER DATA:
Capital expenditures...................... $ 171 $ 167 $ 404 $ 634 $ 103 $ 78 $ 207
Research and development.................. 238 397 576 571 504 255 172
Depreciation and amortization............. 79 214 107 165 310 163 199
EBITDA(5)................................. 158 2,971 1,945 2,628 2,612 1,301 1,801
Cash flow provided by (used in) operating
activities.............................. (424) 464 164 (5) 1,346 139 908
</TABLE>

18
<PAGE> 20

<TABLE>
<CAPTION>
AT DECEMBER 31, AT JUNE 30,
----------------------------------------------------------- ---------------------
1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................. $ 17 $ 324 $ 75 $ 97 $ 462 $ 110 $ 872
Working capital........................... 1 2,128 2,814 3,134 4,097 3,608 5,120
Total assets.............................. 1,382 3,868 4,726 8,523 8,764 8,577 9,182
Notes payable............................. -- 17 12 1,582 695 1,531 1,076
Retained earnings......................... 467 2,491 3,504 4,878 6,172 5,517 7,076
Stockholders' equity...................... 477 2,501 3,513 4,888 6,242 5,527 7,146
</TABLE>

- ---------------
(1) See Note 2 to Notes to Financial Statements.

(3) Pro forma provision for income taxes, pro forma net income and pro forma net
income per share reflect the pro forma effect of income taxes as if the
Company has been taxed as a C Corporation for the six months ended June 30,
1997. Upon consummation of the Offering, the Company will be subject to
federal and state income taxes. See "Prior S Corporation Status."

(4) Also assumes as outstanding during each of the periods presented,
shares of Common Stock offered by the Company in this Offering, which
represent the approximate number of shares deemed to be sold by the Company
to fund the repayment of the Stockholder Notes. See "Prior S Corporation
Status," "Use of Proceeds" and Note 2 of Notes to Financial Statements.

(5) EBITDA represents earnings before taking into consideration interest
expense, income tax expense and depreciation and amortization expense and is
not a GAAP measurement of income. EBITDA may not provide an accurate
comparison among companies because it is not necessarily computed by all
companies in an identical manner. The use of such information is intended
only to supplement the conventional income statement presentation, and is
not to be considered as an alternative to net income, cash flows from
operating activities or any other indicator of the Company's operating
performance which is presented in accordance with GAAP above.

19
<PAGE> 21

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

The Company commenced operations in October 1980 to pioneer the research
and development of microreplicated surfaces for use in holographic sheet
products, high-end special effect camera lenses and projection filters. The
Company initially manufactured these products on a custom order basis, one batch
at a time. Through considerable research, the Company developed proprietary
processes that enable it to manufacture microreplicated surfaces continuously
onto rolls of polymer film. This breakthrough has enabled the Company to
significantly increase its production speeds, lower costs, improve quality and
take advantage of the growing market for holographic films.

The commercial applications of the Company's proprietary microreplication
technologies have changed significantly over time. In the late 1980s and early
1990s, the Company manufactured large quantities of holographic custom images
for its customers. In 1992, the Company shifted its focus from the manufacture
of custom images to the mass production of microreplicated polymer films
featuring the Company's proprietary stock holographic patterns. This shift
enabled the Company to reduce its dependence upon large custom orders, increase
sales volumes, expand new product applications and improve manufacturing
efficiencies. The Company now focuses on three primary market segments: consumer
products, packaging materials and industrial applications. Sales of holographic
films featuring the Company's proprietary stock patterns constituted
substantially all of the Company's net sales during the year ended December 31,
1996 and the six months ended June 30, 1997.

The Company's proprietary manufacturing processes consist of creating image
or pattern masters and microreplicating the master's surface topography onto
continuous rolls of polymer films. Most of the Company's polymer films are
"metallized" by thermally evaporating aluminum onto the holographic film,
creating a metallic or reflective appearance to the film. Once metallized, the
film often undergoes a number of converting or other finishing steps prior to
sale, including laminating, cutting, coating, slitting or sheeting processes.

Prior to 1996, the Company contracted with third party vendors to perform
substantially all of the metallizing and converting steps other than slitting.
In response to expanding sales, the Company made a capital investment in late
1995 of more than $1.5 million to obtain metallizing capabilities. This
investment was made to reduce the Company's metallizing costs, improve quality
and shorten turnaround time. The Company facilitates the sale of its products by
outsourcing certain nonproprietary conversion or finishing processes. In 1996
and the six months ended June 30, 1997, approximately one third of the Company's
cost of goods sold represented costs associated with outsourced conversion
processes.

The following discussion should be read in conjunction with, and is
qualified in its entirety by, the Company's Financial Statements and notes
thereto included elsewhere in this Prospectus. Historical results of operations,
percentage relationships and any trends that may be inferred from the discussion
below are not necessarily indicative of the results for any future period.

20
<PAGE> 22

RESULTS OF OPERATIONS

The following table sets forth for the periods indicated, certain statement
of operations data of the Company.

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------ -----------------
1994 1995 1996 1996 1997
------ ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Net sales........................... $9,052 $10,320 $12,003 $5,452 $7,622
Cost of goods sold.................. 5,243 5,573 7,114 3,231 4,526
------ ------- ------- ------ ------
Gross profit........................ 3,809 4,747 4,889 2,221 3,096
Selling, general and administrative
expense........................... 1,531 1,780 2,142 893 1,315
Research and development expense.... 576 571 504 255 172
------ ------- ------- ------ ------
Income from operations.............. 1,702 2,396 2,243 1,073 1,609
Interest expense.................... 34 68 157 78 55
Other income (expense).............. 136 67 59 66 (7)
------ ------- ------- ------ ------
Income before provision for income
taxes............................. 1,804 2,395 2,145 1,060 1,547
Provision for income taxes.......... 791 1,021 851 421 643(1)
------ ------- ------- ------ ------
Net income.......................... $1,013 $ 1,374 $ 1,294 $ 639 $ 904(1)
====== ======= ======= ====== ======
</TABLE>

The following table sets forth for the periods indicated, the percentages
of net sales represented by each item in the Company's statement of operations.

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------- ---------------
1994 1995 1996 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales.................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold......................... 57.9 54.0 59.3 59.3 59.4
----- ----- ----- ----- -----
Gross profit............................... 42.1 46.0 40.7 40.7 40.6
Selling, general and administrative
expense.................................. 16.9 17.3 17.8 16.4 17.3
Research and development expense........... 6.4 5.5 4.2 4.7 2.2
----- ----- ----- ----- -----
Income from operations..................... 18.8 23.2 18.7 19.6 21.1
Interest expense........................... 0.4 0.7 1.3 1.4 0.7
Other income (expense)..................... 1.5 0.7 0.5 1.2 (0.1)
----- ----- ----- ----- -----
Income before provision for income taxes... 19.9 23.2 17.9 19.4 20.3
Provision for income taxes................. 8.7 9.9 7.1 7.7 8.4(1)
----- ----- ----- ----- -----
Net income................................. 11.2% 13.3% 10.8% 11.7% 11.9%(1)
===== ===== ===== ===== =====
</TABLE>

- ---------------

(1) The Company has been taxed as an S Corporation for federal and state income
tax purposes since January 1, 1997. Provision for income taxes for the six
months ended June 30, 1997, consists primarily of net deferred tax assets
which were written-off in January 1997 upon the Company's election to be
taxed as an S Corporation. If the Company had been taxed as a C Corporation
for the six months ended June 30, 1997, the pro forma provision for income
taxes and the pro forma net income would have been $697,000 (9.1% of net
sales)and $850,000 ($11.2% of net sales) respectively.

SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996

Net Sales. Net sales increased 39.8% to $7.6 million in the six month
period ended June 30, 1997 from $5.5 million in the corresponding period of
1996. Sales to the Company's largest customer increased approximately $530,000,
constituting approximately 24.4% of the increase. The balance of the increase
was derived largely from higher sales to existing customers and expanded
applications in the consumer products market.

21
<PAGE> 23

Gross Profit. Gross profit increased 39.4% to $3.1 million in the six month
period ended June 30, 1996 and 1997 from $2.2 million in the corresponding
period of 1996. Gross margin for the six months ended June 30, 1997 remained
relatively constant at 40.7% and 40.6%, respectively, because increased sales
were offset by lower selling prices associated with higher sales volumes. To
facilitate expanded sales, the Company granted favorable volume purchasing
arrangements to two of its major customers. In addition, during the six months
ended June 30, 1997, the Company incurred higher than average air freight
charges, in part related to the replacement of product which had been improperly
laminated by a third party vendor, and also due to a rapid increase in demand by
a major customer.

Selling, General and Administrative Expense. Selling, general and
administrative expense increased 47.3% to $1.3 million (17.3% of net sales) in
the six month period ended June 30, 1997 from $893,000 (16.4% of net sales) in
the corresponding period of 1996. The dollar increase in selling, general and
administrative expense reflects increased expenses associated with additional
administrative and sales and marketing personnel hired in connection with the
Company's business expansion, and higher commissions associated with the
Company's increased net sales. The decline as a percentage of net sales reflects
the fixed nature of a substantial portion of these expenses, which grew at a
slower rate than net sales.

Research and Development Expense. Research and development expense declined
32.5% to $172,000 (2.2% of net sales) in the six month period ended June 30,
1997 from $255,000 (4.7% of net sales) in the corresponding period of 1996.
Development efforts during the first six months of 1997 were focused in large
part on the completion of a proprietary microreplication machine capable of
producing 55 inch web and the creation of a new custom master. The Company
completed working models of this microreplication machine and the master during
the first six months of 1997. As a result, the Company capitalized approximately
$85,000 incurred for those projects.

Income From Operations. Income from operations increased 49.9% to $1.6
million (21.1% of net sales) in the six month period ended June 30, 1997, from
$1.1 million (19.6% of net sales) in the corresponding period of 1996. The
increase in operating income as a percentage of net sales was principally due to
the increase in net sales and the decline in selling, general and administrative
expense and in research and development expense described above.

Interest Expense. Interest expense decreased 29.5% to $55,000 in the six
month period ended June 30, 1997 from $78,000 in the corresponding period of
1996. The decrease relates primarily to the repayment of debt related to the
metallizer and the advances from officers.

Other Income (Expense). Other income (expense) decreased 110% to $7,000 in
the six month period ended June 30, 1997 from $66,000 in the corresponding
period of 1996. This decrease was primarily due to audit adjustments to the
Company's 1994 and 1995 federal income tax returns and amortization of a loan
fee incurred in connection with the establishment of the Company's $3.5 million
line of credit facility in March 1997, which was partially offset by royalties
paid to the Company by a large label and packaging company for the license of
two of the Company's stock holographic patterns. The timing of the licensee's
promotional programs and product labeling needs varies from time to time,
resulting in fluctuations in other income.

Provision for Income Taxes. Historically, the Company has provided for
federal and state income taxes at a blended rate of approximately 42%. The
Company does not have any net operating losses or other unusual items that would
create significant differences between the tax rate applied in the financial
statements from the statutory tax rates. From January 1, 1997 through the
Termination Date, the Company elected to be treated as an S Corporation for
federal and state income tax purposes. As a consequence, the Company generally
did not have any income tax liability during this period, and the Company's
earnings were treated as having been distributed to the existing stockholders
for income tax reporting purposes. As a result of this election, approximately
$619,000 of net deferred tax assets that were outstanding at December 31, 1996
were written off on January 1, 1997 upon the Company's election to be treated as
an S Corporation.

Net Income. Net income increased 41.5% to $904,000 (11.9% of net sales) for
the six month period ended June 30, 1997 from $639,000 (11.7% of net sales) in
the corresponding period of 1996. If income taxes

22
<PAGE> 24

had been recorded during the six months ended June 30, 1997 as if the Company
were a C Corporation, net income would have increased 33.0% to $850,000 (11.2%
of net sales) for the six month period ended June 30, 1997 from $639,000 (11.7%
of net sales) in the corresponding period of 1996.

YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995

Net Sales. Net sales increased 16.3% to $12.0 million in 1996 from $10.3
million in 1995. This increase in net sales was derived from sales growth across
the Company's diverse base of customers.

Gross Profit. Gross profit increased 3.0% to $4.9 million in 1996 from $4.7
million in 1995, although gross margin declined to 40.7% in 1996 from 46.0% in
1995. In October 1995, the Company made an investment in substantially larger
facilities, expanding from 27,500 square feet to approximately 77,700 square
feet, in response to the growing commercial demand for its products. This
relocation increased the Company's fixed overhead costs related to internal
manufacturing, warehousing and shipping, causing gross margin to decline. The
Company also invested in new metallizing equipment in February 1996, which
resulted in additional fixed costs during this period. The decline in gross
margin also reflects increased depreciation expense associated with the
acquisition of the metallizing equipment. The Company believes these strategic
investments will enable the Company to better take advantage of growth
opportunities and to achieve economies of scale.

Selling, General and Administrative Expense. Selling, general and
administrative expense increased 20.3% to $2.1 million (17.8% of net sales) in
1996 from $1.8 million (17.3% of net sales) in 1995. The increase reflects
higher expenses associated with additional administrative and sales and
marketing personnel, and higher commissions associated with the Company's
increased net sales, as well as higher professional fees related to a three year
audit of the Company's accounts and records.

Research and Development Expense. Research and development expense declined
11.7% to $504,000 (4.2% of net sales) in 1996 from $571,000 (5.5% of net sales)
in 1995. This decrease was primarily due to the timing of development projects.

Income From Operations. Income from operations declined 6.4% to $2.2
million (18.7% of net sales) in 1996 from $2.4 million (23.2% of net sales) in
1995. This decline primarily reflected the decrease in gross margin due to the
Company's significant investment in facilities and equipment as described above.

Interest Expense. Interest expense increased 130.9% to $157,000 in 1996
from $68,000 in 1995. This increase was due in part to interest incurred in
connection with the Company's financing of certain metallizing equipment that
was purchased in the fourth quarter of 1995. This increase reflected $61,000 of
interest incurred in connection with loans previously advanced to the Company
from certain of its officers in order to finance the Company's operations.

Other Income. Other income decreased 11.9% to $59,000 in 1996 from $67,000
in 1995. This decrease resulted from a decline in royalties paid by one customer
in connection with the license of two of the Company's stock holographic
patterns.

Provision for Income Taxes. The Company has provided for federal and state
income taxes at a blended rate of approximately 42%. The Company does not have
any net operating losses or other unusual items that would create significant
differences between the tax rate applied in the financial statements from the
statutory tax rates.

Net Income. Net income decreased 5.8% to $1.3 million (10.8% of net sales)
in 1996 from $1.4 million (13.3% of net sales) in 1995.

YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994

Net Sales. Net sales increased 14.0% to $10.3 million in 1995 from $9.0
million 1994. This growth was primarily attributable to increased market
acceptance of the Company's glitter products and higher sales of pressure
sensitive films to the Company's largest customer in 1995. These increases were
offset in part by declining sales to certain significant customers, reflecting a
change in their product mix.

23
<PAGE> 25

Gross Profit. Gross profit increased 24.6% to $4.7 million in 1995 from
$3.8 million in 1994. Gross margin increased to 46.0% in 1995 from 42.1% in
1994. Management believes that the improvement in gross margin was due in part
to a shift in the product sales mix towards higher margin pressure sensitive and
unconverted holographic films. This margin improvement also reflected the
absorption of fixed overhead over an increased production volume.

Selling, General and Administrative Expense. Selling, general and
administrative expense increased 16.3% to $1.8 million (17.3% of net sales) in
1995 from $1.5 million (16.9% of net sales) in 1994. This increase was largely
due to increased rental obligations incurred in connection with the Company's
relocation to larger facilities and related moving expenses. This increase was
also due to the addition of administrative and sales and marketing personnel and
higher commissions associated with increased net sales.

Research and Development Expense. Research and development expense remained
relatively constant, decreasing slightly to $571,000 (5.5% of net sales) in 1995
from $576,000 (6.4% of net sales) in 1994.

Income From Operations. Income from operations increased 40.8% to $2.4
million (23.2% of net sales) in 1995 from $1.7 million (18.8% of net sales) in
1994. This increase was primarily due to increased net sales and improved gross
margin in 1995.

Interest Expense. Interest expense increased 100.0% to $68,000 in 1995 from
$34,000 in 1994. This increase reflected additional interest expense associated
with debt incurred in connection with the financing of certain metallizing
equipment that was purchased in the fourth quarter of 1995.

Other Income. Other income decreased 50.7% to $67,000 in 1995 from $136,000
in 1994. This decrease primarily resulted from a decline in royalties paid by
one customer in connection with the license of two of the Company's stock
holographic patterns.

Net Income. Net income increased 35.6% to $1.4 million (13.3% of net sales)
in 1995 from $1.0 million (11.2% of net sales) in 1994.

24
<PAGE> 26

QUARTERLY RESULTS

The following table presents selected quarterly financial information for
each of the seven quarters through June 30, 1997 and as a percentage of the
Company's net sales for the periods presented. This information is unaudited,
but in the opinion of the Company's management, reflects all adjustments,
consisting only of normal recurring adjustments, that the Company considers
necessary for a fair presentation of this information in accordance with
generally accepted accounting principles. Quarterly results for prior periods
are not necessarily indicative of future results of operations.

<TABLE>
<CAPTION>
QUARTERS ENDED
---------------------------------------------------------------------------------------
DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1995 1996 1996 1996 1996 1997 1997
-------- -------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
Net sales............................. $2,488 $2,526 $2,926 $ 3,005 $3,546 $4,334 $3,288
Cost of goods sold.................... 1,344 1,497 1,734 1,781 2,102 2,633 1,893
------ ------ ------ ------ ------ ------ ------
Gross profit.......................... 1,144 1,029 1,192 1,224 1,444 1,701 1,395
Selling, general and administrative
expense............................. 452 455 438 470 779(1) 637 678
Research and development expense...... 143 127 128 124 125 130 42(2)
------ ------ ------ ------ ------ ------ ------
Income from operations................ 549 447 626 630 540 934 675
Income before provision for income
taxes............................... 561 434 626 610 475 867 680
Provision for income taxes............ 239 173 248 241 189 635(3) 8(3)
------ ------ ------ ------ ------ ------ ------
Net income............................ $ 322 $ 261 $ 378 $ 369 $ 286 $ 232(3) $ 672(3)
====== ====== ====== ====== ====== ====== ======
</TABLE>

<TABLE>
<CAPTION>
QUARTERS ENDED
---------------------------------------------------------------------------------------
DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1995 1996 1996 1996 1996 1997 1997
-------- -------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
Net sales............................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold.................... 54.0 59.3 59.3 59.3 59.3 60.7 57.6
------ ------ ------ ------ ------ ------ ------
Gross profit.......................... 46.0 40.7 40.7 40.7 40.7 39.3 42.4
Selling, general and administrative
expense............................. 18.2 18.0 15.0 15.6 22.0(1) 14.7 20.6
Research and development expense...... 5.7 5.0 4.3 4.1 3.5 3.0 1.3
------ ------ ------ ------ ------ ------ ------
Income from operations................ 22.1 17.7 21.4 21.0 15.2 21.6 20.5
Income before provision for income
taxes............................... 22.5 17.2 21.4 20.3 13.4 20.0 20.6
Provision for income taxes............ 9.6 6.9 8.5 8.0 5.3 14.7(3) 0.2(3)
------ ------ ------ ------ ------ ------ ------
Net income............................ 12.9% 10.3% 12.9% 12.3% 8.1% 5.3%(3) 20.4%(3)
====== ====== ====== ====== ====== ====== ======
</TABLE>

- ---------------
(1) Includes year end bonuses in the aggregate amount of $125,000, as well as a
$47,500 year end audit fee.

(2) Reflects a shift in the research and development team's focus towards the
construction of the Company's new microreplication machine for 55 inch wide
holographic film, resulting in related capitalized expenses.

(3) The Company has been taxed as an S Corporation for federal and state
purposes since January 1, 1997. Provision for income taxes for the quarter
ended March 31, 1997 consists primarily of net deferred tax assets which
were written off in January 1997 upon the Company's election to be taxed as
an S Corporation. The pro forma provision for income taxes and pro forma net
income presented as if the Company had been taxed as a C Corporation are
$390,000 (9.0% of net sales), and $477,000 (11.0% of net sales) for the
three months ended March 31, 1997 and $307,000 (9.3% of net sales) and
$373,000 (11.3% of net sales) for the three months ended June 30, 1997.

SEASONALITY

The Company's business historically has not been impacted by general
seasonal trends. Although a number of the Company's customers are affected by
seasonality (in the decorative packaging market in particular), the diversity of
the Company's customer base typically negates the impact of these patterns.

25
<PAGE> 27

LIQUIDITY AND CAPITAL RESOURCES

The Company historically has relied generally on funds generated from
operations and loans from its officers to finance its operations. The ownership
of the Company has been primarily concentrated in four individuals who have not
received any dividend distributions since the Company commenced operations in
1980 (other than the S Corporation Distribution). Cash provided by (used in)
operating activities amounted to $(5,000), $1.3 million and $908,000,
respectively, for 1995, 1996 and the six months ended June 30, 1997. Cash used
by the Company in investing activities amounted to $634,000, $103,000 and
$207,000, respectively, for 1995, 1996 and the six months ended June 30, 1997.
These activities were restricted to the purchase of new manufacturing equipment
and office furniture. Cash generated by (used in) financing activities in 1995
and 1996 primarily reflected the $1.1 million debt incurred to purchase a new
metallizer in 1995, and payments made to amortize principal and interest on that
debt. During the six month period ended June 30, 1997, the Company borrowed
approximately $1.0 million pursuant to a new revolving line of credit, the
proceeds of which, along with cash flow from operations, were used to repay the
outstanding balance of approximately $695,000 on its prior credit line, and
approximately $672,000 that remained outstanding on advances from officers of
the Company.

Capital expenditures were nominal in 1994, 1995, 1996 and the six months
ended June 30, 1997, with the exception of the new metallizer machine purchased
in 1995 at a cost of approximately $1.5 million. The Company anticipates making
capital expenditures of approximately $4.5 million through December 31, 1998 to
expand and equip its laser laboratory, quality control and research and
development facilities, to relocate its proprietary manufacturing operations to
a new facility, to incorporate key conversion steps into its manufacturing
processes and, potentially, for strategic acquisitions. The Company plans to use
a portion of the proceeds of this Offering to finance these capital
expenditures.

In March 1997, the Company obtained a $3.5 million revolving credit line
facility from Citibank, FSB, which is secured by substantially all of the
Company's assets and has been guaranteed by four of the Company's stockholders.
The line of credit bears interest at Citibank's base rate plus .75% (9.25% at
June 30, 1997) and expires on April 1, 1998. At December 31, 1996, the Company
had $695,000 of outstanding indebtedness that was incurred to purchase the
Company's metallizer. The Company used borrowings under the new line of credit
to refinance that debt. The outstanding balance on the new line of credit was
approximately $1.0 million at June 30, 1997. The Company plans to use a portion
of the net proceeds of this Offering to retire the balance outstanding under the
line of credit by December 31, 1997.

On January 1, 1997, the Company converted from a C Corporation to an S
Corporation to provide the current stockholders with a one time distribution of
retained earnings derived from that time through the Termination Date. On or
before the consummation of the Offering, the Company will revert to a C
Corporation. No further dividends are planned after that date. As a consequence
of this election, approximately $619,000 of net deferred tax assets that were
outstanding at December 31, 1996 were written off on January 1, 1997.

The Company believes that funds generated from operations, the net proceeds
of the Offering and available borrowings under the Company's line of credit will
be sufficient to meet operating needs and other capital requirements of the
Company for at least the 18 months following the Offering.

26
<PAGE> 28

BUSINESS

GENERAL

Spectratek Technologies, Inc. is a leading manufacturer of microreplicated
holographic films that are used in a wide range of value added applications in
consumer products, packaging materials and industrial products. Using
proprietary technologies, the Company records coherent light onto continuous
rolls of polymer film. This process adds unique optical characteristics to the
film, creating color, motion and the appearance of depth in natural light. The
Company's films are used in consumer applications including stickers, magazines,
glitter and cosmetics; in packaging applications and labels for toys, computer
games, food, beverages and displays; and in industrial applications such as
paint, fabrics, flooring and architectural materials. The Company has refined
its proprietary technology to create virtually seamless holographic patterns
which the Company believes offer superior brightness, clarity and consistency
when compared with competing holographic films. The Company's holographic films
have been incorporated into products marketed by numerous companies in a broad
range of industries, including Coors Bottling Company, Kraft General Foods,
Mattel, Inc. and PPG Industries, Inc.

TECHNOLOGY OVERVIEW

Holograms consist of visual recordings of light wave patterns in a
compacted form that permit three dimensional information to be condensed onto a
flat surface. While holography was originally invented in 1947, broad commercial
applications of holographic materials did not occur until the late 1980s due to
the specialized technology necessary to mass produce holograms.

Holograms add a colorful new dimension to traditional merchandising media.
Attention is often drawn to holograms because images appear to project out of
the hologram, creating the illusion of depth. In addition, when a hologram is
viewed from different angles, features of the depicted object can be seen that
would not otherwise be visible in a conventionally printed image. The Company
believes significant growth potential exists in the applications for the
Company's products due to the visual appeal, impact and uniqueness of holograms.

Holograms are generally created using a four step manufacturing process
involving mastering, microreplication, metallizing and finishing. A master
hologram is created by recording the interference of two coherent laser beams
onto a plate coated with photosensitive material which creates light and dark
regions on the plate. The photosensitive materials undergo a development process
in which certain unexposed areas are removed from the photosensitive material on
the plate, leaving a pattern of microscopic grooves or bumps on the plate's
surface. The close spacing of the grooves or bumps facilitates the dispersion of
white light into its component spectral colors. Color dispersion is increased by
using finer groove spacing. Patterns and artwork may be created by arranging
areas of different grating angles and groove spacing.

Once the master is formed, most traditional holographers use an
electroforming nickel process to produce an exact copy or negative of the
master. This process involves silver coating the master and then plating nickel
over the silver resulting in a hard microreplication negative or a "shim." The
shim is typically wrapped around a cylinder in the microreplication machine.
Microreplication is the process by which the microscopic grooves and bumps from
the shim are transferred to and pressed into thin film material (usually
polyester, nylon, polypropylene or paper). A seam or pattern break on the
holographic film is usually created where the shim is joined as it is wrapped
around the pressure cylinder.

Commercial applications for this technology require the production of large
quantities of continuous thin film material. The uniformity of the optical and
physical properties of this material throughout a production run is often
critical. Large scale production is accomplished with high speed, close
tolerance microreplication equipment.

Once the holographic film is microreplicated, it is often metallized in a
vacuum chamber where aluminum is thermally evaporated onto the holographic film,
creating a reflective coating on the film. Once the holographic film is
produced, it is often sent to third party converters for further processing.
These

27
<PAGE> 29

converters cut the film into particulate, slit it into fine strips, coat or tint
the film or laminate the film to paper or board stock or pressure sensitive
backing.

THE SPECTRATEK ADVANTAGE

The Company's proprietary microreplication technologies have enabled the
Company to mass produce large quantities of holographic films which the Company
believes offer superior brightness, clarity and consistency when compared with
competitors' products. The Company's core strengths include the following:

Unlike most traditional holographers, the Company uses a proprietary
mastering process prior to microreplication that facilitates the mass production
of virtually seamless holographic patterns of a consistent quality. In this
mastering process, the Company creates its own master tool from the shim or the
original master (created either by the Company or by other custom holographers).
The Company utilizes this master tool in its microreplication machines instead
of a shim.

The Company is able to use this procedure to enhance and refine the shape,
size and position of the grooves on the master. By increasing the spacing of the
grooves (as many as 44,000 lines per linear inch) or depth of the bumps (often
only .25 micron deep) and by adjusting the frequency of the light waves (similar
to screening out audio noises), the Company is able to increase the brightness
and clarity of the hologram. The Company is not aware of any other competitor
that is able to modify or enhance a master hologram once it has been generated.
The brightness and clarity of the Company's films are retained even when the
films are finely chopped into geometric pigment. When added to paint or other
coatings, the Company's geometric pigment adds a sparkle and luster to the
finish. In addition, when viewed from different angles, the geometric pigment
creates an optical effect of changing colors. The Company believes these
different optical effects are sought after by large paint and coatings
companies.

The Company also has developed and constructed its own proprietary
microreplication machines that use the Company's unique mastering tool instead
of traditional shims. Because the grooves on a shim wear over time, films
produced using shims tend to lose their clarity and brightness as their groove
resolution deteriorates. The Company has experienced significantly less
deterioration in the groove structure in its mastering tool as compared to
traditional shims, thereby achieving greater output consistency and quality
throughout its production run. The Company is able to manufacture a large
quantity of film without a noticeable change in the quality of the films. The
failure of competitors' films to achieve uniformity throughout the production
run can make it difficult for printers to process the films due to mismatched
inks and can lead to an increased amount of wasted products. In addition,
because the Company's proprietary microreplication machines do not use shims,
the seams or breaks between the Company's patterns are virtually undetectable in
most of the Company's custom stock holographic patterns.

28
<PAGE> 30

EXISTING MARKETS

The following table summarizes the Company's principal markets and product
applications:

<TABLE>
<CAPTION>
MARKET APPLICATION SELECTED END USERS *
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------------
Consumer Products Children's stickers, wrapping DC Comics (Batman cover decals), Jerome
paper, bows, balloons, trading Russell Cosmetics (nail polish and body
cards, snowboards, magazines, gels), Labelad/Sandylion Sticker Co.
glitter, nail polish and (stickers), Motor Trend Magazine (cover
cosmetics. decals), MacUser and PCWorld (cover
decals), TOPPS (trading cards) and The
Upper Deck Company (trading cards)
- --------------------------------------------------------------------------------------------------------------
Packaging Materials Packaging and labels for toys, Coca-Cola (Hi-C labels), Coors (Coors
computer games, food, vitamins, Arctic Ice and Zima labels and signs),
beverages and cigarettes. Also Capital Records (security seals), GT
used in point of purchase Interactive (Duke Nukem software box),
displays and security seals. Kraft General Foods (Capri Sun
packaging), Lucas Art Entertainment (DIG
software box), Mattel (Barbie dolls and
packaging), Proctor & Gamble (Crest
decals), Ralston Purina (Ninja Turtles),
Sears (Mainframe garment tags), Sony
(security seals), Wachovia Bank
(security stickers for cashier's
checks), Wilson Sporting Goods (Pro
Staff Hammer tennis racquets) and
Wrigley Chewing Gum (bubble beeper)
- --------------------------------------------------------------------------------------------------------------
Industrial Applications Fabrics, paint, flooring and Engelhard (automobile paint), Charles
architectural applications. Gray Interiors (AMC theater decor), PPG
Industries, Inc. (automobile paint),
Riviera Hotel (signage) and Soorim
Textile Co., Ltd. (fabrics)
</TABLE>

* The trademarks named are the property of their respective owners.

Consumer Products. The largest market addressed by the Company's products
is currently the consumer products market. The Company's films have been used in
children's stickers, wrapping paper, bows, balloons, trading cards, snow boards,
magazines, glitter, nail polish and cosmetics. The Company's largest application
to date within this market has been pressure sensitive labels. Consumer products
are often impulse purchases and the uniqueness and impact of holography can
differentiate products and draw attention to them at the point of purchase. The
Company believes that brightness and clarity of the films are key factors in
selecting holographic films for these applications.

Packaging Materials. The Company also manufactures holographic films for
flexible packaging and folding carton applications for a variety of consumer
products such as food, beverages, vitamins, cigarettes, toys and computer games.
The Company's products are also used in signage materials and point of purchase
displays. The Company believes significant growth opportunities exist for use of
the Company's products in the packaging materials market due to the visual
appeal, impact and uniqueness of holograms. The Company's holographic films are
selected in various packaging applications for appearance and functional
characteristics. Similar to the consumer products market, a significant
challenge in the packaging market is to draw the attention of the buyer to the
product. For packaging applications, the Company's proprietary stock pattern
films are often laminated to paper or board stock and then printed with a
combination of semi-opaque, opaque and reversed-out, four color process
printing, allowing the optical characteristics of the film to highlight certain
parts of the package.

The packaging market, which includes flexible packaging (bags and pouches)
as well as folding cartons, represents a significant expansion opportunity for
the Company. According to a recent report by the Flexible

29
<PAGE> 31

Packaging Association, the size of the flexible packaging market is estimated to
reach $16.4 billion in 1997. Holographic materials currently represent a very
small share of this market due to the higher cost of holographic materials as
compared to traditional packaging materials. To date, the Company's ability to
serve the flexible packaging market has also been constrained to a large degree
by limitations on the width of its material. In general, it is more economical
for the flexible packaging industry to work with wider materials than the
Company has historically been able to produce.

The Company is in the process of building a new microreplication machine
which is anticipated to be completed in late 1997, which should enable the
Company to manufacture film 55 inches wide. The Company believes its ability to
manufacture this wider material will broaden the applications for its products
by enabling the Company to address the larger material requirements of the
packaging materials market on a more cost-effective basis. In 1998, the Company
plans to develop and build a microreplication machine to produce film that is 65
inches wide.

While the Company has produced only a limited quantity of holographic films
to date for the packaging market, its films were used in the Capri Sun package
for Kraft General Foods. The Company was presented a Silver Award/Structural
Packaging for the Capri Sun package as a part of the Beverage Packaging Global
Design Awards.

Industrial Applications. While industrial applications currently represent
the smallest existing market for the Company's products, the Company believes
this market offers the most significant growth opportunities. The Company's
products can be slit for use in fabrics, finely chopped into geometric pigment
to add sparkle to paint and flooring materials and can be used for architectural
applications such as billboard signage and window treatments. In general, the
Company's films can be used to replace mica or aluminum flakes in various
industrial applications.

The Company has developed proprietary microreplicating technologies which
enable the processing of polyester film ranging as thin as .004 inch to .00024
inch to a depth of .25 micron. The Company is not aware of any other company
with this capability. The Company is working with independent companies to
precision cut the Company's film into particles as small as 1/500 inch. The
Company has entered into joint development efforts with three large paint and
coating manufacturers to expand the applications for the Company's geometric
pigment, particularly for the automobile market. Metallic applications in
automobile paints are currently achieved by adding aluminum flakes or mica to
the paint. The Company's geometric pigment can be added to paint to achieve a
similar effect and to provide tiny pinpoints of reflecting light. Depending on
the angle of the sun, these pinpoints will reflect different colors. By varying
the size or amount of the pigment, the application of the Company's geometric
pigment to automobile paint can provide a subtle glimmer or a spectacular
sparkling effect. Due to the reflective nature of the Company's pigment and the
thinness of the material, the Company believes such effect can be achieved using
significantly less geometric pigment in the paint than would be required with
aluminum flakes or mica.

In July 1997, PPG Industries, Inc. launched the Prizmatique(TM) automobile
paint line which features the Company's geometric pigment. BASF and Englehard
are also beta testing the Company's geometric pigment for use in their paint
products. In addition to automobile paint, the Company's geometric pigment can
be used in a variety of other paint applications including bicycle, personal
watercraft and outdoor furniture paints.

BUSINESS STRATEGY

The Company's objective is to become the leading worldwide provider of
holographic materials by expanding the applications for its products,
continually improving the quality and consistency of its products, enhancing its
mastering capabilities and providing products that meet its customers'
objectives. The key elements of the Company's strategy include the following:

- Expand the Applications for the Company's Products. The Company currently
manufactures holographic film for use in the markets for consumer goods,
packaging materials and industrial applications. The Company believes
significant growth opportunities exist both for different applications
within these markets, as well as in new markets such as architectural
products. To date, the Company's penetration of the packaging market and
certain other markets has been constrained to a

30
<PAGE> 32

large degree by its inability to produce materials in widths that can be
efficiently processed and used by converters, printers and finishers. The
Company is currently developing a new microreplication machine to
manufacture 55 inch wide rolls of film which the Company believes will
enable it to better address the packaging market. The Company also
intends to focus its research and development efforts to process thinner
films, precision cut the Company's film into finer particles, utilize
other substrates and new coatings, and expand its custom mastering
capabilities.

- Maximize Cost Efficiencies. The Company plans to maintain its position as
a low cost producer of holographic films by expanding its production
facilities and by designing and building equipment capable of producing
wider material in larger quantities. The Company is currently operating
only one manufacturing shift and may be able to achieve greater
efficiencies by adding another shift, incorporating new equipment and
bringing certain of the manufacturing steps in house in order to lower
costs, increase quality and expedite turnaround. In addition, the Company
continually modifies its manufacturing processes and proprietary
microreplication equipment in order to utilize the Company's production
facilities more efficiently. In this regard, the Company's new metallizer
and the anticipated new microreplication machine should enable the
Company to manufacture 55 inch wide films with significantly less waste
than the Company's current 24 inch films.

- Expand Sales and Marketing Capabilities. The Company currently operates
in a number of discrete but very large market segments. The Company's
existing sales and marketing efforts have traditionally been product
oriented, with less emphasis directed to the specific industries in which
the Company's customers operate. As a result, the Company's sales and
marketing activities to date have been reactive. The Company plans to
redirect its marketing strategies based on product lines, focus on
in-depth knowledge of targeted applications, provide additional training
to existing employees, increase advertising to educate the Company's
target markets about the benefits of holographic products, and hire
additional marketing personnel and sales representatives to focus on
specific product opportunities in the markets for consumer products,
packaging materials and industrial applications.

- Leverage Proprietary Technology to Expand Mastering Capabilities. The
Company's founders have been refining the proprietary microreplication
technologies and holographic manufacturing processes for nearly twenty
years and accordingly have gained significant expertise in manufacturing
high quality, durable holographic films. While the Company has in recent
years focused its resources on refining its manufacturing processes, it
has elected not to produce its own custom imagery on a large scale basis
in order to achieve greater manufacturing efficiencies. The Company
believes, however, that the increasing utilization of holographic films
will necessitate expanding the Company's mastering capabilities to
respond to its customers' needs quickly and more effectively. The Company
intends to leverage its proprietary technology and know-how to provide
custom imagery upon customer request by designing and installing a laser
laboratory and mastering facility. The Company believes these added
capabilities will enable the Company to offer higher quality holographic
imagery, reduce the Company's reliance on third party custom holographers
and provide additional flexibility for its customers.

- Increase Penetration in International Markets. International sales
constitute a significant portion of the Company's net sales, and the
Company intends to devote additional resources to expand the worldwide
marketing of its products. The Company anticipates substantial growth
opportunities in China, Europe and South America, and intends to market
its custom stock patterns and geometric pigment aggressively in those
markets through the Company's existing direct sales organization. The
Company may also enter into distribution arrangements with foreign
distributors or agents to increase its penetration of these markets.

- Acquire Complementary Products and Technologies. The Company believes
that numerous consolidation opportunities exist in the holographic
materials market which could enable the Company to increase its market
share in its target markets, enter into new markets and attain cost
efficiencies in its manufacturing operations. The Company may seek to
acquire companies with an existing presence in certain markets, which
have well developed sales and marketing capabilities (both domestically
and

31
<PAGE> 33

internationally) or which have manufacturing expertise in certain of the
manufacturing steps not currently addressed by the Company.

PRODUCTS

The Company's holographic films are used in a wide range of value added
applications in consumer products, packaging materials and industrial
applications. In general, the Company's films represent only a small percentage
of the cost of the final product, but can have a significant effect on the
product's marketability due to the visual appeal, impact and uniqueness of the
holographic material.

The Company currently sells its holographic films in five basic forms:
metallized film, metallized pressure sensitive film, permanent laminated film,
glitter or geometric pigment and non-metallized film. The Company offers these
products in 14 stock holographic patterns manufactured at widths of either 25
inches or 40 inches, primarily polyester, in a variety of gauges (thicknesses)
from .004 inch to .00024 inch. The Company is currently in the process of
developing a new microreplication machine to enable the Company to produce 55
inch wide film. The Company believes this wider material will expand the
applications for the Company's products by enabling the Company to address the
larger material requirements of the packaging market on a more efficient basis.

The Company's principal products include the following:

Metallized Film. Nearly all of the Company's holographic films are
metallized by the Company. Once the polyester film has been
microreplicated, the Company typically metallizes the film in a vacuum
chamber where aluminum is thermally evaporated onto the holographic film
providing a reflective coating on the film. Microreplicated metallized film
is the Company's core product and is typically sold to value added
resellers who either laminate the film or convert it into the final
product.

Metallized Pressure Sensitive Film. Once the holographic film is
metallized, the Company often subcontracts with a converter to laminate the
film to paper coated with a silicone release layer. The resulting pressure
sensitive material is typically used in children's stickers, prime labels
and decals and has historically represented the largest segment of the
Company's business.

Permanent Laminated Film. To create its permanent laminated films, the
Company contracts with a converter who laminates the metallized film,
generally to plastic films, paper or board stock for use in packaging
applications. The laminated film is typically used in flexible packaging,
folding cartons, signs, banners, trading cards, point of purchase displays,
folders and boxes.

Glitter or Geometric Pigment. The brightness, clarity and other
optical characteristics of the Company's holographic films are retained
when the material is cut into fine particles creating glitter and geometric
pigment. Glitter is typically cut into particles ranging in size from 1/128
inch to 1/8 inch and is used in a variety of applications including nail
polish, fabrics, hobby and craft applications, cosmetics and injection
molded parts. Geometric pigment is produced by precision cutting the
holographic film into particles 1/250 inch, 1/500 inch or smaller and is
currently used in paint, cosmetics and flooring materials to add a sparkle,
glimmer, color change and other optical effects to these products.

Nonmetallized Film. While nearly all of the Company's products are
metallized, the Company also manufactures nonmetallized holographic film in
small quantities which is typically sold to converters who have their own
metallizing capabilities or to customers who are seeking a transparent
material.

SALES AND MARKETING; PRINCIPAL CUSTOMERS

The Company sells its holographic films directly to end users, to
distributors who sell to end users, and to value added resellers, who add
conversion steps to the film and sell to distributors and end users. A large
percentage of the Company's net sales represent sales of unfinished film to
distributors and to value added resellers. The Company intends to use a portion
of the proceeds of this Offering to expand its marketing and sales capabilities
and to provide a more in depth product focus in its marketing strategies.

32
<PAGE> 34

The Company currently employs an internal sales staff of four
representatives at its Los Angeles headquarters and provides office space at
that location for an independent sales representative. The Company also has two
outside sales representatives located in Northern California and Michigan.

During 1996, the Company's customer base worldwide exceeded 1,000
customers. International sales are typically made directly and through foreign
distributors. The Company has entered into distribution arrangements with Soorim
Textile Co., Ltd. and Ying Lih Industrial Co., Ltd., pursuant to which the
Company's products are sold in Korea and Taiwan, respectively. The arrangements
are cancelable at will at any time by either party. Sales to Soorim and Ying Lih
during the year ended December 31, 1996 represented approximately 7% and 3%,
respectively of the Company net sales. See Note 2 of Notes to Financial
Statements.

During 1995, 1996 and the six months ended June 30, 1997, the Company's
three largest customers accounted for an aggregate of 24%, 17% and 30%,
respectively, of the Company's net sales. The Upper Deck Company, LLC ("Upper
Deck") accounted for more than 12% of the Company's net sales in 1994.
Labelad/Sandylion Sticker Designs, which accounted for 13%, 10% and 19%,
respectively, of the Company's net sales in 1995, 1996 and the six months ended
June 30, 1997. While Mattel typically does not directly purchase significant
quantities of the Company's products, Mattel frequently specifies the Company's
products for inclusion in the product and packaging specifications for Mattel's
products.

MANUFACTURING

Polyester is the primary raw material used in the Company's products. While
the Company also microreplicates nylon and polyvinyl chloride, approximately 95%
of all of the Company's products utilize thin polyester film in thicknesses
ranging from .004 inch to .00024 inch. Because the Company is able to
microreplicate directly into thin polyester film without altering the properties
of the film, the Company's products retain the inherent properties of the
polyester, resulting in a stronger final product which retains its existing
physical properties under extreme heat (up to 175 degrees Celsius) and can
withstand many solvents or other chemicals used in the finishing and converting
processes. The raw polyester film in the thicker gauges (.004 inch to .0005
inch) is readily available from a number of sources without any significant
qualitative differences, and the Company routinely tests material produced by
several suppliers. The Company obtains its .00024 inch polyester film from a
sole source supplier, and is currently investigating other sources of this
material.

The price the Company has paid for polyester film stock has fluctuated
significantly in recent periods due to changes in the supply and demand of
polyester products. Polyester is generally more expensive than the base
materials used by certain of the Company's competitors. There can be no
assurance that the necessary polyester film will continue to be available in the
desired thicknesses at favorable prices.

The Company's manufacturing processes consist primarily of creating image
or pattern masters and microreplicating the images and patterns onto continuous
rolls of polyester film. When the Company creates a new stock pattern or
undertakes a custom order, the Company usually subcontracts the initial custom
mastering. The Company intends to use a portion of the proceeds of this Offering
to install a laser laboratory and expand its mastering capabilities. The Company
currently creates all of the intermediate master tools which are used in the
Company's microreplication machines in lieu of the shims. The Company currently
operates four microreplication machines and is in the process of developing a
new machine that should enable the Company to manufacture 55 inch wide
holographic films. All of the Company's microreplication machines have been
custom developed by the Company and are not otherwise commercially available.

The Company purchased metallizing machines in the fourth quarter of 1995 to
enable the Company to engage in vacuum metallizing, which machines became
operational in February 1996. This equipment can metallize rolls of film up to
65 inches wide. The Company also slits, rewinds and splices rolls to satisfy
customer orders, and to enable efficient warehousing and shipping of its
products. In addition, the Company outsources certain other converting processes
such as cutting, laminating, slitting, coating, tinting and sheeting, but does
not currently provide these processes in-house. If a customer requires a
converted product, the Company typically processes the raw film, metallizes it
and then ships it to converters for additional

33
<PAGE> 35

processing. Some conversion processes are provided by a large number of
suppliers, and the Company has a wide range of choices in procuring services.
Other conversion processes such as cutting into particulate are more specialized
and only a few converters have demonstrated an ability to meet the Company's
requirements. In particular, the Company is aware of only two high quality
geometric pigment cutters in the United States who can consistently cut the
Company's films into 1/250 inch, 1/500 inch and smaller. The Company is
currently underutilizing its manufacturing capabilities and may be able to
achieve greater efficiencies by bringing more of the manufacturing steps in
house such as cutting, finishing and custom mastering capabilities.

The Company's primary output consists of continuous polyester rolls of
holographic film, although the Company also produces small quantities of other
polymer films, including nylon and polyvinyl chloride. Microreplication and the
Company's other proprietary processes are conducted in facilities which are
physically separate from the Company's administrative and warehouse facilities.

COMPETITION

Competition among holographic materials manufacturers is intense and is
characterized by changing technology and evolving standards. Competitors vary
based upon the type of materials into which they microreplicate, the quality of
the holograms, and the breadth of customization or stock patterns offered. While
the Company believes its holographic technology is unique, basic holographic
technology is well known, and there are relatively low barriers to entry into
the holographic materials market. Accordingly, the Company anticipates increased
competition from other established and emerging companies as the market for
holographic materials grows. Increased competition is likely to result in price
reductions, reduced gross margins and loss of market share, any of which could
have a material adverse effect on the Company's business, financial condition
and results of operations. Many of the Company's current and potential
competitors have significantly greater financial, technical, manufacturing,
marketing and other resources than the Company and may be able to expand the
applications for their products and capture a greater share of the holographic
materials market.

The Company also competes to a certain extent with its value added
resellers who purchase the Company's holographic films, add conversion steps to
the films and market the converted products for resale. This competition may
affect such vendors' incentive to provide quality service to the Company.

The Company also experiences competition from manufacturers of
non-holographic materials, particularly in the market for packaging materials,
pigments, fabrics and aluminum flakes. The applications for holographic
materials within such markets are small and have only recently begun to expand.
Due to the higher cost of holographic film and current size constraints, the
Company is often at a price disadvantage as compared to certain non-holographic
media. Accordingly, the Company expects to continue to encounter significant
competition from manufacturers of non-holographic materials in its markets
particularly as it seeks to expand the applications for its products.

The Company's competitors utilize different techniques to microreplicate
polyester than those employed by the Company. The Company believes that its
techniques enable it to produce films which have superior appearance and
properties when compared with those produced by the Company's competitors. The
Company believes that it has a competitive advantage where appearance
characteristics, solvent resistance and durability are critical.

PROPRIETARY RIGHTS

The Company's ability to compete effectively depends in part on its ability
to develop and maintain the proprietary aspects of its microreplication
technology. The Company believes that its proprietary processes are
significantly different from those used by competitors to produce similar
materials. To date, the Company has relied primarily upon trade secret laws and
nondisclosure agreements to protect its proprietary rights and has not sought
patent protection for any of its technologies due to the limited protection
offered by process patents. All of the Company's proprietary manufacturing
processes are conducted at a limited access facility which is separate from the
Company's administrative and warehousing facilities. The Company maintains an
extensive

34
<PAGE> 36

security system at such facility to prevent the unauthorized disclosure of its
trade secrets, and plans to institute similar security measures at its new
manufacturing facility. There can be no assurance that such trade secrets will
remain confidential, that any patents will be applied for or granted in the
future or that other intellectual property rights of the Company will provide
meaningful protection for the Company's proprietary rights. If the processes
employed by the Company become known to competitors, it is likely that they
could be used to produce materials of the quality and durability produced by the
Company. Certain of the customers of the Company could, if in possession of the
Company's trade secrets, produce the materials which are substantially
equivalent or superior products to the Company's products. There can be no
assurance that the steps taken by the Company will be adequate to deter the
misappropriation of its proprietary information and technologies, or will
prevent the assertion of an adverse claim to technology utilized by the Company,
or that the Company will be able to detect unauthorized use and take effective
steps to enforce its intellectual property rights. The Company has substantial
foreign sales, and the laws of some foreign countries into which the Company's
products are sold may not protect the Company's proprietary rights to as great
an extent as do the laws of the United States. Accordingly, effective protection
of intellectual property may be unavailable or limited in certain foreign
countries. There can be no assurance that the Company's means of protecting its
proprietary rights in the United States or abroad will be adequate, or that
competitors will not independently develop technologies that are similar or
superior to the Company's technology or duplicate the Company's technology.

The Company has previously licensed to a related entity on an exclusive
basis the use of certain aspects of its proprietary technologies with respect to
the manufacture of microreplicated films for pre-recorded and recordable digital
information. The Company currently does not anticipate that it will pursue these
applications as part of its growth strategy. See "Certain
Transactions -- FosterCo/Cyberwerks LLC Transactions."

Litigation may be necessary in the future to enforce the Company's
intellectual property rights, to determine the validity and scope of the
proprietary rights of others, or to defend the Company against claims of
infringement or invalidity by others. While the Company is not currently engaged
in any intellectual property litigation or proceedings, there can be no
assurance that it will not become so involved in the future. An adverse outcome
in such litigation or similar proceedings could subject the Company to
significant liabilities to third parties, require disputed rights to be licensed
from others or require the Company to cease marketing or using certain products,
any of which could have a material adverse effect on the Company's business,
financial condition and results of operations. If the Company is required to
obtain licenses under patents or proprietary rights of others, there can be no
assurance that any required licenses would be made available on terms acceptable
to the Company, if at all. In addition, the cost of addressing any intellectual
property litigation claim, both in legal fees and expenses and the diversion of
management's attention, regardless of whether the claim is valid, could be
significant and could have a material adverse effect on the Company's business,
financial condition and results of operations.

EMPLOYEES

At September 30, 1997, the Company employed 54 employees, including 30 in
shipping, warehousing and manufacturing, one in engineering, three in customer
service, nine in sales and marketing and eleven in finance and administration.
The Company is not a party to any collective bargaining agreement or other
similar agreement and has not experienced any work stoppages to date. The
Company believes that its relationship with its employees is good.

FACILITIES

The Company currently leases a 70,440 square foot building in Los Angeles,
California under a sublease expiring in February 1998. This building serves as
the Company's principal administrative, sales and marketing, customer support
and warehousing facility. The Company also conducts certain non-proprietary
manufacturing processes including metallizing and slitting at this facility. The
Company recently renegotiated a new lease for this space which will commence in
February 1998 upon expiration of the existing sublease. The rent under the new
lease will be $42,000 per month. While the new lease will expires in 2003, the
Company has the option to extend this lease for an additional five years
thereafter.

35
<PAGE> 37

The Company also currently leases two additional buildings on a
month-to-month basis in Los Angeles, California with a combined square footage
of approximately 7,500. These facilities house the Company's proprietary
manufacturing processes including mastering and microreplication which involve
trade secret technology. In July 1997, the Company leased an additional 17,000
square foot facility in Los Angeles pursuant to lease which expires in September
2002. The Company has the option to renew this lease for an additional five
years. The rent on this new facility is $12,750 per month. The Company intends
to relocate its proprietary manufacturing processes to this new facility within
the next six months and terminate the existing month-to-month lease on its two
smaller facilities once the relocation has been completed. The Company believes
that its facilities are sufficient to meet its needs for at least the next three
years.

LEGAL PROCEEDINGS

The Company may be involved in legal proceedings from time to time in the
ordinary course of business. As of the date of this Prospectus, there are no
material legal proceedings pending against the Company.

36
<PAGE> 38

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The following table sets forth certain information concerning the Company's
executive officers and directors as of the date of this Prospectus:

<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- -------------------------------- --- -----------------------------------------------------------
<S> <C> <C>
Michael S. Foster............... 53 Chairman of the Board and Chief Technology Officer
Terrence Conway(1)(2)........... 40 Director, President, Chief Executive Officer and Secretary
James Wanlass................... 52 Director and Vice President, Manufacturing
Michael Wanlass................. 55 Director and Vice President, Marketing
Charles M. Spear(1)(2).......... 54 Director and Chief Financial Officer
</TABLE>

- ---------------

(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.

Michael S. Foster, a co-founder of the Company, has served as its Chairman
of the Board and as a director since its inception in October 1980. Since March
1997, he has also served as the Company's Chief Technology Officer. From October
1980 to March 1997, Mr. Foster served as the Company's Vice President, Research
and Development. Since June 1995, Mr. Foster also has served as a director, the
Chief Technical Officer and the Vice President, Research and Development of
FosterCo., Inc., a development stage startup company ("FosterCo"). From June
1995 to August 1997, Mr. Foster served as the Chief Technical Officer and Vice
President, Research and Development of Cyberwerks Interactive, L.L.C., a
development stage startup company ("Cyberwerks LLC"). Mr. Foster successfully
completed in 1966 the coursework required to receive a B.S. degree in Chemistry
from the University of Utah.

Terrence Conway has served as the Company's President, Chief Executive
Officer, Secretary and as a director since January 1988. Since June 1995, Mr.
Conway also has served as a director and the President of FosterCo and as a
manager of Cyberwerks LLC. From June 1995 to August 1997, Mr. Conway served as
the President of Cyberwerks LLC. Mr. Conway received his B.B.A. degree from the
University of Michigan in 1979.

James Wanlass, a co-founder of the Company, has served as its Vice
President, Manufacturing since January 1988 and as a director since its
inception in October 1980. From October 1980 through December 1987, Mr. Wanlass
also served as the Company's President and Treasurer.

Michael Wanlass, a co-founder of the Company, has served as its Vice
President, Marketing and as a director since its inception in October 1980. From
October 1980 through December 1987, Mr. Wanlass also served as the Company's
Secretary.

Charles M. Spear joined the Company as a director in April 1997 and became
its Chief Financial Officer in October 1997. Since April 1993, Mr. Spear has
served as Chairman of the Board and Chief Executive Officer of Spear, Inc., a
privately held financial services company. From April 1995 through January 1996,
Mr. Spear served as Chief Financial Officer of Smith Micro Software, Inc., a
publicly held developer of communications software, and from July 1995 through
January 1996 he also served as a Senior Vice President and director of Smith
Micro. From April 1983 until December 1992, Mr. Spear served as Chairman of the
Board and Chief Executive Officer of Spear Financial Services, Inc., a public
company which Mr. Spear founded. Mr. Spear also is a member of the Board of
Directors of Dynatem, Inc. Mr. Spear received his B.B.A. degree from Ohio
University in 1964 and received his J.D. from Case Western Reserve University in
1968.

The Company's Certificate of Incorporation and Bylaws provide for the Board
of Directors to be divided into three classes, with each class to be as nearly
equal in number of directors as possible. At each annual meeting of
stockholders, the successors to the class of directors whose term expires at the
time are elected to hold office for a term of three years, and until their
respective successors are elected and qualified, so that the

37
<PAGE> 39

term of one class of directors expires at each such annual meeting. The terms of
office expire as follows: Mr. and Mr. , 1998; Mr. and
Mr. , 1999; and Mr. , 2000. See "Description of
Securities -- Certain Provisions of the Company's Certificate of Incorporation
and Bylaws."

The Company intends to appoint two independent directors to serve on the
Board upon the consummation of the Offering, as soon as appropriate individuals
are identified and agree to serve.

Officers are elected by, and serve at the discretion of, the Board of
Directors. James Wanlass and Michael Wanlass are brothers. There are no other
family relationships among the directors or executive officers of the Company.

BOARD COMMITTEES

The Board of Directors has an Audit Committee and a Compensation Committee.
The Audit Committee, which was established in April 1997 and is currently
comprised of Messrs. Conway and Spear, reviews the results and scope of the
audit and other services provided by the Company's independent auditors, reviews
and evaluates the Company's internal control functions, and monitors
transactions between the Company and its employees, officers and directors. The
Compensation Committee, which was established in April 1997 and is currently
comprised of Messrs. Conway and Spear, administers the Company's stock option
plan and designates compensation levels for officers and directors of the
Company.

Upon consummation of the Offering, the Company intends to establish a
Fairness Committee of the Board (comprised of two independent directors), which
will make recommendations to the Company regarding the exercise of the Company's
option to purchase the outstanding capital stock of FosterCo. See "Certain
Transactions -- FosterCo/Cyberwerks LLC Transactions." These independent
directors will also serve on the Compensation Committee and the Audit Committee.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Company's Compensation Committee currently consists of Messrs. Conway
and Spear, who are also officers and employees of the Company.

From January 1993 through December 1996, Mr. Conway made various loans to
the Company. No more than $672,115 was owing to Mr. Conway at any one time and,
as of March 31, 1997, all such loans had been repaid in full. In October 1997,
the Company declared a distribution to its existing stockholders, including
Messrs. Conway and Spear, representing all of the Company's undistributed
retained earnings through the Termination Date. Mr. Conway is a manager and
former officer of Cyberwerks LLC, a director and officer of FosterCo and a
shareholder of ComDisc Technologies, Inc., a California corporation ("ComDisc").
While Mr. Conway received a salary from both Cyberwerks LLC and FosterCo during
the past two fiscal years, he no longer receives any compensation from these
entities. The Company currently shares its facilities with Cyberwerks LLC and
has entered into licensing and other arrangements with Cyberwerks LLC, FosterCo
and ComDisc at various times. In addition, FosterCo previously loaned $25,000 to
the Company in August 1995, which amount has been repaid. See "Certain
Transactions."

In April 1996, the Company issued 30,000 shares of Common Stock to Mr.
Spear in consideration for consulting services previously rendered by him to the
Company. In October 1997, the Company granted an option to Mr. Spear for the
purchase of 7,500 shares of the Company's Common Stock under the 1997 Plan at an
exercise price of $19.25 per share. See "Certain Transactions -- Consulting
Arrangements."

No executive officer of the Company serves as a member of the board of
directors or compensation committee of any entity which has one or more
executive officers serving as a member of the Company's Board of Directors or
its Compensation Committee.

DIRECTOR COMPENSATION

The Company currently does not provide any cash compensation to its
directors but does reimburse them for certain out-of-pocket expenses incurred in
connection with attendance at board and committee meetings.

38
<PAGE> 40

Nonemployee directors will also receive stock option grants automatically under
the 1997 Plan. See "-- 1997 Stock Incentive Plan."

EXECUTIVE COMPENSATION

The following table sets forth the aggregate compensation received, for all
services rendered in all capacities to the Company, by the Chief Executive
Officer and each of the other four most highly compensated executive officers
(the "Named Executive Officers") whose salary and bonus exceeded $100,000 for
the fiscal year ended December 31, 1996. Except as indicated below, no Named
Executive Officer received other compensation in excess of the lesser of $50,000
or 10% of such officer's compensation.

<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------
NAME AND PRINCIPAL POSITIONS SALARY BONUS
-------------------------------------------------------------- -------- -------
<S> <C> <C>
Michael S. Foster............................................. $300,000 $20,000
Chairman of the Board and Chief Technology Officer
Terrence Conway............................................... 150,000(1) 10,000
President and Chief Executive Officer
James Wanlass................................................. 150,000 10,000
Vice President, Manufacturing
Michael Wanlass............................................... 150,000 10,000
Vice President, Marketing
Charles M. Spear(2)........................................... -- --
Chief Financial Officer
</TABLE>

- ---------------

(1) Includes $60,000 earned by Mr. Conway in the fiscal year ended December 31,
1996 but paid in March 1997.

(2) Mr. Spear became the Chief Financial Officer of the Company in October 1997.
In October 1997, the Company granted an option to Mr. Spear for the purchase
of up to 7,500 shares of the Company's Common Stock at an exercise price
equal to $19.25 per share. Such options vest in five equal annual
installments beginning in April 1998.

The Company currently has no employment contracts with any of the Named
Executive Officers. As described below under "-- 1997 Stock Incentive Plan,"
under certain circumstances, the exercisability of options granted to the Named
Executive Officers may be accelerated.

1997 STOCK INCENTIVE PLAN

The Company's 1997 Stock Incentive Plan (the "1997 Plan") became effective
on April 1, 1997 upon adoption by the Board of Directors and approval by the
stockholders of the Company. A total of 303,000 shares of Common Stock have been
reserved for issuance under the 1997 Plan. In no event may any one participant
in the 1997 Plan receive option grants or direct stock issuances for more than
60,000 shares in any given calendar year.

The 1997 Plan is divided into three separate components: the Discretionary
Option Grant Program, the Stock Issuance Program and the Automatic Option Grant
Program. Under the Discretionary Option Grant Program, eligible individuals in
the employ or service or the Company or any parent or subsidiary of the Company
(including employees, officers, nonemployee directors, consultants and other
independent advisors thereof) may, in the discretion of the Plan Administrator,
be granted options to purchase shares of Common Stock at an exercise price not
less than the fair market value of those shares on the grant date. Under the
Stock Issuance Program, the same individuals may, in the discretion of the Plan
Administrator, be issued shares of Common Stock directly, through the purchase
of such shares at a price not less than fair market value of those shares at the
time of issuance, or as a bonus awarded for services rendered to the Company or
any parent or subsidiary of the Company. Lastly, under the Automatic Option
Grant Program, option grants will automatically be made at periodic intervals to
eligible nonemployee directors, which options will enable such directors to
purchase shares of Common Stock at an exercise price equal to 100% of the fair
market value

39
<PAGE> 41

of those shares on the grant date. Eligibility in the Automatic Option Grant
Program shall be limited to those individuals: (i) serving as nonemployee
directors on the date on which the Underwriting Agreement in connection with
this Offering is executed and the Common Stock offered hereby is priced (the
"Underwriting Date") (provided that no initial option will be granted on such
date to any director who has previously received a stock option grant from the
Company in connection with his or her Board service), (ii) who first become
non-employee directors at any time after the Underwriting Date, whether through
appointment by the Board or election by the Company's stockholders (provided
that no such person previously in the employ of the Company or any parent or
subsidiary of the Company shall receive an initial option grant), and (iii) who
serve as non-employee directors at one or more annual meetings of the Company's
stockholders held after the Underwriting Date (provided that no such person who
has not served as a nonemployee director for at least six months shall receive
an option grant in connection with their service at any such meeting).

The Discretionary Option Grant Program and the Stock Issuance Program will
be administered by the Company's Compensation Committee. The Compensation
Committee as Plan Administrator will have complete discretion to determine which
eligible individuals are to receive option grants or stock issuances, the time
or times when such option grants or stock issuances are to be made, the number
of shares subject to each such grant or issuance, the status of any granted
option as either an incentive stock option or a nonqualified stock option, the
vesting schedule to be in effect for the option grant or stock issuance, and the
maximum term for which any granted option is to remain outstanding. The
administration of the Automatic Option Grant Program will be self executing in
accordance with the express provisions of that program.

The exercise price of options granted under the 1997 Plan may be paid in
cash or in shares of Common Stock valued at fair market value on the exercise
date. The option may also be exercised through a same day sale program that
would enable an optionee to exercise without any cash outlay. In addition, the
Plan Administrator may provide financial assistance to one or more individuals
in their acquisition of shares of Common Stock through option exercises or
direct issuances by allowing such individuals to deliver a full recourse,
interest bearing promissory note in payment of the applicable exercise or issue
price (as well as any associated withholding taxes incurred in connection with
their acquisition of those shares).

In the event that the Company is acquired by merger or the purchase of more
than 50% of the Company's outstanding voting securities, or in the event that
the Company sells substantially all of its assets, the exercisability of each
outstanding option under the Discretionary Option Grant Program which is not to
be assumed by the successor corporation or otherwise to continue in effect or to
be replaced with a cash incentive program of the successor corporation will
automatically accelerate in full, and all unvested shares then outstanding under
the Stock Issuance Program will immediately vest, except to the extent the
Company's repurchase rights with respect to those shares are to be assigned to
the successor corporation or such accelerated vesting is precluded by other
limitations imposed under the Stock Issuance Program. The Plan Administrator
will have the authority under the Discretionary Option Grant and Stock Issuance
Programs to grant options and to structure repurchase rights so that the shares
subject to those options or repurchase rights will automatically vest in the
event the individual's service is terminated, whether involuntarily or through a
resignation for good reason, within a designated period (not to exceed eighteen
(18) months) following (i) an acquisition in which those options are assumed or
replaced or those repurchase rights are assigned or (ii) a hostile change in
control of the Company effected by a successful tender offer for more than 50%
of the Company's outstanding voting stock or by proxy contest for the election
of directors.

Stock appreciation rights are authorized for issuance under the
Discretionary Option Grant Program which provide the holders with the election
to surrender their outstanding options for an appreciation distribution from the
Company equal to the excess of (i) the fair market value of the vested shares of
Common Stock subject to the surrendered option over (ii) the aggregate exercise
price payable for such shares. Such appreciation distribution may be made in
cash or in shares of Common Stock.

Under the 1997 Plan, the Plan Administrator has the authority to effect the
cancellation of options outstanding under the Discretionary Option Grant Program
in return for the grant of new options for the same or different number of
option shares with an exercise price per share equal to the fair market value of
the Common Stock on the new grant date.

40
<PAGE> 42

Under the Automatic Option Grant Program, each individual who first joins
the Board after the effective date of this Offering as a nonemployee director
will receive an option grant for 5,100 shares of Common Stock at the time of his
or her commencement of Board service, provided such individual has not otherwise
been in the prior employ of the Company or any parent or subsidiary of the
Company. In addition, at each annual meeting of the Company's stockholders,
beginning with the first annual meeting held after the effective date of this
Offering, each individual who is to continue to serve as a nonemployee director
will receive an option grant to purchase an additional 2,400 shares of Common
Stock provided such individual has served as a nonemployee director for at least
six months.

Each grant of options made pursuant to the Automatic Option Grant Program
will have a maximum term of ten years, subject to earlier termination following
the optionee's cessation of service as a non-employee director. The options to
purchase 5,100 shares of Common Stock that may be granted to any individual who
first joins the Board as a nonemployee director after the effective date of this
Offering will vest and become exercisable in four equal annual installments over
the four year period commencing on the grant date. Any of the annual option
grants to purchase 2,400 shares of Common Stock will vest and become exercisable
in full on the one year anniversary of the grant date, assuming that the
nonemployee director who receives such option has continued to serve as a
director at all times during such period. Notwithstanding the foregoing, all
options granted pursuant to the Automatic Option Grant Program will become
immediately exercisable in full upon (i) certain changes in the ownership or
control of the Company, or (ii) the death or disability of the optionee if it
occurs while such optionee is serving as a nonemployee director.

The Board may amend or modify the 1997 Plan at any time. The 1997 Plan will
terminate on the earlier of (i) March 31, 2007, (ii) the date on which all
shares available for issuance under the 1997 Plan shall have been issued as
fully-vested shares or (iii) the termination of all outstanding options in
connection with a merger or consolidation in which securities possessing more
than 50% of the total combined voting power of the Company's outstanding
securities are transferred to a person or persons different from the persons
holding those securities immediately prior to such transaction or the sale,
transfer or other disposition of all or substantially all of the Company's
assets in complete liquidation or dissolution of the Company.

As of October 21, 1997, the Board had granted to certain employees of the
Company options to purchase an aggregate of 91,500 shares of Common Stock
pursuant to the 1997 Plan. The options vest in four equal annual installments
commencing on the grant date and have a weighted average exercise price of
$16.73 per share. Such exercise price was equal to the fair market value of the
Common Stock on the grant date, as determined by the Board. As of October 21,
1997, no other options had been granted under the Discretionary Option Grant
Program, no options had been granted under the Automatic Option Grant Program,
and no shares of Common Stock had been purchased or awarded pursuant to the
terms of the Stock Issuance Program.

KEY MAN LIFE INSURANCE

The Company currently maintains life insurance policies, under which the
Company is the sole beneficiary, in the amount of $5.0 million on the life of
Mr. Foster and $1.0 million on the life of Mr. Conway.

INDEMNIFICATION OF DIRECTORS AND OFFICERS

Under Section 145 of the Delaware General Corporation Law (the "DGCL"), the
Company can indemnify its directors and officers against liabilities they may
incur in such capacities, including liabilities under the Securities Act. The
Company's Bylaws provide that the Company will indemnify its directors and
officers to the fullest extent permitted by law and require the Company to
advance litigation expenses upon receipt by the Company of an undertaking by the
director or officer to repay such advances if it is ultimately determined that
the director or officer is not entitled to indemnification. The Bylaws further
provide that rights conferred under such Bylaws do not exclude any other right
such persons may have or acquire under any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise.

The Company's Certificate of Incorporation provides that, pursuant to the
DGCL, the Company's directors shall not be liable for monetary damages for
breach of such directors' fiduciary duty of care to the

41
<PAGE> 43

Company and its stockholders. This provision in the Certificate of Incorporation
does not eliminate the duty of care, and in appropriate circumstances equitable
remedies such as injunctive or other forms of non-monetary relief will remain
available under the DGCL. In addition, each director will continue to be subject
to liability for breach of the director's duty of loyalty to the Company or its
stockholders, for acts or omissions not in good faith or involving intentional
misconduct or knowing violations of law, for actions leading to improper
personal benefit to the director, and for payment of dividends or approval of
stock repurchases or redemptions that are unlawful under the DGCL. The provision
also does not affect a director's responsibilities under any other law, such as
the federal or state securities laws environmental laws.

The Company intends to enter into agreements to indemnify its directors in
addition to the indemnification provided for in the Company's Certificate of
Incorporation and Bylaws. These agreements, among other things, will indemnify
the Company's directors for certain expenses (including attorneys' fees),
judgments, fines and settlement amounts incurred by such person in any action or
proceeding, including any action by or in the right of the Company, on account
of services as a director or officer of the Company, or as a director or officer
of any other company or enterprise to which the person provides services at the
request of the Company. The Company also intends to purchase liability insurance
covering its directors and officers.

There is no pending or overtly threatened litigation or proceeding
involving a director, officer, employee or other agent of the Company as to
which indemnification is being sought, nor is the Company aware of any pending
or overtly threatened litigation that may result in claims for indemnification
by any director, officer, employee or other agent.

42
<PAGE> 44

CERTAIN TRANSACTIONS

FOSTERCO/CYBERWERKS LLC TRANSACTIONS

To date, the Company has focused its microreplication technology primarily
on holographic film applications. In the early 1980s, Messrs. Conway, Foster, J.
Wanlass and M. Wanlass and a thirty party created a separate business, ComDisc,
to pursue applications of microreplication technology for the development and
production of products incorporating pre-recorded digital information such as
CD-ROMs (the "Information Storage Technology"). In 1985, Mr. Foster granted an
exclusive license to ComDisc for the Information Storage Technology. At that
time, 87% of the outstanding Common Stock of ComDisc was owned by Messrs.
Conway, Foster, J. Wanlass and M. Wanlass and the balance was owned by two third
parties. ComDisc actively pursued the development of Information Storage
Technology through 1988 and then became inactive.

In 1995, Messrs. Foster and Conway created a separate business, FosterCo,
which is owned 50% by Mr. Conway and 50% by Mr. Foster. In May 1995, the Company
(to the extent it had any rights to the Information Storage Technology) and
ComDisc granted perpetual exclusive licenses to the Information Storage
Technology to FosterCo. In consideration for the Company's license to FosterCo,
FosterCo agreed to pay the Company, for a period of ten years following the date
of its agreement, a 5% royalty based on the amount of thin film microreplicated
with pre-recorded digital information that was sold by FosterCo during such
period. All royalty payments under the Company's license accrue, but are not due
and payable, until cumulative sales revenue of $20 million is achieved by
Cyberwerks LLC, a joint venture owned 50% by FosterCo and 50% by Upper Deck, and
to whom FosterCo has agreed to supply such thin film. No royalty payments have
accrued to date.

In June 1995, FosterCo granted an exclusive license to the Information
Storage Technology to Cyberwerks LLC for certain commercial applications. In
connection with this license and the Cyberwerks LLC joint venture, FosterCo
agreed to transfer to Cyberwerks LLC, upon Cyberwerks LLC's achievement of
revenues of $50 million or more in any 12-month period, the equipment used in
the manufacture of certain Information Storage Technology products and
FosterCo's interest in the facility used in or intended for the manufacture of
such products. Messrs. Conway and Richard McWilliam, the Chairman of the Board
of Upper Deck, are currently the managers of Cyberwerks LLC. In addition, from
the date of its formation until August 1997, Mr. Foster served as Cyberwerks
LLC's Chief Technical Officer and Mr. Conway served as its President. Both of
Messrs. Foster and Conway have resigned as employees and officers of Cyberwerks
LLC.

In October 1997, Mr. Foster, the inventor and developer of the Company's
microreplication technology, assigned all of his rights in that technology to
the Company, other than for use in Information Storage Technology.

Messrs. Conway and Foster are also officers and directors of FosterCo. Mr.
Conway received compensation from FosterCo in the amount of approximately
$59,000 and $18,000 during the year ended December 31, 1996 and the period ended
July 31, 1997, respectively. Mr. Foster received compensation from FosterCo in
the amount of approximately $96,000 and $30,000 during the year ended December
31, 1996 and the period ended July 31, 1997, respectively.

Mr. Conway received compensation from Cyberwerks LLC in the amount of
approximately $35,481, $75,000 and $51,923 during the years ended December 31,
1995 and 1996 and the period ended July 31, 1997, respectively. Mr. Foster
received compensation from Cyberwerks LLC in the amount of approximately
$59,000, $125,000 and $87,000 during the years ended December 31, 1995 and 1996
and the period ended July 31, 1997, respectively.

Neither of Messrs. Conway and Foster will receive any compensation from
Cyberwerks or FosterCo in the future.

Since August 1995, Cyberwerks LLC has subleased space at two of the
Company's facilities. Currently, Cyberwerks LLC subleases approximately 16% of
the square footage at both the Company's corporate headquarters and at its
manufacturing facilities. In consideration for the usage of such space,
Cyberwerks LLC has paid the Company an amount equal to a pro rata portion of the
Company's rent and overhead for each of those facilities. Cyberwerks LLC has
also relied on the Company to provide certain personnel,

43
<PAGE> 45

administrative and management services and has compensated the Company in an
amount equal to a pro rata portion of the salaries and expenses of the Company
personnel whose services Cyberwerks LLC has used. The aggregate amount paid by
Cyberwerks LLC to the Company for rent, overhead and salary reimbursement in
1995 and 1996 for the six months ended June 30, 1997 was approximately $50,000,
$329,000 and $205,000, respectively. The Company believes that it has been
compensated for both the usage of its space and its personnel on terms no less
favorable than it would have received in transactions with independent third
parties.

In October 1997, Messrs. Conway and Foster granted an option (the "FosterCo
Option") to the Company to purchase all the outstanding capital stock of
FosterCo from Messrs. Foster and Conway at an exercise price equal to the
greater of $5.0 million or 50% of the fair market value of FosterCo's
outstanding capital stock as of the date of exercise. The FosterCo Option is
exercisable during the 12-month period beginning October 1, 2002, but will
become exercisable immediately in the event Cyberwerks LLC files a registration
statement on Form S-1 with the Securities and Exchange Commission to register
shares of its Common Stock. The FosterCo Option is exercisable in cash, stock of
the Company or a combination thereof, at the discretion of the Fairness
Committee of the Board of Directors of the Corporation, which will be comprised
of the Company's two independent directors. In connection with any exercise of
the option, FosterCo's capital stock shall be valued by mutual agreement of the
Messrs. Foster and Conway and the Fairness Committee or, in the event the
parties cannot agree on a valuation, by independent appraisal. The Company's
decision to exercise the FosterCo Option must be approved by the Fairness
Committee. See "Management -- Board Committees."

FINANCING TRANSACTIONS

From January 1993 through December 1996, Mr. Conway, the Company's
President and Chief Executive Officer, made various loans to the Company for
working capital and unreimbursed expenses pursuant to nine short-term promissory
notes bearing interest ranging from 7.0% to 9.5% per annum. No more than
$672,115 was owing to Mr. Conway at any one time. As of March 31, 1997, all such
loans had been repaid in full. In December 1993, Mr. Foster, the Company's
Chairman of the Board and Chief Technical Officer, loaned the Company $40,000
for working capital purposes pursuant to a short-term promissory note bearing
interest at a rate of 7.0% per annum. This loan was repaid in full by December
1994. In August 1995, Mr. Foster loaned the Company $75,000 for working capital
purposes pursuant to a short-term promissory note bearing interest at a rate of
11.0% per annum. This loan was repaid in full by October 1995.

In August 1995, FosterCo loaned the Company $25,000 for working capital
purposes pursuant to a short-term promissory notes bearing interest at a rate of
9.75% per annum. This loan was repaid in full by December 1996.

In March 1997, the Company obtained a revolving $3.5 million line of credit
from Citibank, FSB, which is guaranteed personally by Messrs. Foster, Conway, J.
Wanlass and M. Wanlass for all amounts borrowed thereunder.

S CORPORATION DISTRIBUTION

In October 1997, the Company declared a distribution to its existing
stockholders, Messrs. Conway, Foster, Spear, J. Wanlass and M. Wanlass,
consisting of the Stockholder Notes in the aggregate principal amount equal to
the Company's undistributed retained earnings from January 1, 1997 through the
Termination Date (approximately $3.0 million as of September 30, 1997). The
Stockholder Notes bear interest at the rate of 5.5% per annum and are due and
payable on April 1, 1998. The Company intends to use a portion of the proceeds
of the Offering to repay the Stockholder Notes upon consummation of this
Offering. See "Prior S Corporation Status," "Use of Proceeds" and Note 1 to
Notes to Financial Statements.

CONSULTING ARRANGEMENTS

In April 1996, the Company issued 30,000 shares of Common Stock to Mr.
Charles M. Spear, a director of the Company, in consideration for consulting
services previously rendered by him to the Company.

44
<PAGE> 46

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of September 30, 1997, and
as adjusted to reflect the sale of the shares of Common Stock offered hereby, by
(i) each person or entity who beneficially owns more than 5% of the Company's
Common Stock, (ii) each of the Selling Stockholders, (iii) each Named Executive
Officer, (iv) each director of the Company, and (v) all directors and executive
officers of the Company as a group.

<TABLE>
<CAPTION>
BENEFICIAL
OWNERSHIP
PRIOR TO BENEFICIAL OWNERSHIP
OFFERING(1) AFTER OFFERING(1)
------------------- NUMBER OF ---------------------
NUMBER OF SHARES BEING NUMBER OF
NAME AND ADDRESS(2) SHARES PERCENT OFFERED SHARES PERCENT
- ------------------------------------------- --------- ------- ------------ --------- ---------
<S> <C> <C> <C> <C> <C>
Michael Foster............................. 1,200,000 39.8%
Terrence Conway............................ 600,000 19.9
James Wanlass.............................. 591,237 19.6
Michael Wanlass............................ 591,237 19.6
Charles M. Spear........................... 29,561 1.0
All directors and executive officers as a
group (5 persons)........................ 3,012,035 100%
</TABLE>

- ---------------

(1) Beneficial ownership is based on 3,012,035 shares of Common Stock
outstanding as of September 30, 1997 and shares of Common Stock outstanding
after completion of the Offering.

(2) The address for Messrs. Foster, Conway, J. Wanlass, M. Wanlass and Spear is
5405 Jandy Place, Los Angeles, California 90066. The persons named in the
table have sole voting and sole investment power with respect to all shares
of Common Stock shown as beneficially owned by them, subject to community
property laws where applicable.

45
<PAGE> 47

DESCRIPTION OF SECURITIES

Upon consummation of the Offering and the reincorporation of the Company in
the State of Delaware, the authorized capital stock of the Company will consist
of 20,000,000 shares of Common Stock, $.0001 par value per share, and 5,000,000
shares of Preferred Stock, $.0001 par value per share. No shares of Preferred
Stock are currently issued and outstanding. The following summary description of
the capital stock of the Company (i) assumes the reincorporation of the Company
in the State of Delaware immediately prior to the consummation of the Offering,
and (ii) does not purport to be complete and is qualified in its entirety by
reference to the Company's Certificate of Incorporation (the "Certificate") and
Bylaws, which are incorporated by reference as exhibits to the Registration
Statement of which this Prospectus is a part, and by the provisions of
applicable law.

COMMON STOCK

As of September 30, 1997, there were 3,012,035 shares of Common Stock
issued and outstanding held of record by five stockholders. The holders of
Common Stock are entitled to one vote for each share held of record on all
matters to be voted on by the stockholders. The holders of Common Stock are
entitled to receive ratable dividends, when, as and if declared by the Board of
Directors from funds legally available therefor, subject to the dividend
preferences of the holders of Preferred Stock, if any. In the event of a
liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to share ratably in all assets remaining available for
distribution to them after payment of liabilities and after provision is made
for each series of Preferred Stock, if any, having preference over the Common
Stock. Holders of Common Stock have no preemptive rights, no cumulative voting
rights and no rights to convert their Common Stock into any other securities.
The rights, preferences and privileges of holders of Common Stock are subject
to, and may be adversely affected by, the rights of any series of Preferred
Stock which the Company may issue in the future. There are no redemption or
sinking fund provisions applicable to the Common Stock. All outstanding shares
of Common Stock are, and all shares of Common Stock to be outstanding upon
completion of this Offering will be, fully paid and nonassessable.

PREFERRED STOCK

The Board of Directors is authorized, without any further vote or action by
the Company's stockholders, to issue up to 5,000,000 shares of Preferred Stock,
in one or more series and to fix the rights, preferences, privileges and
restrictions thereof, including dividend rights, conversion rights, voting
rights, terms of redemption, liquidation preferences, sinking fund terms and the
number of shares constituting any series or the designation of such series. The
issuance of Preferred Stock could adversely affect, among other things, the
rights of existing stockholders or could delay or prevent a change in control of
the Company without further action by the stockholders. The issuance of
Preferred Stock could decrease the amount of earnings and assets available for
distribution to holders of Common Stock, and the satisfaction of any dividend
preferences of any outstanding Preferred Stock would reduce the amount of funds
available for the payment of dividends on Common Stock. Holders of Preferred
Stock may be entitled to receive a preference payment in the event of any
liquidation, dissolution or winding up of the Company before any payment is made
to the holders of Common Stock. The issuance of Preferred Stock by the Board of
Directors could also have the effect of making it more difficult for a third
party to acquire a majority of the outstanding voting stock of the Company,
thereby delaying, discouraging or preventing a change in control of the Company.
The Company has no present plans to issue any shares of Preferred Stock.

DELAWARE LAW

Following the consummation of the Offering, the Company will be subject to
the provisions of Section 203 of the Delaware General Corporation Law, an
anti-takeover law. In general, the statute prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date that the person became
an interested stockholder unless (with certain exceptions) the business
combination or the transaction in which the person became an interested
stockholder is approved in a prescribed manner. Generally, a "business
combination" includes a

46
<PAGE> 48

merger, asset or stock sale, or other transaction resulting in a financial
benefit to the stockholder. Generally, an "interested stockholder" is a person
who, together with affiliates and associates, owns (or within three years prior,
did own) 15% or more of a corporation's outstanding voting stock. This provision
may have the effect of discouraging, delaying or preventing a change in control
of the Company without further action by the stockholders.

CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS

Provisions of the Company's Certificate and Bylaws may make more difficult
the acquisition of control of the Company by various means, such as a tender
offer, open market purchases not approved by the Company's Board of Directors, a
proxy contest or otherwise and could thereby deprive the stockholders of
opportunities to realize a premium on their Common Stock. In addition, they may
adversely affect the prevailing market price of the stock. These provisions are
intended to enhance the likelihood of continuity and stability in the
composition of the Board of Directors of the Company and in the policies
formulated by the Board of Directors and to discourage certain types of
transactions, described below, which may involve an actual or threatened change
in control of the Company. The provisions are also intended to discourage
certain tactics that may be used in proxy fights. These provisions also
encourage persons seeking to acquire control of the Company to consult first
with the Company's Board of Directors to negotiate the terms of any proposed
business combination or offer. The provisions are designed to reduce the
vulnerability of the Company to an unsolicited proposal for a takeover that does
not contemplate the acquisition of all outstanding shares of the Company or that
is otherwise unfair to stockholders of the Company. The Board of Directors
believes that, as a general rule, such takeover proposals would not be in the
best interests of the Company and its stockholders. See "Risk
Factors -- Potential Anti-Takeover Effects of Certificate of Incorporation,
Bylaws and Delaware Law; Effect of Unissued Preferred Stock."

Directors; Classified Board; Removal; Filling Vacancies and Amendment. The
Certificate provides that the number of directors will be fixed from time to
time by resolution adopted by a majority of the directors then in office, but
shall not consist of less than five, nor more than nine, directors. The
Certificate provides for the Board of Directors to be divided into three
classes, with each class to be as nearly equal in number of directors as
possible. Further, subject to the rights of the holders of any series of
Preferred Stock then outstanding, the Certificate authorizes only the Board of
Directors to fill vacancies, including newly created directorships. Accordingly,
this provision could prevent a stockholder from obtaining majority
representation on the Board of Directors by enlarging the Board of Directors and
filling the new directorships with its own nominees. The Certificate also
provides that directors of the Company may be removed by stockholders only for
cause and only by the affirmative vote of holders of two-thirds of the
outstanding shares of voting stock.

Special Stockholder Meetings. The Certificate provides that special
meetings of the stockholders, for any purpose or purposes, unless required by
law, shall be called by the President or Secretary pursuant to a request in
writing of the President, a majority of the entire Board of Directors or
stockholders owning not less than 40% of the entire voting stock of the Company
then issued and outstanding. A special meeting may not be held absent such a
written request. The request shall state the purpose or purposes of the proposed
meeting. Such limitation on the right of stockholders to call a special meeting
could make it more difficult for stockholders to initiate action that is opposed
by the Board of Directors. Such action on the part of stockholders could include
the removal of an incumbent director, the election of a stockholder nominee as a
director or the implementation of a rule requiring stockholder ratification of
specific defensive strategies that have been adopted by the Board of Directors
with respect to unsolicited takeover bids. The limited ability of the
stockholders to call a special meeting of stockholders may make it more
difficult to change the existing Board of Directors and management.

Advance Notice Requirements for Stockholder Proposals and Director
Nominations. The Certificate establishes an advance notice procedure for the
nomination, other than by or at the discretion of the Board of Directors or a
committee thereof, of candidates for election as directors as well as for other
stockholder proposals to be considered at special or annual stockholders'
meetings. Notice of stockholder proposals and director nominations must be
timely given in writing to the Secretary of the Company prior to the meeting at
which the matters are to be acted upon or the directors are to be elected. To be
timely, notice must be received

47
<PAGE> 49

in general at the principal offices of the Company not less than 60 days nor
more than 90 days prior to the meeting of stockholders. The purpose of requiring
advance notice is to afford the Board of Directors an opportunity to consider
the qualifications of the proposed nominees or the merits of other stockholder
proposals and, to the extent deemed necessary or desirable by the Board of
Directors, to inform stockholders about those matters.

Amendment of Certain Provisions of the Certificate. The Certificate
generally requires the affirmative vote of the holders of at least two-thirds of
the outstanding voting stock in order to amend any provisions of the Certificate
concerning (i) the removal or appointment of directors, (ii) the authority of
stockholders to act by written consent, (iii) the required vote to amend the
Certificate, (iv) calling a special meeting of stockholders, (v) the procedure
and content of stockholder proposals concerning business to be conducted at a
meeting of stockholders, and (vi) director nominations by stockholders. These
voting requirements will make it more difficult for minority stockholders to
make changes in the Certificate that could be designed to facilitate the
exercise of control over the Company. On the other hand, the requirement for
approval by at least a two-thirds stockholder vote will enable the holders of a
minority of the voting stock of the Company to prevent the holders of a majority
or more of such securities from amending such provisions of the Certificate.
Following the completion of the Offering, the Company's present directors and
executive officers and their respective affiliates will beneficially own
approximately % of the outstanding Common Stock, giving them veto power with
respect to any stockholder action or approval requiring a two-thirds vote.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Company's Common Stock is U.S.
Stock Transfer Corporation.

48
<PAGE> 50

SHARES ELIGIBLE FOR FUTURE SALE

Upon consummation of the Offering, the Company will have shares of
Common Stock outstanding ( if the Underwriters' over-allotment option is
exercised in full). All of the shares sold in this Offering will be freely
tradeable without restriction or registration under the Securities Act, except
for any shares held by an "affiliate" of the Company as defined in the
Securities Act (in general, a person who has a control relationship with the
Company). All of the remaining 3,012,035 shares are deemed to be "restricted
securities" as that term is defined in Rule 144 promulgated under the Securities
Act ("Restricted Shares"). Restricted Shares may not be sold unless they are
registered under the Securities Act or are sold pursuant to an applicable
exemption from registration, including an exemption under Rule 144 or Rule 144A.
Upon completion of the Offering, the resale of all of such remaining shares will
be exempt from registration pursuant to Rule 144, subject to the volume
limitations, lock-up prohibitions and certain other restrictions discussed
below.

In general, under Rule 144 as currently in effect, a person (or persons
whose shares are required to be aggregated) who has beneficially owned for at
least one year (including the holding period of any immediate prior owner,
except an affiliate) shares of Common Stock that have not been registered under
the Securities Act or that were acquired from an "affiliate" of the Company (in
a transaction or chain of transactions not involving a public offering) is
entitled to sell in broker's transactions or to market makers, within any three
month period commencing 90 days after the date of effectiveness of the
Registration Statement of which this Prospectus is a part, a number of shares of
Common Stock which does not exceed the greater of (i) 1% of the number of shares
of Common Stock then outstanding (approximately shares immediately
after this Offering, assuming the Underwriters do not exercise the
over-allotment option), or (ii) the average weekly trading volume of the Common
Stock during the four calendar weeks preceding the sale. Sales under Rule 144
are generally subject to certain manner of sale provisions and notice
requirements and to the availability of current public information about the
Company. Under Rule 144(k), a person who is not deemed to have been an affiliate
of the Company at any time during a 90 day period preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years
(including the holding period of any immediate prior owner, except an affiliate)
is entitled to sell such shares without having to comply with the manner of
sale, public information, volume limitation or notice provisions of Rule 144.

The Commission has recently proposed revisions to the holding periods and
volume limitations contained in Rule 144. The adoption of amendments effecting
such proposed revisions may result in resales of restricted securities sooner
than would be the case under Rules 144 and 144(k) as currently amended and in
effect. There can, however, be no assurance of when, if ever, such amendments
will be proposed or adopted.

The Company and its directors and executive officers have agreed that for a
period of 180 days from the date of this Prospectus that they will not, without
the prior written consent of EVEREN Securities, Inc., directly or indirectly
offer for sale, sell, contract to sell or otherwise dispose of any shares of
Common Stock or any securities convertible into or exercisable or exchangeable
for shares of Common Stock, subject to certain exceptions.

The Company intends to register, on or before March 31, 1998, the 303,000
shares of Common Stock that are reserved for issuance under the 1997 Plan. As of
October 21, 1997, options to purchase 91,500 shares were outstanding thereunder.
Once registered, shares issued upon exercise of options will be generally
eligible for immediate resale in the public market, subject to vesting under the
applicable option agreements.

The Company is unable to estimate the number of shares of the Company's
Common Stock that will be sold under Rule 144 or under the planned registration
statement since such sales will depend in part on the market price for the
Common Stock, the personal circumstances of the sellers and other factors not
susceptible of being known in advance.

Prior to this Offering, there has been no public market for the Common
Stock, and any sale of substantial amounts of restricted shares in the open
market, or the availability of such shares for sale, could adversely affect the
market price of the Common Stock offered hereby.

49
<PAGE> 51

UNDERWRITING

Subject to the terms and conditions contained in the Underwriting
Agreement, the syndicate of underwriters named below (the "Underwriters"), for
whom EVEREN Securities, Inc. is acting as Representative (the "Representative"),
have severally agreed, to purchase from the Company and the Selling
Stockholders, and the Company and the Selling Stockholders have agreed to sell,
the respective number of shares of Common Stock set forth opposite the names of
such Underwriters below:

<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
-------------------------------------------------------------------------- ----------
<S> <C>
EVEREN Securities, Inc....................................................

---------
Total...........................................................
=========
</TABLE>

The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase and accept delivery of the shares of Common Stock
offered hereby are subject to approval of certain legal matters by their counsel
and to certain other conditions. The Underwriters are obligated to purchase all
of the shares of Common Stock offered hereby (other than the shares of Common
Stock covered by the over-allotment option described below) if any are
purchased.

The Company and the Selling Stockholders have been advised by the
Underwriters that they propose to offer the Common Stock to the public initially
at the price set forth on the cover page of this Prospectus and to certain
dealers (who may include the Underwriters) at such price, less a concession not
in excess of $ per share of Common Stock. The Underwriters may allow, and
such dealers may reallow, a concession not in excess of $ per share of
Common Stock to certain other dealers. After the initial public Offering, the
price to the public, the concession and the discount to dealers may be changed.
The Representative has informed the Company that the Underwriters do not intend
to confirm sales to accounts over which they exercise discretionary authority.

The Offering of the Common Stock is made for delivery when, as and if
accepted by the Underwriters and subject to prior sale and to withdrawal,
cancellation or modification of the offer without notice. The Underwriters
reserve the right to reject any order for the purchase of the Common Stock.

The Company and the Selling Stockholders have granted to the Underwriters
an option, exercisable for 30 days after the date of this Prospectus, to
purchase up to an aggregate of additional shares of Common Stock at the
initial price to public, less the underwriting discounts and commissions, solely
to cover over-allotments. To the extent that the Underwriters exercise such
option, each Underwriter may be committed, subject to certain conditions, to
purchase a number of additional shares of Common Stock proportionate to such
Underwriter's initial commitment pursuant to the Underwriting Agreement.

In the Underwriting Agreement, the Company, the Selling Stockholders and
the Underwriters have agreed to indemnify each other against certain
liabilities, including liabilities under the Securities Act.

The initial price to the public for the Common Stock offered hereby was
determined by negotiation between the Company and the Representative. The
factors considered in determining the initial price to the public included the
history of and the prospects for the industry in which the Company competes, the
ability of the Company's management, the past and present operations of the
Company, the historical results of operations of the Company, the prospects for
future earnings of the Company, the general condition of the securities markets
at the time of this Offering and the recent market prices of securities of
generally comparable companies.

50
<PAGE> 52

Prior to this Offering, there has been no established trading market for
the Common Stock. There can be no assurance as to the liquidity of any market
that may develop for the Common Stock or the ability of holders to sell their
Common Stock; nor can there by any assurance that the price at which holders are
able to sell their Common Stock will not be lower than the price at which the
Common Stock is sold to the public by the Underwriters.

Subject to certain exceptions, the Company, the executive officers and
directors of the Company (which include the Selling Stockholders) each have
agreed that they will not, without the prior written consent of EVEREN
Securities, Inc., offer, sell, contract to sell, grant any option to purchase or
otherwise dispose of any shares of Common Stock or any securities convertible
into or exercisable or exchangeable for such Common Stock or in any other manner
transfer all or a portion of the economic consequences associated with the
ownership of any such Common Stock for a period of 180 days from the date of
this Prospectus.

In connection with the Offering, the Representative and certain
Underwriters and selling group members and their respective affiliates may, in
accordance with Regulation M under the Securities Act of 1934 (the "Exchange
Act"), engage in over-allotment, stabilizing transactions, syndicate covering
transactions, penalty bids and other transactions that stabilize, maintain or
otherwise affect the market price for the Common Stock. Over-allotment involves
syndicate sales in excess of the offering size, which creates a syndicate short
position, in which case the Underwriters may engage in a syndicate covering
transaction or may exercise the Underwriters' over-allotment option described
above. Syndicate covering transactions involve the purchase of Common Stock in
the open market following completion of the offering to cover all or a portion
of a syndicate short position. Penalty bids permit the Representative, on behalf
of the Underwriters, to reclaim a selling concession from a syndicate member
when Common Stock originally sold by such syndicate member is purchased in a
syndicate covering transaction to cover syndicate short positions. Stabilizing
transactions permit bids to purchase the underlying security so long as the
stabilizing bids do not exceed a specified minimum and prevent or retard a
decline in the market price of the Common Stock. Any of the transactions
described in this paragraph may cause the price of Common Stock to be higher
than it would otherwise be in the absence of such transactions. These
transactions may be effected on the Nasdaq National Market or otherwise and, if
commenced, may be discontinued at any time.

The Company will apply to have the Common Stock approved for quotation on
the Nasdaq National Market under the symbol "SPTK."

LEGAL MATTERS

The validity of the shares of Common Stock offered hereby will be passed
upon for the Company and the Selling Stockholders by Brobeck, Phleger & Harrison
LLP, Newport Beach, California. Certain legal matters relating to this Offering
will be passed upon for the Underwriters by Riordan & McKinzie, a Professional
Law Corporation, Los Angeles, California.

EXPERTS

The financial statements at December 31, 1995 and 1996 and for the three
years ended December 31, 1994, 1995 and 1996 included in this Prospectus have
been audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein and elsewhere in the Registration Statement, and are
included in reliance upon the reports of such firm given upon their authority as
experts in accounting and auditing.

51
<PAGE> 53

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement on Form S-1
under the Securities Act with respect to the Common Stock offered hereby. This
Prospectus does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules thereto. Certain items are omitted in
accordance with the rules and regulations of the Commission. For further
information with respect to this Company and the Common Stock, reference is made
to the Registration Statement and the exhibits and schedules filed therewith.
Statements contained in this Prospectus as to the contents of any contract of
other document referred to are not necessarily complete, and in each instance,
if such contract or document is filed as an exhibit, reference is made to the
copy of such contract or other document filed as an exhibit to the Registration
Statement, each statement being qualified in all respects by such reference. A
copy of the Registration Statement, including the exhibits and schedules
thereto, may be inspected without charge or copied at the public reference
facilities maintained by the Commission in Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices
located at Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2551 and Seven World Trade Center, Suite 1300, New York,
New York 10048, and copies of all or any part thereof can also be obtained by
mail at prescribed rates from the Public Reference Section of the Commission,
450 Fifth Street, N.W., Washington, D.C. 20549. Such material may also be
accessed electronically by means of the Commission's home page on the Internet
at http://www.sec.gov.

52
<PAGE> 54

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.......................................................... F-2
Balance Sheets as of December 31, 1995 and 1996 and June 30, 1997 (unaudited) and Pro
Forma June 30, 1997 (unaudited)..................................................... F-3
Statements of Operations for the years ended December 31, 1994, 1995 and 1996 and six
months ended June 30, 1996 (unaudited) and June 30, 1997 (unaudited)................ F-4
Statements of Stockholders' Equity for the three years ended December 31, 1994, 1995
and 1996 and six months ended June 30, 1997 (unaudited)............................. F-5
Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996 and six
months ended June 30, 1996 (unaudited) and 1997 (unaudited)......................... F-6
Notes to Financial Statements......................................................... F-7
</TABLE>

F-1
<PAGE> 55

INDEPENDENT AUDITORS' REPORT

To the Stockholders of Spectratek Technologies, Inc.:

We have audited the accompanying balance sheets of Spectratek Technologies,
Inc. (the "Company"), as of December 31, 1995 and 1996, and the related
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1995 and
1996, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.

DELOITTE & TOUCHE LLP

Los Angeles, California
October 17, 1997

F-2
<PAGE> 56

SPECTRATEK TECHNOLOGIES, INC.

BALANCE SHEETS
DECEMBER 31, 1995 AND 1996 AND JUNE 30, 1997 AND
PRO FORMA JUNE 30, 1997

ASSETS

<TABLE>
<CAPTION>
PRO FORMA
(NOTE 13)
JUNE 30, JUNE 30,
1995 1996 1997 1997
---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current Assets (Note 5):
Cash and cash equivalents..................... $ 97,371 $ 461,807 $ 871,655 $ 871,655
Accounts receivable, net of allowance for
doubtful accounts and returns of $119,518,
$155,047 and $59,266 as of December 31,
1995 and 1996 and June 30, 1997,
respectively (Note 9)...................... 1,124,275 1,328,809 1,526,381 1,526,381
Inventory (Note 3)............................ 4,080,802 3,957,663 4,059,619 4,059,619
Prepaid expenses and other current assets
(Note 9)................................... 109,315 68,805 697,399 643,645
Deferred tax asset (Note 6)................... 608,425 710,290
---------- ---------- ---------- ----------
Total current assets.................. 6,020,188 6,527,374 7,155,054 7,101,300
Furniture, Fixtures and Equipment, Net
(Notes 4 and 5)............................... 2,273,175 2,021,583 2,026,503 2,026,503
Deposits........................................ 230,000 215,529
---------- ---------- ---------- ----------
Total................................. $8,523,363 $8,764,486 $9,181,557 $9,127,803
========== ========== ========== ==========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses......... $1,324,438 $ 717,568 $ 959,386 $ 959,386
Income taxes payable (Note 6)................. 10,971 346,401
Advances from officers and related entity
(Note 8)................................... 663,519 672,115
Current portion of notes payable (Note 5)..... 887,663 694,745 1,076,127 1,076,127
---------- ---------- ---------- ----------
Total current liabilities............. 2,886,591 2,430,829 2,035,513 2,035,513
---------- ---------- ---------- ----------
Notes Payable (Note 5).......................... 694,745
Deferred Tax Liability (Note 6)................. 54,297 91,692
Commitments and Contingencies (Note 7)
Stockholders' Equity (Note 10):
Preferred stock, no par value, 5,000,000
shares authorized; no shares issued or
outstanding
Common stock, no par value, 15,000,000 shares
authorized; 3,000,000 and 3,030,000 shares
issued and outstanding as of December 31,
1995 and 1996, respectively; 3,030,000
shares issued and outstanding as of June
30, 1997 (Pro Forma shares)......... 10,000 10,100 10,100 10,100
Additional paid-in capital.................... 59,900 59,900 3,059,900
Retained earnings............................. 4,877,730 6,171,965 7,076,044 4,022,290
---------- ---------- ---------- ----------
Total stockholders' equity............ 4,887,730 6,241,965 7,146,044 7,092,290
---------- ---------- ---------- ----------
Total................................. $8,523,363 $8,764,486 $9,181,557 $9,127,803
========== ========== ========== ==========
</TABLE>

See accompanying notes to financial statements.

F-3
<PAGE> 57

SPECTRATEK TECHNOLOGIES, INC.

STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND
SIX MONTHS ENDED JUNE 30, 1996 AND 1997

<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------------------------- -----------------------
1994 1995 1996 1996 1997
---------- ----------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Sales (Note 9)................... $9,051,642 10,320,300 $12,003,415 $5,451,622 $7,621,798
Cost of Goods Sold............... 5,243,047 5,573,395 7,114,595 3,231,254 4,525,034
---------- ----------- ----------- ---------- ----------
Gross Profit..................... 3,808,595 4,746,905 4,888,820 2,220,368 3,096,764
---------- ----------- ----------- ---------- ----------
Selling, General and
Administrative Expense (Note
9)*............................ 1,531,474 1,779,941 2,142,186 893,070 1,315,662
Research and Development
Expense........................ 576,000 570,474 504,000 255,000 172,000
---------- ----------- ----------- ---------- ----------
Income from Operations........... 1,701,121 2,396,490 2,242,634 1,072,298 1,609,102
Interest Expense (Notes 5 and
8)............................. 34,266 68,181 156,900 78,450 55,044
Other Income (Expense)........... 136,899 67,558 59,459 66,155 (6,850)
---------- ----------- ----------- ---------- ----------
Income Before Provision for
Income Taxes................... 1,803,754 2,395,867 2,145,193 1,060,003 1,547,208
Provision for Income Taxes (Note
6)............................. 790,991 1,021,439 850,958 420,556 643,129
---------- ----------- ----------- ---------- ----------
Net Income....................... $1,012,763 $ 1,374,428 $ 1,294,235 $ 639,447 $ 904,079
========== =========== =========== ========== ==========
Net Income per Common and Common
Equivalent Share............... $ 0.33 $ 0.45 $ 0.42 $ 0.21
========== =========== =========== ==========
Weighted Average Common and
Common Equivalent Shares....... 3,048,273 3,048,273 3,049,636 3,048,273
========== =========== =========== ==========
Proforma Net Income Data
(Unaudited)
Income before income taxes, as
reported....................... $1,547,208
Proforma Provision for Income
Taxes..........................
696,883
----------
Proforma Net Income.............. $ 850,325
==========
Proforma Net Income per Common
and Common Equivalent Share.... $
==========
Proforma Weighted Average Common
and Common Equivalent Shares
(Note 2).......................
==========
</TABLE>

- ---------------

* Net of reimbursed expenses by a related party of $119,045 and $632,663 for the
years ended December 31, 1995 and 1996, respectively, and $357,585 and
$262,918 for the six months ended June 30, 1996 and 1997, respectively.

See accompanying notes to financial statements.

F-4
<PAGE> 58

SPECTRATEK TECHNOLOGIES, INC.

STATEMENTS OF STOCKHOLDERS' EQUITY
THREE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND
SIX MONTHS ENDED JUNE 30, 1997

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
--------- ------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1994................ 3,000,000 $10,000 $2,490,539 $2,500,539
Net income.............................. 1,012,763 1,012,763
--------- ------- ------- ---------- ----------
Balance at December 31, 1994.............. 3,000,000 10,000 3,503,302 3,513,302
Net income.............................. 1,374,428 1,374,428
--------- ------- ------- ---------- ----------
Balance at December 31, 1995.............. 3,000,000 10,000 4,877,730 4,887,730
Issuance of common stock................ 30,000 100 $59,900 60,000
Net income.............................. 1,294,235 1,294,235
--------- ------- ------- ---------- ----------
Balance at December 31, 1996.............. 3,030,000 10,100 59,900 6,171,965 6,241,965
Net income (Unaudited).................. 904,079 904,079
--------- ------- ------- ---------- ----------
Balance at June 30, 1997 (Unaudited)...... 3,030,000 $10,100 $59,900 $7,076,044 $7,146,044
========= ======= ======= ========== ==========
</TABLE>

See accompanying notes to financial statements.

F-5
<PAGE> 59

SPECTRATEK TECHNOLOGIES, INC.

STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND
SIX MONTHS ENDED JUNE 30, 1996 AND 1997

<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------------------ ---------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net income.............................................. $1,012,763 $1,374,428 $1,294,235 $ 639,447 $ 904,079
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization......................... 107,171 164,762 309,969 163,017 199,206
Loss on disposal of assets............................ 44,271 2,860
Issuance of common stock for services rendered........ 60,000
Provision for deferred income taxes................... (121,280) (200,868) (64,470) 315,715 618,598
Provision for doubtful accounts and returns........... 65,964 85,207 155,047 91,754 19,114
Changes in operating assets and liabilities:
Accounts receivable................................... (130,250) (244,232) (359,581) (82,676) (216,686)
Inventory............................................. (392,785) (1,767,133) 123,139 (464,871) (101,956)
Prepaid expenses and other current assets............. (190,508) 113,849 40,510 (46,741) (413,065)
Deposits.............................................. (36,400) (93,600) 14,471 5,971
Accounts payable and accrued expenses................. 103,442 551,580 (606,870) (471,206) 241,818
Income taxes payable.................................. (254,353) 10,971 335,430 (10,971) (346,401)
---------- ---------- ---------- -------- ----------
Net cash provided by (used in) operating
activities...................................... 163,764 (5,036) 1,346,151 139,439 907,567
---------- ---------- ---------- -------- ----------

Cash Flows from Investing Activities:
Capital expenditures.................................... (403,547) (633,970) (102,648) (77,915) (206,986)
---------- ---------- ---------- -------- ----------

Cash Flows from Financing Activities:
Net proceeds from (repayments of) line-of-credit........ -- 250,000 (250,000) 249,286 1,076,127
Proceeds from issuance of notes payable................. 500,000
Repayments of notes payable............................. (16,667) (631,588) (300,389) (694,745)
Advances from (payments to) officers and related
entity................................................ (4,087) (66,327) 8,596 2,015 (672,115)
Repayment of capital lease obligations.................. (4,997) (5,867) (6,075)
---------- ---------- ---------- -------- ----------
Net cash provided by (used in) financing
activities...................................... (9,084) 661,139 (879,067) (49,088) (290,733)
---------- ---------- ---------- -------- ----------

Net Increase (Decrease) in Cash........................... (248,867) 22,133 364,436 12,436 409,848

Cash, Beginning of Period................................. 324,105 75,238 97,371 97,371 461,807
---------- ---------- ---------- -------- ----------

Cash, End of Period....................................... $ 75,238 $ 97,371 $ 461,807 $ 109,807 $ 871,655
========== ========== ========== ======== ==========

Supplemental Disclosures of Cash Flow Information --
Cash paid for:
Interest.............................................. $ 34,266 $ 47,526 $ 201,986 $ 35,696 $ 174,146
Income taxes.......................................... 939,754 1,077,552 580,000 200,000 565,000
</TABLE>

Supplemental Disclosure of Noncash Investing and Financing Activities:

During 1995, the Company recorded $843,000 in notes payable and $250,000 of
advances from officers in connection with the purchase of equipment of
$1,093,000.

During 1995, a $100,000 advance from officer was recorded in connection with
the payment of a deposit on the Company's operating facility.

See accompanying notes to financial statements.

F-6
<PAGE> 60

SPECTRATEK TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1994, 1995 AND 1996 AND THE UNAUDITED
SIX MONTHS ENDED JUNE 30, 1996 AND 1997

1. ORGANIZATION

Spectratek (the "Company") was incorporated in the State of California in
October 1980, changed its name to Spectral Holding Corporation in May 1993 and
to Spectratek Technologies, Inc. in June 1997. The Company will be
reincorporated in Delaware in November 1997. The Company is a manufacturer of
microreplicated holographic films that are used in a wide range of value-added
applications in consumer products packaging materials and industrial products.
Sales are made to domestic and foreign companies.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Inventory -- Inventory is stated at standard cost, which approximates the
lower of weighted average cost or market.

Furniture, Fixtures and Equipment -- Furniture, fixtures and equipment are
stated at cost. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets, which range from five to seven years.
Amortization of leasehold improvements is computed using the straight-line
method over the shorter of the lease term or the estimated useful life of the
asset.

Revenue Recognition -- Revenue is recognized when the product is shipped.
An allowance is recorded for estimated sales returns at the time of shipment.

The allowance for doubtful accounts and returns consists of the following:

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
1994 1995 1996 1996 1997
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance, January 1........................... $ -- $ 65,964 $119,518 $119,518 $155,047
Provision for doubtful accounts and
returns.................................... 65,964 85,207 155,047 91,754 19,114
Actual write-offs............................ 31,653 119,518 56,496 114,895
-------- -------- -------- -------- --------
Ending balance............................... $65,964 $119,518 $155,047 $154,776 $ 59,266
======== ======== ======== ======== ========
</TABLE>

Major Customers and International Sales -- The Company had sales to a
single customer which represented 6%, 13% and 10% of total sales for the years
ended December 31, 1994, 1995 and 1996, respectively. During the six month
periods ended June 30, 1996 and 1997, sales to a single customer were 14% and
19% of total sales, respectively. International product sales represented 23%,
36% and 44% of net sales for the years end December 31, 1994, 1995 and 1996,
respectively. During the six month periods ended June 30, 1996 and 1997,
international product sales were 42% and 39% of net sales, respectively.

Research and Development Costs -- Research and Development Costs related to
the designing, developing and testing of new holographic equipment and patterns
are charged to expense as incurred.

Income Taxes -- Deferred income tax assets and liabilities are computed
annually for differences between the financial statement and income tax bases of
assets and liabilities. Such deferred income tax asset and liability
computations are based on enacted tax law and rates applicable in periods in
which the differences are expected to reverse. A valuation allowance is
established to reduce deferred tax assets if it is more likely than not that the
amount will not be realized. Income tax expense is the tax payable or refundable
for the period and the effect of any changes in deferred income tax assets and
liabilities during the period.

On January 1, 1997, the Company elected to be treated as an S corporation
under Subchapter S of the Internal Revenue Code of 1986, as amended, and
comparable State laws through the effective date of the proposed initial public
offering (the "Termination Date"). Under those provisions the Company does not
pay federal or state corporate income taxes on the Company's taxable income from
January 1, 1997 until the

F-7
<PAGE> 61

SPECTRATEK TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1994, 1995 AND 1996 AND THE UNAUDITED
SIX MONTHS ENDED JUNE 30, 1996 AND 1997

Termination Date. Instead, the stockholders are liable for federal and state
income taxes on the Company's taxable income.

The State of California has adopted the provisions of the S Corporation
election; however, there is a 1.5% franchise tax charged at the corporate level.

Net Income Per Common and Common Equivalent Share -- Net income per common
and common equivalent share has been determined by dividing net income by the
weighted average common and common equivalent shares outstanding during the
period. Options issued at prices below the expected offering price in the twelve
months prior to the initial public offering have been included in the
calculation of weighted average common and common equivalent shares as if
outstanding for all periods presented using the treasury stock method.

Unaudited Pro Forma Net Income Per Share -- Unaudited Pro forma net income
per share is based on the weighted average number of shares of common stock
outstanding and dilutive common equivalent shares from stock options (using the
treasury stock method). The shares outstanding for all periods give effect to
the stock split described in Note 12 as well as shares deemed to be
outstanding, which represent the approximate number of shares deemed to be sold
by the Company (at an assumed initial public offering price of $ per
share) to fund an S corporation distribution from January 1, 1997 to the
Termination Date (which is estimated to be $3.0 million at September 30, 1997),
which will be paid from the proceeds of the offering. Common and common
equivalent shares issued during the 12-month period prior to the proposed
offering have been included in the calculation using the treasury stock method
as if they were outstanding for all periods presented.

Fair Values of Financial Instruments -- The Company's financial instruments
consist primarily of cash and cash equivalents, accounts receivable, accounts
payable, advances from officers, and notes payable. The carrying values of all
financial instruments, other than advances from officers and notes payable, are
representative of their fair values due to their short-term maturities. The
carrying value of the Company's notes payable is considered to approximate its
fair value due to the variable interest rate of this instrument. Fair values of
advances from officers are not determinable due to their related party nature.

Concentration of Credit Risk -- Financial instruments that subject the
Company to credit risk consist primarily of accounts receivable. Concentration
of credit risk with respect to accounts receivable are generally diversified due
to the large number of entities composing the Company's customer base and their
geographic dispersion. The Company performs ongoing credit evaluations of its
customers and maintains an allowance for potential credit losses. Approximately
22%, 24% and 17% of net revenues for the years ended December 31, 1994, 1995 and
1996, respectively, were derived from sales of products to the Company's three
largest customers. During the six month periods ending June 30, 1996 and 1997,
approximately 25% and 30% of net revenues were derived from sales of products to
the Company's three largest customers.

Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

Impairment of Long-Lived Assets -- The Company regularly reviews long-lived
assets for impairment whenever events or changes in circumstances indicate that
the carrying amount of the asset may not be

F-8
<PAGE> 62

SPECTRATEK TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1994, 1995 AND 1996 AND THE UNAUDITED
SIX MONTHS ENDED JUNE 30, 1996 AND 1997

recoverable. If the sum of the expected future cash flows (undiscounted and
without interest charges) is less than the carrying amount of the asset, the
Company recognizes an impairment loss. As of December 31, 1994, 1995 and 1996,
no impairment was identified.

Unaudited Interim Financial Statements -- In the opinion of management, the
unaudited interim financial statements have been prepared on the same basis as
the audited financial statements and included all adjustments consisting of only
normal recurring adjustments necessary for a fair presentation of financial
position and results of operations for such dates and periods.

Accounting Standards -- In October 1995, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") SFAS
No. 123, "Accounting for Stock-Based Compensation" which defines a fair value
based method of accounting for stock-based employee compensation plans. Under
SFAS No. 123, companies are encouraged, but are not required, to adopt the fair
value method for fiscal years beginning after December 15, 1995 for all employee
awards granted after the beginning of such year. Companies are permitted to
continue to account for such transactions under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25), but
must disclose in a note to the financial statements pro forma net income and
earnings per share as if SFAS No. 123 had been applied. The Company has
determined that it will not adopt the fair value method but will continue to
account for stock-based compensation under APB No. 25. The required disclosures
related to SFAS No. 123 are presented in Note 10.

In February 1997, the FASB issued SFAS No. 128, "Earnings per Share"
("EPS") which supersedes Accounting Principles Board Opinion No. 15 "Earnings
per Share" ("APB No. 15") and replaces the presentation of primary EPS with a
presentation of basic EPS. It also requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with complex
capital structures and provides guidance on other computational changes. SFAS
No. 128 is effective for financial statements for both interim and annual
periods ending after December 15, 1997. Earlier application is not permitted.
The Company does not expect EPS under SFAS No. 128 to be materially different
from EPS calculated under APB No. 15.

In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general purpose financial statements. SFAS No 130 requires that
an enterprise (a) classify items of other comprehensive income by their nature
in a financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. SFAS No. 130
is effective for fiscal years beginning after December 15, 1997. The Company
does not expect the impact of SFAS No. 130 to be material in relation to its
financial statements.

In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of
an Enterprise and Related Information." SFAS No. 131 established standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to stockholders. It also establishes standards for related
disclosure about products and services, geographic areas and major customers.
SFAS No. 131 is effective for financial statements for periods beginning after
December 15, 1997. The Company does not expect the impact of SFAS No. 131 to be
material in relation to its financial statements.

F-9
<PAGE> 63

SPECTRATEK TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1994, 1995 AND 1996 AND THE UNAUDITED
SIX MONTHS ENDED JUNE 30, 1996 AND 1997

3. INVENTORY

Inventory consists of the following components at December 31, 1995 and
1996 and at June 30, 1997:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- JUNE 30,
1995 1996 1997
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials.......................... $1,136,067 $ 896,368 $ 981,868
Finished goods......................... 2,944,735 3,061,295 3,077,751
---------- ---------- ----------
$4,080,802 $3,957,663 $ 4,059,619
========== ========== ==========
</TABLE>

4. FURNITURE, FIXTURES AND EQUIPMENT

Furniture, fixtures and equipment consist of the following at December 31,
1995 and 1996 and at June 30, 1997:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- JUNE 30,
1995 1996 1997
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Furniture and fixtures................. $ 54,592 $ 64,703 $ 74,312
Equipment.............................. 2,609,938 2,600,025 2,788,027
Leasehold improvements................. 90,463 127,420 132,934
---------- ---------- ----------
2,754,993 2,792,148 2,995,273
Less accumulated depreciation and
amortization......................... 481,818 770,565 968,770
---------- ---------- ----------
Furniture, fixtures and equipment,
net.................................. $2,273,175 $2,021,583 $ 2,026,503
========== ========== ==========
</TABLE>

5. NOTES PAYABLE

Notes payable consist of the following at December 31, 1995 and 1996 and at
June 30, 1997:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30,
1995 1996 1997
---------- -------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Line-of-credit agreement for $3,500,000
bearing interest at the bank's base
rate plus .75% per annum (9.25% at
June 30, 1997), which is subject to
change from time to time, payable
monthly. All unpaid principal and
interest is due April 1, 1998
(see Note 11)......................... $1,076,127
Line-of-credit agreement for $500,000
bearing interest at the prime rate
plus 1% per annum (9.5% at December
31, 1995), which is subject to change
from time to time..................... $ 250,000
</TABLE>

F-10
<PAGE> 64

SPECTRATEK TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1994, 1995 AND 1996 AND THE UNAUDITED
SIX MONTHS ENDED JUNE 30, 1996 AND 1997

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30,
1995 1996 1997
---------- -------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Note payable to bank bears interest at
the prime rate plus 1% per annum
(9.25% at December 31, 1996), which is
subject to change from time to time,
payable on a monthly basis. The note
requires monthly principal payments of
$8,333 with the unpaid balance due
February 28, 1997. The note is secured
by substantially all the assets of the
Company............................... 483,333 $351,745
Note payable bearing interest at 7.91%
per annum. The note requires various
principal payments along with accrued
interest throughout a period of two
years upon delivery of equipment
(August 1995). The note is secured by
the metallizer........................ 843,000 343,000
---------- -------- ----------
Total notes payable..................... 1,576,333 694,745 1,076,127
Capital lease obligations............... 6,075
---------- -------- ----------
Total notes payable and capital lease
obligations........................... 1,582,408 694,745 1,076,127
Less current portion.................... 887,663 694,745 1,076,127
---------- -------- ----------
Long term portion of notes payable...... $ 694,745 $ -- $ --
========== ======== ==========
</TABLE>

The Company leases certain equipment under capital leases. Included in
furniture, fixtures and equipment are capitalized leases with a cost of $17,434
and accumulated depreciation of $14,529 as of December 31, 1995.

The weighted average interest rate on the line of credit agreements during
the years ended December 31, 1995 and 1996 and the six month period ended June
30, 1997 was 9.5%, 9.25% and 9.25%, respectively.

In March 1997, the Company entered into a line of credit agreement for $3.5
million, see Note 11 for description of terms.

6. INCOME TAXES

The provision for income taxes consists of the following:

<TABLE>
<CAPTION>
1994 1995 1996
-------- ---------- --------
<S> <C> <C> <C>
Current:
Federal............................... $716,468 $ 983,522 $771,704
State................................. 195,803 238,785 143,724
Deferred:
Federal............................... (94,528) (158,529) (41,348)
State................................. (26,752) (42,339) (23,122)
-------- ---------- --------
Provision for income taxes.............. $790,991 $1,021,439 $850,958
======== ========== ========
</TABLE>

F-11
<PAGE> 65

SPECTRATEK TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1994, 1995 AND 1996 AND THE UNAUDITED
SIX MONTHS ENDED JUNE 30, 1996 AND 1997

A reconciliation of the provision for income taxes at the federal statutory
rate to the provision recorded in the accompanying financial statements is as
follows:

<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Statutory federal rate............................... 35.0% 35.0% 35.0%
State income taxes, net of federal income tax
benefit............................................ 7.9 6.4 4.5
Miscellaneous........................................ 0.9 1.2 0.1
---- ---- ----
Effective tax rates.................................. 43.8% 42.6% 39.6%
==== ==== ====
</TABLE>

The components of deferred tax assets (liabilities) are as follows:

<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Current:
Uniform capitalization............................... $ 26,045 $ 29,351
Accrued vacation..................................... 12,916 15,692
Allowance for bad debt............................... 51,751 67,135
Inventory reserve.................................... 432,168 558,697
Deferred salaries.................................... 42,095 42,095
State taxes.......................................... 43,450 (2,680)
-------- --------
Total current..................................... 608,425 710,290
-------- --------
Non-current:
State taxes.......................................... 4,277 7,223
Depreciation......................................... (58,574) (98,915)
-------- --------
Total non-current................................. (54,297) (91,692)
-------- --------
Total........................................ $554,128 $618,598
======== ========
</TABLE>

7. COMMITMENTS AND CONTINGENCIES

The Company is the lessee under noncancelable operating leases for
buildings that expire on various dates through 2003. The Company is also a
lessee under operating leases for certain equipment whose terms are generally
month to month. Future minimum rental payments under such leases as of December
31, 1996 are summarized as follows (see Note 11):

<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
-------------
<S> <C>
1997........................................... $ 541,875
1998........................................... 655,000
1999........................................... 657,000
2000........................................... 657,000
2001........................................... 657,000
Thereafter..................................... 660,750
----------
$3,828,625
=========
</TABLE>

Total rental expense for operating leases amounted to $259,589, $516,874
and $522,870 for the years ended December 31, 1994, 1995 and 1996, respectively.
Total rental expense for operating leases amounted to $280,642 and $243,702 for
the six months ended June 30, 1996 and 1997, respectively.

F-12
<PAGE> 66

SPECTRATEK TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1994, 1995 AND 1996 AND THE UNAUDITED
SIX MONTHS ENDED JUNE 30, 1996 AND 1997

8. ADVANCES FROM OFFICERS AND RELATED ENTITY

Advances from officers and related entity bear interest at various rates
ranging from 7 to 11% per annum. Advances from officers and related entity were
$597,218 and $544,718 as of December 31, 1995 and 1996, respectively. Interest
payable related to advances from officers and related entity was $66,301 and
$127,397 as of December 31, 1995 and 1996, respectively. The related entity is
FosterCo, Inc. ("FosterCo"), a corporate entity owned by two stockholders and
officers of the Company. All amounts outstanding as of December 31, 1996 were
paid prior to June 30, 1997.

9. RELATED PARTY TRANSACTIONS

FosterCo is a corporate entity owned 50% by Terrence Conway and 50% by
Michael Foster, directors, stockholders and officers of the Company. The Upper
Deck Co. ("Upper Deck") is a customer of the company. Cyberwerks Interactive,
L.L.C. ("Cyberwerks LLC") is a joint venture 50% owned by FosterCo and 50% owned
by Upper Deck.

Since August 1995, the Company has subleased space at each of its two
facilities to Cyberwerks LLC which includes a portion of the Company's
headquarters facility and of its research and manufacturing facility, both in
Los Angeles, California. In addition to space, Cyberwerks LLC also shares
certain common services at these facilities including personnel, administrative
and management services, for which it reimburses the Company on a pro rata
basis. Expenses reimbursed by Cyberwerks LLC amounted to approximately $119,045
and $632,663 in the years ended December 31, 1995 and 1996, respectively and
$357,585 and $262,918 for the six months ended June 30, 1996 and 1997
(unaudited), respectively. Included in prepaid expenses and other current assets
as of December 31, 1995 is $71,795 due from Cyberwerks LLC. The Company believes
that it has been compensated for both the usage of its space and its personnel
on terms no less favorable than it would have received in transactions with
independent third parties and that the allocation method used is reasonable.

Upper Deck purchased product from the Company in amounts approximating
$666,810, $654,609 and $115,376 in the years ended December 31, 1994, 1995 and
1996, respectively and $79,740 for the six months ending June 30, 1996. Included
in accounts receivable as of December 31, 1995 and 1996, respectively, is $4,053
and $35,834 due from Upper Deck. The Company believes that these purchases were
made on terms no less favorable than it would have received in transactions with
independent third parties.

10. STOCKHOLDERS' EQUITY AND STOCK OPTION PLAN

During fiscal year 1996, the Company issued 30,000 shares of Common Stock
in exchange for $60,000 worth of consulting services. The number of shares
issued was based on the estimated fair value of the Company's stock at the time
of issuance related to the value of services performed.

Effective April 1, 1997, the Company adopted the 1997 Stock Incentive Plan
("1997 Plan") under which a total of 303,000 shares of the Company's Common
Stock have been reserved. Options are granted at the fair market value of the
Company's stock, as determined by the Board of Directors, on the date of grant.

The 1997 Plan is divided into three separate components: (i) the
Discretionary Option Grant Program, under which eligible individuals in the
Company's employ or service (including officers, nonemployee directors and
consultants) may, in the discretion of the Plan Administrator, be granted
options to purchase shares of Common Stock at an exercise price not less than
the fair market value of those shares on the grant date, (ii) the Stock Issuance
Program, under which the same individuals may, in the discretion of the Plan
Administrator, be issued shares of Common Stock directly, through the purchase
of such shares at a price not

F-13
<PAGE> 67

SPECTRATEK TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1994, 1995 AND 1996 AND THE UNAUDITED
SIX MONTHS ENDED JUNE 30, 1996 AND 1997

less than fair market value of those shares at the time of issuance, or as a
bonus awarded for services rendered to the Company, and (iii) the Automatic
Option Grant Program under which option grants will automatically be made at
periodic intervals to eligible nonemployee directors, which options will enable
such directors to purchase shares of Common Stock at an exercise price equal to
100% of the fair market value of those shares on the grant date. The persons
eligible to participant in the Discretionary Option Grant and Stock Issuance
Programs are Company employees, non-employee directors, and consultants and
other independent advisors who provide services to the Company. A person is
eligible to participate in the Automatic Option Grant Program if he or she (i)
is serving as non-employee director on the date on which the Underwriting
Agreement in connection with the Initial Public Offering is executed and the
Common Stock offered hereby is priced (the "Underwriting Date") (provided that
no initial option will be granted on such date to a director who has previously
received a stock option grant form the Company in connection with his or her
Board service), (ii) first becomes a non-employee director at any time after the
Underwriting Date, whether through appointment by the Board or election by the
Company's stockholders, and (iii) continues to serve as a non-employee director
at one or more annual meetings of the Company's stockholders held after the
Underwriting Date.

During the six months ended June 30, 1997, options to purchase 84,000
shares of common stock were granted at an exercise price of $16.50.

Stock option activity for the years are as follows:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE EXERCISE
SHARES PRICE PRICE
------ -------- --------
<S> <C> <C> <C>
Options outstanding, January 1, 1997............ 0 -- --
Options granted................................. 84,000 $16.50 $16.50
------
Options outstanding, June 30, 1997.............. 84,000 $16.50 $16.50
======
</TABLE>

The following table summarizes information about stock options outstanding
at June 30, 1997:

<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE
WEIGHTED OUTSTANDING REMAINING SHARES
AVERAGE AT CONTRACTUAL EXERCISABLE
GRANT EXERCISES JUNE 30, LIVES AT JUNE 30,
YEAR PRICES 1997 (YEARS) 1997
------------------------------- --------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
1997........................... $ 16.50 84,000 5 0
</TABLE>

All stock options are granted at the fair market value of the Company's
Common Stock at the grant date. The weighted average estimated fair value of the
options granted in the six months ended June 30, 1997 was $4.65 per share. The
Company applies Accounting Principles Board Opinion No. 25 and the related
interpretations in accounting for its stock option plan. Accordingly, no
compensation cost for the Company's stock option plan has been recognized in
1997. Had compensation cost for the Company's stock option plan been determined
based on the fair value at the grant dates or awards under the plan consistent
with SFAS

F-14
<PAGE> 68

SPECTRATEK TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1994, 1995 AND 1996 AND THE UNAUDITED
SIX MONTHS ENDED JUNE 30, 1996 AND 1997

Statement No. 123, "Accounting for Stock Based Compensation," the Company's net
income for the six months ended June 30, 1997 would have been reduced to the pro
forma amounts indicated below:

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1997
----------------
(UNAUDITED)
<S> <C>
Net income:
As reported................................................ $904,079
Pro forma.................................................. $875,905
Net income per share:
As reported................................................ $
Pro forma.................................................. $
</TABLE>

The fair market value of options granted under the stock option plan during
six months ended 1997 was determined using the minimum value method as
prescribed by SFAS 123 utilizing the following weighted-average assumptions:

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1997
----------------
(UNAUDITED)
<S> <C>
Expected volatility.......................................... 0%
Dividend yield............................................... --
Risk-free interest rate...................................... 6.73
Expected life................................................ 5 years
</TABLE>

In October 1997, the Company granted options to purchase 7,500 shares of
Common Stock at an exercise price of $19.25.

11. SUBSEQUENT EVENTS

S Corporation Election -- On January 1, 1997, the Company elected to be
treated as an S corporation under Subchapter S of the Internal Revenue Code of
1986, as amended, and comparable State laws through the Termination Date. Under
those provisions the Company does not pay federal or state corporate income
taxes on the Company's taxable income from January 1, 1997 until the Termination
Date. Instead, the stockholders are liable for federal and state income taxes on
the Company's taxable income.

The State of California has adopted the provisions of the S Corporation
election; however, there is a 1.5% franchise tax charged at the corporate level.

Line of Credit Agreement -- In March 1997, the Company entered into a line
of credit agreement with a bank for $3.5 million which is guaranteed personally
by four of the officers of the Company. The Company drew on this line of credit
to pay off all outstanding debt at that time, and to pay the balance of the
outstanding advances from officers. The line of credit bears interest at the
bank's base rate plus 0.75%. All unpaid principal and interest is due April 1,
1998. The line of credit agreement is secured by the assets of the Company.
Under the terms of the agreement, the Company is required to meet certain
financial covenants, as defined. These include covenants related to current
ratio, tangible net worth, total liabilities to tangible net worth, net profit,
and net profit after tax. The Company failed to comply with the net profit after
tax covenant contained in the line-of-credit agreement for the year ended
December 31, 1996 and the three month period ended March 31, 1997. In addition,
the Company failed to provide the bank within 120 days after year end 1996
audited financial statements. The lender waived compliance with the net profit
after tax covenant for the year ended December 31, 1996 and the three month
period ended March 31, 1997. The lender waived the receipt of the audited
financial statements for the year ending December 31, 1996 until October 31,
1997.

F-15
<PAGE> 69

SPECTRATEK TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1994, 1995 AND 1996 AND THE UNAUDITED
SIX MONTHS ENDED JUNE 30, 1996 AND 1997

S Corporation Dividends -- In October 1997, the Company declared a
distribution to its existing shareholders, consisting of promissory notes (the
"Stockholder Notes") in the aggregate principal sum estimated to be
approximately $3 million. The promissory notes bear interest from the closing
date of the Company's initial public offering at 5.5% per annum. Unpaid
principal and interest are due April 1, 1998. This amount represents the
Company's estimated undistributed retained earnings from January 1, 1997 through
the Termination Date of the Company's status as an S corporation. On the
Termination Date, the Company will revert to its former status as a C
corporation.

In connection with the initial public offering of its Common Stock, the
Company anticipates that it will repay the Stockholder Notes from the proceeds
of the offering (see Note 13)

Operating Lease Agreements -- In September 1997, the Company entered into a
new five year lease for space approximating 17,000 square feet in a building
located in Los Angeles, California. This new space will replace two separate Los
Angeles facilities, aggregating approximately 7,200 square feet, presently used
in research and manufacturing. Rent will commence on this new facility on
September 1, 1997 at a rate of $12,750 per month. The facilities on Cotner
Street are currently rented on a month-to-month basis, and will be vacated upon
six months notice. In addition, in July 1997, the Company renegotiated a new
lease for the existing premises on Jandy Place which will commence in February
1998 upon expiration of the existing lease and expire in February 2003. The rent
under the new lease will be $42,000 per month (see Note 7).

FosterCo Option Agreement -- In October 1997, the Company acquired an
option (the "FosterCo Option") to purchase all of the outstanding capital stock
of FosterCo from two stockholders of the Company. Three of the Company's
stockholders, who are not stockholders of FosterCo, contributed 17,975 shares of
Common Stock to the Company as consideration for the option, which shares were
retired in October 1997. The exercise price is equal to the greater of
$5,000,000 or 50% of the fair market value, as defined, of FosterCo's
outstanding capital stock as of the date of exercise of the option. The FosterCo
Option is exercisable during the 12-month period beginning October 1, 2002 and
ending on September 30, 2003. The exercise date will be accelerated in the event
Cyberwerks LLC files a registration statement on Form S-1 with the Securities
and Exchange Commission to register shares of its Common Stock. The option is
exercisable in cash, stock of the Company or a combination thereof, at the
discretion of the Fairness Committee of the Board of Directors of the Company.
The potential effect of the exercise of the FosterCo Option, were it exercisable
at June 30, 1997, would not have a material effect on the Company's financial
statements.

12. COMMON STOCK SPLIT

In June 1997, the Company's Board of Directors enacted a 300 for one split
of its shares of common stock. All outstanding options to purchase shares of the
Company's Common Stock were adjusted accordingly. All references to shares and
per share amounts have been restated to reflect the forward stock split.

13. PRO FORMA INFORMATION (UNAUDITED)

The unaudited pro forma balance sheet has been presented to give pro forma
effect to (i) the distribution, which will be made from the proceeds of the
Offering of previously undistributed income taxed or taxable to the Company's
stockholders (of approximately $3 million as of September 30, 1997); and (ii)
the recognition of income tax expense as if the Company were a C Corporation
during the six month period ended June 30, 1997.

F-16
<PAGE> 70

SPECTRATEK TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1994, 1995 AND 1996 AND THE UNAUDITED
SIX MONTHS ENDED JUNE 30, 1996 AND 1997

A reconciliation of stockholders' equity is as follows:

<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Historical balance..................... $10,100 $ 59,900 $7,076,044 $7,146,044
Effect on net income as if Company were
a C Corporation during the six month
period ended June 30, 1997........... (53,754) (53,754)
Less S Corporation dividend............ 3,000,000 (3,000,000) --
------- ---------- ---------- ----------
Pro forma balance...................... $10,100 $3,059,900 $4,022,290 $7,092,290
======= ========== ========== ==========
</TABLE>

F-17
<PAGE> 71

======================================================

NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED HEREIN IN
THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING
STOCKHOLDERS OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION IN
WHICH SUCH OFFER TO SELL OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE
PERSON MAKING THE OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL CREATE ANY
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.

------------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 7
Prior S Corporation Status............ 14
Use of Proceeds....................... 15
Dividend Policy....................... 15
Capitalization........................ 16
Dilution.............................. 17
Selected Financial Data............... 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 20
Business.............................. 27
Management............................ 37
Certain Transactions.................. 43
Principal and Selling Stockholders.... 45
Description of Securities............. 46
Shares Eligible for Future Sale....... 49
Underwriting.......................... 50
Legal Matters......................... 51
Experts............................... 51
Additional Information................ 52
Index to Financial Statements......... F-1
UNTIL , 1997 (25 DAYS AFTER
THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK,
WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND
WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
</TABLE>

======================================================
======================================================

SHARES
LOGO
COMMON STOCK
------------------

PROSPECTUS
------------------

EVEREN SECURITIES, INC.
, 1997

======================================================
<PAGE> 72

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable in connection with the sale and
distribution of the securities being registered. All amounts shown are estimated
except the Securities and Exchange Commission registration fee and the filing
fee for the National Association of Securities Dealers, Inc. All of the amounts
shown will be paid by the Company (the "Registrant").

<TABLE>
<CAPTION>
ITEM AMOUNT
------------------------------------------------------------------ ---------
<S> <C>
SEC registration fee.............................................. $ 7,576
NASD filing fee................................................... *
Nasdaq National Market listing (entry) fee........................ *
Blue sky fees and expenses........................................ *
Printing and engraving expenses................................... *
Legal fees and expenses........................................... *
Accounting fees and expenses...................................... *
Transfer agent and registrar fees................................. *
Miscellaneous..................................................... *
--------
Total................................................... $ 575,000
========
</TABLE>

- ---------------
* to be provided by amendment

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Under Section 145 of the Delaware General Corporation Law, the Registrant
has broad powers to indemnify its directors and officers against liabilities
they may incur in such capacities, including liabilities under the Securities
Act of 1933. The Registrant's Bylaws (to be filed as Exhibit 3.4 hereto) provide
that the Registrant shall indemnify its directors and officers to the fullest
extent permitted by Delaware law. The Bylaws require the Registrant, subject to
certain limitations, to advance litigation expenses in the case of stockholder
derivative actions or other actions, against an undertaking by the directors and
officers to repay such advances if it is ultimately determined that the
directors or officers are not entitled to indemnification. The Bylaws further
provide that rights conferred under such Bylaws shall not be deemed to be
exclusive of any other right such persons may have or acquire under any
agreement, vote of stockholders or disinterested directors, or otherwise. The
Registrant believes that indemnification under its Bylaws covers at least
negligence and gross negligence.

In addition, the Registrant's Certificate of Incorporation (the
"Certificate") (to be filed as Exhibit 3.3 hereto) provides that the Registrant
shall indemnify its directors and officers if such persons acted (i) in good
faith, (ii) in a manner reasonably believed to be in or not opposed to the best
interests of the Registrant, and (iii) with respect to any criminal action or
proceeding, with reasonable cause to believe such conduct was lawful. The
Certificate also provides that, pursuant to Delaware law, its directors shall
not be liable for monetary damages for breach of the directors' fiduciary duty
of care to the Registrant and its stockholders. This provision in the
Certificate does not eliminate the duty of care, and in appropriate
circumstances equitable remedies such as injunctive or other forms of
non-monetary relief will remain available under Delaware law. In addition, each
director will continue to be subject to liability for breach of the director's
duty of loyalty to the Registrant for acts or omissions not in good faith or
involving intentional misconduct, for knowing violations of law, for actions
leading to improper personal benefit to the director, and for payment of
dividends or approval of stock repurchases or redemptions that are unlawful
under Delaware law. The provision also does not affect a director's
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws. The Certificate further provides that the
Registrant be authorized

II-1
<PAGE> 73

to indemnify its directors and officers to the fullest extent permitted by law
through the Bylaws, agreement, vote of stockholders or disinterested directors,
or otherwise.

The Registrant intends to obtain directors' and officers' liability
insurance in connection with this Offering.

In addition, the Registrant has entered or, concurrently with this
Offering, will enter, into agreements to indemnify its directors and certain of
its officers in addition to the indemnification provided for in the Certificate
and Bylaws. These agreements will, among other things, indemnify the
Registrant's directors and certain of its officers for certain expenses
(including attorneys fees), judgments, fines and settlement amounts incurred by
such person in any action or proceeding, including any action by or in the right
of the Registrant, on account of services by that person as a director or
officer of the Registrant or as a director or officer of any subsidiary of the
Registrant, or as a director or officer of any other company or enterprise that
the person provides services to at the request of the Registrant.

The Underwriting Agreement (to be filed as Exhibit 1.1 hereto) provides for
indemnification by the Underwriters of the Registrant, its officers and
directors and by the Registrant and the Selling Stockholders of the
Underwriters, for certain liabilities arising under the Securities Act or
otherwise.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Registrant
pursuant to the foregoing provisions, the Registrant has been informed that, in
the opinion of the Commission, such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

Since August 1994, the Registrant has sold and issued the following
unregistered securities:

1. On April 1, 1996, the Registrant issued 30,000 shares of its Common
Stock to a business consultant in consideration for services rendered to
the Registrant by such consultant.

2. On April 1, 1997, the Registrant granted incentive stock options to
certain employees of the Registrant under its 1997 Stock Incentive Plan
covering an aggregate of 84,000 shares of the Registrant's Common Stock, at
an exercise price of $16.50 per share. These options vest in five equal
annual installments commencing one year following the date of grant. None
of the optionees paid any cash consideration for these options.

3. In June 1997, the Registrant affected a 300-for-1 stock split. Such
issuance was exempt from registration under Section 2(3) of the Securities
Act on the basis that such transaction did not involve a "sale" of
securities.

4. In October 1997, the Registrant granted stock options to an officer
of the Registrant covering an aggregate of 7,500 shares of Common Stock, at
an exercise price of $19.25 per share. These options vest in five equal
annual installments commencing in April 1998. The optionee did not pay any
cash consideration for these options.

The issuance of securities in Items 1, 2 and 4 above were deemed to be
exempt from registration under the Securities Act by virtue of Rule 701
promulgated thereunder in that they were offered and sold either pursuant to a
written compensatory benefit plan or pursuant to written contract relating to
compensation, as provided by Rule 701.

There were no underwriters, brokers or finders employed in connection with
any of the transactions set forth above.

II-2
<PAGE> 74

\ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Exhibits

The following Exhibits are attached hereto and incorporated herein by
reference.

<TABLE>
<S> <C>
1.1* Form of Underwriting Agreement.
3.1 Amended and Restated Articles of Incorporation of the Registrant.
3.2 Amended and Restated Bylaws of the Registrant.
3.3* Form of Certificate of Incorporation of the Registrant, a Delaware corporation.
3.4* Form of Bylaws of the Registrant, a Delaware corporation.
3.5* Certificate of Merger of the Registrant, a Delaware corporation, and
Registrant, a California corporation.
4.1* Specimen certificate representing shares of Common Stock of the Registrant.
4.2 1997 Stock Incentive Plan.
4.3 Form of Notice of Grant of Stock Option and related form of Stock Option
Agreement under 1997 Stock Incentive Plan.
4.4 Form of Notice of Grant of Nonemployee Director Automatic Stock Option and
related form of Stock Option Agreement under 1997 Stock Incentive Plan.
4.5 Form of Stock Issuance Agreement.
5.1* Form of Opinion of Brobeck, Phleger & Harrison LLP.
10.1 Form of Indemnification Agreement.
10.2 Standard Industrial/Commercial Single-Tenant Lease, dated July 1, 1997, between
Bardon of Hollywood, Inc. and the Registrant.
10.3 Standard Industrial Lease, dated July 10, 1985, between Phillip Rossman and
Ruth Rossman Trust and Comdisc Technologies, Inc., as assigned to the
Registrant as of July 10, 1985.
10.4 Standard Sublease, dated May 8, 1996, between Legasys Legal Systems and the
Registrant.
10.5 Revolving Credit Promissory Note Issued by the Registrant to Citibank, FSB.
10.6* Standard Industrial/Commercial Single-Tenant Lease, dated as of July 21, 1997,
between Jerry Harold Waxman and Arlene Reva Waxman, as Trustees under the Jerry
Harold Waxman and Arlene Reva Waxman Inter Vivos Trust Agreement Dated October
7, 1977, and the Registrant.
10.7 Option Agreement, dated October 1, 1997, among Terrence Conway, Michael S.
Foster and FosterCo, Inc.
10.8 Form of Employee Proprietary Information and Inventions Agreement.
10.9 Technology Assignment Agreement, dated October 1, 1997, between Michael S.
Foster and the Registrant.
10.10* Standard Sublease, dated June 8, 1995, between Foote, Cone & Belding
Communications, Inc., now known as True North Communication, and the
Registrant.
10.11 Form of Stockholder's Note, dated October 1, 1997.
10.12* License Agreement and Release, dated May 31, 1995 among the Registrant,
FosterCo, Inc., Michael Foster, Terrence Conway, Michael Wanlass and James
Wanlass.
11.1 Statement Regarding Computation of Earnings Per Share.
23.1 Consent of Deloitte & Touche LLP Independent Auditors.
23.2* Consent of Brobeck, Phleger & Harrison LLP (contained in Exhibit 5.1).
24.1 Power of Attorney (contained on signature page on page II-5).
27.1 Financial Data Schedule.
</TABLE>

- ---------------

* to be filed by amendment

II-3
<PAGE> 75

(b) Financial Statement Schedules

<TABLE>
<CAPTION>
SCHEDULE
------------
<S> <C>
Schedule II Valuation and Qualifying Accounts
</TABLE>

Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.

ITEM 17. UNDERTAKINGS

The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreements, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described in Item 14 above, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act of 1933 and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.

The undersigned Registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
the form of prospectus filed by the Registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act of 1933 shall be deemed to be
part of this registration statement as of the time it was declared
effective;

(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the Offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

II-4
<PAGE> 76

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement on Form S-1 to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of Los
Angeles, State of California, on the 21st day of October 1997.

SPECTRATEK TECHNOLOGIES, INC.

By: /s/ TERRENCE CONWAY
------------------------------------
Terrence Conway
Chief Executive Officer and
President

POWER OF ATTORNEY

We, the undersigned officers and directors of Spectratek Technologies,
Inc., do hereby constitute and appoint Terrence Conway and Charles M. Spear, and
each of them, our true and lawful attorneys-in-fact and agents, each with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement, or any Registration
Statement (or amendment thereto) for the same offering that is to be effective
upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as
amended, with exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite or necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby, ratifying and confirming all that each of said
attorneys-in-fact and agents, or his substitute or substitutes, may lawfully do
or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form S-1 has been signed by the following persons in
the capacities and on the dates indicated:

<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------------- ----------------------------------- -----------------
<S> <C> <C>

/s/ TERRENCE CONWAY Chief Executive Officer, October 21, 1997
- ------------------------------------- President and Director
Terrence Conway (principal executive officer)

/s/ MICHAEL S. FOSTER Chairman of the Board, Director October 21, 1997
- ------------------------------------- and Chief Technology Officer
Michael S. Foster

/s/ MICHAEL WANLASS Vice President, Marketing October 21, 1997
- ------------------------------------- and Director
Michael Wanlass

/s/ JAMES WANLASS Vice President, Manufacturing October 21, 1997
- ------------------------------------- and Director
James Wanlass

/s/ CHARLES M. SPEAR Chief Financial Officer and October 21, 1997
- ------------------------------------- Director
Charles M. Spear (principal financial and accounting
officer)
</TABLE>

II-5
<PAGE> 77

EXHIBIT INDEX

<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ------------------------------------------------------------------ ------------
<S> <C> <C>
1.1* Form of Underwriting Agreement....................................
3.1 Amended and Restated Articles of Incorporation of the
Registrant........................................................
3.2 Amended and Restated Bylaws of the Registrant.....................
3.3* Form of Certificate of Incorporation of the Registrant, a Delaware
corporation.......................................................
3.4* Form of Bylaws of the Registrant, a Delaware corporation..........
3.5* Certificate of Merger of the Registrant, a Delaware corporation,
and Registrant, a California corporation..........................
4.1* Specimen certificate representing shares of Common Stock of the
Registrant........................................................
4.2 1997 Stock Incentive Plan.........................................
4.3 Form of Notice of Grant of Stock Option and related form of Stock
Option Agreement under 1997 Stock Incentive Plan..................
4.4 Form of Notice of Grant of Nonemployee Director Automatic Stock
Option and related form of Stock Option Agreement under 1997 Stock
Incentive Plan....................................................
4.5 Form of Stock Issuance Agreement..................................
5.1* Form of Opinion of Brobeck, Phleger & Harrison LLP................
10.1 Form of Indemnification Agreement.................................
10.2 Standard Industrial/Commercial Single-Tenant Lease, dated July 1,
1997, between Bardon of Hollywood, Inc. and the Registrant........
10.3 Standard Industrial Lease, dated July 10, 1985, between Phillip
Rossman and Ruth Rossman Trust and Comdisc Technologies, Inc., as
assigned to the Registrant as of July 10, 1985....................
10.4 Standard Sublease, dated May 8, 1996, between Legasys Legal
Systems and the Registrant........................................
10.5 Revolving Credit Promissory Note Issued by the Registrant to
Citibank, FSB.....................................................
10.6* Standard Industrial/Commercial Single-Tenant Lease, dated as of
July 21, 1997, between Jerry Harold Waxman and Arlene Reva Waxman,
as Trustees under the Jerry Harold Waxman and Arlene Reva Waxman
Inter Vivos Trust Agreement Dated October 7, 1977, and the
Registrant........................................................
10.7 Option Agreement, dated October 1, 1997, among Terrence Conway,
Michael S. Foster and FosterCo, Inc...............................
10.8 Form of Employee Proprietary Information and Inventions
Agreement.........................................................
10.9 Technology Assignment Agreement, dated October 1, 1997, between
Michael S. Foster and the Registrant..............................
10.10* Standard Sublease, dated June 8, 1995, between Foote, Cone &
Belding Communications, Inc., now known as True North
Communication, and the Registrant.................................
10.11 Form of Stockholder's Note, dated October 1, 1997.................
10.12 License Agreement and Release, dated May 31, 1995 among the
Registrant, FosterCo, Inc., Michael Foster, Terrence Conway,
Michael Wanlass and James Wanlass.................................
11.1 Statement Regarding Computation of Earnings Per Share.............
</TABLE>

<PAGE> 1
EXHIBIT 3.1

AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF SPECTRAL HOLDING CORPORATION,
a California corporation

The undersigned, Terrence Conway, hereby certifies that:

ONE: He is the duly elected and acting President and Secretary of
Spectral Holding Corporation, a California corporation (the "Corporation").

TWO: The Articles of Incorporation of the Corporation shall be amended
and restated to read in full as follows:

ARTICLE I

The name of the Corporation is Spectratek Technologies, Inc.

ARTICLE II

The purpose of the Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of California other than the banking business, the trust company business
or the practice of a profession permitted to be incorporated by the California
Corporations Code.

ARTICLE III

A. The Corporation is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock." The total
number of shares which the Corporation is authorized to issue is Twenty Million
(20,000,000) shares. Fifteen Million (15,000,000) shares shall be Common Stock.
Five Million (5,000,000) shares shall be Preferred Stock.

Upon the effective date of these Amended and Restated Articles of
Incorporation, each outstanding share of Common Stock shall be split and
reconstituted into three hundred (300) shares of Common Stock.

B. The Preferred Stock may be issued from time to time in one or more
series. The Board of Directors is hereby authorized, to fix or alter the
dividend rights, dividend rate, conversion rights, voting rights, rights and
terms of redemption (including sinking fund provisions), redemption price or
prices, and the

<PAGE> 2
liquidation preferences of any wholly unissued series of Preferred Stock, and
the number of shares constituting any such series and the designation
thereof, or any of them; and to increase or decrease the number of shares of any
series subsequent to the issuance of shares of that series, but not below the
number of shares of such series then outstanding. In case the number of shares
of any series shall be so decreased, the shares constituting such decrease shall
resume the status that they had prior to the adoption of the resolution
originally fixing the number of shares of such series.

ARTICLE IV

A. The liability of the directors of this Corporation
for monetary damages shall be eliminated to the fullest extent permissible under
California law.

B. The Corporation is authorized to indemnify the
directors and officers of the Corporation to the fullest extent permissible
under California law (as defined in Section 317(g) of the California
Corporations Code or elsewhere).

THREE: The foregoing amendment has been approved by the Board of
Directors of the Corporation.

FOUR: The foregoing amendment was approved by the holders of the
requisite number of shares of the Corporation in accordance with Sections 902
of the California General Corporation Law. The total number of outstanding
shares of each class entitled to vote with respect to the foregoing amendment
was 10,100 shares of Common Stock. The number of shares voting in favor of the
foregoing amendment equaled or exceeded the vote required, such required vote
being a majority of the outstanding shares of Common Stock.

<PAGE> 3

IN WITNESS WHEREOF, the undersigned has executed this
certificate on June 12, 1997.

/s/ TERRENCE CONWAY
------------------------------------
Terrence Conway,
President and Secretary

The undersigned certifies under penalty of perjury that
he has read the foregoing Restated Articles of Incorporation and knows the
contents thereof, and that the statements therein are true.

Executed at Los Angeles, California, on June 12, 1997.

/s/ TERRENCE CONWAY
------------------------------------
Terrence Conway

<PAGE> 1
EXHIBIT 3.2

AMENDED AND RESTATED BYLAWS

SPECTRAL HOLDING CORPORATION
(A CALIFORNIA CORPORATION)

<PAGE> 2

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I - OFFICES.......................................................... 2

ARTICLE II - SHAREHOLDERS' MEETINGS.......................................... 2
Section 1. Annual Meetings...................................... 2
Section 2. Special Meetings..................................... 2
Section 3. Place................................................ 2
Section 4. Notice............................................... 2
Section 5. Adjourned Meetings................................... 3
Section 6. Quorum............................................... 3
Section 7. Shareholder Action by Written Consent................ 3
Section 8. Waiver of Notice..................................... 3
Section 9. Voting............................................... 3
Section 10. Record Dates........................................ 4
Section 11. Cumulative Voting for Election of Directors......... 4

ARTICLE III - BOARD OF DIRECTORS............................................. 5
Section 1. Powers............................................... 5
Section 2. Number, Tenure and Qualifications.................... 5
Section 3. Regular Meetings..................................... 5
Section 4. Special Meetings..................................... 5
Section 5. Place of Meetings.................................... 5
Section 6. Participation by Telephone........................... 6
Section 7. Quorum............................................... 6
Section 8. Action at Meeting.................................... 6
Section 9. Waiver of Notice..................................... 6
Section 10. Action Without Meeting.............................. 6
Section 11. Removal............................................. 6
Section 12. Resignations........................................ 7
Section 13. Vacancies........................................... 7
Section 14. Compensation........................................ 7
Section 15. Committees.......................................... 7

ARTICLE IV - OFFICERS........................................................ 7
Section 1. Number and Term...................................... 7
Section 2. Inability to Act..................................... 8
Section 3. Removal and Resignation.............................. 8
Section 4. Vacancies............................................ 8
Section 5. Chairman of the Board................................ 8
Section 6. President............................................ 8
</TABLE>

<PAGE> 3

<TABLE>
<S> <C>
Section 7. Vice President........................................ 8
Section 8. Secretary............................................. 9
Section 9. Chief Financial Officer............................... 9
Section 10. Salaries............................................. 9
Section 11. Officers Holding More Than One Office................ 9
Section 12. Approval of Loan to Officers......................... 10

ARTICLE V - MISCELLANEOUS..................................................... 10
Section 1. Record Date and Closing of Stock Books................ 10
Section 2. Certificates.......................................... 10
Section 3. Representation of Shares in Other..................... 10
Section 4. Fiscal Year........................................... 11
Section 5. Annual Reports........................................ 11
Section 6. Amendments............................................ 11
Section 7. Indemnification of Corporate Agents................... 11

SECRETARY'S CERTIFICATE....................................................... 12
</TABLE>

<PAGE> 4

ARTICLE - OFFICES

Section 1. The principal executive office of SPECTRAL HOLDING
CORPORATION (the "Corporation") shall be at such place inside or outside the
State of California as the Board of Directors may determine from time to time.

Section 2. The Corporation may also have offices at such other
places as the Board of Directors may from time to time designate, or as the
business of the Corporation may require.

ARTICLE I - SHAREHOLDERS' MEETINGS

Section 1. Annual Meetings. The annual meeting of the shareholders
of the Corporation for the election of directors to succeed those whose terms
expire and for the transaction of such other business as may properly come
before the meeting shall be held at such place and at such time as may be fixed
from time to time by the Board of Directors and stated in the notice of the
meeting. If the annual meeting of the shareholders be not held as herein
prescribed, the election of directors may be held at any meeting thereafter
called pursuant to these Bylaws.

Section 2. Special Meetings. Special meetings of the shareholders,
for any purpose whatsoever, unless otherwise prescribed by statute, may be
called at any time by the Chairman of the Board, the President, or by the Board
of Directors, or by one or more shareholders holding not less than ten percent
(10%) of the voting power of the Corporation.

Section 3. Place. All meetings of the shareholders shall be at any
place within or without the State of California designated by the Board of
Directors or by written consent of all the persons entitled to vote thereat,
given either before or after the meeting. In the absence of any such
designation, shareholders' meetings shall be held at the principal executive
office of the Corporation.

Section 4. Notice. Notice of meetings of the shareholders of the
Corporation shall be given in writing to each shareholder entitled to vote,
either personally or by first-class mail or other means of written
communication, charges prepaid, addressed to the shareholder at his address
appearing on the books of the Corporation or given by the shareholder to the
Corporation for the purpose of notice. Notice of any such meeting of
shareholders shall be sent to each shareholder entitled thereto not less than
ten (10) nor more than sixty (60) days before the meeting. Said notice shall
state the place, date and hour of the meeting and, (1) in the case of special
meetings, the general nature of the business to be transacted, and no other
business may be transacted, or (2) in the case of annual meetings, those matters
which the Board of Directors, at the time of the mailing of the notice, intends
to present for action by the shareholders, but subject to Section 601(f) of the
California Corporations Code any proper matter may be presented at the meeting
for shareholder action, and (3) in the case of any meeting at which directors
are to be elected, the names of the nominees intended at the time of the mailing
of the notice to be presented by management for election.

<PAGE> 5

Section 5. Adjourned Meetings. Any shareholders' meeting may be
adjourned from time to time by the vote of the holders of a majority of the
voting shares present at the meeting either in person or by proxy. Notice of any
adjourned meeting need not be given unless a meeting is adjourned for forty-five
(45) days or more from the date set for the original meeting.

Section 6. Quorum. The presence in person or by proxy of the persons
entitled to vote a majority of the shares entitled to vote at any meeting
constitutes a quorum for the transaction of business. The shareholders present
at a duly called or held meeting at which a quorum is present may continue to do
business until adjournment, notwithstanding the withdrawal of enough
shareholders to leave less than a quorum, if any action taken (other than
adjournment) is approved by at least a majority of the shares required to
constitute a quorum.

In the absence of a quorum, any meeting of shareholders may be
adjourned from time to time by the vote of a majority of the shares, the holders
of which are either present in person or represented by proxy thereat, but no
other business may be transacted, except as provided above.

Section 7. Shareholder Action by Written Consent. Any action which
may be taken at any meeting of shareholders may be taken without a meeting and
without prior notice, if a consent in writing, setting forth the action so
taken, shall be signed by the holders of outstanding shares having not less than
the minimum number of votes that would be necessary to authorize or take such
action at a meeting at which all shares entitled to vote thereon were present
and voted; provided, however, that (1) unless the consents of all shareholders
entitled to vote have been solicited in writing, notice of any shareholder
approval without a meeting by less than unanimous written consent shall be given
as required by the California Corporations Code, and (2) directors may not be
elected by written consent except by unanimous written consent of all shares
entitled to vote for the election of directors.

Any written consent may be revoked by a writing received by the
Secretary of the Corporation prior to the time that written consents of the
number of shares required to authorize the proposed action have been filed with
the Secretary.

Section 8. Waiver of Notice. The transactions of any meeting of
shareholders, however called and noticed, and whenever held, shall be as valid
as though had at a meeting duly held after regular call and notice, if a quorum
be present either in person or by proxy, and if, either before or after the
meeting, each of the persons entitled to vote, not present in person or by
proxy, signs a written waiver of notice, or a consent to the holding of the
meeting, or an approval of the minutes thereof. All such waivers, consents, or
approvals shall be filed with the corporate records or made a part of the
minutes of the meeting.

Section 9. Voting. The voting at all meetings of shareholders need
not be by ballot, but any qualified shareholder before the voting begins may
demand a stock vote whereupon such stock vote shall be taken by ballot, each of
which shall state the name of the shareholder voting and the number of shares
voted by such shareholder, and if such ballot be cast by a proxy, it shall also
state the name of such proxy.

<PAGE> 6

At any meeting of the shareholders, every shareholder having the
right to vote shall be entitled to vote in person, or by proxy appointed in a
writing subscribed by such shareholder and bearing a date not more than eleven
(11) months prior to said meeting, unless the writing states that it is
irrevocable and is held by a person specified in Section 705(e) of the
California Corporations Code, in which event it is irrevocable for the period
specified in said writing and said Section 705(e).

Section 10. Record Dates. In the event the Board of Directors fixes
a day for the determination of shareholders of record entitled to vote as
provided in Section 1 of Article V of these Bylaws, then, subject to the
provisions of the General Corporation Law of the State of California, only
persons in whose name shares entitled to vote stand on the stock records of the
Corporation at the close of business on such day shall be entitled to vote.

If no record date is fixed:

The record date for determining shareholders entitled to notice of
or to vote at a meeting of shareholders shall be at the close of business on the
business day next preceding the day notice is given or, if notice is waived, at
the close of business on the business day next preceding the day on which the
meeting is held;

The record date for determining shareholders entitled to give
consent to corporate action in writing without a meeting, when no prior action
by the Board of Directors is necessary, shall be the day on which the first
written consent is given; and

The record date for determining shareholders for any other purpose
shall be at the close of business on the day on which the Board of Directors
adopts the resolution relating thereto, or the sixtieth (60th) day prior to the
date of such other action, whichever is later.

A determination of shareholders of record entitled to notice of or
to vote at a meeting of shareholders shall apply to any adjournment of the
meeting unless the Board of Directors fixes a new record date for the adjourned
meeting, but the Board of Directors shall fix a new record date if the meeting
is adjourned for more than forty-five (45) days.

Section 11. Cumulative Voting for Election of Directors. Provided
the candidate's name has been placed in nomination prior to the voting and one
or more shareholders has given notice at the meeting prior to the voting of the
shareholder's intent to cumulate the shareholder's votes, every shareholder
entitled to vote at any election for directors shall have the right to cumulate
such shareholder's votes and give one candidate a number of votes equal to the
number of directors to be elected multiplied by the number of votes to which the
shareholder's shares are normally entitled, or distribute the shareholder's
votes on the same principle among as many candidates as the shareholder shall
think fit. The candidates receiving the highest number of votes of the shares
entitled to be voted for them up to the number of directors to be elected by
such shares are elected.

<PAGE> 7

ARTICLE II - BOARD OF DIRECTORS

Section 1. Powers. Subject to any limitations in the Articles of
Incorporation or these Bylaws and to any provision of the California
Corporations Code requiring shareholder authorization or approval for a
particular action, the business and affairs of the Corporation shall be managed
and all corporate powers shall be exercised by, or under the direction of, the
Board of Directors. The Board of Directors may delegate the management of the
day-to-day operation of the business of the Corporation to a management company
or other person provided that the business and affairs of the Corporation shall
be managed and all corporate powers shall be exercised, under the ultimate
direction of the Board of Directors.

Section 2. Number, Tenure and Qualifications. The number of
directors that shall constitute the whole board shall be not less than five (5)
nor more than nine (9) . The exact number of directors may be fixed from time to
time within such limit by a duly adopted resolution of the Board of Directors or
shareholders. The exact number of directors presently authorized shall be five
(5) until changed within the limits specified above by a duly adopted resolution
of the Board of Directors or shareholders. Directors need not be shareholders.

Directors shall hold office until the next annual meeting of
shareholders and until their respective successors are elected. If any such
annual meeting is not held, or the directors are not elected thereat, the
directors may be elected at any special meeting of shareholders held for that
purpose. Directors need not be shareholders.

Section 3. Regular Meetings. A regular annual meeting of the Board
of Directors shall be held without other notice than this Bylaw immediately
after, and at the same place as, the annual meeting of shareholders. The Board
of Directors may provide for other regular meetings from time to time by
resolution.

Section 4. Special Meetings. Special meetings of the Board of
Directors may be called at any time by the Chairman of the Board, or the
President or any Vice President, or the Secretary or any two (2) directors.
Written notice of the time and place of all special meetings of the Board of
Directors shall be delivered personally or by telephone or telegraph to each
director at least forty-eight (48) hours before the meeting, or sent to each
director by first-class mail, postage prepaid, at least four (4) days before the
meeting. Such notice need not specify the purpose of the meeting. Notice of any
meeting of the Board of Directors need not be given to any director who signs a
waiver of notice, whether before or after the meeting, or who attends the
meeting without protesting prior thereto or at its commencement, the lack of
notice to such director.

Section 5. Place of Meetings. Meetings of the Board of Directors may
be held at any place within or without the State of California, which has been
designated in the notice, or if not stated in the notice or there is no notice,
the principal executive office of the Corporation or as designated by the
resolution duly adopted by the Board of Directors.

<PAGE> 8

Section 6. Participation by Telephone. Members of the Board of
Directors may participate in a meeting through use of conference telephone or
similar communications equipment, so long as all members participating in such
meeting can hear one another.

Section 7. Quorum. A majority of the Board of Directors shall
constitute a quorum at all meetings. In the absence of a quorum a majority of
the directors present may adjourn any meeting to another time and place. If a
meeting is adjourned for more than twenty-four (24) hours, notice of any
adjournment to another time or place shall be given prior to the time of the
reconvened meting to the directors who were not present at the time of
adjournment.

Section 8. Action at Meeting. Every act or decision done or made by
a majority of the directors present at a meeting duly held at which a quorum is
present is the act of the Board of Directors. A meeting at which a quorum is
initially present may continue to transact business notwithstanding the
withdrawal of directors, if any action taken is approved by at least a majority
of the required quorum for such meeting.

Section 9. Waiver of Notice. The transactions of any meeting of the
Board of Directors, however called and noticed or wherever held, are as valid as
though had at a meeting duly held after regular call and notice if a quorum is
present and if, either before or after the meeting, each of the directors not
present signs a written waiver of notice, a consent to holding the meeting, or
an approval of the minutes thereof. All such waivers, consents and approvals
shall be filed with the corporate records or made a part of the minutes of the
meeting.

Section 10. Action Without Meeting. Any action required or permitted
to be taken by the Board of Directors may be taken without a meeting, if all
members of the Board individually or collectively consent in writing to such
action. Such written consent or consents shall be filed with the minutes of the
proceedings of the Board. Such action by written consent shall have the same
force and effect as a unanimous vote of such directors.

Section 11. Removal. The Board of Directors may declare vacant the
office of a director who has been declared of unsound mind by an order of court
or who has been convicted of a felony.

The entire Board of Directors or any individual director may be
removed from office without cause by a vote of shareholders holding a majority
of the outstanding shares entitled to vote at an election of directors;
provided, however, that unless the entire Board is removed, no individual
director may be removed when the votes cast against removal, or not consenting
in writing to such removal, would be sufficient to elect such director if voted
cumulatively at an election at which the same total number of votes cast were
cast (or, if such action is taken by written consent, all shares entitled to
vote were voted) and the entire number of directors authorized at the time of
the director's most recent election were then being elected.

In the event an office of a director is so declared vacant or in
case the Board or any one or more directors be so removed, new directors may be
elected at the same meeting.

<PAGE> 9

Section 12. Resignations. Any director may resign effective upon
giving written notice to the Chairman of the Board, the President, the Secretary
or the Board of Directors of the Corporation, unless the notice specifies a
later time for the effectiveness of such resignation. If the resignation is
effective at a future time, a successor may be elected to take office when the
resignation becomes effective.

Section 13. Vacancies. Except for a vacancy created by the removal
of a director, all vacancies in the Board of Directors, whether caused by
resignation, death or otherwise, may be filled by a majority of the remaining
directors, though less than a quorum, or by a sole remaining director, and each
director so elected shall hold office until his successor is elected at an
annual, regular or special meeting of the shareholders. Vacancies created by the
removal of a director may be filled only by approval of the shareholders. The
shareholders may elect a director at any time to fill any vacancy not filled by
the directors. Any such election by written consent requires the consent of a
majority of the outstanding shares entitled to vote.

Section 14. Compensation. No stated salary shall be paid directors,
as such, for their services, but, by resolution of the Board of Directors, a
fixed sum and expenses of attendance, if any, may be allowed for attendance at
each regular or special meeting of such Board; provided that nothing herein
contained shall be construed to preclude any director from serving the
Corporation in any other capacity and receiving compensation therefor. Members
of special or standing committees may be allowed like compensation for attending
committee meetings.

Section 15. Committees. The Board of Directors may, by resolution
adopted by a majority of the authorized number of directors, designate one or
more committees, each consisting of two (2) or more directors, to serve at the
pleasure of the Board of Directors. The Board of Directors may designate one or
more directors as alternate members of any committee, who may replace any absent
member at any meeting of the committee. The appointment of members or alternate
members of a committee requires the vote of a majority of the authorized number
of directors. Any such committee, to the extent provided in the resolution of
the Board of Directors, shall have all the authority of the Board of Directors
in the management of the business and affairs of the Corporation, except with
respect to (a) the approval of any action requiring shareholders' approval or
approval of the outstanding shares, (b) the filling of vacancies on the Board or
any committee, (c) the fixing of compensation of directors for serving on the
Board or a committee, (d) the adoption, amendment or repeal of Bylaws, (e) the
amendment or repeal of any resolution of the Board which by its express terms is
not so amendable or repealable, (f) a distribution to shareholders, except at a
rate or in a periodic amount or within a price range determined by the Board,
and (g) the appointment of other committees of the Board or the members thereof.

ARTICLE III - OFFICERS

Section 1. Number and Term. The officers of the Corporation shall be
a Chairman of the Board, a President, one or more Vice-Presidents, a Secretary
and a Chief Financial Officer, all of which shall be chosen by the Board of
Directors. In addition, the Board of Directors may

<PAGE> 10

appoint such other officers as may be deemed expedient for the proper conduct
of the business of the Corporation, each of whom shall have such authority and
perform such duties as the Board of Directors may from time to time determine.
The officers to be appointed by the Board of Directors shall be chosen annually
at the regular meeting of the Board of Directors held after the annual meeting
of shareholders and shall serve at the pleasure of the Board of Directors. If
officers are not chosen at such meeting of the Board of Directors, they shall be
chosen as soon thereafter as shall be convenient. Each officer shall hold office
until his successor shall have been duly chosen or until his removal or
resignation.

Section 2. Inability to Act. In the case of absence or inability to
act of any officer of the Corporation and of any person herein authorized to act
in his place, the Board of Directors may from time to time delegate the powers
or duties of such officer to any other officer, or any director or other person
whom it may select.

Section 3. Removal and Resignation. Any officer chosen by the Board
of Directors may be removed at any time, with or without cause, by the
affirmative vote of a majority of all the members of the Board of Directors.

Any officer chosen by the Board of Directors may resign at any time
by giving written notice of said resignation to the Corporation. Unless a
different time is specified therein, such resignation shall be effective upon
its receipt by the Chairman of the Board, the President, the Secretary or the
Board of Directors.

Section 4. Vacancies. A vacancy in any office because of any cause
may be filled by the Board of Directors for the unexpired portion of the term.

Section 5. Chairman of the Board. The Chairman of the Board shall
preside at all meetings of the Board.

Section 6. President. The President shall be the Chief Executive
Officer of the corporation unless such title is assigned to another officer of
the corporation; in the absence of a Chairman and Vice Chairman of the Board,
the President shall preside as the chairman of meetings of the shareholders and
the Board of Directors; and the President shall have general and active
management of the business of the corporation and shall see that all orders and
resolutions of the Board of Directors are carried into effect. The President or
any Vice- President shall execute bonds, mortgages and other contracts requiring
a seal, under the seal of the corporation, except where required or permitted by
law to be otherwise signed and executed and except where the signing and
execution thereof shall be expressly delegated by the Board of Directors to some
other officer or agent of the corporation.

Section 7. Vice President. In the absence of the President, or in
the event of such officer's death, disability or refusal to act, the Vice
President, or in the event there be more than one Vice President, the Vice
Presidents in the order designated at the time of their selection, or in the
absence of such designation, then in the order of their selection, shall perform
the duties

<PAGE> 11

of President, and when so acting, shall have all the powers and be subject to
all restrictions upon the President. The Vice President shall have such powers
and discharge such duties as may be assigned from time to time by the President
or by the Board of Directors.

Section 8. Secretary. The Secretary shall see that notices for all
meetings are given in accordance with the provisions of these Bylaws and as
required by law, shall keep minutes of all meetings, shall have charge of the
seal and the corporate books, and shall make such reports and perform such other
duties as are incident to such office, or as are properly required by the
President or by the Board of Directors.

The Assistant Secretary or the Assistant Secretaries, in the order
of their seniority, shall, in the absence or disability of the Secretary, or in
the event of such officer's refusal to act, perform the duties and exercise the
powers and discharge such duties as may be assigned from time to time by the
President or by the Board of Directors.

Section 9. Chief Financial Officer. The Chief Financial Officer may
also be designated by the alternate title of "Treasurer." The Chief Financial
Officer shall have the custody of the corporate funds and securities and shall
keep full and accurate accounts of receipts and disbursements in books belonging
to the corporation and shall deposit all moneys and other valuable effects in
the name and to the credit of the corporation in such depositories as may be
designated by the Board of Directors. The Chief Financial Officer shall disburse
the funds of the corporation as may be ordered by the Board of Directors,
President or Chief Executive Officer, taking proper vouchers for such
disbursements, and shall render to the President, Chief Executive Officer and
the Board of Directors, at its regular meetings, or when the Board of Directors
so requires, an account of all his transactions as Chief Financial Officer and
of the financial condition of the corporation. If required by the Board of
Directors, the Chief Financial Officer shall give the corporation a bond (which
shall be renewed every six (6) years) in such sum and with such surety or
sureties as shall be satisfactory to the Board of Directors for the faithful
performance of the duties of his office and for the restoration to the
corporation, in case of his death, resignation, retirement or removal from
office, of all books, papers, vouchers, money and other property of whatever
kind in his possession or under his control belonging to the corporation.

The Assistant Treasurer or the Assistant Treasurers, in the order of
their seniority, shall, in the absence or Chief Financial Officer, or in the
event of such officer's refusal to act, perform the duties and exercise the
powers of the Chief Financial Officer, and shall have such powers and discharge
such duties as may be assigned from time to time by the President or by the
Board of Directors.

Section 10. Salaries. The salaries of the officers shall be fixed
from time to time by the Board of Directors and no officer shall be prevented
from receiving such salary by reason of the fact that such officer is also a
director of the Corporation.

<PAGE> 12

Section 11. Officers Holding More Than One Office. Any two or more
offices may be held by the same person, but no officer shall execute,
acknowledge or verify any instrument in more than one capacity.

Section 12. Approval of Loan to Officers. The Corporation may upon
the approval of the Board of Directors alone, make loans or money or property
to, or guarantee the obligations of, any officer of the Corporation or its
parent or subsidiary, whether or not a director, or adopt an employee benefit
plan or plans authorizing such loans or guaranties provided that (i) the Board
of Directors determines that such a loan or guaranty or plan may reasonably be
expected to benefit the Corporation, (ii) the Corporation has outstanding shares
held of record by 100 or more persons (determined as provided in Section 605 of
the California Corporations Code) on the date of approval by the Board of
Directors, and (iii) the approval of the Board of Directors is by a vote
sufficient without counting the vote of any interested director or directors.
(1/)

ARTICLE IV - MISCELLANEOUS

Section 1. Record Date and Closing of Stock Books. The Board of
Directors may fix a time in the future as a record date for the determination of
the shareholders entitled to notice of and to vote at any meeting of
shareholders or entitled to receive payment of any dividend or distribution, or
any allotment of rights, or to exercise rights in respect to any other lawful
action. The record date so fixed shall not be more than sixty (60) nor less than
ten (10) days prior to the date of the meeting or event for the purposes of
which it is fixed. When a record date is so fixed, only shareholders of record
at the close of business on that date are entitled to notice of and to vote at
the meeting or to receive the dividend, distribution, or allotment of rights, or
to exercise the rights, as the case may be, notwithstanding any transfer of any
shares on the books of the Corporation after the record date.

The Board of Directors may close the books of the Corporation
against transfers of shares during the whole or any part of a period of not more
than sixty (60) days prior to the date of a shareholders' meeting, the date when
the right to any dividend, distribution, or allotment of rights vests, or the
effective date of any change, conversion or exchange of shares.

Section 2. Certificates. Certificates of stock shall be issued in
numerical order and each shareholder shall be entitled to a certificate signed
in the name of the Corporation by the Chairman of the Board or the President or
a Vice President, and the Chief Financial Officer or the Secretary or an
Assistant Secretary, certifying to the number of shares owned by such
shareholder. Any or all of the signatures on the certificate may be facsimile.
Prior to the due presentment for registration of transfer in the stock transfer
book of the Corporation, the registered owner shall be treated as the person
exclusively entitled to vote, to receive notifications

- --------
1This section is effective only if it has been approved by the shareholders in
accordance with Sections 315(b) and 152 of the California Corporations Code.

<PAGE> 13

and otherwise to exercise all the rights and powers of an owner, except as
expressly provided otherwise by the laws of the State of California.

Section 3. Representation of Shares in Other Corporations. Shares of
other corporations standing in the name of this Corporation may be voted or
represented and all incidents thereto may be exercised on behalf of the
Corporation by the Chairman of the Board President or the Vice President and the
Chief Financial Officer or the Secretary or an Assistant Secretary.

Section 4. Fiscal Year. The fiscal year of the Corporation shall be
fixed by resolution of the Board of Directors.

Section 5. Annual Reports. The Annual Report to shareholders,
described in the California Corporations Code, is expressly waived and
dispensed with.

Section 6. Amendments. Bylaws may be adopted, amended, or repealed
by the vote or the written consent of shareholders entitled to exercise a
majority of the voting power of the Corporation. Subject to the right of
shareholders to adopt, amend, or repeal Bylaws, Bylaws may be adopted, amended,
or repealed by the Board of Directors, except that a Bylaw amendment thereof
changing the authorized number of directors may be adopted by the Board of
Directors only if these Bylaws permit an indefinite number of directors and the
Bylaw or amendment thereof adopted by the Board of Directors changes the
authorized number of directors within the limits specified in these Bylaws.

Section 7. Indemnification of Corporate Agents. The Corporation
shall indemnify each of its agents against expenses, judgments, fines,
settlements and other amounts, actually and reasonably incurred by such person
by reason of such person's having been made or having been threatened to be made
a party to a proceeding to the fullest extent permissible under the California
Corporations Code and the Corporation shall advance the expenses reasonably
expected to be incurred by such agent in defending any such proceeding upon
receipt of the undertaking required by subdivision (f) of Section 317 of the
California Corporations Code. The terms "agent," "proceeding" and "expenses"
made in this Section 7 shall have the same meaning as such terms in said Section
317.

<PAGE> 14

SECRETARY'S CERTIFICATE

I, TERRENCE CONWAY, Secretary of SPECTRAL HOLDING CORPORATION (the
"Corporation"), a California corporation, do hereby certify that the attached
document is a true and complete copy of the Amended and Restated Bylaws of the
Corporation as in effect on the date hereof.

Dated: April 1, 1997.

/s/ TERRENCE CONWAY
--------------------------------
TERRENCE CONWAY
Secretary

<PAGE> 1

EXHIBIT 4.2

SPECTRAL HOLDING CORPORATION
1997 STOCK INCENTIVE PLAN

ARTICLE ONE

GENERAL PROVISIONS

I. PURPOSE OF THE PLAN

This 1997 Stock Incentive Plan is intended to promote the interests of
Spectral Holding Corporation, a California corporation doing business as
Spectratek Corporation, by providing eligible persons with the opportunity to
acquire a proprietary interest, or otherwise increase their proprietary
interest, in the Corporation as an incentive for them to remain in the service
of the Corporation.

Capitalized terms shall have the meanings assigned to such terms in the
attached Appendix.

II. STRUCTURE OF THE PLAN

A. The Plan shall be divided into three separate equity programs:

(i) the Discretionary Option Grant Program under which eligible
persons may, at the discretion of the Plan Administrator, be granted options to
purchase shares of Common Stock,

(ii) the Stock Issuance Program under which eligible persons
may, at the discretion of the Plan Administrator, be issued shares of Common
Stock directly, either through the immediate purchase of such shares or as a
bonus for services rendered the Corporation (or any Parent or Subsidiary), and

(iii) the Automatic Option Grant Program under which eligible
non-employee Board members shall automatically receive option grants at periodic
intervals to purchase shares of Common Stock.

B. The provisions of Articles One and Five shall apply to all equity
programs under the Plan and shall govern the interests of all persons under the
Plan.

<PAGE> 2

III. ADMINISTRATION OF THE PLAN

A. Prior to the Section 12 Registration Date, the Discretionary
Option Grant and Stock Issuance Programs shall be administered by the Board.
Effective with the Section 12 Registration Date, the Primary Committee shall
have sole and exclusive authority to administer the Discretionary Option Grant
and Stock Issuance Programs with respect to Section 16 Insiders. Administration
of the Discretionary Option Grant and Stock Issuance Programs with respect to
all other persons eligible to participate in those programs may, at the Board's
discretion, be vested in the Primary Committee or a Secondary Committee, or the
Board may retain the power to administer those programs with respect to such
persons.

B. Members of the Primary Committee or any Secondary Committee shall
serve for such period of time as the Board may determine and may be removed by
the Board at any time. The Board may also at any time terminate the functions of
any Secondary Committee and reassume all powers and authority previously
delegated to such committee or transfer such power and authority to the Primary
Committee.

C. Each Plan Administrator shall, within the scope of its
administrative jurisdiction under the Plan, have full power and authority
(subject to the provisions of the Plan) to establish such rules and regulations
as it may deem appropriate for proper administration of the Discretionary Option
Grant and Stock Issuance Programs and to make such determinations under, and
issue such interpretations of, the provisions of such programs and any
outstanding options or stock issuances thereunder as it may deem necessary or
advisable. Decisions of the Plan Administrator within the scope of its
administrative jurisdiction under the Plan shall be final and binding on all
parties who have an interest in the Discretionary Option Grant and Stock
Issuance Programs under its jurisdiction or any option or stock issuance
thereunder.

D. Service on the Primary Committee or the Secondary Committee shall
constitute service as a Board member, and members of each such committee shall
accordingly be entitled to full indemnification and reimbursement as Board
members for their service on such committee. No member of the Primary Committee
or the Secondary Committee shall be liable for any act or omission made in good
faith with respect to the Plan or any option grants or stock issuances under the
Plan.

E. Administration of the Automatic Option Grant shall be self-
executing in accordance with the terms of those programs, and no Plan
Administrator shall exercise any discretionary functions with respect to any
option grants or stock issuances made under those programs.

<PAGE> 3

IV. ELIGIBILITY

A. The persons eligible to participate in the Discretionary Option
Grant and Stock Issuance Programs are as follows:

(i) Employees,

(ii) non-employee members of the Board or the board of
directors of any Parent or Subsidiary, and

(iii) consultants and other independent advisors who
provide services to the Corporation (or any Parent or Subsidiary).

B. Each Plan Administrator shall, within the scope of its
administrative jurisdiction under the Plan, have full authority to determine,
(i) with respect to the option grants under the Discretionary Option Grant
Program, which eligible persons are to receive option grants, the time or times
when such option grants are to be made, the number of shares to be covered by
each such grant, the status of the granted option as either an Incentive Option
or a Non-Statutory Option, the time or times when each option is to become
exercisable, the vesting schedule (if any) applicable to the option shares and
the maximum term for which the option is to remain outstanding and (ii) with
respect to stock issuances under the Stock Issuance Program, which eligible
persons are to receive such stock issuances, the time or times when such
issuances are to be made, the number of shares to be issued to each Participant,
the vesting schedule (if any) applicable to the issued shares and the
consideration to be paid for such shares.

C. The Plan Administrator shall have the absolute discretion either
to grant options in accordance with the Discretionary Option Grant Program or to
effect stock issuances in accordance with the Stock Issuance Program.

D. The individuals who shall be eligible to participate in the
Automatic Option Grant Program shall be limited to (i) those individuals who
are serving as non-employee Board members on the Underwriting Date, provided
they have not previously received a stock option grant from the Corporation in
connection with their Board service, (ii) those individuals who first become
non-employee Board members at any time after the Underwriting Date, whether
through appointment by the Board or election by the Corporation's stockholders,
and (iii) those individuals who continue to serve as non-employee Board members
at one or more Annual Stockholders Meetings held after the Underwriting Date. A
non-employee Board member who has previously been in the employ of the
Corporation (or any Parent or Subsidiary) shall not be eligible to receive an
option grant under the Automatic Option Grant Program at the time he or she
first becomes a non-employee Board member, but shall be eligible to receive
periodic option grants under the Automatic Option Grant Program while he or she
continues to serve as a non-employee Board member.

<PAGE> 4

V. STOCK SUBJECT TO THE PLAN

A. The stock issuable under the Plan shall be shares of authorized
but unissued or reacquired Common Stock, including shares repurchased by the
Corporation on the open market. The maximum number of shares of Common Stock
initially reserved for issuance over the term of the Plan shall not exceed one
thousand ten (1,010) shares (or 303,000 shares after giving effect to the
proposed 300-for-1 stock split).

B. No one person participating in the Plan may receive options,
separately exercisable stock appreciation rights and direct stock issuances for
more than two hundred (200) shares (or 60,000 shares after giving effect to the
proposed 300-for-1 stock split) of Common Stock in the aggregate per calendar
year, beginning with the 1997 calendar year.

C. Shares of Common Stock subject to outstanding options shall be
available for subsequent issuance under the Plan to the extent those options
expire or terminate for any reason prior to exercise in full. Unvested shares
issued under the Plan and subsequently repurchased by the Corporation, at the
original exercise or issue price paid per share, pursuant to the Corporation's
repurchase rights under the Plan shall be added back to the number of shares of
Common Stock reserved for issuance under the Plan and shall accordingly be
available for reissuance through one or more subsequent option grants or direct
stock issuances under the Plan. However, should the exercise price of an option
under the Plan be paid with shares of Common Stock or should shares of Common
Stock otherwise issuable under the Plan be withheld by the Corporation in
satisfaction of the withholding taxes incurred in connection with the exercise
of an option or the vesting of a stock issuance under the Plan, then the number
of shares of Common Stock available for issuance under the Plan shall be reduced
by the gross number of shares for which the option is exercised or which vest
under the stock issuance, and not by the net number of shares of Common Stock
issued to the holder of such option or stock issuance.

D. If any change is made to the Common Stock by reason of any stock
split, stock dividend, recapitalization, combination of shares, exchange of
shares or other change affecting the outstanding Common Stock as a class without
the Corporation's receipt of consideration, appropriate adjustments shall be
made to (i) the maximum number and/or class of securities issuable under the
Plan, (ii) the number and/or class of securities for which any one person may be
granted stock options, separately exercisable stock appreciation rights and
direct stock issuances under this Plan per calendar year, (iii) the number
and/or class of securities for which grants are subsequently to be made under
the Automatic Option Grant Program to new and continuing non-employee Board
members, (iv) the number and/or class of securities and the exercise price per
share in effect under each outstanding option under the Plan. Such adjustments
to the outstanding options are to be effected in a manner which shall preclude
the enlargement or dilution of rights and benefits under such options. The
adjustments determined by the Plan Administrator shall be final, binding and
conclusive.

<PAGE> 5

ARTICLE TWO

DISCRETIONARY OPTION GRANT PROGRAM

I. OPTION TERMS

Each option shall be evidenced by one or more documents in the form
approved by the Plan Administrator; provided, however, that each such document
shall comply with the terms specified below. Each document evidencing an
Incentive Option shall, in addition, be subject to the provisions of the Plan
applicable to such options.

A. EXERCISE PRICE.

1. The exercise price per share shall be fixed by the Plan
Administrator but shall not be less than one hundred percent (100%) of the Fair
Market Value per share of Common Stock on the option grant date. However, if the
person to whom the option is granted is a 10% Stockholder, then the exercise
price per share shall not be less than one hundred ten percent (110%) of the
Fair Market Value per share of Common Stock on the option grant date.

2. The exercise price shall become immediately due upon
exercise of the option and shall, subject to the provisions of Section I of
Article Four and the documents evidencing the option, be payable in cash or
check made payable to the Corporation. Should the Common Stock be registered
under Section 12(g) of the 1934 Act at the time the option is exercised, then
the exercise price may also be paid as follows:

(i) in shares of Common Stock held for the requisite
period necessary to avoid a charge to the Corporation's earnings for
financial reporting purposes and valued at Fair Market Value on the
Exercise Date, or

(ii) to the extent the option is exercised for vested
shares, through a special sale and remittance procedure pursuant to
which the Optionee shall concurrently provide irrevocable
instructions (A) to a Corporation-designated brokerage firm to
effect the immediate sale of the purchased shares and remit to the
Corporation, out of the sale proceeds available on the settlement
date, sufficient funds to cover the aggregate exercise price payable
for the purchased shares plus all applicable Federal, state and
local income and employment taxes required to be withheld by the
Corporation by reason of such exercise and (B) to the Corporation to
deliver the certificates for the purchased shares directly to such
brokerage firm in order to complete the sale.

5.
<PAGE> 6

Except to the extent such sale and remittance procedure is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.

B. EXERCISE AND TERM OF OPTIONS. Each option shall be exercisable at
such time or times, during such period and for such number of shares as shall be
determined by the Plan Administrator and set forth in the documents evidencing
the option. However, no option shall have a term in excess of ten (10) years
measured from the option grant date.

C. EFFECT OF TERMINATION OF SERVICE.

1. The following provisions shall govern the exercise of any
options held by the Optionee at the time of cessation of Service or death:

(i) Should the Optionee cease to remain in Service for
any reason other than death, Disability or Misconduct, then the
Optionee shall have a period of three (3) months following the date
of such cessation of Service during which to exercise each
outstanding option held by such Optionee.

(ii) Should Optionee's Service terminate by reason of
Disability, then the Optionee shall have a period of twelve (12)
months following the date of such cessation of Service during which
to exercise each outstanding option held by such Optionee.

(iii) If the Optionee dies while holding an outstanding
option, then the personal representative of his or her estate or the
person or persons to whom the option is transferred pursuant to the
Optionee's will or the laws of inheritance shall have a twelve
(12)-month period following the date of the Optionee's death to
exercise such option.

(iv) Under no circumstances, however, shall any such
option be exercisable after the specified expiration of the option
term.

(v) During the applicable post-Service exercise period,
the option may not be exercised in the aggregate for more than the
number of vested shares for which the option is exercisable on the
date of the Optionee's cessation of Service. Upon the expiration of
the applicable exercise period or (if earlier) upon the expiration
of the option term, the option shall terminate and cease to be
outstanding for any vested shares for which the option has not been
exercised. However, the option shall, immediately upon the
Optionee's cessation of Service, terminate and cease to be
outstanding with respect to any and all option shares for which the
option is not otherwise at the time exercisable or in which the
Optionee is not otherwise at that time vested.

<PAGE> 7

(vi) Should Optionee's Service be terminated for
Misconduct, then all outstanding options held by the Optionee shall
terminate immediately and cease to remain outstanding.

2. The Plan Administrator shall have complete discretion,
exercisable either at the time an option is granted or at any time while the
option remains outstanding, to:

(i) extend the period of time for which the option is to
remain exercisable following the Optionee's cessation of Service
from the limited exercise period otherwise in effect for that option
to such greater period of time as the Plan Administrator shall deem
appropriate, but in no event beyond the expiration of the option
term, and/or

(ii) permit the option to be exercised, during the
applicable post-Service exercise period, not only with respect to
the number of vested shares of Common Stock for which such option is
exercisable at the time of the Optionee's cessation of Service but
also with respect to one or more additional installments in which
the Optionee would have vested had the Optionee continued in
Service.

D. STOCKHOLDER RIGHTS. The holder of an option shall have no
stockholder rights with respect to the shares subject to the option until such
person shall have exercised the option, paid the exercise price and become a
holder of record of the purchased shares.

E. UNVESTED SHARES. The Plan Administrator shall have the discretion
to grant options which are exercisable for unvested shares of Common Stock.
Should the Optionee cease Service while holding such unvested shares, the
Corporation shall have the right to repurchase, at the exercise price paid per
share, all or (at the discretion of the Corporation and with the consent of the
Optionee) any of those unvested shares. The terms upon which such repurchase
right shall be exercisable (including the period and procedure for exercise and
the appropriate vesting schedule for the purchased shares) shall be established
by the Plan Administrator and set forth in the document evidencing such
repurchase right. The Plan Administrator may not impose a vesting schedule upon
any option grant or any shares of Common Stock subject to the option which is
more restrictive than twenty percent (20%) per year vesting, with the initial
vesting to occur not later than one (1) year after the option grant date.
However, such limitation shall not be applicable to any option grants made to
individuals who are officers of the Corporation, non-employee Board members or
independent consultants.

F. LIMITED TRANSFERABILITY OF OPTIONS. During the lifetime of the
Optionee, the option shall be exercisable only by the Optionee and shall not be
assignable or transferable other than by will or by the laws of descent and
distribution following the Optionee's death.

II. INCENTIVE OPTIONS

<PAGE> 8

The terms specified below shall be applicable to all Incentive
Options. Except as modified by the provisions of this Section II, all the
provisions of Articles One, Two and Five shall be applicable to Incentive
Options. Options designated as Non-Statutory Options when issued under the Plan
shall not be subject to the terms of this Section II.

A. ELIGIBILITY. Incentive Options may be granted only to Employees.

B. DOLLAR LIMITATION. The aggregate Fair Market Value of the shares
of Common Stock (determined as of the respective date or dates of grant) for
which one or more options granted to any Employee under the Plan (or any other
option plan of the Corporation or any Parent or Subsidiary) may for the first
time become exercisable as Incentive Options during any one calendar year shall
not exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent the
Employee holds two (2) or more such options which become exercisable for the
first time in the same calendar year, the foregoing limitation on the
exercisability of such options as Incentive Options shall be applied on the
basis of the order in which such options are granted.

C. 10% STOCKHOLDER. If any Employee to whom an Incentive Option is
granted is a 10% Stockholder, then the option term shall not exceed five (5)
years measured from the option grant date.

III. CORPORATE TRANSACTION/CHANGE IN CONTROL

A. The shares subject to each option outstanding under the
Discretionary Option Grant Program at the time of a Corporate Transaction shall
automatically vest in full so that each such option shall, immediately prior to
the effective date of the Corporate Transaction, become fully exercisable for
all of the shares of Common Stock at the time subject to that option and may be
exercised for any or all of those shares as fully-vested shares of Common Stock.
However, the shares subject to an outstanding option shall NOT vest on such an
accelerated basis if and to the extent: (i) such option is assumed by the
successor corporation (or parent thereof) in the Corporate Transaction or (ii)
such option is to be replaced with a cash incentive program of the successor
corporation which preserves the spread existing on the unvested option shares at
the time of the Corporate Transaction and provides for subsequent payout in
accordance with the same exercise/vesting schedule applicable to those unvested
option shares or (iii) the acceleration of such option is subject to other
limitations imposed by the Plan Administrator at the time of the option grant.

B. All outstanding repurchase rights shall also terminate
automatically, and the Common Stock subject to those terminated rights shall
immediately vest in full, in the event of any Corporate Transaction, except to
the extent: (i) those repurchase rights are to be assigned to the successor
corporation (or parent thereof) in connection with such Corporate Transaction or
(ii) such accelerated vesting is precluded by other limitations imposed by the
Plan Administrator at the time the repurchase right is issued.

<PAGE> 9

C. Immediately following the consummation of the Corporate
Transaction, all outstanding options shall terminate and cease to be
outstanding, except to the extent assumed by the successor corporation (or
parent thereof).

D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments to reflect such Corporate Transaction shall also be made
to (i) the exercise price payable per share under each outstanding option,
provided the aggregate exercise price payable for such securities shall remain
the same, (ii) the maximum number and/or class of securities available for
issuance over the remaining term of the Plan and (iii) the maximum number and/or
class of securities for which any one person may be granted stock options,
separately exercisable stock appreciation rights and direct stock issuances
under the Plan per calendar year.

E. The Plan Administrator shall have the discretionary authority,
exercisable either at the time the option is granted or at any time while the
option remains outstanding, to provide for the automatic acceleration of one or
more outstanding options under the Discretionary Option Grant Program upon the
occurrence of a Corporate Transaction, whether or not those options are to be
assumed or replaced in the Corporate Transaction. In addition, the Plan
Administrator shall have the discretionary authority to structure one or more of
the Corporation's repurchase rights so that those rights shall not be assignable
in connection with a Corporate Transaction and shall accordingly terminate upon
the consummation of such Corporate Transaction, and the shares subject to those
terminated repurchase rights shall immediately vest in full, whether or not the
options under which those shares are purchasable are to be assumed by the
successor corporation.

F. The Plan Administrator shall have full power and authority
exercisable, either at the time the option is granted or at any time while the
option remains outstanding, to provide for the automatic acceleration of one or
more outstanding options under the Discretionary Option Grant Program in the
event the Optionee's Service is subsequently terminated by reason of an
Involuntary Termination within a designated period (not to exceed eighteen (18)
months) following the effective date of any Corporate Transaction in which those
options are assumed or replaced and do not otherwise accelerate. Any options so
accelerated shall remain exercisable for fully-vested shares until the earlier
of (i) the expiration of the option term or (ii) the expiration of the one
(1)-year period measured from the effective date of the Involuntary Termination.
In addition, the Plan Administrator shall have the discretionary authority to
structure one or more of the Corporation's repurchase rights so that those
repurchase rights shall immediately terminate with respect to any shares held by
the Optionee at the time of his or her Involuntary Termination, and the shares
subject to those terminated rights shall accordingly vest in full.

G. The Plan Administrator shall have full power and authority
exercisable, either at the time the option is granted or at any time while the
option remains outstanding, to provide for

<PAGE> 10

the automatic acceleration of one ore more outstanding options under the
Discretionary Option Grant Program upon (i) a Change in Control or (ii) the
subsequent termination of the Optionee's Service by reason of an Involuntary
Termination within a designated period (not to exceed eighteen (18) months)
following the effective date of such Change in Control. Each option so
accelerated shall remain exercisable for fully-vested shares until the earlier
of (i) the expiration of the option term or (ii) the expiration of the one
(1)-year period measured from the effective date of the Optionee's cessation of
Service. In addition, the Plan Administrator shall have the discretionary
authority to structure one or more of the Corporation's repurchase rights so
that those repurchase rights shall immediately terminate with respect to any
shares held by the Optionee at the time of such Change in Control or Involuntary
Termination, and the shares subject to those terminated rights shall accordingly
vest in full at that time.

H. The portion of any Incentive Option accelerated in connection with
a Corporate Transaction or Change in Control shall remain exercisable as an
Incentive Option only to the extent the applicable One Hundred Thousand Dollar
limitation is not exceeded. To the extent such dollar limitation is exceeded,
the accelerated portion of such option shall be exercisable as a Non-Statutory
Option under the Federal tax laws.

I. The outstanding options shall in no way affect the right of the
Corporation to adjust, reclassify, reorganize or otherwise change its capital or
business structure or to merge, consolidate, dissolve, liquidate or sell or
transfer all or any part of its business or assets.

IV. CANCELLATION AND REGRANT OF OPTIONS

The Plan Administrator shall have the authority to effect, at any
time and from time to time, with the consent of the affected option holders, the
cancellation of any or all outstanding options under the Discretionary Option
Grant Program and to grant in substitution new options covering the same or
different number of shares of Common Stock but with an exercise price per share
equal to the Fair Market Value per share of Common Stock on the new grant date.

V. STOCK APPRECIATION RIGHTS

A. The Plan Administrator shall have the authority to grant to
selected Optionees tandem stock appreciation rights and/or limited stock
appreciation rights.

B. The following terms shall govern the grant and exercise of tandem
stock appreciation rights:

(i) One or more Optionees may be granted the right,
exercisable upon such terms as the Plan Administrator may establish,
to elect between the exercise of the underlying option for shares of
Common Stock and the surrender of that option in exchange for a
distribution from the Corporation in an amount equal

10.

<PAGE> 11

to the excess of (a) the Fair Market Value (on the option surrender
date) of the number of shares in which the Optionee is at the time
vested under the surrendered option (or surrendered portion thereof)
over (b) the aggregate exercise price payable for such shares.

(ii) No such option surrender shall be effective unless
it is approved by the Plan Administrator, either at the time of the
actual option surrender or at any earlier time. If the surrender is
so approved, then the distribution to which the Optionee shall be
entitled may be made in shares of Common Stock valued at Fair Market
Value on the option surrender date, in cash, or partly in shares and
partly in cash, as the Plan Administrator shall in its sole
discretion deem appropriate.

(iii) If the surrender of an option is not approved by
the Plan Administrator, then the Optionee shall retain whatever
rights the Optionee had under the surrendered option (or surrendered
portion thereof) on the option surrender date and may exercise such
rights at any time prior to the later of (a) five (5) business days
after the receipt of the rejection notice or (b) the last day on
which the option is otherwise exercisable in accordance with the
terms of the documents evidencing such option, but in no event may
such rights be exercised more than ten (10) years after the option
grant date.

C. The following terms shall govern the grant and exercise of limited
stock appreciation rights:

(i) One or more Section 16 Insiders may be granted
limited stock appreciation rights with respect to their outstanding
options.

(ii) Upon the occurrence of a Hostile Takeover, each
individual holding one or more options with such a limited stock
appreciation right shall have the unconditional right (exercisable
for a thirty (30)-day period following such Hostile Takeover) to
surrender each such option to the Corporation, to the extent the
option is at the time exercisable for vested shares of Common Stock.
In return for the surrendered option, the Optionee shall receive a
cash distribution from the Corporation in an amount equal to the
excess of (A) the Takeover Price of the shares of Common Stock which
are at the time vested under each surrendered option (or surrendered
portion thereof) over (B) the aggregate exercise price payable for
such shares. Such cash distribution shall be paid within five (5)
days following the option surrender date.

(iii) The Plan Administrator shall pre-approve, at the
time the limited right is granted, the subsequent exercise of that
right in accordance with the terms of the grant and the provisions
of this Section V. No additional approval of the

11.
<PAGE> 12

Plan Administrator or the Board shall be required at the time of the
actual option surrender and cash distribution.

(iv) The balance of the option (if any) shall remain
outstanding and exercisable in accordance with the documents
evidencing such option.

12.

<PAGE> 13

ARTICLE THREE

STOCK ISSUANCE PROGRAM

I. STOCK ISSUANCE TERMS

Shares of Common Stock may be issued under the Stock Issuance Program
through direct and immediate issuances without any intervening option grants.
Each such stock issuance shall be evidenced by a Stock Issuance Agreement which
complies with the terms specified below.

A. PURCHASE PRICE.

1. The purchase price per share shall be fixed by the Plan
Administrator, but shall not be less than one hundred percent (100%) of the Fair
Market Value per share of Common Stock on the issuance date. However, the
purchase price per share of Common Stock issued to a 10% Stockholder shall not
be less than one hundred and ten percent (110%) of such Fair Market Value.

2. Subject to the provisions of Section I of Article Five,
shares of Common Stock may be issued under the Stock Issuance Program for any of
the following items of consideration which the Plan Administrator may deem
appropriate in each individual instance:

(i) cash or check made payable to the Corporation, or

(ii) past services rendered to the Corporation (or any
Parent or Subsidiary).

B. VESTING PROVISIONS.

1. Shares of Common Stock issued under the Stock Issuance
Program may, in the discretion of the Plan Administrator, be fully and
immediately vested upon issuance or may vest in one or more installments over
the Participant's period of Service or upon attainment of specified performance
objectives. However, the Plan Administrator may not impose a vesting schedule
upon any stock issuance effected under the Stock Issuance Program which is more
restrictive than twenty percent (20%) per year vesting, with initial vesting to
occur not later than one (1) year after the issuance date. Such limitation shall
not apply to any Common Stock issuances made to the officers of the Corporation,
non-employee Board members or independent consultants.

2. Any new, substituted or additional securities or other
property (including money paid other than as a regular cash dividend) which the
Participant may have the right to receive with respect to the Participant's
unvested shares of Common Stock by reason of any

13.

<PAGE> 14

stock dividend, stock split, recapitalization, combination of shares, exchange
of shares or other change affecting the outstanding Common Stock as a class
without the Corporation's receipt of consideration shall be issued subject
to (i) the same vesting requirements applicable to the Participant's unvested
shares of Common Stock and (ii) such escrow arrangements as the Plan
Administrator shall deem appropriate.

3. The Participant shall have full stockholder rights with
respect to any shares of Common Stock issued to the Participant under the Stock
Issuance Program, whether or not the Participant's interest in those shares is
vested. Accordingly, the Participant shall have the right to vote such shares
and to receive any regular cash dividends paid on such shares.

4. Should the Participant cease to remain in Service while
holding one or more unvested shares of Common Stock issued under the Stock
Issuance Program or should the performance objectives not be attained with
respect to one or more such unvested shares of Common Stock, then those shares
shall be immediately surrendered to the Corporation for cancellation, and the
Participant shall have no further stockholder rights with respect to those
shares. The Corporation shall repay to the Participant any cash consideration
paid for the surrendered shares and shall cancel the unpaid principal balance of
any outstanding purchase-money note of the Participant attributable to the
surrendered shares.

5. The Plan Administrator may in its discretion waive the
surrender and cancellation of one or more unvested shares of Common Stock which
would otherwise occur upon the cessation of the Participant's Service or the
non-attainment of the performance objectives applicable to those shares. Such
waiver shall result in the immediate vesting of the Participant's interest in
the shares as to which the waiver applies. Such waiver may be effected at any
time, whether before or after the Participant's cessation of Service or the
attainment or non-attainment of the applicable performance objectives.

II. CORPORATE TRANSACTION/CHANGE IN CONTROL

A. All of the Corporation's outstanding repurchase rights under the
Stock Issuance Program shall terminate automatically, and all the shares of
Common Stock subject to those terminated rights shall immediately vest in full,
in the event of any Corporate Transaction, except to the extent (i) those
repurchase rights are to be assigned to the successor corporation (or parent
thereof) in connection with such Corporate Transaction or (ii) such accelerated
vesting is precluded by other limitations imposed in the Stock Issuance
Agreement.

B. The Plan Administrator shall have the discretionary authority,
exercisable either at the time the unvested shares are issued or any time while
the Corporation's repurchase rights with respect to those shares remain
outstanding under the Stock Issuance Program, to structure one or more of those
repurchase rights so that such rights shall not be assignable in connection with
a Corporate Transaction and shall accordingly terminate upon the consummation of
such Corporate

14.
<PAGE> 15

Transaction, and the shares subject to those terminated repurchase rights shall
immediately vest in full.

C. The Plan Administrator shall have the discretionary authority,
exercisable either at the time the unvested shares are issued or any time while
the Corporation's repurchase rights with respect to those shares remain
outstanding under the Stock Issuance Program, to structure one or more of those
repurchase rights so that such rights shall automatically terminate in whole or
in part, and the shares of Common Stock subject to those terminated rights shall
immediately vest, in the event the Participant's Service should subsequently
terminate by reason of an Involuntary Termination within a designated period
(not to exceed eighteen (18) months) following the effective date of any
Corporate Transaction in which those repurchase rights are assigned to the
successor corporation (or parent thereof).

D. The Plan Administrator shall have the discretionary authority,
exercisable either at the time the unvested shares are issued or any time while
the Corporation's repurchase rights with respect to those shares remain
outstanding under the Stock Issuance Program, to structure one or more of those
repurchase rights so that such rights shall automatically terminate in whole or
in part, and the shares of Common Stock subject to those terminated rights shall
immediately vest, upon (i) a Change in Control or (ii) the subsequent
termination of the Participant's Service by reason of an Involuntary Termination
within a designated period (not to exceed eighteen (18) months) following the
effective date of such Change in Control or Involuntary Termination.

III. SHARE ESCROW/LEGENDS

Unvested shares may, in the Plan Administrator's discretion, be held
in escrow by the Corporation until the Participant's interest in such shares
vests or may be issued directly to the Participant with restrictive legends on
the certificates evidencing those unvested shares.

15.

<PAGE> 16

ARTICLE FOUR

AUTOMATIC OPTION GRANT PROGRAM

I. OPTION TERMS

A. GRANT DATES. Option grants shall be made on the dates specified
below:

1. Each individual who is serving as a non-employee Board
member on the Underwriting Date shall automatically be granted on that date a
Non-Statutory Option to purchase seventeen (17) shares (or 5,100 shares after
giving effect to the proposed 300-for-1 stock split) of Common Stock, provided
that individual has not previously received a stock option grant from the
Corporation in connection with his or her Board service.

2. Each individual who is first elected or appointed as a non-
employee Board member at any time after the Underwriting Date shall
automatically be granted, on the date of such initial election or appointment,
a Non-Statutory Option to purchase seventeen (17) shares (or 5,100 shares after
giving effect to the proposed 300-for-1 stock split) of Common Stock, provided
that individual has not previously been in the employ of the Corporation or any
Parent or Subsidiary.

3. On the date of each Annual Stockholders Meeting held after
the Underwriting Date, each individual who is to continue to serve as a non-
employee Board member, whether or not that individual is standing for
re-election to the Board at that particular Annual Meeting, shall automatically
be granted a Non-Statutory Option to purchase eight (8) shares (or 2,400 shares
after giving effect to the proposed 300-for-1 stock split) of Common Stock,
provided such individual has served as a non-employee Board member for at least
six (6) months. There shall be no limit on the number of such eight (8) share
option grants any one non-employee Board member may receive over his or her
period of Board service, and non-employee Board members who have previously
received stock option grants from the Corporation or been in the employ of the
Corporation (or any Parent or Subsidiary) shall be eligible to receive one or
more such annual option grants over their period of continued Board service.

B. EXERCISE PRICE.

1. The exercise price per share shall be equal to one hundred
percent (100%) of the Fair Market Value per share of Common Stock on the option
grant date.

2. The exercise price shall be payable in one or more of the
alternative forms authorized under the Discretionary Option Grant Program.
Except to the extent the sale and remittance procedure specified thereunder is
utilized, payment of the exercise price for the purchased shares must be made on
the Exercise Date.

16.

<PAGE> 17

C. OPTION TERM. Each option shall have a term of ten (10) years
measured from the option grant date.

D. EXERCISE AND VESTING OF OPTIONS. Each option grant under this
Automatic Option Grant Program shall be immediately exercisable for any or all
of the option shares. However, the shares of Common Stock purchased under each
such option grant shall be subject to repurchase by the Corporation, at the
exercise price paid per share, upon the Optionee's cessation of Board service
prior to vesting in those shares. Each initial seventeen (17) share grant shall
vest, and the Corporation's repurchase right shall lapse, in a series of four
(4) successive equal annual installments upon the Optionee's completion of each
year of Board service over the four (4)-year period measured from the option
grant date. Each annual eight (8) share grant shall vest, and the Corporation's
repurchase right shall lapse, upon the Optionee's completion of one (1) year of
Board service measured from the option grant date.

E. TERMINATION OF BOARD SERVICE. The following provisions shall
govern the exercise of any options held by the Optionee under this Automatic
Option Grant Program at the time the Optionee ceases to serve as a Board member:

(i) The Optionee (or, in the event of Optionee's death,
the personal representative of the Optionee's estate or the person
or persons to whom the option is transferred pursuant to the
Optionee's will or in accordance with the laws of descent and
distribution) shall have a twelve (12)-month period following the
date of such cessation of Board service in which to exercise each
such option.

(ii) During the twelve (12)-month exercise period, the
option may not be exercised in the aggregate for more than the
number of vested shares of Common Stock for which the option is
exercisable at the time of the Optionee's cessation of Board
service.

(iii) Should the Optionee cease to serve as a Board
member by reason of death or Permanent Disability, then all shares
at the time subject to the option shall immediately vest so that
such option may, during the twelve (12)-month exercise period
following such cessation of Board service, be exercised for all or
any portion of those shares as fully-vested shares of Common Stock.

(iv) In no event shall the option remain exercisable
after the expiration of the option term. Upon the expiration of the
twelve (12)-month exercise period or (if earlier) upon the
expiration of the option term, the option shall terminate and cease
to be outstanding for any vested shares for which the option has not
been exercised. However, the option shall, immediately upon the
Optionee's cessation of Board service for any reason other than
death or Permanent Disability, terminate and

17.

<PAGE> 18

cease to be outstanding to the extent the option is not otherwise at
that time exercisable for vested shares.

II. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKEOVER

A. In the event of any Corporate Transaction, the shares of Common
Stock at the time subject to each outstanding option but not otherwise vested
shall automatically vest in full so that each such option shall, immediately
prior to the effective date of the Corporate Transaction, become fully
exercisable for all of the shares of Common Stock at the time subject to such
option and may be exercised for all or any portion of those shares as fully-
vested shares of Common Stock. Immediately following the consummation of the
Corporate Transaction, each automatic option grant shall terminate and cease to
be outstanding, except to the extent assumed by the successor corporation (or
parent thereof).

B. In connection with any Change in Control, the shares of Common
Stock at the time subject to each outstanding option but not otherwise vested
shall automatically vest in full so that each such option shall, immediately
prior to the effective date of the Change in Control, become fully exercisable
for all of the shares of Common Stock at the time subject to such option and may
be exercised for all or any portion of those shares as fully-vested shares of
Common Stock. Each such option shall remain exercisable for such fully-vested
option shares until the expiration or sooner termination of the option term or
the surrender of the option in connection with a Hostile Takeover.

C. Upon the occurrence of a Hostile Takeover, the Optionee shall have
a thirty (30)-day period in which to surrender to the Corporation each of his or
her outstanding automatic option grants. The Optionee shall in return be
entitled to a cash distribution from the Corporation in an amount equal to the
excess of (i) the Takeover Price of the shares of Common Stock at the time
subject to each surrendered option (whether or not the Optionee is otherwise at
the time vested in those shares) over (ii) the aggregate exercise price payable
for such shares. Such cash distribution shall be paid within five (5) days
following the surrender of the option to the Corporation. Stockholder approval
of the Plan shall constitute pre-approval of the grant of each such option
surrender right under this Automatic Option Grant Program and the subsequent
exercise of such right in accordance with the terms and provisions of this
Section II.C. No additional approval of the Board or any Plan Administrator
shall be required at the time of the actual option surrender and cash
distribution.

18.

<PAGE> 19
under each outstanding option, provided the aggregate exercise price payable for
such securities shall remain the same.

E. The grant of options under the Automatic Option Grant Program
shall in no way affect the right of the Corporation to adjust, reclassify,
reorganize or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets.

III. REMAINING TERMS

The remaining terms of each option granted under the Automatic Option
Grant Program shall be the same as the terms in effect for option grants made
under the Discretionary Option Grant Program.

19.

<PAGE> 20

ARTICLE FIVE

MISCELLANEOUS

I. FINANCING

The Plan Administrator may permit any Optionee or Participant to pay
the option exercise price under the Discretionary Option Grant Program or the
purchase price of shares issued under the Stock Issuance Program by delivering a
full-recourse, interest bearing promissory note payable in one or more
installments. The terms of any such promissory note (including the interest rate
and the terms of repayment) shall be established by the Plan Administrator in
its sole discretion. In no event may the maximum credit available to the
Optionee or Participant exceed the sum of (i) the aggregate option exercise
price or purchase price payable for the purchased shares plus (ii) any Federal,
state and local income and employment tax liability incurred by the Optionee or
the Participant in connection with the option exercise or share purchase.

II. TAX WITHHOLDING

A. The Corporation's obligation to deliver shares of Common Stock
upon the exercise of options or the issuance or vesting of such shares under the
Plan shall be subject to the satisfaction of all applicable Federal, state and
local income and employment tax withholding requirements.

B. The Plan Administrator may, in its discretion, provide any or
all holders of Non-Statutory Options or unvested shares of Common Stock under
the Plan (other than the options granted or the shares issued under the
Automatic Option Grant Program) with the right to use shares of Common Stock in
satisfaction of all or part of the Taxes incurred by such holders in connection
with the exercise of their options or the vesting of their shares. Such right
may be provided to any such holder in either or both of the following formats:

Stock Withholding: The election to have the Corporation
withhold, from the shares of Common Stock otherwise issuable upon the exercise
of such Non-Statutory Option or the vesting of such shares, a portion of those
shares with an aggregate Fair Market Value equal to the percentage of the Taxes
(not to exceed one hundred percent (100%)) designated by the holder.

Stock Delivery: The election to deliver to the Corporation, at
the time the Non-Statutory Option is exercised or the shares vest, one or more
shares of Common Stock or Common Stock previously acquired by such holder (other
than in connection with the option exercise or share vesting triggering the
Taxes) with an aggregate Fair Market Value equal to the percentage of the Taxes
(not to exceed one hundred percent (100%)) designated by the holder.

20.

<PAGE> 21

III. EFFECTIVE DATE AND TERM OF THE PLAN

A. The Discretionary Option Grant and Stock Issuance Programs shall
become effective immediately upon the Plan Effective Date, and options may be
granted under the Discretionary Option Grant Program at any time on or after the
Plan Effective Date. The Automatic Option Grant Program shall become effective
upon the Underwriting Date, and the initial option grants under such program
shall be made at that time. However, no options granted under the Plan may be
exercised, and no shares shall be issued under the Stock Issuance Program, until
the Plan is approved by the Corporation's stockholders. If such stockholder
approval is not obtained within twelve (12) months after the Plan Effective
Date, then all options previously granted under the Discretionary Option Grant
or Automatic Option Grant Program shall terminate and cease to be outstanding,
and no further options shall be granted and no shares shall be issued under the
Plan.

B. The Plan shall terminate upon the earliest of (i) March 31, 2007,
(ii) the date on which all shares available for issuance under the Plan shall
have been issued as fully-vested shares or (iii) the termination of all
outstanding options in connection with a Corporate Transaction. Upon such a
clause (i) plan termination, any outstanding option grants and unvested stock
issuances shall thereafter continue to have force and effect in accordance with
the provisions of the documents evidencing such grants or issuances.

IV. AMENDMENT OF THE PLAN

A. The Board shall have complete and exclusive power and authority to
amend or modify the Plan in any or all respects. However, no such amendment or
modification shall adversely affect the rights and obligations with respect to
stock options or unvested stock issuances at the time outstanding under the Plan
unless the Optionee or the Participant consents to such amendment or
modification. In addition, certain amendments may require stockholder approval
pursuant to applicable laws or regulations.

B. Options to purchase shares of Common Stock may be granted under
the Discretionary Option Grant Program and shares of Common Stock may be issued
under the Stock Issuance Program that are in each instance in excess of the
number of shares then available for issuance under the Plan, provided any excess
shares actually issued under those programs shall be held in escrow until there
is obtained stockholder approval of an amendment sufficiently increasing the
number of shares of Common Stock available for issuance under the Plan. If such
stockholder approval is not obtained within twelve (12) months after the date
the first such excess issuances are made, then (i) any unexercised options
granted on the basis of such excess shares shall terminate and cease to be
outstanding and (ii) the Corporation shall promptly refund to the Optionees and
the Participants the exercise or purchase price paid for any excess shares
issued under the Plan and held in escrow, together with interest (at the
applicable Short Term Federal Rate) for the period the shares were held in
escrow, and such shares shall thereupon be automatically cancelled and cease to
be outstanding.

21.

<PAGE> 22
V. USE OF PROCEEDS

Any cash proceeds received by the Corporation from the sale of shares
of Common Stock under the Plan shall be used for general corporate purposes.

VI. REGULATORY APPROVALS

A. The implementation of the Plan, the granting of any stock option
under the Plan and the issuance of any shares of Common Stock (i) upon the
exercise of any granted option or (ii) under the Stock Issuance Program shall be
subject to the Corporation's procurement of all approvals and permits required
by regulatory authorities having jurisdiction over the Plan, the stock options
granted under it and the shares of Common Stock issued pursuant to it.

B. No shares of Common Stock or other assets shall be issued or
delivered under the Plan unless and until there shall have been compliance with
all applicable requirements of Federal and state securities laws, including the
filing and effectiveness of the Form S-8 registration statement for the shares
of Common Stock issuable under the Plan, and all applicable listing requirements
of any stock exchange (or the Nasdaq National Market, if applicable) on which
Common Stock is then listed for trading.

VII. NO EMPLOYMENT/SERVICE RIGHTS

Nothing in the Plan shall confer upon the Optionee or the Participant
any right to continue in Service for any period of specific duration or
interfere with or otherwise restrict in any way the rights of the Corporation
(or any Parent or Subsidiary employing or retaining such person) or of the
Optionee or the Participant, which rights are hereby expressly reserved by each,
to terminate such person's Service at any time for any reason, with or without
cause.

22.

<PAGE> 23
ARTICLE SIX

CALL RIGHT

I. PURPOSE

The purpose of this Article Six is to provide the Corporation with a
vehicle for liquidating the outstanding options under the Plan in the event the
Corporation should remain a closely-held corporation through February 28, 1998.
Accordingly, in the absence of a Liquidity Transaction on or before such date,
the Corporation may repurchase all the outstanding options under the Plan during
a limited window period beginning March 1, 1998.

II. TERMS AND CONDITIONS

A. Should a Liquidity Transaction not be effected prior to March 1,
1998, then the Corporation shall have the right (the "Call Right"), to
repurchase all outstanding options under the Plan upon the following terms and
conditions:

- The Call Right may be exercised by the Corporation at
any time during the period beginning March 1, 1998 and ending March
31, 1998. However, the Call Right shall terminate and cease to be
exercisable prior to March 31, 1998 should a Liquidity Transaction
occur at any time prior to such date. The Call Right shall, during
the exercise period, be exercisable by written notice delivered to
each holder of an outstanding option under the Plan. In no event may
the Call Right be exercised for less than the total number of
outstanding options under the Plan.

- The purchase price payable by the Corporation for each
option repurchased pursuant to the Call Right shall be equal to the
number of shares of Common Stock at the time subject to such option,
whether vested or unvested, multiplied by the excess of (A) the
Appraised Value Per Share of Common Stock as of February 28, 1998
over (B) the exercise price payable per share under such option.
However, no amount shall be payable by the Corporation for any
option which ceases to remain outstanding (by reason of the
Optionee's cessation of Service) prior to the date the Corporation
exercises the Call Right with respect to that option.

- Within fifteen (15) days following receipt of the
Corporation's exercise notice, the option holder shall deliver to
the Corporation the executed stock option agreement evidencing each
outstanding option held by such individual. The purchase price for
each option shall be paid in one lump-sum cash payment within
fifteen (15) days after the Corporation's receipt of the executed
stock option

23.

<PAGE> 24

agreement for that option. At the time such payment is made to the
option holder, such individual shall cease to have any right, title
or interest in and to the repurchased option and the option shares
purchasable thereunder, and such individual shall no longer have any
equity or other proprietary interest in the Corporation by reason of
any options issued under the Plan.

III. TERMINATION OF CALL RIGHT

The Call Right shall terminate and cease to be exercisable
immediately upon the occurrence of a Liquidity Transaction. The Call Right shall
also terminate at the close of business on March 31, 1998, unless the
Corporation shall have previously provided the requisite exercise notice of the
Call Right to each option holder under the Plan.

24.

<PAGE> 25
APPENDIX

The following definitions shall be in effect under the Plan:

A. APPRAISED VALUE PER SHARE shall mean the fair market value per
share of Common Stock, as determined as of February 28, 1998 through independent
appraisal on the basis of the going-concern value of the Corporation at that
time, without discount for the limited marketability or minority interest
represented by such share of Common Stock.

B. AUTOMATIC OPTION GRANT PROGRAM shall mean the automatic option
grant program in effect under the Plan.

C. BOARD shall mean the Corporation's Board of Directors.

D. CHANGE IN CONTROL shall mean a change in ownership or control
of the Corporation effected through either of the following transactions:

(i) the acquisition, directly or indirectly by any
person or related group of persons (other than the Corporation or a
person that directly or indirectly controls, is controlled by, or is
under common control with, the Corporation), of beneficial ownership
(within the meaning of Rule 13d-3 of the 1934 Act) of securities
possessing more than fifty percent (50%) of the total combined
voting power of the Corporation's outstanding securities pursuant to
a tender or exchange offer made directly to the Corporation's
stockholders, or

(ii) a change in the composition of the Board over a
period of thirty-six (36) consecutive months or less such that a
majority of the Board members ceases, by reason of one or more
contested elections for Board membership, to be comprised of
individuals who either (A) have been Board members continuously
since the beginning of such period or (B) have been elected or
nominated for election as Board members during such period by at
least a majority of the Board members described in clause (A) who
were still in office at the time the Board approved such election or
nomination.

E. CODE shall mean the Internal Revenue Code of 1986, as amended.

F. COMMON STOCK shall mean the Corporation's common stock.

G. CORPORATE TRANSACTION shall mean either of the following
stockholder-approved transactions to which the Corporation is a party:

A-1.

<PAGE> 26
(i) a merger or consolidation in which securities
possessing more than fifty percent (50%) of the total combined
voting power of the Corporation's outstanding securities are
transferred to a person or persons different from the persons
holding those securities immediately prior to such transaction, or

(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in complete
liquidation or dissolution of the Corporation.

H. CORPORATION shall mean Spectral Holding Corporation, a California
corporation doing business as Spectratek Corporation, and any successor
corporation which shall assume the Plan and the outstanding options and stock
issuances under the Plan.

I. DISCRETIONARY OPTION GRANT PROGRAM shall mean the discretionary
option grant program in effect under the Plan.

J. ELIGIBLE DIRECTOR shall mean a non-employee Board member eligible
to participate in the Automatic Option Grant Program in accordance with the
eligibility provisions of Article One.

K. EMPLOYEE shall mean an individual who is in the employ of the
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.

L. EXERCISE DATE shall mean the date on which the Corporation shall
have received written notice of the option exercise.

M. FAIR MARKET VALUE per share of Common Stock on any relevant date
shall be determined in accordance with the following provisions:

(i) If the Common Stock or Common Stock is at the time
traded on the Nasdaq National Market, then the Fair Market Value
shall be deemed equal to the closing selling price per share of
Common Stock on the date in question, as such price is reported on
the Nasdaq National Market or any successor system. If there is no
closing selling price for the Common Stock on the date in question,
then the Fair Market Value shall be the closing selling price on the
last preceding date for which such quotation exists.

(ii) If the Common Stock is at the time listed on any
Stock Exchange, then the Fair Market Value shall be deemed equal to
the closing selling price per share of Common Stock on the date in
question on the Stock Exchange determined by the Plan Administrator
to be the primary market for the Common Stock, as such price is
officially quoted in the composite tape of transactions on such
exchange. If there is no closing selling price for the Common Stock
on the date in

A-2.

<PAGE> 27
question, then the Fair Market Value shall be the closing selling
price on the last preceding date for which such quotation exists.

(iii) If the Fair Market Value of Common Stock
is not determinable pursuant to subparagraph (i) or (ii) of this
provision, then the Fair Market Value shall be determined by the
Plan Administrator, after taking into account such factors as it
shall deem appropriate.

N. HOSTILE TAKEOVER shall mean the acquisition, directly or
indirectly, by any person or related group of persons (other than the
Corporation or a person that directly or indirectly controls, is controlled by,
or is under common control with, the Corporation) of beneficial ownership
(within the meaning of Rule 13d-3 of the 1934 Act) of securities possessing more
than fifty percent (50%) of the total combined voting power of the Corporation's
outstanding securities pursuant to a tender or exchange offer made directly to
the Corporation's stockholders which the Board does not recommend such
stockholders to accept.

O. INCENTIVE OPTION shall mean an option which satisfies the
requirements of Code Section 422.

P. INVOLUNTARY TERMINATION shall mean the termination of the Service
of any individual which occurs by reason of:

(i) such individual's involuntary dismissal or
discharge by the Corporation for reasons other than Misconduct, or

(ii) such individual's voluntary resignation following
(A) a change in his or her position with the Corporation which
materially reduces his or her level of responsibility, (B) a
reduction in his or her level of compensation (including base
salary, fringe benefits and target bonus under any corporate-
performance based bonus or incentive programs) by more than fifteen
percent (15%) or (C) a relocation of such individual's place of
employment by more than fifty (50) miles, provided and only if such
change, reduction or relocation is effected by the Corporation
without the individual's consent.

Q. LIQUIDITY TRANSACTION shall mean either of the following
transactions:

(i) the completion of a firm commitment underwritten
public offering of Common Stock, pursuant to an effective
registration statement under the 1933 Act, which yields aggregate
net proceeds to the Corporation of not less than Fifteen Million
Dollars ($15,000,000), or

A-3.

<PAGE> 28

(ii) a Corporate Transaction or any other acquisition
of the Corporation effected through a direct sale, exchange or
transfer by the Corporation's stockholders of securities possessing
more than fifty percent (50%) of the total combined voting power of
the Corporation's outstanding securities.

R. MISCONDUCT shall mean the commission of any act of fraud,
embezzlement or dishonesty by the Optionee or Participant, any unauthorized use
or disclosure by such person of confidential information or trade secrets of the
Corporation (or any Parent or Subsidiary), or any other intentional misconduct
by such person adversely affecting the business or affairs of the Corporation
(or any Parent or Subsidiary) in a material manner. The foregoing definition
shall not be deemed to be inclusive of all the acts or omissions which the
Corporation (or any Parent or Subsidiary) may consider as grounds for the
dismissal or discharge of any Optionee, Participant or other person in the
Service of the Corporation (or any Parent or Subsidiary).

S. 1934 ACT shall mean the Securities Exchange Act of 1934, as
amended.

T. NON-STATUTORY OPTION shall mean an option not intended to satisfy
the requirements of Code Section 422.

U. OPTIONEE shall mean any person to whom an option is granted under
the Discretionary Option Grant, Automatic Option Grant or Director Fee Option
Grant Program.

V. PARENT shall mean any corporation (other than the Corporation) in
an unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.

W. PARTICIPANT shall mean any person who is issued shares of Common
Stock under the Stock Issuance Program.

X. PERMANENT DISABILITY OR PERMANENTLY DISABLED shall mean the
inability of the Optionee or the Participant to engage in any substantial
gainful activity by reason of any medically determinable physical or mental
impairment expected to result in death or to be of continuous duration of twelve
(12) months or more. However, solely for purposes of the Automatic Option Grant
Program, Permanent Disability or Permanently Disabled shall mean the inability
of the non-employee Board member to perform his or her usual duties as a Board
member by reason of any medically determinable physical or mental impairment
expected to result in death or to be of continuous duration of twelve (12)
months or more.

Y. PLAN shall mean the Corporation's 1997 Stock Incentive Plan, as
set forth in this document.

A-4.

<PAGE> 29
Z. PLAN ADMINISTRATOR shall mean the particular entity, whether the
Primary Committee, the Board or the Secondary Committee, which is authorized to
administer the Discretionary Option Grant and Stock Issuance Programs with
respect to one or more classes of eligible persons, to the extent such entity is
carrying out its administrative functions under those programs with respect to
the persons under its jurisdiction.

AA. PLAN EFFECTIVE DATE shall mean , 1997, the date on
which the Plan was adopted by the Board.

BB. PRIMARY COMMITTEE shall mean the committee of two (2) or more
non-employee Board members appointed by the Board to administer the
Discretionary Option Grant and Stock Issuance Programs with respect to Section
16 Insiders.

CC. SECONDARY COMMITTEE shall mean a committee of one (1) or more
Board members appointed by the Board to administer the Discretionary Option
Grant and Stock Issuance Programs with respect to eligible persons other than
Section 16 Insiders.

DD. SECTION 12 REGISTRATION DATE shall mean the date on which the
Common Stock is first registered under Section 12(g) of Section 16 of the 1934
Act.

EE. SECTION 16 INSIDER shall mean an officer or director of the
Corporation subject to the short-swing profit liabilities of Section 16 of the
1934 Act.

FF. SERVICE shall mean the performance of services for the
Corporation (or any Parent or Subsidiary) by a person in the capacity of an
Employee, a non-employee member of the board of directors or a consultant or
independent advisor, except to the extent otherwise specifically provided in the
documents evidencing the option grant or stock issuance.

GG. STOCK EXCHANGE shall mean either the American Stock Exchange or
the New York Stock Exchange.

HH. STOCK ISSUANCE AGREEMENT shall mean the agreement entered into by
the Corporation and the Participant at the time of issuance of shares of Common
Stock under the Stock Issuance Program.

II. STOCK ISSUANCE PROGRAM shall mean the stock issuance program in
effect under the Plan.

JJ. SUBSIDIARY shall mean any corporation (other than the
Corporation) in an unbroken chain of corporations beginning with the
Corporation, provided each corporation (other than the last corporation) in the
unbroken chain owns, at the time of the determination, stock possessing fifty

A-5.

<PAGE> 30

percent (50%) or more of the total combined voting power of all classes of stock
in one of the other corporations in such chain.

KK. TAKEOVER PRICE shall mean the greater of (i) the Fair Market
Value per share of Common Stock on the date the option is surrendered to the
Corporation in connection with a Hostile Takeover or (ii) the highest reported
price per share of Common Stock paid by the tender offeror in effecting such
Hostile Takeover. However, if the surrendered option is an Incentive Option, the
Takeover Price shall not exceed the clause (i) price per share.

LL. TAXES shall mean the Federal, state and local income and
employment tax liabilities incurred by the holder of Non-Statutory Options or
unvested shares of Common Stock in connection with the exercise of those options
or the vesting of those shares.

MM. 10% STOCKHOLDER shall mean the owner of stock (as determined
under Code Section 424(d)) possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation (or any Parent
or Subsidiary).

NN. UNDERWRITING AGREEMENT shall mean the agreement between the
Corporation and the underwriter or underwriters managing the initial public
offering of the Common Stock.

OO. UNDERWRITING DATE shall mean the date on which the Underwriting
Agreement is executed and priced in connection with an initial public offering
of the Common Stock.

A-6.

<PAGE> 1

SPECTRAL HOLDING CORPORATION
NOTICE OF GRANT OF STOCK OPTION

Notice is hereby given of the following option grant (the "Option")
to purchase shares of the Common Stock of Spectral Holding Corporation, (the
"Corporation"):

Optionee:

Grant Date: __________, 199__

Vesting Commencement Date: __________, 199__

Exercise Price: $____ per share

Number of Option Shares: ______ shares

Expiration Date: __________, 199__

Type of Option: ___ Incentive Stock Option
___ Non-Statutory Stock Option

Exercise Schedule: The Option shall become exercisable
with respect to the Option Shares in a series of five
(5) successive equal annual installments upon Optionee's
completion of each year of Service over the five
(5)-year period measured from the Vesting Commencement
Date. In no event shall any additional Option Shares
vest after Optionee's cessation of Service.

Optionee understands and agrees that the Option is granted subject
to and in accordance with the terms of the Spectral Holding Corporation 1997
Stock Incentive Plan (the "Plan"). Optionee further agrees to be bound by the
terms of the Plan and the terms of the Option as set forth in the Stock Option
Agreement attached hereto as Exhibit A. Optionee also acknowledges receipt of a
copy of the Plan in the form of attached Exhibit B.

At Will Status. Nothing in this Notice or in the attached Stock
Option Agreement or in the Plan shall confer upon Optionee any right to continue
in Service for any period of specific duration or interfere with or otherwise
restrict in any way the rights of the Corporation (or any Parent or Subsidiary
employing or retaining Optionee) or of Optionee, which rights are hereby
expressly reserved by each, to terminate Optionee's Service at any time for any
reason, with or without cause.

<PAGE> 2
Definitions. All capitalized terms in this Notice shall have the
meaning assigned to them in this Notice or in the attached Stock Option
Agreement.

DATED:

SPECTRAL HOLDING CORPORATION

By: ____________________________________

Title: _________________________________

________________________________________
__________________, OPTIONEE

Address: _______________________________

________________________________________

ATTACHMENTS
EXHIBIT A - STOCK OPTION AGREEMENT
EXHIBIT B - 1997 STOCK INCENTIVE PLAN

<PAGE> 3

EXHIBIT A

SPECTRAL HOLDING CORPORATION
STOCK OPTION AGREEMENT

RECITALS

A. The Board has adopted the Plan for the purpose of retaining the
services of selected Employees, non-employee members of the Board or of the
board of directors of any Parent or Subsidiary and consultants and other
independent advisors who provide services to the Corporation (or any Parent or
Subsidiary).

B. Optionee is to render valuable services to the Corporation (or a
Parent or Subsidiary), and this Agreement is executed pursuant to, and is
intended to carry out the purposes of, the Plan in connection with the
Corporation's grant of an option to Optionee.

C. All capitalized terms in this Agreement shall have the meaning
assigned to them in the attached Appendix.

NOW, THEREFORE, it is hereby agreed as follows:

1. GRANT OF OPTION. The Corporation hereby grants to Optionee, as
of the Grant Date, an option to purchase up to the number of Option Shares
specified in the Grant Notice. The Option Shares shall be purchasable from time
to time during the option term specified in Paragraph 2 at the Exercise Price.

2. OPTION TERM. This option shall have a maximum term of ten (10)
years measured from the Grant Date and shall accordingly expire at the close of
business on the Expiration Date, unless sooner terminated in accordance with
Paragraph 5 or 6.

3. LIMITED TRANSFERABILITY. During Optionee's lifetime, this
option shall be exercisable only by Optionee and shall not be assignable or
transferable other than by will or by the laws of descent and distribution
following Optionee's death.

4. DATES OF EXERCISE. This option shall become exercisable for
the Option Shares in one or more installments as specified in the Grant Notice.
As the option becomes exercisable for such installments, those installments
shall accumulate and the option shall remain exercisable for the accumulated
installments until the Expiration Date or sooner termination of the option term
under Paragraph 5 or 6.

<PAGE> 4
5. CESSATION OF SERVICE. The option term specified in Paragraph 2
shall terminate (and this option shall cease to be outstanding) prior to the
Expiration Date should any of the following provisions become applicable:

(a) Should Optionee cease to remain in Service for any
reason (other than death, Disability or Misconduct) while this
option is outstanding, then Optionee shall have a period of three
(3) months (commencing with the date of such cessation of Service)
during which to exercise this option, but in no event shall this
option be exercisable at any time after the Expiration Date.

(b) If Optionee dies while this option is outstanding,
then the personal representative of Optionee's estate or the person
or persons to whom the option is transferred pursuant to Optionee's
will or in accordance with the laws of descent and distribution
shall have the right to exercise this option. Such right shall
lapse, and this option shall cease to be outstanding, upon the
earlier of (i) the expiration of the twelve (12)- month period
measured from the date of Optionee's death or (ii) the Expiration
Date.

(c) Should Optionee cease Service by reason of Disability
while this option is outstanding, then Optionee shall have a period
of twelve (12) months (commencing with the date of such cessation of
Service) during which to exercise this option. In no event shall
this option be exercisable at any time after the Expiration Date.

Note: Exercise of this option on a date later than
three (3) months following cessation of Service due to
Disability will result in loss of favorable Incentive
Option treatment, unless such Disability constitutes
Permanent Disability. In the event that Incentive Option
treatment is not available, this option will be taxed as
a Non-Statutory Option upon exercise.

(d) During the limited period of post-Service
exercisability, this option may not be exercised in the aggregate
for more than the number of vested Option Shares for which the
option is exercisable at the time of Optionee's cessation of
Service. Upon the expiration of such limited exercise period or
(if earlier) upon the Expiration Date, this option shall terminate
and cease to be outstanding for any vested Option Shares for which
the option has not been exercised. However, this option shall,
immediately upon Optionee's cessation of Service for any reason,
terminate and cease to be outstanding with respect to any Option
Shares in which Optionee is not otherwise at that time vested or
for which this option is not otherwise at that time exercisable.

<PAGE> 5

(e) Should Optionee's Service be terminated for
Misconduct, then this option shall terminate immediately and cease
to remain outstanding.

6. SPECIAL ACCELERATION OF OPTION.

(a) This option, to the extent outstanding at the time
of a Corporate Transaction but not otherwise fully exercisable, shall
automatically accelerate so that this option shall, immediately prior to the
effective date of the Corporate Transaction, become exercisable for all of the
Option Shares at the time subject to this option and may be exercised for any or
all of those Option Shares as fully-vested shares of Common Stock. No such
acceleration of this option, however, shall occur if and to the extent: (i) this
option is, in connection with the Corporate Transaction, to be assumed by the
successor corporation (or parent thereof) or (ii) this option is to be replaced
with a cash incentive program of the successor corporation which preserves the
spread existing on the Option Shares for which this option is not otherwise
exercisable at the time of the Corporate Transaction (the excess of the Fair
Market Value of those Option Shares over the aggregate Exercise Price payable
for such shares) and provides for subsequent pay-out in accordance with the
Exercise Schedule in effect for those Option Shares.

(b) Immediately following the Corporate Transaction, this
option shall terminate and cease to be outstanding, except to the extent assumed
by the successor corporation (or parent thereof) in connection with the
Corporate Transaction.

(c) If this option is assumed in connection with a
Corporate Transaction, then this option shall be appropriately adjusted,
immediately after such Corporate Transaction, to apply to the number and class
of securities which would have been issuable to Optionee in consummation of such
Corporate Transaction had the option been exercised immediately prior to such
Corporate Transaction, and appropriate adjustments shall also be made to the
Exercise Price, provided the aggregate Exercise Price shall remain the same.

(d) This option may also be subject to acceleration in
whole or in part in accordance with the terms of any special Addendum attached
to this Agreement.

(e) This Agreement shall not in any way affect the right
of the Corporation to adjust, reclassify, reorganize or otherwise change its
capital or business structure or to merge, consolidate, dissolve, liquidate or
sell or transfer all or any part of its business or assets.

7. ADJUSTMENT IN OPTION SHARES. Should any change be made to
the Common Stock by reason of any stock split, stock dividend, recapitalization,
combination of shares, exchange of shares or other change affecting the
outstanding Common Stock as a class without the Corporation's receipt of
consideration, appropriate adjustments shall be made to (i) the total number

<PAGE> 6

and/or class of securities subject to this option and (ii) the Exercise Price
in order to reflect such change and thereby preclude a dilution or enlargement
of benefits hereunder.

8. STOCKHOLDER RIGHTS. The holder of this option shall not have
any stockholder rights with respect to the Option Shares until such person shall
have exercised the option, paid the Exercise Price and become a holder of record
of the purchased shares.

9. MANNER OF EXERCISING OPTION.

(a) In order to exercise this option with respect to all
or any part of the Option Shares for which this option is at the time
exercisable, Optionee (or any other person or persons exercising the option)
must take the following actions:

(i) Execute and deliver to the Corporation a
Notice of Exercise for the Option Shares for which the option is
exercised.

(ii) Pay the aggregate Exercise Price for the
purchased shares in one or more of the following forms:

(A) cash or check made payable to the
Corporation; or

(B) a promissory note payable to the
Corporation, but only to the extent authorized by the
Plan Administrator in accordance with Paragraph 13.

Should the Common Stock be registered under
Section 12(g) of the 1934 Act at the time the option is
exercised, then the Exercise Price may also be paid as
follows:

(C) in shares of Common Stock held by
Optionee (or any other person or persons exercising the
option) for the requisite period necessary to avoid a
charge to the Corporation's earnings for financial
reporting purposes and valued at Fair Market Value on
the Exercise Date; or

(D) through a special sale and remittance
procedure pursuant to which Optionee (or any other
person or persons exercising the option) shall
concurrently provide irrevocable instructions (a) to a
Corporation-designated brokerage firm to effect the
immediate sale of the purchased shares and remit to the
Corporation, out of the sale proceeds

<PAGE> 7

available on the settlement date, sufficient
funds to cover the aggregate Exercise Price payable for
the purchased shares plus all applicable Federal, state
and local income and employment taxes required to be
withheld by the Corporation by reason of such exercise
and (b) to the Corporation to deliver the certificates
for the purchased shares directly to such brokerage firm
in order to complete the sale.

Except to the extent the sale and remittance
procedure is utilized in connection with the option exercise,
payment of the Exercise Price must accompany the Notice of Exercise
delivered to the Corporation in connection with the option exercise.

(iii) Furnish to the Corporation appropriate
documentation that the person or persons exercising the option (if
other than Optionee) have the right to exercise this option.

(iv) Make appropriate arrangements with the
Corporation (or Parent or Subsidiary employing or retaining
Optionee) for the satisfaction of all Federal, state and local
income and employment tax withholding requirements applicable to the
option exercise.

(b) As soon as practical after the Exercise Date, the
Corporation shall issue to or on behalf of Optionee (or any other person or
persons exercising this option) a certificate for the purchased Option Shares,
with the appropriate legends affixed thereto.

10. CALL RIGHT. This option shall be subject to repurchase by
the Corporation on or before March 31, 1998 in accordance with the terms and
conditions set forth in Article Six of the Plan and the Special Addendum
attached to this Agreement.

11. COMPLIANCE WITH LAWS AND REGULATIONS.

(a) The exercise of this option and the issuance of the
Option Shares upon such exercise shall be subject to compliance by the
Corporation and Optionee with all applicable requirements of law relating
thereto and with all applicable regulations of any stock exchange (or the Nasdaq
National Market, if applicable) on which the Common Stock may be listed for
trading at the time of such exercise and issuance.

<PAGE> 8
to the non-issuance or sale of the Common Stock as to which such approval shall
not have been obtained. The Corporation, however, shall use its best efforts to
obtain all such approvals.

12. SUCCESSORS AND ASSIGNS. Except to the extent otherwise
provided in Paragraphs 3 and 6, the provisions of this Agreement shall inure to
the benefit of, and be binding upon, the Corporation and its successors and
assigns and Optionee, Optionee's assigns and the legal representatives, heirs
and legatees of Optionee's estate.

13. NOTICES. Any notice required to be given or delivered to
the Corporation under the terms of this Agreement shall be in writing and
addressed to the Corporation at its principal corporate offices. Any notice
required to be given or delivered to Optionee shall be in writing and addressed
to Optionee at the address indicated below Optionee's signature line on the
Grant Notice. All notices shall be deemed effective upon personal delivery or
upon deposit in the U.S. mail, postage prepaid and properly addressed to the
party to be notified.

14. FINANCING. The Plan Administrator may, in its absolute
discretion and without any obligation to do so, permit Optionee to pay the
Exercise Price for the purchased Option Shares by delivering a full-recourse
promissory note payable to the Corporation. The terms of any such promissory
note (including the interest rate, the requirements for collateral and the terms
of repayment) shall be established by the Plan Administrator in its sole
discretion.

15. CONSTRUCTION. This Agreement and the option evidenced
hereby are made and granted pursuant to the Plan and are in all respects limited
by and subject to the terms of the Plan. All decisions of the Plan Administrator
with respect to any question or issue arising under the Plan or this Agreement
shall be conclusive and binding on all persons having an interest in this
option.

16. EXCESS SHARES. If the Option Shares covered by this
Agreement exceed, as of the Grant Date, the number of shares of Common Stock
which may without stockholder approval be issued under the Plan, then this
option shall be void with respect to those excess shares, unless stockholder
approval of an amendment sufficiently increasing the number of shares of Common
Stock issuable under the Plan is obtained in accordance with the provisions of
the Plan.

17. GOVERNING LAW. The interpretation, performance and
enforcement of this Agreement shall be governed by the laws of the State of
California without resort to that State's conflict-of-laws rules.

18. ADDITIONAL TERMS APPLICABLE TO AN INCENTIVE OPTION. In the
event this option is designated an Incentive Option in the Grant Notice, the
following terms and conditions shall also apply to the grant:

<PAGE> 9

(a) This option shall cease to qualify for favorable tax
treatment as an Incentive Option if (and to the extent) this option is exercised
for one or more Option Shares: (A) more than three (3) months after the date
Optionee ceases to be an Employee for any reason other than death or Permanent
Disability or (B) more than twelve (12) months after the date Optionee ceases to
be an Employee by reason of Permanent Disability.

(b) No installment under this option shall qualify for
favorable tax treatment as an Incentive Option if (and to the extent) the
aggregate Fair Market Value (determined at the Grant Date) of the Common Stock
for which such installment first becomes exercisable hereunder would, when added
to the aggregate value (determined as of the respective date or dates of grant)
of the Common Stock or other securities for which this option or any other
Incentive Options granted to Optionee prior to the Grant Date (whether under the
Plan or any other option plan of the Corporation or any Parent or Subsidiary)
first become exercisable during the same calendar year, exceed One Hundred
Thousand Dollars ($100,000) in the aggregate. Should such One Hundred Thousand
Dollar ($100,000) limitation be exceeded in any calendar year, this option shall
nevertheless become exercisable for the excess shares in such calendar year as a
Non-Statutory Option.

(c) Should the exercisability of this option be
accelerated upon a Corporate Transaction, then this option shall qualify for
favorable tax treatment as an Incentive Option only to the extent the aggregate
Fair Market Value (determined at the Grant Date) of the Common Stock for which
this option first becomes exercisable in the calendar year in which the
Corporate Transaction occurs does not, when added to the aggregate value
(determined as of the respective date or dates of grant) of the Common Stock or
other securities for which this option or one or more other Incentive Options
granted to Optionee prior to the Grant Date (whether under the Plan or any other
option plan of the Corporation or any Parent or Subsidiary) first become
exercisable during the same calendar year, exceed One Hundred Thousand Dollars
($100,000) in the aggregate. Should the applicable One Hundred Thousand Dollar
($100,000) limitation be exceeded in the calendar year of such Corporate
Transaction, the option may nevertheless be exercised for the excess shares in
such calendar year as a Non-Statutory Option.

(d) Should Optionee hold, in addition to this option, one
or more other options to purchase Common Stock which become exercisable for the
first time in the same calendar year as this option, then the foregoing
limitations on the exercisability of such options as Incentive Options shall be
applied on the basis of the order in which such options are granted.

<PAGE> 10

19. LEAVE OF ABSENCE. The following provisions shall apply upon
the Optionee's commencement of an authorized leave of absence:

(a) The exercise schedule in effect under the Grant
Notice shall be frozen as of the first day of the authorized leave,
and this option shall not become exercisable for any additional
installments of the Option Shares during the period Optionee remains
on such leave.

(b) Should Optionee resume active Employee status within
sixty (60) days after the start date of the authorized leave,
Optionee shall, for purposes of the exercise schedule set forth in
the Grant Notice, receive Service credit for the entire period of
such leave. If Optionee does not resume active Employee status within
such sixty (60)-day period, then no Service credit shall be given for
the period of such leave.

(c) If the option is designated as an Incentive Option in
the Grant Notice, then the following additional provision shall
apply:

(i) If the leave of absence continues for more than
ninety (90) days, then this option shall automatically convert to a
Non-Statutory Option under the Federal tax laws at the end of such
ninety (90)-day period, unless the Optionee's reemployment rights are
guaranteed by statute or by written agreement. Following any such
conversion of the option, all subsequent exercises of such option,
whether effected before or after Optionee's return to active Employee
status, shall result in an immediate taxable event, and the
Corporation shall be required to collect from Optionee the Federal,
state and local income and employment withholding taxes applicable to
such exercise.

(ii) In no event shall this option become
exercisable for any additional Option Shares or otherwise remain
outstanding if Optionee does not resume Employee status prior to the
Expiration Date of the option term.

10.

<PAGE> 11

EXHIBIT I
NOTICE OF EXERCISE

I hereby notify Spectral Holding Corporation, (the "Corporation")
that I elect to purchase __________________shares of the Corporation's Common
Stock (the "Purchased Shares") at the option exercise price of $___________ per
share (the "Exercise Price") pursuant to that certain option (the "Option")
granted to me under the Corporation's 1997 Stock Incentive Plan on
_______________________, 199__ .

Concurrently with the delivery of this Exercise Notice to the
Corporation, I shall hereby pay to the Corporation the Exercise Price for the
Purchased Shares in accordance with the provisions of my agreement with the
Corporation (or other documents) evidencing the Option and shall deliver
whatever additional documents may be required by such agreement as a condition
for exercise.

_____________________________, 199__
Date

___________________________________
Optionee

Address: __________________________

___________________________________

Print name in exact manner
it is to appear on the
stock certificate: ___________________________________

Address to which certificate
is to be sent, if different
from address above: ___________________________________

___________________________________

Social Security Number: ___________________________________

Employee Number: ___________________________________

<PAGE> 12
APPENDIX

The following definitions shall be in effect under the Agreement:

A. AGREEMENT shall mean this Stock Option Agreement.

B. BOARD shall mean the Corporation's Board of Directors.

C. CODE shall mean the Internal Revenue Code of 1986, as amended.

D. COMMON STOCK shall mean the Corporation's common stock.

E. CORPORATE TRANSACTION shall mean either of the following
stockholder-approved transactions to which the Corporation is a party:

(i) a merger or consolidation in which securities
possessing more than fifty percent (50%) of the total combined voting
power of the Corporation's outstanding securities are transferred to
a person or persons different from the persons holding those
securities immediately prior to such transaction, or

(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in complete liquidation
or dissolution of the Corporation.

F. CORPORATION shall mean Spectral Holding Corporation, a California
corporation, and any successor corporation which assumes the Plan and the
outstanding options thereunder, including the option evidenced by this
Agreement.

G. DISABILITY shall mean the inability of Optionee to engage in any
substantial gainful activity by reason of any medically determinable physical or
mental impairment and shall be determined by the Plan Administrator on the basis
of such medical evidence as the Plan Administrator deems warranted under the
circumstances. Disability shall be deemed to constitute PERMANENT DISABILITY in
the event that such Disability is expected to result in death or has lasted or
can be expected to last for a continuous period of twelve (12) months or more.

H. EMPLOYEE shall mean an individual who is in the employ of the
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.

I. EXERCISE DATE shall mean the date on which the option shall have
been exercised in accordance with Paragraph 9 of the Agreement.

A-1.

<PAGE> 13

J. EXERCISE PRICE shall mean the exercise price per share as
specified in the Grant Notice.

K. EXERCISE SCHEDULE shall mean the schedule specified in the Grant
Notice pursuant to which the option is to become exercisable for the Option
Shares in a series of installments over Optionee's period of Service.

L. EXPIRATION DATE shall mean the date on which the option expires as
specified in the Grant Notice.

M. FAIR MARKET VALUE per share of Common Stock on any relevant date
shall be determined in accordance with the following provisions:

(i) If the Common Stock is at the time traded on the
Nasdaq National Market, then the Fair Market Value shall be the
closing selling price per share of Common Stock on the date in
question, as the price is reported by the National Association of
Securities Dealers on the Nasdaq National Market or any successor
system. If there is no closing selling price for the Common Stock on
the date in question, then the Fair Market Value shall be the closing
selling price on the last preceding date for which such quotation
exists.

(ii) If the Common Stock is at the time listed on any
Stock Exchange, then the Fair Market Value shall be the closing
selling price per share of Common Stock on the date in question on
the Stock Exchange determined by the Plan Administrator to be the
primary market for the Common Stock, as such price is officially
quoted in the composite tape of transactions on such exchange. If
there is no closing selling price for the Common Stock on the date in
question, then the Fair Market Value shall be the closing selling
price on the last preceding date for which such quotation exists.

(iii) If the Fair Market Value of Common Stock is not
determinable pursuant to subparagraph (i) or (ii) of this provision,
then the Fair Market Value shall be determined by the Plan
Administrator, after taking into account such factors as it shall
deem appropriate.

N. GRANT DATE shall mean the date of grant of the option as specified
in the Grant Notice.

O. GRANT NOTICE shall mean the Notice of Grant of Stock Option
accompanying the Agreement, pursuant to which Optionee has been informed of the
basic terms of the option evidenced hereby.

A-2.

<PAGE> 14
P. INCENTIVE OPTION shall mean an option which satisfies the
requirements of Code Section 422.

Q. MISCONDUCT shall mean the commission of any act of fraud,
embezzlement or dishonesty by Optionee, any unauthorized use or disclosure by
Optionee of confidential information or trade secrets of the Corporation (or any
Parent or Subsidiary), or any other intentional misconduct by Optionee adversely
affecting the business or affairs of the Corporation (or any Parent or
Subsidiary) in a material manner. The foregoing definition shall not be deemed
to be inclusive of all the acts or omissions which the Corporation (or any
Parent or Subsidiary) may consider as grounds for the dismissal or discharge of
Optionee or any other person in the Service of the Corporation (or any Parent or
Subsidiary).

R. 1934 ACT shall mean the Securities Exchange Act of 1934, as
amended.

S. NON-STATUTORY OPTION shall mean an option not intended to satisfy
the requirements of Code Section 422.

T. NOTICE OF EXERCISE shall mean the notice of exercise in the form
attached hereto as Exhibit I.

U. OPTION SHARES shall mean the number of shares of Common Stock
subject to the option as specified in the Grant Notice.

V. OPTIONEE shall mean the person to whom the option is granted as
specified in the Grant Notice.

W. PARENT shall mean any corporation (other than the Corporation) in
an unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.

X. PLAN shall mean the Corporation's 1997 Stock Incentive Plan.

Y. PLAN ADMINISTRATOR shall mean either the Board or a committee of
the Board acting in its administrative capacity under the Plan.

Z. SERVICE shall mean the Optionee's performance of services for the
Corporation (or any Parent or Subsidiary) in the capacity of an Employee, a
non-employee member of the board of directors or a consultant or independent
advisor.

A-3.

<PAGE> 15

AA. STOCK EXCHANGE shall mean the American Stock Exchange or the New
York Stock Exchange.

BB. SUBSIDIARY shall mean any corporation (other than the
Corporation) in an unbroken chain of corporations beginning with the
Corporation, provided each corporation (other than the last corporation) in the
unbroken chain owns, at the time of the determination, stock possessing fifty
percent (50%) or more of the total combined voting power of all classes of stock
in one of the other corporations in such chain.

A-4.

<PAGE> 16

EXHIBIT B

1997 STOCK INCENTIVE PLAN

<PAGE> 1
INITIAL GRANT

SPECTRAL HOLDING CORPORATION
NOTICE OF GRANT OF NON-EMPLOYEE DIRECTOR
AUTOMATIC STOCK OPTION

Notice is hereby given of the following option grant (the "Option")
to purchase shares of the Common Stock of Spectral Holding Corporation (the
"Corporation"):

Optionee:
-----------------------------------------------------------
Grant Date:
---------------------------------------------------------

Exercise Price: $ per share
---------------------------------------

Number of Option Shares: shares
-------------------------

Expiration Date: ---------------------------------------------------

Type of Option: Non-Statutory Stock Option

Date Exercisable: Immediately Exercisable

Vesting Schedule: The Option Shares shall initially be unvested and
subject to repurchase by the Corporation at the Exercise Price paid
per share. Optionee shall acquire a vested interest in, and the
Corporation's repurchase right shall accordingly lapse with respect
to, the Option Shares in a series of four (4) successive equal
annual installments upon the Optionee's completion of each year of
service as a member of the Corporation's Board of Directors (the
"Board") over the four (4)-year period measured from the Grant Date.
In no event shall any additional Option Shares vest after Optionee's
cessation of Board service.

Optionee understands and agrees that the Option is granted subject
to and in accordance with the terms of the automatic option grant program under
the Spectral Holding Corporation 1997 Stock Incentive Plan (the "Plan").
Optionee further agrees to be bound by the terms of the Plan and the terms of
the Option as set forth in the Automatic Stock Option Agreement attached hereto
as Exhibit A. A copy of the Plan is available upon request made to the Corporate
Secretary at the Corporation's principal offices.

<PAGE> 2

REPURCHASE RIGHT. OPTIONEE HEREBY AGREES THAT ALL UNVESTED OPTION
SHARES ACQUIRED UPON THE EXERCISE OF THE OPTION SHALL NOT BE TRANSFERABLE AND
SHALL BE SUBJECT TO REPURCHASE BY THE CORPORATION, AT THE EXERCISE PRICE PAID
PER SHARE, UPON OPTIONEE'S TERMINATION OF SERVICE AS A MEMBER OF THE
CORPORATION'S BOARD OF DIRECTORS PRIOR TO VESTING IN THOSE SHARES. THE TERMS AND
CONDITIONS OF SUCH REPURCHASE RIGHT SHALL BE SPECIFIED IN A STOCK PURCHASE
AGREEMENT, IN FORM AND SUBSTANCE SATISFACTORY TO THE CORPORATION, EXECUTED BY
OPTIONEE AT THE TIME OF THE OPTION EXERCISE.

No Impairment of Rights. Nothing in this Notice or in the attached
Automatic Stock Option Agreement or the Plan shall interfere with or otherwise
restrict in any way the rights of the Corporation or the Corporation's
stockholders to remove Optionee from the Board at any time in accordance with
the provisions of applicable law.

Definitions. All capitalized terms in this Notice shall have the
meaning assigned to them in this Notice or in the attached Automatic Stock
Option Agreement.

DATED: , 199
-----------------

SPECTRAL HOLDING CORPORATION

By:
-------------------------------

Title:
-------------------------------

-------------------------------
OPTIONEE

Address:
-------------------------------

-------------------------------

ATTACHMENTS

EXHIBIT A - AUTOMATIC STOCK OPTION AGREEMENT

<PAGE> 3

EXHIBIT A

SPECTRAL HOLDING CORPORATION
AUTOMATIC STOCK OPTION AGREEMENT

RECITALS

I. Spectral Holding Corporation has implemented an automatic option grant
program under the Corporation's 1997 Stock Incentive Plan pursuant to which
eligible non-employee members of the Corporation's Board will automatically
receive special option grants at designated intervals over their period of Board
service in order to provide such individuals with a meaningful incentive to
continue to serve as a member of the Board.

A. Optionee is an eligible non-employee Board member, and this Agreement
is executed pursuant to, and is intended to carry out the purposes of, the Plan
in connection with the automatic grant of a stock option to purchase shares of
the Corporation's Common Stock under the Plan.

B. The granted option is intended to be a non-statutory option which does
not meet the requirements of Section 422 of the Internal Revenue Code.

C. All capitalized terms in this Agreement, to the extent not otherwise
defined in the Agreement, shall have the meaning assigned to them in the
attached Appendix.

NOW, THEREFORE, it is hereby agreed as follows:

1. GRANT OF OPTION. The Corporation hereby grants to Optionee, as of
the Grant Date, a Non-Statutory Option to purchase up to the number of Option
Shares specified in the Grant Notice. The Option Shares shall be purchasable
from time to time during the option term specified in Paragraph 2 at the
Exercise Price.

3. LIMITED TRANSFERABILITY. This option may, in connection with the
Optionee's estate plan, be assigned in whole or in part during Optionee's
lifetime to one or more members of the Optionee's immediate family or to a trust
established for the exclusive benefit of one or more such family members. The
assigned portion shall be exercisable only by the person or persons who acquire
a proprietary interest in the option pursuant to such assignment. The terms
applicable to the assigned portion shall be the same as those in effect for this
option immediately prior to such

<PAGE> 4

assignment and shall be set forth in such documents issued to the assignee as
the Corporation may deem appropriate. Should the Optionee die while holding this
option, then this option shall be transferred in accordance with Optionee's will
or the laws of descent and distribution.

4. EXERCISABILITY/VESTING.

(a) This option shall be immediately exercisable for any or
all of the Option Shares, whether or not the Option Shares are vested in
accordance with the Vesting Schedule set forth in the Grant Notice, and shall
remain so exercisable until the Expiration Date or the sooner termination of the
option term under Paragraph 5, 6 or 7.

(b) Optionee shall, in accordance with the Vesting Schedule
set forth in the Grant Notice, vest in the Option Shares in a series of
installments over his or her period of Board service. Vesting in the Option
Shares may be accelerated pursuant to the provisions of Paragraph 5, 6 or 7. In
no event, however, shall any additional Option Shares vest following Optionee's
cessation of service as a Board member.

5. CESSATION OF BOARD SERVICE. Should Optionee's service as a Board
member cease while this option remains outstanding, then the option term
specified in Paragraph 2 shall terminate (and this option shall cease to be
outstanding) prior to the Expiration Date in accordance with the following
provisions:

(i) Should Optionee cease to serve as a Board member for
any reason (other than death or Permanent Disability) while holding this
option, then the period for exercising this option shall be reduced to a
twelve (12)-month period commencing with the date of such cessation of
Board service, but in no event shall this option be exercisable at any
time after the Expiration Date. During such limited period of
exercisability, this option may not be exercised in the aggregate for more
than the number of Option Shares (if any) in which Optionee is vested on
the date of his or her cessation of Board service. Upon the earlier of (i)
the expiration of such twelve (12)- month period or (ii) the specified
Expiration Date, the option shall terminate and cease to be exercisable
with respect to any vested Option Shares for which the option has not been
exercised.

(ii) Should Optionee die during the twelve (12)-month
period following his or her cessation of Board service, then the personal
representative of Optionee's estate or the person or persons to whom the
option is transferred pursuant to Optionee's will or in accordance with
the laws of descent and distribution shall have the right to exercise this
option for any or all of the Option Shares in which Optionee is vested at
the time of Optionee's cessation of Board service (less any Option Shares
purchased by Optionee after such cessation of Board service but prior to
death). Such right of exercise shall terminate, and this option shall
accordingly cease to be exercisable for those vested Option Shares, upon
the earlier of (i) the expiration of the twelve (12)-month period measured
from the date

<PAGE> 5

of Optionee's cessation of Board service or (ii) the specified Expiration
Date of the option term.

(iii) Should Optionee cease service as a Board member by
reason of death or Permanent Disability, then all Option Shares at the
time subject to this option but not otherwise vested shall immediately
vest in full so that Optionee (or the personal representative of
Optionee's estate or the person or persons to whom the option is
transferred upon Optionee's death) shall have the right to exercise this
option for any or all of the Option Shares as fully-vested shares of
Common Stock at any time prior to the earlier of (i) the expiration of the
twelve (12)-month period measured from the date of Optionee's cessation of
Board service or (ii) the specified Expiration Date.

(iv) Upon Optionee's cessation of Board service for any
reason other than death or Permanent Disability, this option shall
immediately terminate and cease to be outstanding with respect to any and
all Option Shares in which Optionee is not otherwise at that time vested
in accordance with the normal Vesting Schedule set forth in the Grant
Notice or the special vesting acceleration provisions of Paragraph 6 or 7
below.

6. CORPORATE TRANSACTION.

(a) In the event of a Corporate Transaction, all Option Shares
at the time subject to this option but not otherwise vested shall automatically
vest so that this option shall, immediately prior to the specified effective
date for the Corporate Transaction, become fully exercisable for all of the
Option Shares at the time subject to this option and may be exercised for all or
any portion of such shares as fully-vested shares of Common Stock. Immediately
following the consummation of the Corporate Transaction, this option shall
terminate and cease to be outstanding, except to the extent assumed by the
successor corporation or its parent company.

(b) If this option is assumed in connection with a Corporate
Transaction, then this option shall be appropriately adjusted, immediately after
such Corporate Transaction, to apply to the number and class of securities which
would have been issuable to Optionee in consummation of such Corporate
Transaction had the option been exercised immediately prior to such Corporate
Transaction, and appropriate adjustments shall also be made to the Exercise
Price, provided the aggregate Exercise Price shall remain the same.

7. CHANGE IN CONTROL/HOSTILE TAKE-OVER.

(a) All Option Shares subject to this option at the time of a
Change in Control but not otherwise vested shall automatically vest so that this
option shall, immediately prior to the effective date of such Change in Control,
become fully exercisable for all of the Option Shares at the time subject to
this option and may be exercised for all or any portion of such shares as
fully-vested shares of Common Stock. This option shall remain exercisable for
such fully-vested Option

<PAGE> 6

Shares until the earliest to occur of (i) the specified Expiration Date, (ii)
the sooner termination of this option in accordance with Paragraph 5 or 6 or
(iii) the surrender of this option under Paragraph 7(b).

(b) Optionee shall have an unconditional right (exercisable
during the thirty (30)-day period immediately following the consummation of a
Hostile Take-Over) to surrender this option to the Corporation in exchange for a
cash distribution from the Corporation in an amount equal to the excess of (i)
the Take-Over Price of the Option Shares at the time subject to the surrendered
option (whether or not those Option Shares are otherwise at the time vested)
over (ii) the aggregate Exercise Price payable for such shares. This Paragraph
7(b) limited stock appreciation right shall in all events terminate upon the
expiration or sooner termination of the option term and may not be assigned or
transferred by Optionee.

(c) To exercise the Paragraph 7(b) limited stock appreciation
right, Optionee must, during the applicable thirty (30)-day exercise period,
provide the Corporation with written notice of the option surrender in which
there is specified the number of Option Shares as to which the option is being
surrendered. Such notice must be accompanied by the return of Optionee's copy of
this Agreement, together with any written amendments to such Agreement. The cash
distribution shall be paid to Optionee within five (5) business days following
such delivery date, and neither the approval of the Plan Administrator nor the
consent of the Board shall be required in connection with such option surrender
and cash distribution. Upon receipt of such cash distribution, this option shall
be cancelled with respect to the shares subject to the surrendered option (or
the surrendered portion), and Optionee shall cease to have any further right to
acquire those Option Shares under this Agreement. The option shall, however,
remain outstanding for the balance of the Option Shares (if any) in accordance
with the terms and provisions of this Agreement, and the Corporation shall
accordingly issue a new stock option agreement (substantially in the same form
as this Agreement) for those remaining Option Shares.

8. ADJUSTMENT IN OPTION SHARES. Should any change be made to the
Common Stock by reason of any stock split, stock dividend, recapitalization,
combination of shares, exchange of shares or other change affecting the
outstanding Common Stock as a class without the Corporation's receipt of
consideration, appropriate adjustments shall be made to (i) the number and/or
class of securities subject to this option and (ii) the Exercise Price in order
to reflect such change and thereby preclude a dilution or enlargement of
benefits hereunder; provided, however, that the aggregate Exercise Price shall
remain the same.

9. STOCKHOLDER RIGHTS. The holder of this option shall not have any
stockholder rights with respect to the Option Shares until such person shall
have exercised the option, paid the Exercise Price and become a holder of record
of the purchased shares.

<PAGE> 7

10. MANNER OF EXERCISING OPTION.

(a) In order to exercise this option for all or any part of
the Option Shares for which the option is at the time exercisable, Optionee or,
in the case of exercise after Optionee's death, Optionee's executor,
administrator, heir or legatee, as the case may be, must take the following
actions:

(i) To the extent the option is exercised for vested
Option Shares, the Secretary of the Corporation shall be provided with
written notice of the option exercise (the "Exercise Notice") in
substantially the form of Exhibit I attached hereto, in which there is
specified the number of vested Option Shares to be purchased under the
exercised option. To the extent that the option is exercised for one or
more unvested Option Shares, Optionee (or other person exercising the
option) shall deliver to the Secretary of the Corporation a Purchase
Agreement for those unvested Option Shares.

(ii) The Exercise Price for the purchased shares
shall be paid in one or more of the following alternative forms:

- cash or check made payable to the Corporation's
order; or

- shares of Common Stock held by Optionee (or any
other person or persons exercising the option) for the requisite
period necessary to avoid a charge to the Corporation's earnings for
financial reporting purposes and valued at Fair Market Value on the
Exercise Date; or

- to the extent the option is exercised for vested
Option Shares, through a special sale and remittance procedure
pursuant to which Optionee shall provide irrevocable written
instructions (A) to a Corporation-designated brokerage firm to
effect the immediate sale of the vested shares purchased under the
option and remit to the Corporation, out of the sale proceeds
available on the settlement date, sufficient funds to cover the
aggregate Exercise Price payable for those shares plus the
applicable Federal, state and local income taxes required to be
withheld by the Corporation by reason of such exercise and (B) to
the Corporation to deliver the certificates for the purchased shares
directly to such brokerage firm in order to complete the sale.

(iii) Appropriate documentation evidencing the right
to exercise this option shall be furnished the Corporation if the person
or persons exercising the option is other than Optionee.

<PAGE> 8

(iv) Appropriate arrangement must be made with the
Corporation for the satisfaction of all Federal, state and local income
tax withholding requirements applicable to the option exercise.

(b) Except to the extent the sale and remittance procedure
specified above is utilized in connection with the exercise of the option for
vested Option Shares, payment of the Exercise Price for the purchased shares
must accompany the Exercise Notice or Purchase Agreement delivered to the
Corporation in connection with the option exercise.

(c) As soon as practical after the Exercise Date, the
Corporation shall issue to or on behalf of Optionee (or any other person or
persons exercising this option) a certificate or certificates representing the
purchased Option Shares. To the extent any such Option Shares are unvested, the
certificates for those Option Shares shall be endorsed with an appropriate
legend evidencing the Corporation's repurchase rights and may be held in escrow
with the Corporation until such shares vest.

(d) In no event may this option be exercised for fractional
shares.

11. NO IMPAIRMENT OF RIGHTS. This Agreement shall not in any way
affect the right of the Corporation to adjust, reclassify, reorganize or
otherwise make changes in its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets. Nor shall this Agreement in any way be construed or
interpreted so as to affect adversely or otherwise impair the right of the
Corporation or the stockholders to remove Optionee from the Board at any time in
accordance with the provisions of applicable law.

12. COMPLIANCE WITH LAWS AND REGULATIONS.

(a) The exercise of this option and the issuance of the Option
Shares upon such exercise shall be subject to compliance by the Corporation and
Optionee with all applicable requirements of law relating thereto and with all
applicable regulations of any stock exchange (or the Nasdaq National Market, if
applicable) on which the Common Stock may be listed for trading at the time of
such exercise and issuance.

(b) The inability of the Corporation to obtain approval from
any regulatory body having authority deemed by the Corporation to be necessary
to the lawful issuance and sale of any Common Stock pursuant to this option
shall relieve the Corporation of any liability with respect to the non-issuance
or sale of the Common Stock as to which such approval shall not have been
obtained. However, the Corporation shall use its best efforts to obtain all such
applicable approvals.

<PAGE> 9

13. SUCCESSORS AND ASSIGNS. Except to the extent otherwise provided
in Paragraph 3 or 6, the provisions of this Agreement shall inure to the benefit
of, and be binding upon, the Corporation and its successors and assigns and
Optionee, Optionee's assigns and the legal representatives, heirs and legatees
of Optionee's estate.

14. CONSTRUCTION/GOVERNING LAW. This Agreement and the option
evidenced hereby are made and granted pursuant to the automatic option grant
program in effect under the Plan and are in all respects limited by and subject
to the express terms and provisions of that program. The interpretation,
performance, and enforcement of this Agreement shall be governed by the laws of
the State of California without resort to that State's conflict-of-laws rules.

15. NOTICES. Any notice required to be given or delivered to the
Corporation under the terms of this Agreement shall be in writing and addressed
to the Corporation at its principal corporate offices. Any notice required to be
given or delivered to Optionee shall be in writing and addressed to Optionee at
the address indicated below Optionee's signature line on the Grant Notice. All
notices shall be deemed effective upon personal delivery or upon deposit in the
U.S. mail, postage prepaid and properly addressed to the party to be notified.

<PAGE> 10

EXHIBIT I

NOTICE OF EXERCISE

I hereby notify Spectral Holding Corporation (the "Corporation")
that I elect to purchase ___________ shares of the Corporation's Common Stock
(the "Purchased Shares") at the option exercise price of $_____ per share (the
"Exercise Price") pursuant to that certain option (the "Option") granted to me
pursuant to the automatic option grant program under the Corporation's 1997
Stock Incentive Plan on ________________, 199_.

Concurrently with the delivery of this Exercise Notice to the
Secretary of the Corporation, I shall hereby pay to the Corporation the Exercise
Price for the Purchased Shares in accordance with the provisions of my agreement
with the Corporation evidencing the Option and shall deliver whatever additional
documents may be required by such agreement as a condition for exercise.
Alternatively, I may utilize the special broker/dealer sale and remittance
procedure specified in my agreement to effect payment of the Exercise Price for
any Purchased Shares in which I am vested at the time of exercise.

, 199
- ------------------------
Date

--------------------------------------------
Optionee

Address:
------------------------------------

--------------------------------------------

Print name in exact manner
it is to appear on the
stock certificate:
--------------------------------------------

Address to which certificate
is to be sent, if different
from address above:
--------------------------------------------

Social Security Number:
--------------------------------------------

<PAGE> 11
APPENDIX

The following definitions shall be in effect under the Agreement:

A. AGREEMENT shall mean this Automatic Stock Option Agreement.

B. BOARD shall mean the Corporation's Board of Directors.

C. CHANGE IN CONTROL shall mean a change in ownership or control of the
Corporation effected through either of the following transactions:

(i) the acquisition, directly or indirectly, by any person or related
group of persons (other than the Corporation or a person that directly or
indirectly controls, is controlled by, or is under common control with,
the Corporation) of beneficial ownership (within the meaning of Rule
13d-3 of the 1934 Act) of securities possessing more than fifty percent
(50%) of the total combined voting power of the Corporation's outstanding
securities pursuant to a tender or exchange offer made directly to the
Corporation's stockholders which the Board does not recommend such
stockholders to accept, or

(ii) a change in the composition of the Board over a period of
thirty-six (36) consecutive months or less such that a majority of the
Board members ceases, by reason of one or more contested elections for
Board membership, to be comprised of individuals who either (A) have been
Board members continuously since the beginning of such period or (B) have
been elected or nominated for election as Board members during such
period by at least a majority of the Board members described in clause
(A) who were still in office at the time the Board approved such election
or nomination.

D. CODE shall mean the Internal Revenue Code of 1986, as amended.

E. COMMON STOCK shall mean the Corporation's common stock.

F. CORPORATE TRANSACTION shall mean either of the following
stockholder-approved transactions to which the Corporation is a party:

(i) a merger or consolidation in which securities possessing more
than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities are transferred to a person or
persons different from the persons holding those securities immediately
prior to such transaction, or

A-1.

<PAGE> 12

(ii) the sale, transfer or other disposition of all or substantially
all of the Corporation's assets in complete liquidation or dissolution of
the Corporation.

G. CORPORATION shall mean Spectral Holding Corporation, a California
corporation.

H. EXERCISE DATE shall mean the date on which the option shall have been
exercised in accordance with Paragraph 10 of the Agreement.

I. EXERCISE PRICE shall mean the exercise price payable per share as
specified in the Grant Notice.

J. EXPIRATION DATE shall mean the date on which the option term expires
as specified in the Grant Notice.

K. FAIR MARKET VALUE per share of Common Stock on any relevant date shall
be determined in accordance with the following provisions:

(i) If the Common Stock is at the time traded on the Nasdaq National
Market, then the Fair Market Value shall be the closing selling price per
share of Common Stock on the date in question, as the price is reported
by the National Association of Securities Dealers on the Nasdaq National
Market or any successor system. If there is no closing selling price for
the Common Stock on the date in question, then the Fair Market Value
shall be the closing selling price on the last preceding date for which
such quotation exists.

(ii) If the Common Stock is at the time listed on any Stock Exchange,
then the Fair Market Value shall be the closing selling price per share
of Common Stock on the date in question on the Stock Exchange determined
by the Plan Administrator to be the primary market for the Common Stock,
as such price is officially quoted in the composite tape of transactions
on such exchange. If there is no closing selling price for the Common
Stock on the date in question, then the Fair Market Value shall be the
closing selling price on the last preceding date for which such quotation
exists.

L. GRANT DATE shall mean the date of grant of the option as specified in
the Grant Notice.

A-2.

<PAGE> 13

M. GRANT NOTICE shall mean the Notice of Grant of Automatic Stock Option
accompanying this Agreement, pursuant to which Optionee has been informed of the
basic terms of the option evidenced hereby.

N. HOSTILE TAKE-OVER shall mean the acquisition, directly or indirectly,
by any person or related group of persons (other than Spectratek Corporation or
a person that directly or indirectly controls, is controlled by, or is under
common control with, Spectratek Corporation) of beneficial ownership (within the
meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty
percent (50%) of the total combined voting power of Spectratek Corporation's
outstanding securities pursuant to a tender or exchange offer made directly to
Spectratek Corporation's stockholders which the Board does not recommend such
stockholders to accept.

O. 1934 ACT shall mean the Securities Exchange Act of 1934, as amended.

P. NON-STATUTORY OPTION shall mean an option not intended to satisfy the
requirements of Code Section 422.

Q. OPTION SHARES shall mean the number of shares of Common Stock subject
to the option.

R. OPTIONEE shall mean the person to whom the option is granted as
specified in the Grant Notice.

S. PERMANENT DISABILITY shall mean the inability of Optionee to perform
his or her usual duties as a Board member by reason of any medically
determinable physical or mental impairment which is expected to result in death
or has lasted or can be expected to last for a continuous period of twelve (12)
months or more.

T. PLAN shall mean Spectratek Corporation's 1997 Stock Incentive Plan.

U. PURCHASE AGREEMENT shall mean the stock purchase agreement (in form
and substance satisfactory to the Corporation) which must be executed at the
time the option is exercised for unvested Option Shares and which will
accordingly (i) grant the Corporation the right to repurchase, at the Exercise
Price, any and all of those Option Shares in which Optionee is not otherwise
vested at the time of his or her cessation of service as a Board member and (ii)
preclude the sale, transfer or other disposition of any of the Option Shares
purchased under such agreement while those Option Shares remain subject to the
repurchase right.

V. STOCK EXCHANGE shall mean the American Stock Exchange or the New York
Stock Exchange.

A-3.

<PAGE> 14

W. TAKE-OVER PRICE shall mean the greater of (i) the Fair Market Value
per share of Common Stock on the date the option is surrendered to the
Corporation in connection with a Hostile Take-Over or (ii) the highest reported
price per share of Common Stock paid by the tender offeror in effecting the
Hostile Take-Over.

X. VESTING SCHEDULE shall mean the vesting schedule specified in the
Grant Notice, pursuant to which Optionee will vest in the Option Shares in one
or more installments over his or her period of Board service, subject to
acceleration in accordance with the provisions of the Agreement.

A-4.

<PAGE> 1

SPECTRAL HOLDING CORPORATION

STOCK ISSUANCE AGREEMENT

AGREEMENT made this ___ day of 199 ___ , by and between Spectral
Holding Corporation, a California corporation, and ____________________________,
a Participant in the Corporation's 1997 Stock Incentive Plan.

All capitalized terms in this Agreement shall have the meaning
assigned to them in this Agreement or in the attached Appendix.

A. PURCHASE OF SHARES

1. PURCHASE. Participant hereby purchases shares of Common
Stock (the "Purchased Shares") pursuant to the provisions of the Stock Issuance
Program at the purchase price of $______ per share (the "Purchase Price").

2. PAYMENT. Concurrently with the delivery of this Agreement to
the Corporation, Participant shall pay the Purchase Price for the Purchased
Shares in cash or check payable to the Corporation and shall deliver a
duly-executed blank Assignment Separate from Certificate (in the form attached
hereto as Exhibit I) with respect to the Purchased Shares.

3. STOCKHOLDER RIGHTS. Until such time as the Corporation
exercises the Repurchase Right, Participant (or any successor in interest) shall
have all the rights of a stockholder (including voting, dividend and liquidation
rights) with respect to the Purchased Shares, subject, however, to the transfer
restrictions of this Agreement.

4. ESCROW. The Corporation shall have the right to hold the
Purchased Shares in escrow until those shares have vested in accordance with the
Vesting Schedule.

5. COMPLIANCE WITH LAW. Under no circumstances shall shares of
the Common Stock or other assets be issued or delivered to Participant pursuant
to the provisions of this Agreement unless, in the opinion of counsel for the
Corporation or its successors, there shall have been compliance with all
applicable requirements of Federal and state securities laws, all applicable
listing requirements of any stock exchange (or the Nasdaq National Market, if
applicable) on which the Common Stock is at the time listed for trading and all
other requirements of law or of any regulatory bodies having jurisdiction over
such issuance and delivery.

<PAGE> 2
B. TRANSFER RESTRICTIONS

1. RESTRICTION ON TRANSFER. Except for any Permitted Transfer,
Participant shall not transfer, assign, encumber or otherwise dispose of any of
the Purchased Shares which are subject to the Repurchase Right.

2. RESTRICTIVE LEGEND. The stock certificate for the Purchased
Shares shall be endorsed with the following restrictive legend:

"The shares represented by this certificate are unvested and
subject to certain repurchase rights granted to the Corporation and
accordingly may not be sold, assigned, transferred, encumbered, or in
any manner disposed of except in conformity with the terms of a written
agreement dated , 199 between the Corporation and the registered holder
of the shares (or the predecessor in interest to the shares). A copy of
such agreement is maintained at the Corporation's principal corporate
offices."

3. TRANSFEREE OBLIGATIONS. Each person (other than the
Corporation) to whom the Purchased Shares are transferred by means of a
Permitted Transfer must, as a condition precedent to the validity of such
transfer, acknowledge in writing to the Corporation that such person is bound by
the provisions of this Agreement and that the transferred shares are subject to
the Repurchase Right to the same extent such shares would be so subject if
retained by Participant.

C. REPURCHASE RIGHT

1. GRANT. The Corporation is hereby granted the right (the
"Repurchase Right"), exercisable at any time during the sixty (60)-day period
following the date Participant ceases for any reason to remain in Service, to
repurchase at the Purchase Price all or any portion of the Purchased Shares in
which Participant is not, at the time of his or her cessation of Service, vested
in accordance with the Vesting Schedule (such shares to be hereinafter referred
to as the "Unvested Shares").

2. EXERCISE OF THE REPURCHASE RIGHT. The Repurchase Right shall
be exercisable by written notice delivered to each Owner of the Unvested Shares
prior to the expiration of the sixty (60)-day exercise period. The notice shall
indicate the number of Unvested Shares to be repurchased and the date on which
the repurchase is to be effected, such date to be not more than thirty (30) days
after the date of such notice. The certificates representing the Unvested Shares
to be repurchased shall be delivered to the Corporation on or before the close
of business on the date specified for the repurchase. Concurrently with the
receipt of such stock certificates, the Corporation shall pay to Owner, in cash
or cash equivalent (including the cancellation of any purchase-money
indebtedness), an amount equal to the Purchase Price previously paid for the
Unvested Shares to be repurchased from Owner.

<PAGE> 3

3. TERMINATION OF THE REPURCHASE RIGHT. The Repurchase Right
shall terminate with respect to any Unvested Shares for which it is not timely
exercised under Paragraph C.2. In addition, the Repurchase Right shall terminate
and cease to be exercisable with respect to any and all Purchased Shares in
which Participant vests in accordance with the following Vesting Schedule:

(i) Upon Participant's completion of one (1) year of
Service measured from ______________, 199__, Participant shall
acquire a vested interest in, and the Repurchase Right shall lapse
with respect to, twenty-five percent (25%) of the Purchased Shares.

(ii) Participant shall acquire a vested interest in, and
the Repurchase Right shall lapse with respect to, the remaining
Purchased Shares in a series of thirty-six (36) successive equal
monthly installments upon Participant's completion of each additional
month of Service over the thirty-six (36)-month period measured from
the initial vesting date under subparagraph (i) above.

4. RECAPITALIZATION. Any new, substituted or additional
securities or other property (including cash paid other than as a regular cash
dividend) which is by reason of any Recapitalization distributed with respect to
the Purchased Shares shall be immediately subject to the Repurchase Right and
any escrow requirements hereunder, but only to the extent the Purchased Shares
are at the time covered by such right or escrow requirements. Appropriate
adjustments to reflect such distribution shall be made to the number and/or
class of Purchased Shares subject to this Agreement and to the price per share
to be paid upon the exercise of the Repurchase Right in order to reflect the
effect of any such Recapitalization upon the Corporation's capital structure;
provided, however, that the aggregate purchase price shall remain the same.

5. CORPORATE TRANSACTION.

(a) Immediately prior to the consummation of any
Corporate Transaction, the Repurchase Right shall automatically lapse in its
entirety and the Purchased Shares shall vest in full, except to the extent the
Repurchase Right is to be assigned to the successor corporation (or parent
thereof) in connection with the Corporate Transaction.

(b) To the extent the Repurchase Right remains in effect
following a Corporate Transaction, such right shall apply to the new securities
or other property (including any cash payments) received in exchange for the
Purchased Shares in consummation of the Corporate Transaction, but only to the
extent the Purchased Shares are at the time covered by such right. Appropriate
adjustments shall be made to the price per share payable upon exercise of the
Repurchase Right to reflect the effect of the Corporate Transaction upon the
Corporation's capital structure; provided, however, that the aggregate purchase
price shall remain the same. The new securities or other property (including
cash payments) issued or distributed with respect to the

<PAGE> 4

Purchased Shares in consummation of the Corporate Transaction shall
immediately be deposited in escrow with the Corporation (or the successor
entity) and shall not be released from escrow until Participant vests in such
securities or other property in accordance with the same Vesting Schedule in
effect for the Purchased Shares.

(c) The Repurchase Right may also be subject to termination in
whole or in part on an accelerated basis, and the Purchased Shares subject to
immediate vesting, in accordance with the terms of any special Addendum attached
to this Agreement.

D. SPECIAL TAX ELECTION

1. SECTION 83(b) ELECTION. Under Code Section 83, the excess
of the fair market value of the Purchased Shares on the date any forfeiture
restrictions applicable to such shares lapse over the Purchase Price paid for
those shares will be reportable as ordinary income on the lapse date. For this
purpose, the term "forfeiture restrictions" includes the right of the
Corporation to repurchase the Purchased Shares pursuant to the Repurchase Right.
Participant may elect under Code Section 83(b) to be taxed at the time the
Purchased Shares are acquired, rather than when and as such Purchased Shares
cease to be subject to such forfeiture restrictions. Such election must be filed
with the Internal Revenue Service within thirty (30) days after the date of this
Agreement. Even if the fair market value of the Purchased Shares on the date of
this Agreement equals the Purchase Price paid (and thus no tax is payable), the
election must be made to avoid adverse tax consequences in the future. THE FORM
FOR MAKING THIS ELECTION IS ATTACHED AS EXHIBIT II HERETO. PARTICIPANT
UNDERSTANDS THAT FAILURE TO MAKE THIS FILING WITHIN THE APPLICABLE THIRTY (30)-
DAY PERIOD WILL RESULT IN THE RECOGNITION OF ORDINARY INCOME AS THE FORFEITURE
RESTRICTIONS LAPSE.

2. FILING RESPONSIBILITY. PARTICIPANT ACKNOWLEDGES THAT IT IS
PARTICIPANT'S SOLE RESPONSIBILITY, AND NOT THE CORPORATION'S, TO FILE A TIMELY
ELECTION UNDER CODE SECTION 83(b), EVEN IF PARTICIPANT REQUESTS THE CORPORATION
OR ITS REPRESENTATIVES TO MAKE THIS FILING ON HIS OR HER BEHALF.

E. GENERAL PROVISIONS

1. ASSIGNMENT. The Corporation may assign the Repurchase Right
to any person or entity selected by the Board, including (without limitation)
one or more stockholders of the Corporation.

2. AT WILL STATUS. Nothing in this Agreement or in the Plan
shall confer upon Participant any right to continue in Service for any period of
specific duration or interfere with or otherwise restrict in any way the rights
of the Corporation (or any Parent or Subsidiary employing

<PAGE> 5

or retaining Participant) or of Participant, which rights are hereby expressly
reserved by each, to terminate Participant's Service at any time for any reason,
with or without cause.

3. NOTICES. Any notice required to be given under this
Agreement shall be in writing and shall be deemed effective upon personal
delivery or upon deposit in the U.S. mail, registered or certified, postage
prepaid and properly addressed to the party entitled to such notice at the
address indicated below such party's signature line on this Agreement or at such
other address as such party may designate by ten (10) days advance written
notice under this paragraph to all other parties to this Agreement.

4. NO WAIVER. The failure of the Corporation in any instance to
exercise the Repurchase Right shall not constitute a waiver of any other
repurchase rights that may subsequently arise under the provisions of this
Agreement or any other agreement between the Corporation and Participant. No
waiver of any breach or condition of this Agreement shall be deemed to be a
waiver of any other or subsequent breach or condition, whether of like or
different nature.

5. CANCELLATION OF SHARES. If the Corporation shall make
available, at the time and place and in the amount and form provided in this
Agreement, the consideration for the Purchased Shares to be repurchased in
accordance with the provisions of this Agreement, then from and after such time,
the person from whom such shares are to be repurchased shall no longer have any
rights as a holder of such shares (other than the right to receive payment of
such consideration in accordance with this Agreement). Such shares shall be
deemed purchased in accordance with the applicable provisions hereof, and the
Corporation shall be deemed the owner and holder of such shares, whether or not
the certificates therefor have been delivered as required by this Agreement.

6. PARTICIPANT UNDERTAKING. Participant hereby agrees to take
whatever additional action and execute whatever additional documents the
Corporation may deem necessary or advisable in order to carry out or effect one
or more of the obligations or restrictions imposed on either Participant or the
Purchased Shares pursuant to the provisions of this Agreement.

7. AGREEMENT IS ENTIRE CONTRACT. This Agreement constitutes the
entire contract between the parties hereto with regard to the subject matter
hereof. This Agreement is made pursuant to the provisions of the Plan and shall
in all respects be construed in conformity with the terms of the Plan.

8. GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of California without resort
to that State's conflict-of-laws rules.

9. COUNTERPARTS. This Agreement may be executed in
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.

<PAGE> 6

10. SUCCESSORS AND ASSIGNS. The provisions of this Agreement
shall inure to the benefit of, and be binding upon, the Corporation and its
successors and assigns and upon Participant, Participant's assigns and the legal
representatives, heirs and legatees of Participant's estate, whether or not any
such person shall have become a party to this Agreement and have agreed in
writing to join herein and be bound by the terms hereof.

IN WITNESS WHEREOF, the parties have executed this Agreement on
the day and year first indicated above.

SPECTRAL HOLDING CORPORATION

By: _________________________________

Title: ______________________________

Address: ____________________________

_____________________________________

_____________________________________
PARTICIPANT

Address: ____________________________

_____________________________________

<PAGE> 7

EXHIBIT I

ASSIGNMENT SEPARATE FROM CERTIFICATE

FOR VALUE RECEIVED _______________________hereby sell(s),
assign(s) and transfer(s) unto Spectral Holding Corporation (the "Corporation"),
________________________ (____) shares of the Common Stock of the Corporation
standing in his or her name on the books of the Corporation represented by
Certificate No. _____________ herewith and do(es) hereby irrevocably constitute
and appoint ________________ Attorney to transfer the said stock on the books of
the Corporation with full power of substitution in the premises.

Dated: ______________ , 199 ___ .

Signature _________________________

INSTRUCTION: Please do not fill in any blanks other than the signature line.
Please sign exactly as you would like your name to appear on the issued stock
certificate. The purpose of this assignment is to enable the Corporation to
exercise the Repurchase Right without requiring additional signatures on the
part of Participant.

<PAGE> 8

EXHIBIT II

SECTION 83(b) TAX ELECTION

This statement is being made under Section 83(b) of the Internal Revenue Code,
pursuant to Treas. Reg. Section 1.83-2.

(1) The taxpayer who performed the services is:

Name:
Address:
Taxpayer Ident. No.:

(2) The property with respect to which the election is being made is _________
shares of the common stock of Spectral Holding Corporation.

(3) The property was issued on _________________ , 199 __ .

(4) The taxable year in which the election is being made is the calendar
year 199 ____ .

(5) The property is subject to a repurchase right pursuant to which the
issuer has the right to acquire the property at the original
purchase price if for any reason taxpayer's employment with the
issuer is terminated. The issuer's repurchase right lapses in a
series of annual and monthly installments over a four (4)-year
period ending on ____________________________.

(6) The fair market value at the time of transfer (determined without
regard to any restriction other than a restriction which by its
terms will never lapse) is $ _________ per share.

(7) The amount paid for such property is $ ___________ per share.

(8) A copy of this statement was furnished to Spectral Holding
Corporation for whom taxpayer rendered the services underlying the
transfer of property.

(9) This statement is executed on ________________________, 199__.

- ------------------------------- --------------------------------------
Spouse (if any) Taxpayer

This election must be filed with the Internal Revenue Service Center with which
taxpayer files his or her federal income tax returns and must be made within
thirty (30) days after the execution date of the Stock Issuance Agreement. This
filing should be made by registered or certified mail, return receipt requested.
Participant must retain two (2) copies of the completed form for filing with his
or her federal and state tax returns for the current tax year and an additional
copy for his or her records.

<PAGE> 9

APPENDIX

The following definitions shall be in effect under the Agreement:

A. AGREEMENT shall mean this Stock Issuance Agreement.

B. BOARD shall mean the Corporation's Board of Directors.

C. CODE shall mean the Internal Revenue Code of 1986, as amended.

D. COMMON STOCK shall mean the Corporation's common stock.

E. CORPORATE TRANSACTION shall mean either of the following
stockholder-approved transactions:

(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in complete liquidation
or dissolution of the Corporation.

F. CORPORATION shall mean Spectral Holding Corporation, a California
corporation, and any successor corporation which shall assume the Plan and the
outstanding stock options and stock issuances thereunder.

G. OWNER shall mean Participant and all subsequent holders of the
Purchased Shares who derive their chain of ownership through a Permitted
Transfer from Participant.

H. PARENT shall mean any corporation (other than the Corporation) in
an unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.

I. PARTICIPANT shall mean the person to whom the Purchased Shares are
issued under the Stock Issuance Program.

J. PERMITTED TRANSFER shall mean (i) a gratuitous transfer of the
Purchased Shares, provided and only if Participant obtains the Corporation's
prior written consent to such transfer, (ii) a transfer of title to the
Purchased Shares effected pursuant to Participant's will or the laws of

A-1.

<PAGE> 10

intestate succession following Participant's death or (iii) a transfer to the
Corporation in pledge as security for any purchase-money indebtedness incurred
by Participant in connection with the acquisition of the Purchased Shares.

K. PLAN shall mean the Corporation's 1997 Stock Incentive Plan. ----

L. PLAN ADMINISTRATOR shall mean either the Board or a committee of
the Board acting in its administrative capacity under the Plan.

M. PURCHASE PRICE shall have the meaning assigned to such term in
Paragraph A.1.

N. PURCHASED SHARES shall have the meaning assigned to such term in
Paragraph A.1.

O. RECAPITALIZATION shall mean any stock split, stock dividend,
recapitalization, combination of shares, exchange of shares or other change
affecting the Corporation's outstanding Common Stock as a class without the
Corporation's receipt of consideration.

P. REPURCHASE RIGHT shall mean the right granted to the Corporation
in accordance with Article C.

Q. SERVICE shall mean the Participant's performance of services for
the Corporation (or any Parent or Subsidiary) in the capacity of an employee,
subject to the control and direction of the employer entity as to both the work
to be performed and the manner and method of performance, a non-employee member
of the board of directors or a consultant.

R. STOCK ISSUANCE PROGRAM shall mean the Stock Issuance Program under
the Plan.

S. SUBSIDIARY shall mean any corporation (other than the Corporation)
in an unbroken chain of corporations beginning with the Corporation, provided
each corporation (other than the last corporation) in the unbroken chain owns,
at the time of the determination, stock possessing fifty percent (50%) or more
of the total combined voting power of all classes of stock in one of the other
corporations in such chain.

T. VESTING SCHEDULE shall mean the vesting schedule specified in
Paragraph C.3, subject to the acceleration provisions of Paragraph C.5.

U. UNVESTED SHARES shall have the meaning assigned to such term in
Paragraph C.1.

A-2.

<PAGE> 1

INDEMNIFICATION AGREEMENT EXHIBIT 10.1

THIS AGREEMENT (the "Agreement") is made and entered into this ____
day of ____________ 1997 between Spectratek Technologies, Inc., a Delaware
corporation (the "Company"), and __________________________ ("Indemnitee").

WITNESSETH THAT:

WHEREAS, Indemnitee performs a valuable service for the Company; and

WHEREAS, the Board of Directors of the Company have adopted a
Certificate of Incorporation (the "Certificate") permitting the Board of
Directors to indemnify the officers and directors of the Company; and

WHEREAS, the Certificate and Section 145 of the Delaware General
Corporation Law, as amended ("Law"), by their nonexclusive nature permit
contracts between the Company and the officers and directors of the Company with
respect to indemnification of such officers and directors; and

WHEREAS, in accordance with the authorization as provided by the Law,
the Company may purchase and maintain a policy or policies of directors' and
officers' liability insurance ("D & O Insurance"), covering certain liabilities
which may be incurred by its officers and directors in the performance of their
obligations as officers and directors of the Company; and

WHEREAS, as a result of recent developments affecting the terms,
scope and availability of D & O Insurance there exists general uncertainty as to
the extent of protection afforded the Company's officers and directors by such D
& O Insurance and said uncertainty also exists under statutory and bylaw
indemnification provisions; and

WHEREAS, in recognition of past services and in order to induce
Indemnitee to continue to serve as an officer and/or a director of the Company,
the Company has determined and agreed to enter into this contract with
Indemnitee;

NOW, THEREFORE, in consideration of Indemnitee's continued service as
an officer and/or a director after the date hereof, the parties hereto agree as
follows:

1. INDEMNITY OF INDEMNITEE. The Company hereby agrees to hold
harmless and indemnify Indemnitee to the full extent authorized or permitted by
the provisions of the Law, as such may be amended from time to time, and the
Certificate, as such may be amended. In furtherance of the foregoing
indemnification, and without limiting the generality thereof:

(a) Proceedings Other Than Proceedings by or in the Right of
the Company. Indemnitee shall be entitled to the rights of indemnification
provided in this Section 1(a)

<PAGE> 2

if, by reason of his Corporate Status (as hereinafter defined), he is, or is
threatened to be made, a party to or participant in any Proceeding (as
hereinafter defined) other than a Proceeding by or in the right of the Company.
Pursuant to this Section 1(a), Indemnitee shall be indemnified against all
Expenses (as hereinafter defined), judgments, penalties, fines and amounts paid
in settlement actually and reasonably incurred by him or on his behalf in
connection with such Proceeding or any claim, issue or matter therein, if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Company and, with respect to any criminal
Proceeding, had no reasonable cause to believe his conduct was unlawful.

(b) Proceedings by or in the Right of the Company. Indemnitee
shall be entitled to the rights of indemnification provided in this Section 1(b)
if, by reason of his Corporate Status, he is, or is threatened to be made, a
party to or participant in any Proceeding brought by or in the right of the
Company to procure a judgment in its favor. Pursuant to this Section 1(b),
Indemnitee shall be indemnified against all Expenses actually and reasonably
incurred by him or on his behalf in connection with such Proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the Company; provided, however, that, if applicable law so
provides, no indemnification against such Expenses shall be made in respect of
any claim, issue or matter in such Proceeding as to which Indemnitee shall have
been adjudged to be liable to the Company unless and to the extent that the
Court of Chancery of the State of Delaware, or the court in which such
Proceeding shall have been brought or is pending, shall determine that such
indemnification may be made.

(c) Indemnification for Expenses of a Party Who is Wholly or
Partly Successful. Notwithstanding any other provision of this Agreement, to the
extent that Indemnitee is, by reason of his Corporate Status, a party to and is
successful, on the merits or otherwise, in any Proceeding, he shall be
indemnified to the maximum extent permitted by law against all Expenses actually
and reasonably incurred by him or on his behalf in connection therewith. If
Indemnitee is not wholly successful in such Proceeding but is successful, on the
merits or otherwise, as to one or more but less than all claims, issues or
matters in such Proceeding, the Company shall indemnify Indemnitee against all
Expenses actually and reasonably incurred by him or on his behalf in connection
with each successfully resolved claim, issue or matter. For purposes of this
Section and without limitation, the termination of any claim, issue or matter in
such a Proceeding by dismissal, with or without prejudice, shall be deemed to be
a successful result as to such claim, issue or matter.

2. ADDITIONAL INDEMNITY.

(a) Subject only to the exclusions set forth in Section 2(b)
hereof, the Company hereby further agrees to hold harmless and indemnify
Indemnitee against any and all Expenses, judgments, fines and amounts paid in
settlement actually and reasonably incurred by Indemnitee in connection with any
Proceeding (including an action by or on behalf of the Company) to which
Indemnitee is, was or at any time becomes a party, or is threatened to be made a
party, by reason of his Corporate Status; provided, however, that with respect
to actions by or on behalf of the Company, indemnification of Indemnitee against
any judgments shall be made by the Company

<PAGE> 3

only as authorized in the specific case upon a determination that Indemnitee
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Company; and

(b) No indemnity pursuant to this Section 2 shall be paid by
the Company:

(i) In respect to remuneration paid to Indemnitee if it
shall be determined by a final judgment or other final adjudication that such
remuneration was in violation of law;

(ii) On account of any suit in which judgment is rendered
against Indemnitee for an accounting of profits made from the purchase or sale
by Indemnitee of securities of the Company pursuant to the provisions of Section
16(b) of the Securities Exchange Act of 1934 and amendments thereto or similar
provisions of any federal, state or local statutory law;

(iii) On account of Indemnitee's conduct which is finally
adjudged to have been knowingly fraudulent or deliberately dishonest, or to
constitute willful misconduct; or

(iv) If a final decision by a court having jurisdiction in
the matter shall determine that such indemnification is not lawful.

3. CONTRIBUTION. If the indemnification provided in Sections 1 and 2
is unavailable and may not be paid to Indemnitee for any reason other than those
set forth in paragraphs (i), (ii) and (iii) of Section 2(b), then in respect to
any Proceeding in which the Company is jointly liable with Indemnitee (or would
be if joined in such Proceeding), the Company shall contribute to the amount of
Expenses, judgments, fines and amounts paid in settlement actually and
reasonably incurred and paid or payable by Indemnitee in such proportion as is
appropriate to reflect (i) the relative benefits received by the Company on the
one hand and by the Indemnitee on the other hand from the transaction from which
such Proceeding arose, and (ii) the relative fault of the Company on the one
hand and of the Indemnitee on the other hand in connection with the events which
resulted in such Expenses, judgments, fines or settlement amounts, as well as
any other relevant equitable considerations. The relative fault of the Company
on the one hand and of the Indemnitee on the other hand shall be determined by
reference to, among other things, the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent the circumstances
resulting in such Expenses, judgments, fines or settlement amounts. The Company
agrees that it would not be just and equitable if contribution pursuant to this
Section 3 were determined by pro rata allocation or any other method of
allocation which does not take account of the foregoing equitable
considerations.

4. INDEMNIFICATION FOR EXPENSES OF A WITNESS. Notwithstanding any
other provision of this Agreement, to the extent that Indemnitee is, by reason
of his Corporate Status, a witness in any Proceeding to which Indemnitee is not
a party, he shall be indemnified against all Expenses actually and reasonably
incurred by him or on his behalf in connection therewith.

<PAGE> 4

5. ADVANCEMENT OF EXPENSES. Notwithstanding any other provision of
this Agreement, the Company shall advance all reasonable Expenses incurred by or
on behalf of Indemnitee in connection with any Proceeding by reason of
Indemnitee's Corporate Status within ten days after the receipt by the Company
of a statement or statements from Indemnitee requesting such advance or advances
from time to time, whether prior to or after final disposition of such
Proceeding. Such statement or statements shall reasonably evidence the Expenses
incurred by Indemnitee and shall include or be preceded or accompanied by an
undertaking by or on behalf of Indemnitee to repay any Expenses advanced if it
shall ultimately be determined that Indemnitee is not entitled to be indemnified
against such Expenses. Any advances and undertakings to repay pursuant to this
Section 5 shall be unsecured and interest free. Notwithstanding the foregoing,
the obligation of the Company to advance Expenses pursuant to this Section 5
shall be subject to the condition that, if, when and to the extent that the
Company determines that Indemnitee would not be permitted to be indemnified
under applicable law, the Company shall be entitled to be reimbursed, within
thirty (30) days of such determination, by Indemnitee (who hereby agrees to
reimburse the Company) for all such amounts theretofore paid; provided, however,
that if Indemnitee has commenced or thereafter commences legal proceedings in a
court of competent jurisdiction to secure a determination that Indemnitee should
be indemnified under applicable law, any determination made by the Company that
Indemnitee would not be permitted to be indemnified under applicable law shall
not be binding and Indemnitee shall not be required to reimburse the Company for
any advance of Expenses until a final judicial determination is made with
respect thereto (as to which all rights of appeal therefrom have been exhausted
or lapsed).

6. PROCEDURE FOR DETERMINATION OF ENTITLEMENT TO INDEMNIFICATION.

(a) To obtain indemnification (including, but not limited to, the
advancement of Expenses and contribution by the Company) under this Agreement,
Indemnitee shall submit to the Company a written request, including therein or
therewith such documentation and information as is reasonably available to
Indemnitee and is reasonably necessary to determine whether and to what extent
Indemnitee is entitled to indemnification. The Secretary of the Company shall,
promptly upon receipt of such a request for indemnification, advise the Board of
Directors in writing that Indemnitee has requested indemnification.

(b) Upon written request by Indemnitee for indemnification
pursuant to the first sentence of Section 6(a) hereof, a determination, if
required by applicable law, with respect to Indemnitee's entitlement thereto
shall be made in the specific case: (i) if a Change in Control (as hereinafter
defined) shall have occurred, by Independent Counsel (as hereinafter defined) in
a written opinion to

<PAGE> 5

the Board of Directors, a copy of which shall be delivered to Indemnitee (unless
Indemnitee shall request that such determination be made by the Board of
Directors or the stockholders, in which case the determination shall be made in
the manner provided in Clause (ii) below), or (ii) if a Change in Control shall
not have occurred, (A) by the Board of Directors by a majority vote of a quorum
consisting of Disinterested Directors (as hereinafter defined), or (B) if a
quorum of the Board of Directors consisting of Disinterested Directors is not
obtainable or, even if obtainable, said Disinterested Directors so direct, by
Independent Counsel in a written opinion to the Board of Directors, a copy of
which shall be delivered to Indemnitee, or (C) if so directed by said
Disinterested Directors, by the stockholders of the Company; and, if it is
determined that Indemnitee is entitled to indemnification, payment to Indemnitee
shall be made within ten (10) days after such determination. Indemnitee shall
cooperate with the person, persons or entity making such determination with
respect to Indemnitee's entitlement to indemnification, including providing to
such person, persons or entity upon reasonable advance request any documentation
or information which is not privileged or otherwise protected from disclosure
and which is reasonably available to Indemnitee and reasonably necessary to such
determination. Any Independent Counsel, member of the Board of Directors, or
stockholder of the Company shall act reasonably and in good faith in making a
determination under the Agreement of the Indemnitee's entitlement to
indemnification. Any costs or expenses (including attorneys' fees and
disbursements) incurred by Indemnitee in so cooperating with the person, persons
or entity making such determination shall be borne by the Company (irrespective
of the determination as to Indemnitee's entitlement to indemnification) and the
Company hereby indemnifies and agrees to hold Indemnitee harmless therefrom.

(c) If the determination of entitlement to indemnification is to
be made by Independent Counsel pursuant to Section 6(b) hereof, the Independent
Counsel shall be selected as provided in this Section 6(c). If a Change in
Control shall not have occurred, the Independent Counsel shall be selected by
the Board of Directors, and the Company shall give written notice to Indemnitee
advising him of the identity of the Independent Counsel so selected. If a Change
in Control shall have occurred, the Independent Counsel shall be selected by
Indemnitee (unless Indemnitee shall request that such selection be made by the
Board of Directors, in which event the preceding sentence shall apply), and
Indemnitee shall give written notice to the Company advising it of the identity
of the Independent Counsel so selected. In either event, Indemnitee or the
Company, as the case may be, may, within 10 days after such written notice of
selection shall have been given, deliver to the Company or to Indemnitee, as the
case may be, a written objection to such selection; provided, however, that such
objection may be asserted only on the ground that the Independent Counsel so
selected does not meet the requirements of "Independent Counsel" as defined in
Section 14 of this Agreement, and the objection shall set forth with
particularity the factual basis of such assertion. Absent a proper and timely
objection, the person so selected shall act as Independent Counsel. If a written
objection is made and substantiated, the Independent Counsel selected may not
serve as Independent Counsel unless and until such objection is withdrawn or a
court has determined that such objection is without merit. If, within 20 days
after submission by Indemnitee of a written request for indemnification pursuant
to Section 6(a) hereof, no Independent Counsel shall have been selected and not
objected to, either the Company or Indemnitee may petition the Court of Chancery
of the State of Delaware or other court of competent jurisdiction for resolution
of any objection which shall have been made by the Company or Indemnitee to the
other's selection of Independent Counsel and/or for the appointment as
Independent Counsel of a person selected by the court or by such other person as
the court shall designate, and the person with respect to whom all objections
are so resolved or the person so appointed shall act as Independent Counsel
under Section 6(b) hereof. The Company shall pay any and all reasonable fees and
expenses of Independent Counsel incurred by such Independent Counsel in
connection with acting pursuant to Section 6(b) hereof, and the Company shall
pay all reasonable fees and expenses incident to the

<PAGE> 6

procedures of this Section 6(c), regardless of the manner in which such
Independent Counsel was selected or appointed. Upon the due commencement of any
judicial proceeding or arbitration pursuant to Section 8(a)(iii) of this
Agreement, Independent Counsel shall be discharged and relieved of any further
responsibility in such capacity (subject to the applicable standards of
professional conduct then prevailing).

(d) The Company shall not be required to obtain the consent of
the Indemnitee to the settlement of any Proceeding which the Company has
undertaken to defend if the Company assumes full and sole responsibility for
such settlement and the settlement grants the Indemnitee a complete and
unqualified release in respect of the potential liability.

7. PRESUMPTIONS AND EFFECT OF CERTAIN PROCEEDINGS.

(a) In making a determination with respect to entitlement to
indemnifica- tion hereunder, the person or persons or entity making such
determination shall presume that Indemnitee is entitled to indemnification under
this Agreement if Indemnitee has submitted a request for indemnification in
accordance with Section 6(a) of this Agreement, and the Company shall have the
burden of proof to overcome that presumption in connection with the making by
any person, persons or entity of any determination contrary to that presumption.

(b) If the person, persons or entity empowered or selected under
Section 6 of this Agreement to determine whether Indemnitee is entitled to
indemnification shall not have made a determination within thirty (30) days
after receipt by the Company of the request therefor, the requisite
determination of entitlement to indemnification shall be deemed to have been
made and Indemnitee shall be entitled to such indemnification, absent (i) a
misstatement by Indemnitee of a material fact, or an omission of a material fact
necessary to make Indemnitee's statement not materially misleading, in
connection with the request for indemnification, or (ii) a prohibition of such
indemnification under applicable law; provided, however, that such 30-day period
may be extended for a reasonable time, not to exceed an additional fifteen (15)
days, if the person, persons or entity making the determination with respect to
entitlement to indemnification in good faith requires such additional time for
the obtaining or evaluating documentation and/or information relating thereto;
and provided, further, that the foregoing provisions of this Section 7(b) shall
not apply (i) if the determination of entitlement to indemnification is to be
made by the stockholders pursuant to Section 6(b) of this Agreement and if (A)
within fifteen (15) days after receipt by the Company of the request for such
determination the Board of Directors or the Disinterested Directors, if
appropriate, resolve to submit such determination to the stockholders for their
consideration at an annual meeting thereof to be held within seventy five (75)
days after such receipt and such determination is made thereat, or (B) a special
meeting of stockholders is called within fifteen (15) days after such receipt
for the purpose of making such determination, such meeting is held for such
purpose within sixty (60) days after having been so called and such
determination is made thereat, or (ii) if the determination of entitlement to
indemnification is to be made by Independent Counsel pursuant to Section 6(b) of
this Agreement.

<PAGE> 7

(c) The termination of any Proceeding or of any claim, issue or
matter therein, by judgment, order, settlement (with or without court approval),
conviction, or upon a plea of nolo contendere or its equivalent, shall not
(except as otherwise expressly provided in this Agreement) of itself adversely
affect the right of Indemnitee to indemnification or create a presumption that
Indemnitee did not act in good faith and in a manner which he reasonably
believed to be in or not opposed to the best interests of the Company or, with
respect to any criminal Proceeding, that Indemnitee had reasonable cause to
believe that his conduct was unlawful.

(d) For purposes of any determination of good faith, Indemnitee
shall be deemed to have acted in good faith if Indemnitee's action is based on
the records or books of account of the Enterprise (as hereinafter defined),
including financial statements, or on information supplied to Indemnitee by the
officers and directors of the Enterprise in the course of their duties, or on
the advice of legal counsel for the Enterprise or on information or records
given or reports made to the Enterprise by an independent certified public
accountant or by an appraiser or other expert selected with reasonable care by
the Enterprise. In addition, the knowledge and/or actions, or failure to act, of
any director, officer, agent or employee of the Enterprise shall not be imputed
to Indemnitee for purposes of determining the right to indemnification under
this Agreement. The provisions of this Section 7(d) shall not be deemed to be
exclusive or to limit in any way the other circumstances in which the Indemnitee
may be deemed to have met the applicable standard of conduct set forth in this
Agreement.

8. REMEDIES OF INDEMNITEE.

(a) In the event that (i) a determination is made pursuant to
Section 6 of this Agreement that Indemnitee is not entitled to indemnification
under this Agreement, (ii) advancement of Expenses is not timely made pursuant
to Section 5 of this Agreement, (iii) no determination of entitlement to
indemnification shall have been made pursuant to Section 6(b) of this Agreement
within 90 days after receipt by the Company of the request for indemnification,
(iv) payment of indemnification is not made pursuant to Section 3 or 4 of this
Agreement within ten (10) days after receipt by the Company of a written request
therefor, or (v) payment of indemnification is not made within ten (10) days
after a determination has been made that Indemnitee is entitled to
indemnification or such determination is deemed to have been made pursuant to
Section 6 or 7 of this Agreement, Indemnitee shall be entitled to an
adjudication in an appropriate court of the State of Delaware, or in any other
court of competent jurisdiction, of his entitlement to such indemnification.
Alternatively, Indemnitee, at his option, may seek an award in arbitration to be
conducted by a single arbitrator pursuant to the Commercial Arbitration Rules of
the American Arbitration Association. Indemnitee shall commence such proceeding
seeking an adjudication or an award in arbitration within 180 days following the
date on which Indemnitee first has the right to commence such proceeding
pursuant to this Section 8(a). The Company shall not oppose Indemnitee's right
to seek any such adjudication or award in arbitration.

<PAGE> 8

(b) In the event that a determination shall have been made
pursuant to Section 6(b) of this Agreement that Indemnitee is not entitled to
indemnification, any judicial proceeding or arbitration commenced pursuant to
this Section 8 shall be conducted in all respects as a de novo trial, or
arbitration, on the merits and Indemnitee shall not be prejudiced by reason of
that adverse determination.

(c) If a determination shall have been made pursuant to Section
6(b) of this Agreement that Indemnitee is entitled to indemnification, the
Company shall be bound by such determination in any judicial proceeding or
arbitration commenced pursuant to this Section 8, absent (i) a misstatement by
Indemnitee of a material fact, or an omission of a material fact necessary to
make Indemnitee's statement not materially misleading, in connection with the
request for indemnification, or (ii) a prohibition of such indemnification under
applicable law.

(d) In the event that Indemnitee, pursuant to this Section 8,
seeks a judicial adjudication of or an award in arbitration to enforce his
rights under, or to recover damages for breach of, this Agreement, Indemnitee
shall be entitled to recover from the Company, and shall be indemnified by the
Company against, any and all expenses (of the types described in the definition
of Expenses in Section 14 of this Agreement) actually and reasonably incurred by
him in such judicial adjudication or arbitration, but only if he prevails
therein. If it shall be determined in said judicial adjudication or arbitration
that Indemnitee is entitled to receive part but not all of the indemnification
sought, the expenses incurred by Indemnitee in connection with such judicial
adjudication or arbitration shall be appropriately prorated. The Company shall
indemnify Indemnitee against any and all expenses and, if requested by
Indemnitee, shall (within ten (10) days after receipt by the Company of a
written request therefor) advance such expenses to Indemnitee, which are
incurred by Indemnitee in connection with any action brought by Indemnitee to
recover under any directors' and officers' liability insurance policies
maintained by the Company, regardless of whether Indemnitee ultimately is
determined to be entitled to such indemnification, advancement of expenses or
insurance recovery, as the case may be.

(e) The Company shall be precluded from asserting in any judicial
pro- ceeding or arbitration commenced pursuant to this Section 8 that the
procedures and presumptions of this Agreement are not valid, binding and
enforceable and shall stipulate in any such court or before any such arbitrator
that the Company is bound by all the provisions of this Agreement.

9. NONEXCLUSIVITY; SURVIVAL OF RIGHTS; INSURANCE; SUBROGATION.

(a) The rights of indemnification as provided by this Agreement
shall not be deemed exclusive of any other rights to which Indemnitee may at any
time be entitled under applicable law, the Certificate, any agreement, a vote of
stockholders or a resolution of directors, or otherwise. No amendment,
alteration or repeal of this Agreement or of any provision hereof shall limit or
restrict any right of Indemnitee under this Agreement in respect of any action
taken or omitted by such Indemnitee in his Corporate Status prior to such
amendment, alteration or repeal. To the extent that a change in the Law, whether
by statute or judicial decision, permits greater

<PAGE> 9

indemnification than would be afforded currently under the Certificate and this
Agreement, it is the intent of the parties hereto that Indemnitee shall enjoy by
this Agreement the greater benefits so afforded by such change. No right or
remedy herein conferred is intended to be exclusive of any other right or
remedy, and every other right and remedy shall be cumulative and in addition to
every other right and remedy given hereunder or now or hereafter existing at law
or in equity or otherwise. The assertion or employment of any right or remedy
hereunder, or otherwise, shall not prevent the concurrent assertion or
employment of any other right or remedy.

(b) To the extent that the Company maintains an insurance policy
or policies providing liability insurance for directors, officers, employees, or
agents or fiduciaries of the Company or of any other corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise which such
person serves at the request of the Company, Indemnitee shall be covered by such
policy or policies in accordance with its or their terms to the maximum extent
of the coverage available for any such director, officer, employee or agent
under such policy or policies.

(c) In the event of any payment under this Agreement, the Company
shall be subrogated to the extent of such payment to all of the rights of
recovery of Indemnitee, who shall execute all papers required and take all
action necessary to secure such rights, including execution of such documents as
are necessary to enable the Company to bring suit to enforce such rights.

(d) The Company shall not be liable under this Agreement to make
any payment of amounts otherwise indemnifiable hereunder if and to the extent
that Indemnitee has otherwise actually received such payment under any insurance
policy, contract, agreement or otherwise.

10. EXCEPTION TO RIGHT OF INDEMNIFICATION. Notwithstanding any other
provision of this Agreement, Indemnitee shall not be entitled to indemnification
under this Agreement with respect to any Proceeding brought by Indemnitee, or
any claim therein, unless (a) the bringing of such Proceeding or making of such
claim shall have been approved by the Board of Directors or (b) such Proceeding
is being brought by the Indemnitee to assert his rights under this Agreement.

11. DURATION OF AGREEMENT. All agreements and obligations of the
Company contained herein shall continue during the period Indemnitee is an
officer and/or a director of the Company (or is or was serving at the request of
the Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise) and shall continue
thereafter so long as Indemnitee shall be subject to any Proceeding (or any
proceeding commenced under Section 8 hereof) by reason of his Corporate Status,
whether or not he is acting or serving in any such capacity at the time any
liability or expense is incurred for which indemnification can be provided under
this Agreement. This Agreement shall be binding upon and inure to the benefit of
and be enforceable by the parties hereto and their respective successors
(including any direct or indirect successor by purchase, merger, consolidation
or otherwise to all or substantially all of the business or assets of the
Company), assigns, spouses, heirs, executors and personal and legal

<PAGE> 10

representatives. This Agreement shall continue in effect regardless of whether
Indemnitee continues to serve as an officer and/or a director of the Company or
any other enterprise at the Company's request.

12. SECURITY. To the extent requested by the Indemnitee and approved
by the Board of Directors, the Company may at any time and from time to time
provide security to the Indemnitee for the Company's obligations hereunder
through an irrevocable bank line of credit, funded trust or other collateral.
Any such security, once provided to the Indemnitee, may not be revoked or
released without the prior written consent of the Indemnitee.

13. ENFORCEMENT.

(a) The Company expressly confirms and agrees that it has entered
into this Agreement and assumed the obligations imposed on it hereby in order to
induce Indemnitee to serve as an officer and/or a director of the Company, and
the Company acknowledges that Indemnitee is relying upon this Agreement in
serving as an officer and/or a director of the Company.

(b) This Agreement constitutes the entire agreement between the
parties hereto with respect to the subject matter hereof and supersedes all
prior agreements and understandings, oral, written and implied, between the
parties hereto with respect to the subject matter hereof.

14. DEFINITIONS. For purposes of this Agreement:

(a) "Change in Control" means a change in control of the Company
occurring after the date of this Agreement of a nature that would be required to
be reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or in
response to any similar item on any similar schedule or form) promulgated under
the Securities Exchange Act of 1934, as amended (the "Act"), whether or not the
Company is then subject to such reporting requirement; provided, however, that,
without limitation, such a Change in Control shall be deemed to have occurred if
after the date of this Agreement (i) any "person" (as such term is used in
Sections 13(d) and 14(d) of the Act, as amended) other than a trustee or other
fiduciary holding securities under an employee benefit plan of the Company or a
corporation owned directly or indirectly by the stockholders of the Company in
substantially the same proportions as their ownership of stock of the Company,
is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Act),
directly or indirectly, of securities of the Company representing 15% or more of
the combined voting power of the Company's then outstanding securities (other
than any such person or any affiliate thereof that is such a 15% beneficial
owner as of the date hereof) without the prior approval of at least two-thirds
of the members of the Board of Directors in office immediately prior to such
person attaining such percentage interest; (ii) there occurs a proxy contest, or
the Company is a party to a merger, consolidation, sale of assets, plan of
liquidation or other reorganization, as a consequence of which members of the
Board of Directors in office immediately prior to such transaction or event
constitute less than a majority of the Board of Directors thereafter; or (iii)
during any period of two

10.

<PAGE> 11

consecutive years, other than as a result of an event described in clause
(a)(ii) of this Section 14, individuals who at the beginning of such period
constituted the Board of Directors (including for this purpose any new director
whose election or nomination for election by the Company's stockholders was
approved by a vote of at least two-thirds of the directors then still in office
who were directors at the beginning of such period) cease for any reason to
constitute at least a majority of the Board of Directors. A Change in Control
shall not be deemed to have occurred under item (i) above if the "person"
described under item (i) is entitled to report its ownership on Schedule 13G
promulgated under the Act and such person is able to represent that it acquired
such securities in the ordinary course of its business and not with the purpose
nor with the effect of changing or influencing the control of the Company, nor
in connection with or as a participant in any transaction having such purpose or
effect. If the "person" referred to in the previous sentence would at any time
not be entitled to continue to report such ownership on Schedule 13G pursuant to
Rule 13d-1(b)(3)(i)(B) of the Act, then a Change in Control shall be deemed to
have occurred at such time.

(b) "Corporate Status" describes the status of a person who is or
was a director, officer, employee or agent or fiduciary of the Company or of any
other corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise which such person is or was serving at the express written
request of the Company.

(c) "Disinterested Director" means a director of the Company who
is not and was not a party to the Proceeding in respect of which indemnification
is sought by Indemnitee.

(d) "Enterprise" shall mean the Company and any other
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise of which Indemnitee is or was serving at the express written request
of the Company as a director, officer, employee, agent or fiduciary.

(e) "Expenses" shall include all reasonable attorneys' fees,
retainers, court costs, transcript costs, fees of experts, witness fees, travel
expenses, duplicating costs, printing and binding costs, telephone charges,
postage, delivery service fees, and all other disbursements or expenses of the
types customarily incurred in connection with prosecuting, defending, preparing
to prosecute or defend, investigating, participating, or being or preparing to
be a witness in a Proceeding.

(f) "Independent Counsel" means a law firm, or a member of a law
firm, that is experienced in matters of corporation law and neither presently
is, nor in the past five years has been, retained to represent: (i) the Company
or Indemnitee in any matter material to either such party (other than with
respect to matters concerning the Indemnitee under this Agreement, or of other
indemnitees under similar indemnification agreements), or (ii) any other party
to the Proceeding giving rise to a claim for indemnification hereunder.
Notwithstanding the foregoing, the term "Independent Counsel" shall not include
any person who, under the applicable standards of professional conduct then
prevailing, would have a conflict of interest in representing either the Company
or Indemnitee in an action to determine Indemnitee's rights under this
Agreement. The

11.

<PAGE> 12

Company agrees to pay the reasonable fees of the Independent Counsel referred to
above and to fully indemnify such counsel against any and all Expenses, claims,
liabilities and damages arising out of or relating to this Agreement or its
engagement pursuant hereto.

(g) "Proceeding" includes any threatened, pending or completed
action, suit, arbitration, alternate dispute resolution mechanism,
investigation, inquiry, administrative hearing or any other actual, threatened
or completed proceeding, whether brought by or in the right of the Company or
otherwise and whether civil, criminal, administrative or investigative, in which
Indemnitee was, is or will be involved as a party or otherwise, by reason of the
fact that Indemnitee is or was an officer and/or a director of the Company, by
reason of any action taken by him or of any inaction on his part while acting as
an officer and/or a director of the Company, or by reason of the fact that he is
or was serving at the request of the Company as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise; in each case whether or not he is acting or serving in any such
capacity at the time any liability or expense is incurred for which
indemnification can be provided under this Agreement; including one pending on
or before the date of this Agreement; and excluding one initiated by an
Indemnitee pursuant to Section 8 of this Agreement to enforce his rights under
this Agreement.

15. SEVERABILITY. If any provision or provisions of this Agreement
shall be held by a court of competent jurisdiction to be invalid, void, illegal
or otherwise unenforceable for any reason whatsoever: (a) the validity, legality
and enforceability of the remaining provisions of this Agreement (including
without limitation, each portion of any section of this Agreement containing any
such provision held to be invalid, illegal or unenforceable, that is not itself
invalid, illegal or unenforceable) shall not in any way be affected or impaired
thereby and shall remain enforceable to the fullest extent permitted by law; and
(b) to the fullest extent possible, the provisions of this Agreement (including,
without limitation, each portion of any section of this Agreement containing any
such provision held to be invalid, illegal or unenforceable, that is not itself
invalid, illegal or unenforceable) shall be construed so as to give effect to
the intent manifested thereby.

16. MODIFICATION AND WAIVER. No supplement, modification, termination
or amendment of this Agreement shall be binding unless executed in writing by
both of the parties hereto. No waiver of any of the provisions of this Agreement
shall be deemed or shall constitute a waiver of any other provisions hereof
(whether or not similar) nor shall such waiver constitute a continuing waiver.

17. NOTICE BY INDEMNITEE. Indemnitee agrees promptly to notify the
Company in writing upon being served with any summons, citation, subpoena,
complaint, indictment, information or other document relating to any Proceeding
or matter which may be subject to indemnification covered hereunder. The failure
to so notify the Company shall not relieve the Company of any obligation which
it may have to the Indemnitee under this Agreement or otherwise.

12.

<PAGE> 13

18. NOTICES. All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed to have been duly given if (i)
delivered by hand and receipted for by the party to whom said notice or other
communication shall have been directed, or (ii) mailed by certified or
registered mail with postage prepaid, on the third business day after the date
on which it is so mailed:

(a) If to Indemnitee, to:

-----------------------------------

(b) If to the Company, to:

Spectratek Technologies, Inc.
5405 Jandy Place
Los Angeles, California 90066
Attention: President

or to such other address as may have been furnished to Indemnitee by the Company
or to the Company by Indemnitee, as the case may be.

19. IDENTICAL COUNTERPARTS. This Agreement may be executed in one or
more counterparts, each of which shall for all purposes be deemed to be an
original but all of which together shall constitute one and the same Agreement.
Only one such counterpart signed by the party against whom enforceability is
sought needs to be produced to evidence the existence of this Agreement.

20. HEADINGS. The headings of the paragraphs of this Agreement are
inserted for convenience only and shall not be deemed to constitute part of this
Agreement or to affect the construction thereof.

21. GOVERNING LAW. The parties agree that this Agreement shall be
governed by, and construed and enforced in accordance with, the laws of the
State of Delaware without application of the conflict of laws principles
thereof.

22. GENDER. Use of the masculine pronoun shall be deemed to include
usage of the feminine pronoun where appropriate.

13.

<PAGE> 14

IN WITNESS WHEREOF, the parties hereto have executed this Agreement
on and as of the day and year first above written.

SPECTRATEK TECHNOLOGIES, INC.,
a Delaware corporation

By
--------------------------------------
Terrence Conway, President

----------------------------------------

----------------------------, Indemnitee

14.

<PAGE> 1
EXHIBIT 10.2

STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE -- NET

AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION

1. BASIC PROVISIONS ("BASIC PROVISIONS")

1.1 PARTIES: This Lease ("LEASE"), dated for reference purposes only,
July 1, 1997, is made by and between BARDON OF HOLLYWOOD, INC., a California
corporation, dba Bardon, Inc. ("LESSOR") and SPECTRAL HOLDING CORPORATION, a
California corporation. dba Spectratek ("LESSEE"), (collectively the "PARTIES,"
or individually a "PARTY").

1.2 PREMISES: That certain real property, including all improvements
therein or to be provided by Lessor under the terms of this Lease, and commonly
known by the street address of 5405 Jandy Place located in the County of Los
Angeles, State of California, and generally described as (describe briefly the
nature of the property) an industrial building containing approximately 70,440
square feet and more particularly described on Exhibit "A" attached hereto and
incorporated herein by reference ("PREMISES"). (See Paragraph 2 for further
provisions.)

1.3 TERM: Five (5) years and zero (0) months ("ORIGINAL TERM")
commencing February 12, 1998 ("COMMENCEMENT DATE") and ending February 11, 2003
("EXPIRATION DATE"). (See Paragraph 3 for further provisions.)

1.4 EARLY POSSESSION: N/A. (See Paragraphs 3.2 and 3.3 for further
provisions.)

1.5 BASE RENT: $42,000 per month ("BASE RENT"), payable on the twelfth
(12th) day of each month commencing February 12, 1998 and shall be increased on
each anniversary of the Commencement Date in accordance with the provisions of
Section 4.2 below. (See Paragraph 4 for further provisions.)

[X] If this box is checked, there are provisions in this Lease for the Base
Rent to be adjusted.

1.6 BASE RENT PAID UPON EXECUTION: $42,000 as Base Rent for the period
February 12 - March 11, 1998.

1.7 SECURITY DEPOSIT: $84,000 ("SECURITY DEPOSIT"). (See Paragraph 5 for
further provisions.)

1.8 PERMITTED USE: corporate office, warehouse, manufacturing and
distribution of holograms and other related uses.

1.9 INSURING PARTY: Lessor is the "INSURING PARTY" unless otherwise
stated herein. (See Paragraph 8 for further provisions.)

1.10 REAL ESTATE BROKERS: The following real estate brokers
(collectively, the "BROKERS") and brokerage relationships exist in this
transaction and are consented to by the Parties (check applicable boxes):
The Klabin Company (Stuart Klabin) represents

[X] Lessor exclusively ("LESSOR'S BROKER"); [ ] both Lessor and Lessee, and
Zamel & Associates (Mark Zamel) represents

[X] Lessee exclusively ("LESSEE'S BROKER"); [ ] both Lessee and Lessor. (See
Paragraph 15 for further provisions.)

1.11 GUARANTOR. The obligations of the Lessee under this Lease are to be
guaranteed by None ("GUARANTOR"). (See Paragraph 37 for further provisions.)

Page 1

<PAGE> 2

1.12 ADDENDA. Attached hereto is an Addendum or Addenda consisting of
Paragraphs 1 through and Exhibits "A" all of which constitute a part of this
Lease.

2. PREMISES.

2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby leases
from Lessor, the Premises, for the term, at the rental, and upon all of the
terms, covenants and conditions set forth in this Lease. Unless otherwise
provided herein, any statement of square footage set forth in this Lease, or
that may have been used in calculating rental, is an approximation which Lessor
and Lessee agree is reasonable and the rental based thereon is not subject to
revision whether or not the actual square footage is more or less.

2.2 CONDITION. Lessor shall deliver the Premises to Lessee clean and
free of debris on the Commencement Date and warrants to Lessee that the existing
plumbing, fire sprinkler system, lighting, air conditioning, heating, and
loading doors, if any, in the Premises, other than those constructed by Lessee,
shall be in good operating condition on the Commencement Date. If a
non-compliance with warranty exists as of the Commencement Date, Lessor shall,
except as otherwise provided in this Lease, promptly after receipt of written
notice form Lessee setting forth with specificity the nature and extent of such
non-compliance, rectify same at Lessor's expense. If Lessee does not give Lessor
written notice of a non-compliance with this warranty within thirty (30) days
after the Commencement Date, correction of that non-compliance shall be the
obligation of Lessee at Lessee's sole cost and expense.

2.3 COMPLIANCE WITH COVENANTS, RESTRICTIONS AND BUILDING CODE. Lessor
warrants to Lessee that the improvements on the Premises comply with all
applicable covenants or restrictions of record and applicable building codes,
regulations and ordinances in effect on the Commencement Date. Said warranty
does not apply to the use to which Lessee will put the Premises or to any
Alterations or Utility Installations (as defined in Paragraph 7.3(a)) made or to
be made by Lessee. If the Premises do not comply with said warranty, Lessor
shall, except as otherwise provided in this Lease, promptly after receipt of
written notice from Lessee setting forth with specificity the nature and extent
of such non-compliance, rectify the same at Lessor's expense. If Lessee does not
give Lessor written notice of a non-compliance with this warranty within six (6)
months following the Commencement Date, correction of that non-compliance shall
be the obligation of Lessee at Lessee's sole cost and expense.

2.4 ACCEPTANCE OF PREMISES. Lessee hereby acknowledges: (a) that it has
been advised by the Brokers to satisfy itself with respect to the condition of
the Premises (including but not limited to the electrical and fire sprinkler
systems, security, environmental aspects, compliance with Applicable Law, as
defined in Paragraph 6.3) and the present and future suitability of the Premises
for Lessee's intended use, (b) that Lessee has made such investigation as it
deems necessary with reference to such matters and assumes all responsibility
therefor as the same relate to Lessee's occupancy of the Premises and/or the
term of this Lease, and (c) that neither Lessor, nor any of Lessor's agents, has
made any oral or written representations or warranties with respect to the said
matters other than as set forth in this Lease.

2.5 LESSEE PRIOR OWNER/OCCUPANT. The warranties made by Lessor in this
Paragraph 2 shall be of no force or effect if immediately prior to the date set
forth in Paragraph 1.1 Lessee was the owner or occupant of the Premises. In such
event, Lessee shall, at Lessee's sole cost and expense, correct any
non-compliance of the Premises with said warranties.

3. TERM.

3.1 TERM. The Commencement Date, Expiration Date and Original Term of
this Lease are as specified in Paragraph 1.3.

3.2 EARLY POSSESSION. Deleted.

Page 2

<PAGE> 3

3.3 DELAY IN POSSESSION. If for any reason Lessor cannot deliver
possession of the Premises to Lessee as agreed herein by the Early Possession
Date, if one is specified in Paragraph 1.4, if no Early Possession Date is
specified, by the Commencement Date, Lessor shall not be subject to any
liability therefor, nor shall such failure affect the validity of this Lease, or
the obligations of Lessee hereunder, or extend the term hereof, but in such
case, Lessee shall not, except as otherwise provided herein, be obligated to pay
rent or perform any other obligation of Lessee under the terms of this Lease
until Lessor delivers possession of the Premises to Lessee. If possession of the
Premises is not delivered to Lessee within sixty (60) days after the
Commencement Date, Lessee may, at its option, by notice in writing to Lessor
within ten (10) days thereafter, cancel this Lease, in which event the Parties
shall be discharged from all obligations hereunder; provided, however, that if
such written notice by Lessee is not received by Lessor within said ten (10) day
period, Lessee's right to cancel this Lease shall terminate and be of no further
force or effect. Except as may be otherwise provided, and regardless of when the
term actually commences, if possession is not tendered to Lessee when required
by this Lease and Lessee does not terminate this Lease, as aforesaid, the period
free of the obligation to pay Base Rent, if any, that Lessee would otherwise
have enjoyed shall run from the date of delivery of possession and continue for
a period equal to what Lessee would otherwise have enjoyed under the terms
hereof, but minus any days of delay caused by the acts, changes or omissions of
Lessee.

4. RENT.

4.1 BASE RENT. Lessee shall cause payment of Base Rent and other rent or
charges, as the same may be adjusted from time to time, to be received by Lessor
in lawful money of the United States, without offset or deduction, on or before
the day on which it is due under the terms of this Lease. Base Rent and all
other rent and charges for any period during the term hereof which is for less
than one (1) full calendar month shall be prorated based upon the actual number
of days of the calendar month involved. Payment of Base Rent and other charges
shall be made to Lessor at its address stated herein or to such other persons or
at such other addresses as Lessor may from time to time designate in writing to
Lessee.

4.2 See Addendum.

5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof
the Security Deposit set forth in Paragraph 1.7 as security for Lessee's
faithful performance of Lessee's obligations under this Lease. If Lessee fails
to pay Base Rent or other rent or charges due hereunder, or otherwise Defaults
under this Lease (as defined in Paragraph 13.1), Lessor may use, apply or retain
all or any portion of said Security Deposit for the payment of any amount due
Lessor or to reimburse or compensate Lessor for any liability, cost, expense,
loss or damage (including attorneys' fees) which Lessor may suffer or incur by
reason thereof. If Lessor uses or applies all or any portion of said Security
Deposit, Lessee shall within ten (10) days after written request therefor
deposit moneys with Lessor sufficient to restore said Security Deposit to the
full amount required by this Lease. Lessor shall not be required to keep all or
any part of the Security Deposit separate from its general accounts. Lessor
shall, at the expiration or earlier termination of the term hereof and after
Lessee has vacated the Premises, return to Lessee (or, at Lessor's option, to
the last assignee, if any, of Lessee's interest herein), that portion of the
Security Deposit not used or applied by Lessor. Unless otherwise expressly
agreed in writing by Lessor, no part of the Security Deposit shall be considered
to be held in trust, to bear interest or other increment for its use, or to be
prepayment for any moneys to be paid by Lessee under this Lease.

6. USE.

6.1 USE. Lessee shall use and occupy the Premises only for the purposes
set forth in Paragraph 1.8, or any other use which is comparable thereto, and
for no other purpose. Lessee shall not use or permit the use of the Premises in
a manner that creates waste or a nuisance, or that disturbs owners and/or
occupants of, or causes damage to, neighboring premises or properties. Lessor
hereby agrees to not unreasonably withhold or delay its consent to any written
request by Lessee, Lessee's assignees or subtenants, and by prospective
assignees and subtenants of the Lessee, its assignees and subtenants, for a
modification of said permitted purpose for which the premises may be used or
occupied, so long as the same will not impair the structural integrity of the
improvements on the Premises, the mechanical or electrical systems therein, is
not significantly more burdensome to the Premises and the improvements

Page 3

<PAGE> 4

thereon, and is otherwise permissible pursuant to this Paragraph 6. If Lessor
elects to withhold such consent, Lessor shall within five (5) business days give
a written notification of same, which notice shall include an explanation of
Lessor's reasonable objections to the change in use.

6.2 HAZARDOUS SUBSTANCES.

(a) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS SUBSTANCES"
as used in this Lease shall mean any product, substance, chemical, material or
waste whose presence, nature, quantity and/or intensity of existence, use,
manufacture, disposal, transportation, spill, release or effect, either by
itself or in combination with other materials expected to be on the Premises, is
either: (i) potentially injurious to the public health, safety or welfare, the
environment or the Premises, (ii) regulated or monitored by any governmental
authority, or (iii) a basis for liability of Lessor to any governmental agency
or third party under any applicable statute or common law theory. Hazardous
Substance shall include, but not be limited to, hydrocarbons, petroleum,
gasoline, crude oil or any products, by-products or fractions thereof. Lessee
shall not engage in any activity in, on or about the Premises which constitutes
a Reportable Use (as hereinafter defined) of Hazardous Substances without the
express prior written consent of Lessor and compliance in a timely manner (at
Lessee's sole cost and expense) with all Applicable Law (as defined in Paragraph
6.3). "REPORTABLE USE" shall mean (i) the installation or use of any above or
below ground storage tank, (ii) the generation, possession, storage, use,
transportation, or disposal of a Hazardous Substance that requires a permit
from, or with respect to which a report, notice, registration or business plan
is required to be filed with, any governmental authority. Reportable Use shall
also include Lessee's being responsible for the presence in, on or about the
Premises of a Hazardous Substance with respect to which any Applicable Law
requires that a notice be given to persons entering or occupying the Premises or
neighboring properties. Notwithstanding the foregoing, Lessee may, without
Lessor's prior consent, but in compliance with all Applicable Law, use any
ordinary and customary materials reasonably required to be used by Lessee in the
normal course of Lessee's business permitted on the Premises, so long as such
use is not a Reportable Use and does not expose the Premises or neighboring
properties to any meaningful risk of contamination or damage or expose Lessor to
any liability therefor. In addition, Lessor may (but without any obligation to
do so) condition its consent to the use or presence of any Hazardous Substance,
activity or storage tank by Lessee upon Lessee's giving Lessor such additional
assurances as Lessor, in its reasonable discretion, deems necessary to protect
itself, the public, the Premises and the environment against damage,
contamination or injury and/or liability therefrom or therefor, including, but
not limited to, the installation (and removal on or before Lease expiration or
earlier termination) of reasonably necessary protective modifications to the
Premises (such as concrete encasements).

(b) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable
cause to believe, that a Hazardous Substance, or a condition involving or
resulting from same, has come to be located in, on, under or about the Premises,
other than as previously consented to by Lessor, Lessee shall immediately give
written notice of such fact to Lessor. Lessee shall also immediately give Lessor
a copy of any statement, report, notice, registration, application, permit,
business plan, license, claim, action or proceeding given to, or received from,
any governmental authority or private party, or persons entering or occupying
the Premises, concerning the presence, spill, release, discharge of, or exposure
to, any Hazardous Substance or contamination in, on, or about the Premises,
including but not limited to all such documents a may be involved in any
Reportable Uses involving the Premises.

(c) INDEMNIFICATION. Lessee shall indemnify, protect, defend and
hold Lessor, its agents, employees, lenders and ground lessor, if any, and the
Premises, harmless from and against any and all loss of rents and/or damages,
liabilities, judgments, costs, claims, liens, expenses, penalties, permits and
attorney's and consultant's fees arising out of or involving any Hazardous
Substance or storage tank brought onto the Premises by or for Lessee or under
Lessee's control. Lessee's obligations under this Paragraph 6 shall include, but
not be limited to, the effects of any contamination or injury to person,
property or the environment created or suffered by Lessee, and the cost of
investigation (including consultant's and attorney's fees and testing), removal,
remediation, restoration and/or abatement thereof, or of any contamination
therein involved, and shall survive the expiration or earlier termination of
this Lease. No termination, cancellation or release agreement entered into by
Lessor and Lessee shall release Lessee from its obligations under this Lease
with respect to Hazardous Substances or storage tanks, unless specifically so
agreed by Lessor in writing at the time of such agreement.

Page 4

<PAGE> 5

6.3 LESSEE'S COMPLIANCE WITH LAW. Except as otherwise provided in this
Lease, Lessee, shall, at Lessee's sole cost and expense, fully, diligently and
in a timely manner, comply with all "APPLICABLE LAW," which term is used in this
Lease to include all laws, rules, regulations, ordinances, directives,
covenants, easements and restrictions of record, permits, the requirements of
any applicable fire insurance underwriter or rating bureau, and the
recommendations of Lessor's engineers and/or consultants, relating in any manner
to the Premises (including but not limited to matters pertaining to (i)
industrial hygiene, (ii) environmental conditions on, in, under or about the
Premises, including soil and groundwater conditions, and (iii) the use,
generation, manufacture, production, installation, maintenance, removal,
transportation, storage, spill or release of any Hazardous Substance or storage
tank), now in effect or which may hereafter come into effect, and whether or not
reflecting a change in policy from any previously existing policy. Lessee shall,
within five (5) days after receipt of Lessor's written request, provide Lessor
with copies of all documents and information, including, but not limited to,
permits, registrations, manifests, applications, reports and certificates,
evidencing Lessee's compliance with any Applicable Law specified by Lessor, and
shall immediately upon receipt, notify Lessor in writing (with copies of any
documents involved) of any threatened or actual claim, notice, citation,
warning, complaint or report pertaining to or involving failure by Lessee or the
Premises to comply with any Applicable Law.

6.4 INSPECTION; COMPLIANCE. Lessor and Lessor's Lender(s) (as defined in
Paragraph 8.3(a)) shall have the right to enter the Premises at any time, in the
case of an emergency, and otherwise at reasonable times, for the purpose of
inspecting the condition of the Premises and for verifying compliance by Lessee
with this Lease and all Applicable Laws (as defined in Paragraph 6.3), and to
employ experts and/or consultants in connection therewith and/or to advise
Lessor with respect to Lessee's activities, including but not limited to the
installation, operation, use, monitoring, maintenance, or removal of any
Hazardous Substance or storage tank on or from the Premises. The costs and
expenses of any such inspections shall be paid by the party requesting same,
unless a Default or Breach of this Lease, violation of Applicable Law, or a
contamination, caused or materially contributed to by Lessee is found to exist
or be imminent, or unless the inspection is requested or ordered by a
governmental authority as the result of any such existing or imminent violation
or contamination. In any such case, Lessee shall upon request reimburse Lessor
or Lessor's Lender, as the case may be, for the costs and expenses of such
inspections.

7. MAINTENANCE; REPAIRS; UTILITY INSTALLATIONS; TRADE FIXTURES AND
ALTERATIONS.

7.1 LESSEE'S OBLIGATIONS.

(a) Subject to the provisions of Paragraphs 2.2 (Lessor's warranty
as to condition), 2.3 (Lessor's warranty as to compliance with covenants, etc.)
7.2 and Section 3 of the Addendum (Lessor's obligations to repair), 9 (damage
and destruction), and 14 (condemnation), Lessee shall, at Lessee's sole cost and
expense and at all times, keep the Premises and every part thereof in good
order, condition and repair, (whether or not such portion of the Premises
requiring repair, or the means of repairing the same, are reasonably or readily
accessible to Lessee, and whether or not the need for such repairs occurs as a
result of Lessee's use and prior use, the elements or the age of such portion of
the Premises), including, without limiting the generality of the foregoing, all
equipment or facilities serving the Premises, such as plumbing, heating, air
conditioning, ventilating, electrical, lighting facilities, boilers, fired or
unfired pressure vessels, fixtures, walls, interior ceilings, floors, windows,
doors, plate glass, skylights, landscaping, driveways, parking lots, fences,
retaining walls, signs, sidewalks and parkways located in, on, about, or
adjacent to the Premises. Lessee shall not cause or permit any Hazardous
Substance to be spilled or released in, on, under or about the Premises
(including through the plumbing or sanitary sewer system) and shall promptly, at
Lessee's expense, take all investigatory and/or remedial action reasonably
recommended, whether or not formally ordered or required, for the cleanup of any
contamination of, and for the maintenance, security and/or monitoring of, the
Premises, the elements surrounding same, or neighboring properties, that was
caused or materially contributed to by Lessee, or pertaining to or involving any
Hazardous Substance and/or storage tank brought onto the Premises by or for
Lessee or under its control. Lessee, in keeping the Premises in good order,
condition and repair, shall exercise and perform good maintenance practices.
Lessee's obligations shall include restorations, replacements or renewals when
necessary to keep the Premises and all improvement thereon or a part thereof in
good order, condition and state of repair.

Page 5

<PAGE> 6

(b) Lessee shall, at Lessee's sole cost and expense, procure and
maintain 'contracts, with copies to Lessor, in customary form and substance for,
and with contractors specializing and experienced in, the inspection,
maintenance and service of the following equipment and improvements, if any,
located on the Premises: (i) heating, air conditioning and ventilation
equipment, (ii) boiler, fired or unfired pressure vessels, (iii) fire sprinkler
and/or standpipe and hose or other automatic fire extinguishing systems,
including fire alarm and/or smoke detection, (iv) landscaping and irrigation
systems, (v) roof covering and drain maintenance and (vi) asphalt and parking
lot maintenance.

7.2 LESSOR'S OBLIGATIONS. Except for the warranties and agreements of
Lessor contained in Paragraphs 2.2 (relating to condition of the Premises), 2.3
(relating to compliance with covenants, restrictions and building code), 9
(relating to destruction of the Premises) and 14 (relating to condemnation of
the Premises), it is intended by the Parties hereto that Lessor have no
obligation, in any manner whatsoever, to repair and maintain the Premises, the
improvements located thereon, or the equipment therein, all of which obligations
are intended to be that of the Lessee under Paragraph 7.1 hereof. It is the
intention of the Parties that the terms of this Lease govern the respective
obligations of the Parties as to maintenance and repair of the Premises. Lessee
and Lessor expressly waive the benefit of any statute now or hereafter in effect
to the extent it is inconsistent with the terms of this Lease with respect to,
or which affords Lessee the right to make repairs at the expense of Lessor or to
terminate this Lease by reason of, any needed repairs. See Addendum.

7.3 UTILITY INSTALLATIONS; TRADE FIXTURES; ALTERATIONS.

(a) DEFINITIONS; CONSENT REQUIRED. The term "UTILITY INSTALLATIONS"
is used in this Lease to refer to all carpeting, window coverings, air lines,
power panels, electrical distribution, security, fire protection systems,
communications systems, lighting fixtures, heating, ventilating, and air
conditioning equipment, plumbing, and fencing in, on or about the Premises. The
term "TRADE FIXTURES" shall mean Lessee's machinery and equipment that can be
removed without doing material damage to the Premises. The term "ALTERATIONS"
shall mean any modification of the improvements on the Premises from that which
are provided by Lessor under the terms of this Lease, other than Utility
Installations or Trade Fixtures, whether by addition or deletion. "LESSEE OWNED
ALTERATIONS AND/OR UTILITY INSTALLATIONS" are defined as Alterations and/or
Utility Installations made by Lessee that are not yet owned by Lessor as defined
in Paragraph 7.4(a). Lessee shall not make any Alterations or Utility
Installations in, on, under or about the Premises without Lessor's prior written
consent. Lessee may, however, make non-structural Utility Installations to the
interior of the Premises (excluding the roof), as long as they are not visible
from the outside, do not involve puncturing, relocating or removing the roof or
any existing walls, and the cumulative cost thereof during the term of this
Lease as extended does not exceed $25,000.

(b) CONSENT. Any Alterations or Utility Installations that Lessee
shall desire to make and which require the consent of the Lessor shall be
presented to Lessor in written form with proposed detailed plans. All consents
given by Lessor, whether by virtute of Paragraph 7.3(a) or by subsequent
specific consent, shall be deemed conditioned upon: (i) Lessee's acquiring all
applicable permits required by governmental authorities, (ii) the furnishing of
copies of such permits together with a copy of the plans and specifications for
the Alteration or Utility Installation to Lessor prior to commencement of the
work thereon, and (iii) the compliance by Lessee with all conditions of said
permits in a prompt and expeditious manner. Any Alterations or Utility
Installations by Lessee during the term of this Lease shall be done in a good
and workmanlike manner, with good and sufficient materials, and in compliance
with all Applicable Law. Lessee shall promptly upon completion thereof furnish
Lessor with as-built plans and specifications therefor.

Page 6

<PAGE> 7

rendered thereon before the enforcement thereof against the Lessor or the
Premises. If Lessor shall require, Lessee shall furnish to Lessor a surety bond
satisfactory to Lessor in an amount equal to one and one-half times the amount
of such contested lien claim or demand, indemnifying Lessor against liability
for the same, as required by law for the holding of the Premises free from the
effect of such lien or claim. In addition, Lessor may require Lessee to pay
Lessor's attorney's fees and costs in participating in such action if Lessor
shall decide it is to its best interest to do so.

7.4 OWNERSHIP; REMOVAL; SURRENDER; AND RESTORATION.

(a) OWNERSHIP. Subject to Lessor's right to require their removal
or become the owner thereof as hereinafter provided in this Paragraph 7.4, all
Alterations and Utility Additions made to the Premises by Lessee shall be the
property of and owned by Lessee, but considered a part of the Premises. Lessor
may, at any time and at its option, elect in writing to Lessee to be the owner
of all or any specified part of the Lessee Owned Alterations and Utility
Installations. Unless otherwise instructed per subparagraph 7.4(b) hereof, all
Lessee Owned Alterations and Utility Installations shall, at the expiration or
earlier termination of this Lease, become the property of Lessor and remain upon
and be surrendered by Lessee with the Premises.

(b) REMOVAL. Unless otherwise agreed in writing, Lessor may require
that any or all Lessee Owned Alterations or Utility Installations be removed by
the expiration or earlier termination of this Lease, notwithstanding their
installation may have been consented to by Lessor. Lessor may require the
removal at any time of all or any part of any Lessee Owned Alterations or
Utility Installations made without the required consent of Lessor. See Addendum.

(c) SURRENDER/RESTORATION. Lessee shall surrender the Premises by
the end of the last day of the Lease term or any earlier termination date, with
all of the improvements, parts and surfaces thereof clean and free of debris and
in good operating order, condition and state of repair, ordinary wear and tear
and damage by casualty excepted. "ORDINARY WEAR AND TEAR" shall not include any
damage or deterioration that would have been prevented by good maintenance
practice or by Lessee performing all of its obligations under this Lease. Except
as otherwise agreed or specified in writing by Lessor, the Premises, as
surrendered, shall include the Utility Installations. The obligation of Lessee
shall include the repair of any damage occasioned by the installation,
maintenance or removal of Lessee's Trade Fixtures, furnishings, equipment, and
Alterations and/or Utility Installations, as well as the removal of any storage
tank installed by or for Lessee, and the removal, replacement, or remediation of
any soil, material or ground water contaminated by Lessee, all as may then be
required by Applicable Law and/or good service practice. Lessee's Trade Fixtures
shall remain the property of Lessee and shall be removed by Lessee subject to
its obligation to repair and restore the Premises per this Lease.

7.5 See Addendum

8. INSURANCE; INDEMNITY.

8.1 PAYMENT FOR INSURANCE. Regardless of whether the Lessor or Lessee is
the Insuring Party, Lessee shall pay for all insurance required under this
Paragraph 8 except to the extent of the cost attributable to liability insurance
carried by Lessor in excess of $2,000,000 per occurrence. Premiums for policy
periods commencing prior to or extending beyond the Lease term shall be prorated
to correspond to the Lease term. Payment shall be made by Lessee to Lessor
within ten (10) days following receipt of an invoice for any amount due.

8.2 LIABILITY INSURANCE.

Page 7

<PAGE> 8

"Additional Insured-Managers or Lessors of Premises" Endorsement and contain the
"Amendment of the Pollution Exclusion" for damage caused by heat, smoke or fumes
from a hostile fire. The policy shall not contain any intra-insured exclusions
as between insured persons or organizations, but shall include coverage for
liability assumed under this Lease as an "insured contract" for the performance
of Lessee's indemnity obligations under this Lease. The limits of said insurance
required by this Lease or as carried by Lessee shall not, however, limit the
liability of Lessee nor relieve Lessee of any obligation hereunder. All
insurance to be carried by Lessee shall be primary to and not contributory with
any similar insurance carried by Lessor, whose insurance shall be considered
excess insurance only.

(b) CARRIED BY LESSOR. In the event Lessor is the Insuring Party,
Lessor shall also maintain liability insurance described in Paragraph 8.2(a),
above, in addition to, and not in lieu of, the insurance required to be
maintained by Lessee. Lessee shall not be named as an additional insured
therein.

8.3 PROPERTY INSURANCE -- BUILDING, IMPROVEMENTS AND RENTAL VALUE.

(a) BUILDING AND IMPROVEMENTS. The Insuring Party shall obtain and
keep in force during the term of this Lease a policy or policies in the name of
Lessor, with loss payable to Lessor and to the holders of any mortgages, deeds
of trust or ground leases on the Premises ("LENDER(S)"), insuring loss or damage
to the Premises. The amount of such insurance shall be equal to the full
replacement cost of the Premises, as the same shall exist from time to time, or
the amount required by Lenders, but in no event more than the commercially
reasonable and available insurable value thereof if, by reason of the unique
nature or age of the improvements involved, such latter amount is less than full
replacement cost. If Lessor is the Insuring Party, however, Lessee Owned
Alterations and Utility Installations shall be insured by Lessee under Paragraph
8.4 rather than by Lessor. If the coverage is available and commercially
appropriate, such policy or policies shall insure against all risks of direct
physical loss or damage (except the perils of flood unless required by a
Lender), including coverage for any additional costs resulting from debris
removal and reasonable amounts of coverage for the enforcement of any ordinance
or law regulating the reconstruction or replacement of any undamaged sections of
the Premises required to be demolished or removed by reason of the enforcement
of any building, zoning, safety or land use laws as the result of a covered
cause of loss. Said policy or policies shall also contain an agreed valuation
provision in lieu of any coinsurance clause, waiver of subrogation, and
inflation guard protection causing an increase in the annual property insurance
coverage amount by a factor of not less than the adjusted U.S. Department of
Labor Consumer Price Index for All Urban Consumers for the city nearest to where
the Premises are located. If such insurance coverage has a deductible clause,
the deductible amount shall not exceed $1,000 per occurrence, and Lessee shall
be liable for such deductible amount in the event of an Insured Loss, as defined
in Paragraph 9.1(c). See Addendum

(b) RENTAL VALUE. The Insuring Party shall, in addition, obtain and
keep in force during the term of this Lease a policy or policies in the name of
Lessor, with loss payable to Lessor and Lender(s), insuring the loss of the full
rental and other charges payable by Lessee to Lessor under this Lease for one
(1) year (including all real estate taxes, insurance costs, and any scheduled
rental increases). Said insurance shall provide that in the event the Lease is
terminated by reason of an insured loss, the period of indemnity for such
coverage shall be extended beyond the date of the completion of repairs or
replacement of the Premises, to provide for one full year's loss of rental
revenues from the date of any such loss. Said insurance shall contain an agreed
valuation provision in lieu of any coinsurance clause, and the amount of
coverage shall be adjusted annually to reflect the projected rental income,
property taxes, insurance premium costs and other expenses, if any, otherwise
payable by Lessee, for the next twelve (12) month period. Lessee shall be liable
for any deductible amount in the event of such loss.

(c) ADJACENT PREMISES. If the Premises are part of a larger
building, or if the Premises are part of a group of buildings owned by Lessor
which are adjacent to the Premises, the Lessee shall pay for any increase in the
premiums for the property insurance of such building or buildings if said
increase is caused by Lessee's acts, omissions, use or occupancy of the
Premises.

(d) TENANT'S IMPROVEMENTS. Since Lessor is the Insuring Party, the
Lessor shall not be required to insure Lessee Owned Alterations and Utility
Installations unless the item in question has become the

Page 8

<PAGE> 9

property of Lessor under the terms of this Lease. If Lessee is the Insuring
Party, the policy carried by Lessee under this Paragraph 8.3 shall insure Lessee
Owned Alterations and Utility Installations.

8.4 LESSEE'S PROPERTY INSURANCE. Subject to the requirements of
Paragraph 8.5, Lessee at its cost shall either by separate policy or, at
Lessor's option, by endorsement to a policy already carried, maintain insurance
coverage on all of Lessee's personal property, Lessee Owned Alterations and
Utility Installations in, on, or about the Premises similar in coverage to that
carried by the Insuring Party under Paragraph 8.3. Such insurance shall be full
replacement cost coverage with a deductible of not to exceed $1,000 per
occurrence. Lessee shall be the Insuring Party with respect to the insurance
required by this Paragraph 8.4 and shall provide Lessor with written evidence
that such insurance is in force.

8.5 INSURANCE POLICIES. Insurance required hereunder shall be in
companies duly licensed to transact business in the state where the Premises are
located, and maintaining during the policy term a "General Policyholders Rating"
of at least B+, V, or such other rating as may be required by a Lender having a
lien on the Premises, as set forth in the most current issue of "Best's
Insurance Guide." Lessee shall not do or permit to be done anything which shall
invalidate the insurance policies referred to in this Paragraph 8. If Lessee is
the Insuring Party, Lessee shall cause to be delivered to Lessor certified
copies of policies of such insurance or certificates evidencing the existence
and amounts of such insurance with the insureds and loss payable clauses as
required by this Lease. No such policy shall be cancelable or subject to
modification except after thirty (30) days prior written notice to Lessor.
Lessee shall at least thirty (30) days prior to the expiration of such policies,
furnish Lessor with evidence of renewals or "insurance binders" evidencing
renewal thereof, or Lessor may order such insurance and charge the cost thereof
to Lessee, which amount shall be payable by Lessee to Lessor upon demand. If the
Insuring Party shall fail to procure and maintai the insurance required to be
carried by the Insuring Party under this Paragraph 8, the other Party may, but
shall not be required to, procure and maintain the same, but at Lessee's
expense.

8.6 WAIVER OF SUBROGATION. Without affecting any other rights or
remedies, Lessee and Lessor ("WAIVING PARTY") each hereby release and relieve
the other, and waive their entire right to recover damages (whether in contract
or in tort) against the other, for loss or damage to the Waiving Party's
property arising out of or incident to the perils required to be insured against
under Paragraph 8 except Lessee shall remain liable for any insurance deductible
in accordance with Paragraph 8.3(a) above. The effect of such releases and
waivers of the right to recover damages shall not be limited by the amount of
insurance carried or required, or by any deductibles applicable thereto.

8.7 INDEMNITY. Except for Lessor's negligence and/or breach of express
warranties, Lessee shall indemnify, protect, defend and hold harmless the
Premises, Lessor and its agents, Lessor's master or ground lessor, partners and
Lenders, from and against any and all claims, loss of rents and/or damages,
costs, liens, judgments, penalties, permits, attorney's and consultant's fees,
expenses and/or liabilities arising out of, involving, or in dealing with, the
occupancy of the Premises by Lessee, the conduct of Lessee's business, any act,
omission or neglect of Lessee, its agents, contractors, employees or invitees,
and out of any Default or Breach by Lessee in the performance in a timely manner
of any obligation on Lessee's part to be performed under this Lease. The
foregoing shall include, but not be limited to, the defense or pursuit of any
claim or any action or proceeding involved therein, and whether or not (in the
case of claims made against Lessor) litigated and/or reduced to judgment, and
whether well founded or not. In case any action or proceeding be brought against
Lessor by reason of any of the foregoing matters, Lessee upon notice from Lessor
shall defend the same at Lessee's expense by counsel reasonably satisfactory to
Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not
have first paid any such claim in order to be so indemnified.

Page 9

<PAGE> 10

Premises are a part, or from other sources or places, and regardless of whether
the cause of such damage or injury or the means of repairing the same is
accessible or not. Lessor shall not be liable for any damages arising from any
act or neglect of any other tenant of Lessor. Notwithstanding Lessor's
negligence or breach of this Lease, Lessor shall under no circumstances be
liable for injury to Lessee's business or for any loss of income or profit
therefrom.

9. DAMAGES OR DESTRUCTION.

9.1 DEFINITIONS.

(a) "PREMISES PARTIAL DAMAGE" shall mean damage or destruction to
the improvements on the Premises, other than Lessee Owned Alterations and
Utility Installations, the repair cost of which damage or destruction is less
than 50% of the then Replacement Cost of the Premises immediately prior to such
damage or destruction, excluding from such calculation the value of the land and
Lessee Owned Alterations and Utility Installations.

(b) "PREMISES TOTAL DESTRUCTION" shall mean damage or destruction to
the Premises, other than Lessee Owned Alterations and Utility Installations the
repair cost of which damage or destruction is 50% or more of the then
Replacement Cost of the Premises immediately prior to such damage or
destruction, excluding from such calculation the value of the land and Lessee
Owned Alterations and Utility Installations.

(c) "INSURED LOSS" shall mean damage or destruction to improvements
on the Premises, other than Lessee Owned Alterations and Utility Installations,
which was caused by an event required to be covered by the insurance described
in Paragraph 8.3(a), irrespective of any deductible amounts or coverage limits
involved.

(d) "REPLACEMENT COST" shall mean the cost to repair or rebuild the
improvements owned by Lessor at the time of the occurrence to their condition
existing immediately prior thereto, including demolition, debris removal and
upgrading required by the operation of applicable building codes, ordinances or
laws, and without deduction for depreciation.

(e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence or
discovery of a condition involving the presence of, or a contamination by, a
Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the
Premises.

9.2 PARTIAL DAMAGE -- INSURED LOSS. If a Premises Partial Damage that is
an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such
damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility
Installations) as soon as reasonably possible and this Lease shall continue in
full force and effect; provided, however, that Lessee shall, at Lessor's
election, make the repair of any damage or destruction the total cost to repair
of which is $10,000 or less, and, in such event, Lessor shall make the insurance
proceeds available to Lessee on a reasonable basis for that purpose.
Notwithstanding the foregoing, if the required insurance was not in force or the
insurance proceeds are not sufficient to effect such repair, the Insuring Party
shall promptly contribute the shortage in proceeds (except as to the deductible
which is Lessee's responsibility) as and when required to complete said repairs.
In the event, however, the shortage in proceeds was due to the fact that, by
reason of the unique nature of the improvements, full replacement cost insurance
coverage was not commercially reasonable and available, Lessor shall have no
obligation to pay for the shortage in insurance proceeds or to fully restore the
unique aspects of the Premises unless Lessee provides Lessor with the funds to
cover same, or adequate assurance thereof, within ten (10) days following
receipt of written notice of such shortage and request therefore. If Lessor
receives said funds or adequate assurance thereof within said ten (10) day
period, the party responsible for making the repairs shall complete them as soon
as reasonably possible and this Lease shall remain in full force and effect. If
Lessor does not receive such funds or assurance within said period, Lessor may
nevertheless elect by written notice to Lessee within ten (10) days thereafter
to make such restoration and repair as is commercially reasonable with Lessor
paying any shortage in proceeds, in which case this Lease shall remain in full
force and effect. If in such case Lessor does not so elect, then this Lease
shall terminate sixty (60) days following the occurence of the damage or
destruction. Unless otherwise agreed, Lessee shall in no event have any right to
reimbursement from Lessor for any funds contributed

Page 10

<PAGE> 11

by Lessee to repair any such damage or destruction. Premises Partial Damage due
to flood or earthquake shall be subject to Paragraph 9.3 rather than Paragraph
9.2, notwithstanding that there may be some insurance coverage, but the net
proceeds of any such insurance shall be made available for the repairs if made
by either Party.

9.3 PARTIAL DAMAGE -- UNINSURED LOSS. If a Premises Partial Damage that
is not an Insured Loss occurs, unless caused by a negligent or willful act of
Lessee (in which event Lessee shall make the repairs at Lessee's expense and
this Lease shall continue in full force and effect, but subject to Lessor's
rights under Paragraph 13), Lessor may at Lessor's option, either: (i) repair
such damage as soon as reasonably possible at Lessor's expense, in which event
this Lease shall continue in full force and effect, or (ii) give written notice
to Lessee within thirty (30) days after receipt by Lessor of knowledge of the
occurrence of such damage of Lessor's desire to terminate this Lease as of the
date sixty (60) days following the giving of such notice. In the event Lessor
elects to give such notice of Lessor's intention to terminate this Lease, Lessee
shall have the right within ten (10) days after the receipt of such notice to
give written notice to Lessor of Lessee's commitment to pay for the repair of
such damage totally at Lessee's expense and without reimbursement from Lessor.
Lessee shall provide Lessor with the required funds or satisfactory assurance
thereof within thirty (30) days following Lessee's said commitment. In such
event this Lease shall continue in full force and effect, and Lessor shall
proceed to make such repairs as soon as reasonably possible and the required
funds are available. If Lessee does not give such notice and provide the funds
or assurance thereof within the times specified above, this Lease shall
terminate as of the date specified in Lessor's notice of termination.

9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof, if a
Premises Total Destruction occurs (including any destruction required by any
authorized public authority), this Lease shall terminate sixty (60) days
following the date of such Premises Total Destruction, whether or not the damage
or destruction is an Insured Loss or was caused by a negligent or willful act of
Lessee. In the event, however, that the damage or destruction was caused by
Lessee, Lessor shall have the right to recover Lessor's damages from Lessee
except as released and waived in Paragraph 8.6.

9.5 [DELETED]

See Addendum

9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES.

(a) In the event of damage described in Paragraph 9.2 (Partial
Damage-Insured) or Paragraph 9.3 (Partial Damage - Uninsured Loss), whether or
not Lessor or Lessee repairs or restores the Premises, the Base Rent, Real
Property Taxes, insurance premiums, and other charges, if any, payable by Lessee
hereunder for the period during which such damage, its repair or the restoration
continues (not to exceed the period for which rental value insurance is required
under Paragraph 8.3(b)), shall be abated in proportion to the degree to which
Lessee's use of the Premises is impaired. Except for abatement of Base Rent,
Real Property Taxes, insurance premiums, and other charges, if any, as
aforesaid, all other obligations of Lessee hereunder shall be performed by
Lessee, and Lessee shall have no claim against Lessor for any damage suffered by
reason of any such repair or restoration.

Page 11

<PAGE> 12

(b) If Lessor shall be obligated to repair or restore the Premises
under the provisions of this Paragraph 9 and shall not commence, in a
substantial and meaningful way, the repair or restoration of the Premises within
ninety (90) days after such obligation shall accrue, Lessee may, at any time
prior to the commencement of such repair or restoration, given written notice to
Lessor and to any Lenders of which Lessee has actual notice of Lessee's election
to terminate this Lease on a date not less than sixty (60) days following the
giving of such notice. If Lessee gives such notice to Lessor and such Lenders
and such repair or restoration is not commenced within thirty (30) days after
receipt of such notice, this Lease shall terminate as of the date specified in
said notice. If Lessor or a Lender commences the repair or restoration of the
Premises within thirty (30) days after receipt of such notice, this Lease shall
continue in full force and effect. "COMMENCE" as used in this Paragraph shall
mean either the unconditional authorization of the preparation of the required
plans, or the beginning of the actual work on the Premises, whichever first
occurs.

9.7 HAZARDOUS SUBSTANCE CONDITIONS. If a Hazardous Substance Condition
occurs, unless Lessee is legally responsible therefor (in which case Lessee
shall make the investigation and remediation thereof required by Applicable Law
and this Lease shall continue in full force and effect, but subject to Lessor's
rights under Paragraph 13), Lessor may at Lessor's option either (i) investigate
and remediate such Hazardous Substance Condition, if required, as soon as
reasonably possible at Lessor's expense, in which event this Lease shall
continue in full force and effect, or (ii) if the estimated cost to investigate
and remediate such condition exceeds twelve (12) times the then monthly Base
Rent or $100,000, whichever is greater, give written notice to Lessee within
thirty (30) days after receipt by Lessor of knowledge of the occurrence of such
Hazardous Substance Condition of Lessor's desire to terminate this Lease as of
the date sixty (60) days following the giving of such notice. In the event
Lessor elects to give such notice of Lessor's intention to terminate this Lease,
Lessee shall have the right within ten (10) days after the receipt of such
notice to give written notice to Lessor of Lessee's commitment to pay for the
investigation and remediation of such Hazardous Substance Condition totally at
Lessee's expense and without reimbursement from Lessor except to the extent of
an amount equal to twelve (12) times the then monthly Base Rent or $100,000,
whichever is greater, Lessee shall provide Lessor with the funds required of
Lessee or satisfactory assurance thereof within thirty (30) days following
Lessee's said commitment. In such event this Lease shall continue in full force
and effect, and Lessor shall proceed to make such investigation and remediation
as soon as reasonably possible and the required funds are available. If Lessee
does not give such notice and provide the required funds or assurance thereof
within the times specified above, this Lease shall terminate as of the date
specified in Lessor's notice of termination. If a Hazardous Substance Condition
occurs for which Lessee is not legally responsible, there shall be abatement of
Lessee's obligations under this Lease to the same extent as provided in
Paragraph 9.6(a) for a period of not to exceed twelve (12) months.

9.8 TERMINATION -- ADVANCE PAYMENTS. Upon termination of this Lease
pursuant to this Paragraph 9, an equitable adjustment shall be made concerning
advance Base Rent and any other advance payments made by Lessee to Lessor.
Lessor shall, in addition, return to Lessee so much of Lessee's Security Deposit
as has not been, or is not then required to be, used by Lessor under the terms
of this Lease.

9.9 WAIVE STATUTES. Lessor and Lessee agree that the terms of this Lease
shall govern the effect of any damage to or destruction of the Premises with
respect to the termination of this Lease and hereby waive the provisions of any
present or future statute to the extent inconsistent herewith.

10. REAL PROPERTY TAXES.

10.1 (a) PAYMENT OF TAXES. Lessee shall pay the Real Property Taxes, as
defined in Paragraph 10.2, applicable to the Premises during the terms of this
Lease. Subject to Paragraph 10.1(b), all such payments shall be made at least
ten (10) days prior to the delinquency date of the applicable installment.
Lessee shall promptly furnish Lessor with satisfactory evidence that such taxes
have been paid. If any such taxes to be paid by Lessee shall cover any period of
time prior to or after the expiration or earlier termination of the term hereof,
Lessee's share of such taxes shall be equitably prorated to cover only the
period of time within the tax fiscal year this Lease is in effect, and Lessor
shall reimburse Leasee for any overpayment after such proration. If Lessee shall

Page 12

<PAGE> 13

fail to pay any Real Property Taxes required by this Lease to be paid by Lessee,
Lessor shall have the right to pay the same, and Lessee shall reimburse Lessor
therefor upon demand.

(b) ADVANCE PAYMENT. In order to insure payment when due and before
delinquency of any or all Real Property Taxes, Lessor reserves the right, at
Lessor's option, to estimate the current Real Property Taxes applicable to the
Premises, and to require such current year's Real Property Taxes to be paid in
advance to Lessor by Lessee, either: (i) in a lump sum amount equal to the
installment due, at least twenty (20) days prior to the applicable delinquency
date, or (ii) monthly in advance with the payment of the Base Rent. If Lessor
elects to require payment monthly in advance, the monthly payment shall be that
equal monthly amount which, over the number of months remaining before the month
in which the applicable tax installment would become delinquent (and without
interest thereon), would provide a fund large enough to fully discharge before
delinquency the estimated installment of taxes to be paid. When the actual
amount of the applicable tax bill is known, the amount of such equal monthly
advance payment shall be adjusted as requied to provide the fund needed to pay
the applicable taxes before delinquency. If the amounts paid to Lessor by Lessee
under the provisions of this Paragraph are insufficient to discharge the
obligations of Lessee to pay such Real Property Taxes as the same become due,
Lessee shall pay to Lessor, upon Lessor's demand, such additional sums as are
necessary to pay such obligations. All moneys paid to Lessor under this
Paragraph may be intermingled with other moneys of Lessor and shall not bear
interest. In the event of a Breach by Lessee in the performance of th
eobligations of Lessee under this Lease, then any balance of funds paid to
Lessor under the provisions of this Paragraph may, subject to proration as
provided in Paragraph 10.1(a), at the option of Lessor, be treated as an
additional Security Deposit under Paragraph 5.

10.2 DEFINITION OF "REAL PROPERTY TAXES." As used herein, the term "REAL
PROPERTY TAXES" shall include any form of real estate tax or assessment,
general, special, ordinary or extraordinary, and any license fee, commercial
rental tax, improvement bond or bonds, levy or tax (other than inheritance,
personal income or estate taxes) imposed upon the Premises by any authority
having the direct or indirect power to tax, including any city, state or federal
government, or any school, agricultural, sanitary, fire, street, drainage or
other improvement district thereof, levied against any legal or equitable
interest of Lessor in the Premises or in the real property of which the Premises
are a part, Lessor's right to rent or other income therefrom, and/or Lessor's
business of leasing the Premises. The term "REAL PROPERTY TAXES" shall also
include any tax, fee, levy, assessment or charge, or any increase therein,
imposed by reason of events occurring, or changes in applicable law taking
effect, during the term of this Lease, including but not limited to a change in
the ownership of the Premises or in the improvements thereon, the execution of
this Lease, or any modificiation, amendment or transfer thereof, and whether or
not contemplated by the Parties.

10.3 JOINT ASSESSMENT. If the Premises are ot separately assessed,
Lessee's liability shall be an equitable proportion of the Real Property Taxes
for all of the land and improvements included within the tax parcel assessed,
such proportion to be determined by Lessor from the respective valuations
assigned in the assessor's work sheets or such other information as may be
reasonably available. Lessor's reasonable determination threof, in good faith,
shall be conclusive.

10.4 PERSONAL PROPERTY TAXES. Lessee shall pay prior to delinquency all
taxes assessed against and levied upon Lessee Owned Alterations, Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of Lesee contained in the Premises or elsewhere. When possible, Lessee shall
cause its Trade Fixtures, furnishings, equipment and all other personal property
to be assessed and billed separately from the real property of Lessor. If any of
Lessee's said personal property shall be assessed with Lessor's real property,
Lessee shall pay Lessor the taxes attributable to Lessee within ten (10) days
after receipt of a written statement setting forth the taxes applicable to
Lessee's property or, at Lessor's option, as provided in Paragraph 10.1(b).

11. UTILITIES. Lessee shall pay for all water, gas, heat, lighyt, power,
telephone, trash disposal and other utilities and services supplied to the
Premises, together with any taxes threon. If any such services are not
separately metered to Lessee, Lessee shall pay a reasonable proportion, to be
determined by Lessor, of all charges jointly metred with other premises.

Page 13

<PAGE> 14

12. ASSIGNMENT AND SUBLETTING.

12.1 LESSOR'S CONSENT REQUIREMENT.

(a) Lessee shall not voluntarily or by operation of law assign,
transfer, mortgage or otherwise transfer or encumber (collectively,
"ASSIGNMENT") or sublet all or any part of Lessee's interest in this Lease or in
the Premises without Lessor's prior written consent given under and subject to
the terms of Paragraph 36.

(b) A change in the control of Lessee shall constitute an
assignment requiring Lessor's consent. The transfer, on a cumulative basis, of
twenty-five percent (25%) or more of the voting control of Lessee shall
constituet a change in control for this purpose.

(c) The involvement of Lessee or its assets in any transaction, or
series of transactions (by way of merger, sale, acquisition, financing,
refinancing, transfer, leveraged buy-out or otherwise), whether or not a formal
assignment or hypothecation of this Lease or Lessee's assets occurs, which
results or will result in a reduction of the net Worth of Lessee, as hereinafter
defined, by an amount equal to or greater than twenty-five percent (25%) of such
Net Worth of Lessee as it exists immediately prior to said transaction or
transactions constituting such reduction, shall be considered an assignment of
this Lease by Lessee to which Lessor may reasonably withhold its consent. "NET
WORTH OF LESSEE" for purposes of this Lease shall be the net worth of Lessee
(excluding any guarantors) established under generally accepted accounting
principles consistently applied.

(d) [Deleted]

(e) Lessee's remedy for any breach of this Paragraph 12.1 by Lessor
shall be limited to compensatory damages and injunctive relief.

12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING.

(a) Regardless of Lessor's consent, any assignment or subletting
shall not: (i) be effective without the express written assumption by such
assignee or sublessee of the obligations of Lessee under this Lease, (ii)
release Lessee of any obligations hereunder, or (iii) alter the primary
liability of Lessee for the payment of Base Rent and other sums due Lessor
hereunder or for the performance of any other obligations to be performed by
Lessee under this Lease.

(b) Lessor may accept any rent or performance of Lessee's
obligations from any person other than Lessee pending approval or disapproval of
an assignment. Neither a delay in the approval or disapproval of such assignment
nor the acceptance of any rent or performance shall constitute a waiver or
estoppel of Lessor's right to exercise its remedies for the Default or Breach by
Lessee of any of the terms, covenants or conditions of this Lease.

(c) The consent of Lessor to any assignment or subletting shall not
constitute a consent to any subsequent assignment or subletting by Lessee or to
any subsequent or successive assignment or subletting by the sublessee. However,
Lessor may consent to subsequent sublettings and assignments of the sublease or
any amendments or modifications thereto without notifying Lessee or anyone else
liable on the Lease or sublease and without obtaining their consent, and such
action shall not relieve such persons from liability under this Lease or
sublease.

(d) In the event of any Default or Breach of Lessee's obligations
under this Lease, Lessor may proceed directly against Lessee, any Guarantors or
any one else responsible for the performance of the Lessee's obligations under
this Lease, including the sublessee, without first exhausting Lessor's remedies
against any other person or entity responsible therefor to Lessor, or any
security held by Lessor or Lessee.

(e) Each request for consent to an assignment or subletting shall
be in writing, accompanied by information relevant to Lessor's determination as
to the financial and operational responsibility and

Page 14

<PAGE> 15

appropriateness of the proposed assignee or sublessee, including but not limited
to the intended use and/or required modification of the Premises, if any,
together with a non-refundable deposit of $1,000 as reasonable consideration for
Lessor's considering and processing the request for consent. Lessee agrees to
provide Lessor with such other or additional information and/or documentation as
may be reasonably requested by Lessor.

(f) Any assignee of, or sublessee under, this Lease shall by reason
of accepting such assignment or entering into such sublease, be deemed, for the
benefit of Lessor, to have assumed and agreed to conform and comply with each
and every term, covenant, condition and obligation herein to be observed or
performed by Lessee during the term of said assignment or sublease, other than
such obligations as are contrary to or inconsistent with provisions of an
assignment or sublease to which Lessor has specifically consented in writing.

12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The
following terms and conditions shall apply to any subletting by Lessee of all or
any part of the Premises and shall be deemed included in all subleases under
this Lease whether or not expressly incorporated therein:

(a) Lessee hereby assigns and transfers to Lessor all of Lessee's
interest in all rentals and income arising from any sublease of all or a portion
of the Premise heretofore or hereafter made by Lessee, and Lessor may collect
such rent and income and apply same toward Lessee's obligations under this
Lease; provided, however, that until a Breach (as defined in Paragraph 13.1)
shall occur in the performance of Lessee's obligations under this Lease, Lessee
may, except as otherwise provided in this Lease, receive, collect and enjoy the
rents accruing under such sublease. Lessor shall not, by reason of this or any
other assignment of such sublease to Lessor, nor by reason of the collection of
the rents from a sublessee, be deemed liable to the sublessee for any failure of
Lessee to perform and comply with any of Lessee's obligations to such sublessee
under such sublease. Lessee hereby irrevocably authorizes and directs any such
sublessee, upon receipt of a written notice from Lessor stating that a Breach
exists in the performance of Lessee's obligations under this Lease, to pay to
Lessor the rents and other charges due and to become due under the sublease.
Sublessee shall relay upon any such statement and request from Lessor and shall
pay such rents and other charges to Lessor without any obligation or right to
inquire as to whether such Breach exists and notwithstanding any notice from or
claim from Lessee to the contrary. Lessee shall have no right or claim against
said sublessee, or, until the Breach has been cured, against Lessor, for any
such rents and other charges so paid by said sublessee to Lessor.

(b) In the event of a Breach by Lessee in the performance of its
obligations under this Lease, Lessor, at its option and without any obligation
to do so, may require any sublessee to attorn to Lessor, in which event Lessor
shall undertake the obligations of the sublessor under such sublease from the
time of the exercise of said option to the expiration of such sublease;
provided, however, Lessor shall not be liable for any prepaid rents or security
deposit paid by such sublessee to such sublessor or for any other prior Defaults
or Breaches of such sublessor under such sublease.

(d) Lessor shall deliver a copy of any notice of Default or Breach
by Lessee to the sublessee, who shall have the right to cure the Default of
Lessee within the grace period, if any, specified in such notice. The sublessee
shall have a right of reimbursement and offset from and against Lessee for any
such Defaults cured by the sublessee.

12.4 See Addendum

Page 15

<PAGE> 16

13. DEFAULT; BREACH; REMEDIES.

13.1 DEFAULT; BREACH. Lessor and Lessee agree that if an attorney is
consulted by Lessor in connection with a Lessee Default or Breach (as
hereinafter defined), $350.00 is a reasonable minimum sum per such occurrence
for legal services and costs in the preparation and service of a notice of
Default, and that Lessor may include the cost of such services and costs in said
notice as rent due and payable to cure said Default. A "DEFAULT" is defined as a
failure by the Lessee to observe, comply with or perform any of the terms,
covenants, conditions or rules applicable to Lessee under this Lease. A "BREACH"
is defined as the occurrence of any one or more of the following Defaults, and,
where a grace period for cure after notice is specified herein, the failure by
Lessee to cure such Default prior to the expiration of the applicable grace
period, shall entitle Lessor to pursue the remedies set forth in Paragraph 13.2
and/or 13.3:

(a) The vacating of the Premises without the intention to reoccupy
same, or the abandonment of the Premises.

(b) Except as expressly otherwise provided in this Lease, the
failure by Lessee to make any payment of Base Rent or any other monetary payment
required to be made by Lessee hereunder, whether to Lessor or to a third party,
as and when due, the failure by Lessee to provide Lessor with reasonable
evidence of insurance or surety bond required under this Lease, or failure of
Lessee to fulfill any obligation under this Lease which endangers or threatens
life or property, where such failure continues for a period of five (5) days
following written notice thereof by or on behalf of Lessor to Lessee.

(c) Except as expressly otherwise provided in this Lease, the
failure by Lessee to provide Lessor with reasonable written evidence (in duly
executed original form, if applicable) of (i) compliance with Applicable Law per
Paragraph 6.3, (ii) the inspection, maintenance and service contracts required
under Paragraph 7.1(b), (iii) the rescission of an unauthorized assignment or
subletting per Paragraph 12.1(b), (iv) a Tenancy Statement per Paragraphs 16 or
37, (v) the subordination or non-subordination of this Lease per Paragraph 30,
(vi) the guaranty of the performance of Lessee's obligations under this Lease if
required under Paragraphs 1.11 and 37, (vii) the execution of any document
requested under Paragraph 42 (easements), or (viii) any other documentation or
information which Lessor may reasonably require of Lessee under the terms of
this Lease, where any such failure continues for a period of ten (10) days
following written notice by or on behalf of Lessor to Lessee.

(d) A Default by Lessee as to the terms, covenants, conditions or
provisions of this Lease, or of the rules adopted under Paragraph 40 hereof,
that are to be observed, complied with or performed by Lessee, other than those
described in subparagraphs (a), (b) or (c), above, where such Default continues
for a period of thirty (30) days after written notice thereof by or on behalf of
Lessor to Lessee; provided, however, that if the nature of Lessee's Default is
such that more than thirty (30) days are reasonably required for its cure, then
it shall not be deemed to be a Breach of this Lease by Lessee if Lessee
commences such cure within said thirty (30) day period and thereafter diligently
prosecutes such cure to completion.

(e) The occurrence of any of the following events: (i) The making
by lessee of any general arrangement or assignment for the benefit of creditors;
(ii) Lessee's becoming a "debtor" as defined in 11 U.S.C ss.101 or any successor
statute thereto (unless, in the case of a petition filed against Lessee, the
same is dismissed within sixty (60) days; (iii) the appointment of a trustee or
receiver to take possession of substantially all of Lessee's assets located at
the Premises or of Lessee's interest in this Lease, where possession is not
restored to Lessee within sixty (60) days; or (iv) the attachment, execution or
other judicial seizure of substantially all of Lessee's assets located at the
Premises or of Lessee's interest in this Lease, where such seizure is not
discharged within sixty (60) days; provided, however, in the vent that any
provision of this subparagraph (e) is contrary to any applicable law, such
provision shall be of no force or effect, and not affect the validity of the
remaining provisions.

(f) The discovery by Lessor that any financial statement given to
Lessor by Lessee or any Guarantor of Lessee's obligations hereunder was
materially false.

Page 16

<PAGE> 17

(g) If the performance of Lessee's obligations under this Lease is
guaranteed: (i) the death of a guarantor; (ii) the termination of a guarantor's
liability with respect to this Lease other than in accordance with the terms of
such guaranty, (iii) a guarantor's becoming insolvent or the subject of a
bankruptcy filing, (iv) a guarantor's refusal to honor the guaranty, or (v) a
guarantor's breach of its guaranty obligation of an anticipatory breach basis,
and Lessee's failure, within sixty (60) days following written notice by or on
behalf of Lessor to Lessee of any such event, to provide Lessor with written
alternative assurance or security, which, when coupled with the then existing
resources of Lessee, equals or exceeds the combined financial resources of
Lessee and the guarantors that existed at the time of execution of this Lease.

13.2 REMEDIES. If Lessee fails to perform any affirmative duty or
obligation of Lessee under this Lease, within ten (10) days after written notice
to Lessee (or in case of an emergency, without notice), Lessor may at its option
(but without obligation to do so), perform such duty or obligation on Lessee's
behalf, including but not limited to the obtaining of reasonably required bonds,
insurance policies, or governmental licenses, permits or approvals. The costs
and expenses of any such performance by Lessor shall be due and payable by
Lessee to Lessor upon invoice therefor. If any check given to Lessor by Lessee
shall not be honored by the bank upon which it is drawn, Lessor, at its option,
may require all future payments to be made under this Lease by Lessee to be made
only by cashier's check. In the event of a Breach of this Lease by Lessee, as
defined in Paragraph 13.1, with or without further notice or demand, and without
limiting Lessor in the exercise of any right or remedy which Lessor may have by
reason of such Breach, Lessor may:

(a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease and the term hereof shall terminate and
Lessee shall immediately surrender possession of the Premises to Lessor. In such
event Lessor shall be entitled to recover from Lessee: (i) the worth at the time
of the award of the unpaid rent which had been earned at the time of
termination; (ii) the worth at the time of award of the amount by which the
unpaid rent which would have been earned after termination until the time of
award exceeds the amount of such rental loss that the Lessee proves could have
been reasonably avoided; (iii) the worth at the time of award of the amount by
which the unpaid rent for the balance of the term after the time of award
exceeds the amount of such rental loss that the Lessee proves could be
reasonably avoided; and (iv) any other amount necessary to compensate Lessor for
all the detriment proximately caused by the Lessee's failure to perform its
obligations under this Lease or which in the ordinary course of things would be
likely to result therefrom, including but not limited to the cost of recovering
possession of the Premises, expenses of reletting, including necessary
renovation and alteration of the Premises, reasonable attorneys' fees, and that
portion of the leasing commission paid by Lessor applicable to the unexpired
term of this Lease. The worth at the time of award of the amount referred to in
provision (iii) of the prior sentence shall be computed by discounting such
amount at the discount rate of the Federal Reserve Bank of San Francisco at the
time of award plus one percent (1%). Efforts by Lessor to mitigate damages
caused by Lessee's Default or Breach of this Lease shall not waive Lessor's
right to recover damages under this Paragraph. If termination of this Lease is
obtained through the provisional remedy of unlawful detainer, Lessor shall have
the right to recover in such proceeding the unpaid rent and damages as are
recoverable therein, or Lessor may reserve therein the right to recover all or
any part thereof in a separate suit for such rent and/or damages. If a notice
and grace period required under subparagraphs 13.1(b), (c) or (d) was not
previously given, a notice to pay rent or quit, or to perform or quit, as the
case may be, given to Lessee under any statute authorizing the forfeiture of
leases for unlawful detainer shall also constitute the applicable notice for
grace period purposes required by subparagraphs 13.1(b), (c) or (d). In such
case, the applicable grace period under subparagraphs 13.1(b), (c) or (d) and
under the unlawful detainer statute shall run concurrently after the one such
statutory notice, and the failure of Lessee to cure the Default within the
greater of the two such grace periods shall constitute both an unlawful detainer
and a Breach of this Lease entitling Lessor to the remedies provided for in this
Lease and/or by said statute.

Page 17

<PAGE> 18

Acts of maintenance or preservation, efforts to relet the Premises, or the
appointment of a receiver to protect the Lessor's interest under the Lease,
shall not constitute a termination of the Lessee's right to possession.

(c) Pursue any other remedy now or hereafter available to Lessor
under the laws or judicial decisions of the state wherein the Premises are
located.

(d) The expiration or termination of this Lease and/or the
termination of Lessee's right to possession shall not relieve Lessee from
liability under any indemnity provisions of this Lease as to matters occurring
or accruing during the term hereof or by reason of Lessee's occupancy of the
Premises.

13.3 INDUCEMENT RECAPTURE IN EVENT OF BREACH. Deleted.

13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by
Lessee to Lessor of rent and other sums due hereunder will cause Lessor to incur
costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited to,
processing and accounting charges, and late charges which may be imposed upon
Lessor by the terms of any ground lease, mortgage or trust deed covering the
Premises. Accordingly, if any installment of rent or any other sum due form
Lessee shall not be received by Lessor or Lessor's designee within five (5) days
after such amount shall be due, then, without any requirement for notice to
Lessee, Lessee shall pay to Lessor a late charge equal to six percent (6%) of
such overdue amount. The parties hereby agree that such late charge represents a
fair and reasonable estimate of the costs Lessor will incur by reason of late
payment by Lessee. Acceptance of such late charge by Lessor shall in no event
constitute a waiver of Lessee's Default or Breach with respect to such overdue
amount, nor prevent Lessor from exercising any of the other rights and remedies
granted hereunder.

13.5 BREACH BY LESSOR. Lessor shall not be deemed in breach of this
Lease unless Lessor fails within a reasonable time to perform an obligation
required to be performed by Lessor. For purposes of this Paragraph 13.5, a
reasonable time shall be thirty (30) days after receipt by Lessor, and by the
holders of any ground lease, mortgage or deed of trust covering the Premises
whose name and address shall have been furnished Lessee in writing for such
purpose, of written notice specifying wherein such obligation of Lessor has not
been performed; provided, however, that if the nature of Lessor's obligation is
such that more than thirty (30) days after such notice are reasonably required
for its performance, the Lessor shall not be in breach of this Lease if
performance is commenced within such thirty (30) day period and thereafter
diligently pursued to completion.

14. CONDEMNATION. If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of the exercise of said power
(all of which are herein called "CONDEMNATION"), this Lease shall terminate as
to the part so taken as of the date the condemning authority takes title or
possession, whichever first occurs. If more than ten percent (10%) of the floor
area of the Premises, or more than twenty-five percent (25%) of the land area
not occupied by any building, is taken by condemnation, Lessee may, at Lessee's
option, to be exercised in writing within ten (10) days after Lessor shall have
given Lessee written notice of such taking (or in the absence of such notice,
within ten (10) days after the condemning authority shall have taken possession)
terminate this Lease as to the date the condemning authority takes such
possession. If Lessee does not terminate this lease in accordance with the
foregoing, this Lease shall remain in full force and effect as to the portion of
the Premises remaining, except that the Base Rent shall be reduced in the same
proportion as the rentable floor area of the Premises taken bears to the total
rentable floor area of the building located on the Premises. No reduction of
Base Rent shall occur if the only portion of the Premises taken is land on which
there is no building. Any award for the taking of all or any part of the
Premises under the power of eminent domain or any payment made under threat of
the exercise of such power shall be the property of Lessor, whether such award
shall be made as compensation for diminution in value of the leaseholder or for
taking of the fee, or as severance damages; provided, however, that Lessee shall
be entitled to any compensation separately awarded to Lessee for Lessee's
relocation expenses and/or loss of Lessee's Trade Fixtures. In the event that
this Lease is not terminated by reason of such condemnation, Lessor shall to the
extent of its net severance damages received, over and above the legal and other
expenses incurred by Lessor in the condemnation matter, repair any damage to the
Premises caused by such condemnation, except to the extent that Lessee has been
reimbursed therefor by the condemning authority. Lessee

Page 18

<PAGE> 19

shall be responsible for the payment of any amount in excess of such net
severance damages required to complete such repair.

15. BROKER'S FEE.

15.1 The Brokers named in Paragraph 1.10 are the procuring causes of
this Lease.

15.2 If this Lease is executed and Lessee takes possession of the
Premises on the Commencement Date, Lessor shall pay to Lessor's Broker, a fee as
set forth in a separate written agreement for brokerage services rendered to
Lessor in this transaction.

15.3 Deleted.

15.4 Deleted.

15.5 Lessee and Lessor each represent and warrant to the other that it
has had no dealings with any person, firm, broker or finder (other than the
Brokers, if any named in Paragraph 1.10) in connection with the negotiation of
this Lease and/or the consummation of the transaction contemplated hereby, and
that no broker or other person, firm or entity other than said named Brokers is
entitled to any commission or finder's fee in connection with said transaction.
Lessee and Lessor do each hereby agree to indemnify, protect, defend and hold
the other harmless form and against liability for compensation of charges which
may be claimed by any such unnamed broker, finder or other similar party by
reason of any dealings or actions of the indemnifying Party, including any
costs, expenses, attorneys' fees reasonably incurred with respect thereto.

15.6 Lessor and Lessee hereby consent to and approve all agency
relationships, including any dual agencies, indicated in Paragraph 1.10.

16. TENANCY STATEMENT.

16.1 Each Party (as "RESPONDING PARTY") shall within ten (10) days after
written notice from the other Party (the "REQUESTING PARTY") execute,
acknowledge and deliver to the Requesting Party a statement in writing in form
similar to the then most current "TENANCY STATEMENT" form published by the
American Industrial Real Estate Association, plus such additional information,
confirmation and/or statements as may be reasonably requested by the Requesting
Party.

16.2 If Lessor desires to finance, refinance, or sell the Premises, any
part thereof, or the building of which the Premises are a part, Lessee and all
Guarantors of Lessee's performance hereunder shall deliver to any potential
lender or purchaser designated by Lessor such financial statements of Lessee and
such Guarantors as may be reasonably required by such lender or purchaser,
including but not limited to Lessee's financial statements for the past three
(3) years. All such financial statements shall be received by Lessor and such
lender or purchaser in confidence and shall be used only for the purposes herein
set forth.

17. LESSOR'S LIABILITY. The term "LESSOR" as used herein shall mean the
owner or owners at the time in question of the fee title to the Premises, or, if
this is a sublease, of the Lessee's interest in the prior lease. In the event of
a transfer of Lessor's title or interest in the Premises or in this Lease,
Lessor shall deliver to the transferee or assignee (in cash or by credit) any
unused Security Deposit held by Lessor at the time of such transfer or
assignment. Except as provided in Paragraph 15, upon such transfer or assignment
and delivery of the Security Deposit, as aforesaid, the prior Lessor shall be
relieved of all liability with respect to the obligations and/or covenants under
this Lease thereafter to be performed by the Lessor. Subject to the foregoing,
the obligations and/or covenants in this Lease to be performed by the Lessor
shall be binding only upon the Lessor as hereinafter defined. See Addendum.

Page 19

<PAGE> 20

18. SEVERABILITY. The invalidity of any provision of this Lease, as
determined by a court of competent jurisdiction, shall in no way affect the
validity of any other provision hereof.

19. INTEREST ON PAST-DUE OBLIGATIONS. Any monetary payment due Lessor
hereunder, other than late charges, not received by Lessor within thirty (30)
days following the date on which it was due, shall bear interest from the
thirty-first (31st) day after it was due at the rate of 12% per annum, but not
exceeding the maximum rate allowed by law, in addition to the late charge
provided for in Paragraph 13.4.

20. TIME OF ESSENCE. Time is of the essence with respect to the performance
of all obligations to be performed or observed by the Parties under this Lease.

21. RENT DEFINED. All monetary obligations of Lessee to Lessor under the
terms of this Lease are deemed to be rent.

22. NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER. This Lease contains all
agreements between the Parties with respect to any matter mentioned herein and
no other prior or contemporaneous agreement or understanding shall be effective.
Lessor and Lessee each represents and warrants to the Brokers that it has made,
and is relying solely upon, its own investigation as to the nature, quality,
character and financial responsibility of the other Party to this Lease and as
to the nature, quality and character of the Premises. Brokers have no
responsibility with respect thereto or with respect to any default or breach
hereof by either Party.

23. NOTICES.

23.1 All notices required or permitted by this Lease shall be in writing
and may be delivered in person (by hand or by messenger or courier service) or
may be sent by regular, certified or registered mail or U.S. Postal Service
Express Mail, with postage prepaid, or by facsimile transmission, and shall be
deemed sufficiently given if served in a manner specified in this Paragraph 23.
The addresses noted adjacent to a Party's signature on this Lease shall be that
Party's address for delivery or mailing of notice purposes. Either Party may by
written notice to the other specify a different address for notice purposes,
except that upon Lessee's taking possession of the Premises, the Premises shall
constitute Lessee's address for the purpose of mailing or delivering notices to
Lessee. A copy of all notices required or permitted to be given to Lessor
hereunder shall be concurrently transmitted to such party or parties at such
addresses as Lessor may from time to time hereafter designate by written notice
to Lessee.

23.2 Any notice sent by registered or certified mail, return receipt
requested, shall be deemed given on the date of delivery shown on the receipt
card, or if no delivery date is shown, the postmark thereon. If sent by regular
mail the notice shall be deemed given forty-eight (48) hours after the same is
addressed as required herein and mailed with postage prepaid. Notices delivered
by United States Express Mail or overnight courier that guarantees next day
delivery shall be deemed given twenty-four (24) hours after delivery of the same
to the United States Postal Service or courier. If any notice is transmitted by
facsimile transmission or similar means, the same shall be deemed served or
delivered upon telephone confirmation of receipt of the transmission thereof,
provided a copy is also delivered via delivery or mail. If notice is received on
a Sunday or legal holiday, it shall be deemed received on the next business day.

24. WAIVERS. No waiver by Lessor of the Default or Breach of any term,
covenant or condition hereof by Lessee, shall be deemed a waiver of any other
term, covenant or condition hereof, or of any subsequent Default or Breach by
Lessee of the same or of any other term, covenant or condition hereof, Lessor's
consent to, or approval of, any act shall not be deemed to render unnecessary
the obtaining of Lessor's consent to, or approval of, any subsequent or similar
act by Lessee, or be construed as the basis of an estoppel to enforce the
provision or provisions of this Lease requiring such consent. Regardless of
Lessor's knowledge of a Default or Breach at the time of accepting rent, the
acceptance of rent by Lessor shall not be a waiver of any preceding Default or
Breach by Lessee of any provision hereof, other than the failure of Lessee to
pay the particular rent so accepted. Any payment given Lessor by Lessee may be
accepted by Lessor on account of moneys or damages due Lessor, notwithstanding
any qualifying statements or conditions made by Lessee in connection therewith,
which such

Page 20

<PAGE> 21

statements and/or conditions shall be of no force or effect whatsoever unless
specifically agreed to in writing by Lessor at or before the time of deposit of
such payment.

25. RECORDING. Deleted.

26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or earlier termination of
this Lease.

27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.

28. COVENANTS AND CONDITIONS. All provisions of this Lease to be observed or
performed by Lessee are both covenants and conditions.

29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the
parties, their personal representatives, successors and assigns and be governed
by the laws of the State in which the Premises are located. Any litigation
between the Parties hereto concerning this Lease shall be initiated in the
county in which the Premises are located.

30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE.

30.1 SUBORDINATION. This Lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of trust, or other
hypothecation or security device (collectively, "SECURITY DEVICE"), now or
hereafter placed by Lessor upon the real property of which the Premises are a
part, to any and all advanced made on the security thereof, and to all renewals,
modifications, consolidations, replacements and extensions thereof. Lessee
agrees that the Lenders holding any such Security Device shall have no duty,
liability or obligation to perform any of the obligations of Lessor under this
Lease, but that in the event of Lessor's default with respect to any such
obligation, Lessee will give any Lender whose name and address have been
furnished Lessee in writing for such purpose notice of Lessor's default and
allow such Lender thirty (30) days following receipt of such notice for the cure
of said default before invoking any remedies Lessee may have by reasons thereof.
If any Lender shall elect to have this Lease and/or any Option granted hereby
superior to the lien of its Security Device and shall give written notice
thereof to Lessee, this Lease and such Options shall be deemed prior to such
Security Device, notwithstanding the relative dates of the documentation or
recordation thereof.

30.2 ATTORNMENT. Subject to the non-disturbance provisions of Paragraph
30.3, Lessee agrees to attorn to a Lender or any other party who acquires
ownership of the Premises by reasons of a foreclosure of a Security Device, and
that in the event of such foreclosure, such new owner shall not: (i) be liable
for any act or omission of any prior lessor or with respect to events occurring
prior to acquisition of ownership, (ii) be subject to any offsets or defenses
which Lessee might have against any prior lessor, or (iii) be bound by
prepayment of more than one (1) month's rent.

30.3 NON-DISTURBANCE. With respect to Security Devices entered into by
Lessor after the execution of this Lease, Lessee's subordination of this Lease
shall be subject to receiving assurance (a "NON-DISTURBANCE AGREEMENT") from the
Lender that Lessee's possession and this Lease, including any options to extend
the term hereof, will not be disturbed so long as Lessee is not in Breach hereof
and attorns to the record owner of the Premises.

30.4 SELF-EXECUTING. The agreements contained in this Paragraph 30 shall
be effective without the execution of any further documents; provided, however,
that, upon written request from Lessor or a Lender in connection with a sale,
financing or refinancing of the Premises, Lessee and Lessor shall execute such
further writings as may be reasonably required to separately document any such
subordination or non-subordination, attornment and/or non-disturbance agreement
as is provided for herein.

Page 21

<PAGE> 22

31. ATTORNEY'S FEES. If any Party or Broker brings an action or proceeding
to enforce the terms hereof or declare rights hereunder, the Prevailing Party
(as hereafter defined) or Broker in any such proceeding, action, or appeal
thereon, shall be entitled to reasonable attorney's fees. Such fees may be
awarded in the same suit or recovered in a separate suit, whether or not such
action or proceeding is pursued to decision or judgment. The term, "PREVAILING
PARTY" shall include, without limitation, a Party or Broker who substantially
obtains or defeats the relief sought, as the case may be, whether by compromise,
settlement, judgment, or the abandonment by the other Party or Broker of its
claim or defense. They attorney's fee award shall not be computed in accordance
with any court fee schedule, but shall be such as to fully reimburse all
attorney's fees reasonably incurred. Lessor shall be entitled to attorney's
fees, costs and expenses incurred in the preparation and service of notices of
Default and consultations in connection therewith, whether or not a legal action
is subsequently commenced in connection with such Default or resulting Breach.

32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents
shall have the right to enter the Premises at any time, in the case of an
emergency, and otherwise at reasonable times for the purpose of showing the same
to prospective purchasers, lenders, or lessees, and making such alterations,
repairs, improvements or additions to the Premises or to the building of which
they are a part, as Lessor may reasonably deem necessary. Lessor may at any time
place on or about the Premises or building any ordinary "For Sale" signs and
Lessor may at any time during the last one hundred twenty (120) days of the term
hereof place on or about the Premises any ordinary "For Lease" signs. All such
activities of Lessor shall be without abatement of rent or liability to Lessee.

33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises without first having
obtained Lessor's prior written consent. Notwithstanding anything to the
contrary in this Lease, Lessor shall not be obligated to exercise any standard
of reasonableness in determining whether to grant such consent.

34. SIGNS. Lessee shall not place any sign upon the Premises, except that
Lessee may, with Lessor's prior written consent, install (but not on the roof)
such signs as are reasonably required to advertise Lessee's own business. The
installation of any sign on the Premises by or for Lessee shall be subject to
the provisions of Paragraph 7 (Maintenance, Repairs, Utility Installations,
Trade Fixtures and Alterations). Unless otherwise expressly agreed herein,
Lessor reserves all rights to the use of the roof and the right to install, and
all revenues from the installation of, such advertising signs on the Premises,
including the roof, as do not unreasonably interfere with the conduct of
Lessee's business.

35. TERMINATION; MERGER. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for Breach
by Lessee, shall automatically terminate any sublease or lesser estate in the
Premises; provided, however, Lessor shall, in the event of any such surrender,
termination or cancellation, have the option to continue any one or all of any
existing subtenancies. Lessor's failure within ten (10) days following any such
event to make a written election to the contrary by written notice to the holder
of any such lesser interest, shall constitute Lessor's election to have such
event constitute the termination of such interest.

36. CONSENTS.

Page 22

<PAGE> 23

to Lessee's request. Except as otherwise provided, any unused portion of said
deposit shall be refunded to Lessee without interest. Lessor's consent to any
act, assignment of this Lease or subletting of the Premises by Lessee shall not
constitute an acknowledgement that no Default or Breach by Lessee of this Lease
exists, nor shall such consent be deemed a waiver of any then existing Default
or Breach, except as may be otherwise specifically stated in writing by Lessor
at the time of such consent.

(b) All conditions to Lessor's consent authorized by this Lease are
acknowledged by Lessee as being reasonable. The failure to specify herein any
particular condition to Lessor's consent shall not preclude the imposition by
Lessor at the time of consent of such further or other conditions as are then
reasonable with reference to the particular matter for which consent is being
given.

37. GUARANTOR.

37.1 If there are to be any Guarantors of this Lease per Paragraph 1.11,
the form of the guaranty to be executed by each such Guarantor shall be in the
form most recently published by the American Industrial Real Estate Association,
and each said Guarantor shall have the same obligations as Lessee under this
Lease, including but not limited to the obligation to provide the Tenancy
Statement and information called for by Paragraph 16.

37.2 It shall constitute a Default of the Lessee under this Lease if any
such Guarantor fails or refuses, upon reasonable request by Lessor to give: (a)
evidence of the due execution of the guaranty called for by this Lease,
including the authority of the Guarantor (and of the party signing on
Guarantor's behalf) to obligate such Guarantor on said guaranty, and including
in the case of a corporate Guarantor, a certified copy of a resolution of its
board of directors authorizing the making of such guaranty, together with a
certificate of incumbency showing the signature of the persons authorized to
sign on its behalf, (b) current financial statements of Guarantor as may from
time to time be requested by Lessor, (c) a Tenancy Statement, or (d) written
confirmation that the guaranty is still in effect.

38. QUIET POSSESSION. Upon payment by Lessee of the rent for the Premises
and the observance and performance of all of the covenants, conditions and
provisions on Lessee's part to be observed and performed under this Lease,
Lessee shall have quiet possession of the Premises for the entire term hereof
subject to all of the provisions of this lease.

39. OPTIONS.

39.1 DEFINITION. As used in this Paragraph 39 the word "OPTION" has the
following meaning: (a) the right to extend the term of this Lease or to renew
this Lease or to extend or renew any lease that Lessee has on other property of
Lessor; (b) the right of first refusal to lease the Premises or the right of
first offer to lease the Premises or the right of first refusal to lease other
property of Lessor or the right of first offer to lease other property of
Lessor; (c) the right to purchase the Premises, or the right of first refusal to
purchase the Premises, or the right of first offer to purchase the Premises, or
the right to purchase other property of Lessor, or the right of first refusal to
purchase other property of Lessor, or the right of first offer to purchase other
property of Lessor.

39.2 OPTIONS PERSONAL TO ORIGINAL LESSEE. Each Option granted to Lessee
in this Lease is personal to the original Lessee named in Paragraph 1.1 hereof,
and cannot be voluntarily or involuntarily assigned or exercised by any person
or entity other than said original Lessee while the original Lessee is in full
and actual possession of the Premises and without the intention of thereafter
assigning or subletting. The Options, if any, herein granted to Lessee are not
assignable, either as a part of an assignment of this Lease or separately or
apart therefrom, and no Option may be separated from this Lease in any manner,
by reservation or otherwise.

39.3 MULTIPLE OPTIONS. In the event that Lessee has any Multiple Options
to extend or renew this Lease, a later Option cannot be exercised unless the
prior Options to extend or renew this Lease have been validly exercised.

Page 23

<PAGE> 24

39.4 EFFECT OF DEFAULT ON OPTIONS.

(a) Lessee shall have no right to exercise an Option,
notwithstanding any provision in the grant of Option to the contrary: (i) during
the period commencing with the giving of any notice of Default under Paragraph
13.1 and continuing until the noticed Default is cured, or (ii) during the
period of time any monetary obligation due Lessor from Lessee is unpaid (without
regard to whether notice thereof is given Lessee), or (iii) during the time
Lessee is in Breach of this Lease, or (iv) in the event that Lessor has given to
Lessee three (3) or more notices of Default under Paragraph 13.1, whether or not
the Defaults are cured, during the twelve (12) month period immediately
preceding the exercise of the Option.

(b) The period of time within which an Option may be exercised
shall not be extended or enlarged by reasons of Lessee's inability to exercise
an Option because of the provisions of Paragraph 39.4(a).

39.5 See Addendum.

40. MULTIPLE BUILDINGS. If the Premises are part of a group of buildings
controlled by Lessor, Lessee agrees that it will abide by, keep and observe all
reasonable rules and regulations which Lessor may make from time to time for the
management, safety, care, and cleanliness of the grounds, the parking and
unloading of vehicles and the preservation of good order, as well as for the
convenience of other occupants or tenants of such other buildings and their
invitees, and that Lessee will pay its fair share of common expenses incurred in
connection therewith.

41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of the Premises, Lessee,
its agents and invitees and their property from the acts of third parties.

42. RESERVATIONS. Lessor reserves to itself the right, from time to time, to
grant, without the consent or joinder of Lessee, such easements, rights and
dedications that Lessor deems necessary, and to cause the recordation of parcel
maps and restrictions, so long as such easements, rights, dedications, maps and
restrictions do not unreasonably interfere with the use of the Premises by
Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to
effectuate any such easement rights, dedication, map or restrictions.

43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to
any amount or sum of money to be paid by one Party to the other under the
provisions hereof, the Party against whom the obligation to pay the money is
asserted shall have the right to make payment "under protest" and such payment
shall not be regarded as a voluntary payment and there shall survive the right
on the part of said Party to institute suit for recovery of such sum. If it
shall be adjudged that there was no legal obligation on the part of said Party
to pay such sum or any part thereof, said Party shall be entitled to recover
such sum or so much thereof as it was not legally required to pay under the
provisions of this Lease.

44. AUTHORITY. If either Party hereto is a corporation, trust, or general or
limited partnership, each individual executing this Lease on behalf of such
entity represents and warrants that he or she is duly authorized to execute and
deliver this lease on its behalf. If Lessee is a corporation, trust or
partnership, Lessee shall, within thirty (30) days after request by Lessor,
deliver to Lessor evidence satisfactory to Lessor of such authority.

45. CONFLICT. Any conflict between the printed provisions of this Lease and
the typewritten or handwritten provisions shall be controlled by the typewritten
or handwritten provisions.

Page 24

<PAGE> 25

46. OFFER. Preparation of this Lease by Lessor or Lessor's agent and
submission of same to Lessee shall not be deemed an offer to lease to Lessee.
This Lease is not intended to be binding until executed by all Parties hereto.

47. AMENDMENTS. This Lease may be modified only in writing, signed by the
parties in interest at the time of the modification. The parties shall amend
this Lease from time to time to reflect any adjustments that are made to the
Base Rent or other rent payable under this Lease. As long as they do not
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by an institutional, insurance company, or pension plan Lender in
connection with the obtaining of normal financing or refinancing of the property
of which the Premises are a part.

48. MULTIPLE PARTIES. Except as otherwise expressly provided herein, if more
than one person or entity is named herein as either Lessor or Lessee, the
obligations of such Multiple Parties shall be the joint and several
responsibility of all persons or entities named herein as such Lessor or Lessee.

LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.

IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR SUBMISSION
TO YOUR ATTORNEY FOR HIS APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED
TO EVALUATE THE CONDITION OF THE PROPERTY AS TO THE POSSIBLE PRESENCE
OF ASBESTOS, STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO REPRESENTATION
OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE
ASSOCIATION OR BY THE REAL ESTATE BROKER(S) OR THEIR AGENTS OR
EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX
CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES; THE
PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN COUNSEL AS TO
THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. IF THE SUBJECT PROPERTY
IS LOCATED IN A STATE OTHER THAN CALIFORNIA, AN ATTORNEY FROM THE STATE
WHERE THE PROPERTY IS LOCATED SHOULD BE CONSULTED.

The Parties hereto have executed this Lease at the place on the dates specified
above to their respective signatures.

Executed at ________________________________________
on _________________________________________________
by LESSOR: _________________________________________
Bardon of Hollywood, Inc., a California corporation,
dba Bardon, Inc.

By: ________________________________________________
Name Printed: Donald Slate
Title: President

By: ________________________________________________
Name Printed: ______________________________________
Title: _____________________________________________
Address: ___________________________________________

Tel. No. (___) ____________ Fax No. (___) __________

Executed at ________________________________________
on _________________________________________________
by LESSEE: _________________________________________
Spectral Holding Corporation, a California
corporation, dba Spectratek

By: ________________________________________________
Name Printed: ______________________________________
Title: _____________________________________________

Tel. No. (___) ______________ Fax No. (___) ________

NET

NOTICE: These forms are often modified to meet changing requirements of law and
industry needs. Always write or call to make sure you are utilizing the
most current form: American Industrial Real Estate Association, 345
South Figueroa Street, Suite M-1, Los Angeles, CA 90071 213) 687-8777.
Fax No. (213) 687-8616.

Page 25

<PAGE> 26

ADDENDUM

This Addendum is attached to and forms a part of that certain Lease
dated July 1, 1997 by and between Bardon of Hollywood, Inc., a California
corporation, dba Bardon, Inc., as Lessor, and Spectral Holding Corporation, a
California corporation, dba Spectratek, as Lessee. The provisions of this
Addendum supersede any contrary provisions in the Lease.

1. Paragraph 2.5 - Lessee Prior Occupant.

Lessee acknowledges that Lessee is currently occupying the Premises
(prior to Commencement Date) pursuant to a Sublease dated June 8, 1995, between
Foote, Cone & Belding Communications, Inc. (successor-in-interest to Krupp
Taylor U.S.A.), as Sublessor, and Lessee, as Sublessee.

2. Paragraph 4.2 - Cost of Living Increase (NEW).

The Base Rent shall be increased on the first day of the 31st month of
the Original Term hereof (the "Rental Adjustment Date") in accordance with the
increase in the United States Department of Labor, Bureau of Labor Statistics,
Consumer Price Index for All Urban Consumers (Los Angeles/Anaheim/Riverside
Statistical Area on the basis of 1982-1984 = 100) (the "Index"), as follows:

The Base Rent (the "Comparison Base Rent") in effect immediately prior
to the Rental Adjustment Date (without regard to any setoffs, free rent or other
deductions) shall be increased by the percentage that the Index has increased
from the date (the "Comparison Date") on which payment of the Comparison Base
Rent began through the month in which the Rental Adjustment Date occurs;
provided, however, the increase in Base Rent payable by Lessee pursuant to this
section shall not be less than three percent (3%) per annum (cumulative and
compounded) nor greater than six percent (6%) per annum (cumulative and
compounded) of the Base Rent in effect immediately prior to the Rental
Adjustment Date. The Base Rent shall not, however, be reduced by reason of such
computation. Lessor shall notify Lessee of such increase by a written statement
which shall include the Index for the Comparison Date, the Index for the Rental
Adjustment Date, the percentage increase between the two indices and the new
Base Rent. Lessee shall pay the new Base Rent from the Rental Adjustment Date
until the expiration of the Original Term. Lessor's notice may be given after
the Rental Adjustment Date and Lessee shall pay Lessor the accrued rental
adjustment for the months elapsed between the effective date of the increase and
Lessor's notice of such increase within thirty (30) days after Lessor's notice.
If the format or components of the Index are materially changed after the
Commencement Date, Lessor shall reasonably select a substitute index which is
published by the Bureau of Labor Statistics or similar agency and which is most
nearly equivalent to the Index in effect on the Commencement Date.

3. Paragraph 7.2 - Lessor's Obligations.

Notwithstanding anything to the contrary contained in this Lease, Lessor
shall, at its sole cost and expense, maintain the foundations, roof, exterior
walls and other structural portions of the Premises in good condition and repair
provided that Lessor shall not be responsible for the routine cleaning of the
roof or maintenance of the drainage systems or any damage caused to the
foregoing which results from the acts or omissions of Lessee, its agents or
employees. Furthermore, Lessee acknowledges and agrees that to the extent any of
Lessee's improvements (including the installation and maintenance of an HVAC
system on the roof of the Premises) causes any damage to the roof or other
structural portions of the Premises, Lessee shall remain liable for such damage
including, without limitation, the repair and/or replacement of the roof.

Page 26

<PAGE> 27

4. Paragraph 7.4(b) - Removal.

Notwithstanding anything to the contrary set forth in Paragraph 7.4(b),
Lessee shall not be required to remove any of the offices existing in the
Premises as of the Commencement Date.

5. Paragraph 7.5 - Condition of Premises.

Lessee hereby acknowledges and agrees that it is accepting the Premises
in its "As Is" condition and that Lessor shall not be obligated to construct or
pay for any tenant improvements therein.

6. Paragraph 8.3 - Property Insurance.

Notwithstanding anything to the contrary contained in the printed
portion of Paragraph 8.3 of the Lease, Lessee shall not be obligated to pay for
the premium attributable to the portion of the property insurance relating to
earthquake coverage.

7. Paragraph on 9.5 - Damage Near End of Term.

If at any time during the last six (6) months of the term of this Lease
there is damage for which the cost to repair exceeds one month's Base Rent,
whether or not an Insured Loss, Lessor or Lessee may, at their respective
option, terminate this Lease by giving notice to the other of such party's
election to do so within thirty (30) days after the date of the occurrence of
such damage. In such event, this Lease shall terminate as of the date of such
notice; provided, however, if Lessee at the time has an exercisable option to
extend this Lease, then Lessee may preserve this Lease by exercising such option
within twenty (20) days following the occurrence of damage or before the
expiration of the time provided in such option for its exercise, whichever is
earlier (the "Exercise Period"). If Lessee duly exercises such option during
said Exercise Period, Lessor shall, if and to the extent required under this
Paragraph 9, repair such damage as soon as reasonably possible and this Lease
shall, subject to the provisions of this Paragraph 9, continue in full force and
effect. If Lessee fails to exercise such option during said Exercise Period,
then Lessor or Lessee may, at their respective option, terminate this Lease by
giving written notice to the other of its election to do so within ten (10) days
after the expiration of the Exercise Period, notwithstanding any term or
provision in the grant of option to the contrary. In such event, this Lease
shall terminate as of the date of such notice.

8. Paragraph 12.4 - Assignment and Subletting to Affiliates.

Notwithstanding anything to the contrary contained in Paragraph 12 of
the Lease, Lessee shall have the right, without Lessor's consent, to assign this
Lease or sublet all of the Premises to any parent or subsidiary of Lessee or to
any person, firm or corporation which is controlled by, under the control of, or
under common control with Lessee, or, subject to the terms of Paragraph 12.1 (c)
of the Lease any entity into which Lessee may be merged or consolidated or which
purchases all or substantially all of the assets of Lessee; provided, however,
in all such instances, Lessee shall provide Lessor with written notice of such
transfer, the transferee shall expressly assume in writing all of Lessee's
obligations under the Lease and Lessee shall not be released from any liability
under the Lease.

9. Paragraph 17 - Lessor's Liability.

Lessee understands and agrees that this Lease is a sublease of the
Premises and that Lessor is the tenant under that certain Master Lease dated
July 4, 1969 (the "Master Lease") between Jandy Investment Company, a California
general partnership ("Master Landlord") as landlord, and Lessor, as tenant.

Page 27

<PAGE> 28

10. Paragraph 39.5 - Option to Extend.

(a) Grant of Option.

Lessor hereby grants to Lessee one (1) option (the "Option") to extend
the Original Term for an additional term of five (5) years (the "Extension"), on
the same terms and conditions as set forth in the Lease, but at a Base Rent as
set forth below. The Option shall be exercised only by written notice delivered
to Lessor at least one hundred eighty (180) days before the expiration of the
Original Term. If Lessee fails to deliver to Lessor written notice of the
exercise of the Option within the prescribed time period, the Option shall
lapse, and there shall be no further right to extend the Original Term.

(b) Cost of Living Adjustment.

The Base Rent shall be further increased on the 1st and 31st months of
the Extension (each of which is referred to as an "Extension Adjustment Date")
by reference to the Index (or substitute index) defined in Paragraph 4.2 of the
Lease as follows: The Base Rent in effect immediately prior to each Extension
Adjustment Date (the "Comparison Base Rent") shall be increased by the
percentage that the Index has increased from the month in which the payment of
the Comparison Base Rent commenced through the month in which such Extension
Adjustment Date occurs; provided, however, the increase in Base Rent payable by
Lessee pursuant to this section shall not be less than three percent (3%) per
annum (cumulative and compounded) nor greater than six percent (6%) per annum
(cumulative and compounded) of the Base Rent in effect immediately prior to such
Extension Adjustment Date. In no event shall the Base Rent be reduced by reason
of such computation.

11. Safe to Remain on Premises.

Lessee acknowledges and agrees that the safe located on the mezzanine
level of the Premises is and shall remain the sole and exclusive property of
Lessor. However, as an accommodation to Lessor, Lessee hereby agrees to permit
Lessor to store the safe at the Premises during the term of the Lease, at no
additional cost or expense. Lessor shall have no right of access to the safe
until the Lease expires. Lessee shall not be liable for any damage or
destruction to the safe unless caused by Lessee's gross negligence or willful
misconduct.

Page 28

<PAGE> 1
Exhibit 10.3

STANDARD INDUSTRIAL LEASE -- NET

AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION

1. PARTIES. This Lease, dated, for reference purposes only, July 10,
1985, 1985, is made by and between Phillip Rossman and Ruth Rossman Trust
(herein called "Lessor") and Comdisc Technologies, INC. (herein called
"Lessee").

2. PREMISES. Lessor hereby leases to Lessee and Lessee leases from
Lessor for the term, at the rental, and upon all of the conditions set forth
herein, that certain real property situated in the County of Los Angeles State
of California, commonly known as 1510 Cotner Ave, West Los Angeles, Calif and
described as single story, free standing brick building together with 10 car
parking. Said real property including the land and all improvements therein,
is herein called "the Premises."

3. TERM.

3.1 TERM. The term of this Lease shall be for 5 years commencing
on September 1, 1985 and ending on August 31, 1990 unless sooner terminated
pursuant to any provision hereof.

3.2 DELAY IN POSSESSION. Notwithstanding said commencement date,
if for any reason Lessor cannot deliver possession of the Premises to Lessee on
said date, Lessor shall not be subject to any liability therefor, nor shall
such failure affect the validity of this Lease or the obligations of Lessee
hereunder or extend the term hereof, but in such case, Lessee shall not be
obligated to pay rent until possession of the Premises is tendered to Lessee;
provided, however, that if Lessor shall not have delivered possession of the
Premises within sixty (60) days from said commencement date, Lessee may, at
Lessee's option, by notice in writing to Lessor within ten (10) days
thereafter, cancel this Lease, in which event the parties shall be discharged
from all obligations hereunder; provided further, however, that if such written
notice of Lessee is not received by Lessor within said ten (10) day period,
Lessee's right to cancel this Lease hereunder shall terminate and be of no
further force or effect.

3.3 EARLY POSSESSION. If Lessee occupies the Premises prior to
said commencement date, such occupancy shall be subject to all provisions
hereof, such occupancy shall not advance the termination date, and Lessee shall
pay rent for such period at the initial monthly rates set forth below.

4. RENT. Lessee shall pay to Lessor as rent for the Premises, monthly
payments of $4,900.00, in advance, on the 1st day of each month of the term
hereof. Lessee shall pay Lessor upon the execution hereof $4,900.00 as rent
for September 1985 Rent for any period during the term hereof which is for less
than one month shall be a pro rata portion of the monthly installment. Rent
shall be payable in lawful money of the United States to Lessor at the address
stated herein or to such other persons or at such other places as Lessor may
designate in writing.

5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution
hereof $9,800.00 as security for Lessee's faithful performance of Lessee's
obligations hereunder. If Lessee fails to pay rent or other charges due
hereunder, or otherwise defaults with respect to any provision of this Lease,
Lessor may use, apply or retain all or any portion of said deposit for the
payment of any rent or other charge in default or for the payment of any other
sum to which Lessor may become obligated by reason of Lessee's default, or to
compensate Lessor for any loss or damage which Lessor may suffer thereby. If
Lessor so uses or applies all or any portion of said deposit, Lessee shall
within ten (10) days after written demand therefor deposit cash with Lessor in
an amount sufficient to restore said deposit to the full amount hereinabove
stated and Lessee's failure to do so shall be a material breach of this Lease.
If the monthly rent shall, from time to time, increase during the term of this
Lease, Lessee shall thereupon deposit with Lessor additional security deposit
so that the amount of security deposit held by Lessor shall at all times bear
the same proportion to current rent as the original security deposit bears to
the original monthly rent set forth

- 1 -
<PAGE> 2
in paragraph 4 hereof. Lessor shall not be required to keep said deposit
separate from its general accounts. If Lessee performs all of Lessee's
obligations hereunder, said deposit, or so much thereof as has not theretofore
been applied by Lessor, shall be returned, without payment or interest or other
increment for its use, to Lessee (or, at Lessor's option, to the last assignee,
if any, of Lessee's interest hereunder) at the expiration of the term hereof,
and after Lessee has vacated the Premises. No trust relationship is created
herein between Lessor and Lessee with respect to said Security Deposit.

6. USE.

6.1 USE. The Premises shall be used and occupied only for
Production, storage, and shipping of laser discs and any other lawful uses. or
any other use which is reasonably comparable and for no other purpose.

6.2 COMPLIANCE WITH LAW.

(a) Lessor warrants to Lessee that the Premises, in its
state existing on the date that the Lease term commences, but without regard to
the use for which Lessee will use the Premises, does not violate any covenants
or restrictions of record, or any applicable building code, regulation or
ordinance in effect on such Lease term commencement date. In the event it is
determined that this warranty has been violated, then it shall be the
obligation of the Lessor, after written notice from Lessee, to promptly, at
Lessor's sole cost and expense, rectify any such violation. In the event
Lessee does not give to lessor written notice of the violation of this warranty
within six months from the date that the Lease term commences, the correction
of same shall be the obligation of the Lessee at Lessee's sole cost. The
warranty contained in this paragraph 6.2(a) shall be of no force or effect if,
prior to the date of this Lease, Lessee was the owner or occupant of the
Premises, and, in such event, Lessee shall correct any such violation at
Lessee's sole cost.

(b) Except as provided in paragraph 6.2(a), Lessee shall,
at Lessee's expense, comply promptly with all applicable statutes, ordinances,
rules, regulations, orders, covenants and restrictions of record, and
requirements in effect during the term or any part of the term hereof,
regulating the use by Lessee of the Premises. Lessee shall not use nor permit
the use of the Premises in any manner that will tend to create waste or a
nuisance or, if there shall be more than one tenant in the building containing
the Premises, shall tend to disturb such other tenants.

6.3 CONDITION OF PREMISES.

(a) Lessor shall deliver the Premises to Lessee clean and
free of debris on Lease commencement date (unless Lessee is already in
possession) and Lessor further warrants to Lessee that the plumbing, lighting,
air conditioning, heating, and loading doors in the Premises shall be in good
operating condition on the Lease commencement date. In the event that it is
determined that this warranty has been violated, then it shall be the
obligation of Lessor, after receipt of written notice from Lessee setting forth
with specificity the nature of the violation, to promptly, at Lessor's sole
cost, rectify such violation. Lessee's failure to give such written notice to
Lessor within thirty (30) days after the Lease commencement date shall cause
the conclusive presumption that Lessor has complied with all of Lessor's
obligations hereunder. The warranty contained in this paragraph 6.3(a) shall
be of no force or effect if prior to the date of this Lease, Lessee was the
owner or occupant of the Premises.

(b) Except as otherwise provided in this Lease, Lessee
hereby accepts the Premises in their condition existing as of the Lease
commencement date or the date that Lessee takes possession of the Premises,
whichever is earlier, subject to all applicable zoning, municipal, county and
state laws, ordinances and regulations governing and regulating the use of the
Premises, and any covenants or restrictions of record, and accepts this Lease
subject thereto and to all matters disclosed thereby and by any exhibits
attached hereto. Lessee acknowledges that neither Lessor nor Lessor's agent
has made any representation or warranty as to the present or future suitability
of the Premises for the conduct of Lessee's business.

- 2 -
<PAGE> 3
7. MAINTENANCE, REPAIRS AND ALTERATIONS.

7.1 LESSEE'S OBLIGATIONS. Lessee shall keep in good order,
condition and repair the Premises and every part thereof, structural and
non-structural, (whether or not such portion of the Premises requiring repair,
or the means of repairing the same are reasonably or readily accessible to
Lessee, and whether or not the need for such repairs occurs as a result of
Lessee's use, any prior use, the elements or the age of such portion of the
Premises) including, without limiting the generality of the foregoing, all
plumbing, heating, air conditioning, (Lessee shall procure and maintain, at
Lessee's expense, an air conditioning system maintenance contract) ventilating,
electrical, lighting facilities and equipment within the Premises, fixtures,
walls (interior and exterior), foundations, ceilings, roofs (interior and
exterior), floors, windows, doors, plate glass and skylights located within the
Premises, and all landscaping, driveways, parking lots, fences and signs
located on the Premises and sidewalks and parkways adjacent to the Premises.

7.2 SURRENDER. On the last day of the term hereof, or on any
sooner termination, Lessee shall deliver the Premises to lessor in the same
condition as when received, ordinary wear and tear excepted, free and clear of
debris. Lessee shall repair any damage to Premises occasioned by the
installation ore removal of Lessee's trade fixtures, furnishings and equipment.
Notwithstanding anything to the contrary otherwise stated in this Lease, Lessee
shall leave the air lines, power panels, electrical distribution systems,
lighting fixtures, space heaters, air conditioning, plumbing and fencing on the
Premises in good operating condition.

7.3 LESSOR'S RIGHTS. If Lessee fails to perform Lessee's
obligations under this Paragraph 7, or under any other paragraph of this Lease,
Lessor may at its option (but shall not be required to) enter upon the Premises
after ten (10) days' prior written notice to Lessee (except in the case of an
emergency, in which case no notice shall be required), perform such obligations
on Lessee's behalf and put the same in good order, condition and repair, and
the cost thereof together with interest thereon at the maximum rate then
allowable by law shall become due and payable as additional rental to Lessor
together with Lessee's next rental installment.

7.4 LESSOR'S OBLIGATIONS. Except for the obligations of Lessor
under Paragraph 6.2(a) and 6.3(a) (relating to Lessor's warranty), Paragraph 9
(relating to destruction of the Premises) and under Paragraph 14 (relating to
condemnation of the Premises), it is intended by the parties hereto that Lessor
have no obligation, in any manner whatsoever, to repair and maintain the
Premises nor the building located thereon nor the equipment therein, whether
structural or non-structural, all of which obligations are intended to be that
of the Lessee under Paragraph 7.1 hereof. Lessee expressly waives the benefit
of any statute now or hereinafter in effect which would otherwise afford Lessee
the right to make repairs at Lessor's expense or to terminate this Lease
because of Lessor's failure to keep the Premises in good order, condition and
repair.

7.5 ALTERATIONS AND ADDITIONS.

(a) Lessee shall not, without Lessor's prior written
consent make any alterations, improvements, additions, or Utility Installations
in, on or about the Premises, except for nonstructural alterations not
exceeding $2,500 in cumulative costs during the term of this Lease. In any
event, whether or not in excess of $2,500 in cumulative cost, Lessee shall make
no change or alteration to the exterior of the Premises nor the exterior of the
building(s) on the Premises without Lessor's prior written consent. As used in
this Paragraph 7.5 the term "Utility Installation" shall mean carpeting, window
coverings, air lines, power panels, electrical distribution systems, lighting
fixtures, space heaters, air conditioning, plumbing and fencing. Lessor may
require that lessee remove any or all of said alterations, improvements,
additions or Utility Installations at the expiration of the term, and restore
the Premises to their prior condition. Lessor may require Lessee to provide
Lessor, at Lessee's sole cost and expense, a lien and completion bond in an
amount equal to one and one-half times the estimated cost of such improvements,
to insure Lessor against any liability for mechanic's and materialmen's liens
and to insure completion of the work. Should Lessee make any alterations,
improvements, additions or Utility Installations without the prior approval of
Lessor, Lessor may require that Lessee remove any or all of the same.

- 3 -
<PAGE> 4
(b) Any alterations, improvements, additions or Utility
Installations in, or about the Premises that Lessee shall desire to make and
which requires the consent of the Lessor shall be presented to Lessor in
written form, with proposed detailed plans. If Lessor shall give its consent,
the consent shall be deemed conditioned upon Lessee acquiring a permit to do so
from appropriate governmental agencies, the furnishing of a copy thereof to
Lessor prior to the commencement of the work and the compliance by Lessee of
all conditions of said permit in a prompt and expeditious manner.

(c) Lessee shall pay, when due, all claims for labor or
materials furnished or alleged to have been furnished to or for Lessee at or
for use in the Premises, which claims are or may be secured by any mechanics'
or materialmen's lien against the Premises or any interest therein. Lessee
shall give Lessor not less than ten (10) days' notice prior to the commencement
of any work in the Premises, and Lessor shall have the right to post notices of
non-responsibility in or on the Premises as provided by law. If Lessee shall,
in good faith, contest the validity of any such lien, claim or demand, then
lessee shall, at its sole expense defend itself and Lessor against the same and
shall pay and satisfy any such adverse judgment that may be rendered thereon
before the enforcement thereof against the Lessor or the Premises, upon the
condition that if Lessor shall require, Lessee shall furnish to Lessor a surety
bond satisfactory to Lessor in an amount equal to such contested lien claim or
demand indemnifying Lessor against liability for the same and holding the
Premises free from the effect of such lien or claim. In addition, Lessor may
require Lessee to pay Lessor's attorneys fees and costs in participating in
such action if Lessor shall decide it is to its best interest to do so.

(d) Unless Lessor requires their removal, as set forth in
Paragraph 7.5(a), all alterations, improvements, additions and Utility
Installations (whether or not such Utility Installations constitute trade
fixtures of Lessee), which may be made on the Premises, shall become the
property of Lessor and remain upon and be surrendered with the Premises at the
expiration of the term. Notwithstanding the provisions of this Paragraph
7.5(d), Lessee's machinery and equipment, other than that which is affixed to
the Premises so that it cannot be removed without material damage to the
Premises, shall remain the property of Lessee and may be removed by Lessee
subject to the provisions of Paragraph 7.2.

8. INSURANCE INDEMNITY.

8.1 INSURING PARTY. As used in this Paragraph 8, the term
"insuring party" shall mean the party who has the obligation to obtain the
Property Insurance required hereunder. The insuring party shall be designated
in Paragraph 46 hereof. In the event Lessor is the insuring party, Lessor
shall also maintain the liability insurance described in paragraph 8.2 hereof,
in addition to, and not in lieu of, the insurance required to be maintained by
Lessee under said paragraph 8.2, but Lessor shall not be required to name
Lessee as an additional insured on such policy. Whether the insuring party is
the Lessor or the Lessee, Lessee shall, as additional rent for the Premises,
pay the cost of all insurance required hereunder, except for that portion of
the cost attributable to Lessor's liability insurance coverage in excess of
$1,000,000 per occurrence. If Lessor is the insuring party Lessee shall,
within ten (10) days following demand by Lessor, reimburse Lessor for the cost
of the insurance so obtained.

8.2 LIABILITY INSURANCE. Lessee shall, at Lessee's expense obtain
and keep in force during the term of this Lease a policy of Combined Single
Limit, Bodily Injury and Property Damage insurance insuring Lessor and Lessee
against any liability arising out of the ownership, use, occupancy or
maintenance of the Premises and all areas appurtenant thereto. Such insurance
shall be a combined single limit policy in an amount not less than $500,000 per
occurrence. The policy shall insure performance by Lessee of the indemnity
provisions of this Paragraph 8. The limits of said insurance shall not,
however, limit the liability of Lessee hereunder.

8.3 PROPERTY INSURANCE.

(a) The insuring party shall obtain and keep in force
during the term of this Lease a policy or policies of insurance covering loss
or damage to the Premises, in the amount of the full replacement value thereof,
as the same may exist from time to time, which replacement value is now
[$800,000], but in no event less than the total amount required by lenders
having liens on the Premises, against all perils included within the
classification of

- 4 -
<PAGE> 5
fire, extended coverage, vandalism, malicious mischief, flood (in the event
same is required by a lender having a lien on the Premises), and special
extended perils ("all risk" as such term is used in the insurance industry).
Said insurance shall provide for payment of loss thereunder to Lessor or to the
holders of mortgages or deeds of trust on the Premises. The insuring party
shall, in addition, obtain and keep in force during the term of this Lease a
policy of rental value insurance covering a period of one year, with loss
payable to Lessor, which insurance shall also cover all real estate taxes and
insurance costs for said period. A stipulated value or agreed amount
endorsement deleting the coinsurance provision of the policy shall be procured
with said insurance as well as an automatic increase in insurance endorsement
causing the increase in annual property insurance coverage by 2% per quarter.
If the insuring party shall fail to procure and maintain said insurance the
other party may, but shall not be required to, procure and maintain the same,
but at the expense of Lessee. If such insurance coverage has a deductible
clause, the deductible amount shall not exceed $1,000 per occurrence, and
Lessee shall be liable for such deductible amount.

(b) If the Premises are part of a larger building, or if
the Premises are part of a group of buildings owned by Lessor which are
adjacent to the Premises, then Lessee shall pay for any increase in the
property insurance of such other building or buildings if said increase is
caused by Lessee's acts, omissions, use or occupancy of the Premises.

(c) If the Lessor is the insuring party the Lessor will
not insure Lessee's fixtures, equipment or tenant improvements unless the
tenant improvements have become a part of the Premises under paragraph 7,
hereof. But if Lessee is the insuring party the Lessee shall insure its
fixtures, equipment and tenant improvements.

8.4 INSURANCE POLICIES. Insurance required hereunder shall be in
companies holding a "General Policyholders Rating" of at least B plus, or such
other rating as may be required by a lender having a lien on the Premises, as
set forth in the most current issue of "Best's Insurance Guide." The insuring
party shall deliver to the other party copies of policies of such insurance or
certificates evidencing the existence and amounts of such insurance with loss
payable clauses as required by this paragraph 8. No such policy shall be
cancelable or subject to reduction of coverage or other modification except
after thirty (30) days' prior written notice to Lessor. If Lessee is the
insuring party Lessee shall, at least thirty (30) days prior to the expiration
of such policies, furnish Lessor with renewals or "binders" thereof, or Lessor
may order such insurance and charge the cost thereof to Lessee, which amount
shall be payable by Lessee upon demand. Lessee shall not do or permit to be
done anything which shall invalidate the insurance policies referred to in
Paragraph 8.3. If Lessee does or permits to be done anything which shall
increase the cost of the insurance policies referred to in Paragraph 8.3, then
Lessee shall forthwith upon Lessor's demand reimburse Lessor for any additional
premiums attributable to any act or omission or operation of Lessee causing
such increase in the cost of insurance. If Lessor is the insuring party, and
if the insurance policies maintained hereunder cover other improvements in
addition to the Premises, Lessor shall deliver to Lessee a written statement
setting forth the amount of any such insurance cost increase and showing in
reasonable detail the manner in which it has been computed.

8.5 WAIVER OF SUBROGATION. Lessee and Lessor each hereby release
and relieve the other, and waive their entire right of recovery against the
other for loss or damage arising out of or incident to the perils insured
against under paragraph 8.3, which perils occur in, on or about the Premises,
whether due to the negligence of Lessor or Lessee or their agents, employees,
contractors and/or invitees. Lessee and Lessor shall, upon obtaining the
policies of insurance required hereunder, give notice to the insurance carrier
or carriers that the foregoing mutual waiver of subrogation is contained in
this Lease.

8.6 INDEMNITY. Lessee shall indemnify and hold harmless Lessor
from and against any and all claims arising from Lessee's use of the Premises,
or from the conduct of Lessee's business or from any activity, work or things
done, permitted or suffered by Lessee in or about the Premises or elsewhere and
shall further indemnify and hold harmless Lessor from and against any and all
claims arising from any breach or default in the performance of any obligation
on Lessee's part to be performed under the terms of this Lease, or arising from
any negligence of the Lessee, or any of the Lessee's agents, contractors, or
employees, and from and against all costs, attorneys' fees, expenses and
liabilities incurred in the defense of any such claim or any action or
proceeding brought thereon; and in case any action or proceeding be brought
against Lessor by reason of any such claim, Lessee upon notice from

- 5 -
<PAGE> 6
Lessor shall defend the same at Lessee's expense by counsel satisfactory to
Lessor. Lessee, as a material part of the consideration to Lessor, hereby
assumes all risk of damage to property or injury to persons, in, upon or about
the Premises arising from any cause and Lessee hereby waives all claims in
respect thereof against Lessor.

8.7 EXEMPTION OF LESSOR FROM LIABILITY. Lessee hereby agrees that
Lessor shall not be liable for injury to Lessee's business or any loss of
income therefrom or for damage to the goods, wares, merchandise or other
property of Lessee, Lessee's employees, invitees, customers, or any other
person in or about the Premises, nor shall Lessor be liable for injury to the
person of Lessee, Lessee's employees, agents or contractors, whether such
damage or injury is caused by or results from fire, steam, electricity, gas,
water or rain, or from the breakage, leakage, obstruction or other defects of
pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting
fixtures, or from any other cause, whether the said damage or injury results
from conditions arising upon the Premises or upon other portions of the
building of which the Premises are a part, or from other sources or places and
regardless of whether the cause of such damage or injury or the means of
repairing the same is inaccessible to Lessee. Lessor shall not be liable for
any damages arising from any act or neglect of any other tenant, if any, of the
building in which the Premises are located.

9. DAMAGE OR DESCRUCTION.

9.1 DEFINITIONS.

(a) "Premises Partial Damage" shall herein mean damage or
destruction to the Premises to the extent that the cost of repair is less than
50% of the then replacement cost of the Premises. "Premises Building Partial
Damage" shall herein mean damage or destruction to the building of which the
Premises are a part to the extent that the cost of repair is less than 50% of
the then replacement cost of such building as a whole.

(b) "Premises Total Destruction" shall herein mean damage
or destruction to the Premises to the extent that the cost of repair is 50% or
more of the then replacement cost of the Premises. "Premises Building Total
Destruction" shall herein mean damage or destruction to the building of which
the Premises are a part to the extent that the cost of repair is 50% or more of
the then replacement cost of such building as a whole.

(c) "Insured Loss" shall herein mean damage or
destruction which was caused by an event required to be covered by the
insurance described in paragraph 8.

9.2 PARTIAL DAMAGE -- INSURED LOSS. Subject to the provisions of
paragraphs 9.4, 9.5 and 9.6, if at any time during the term of this Lease there
is damage which is an Insured Loss and which falls into the classification of
Premises Partial Damage or Premises Building Partial Damage, then Lessor shall,
at Lessee's expense, repair such damage, but not Lessee's fixtures, equipment
or tenant improvements unless the same have become a part of the Premises
pursuant to Paragraph 7.5 hereof as soon as reasonably possible and this Lease
shall continue in full force and effect. Notwithstanding the above, if the
Lessee is the insuring party, and if the insurance proceeds received by Lessor
are not sufficient to effect such repair, Lessor shall give notice to lessee of
the amount required in addition to the insurance proceeds to effect such
repair. Lessee shall contribute the required amount to Lessor within ten days
after Lessee has received notice from Lessor of the shortage in the insurance.
When Lessee shall contribute such amount to Lessor, Lessor shall make such
repairs as soon as reasonably possible and this Lease shall continue in full
force and effect. Lessee shall in no event have any right to reimbursement for
any such amounts so contributed.

9.3 PARTIAL DAMAGE -- UNINSURED LOSS. Subject to the provisions
of Paragraphs 9.4, 9.5 and 9.6, if at any time during the term of this Lease
there is damage which is not an Insured Loss and which falls within the
classification of Premises Partial Damage or Premises Building Partial Damage,
unless caused by a negligent or willful act of Lessee (in which event Lessee
shall make the repairs at Lessee's expense), Lessor may at Lessor's option
either (i) repair such damage as soon as reasonably possible at Lessor's
expense, in which event this Lease shall continue in full force and effect, or
(ii) give written notice to Lessee within thirty (30) days after the date of
the occurrence of such damage of Lessor's intention to cancel and terminate
this Lease, as of the date of the occurrence of such damage. In the event
Lessor elects to give such notice of Lessor's intention to cancel and terminate
this Lease, Lessee

- 6 -
<PAGE> 7
shall have the right within ten (10) days after the receipt of such notice to
give written notice to lessor of Lessee's intention to repair such damage at
Lessee's expense, without reimbursement from Lessor, in which event this Lease
shall continue in full force and effect, and Lessee shall proceed to make such
repairs as soon as reasonably possible. If Lessee does not give such notice
within such 10-day period this Lease shall be cancelled and terminated as of
the date of the occurrence of such damage.

9.4 TOTAL DESTRUCTION. If at any time during the term of this
Lease there is damage, whether or not an Insured Loss, (including destruction
required by any authorized public authority), which falls into the
classification of Premises Total Destruction or Premises Building Total
Destruction, this Lease shall automatically terminate as of the date of such
total destruction.

9.5 DAMAGE NEAR END OF TERM.

(a) If at any time during the last six months of the term
of this Lease there is damage, whether or not an Insured Loss, which falls
within the classification of Premises Partial Damage, Lessor may at Lessor's
option cancel and terminate this Lease as of the date of occurrence of such
damage by giving written notice to Lessee of Lessor's election to do so within
30 days after the date of occurrence of such damage.

(b) Notwithstanding paragraph 9.5(a), in the event that
Lessee has an option to extend or renew this Lease, and the time within which
said option may be exercised has not yet expired, Lessee shall exercise such
option, if it is to be exercised at all, no later than 20 days after the
occurrence of an Insured Loss falling within the classification of Premises
Partial Damage during the last six months of the term of this Lease. If Lessee
duly exercises such option during said 20 day period, Lessor shall, at Lessor's
expense, repair such damage as soon as reasonably possible and this Lease shall
continue in full force and effect. If Lessee fails to exercise such option
during said 20 day period, then Lessor may at Lessor's option terminate and
cancel this Lease as of the expiration of said 20 day period by giving written
notice to Lessee of Lessor's election to do so within 10 days after the
expiration of said 20 day period, notwithstanding any term or provision in the
grant of option to the contrary.

9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES.

(a) In the event of damage described in paragraphs 9.2 or
9.3, and Lessor and Lessee repairs or restores the Premises pursuant to the
provisions of this Paragraph 9, the rent payable hereunder for the period
during which such damage, repair or restoration continues shall be abated in
proportion to the degree to which Lessee's use of the Premises is impaired.
Except for abatement of rent, if any, Lessee shall have no claim against Lessor
for any damage suffered by reason of any such damage, destruction, repair or
restoration.

(b) If Lessor shall be obligated to repair or restore the
Premises under the provisions of this Paragraph 9 and shall not commence such
repair or restoration within 90 days after such obligations shall accrue,
Lessee may at Lessee's option cancel and terminate this lease by giving Lessor
written notice of Lessee's election to do so at any time prior to the
commencement of such repair or restoration. In such event this Lease shall
terminate as of the date of such notice.

9.7 TERMINATION -- ADVANCE PAYMENTS. Upon termination of this
Lease pursuant to this Paragraph 9, an equitable adjustment shall be made
concerning advance rent and any advance payments made by Lessee to Lessor.
Lessor shall, in addition, return to Lessee so much of Lessee's security
deposit as has not theretofore been applied by Lessor.

9.8 WAIVER. Lessor and Lessee waive the provisions of any
statutes which relate to termination of leases when leased property is
destroyed and agree that such event shall be governed by the terms of this
Lease.

- 7 -
<PAGE> 8
10. REAL PROPERTY TAXES.

10.1 PAYMENT OF TAXES. Lessee shall pay the real property tax, as
defined in paragraph 10.2, applicable to the Premises during the term of this
Lease. All such payments shall be made at least ten (10) days prior to the
delinquency date of such payment. Lessee shall promptly furnish Lessor with
satisfactory evidence that such taxes have been paid. If any such taxes paid
by Lessee shall cover any period of time prior to or after the expiration of
the term hereof. Lessee's share of such taxes shall be equitably prorated to
cover only the period of time within the tax fiscal year during which this
Lease shall be in effect, and Lessor shall reimburse Lessee to the extent
required. If Lessee shall fail to pay any such taxes, Lessor shall have the
right to pay the same, in which case Lessee shall repay such amount to Lessor
with Lessee's next rent installment together with interest at the maximum rate
then allowable by law.

10.2 DEFINITION OF "REAL PROPERTY TAX". As used herein, "real
property tax" shall include any form of real estate tax or assessment, general,
special, ordinary or extraordinary, and any license fee, commercial rental tax,
improvement bond or bonds, levy or tax (other than inheritance, personal income
or estate taxes) imposed on the Premises by any authority having the direct or
indirect power to tax, including any city, state or federal government, or any
school, agricultural, sanitary, fire, street, drainage or other improvement
district thereof, as against any legal or equitable interest of Lessor in the
Premises or in the real property of which the Premises are a part, as against
Lessor's right to rent or other income therefrom, and as against Lessor's
business of leasing the Premises. The term "real property tax" shall also
include any tax, fee, levy, assessment or charge (i) in substitution of,
partially or totally, any tax, fee, levy, assessment or charge hereinabove
included within the definition of "real property tax," or (ii) the nature of
which was hereinbefore included within the definition of "real property tax,"
or (iii) which is imposed for a service or right not charged prior to June 1,
1978, or, if previously charged, has been increased since June 1, 1978, or (iv)
which is imposed as a result of a transfer, either partial or total, of
Lessor's interest in the Premises or which is added to a tax or charge
hereinbefore included within the definition of real property tax by reason of
such transfer, or (v) which is imposed by reason of this transaction, any
modifications or changes hereto, or any transfers hereof.

10.3 JOINT ASSESSMENT. If the Premises are not separately
assessed, Lessee's liability shall be an equitable proportion of the real
property taxes for all of the land and improvements included within the tax
parcel assessed, such proportion to be determined by Lessor from the respective
valuations assigned in the assessor's work sheets or such other information as
may be reasonably available. Lessor's reasonable determination thereof, in
good faith, shall be conclusive.

10.4 PERSONAL PROPERTY TAXES.

(a) Lessee shall pay prior to delinquency all taxes
assessed against and levied upon trade fixtures, furnishings, equipment and all
other personal property of Lessee contained in the Premises or elsewhere. When
possible, Lessee shall cause said trade fixtures, furnishings, equipment and
all other personal property to be assessed and billed separately from the real
property of Lessor.

(b) If any of Lessee's said personal property shall be
assessed with Lessor's real property, Lessee shall pay Lessor the taxes
attributable to Lessee within 10 days after receipt of a written statement
setting forth the taxes applicable to Lessee's property.

11. UTILITIES. Lessee shall pay for all water, gas, light, power,
telephone and other utilities and services supplied to the Premises, together
with any taxes thereon. If any such services are not separately metered to
Lessee, Lessee shall pay a reasonable proportion to be determined by Lessor of
all charges jointly metered with other premises.

12. ASSIGNMENT AND SUBLETTING.

12.1 LESSOR'S CONSENT REQUIRED. Lessee shall not voluntarily or by
operation of law assign, transfer, mortgage sublet, or otherwise transfer or
encumber all or any part of Lessee's interest in this Lease or in the Premises,
without Lessor's prior written consent, which Lessor shall not unreasonably
withhold, Lessor shall respond

- 8 -
<PAGE> 9
to Lessee's request for consent hereunder in a timely manner and any attempted
assignment, transfer, mortgage, encumbrance or subletting without such consent
shall be void, and shall constitute a breach of this Lease.

12.2 LESSEE AFFILIATE. Notwithstanding the provisions of paragraph
12.1 hereof, Lessee may assign or sublet the Premises, or any portion thereof,
without Lessor's consent, to any corporation which controls, is controlled by
or is under common control with Lessee, or to any corporation resulting from
the merger or consolidation with Lessee, or to any person or entity which
acquires all the assets of Lessee as a going concern of the business that is
being conducted on the Premises, provided that said assignee assumes, in full,
the obligations of Lessee under this Lease. Any such assignment shall not, in
any way, affect or limit the liability of Lessee under the terms of this Lease
even if after such assignment or subletting the terms of this Lease are
materially changed or altered without the consent of Lessee, the consent of
whom shall not be necessary.

12.3 NO RELEASE OF LESSEE. Regardless of Lessor's consent, no
subletting or assignment shall release Lessee of Lessee's obligation or alter
the primary liability of Lessee to pay the rent and to perform all other
obligations to be performed by Lessee hereunder. The acceptance of rent by
Lessor from any other person shall not be deemed to be a waiver by Lessor of
any provision hereof. Consent to one assignment or subletting shall not be
deemed consent to any subsequent assignment or subletting. In the event of
default by any assignee of Lessee or any successor Lessee, in the performance
of any of the terms hereof. Lessor may proceed directly against Lessee without
the necessity of exhausting remedies against said assignee. Lessor may consent
to subsequent assignments or subletting of this Lease or amendments or
modifications to this Lease with assignees [text missing from source copy of
lease]

12.4 ATTORNEY'S FEES. In the event Lessee shall assign or sublet
the Premises or request the consent of Lessor to any assignment or subletting
or if Lessee shall request the consent of Lessor for any act Lessee proposes to
do then Lessee shall pay Lessor's reasonable attorneys fees incurred in
connection therewith, such attorneys fees not to exceed $350.00 for each
request.

13. DEFAULTS; REMEDIES.

13.1 DEFAULTS. The occurrence of any one or more of the following
events shall constitute a material default and breach of this Lease by Lessee:

(a) The vacating or abandonment of the Premises by
Lessee.

(b) The failure by Lessee to make any payment of rent or
any other payment required to be made by Lessee hereunder, as and when due
where such failure shall continue for a period of three days after written
notice thereof from Lessor to Lessee. In the event that Lessor serves Lessee
with a Notice to Pay Rent or Quit pursuant to applicable Unlawful Detainer
statutes such Notice to Pay Rent or Quit shall also constitute the notice
required by this subparagraph.

(c) The failure by Lessee to observe or perform any of
the covenants, conditions or provisions of this Lease to be observed or
performed by Lessee, other than described in paragraph (b) above, where such
failure shall continue for a period of 30 days after written notice thereof
from Lessor to Lessee; provided, however, that if the nature of Lessee's
default is such that more than 30 days are reasonably required for its cure,
then Lessee shall not be deemed to be in default if Lessee commenced with such
cure within said 30-day period and thereafter diligently prosecutes such cure
to completion.

(d) (i) The making by Lessee of any general
arrangement or assignment for the benefit of creditors; (ii) Lessee becomes a
"debtor" as defined in 11 U.S.C. Section 101 or any successor statute thereto
(unless, in the case of a petition filed against Lessee, the same is dismissed
within 60 days); (iii) the appointment of a trustee or receiver to take
possession of substantially all of Lessee's assets located at the Premises or
of Lessee's Interest in this Lease, where possession is not restored to Lessee
within 30 days; or (iv) the attachment, execution or other judicial seizure of
substantially all of Lessee's assets located at the Premises or of Lessee's
interest in this Lease,

- 9 -
<PAGE> 10
where such seizure is not discharged within 30 days. Provided, however, in the
event that any provision of this paragraph 13.1(d) is contrary to any
applicable law, such provision shall be of no force or effect.

(e) The discovery by Lessor that any financial statement
given to Lessor by Lessee, any assignment of Lessee, any subtenant of Lessee,
any successor in interest of Lessee or any guarantor of Lessee's obligation
hereunder, and any of them, was materially false.

13.2 REMEDIES. In the event of any such material default or
breach by Lessee, Lessor may at any time thereafter, with or without notice or
demand and without limiting Lessor in the exercise of any right or remedy which
Lessor may have by reason of such default or breach:

(a) Terminate Lessee's right to possession of the
Premises by any lawful means, in which case this Lease shall terminate and
Lessee shall immediately surrender possession of the Premises to Lessor. In
such event Lessor shall be entitled to recover from Lessee all damages incurred
by Lessor by reason of Lessee's default including, but not limited to, the cost
of recovering possession of the Premises; expenses of reletting, including
necessary renovation and alteration of the Premises, reasonable attorney's
fees, and any real estate commission actually paid; the worth at the time of
award by the court having jurisdiction thereof of the amount by which the
unpaid rent for the balance of the term after the time of such aware exceeds
the amount of such rental loss for the same period that Lessee proves could be
reasonably avoided; that portion of the leasing commission paid by Lessor
pursuant to Paragraph 15 applicable to the unexpired term of this Lease.

(b) Maintain Lessee's right to possession in which case
this Lease shall continue in effect whether or not Lessee shall have abandoned
the Premises. In such event Lessor shall be entitled to enforce all of
Lessor's rights and remedies under this Lease, including the right to recover
the rent as it becomes due hereunder.

(c) Pursue any other remedy now or hereafter available to
Lessor under the laws or judicial decisions of the state wherein the Premises
are located. Unpaid installments of rent and other unpaid monetary obligations
of Lessee under the terms of this Lease shall bear interest from the date due
at the maximum rate then allowable by law.

13.3 DEFAULT BY LESSOR. Lessor shall not be in default unless
Lessor fails to perform obligations required of Lessor within a reasonable
time, but in no event later than thirty (30) days after written notice by
Lessee to Lessor and to the holder of any first mortgage or deed of trust
covering the Premises whose name and address shall have theretofore been
furnished to Lessee in writing, specifying wherein Lessor has failed to perform
such obligation; provided, however, that if the nature of Lessor's obligation
is such that more than thirty (30) days are required for performance then
Lessor shall not be in default if Lessor commences performance within such
30-day period and thereafter diligently prosecutes the same to completion.

13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by
Lessee to Lessor or rent and other sums due hereunder will cause Lessor to
incur costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited to,
processing and accounting charges, and late charges which may be imposed on
Lessor by the terms of any mortgage or trust deed covering the Premises.
Accordingly, if any installment of rent or any other sum due from Lessee shall
not be received by Lessor or Lessor's designee within ten (10) days after such
amount shall be due, then, without any requirement for notice to Lessee, Lessee
shall pay to Lessor a late charge equal to 6% of such overdue amount. The
parties hereby agree that such late charge represents a fair and reasonable
estimate of the costs Lessor will incur by reason of late payment by Lessee.
Acceptance of such late charge by Lessor shall in no event constitute a waiver
of Lessee's default with respect to such overdue amount, nor prevent Lessor
from exercising any of the other rights and remedies granted hereunder. In the
event that a late charge is payable hereunder, whether or not collected, for
three (3) consecutive installments of rent, then rent shall automatically
become due and payable quarterly in advance, rather than monthly,
notwithstanding paragraph 4 or any other provision of this Lease to the
contrary.

- 10 -
<PAGE> 11
13.5 IMPOUNDS. In the event that a late charge is payable
hereunder, whether or not collected, for three (3) installments of rent or any
other monetary obligation of Lessee under the terms of this Lease, Lessee shall
pay to Lessor, if Lessor shall so request, in addition to any other payments
required under this Lease, a monthly advance installment payable at the same
time as the monthly rent, as estimated by Lessor, for real property tax and
insurance expenses on the Premises which are payable by Lessee under the terms
of this Lease. Such fund shall be established to insure payment when due,
before delinquency, of any or all such real property taxes and insurance
premiums. If the amounts paid to Lessor by Lessee under the provisions of this
paragraph are insufficient to discharge the obligations of Lessee to pay such
real property taxes and insurance premiums as the same become due, Lessee shall
pay to Lessor, upon Lessor's demand, such additional sums necessary to pay such
obligations. All moneys paid to Lessor under this paragraph may be
intermingled with other moneys of Lessor and shall not bear interest. In the
event of a default in the obligations of Lessee to perform under this Lease,
then any balance remaining from funds paid to Lessor under the provisions of
this paragraph may, at the option of Lessor, be applied to the payment of any
monetary default of Lessee in lieu of being applied to the payment of real
property tax and insurance premiums.

14. CONDEMNATION. If the Premises or any portion thereof are taken under
the power of eminent domain, or sold under the threat of exercise of said power
(all of which are called "condemnation"), this Lease shall terminate as to the
part so taken as of the date the condemning authority takes title or
possession, whichever first occurs. If more than 10% of the floor area of the
building on the Premises, or more than 25% of the land area of the Premises
which is not occupied by any building, is taken by condemnation, Lessee may, at
Lessee's option, to be exercised in writing only within ten (10) days after
Lessor shall have given Lessee written notice of such taking (or in the absence
of such notice, within ten (10) days after the condemning authority shall have
taken possession) terminate this Lease as of the date the condemning authority
takes such possession. If Lessee does not terminate this Lease in accordance
with the foregoing, this Lease shall remain in full force and effect as to the
portion of the Premises remaining, except that the rent shall be reduced in the
proportion that the floor area of the building taken bears to the total floor
area of the building situated on the Premises. No reduction of rent shall
occur if the only area taken is that which does not have a building located
thereon. Any award for the taking of all or any part of the Premises under the
power of eminent domain or any payment made under threat of the exercise of
such power shall be the property of Lessor, whether such award shall be made as
compensation for diminution in value of the leasehold or for the taking of the
fee, or as severance damages; provided, however, that Lessee shall be entitled
to any award for loss of or damage to Lessee's trade fixtures and removable
personal property. In the event that this Lease is not terminated by reason of
such condemnation, Lessor shall to the extent of severance damages received by
Lessor in connection with such condemnation, repair any damage to the Premises
caused by such condemnation except to the extent that Lessee has been
reimbursed therefor by the condemning authority. Lessee shall pay any amount
in excess of such severance damages required to complete such repair.

15. BROKER'S FEE.

(a) Upon execution of this Lease by both parties, Lessor
shall pay to LASWELL COMPANY/GEORGE ELKINS COMPANY Licensed real estate
broker(s), a fee as set forth in a separate agreement between Lessor and said
broker(s), or in the event there is no separate agreement between Lessor and
said broker(s), the sum of $_____________________, for brokerage services
rendered by said broker(s) to Lessor in this transaction.

(b) Lessor further agrees that if Lessee exercises any
Option as defined in paragraph 39.1 of this Lease, which is granted to Lessee
under this Lease, or any subsequently granted option which is substantially
similar to an Option granted to Lessee under this Lease, or if Lessee acquires
any rights to the Premises or other premises described in this Lease which are
substantially similar to what Lessee would have acquired had an Option herein
granted to Lessee been exercised, or if Lessee remains in possession of the
Premises after the expiration of the term of this Lease after having failed to
exercise an Option, or if said broker(s) are the procuring cause of any other
lease or sale entered into between the parties pertaining to the Premises
and/or any adjacent property in which Lessor has an interest, then as to any of
said transactions, Lessor shall pay said broker(s) a fee in accordance with the
schedule of said broker(s) in effect at the time of execution of this Lease.

- 11 -
<PAGE> 12
(c) Lessor agrees to pay said fee not only on behalf of
Lessor but also on behalf of any person, corporation, association, or other
entity having an ownership interest in said real property or any party thereof,
when such fee is due hereunder. Any transferee of Lessor's interest in this
Lease, whether such transfer is by agreement or by operation of law, shall be
deemed to have assumed Lessor's obligation under this Paragraph 15. Said
broker shall be a third party beneficiary to the provisions of this Paragraph
15.

16. ESTOPPEL CERTIFICATE.

(a) Lessee shall at any time upon not less than ten (10)
days' written notice from Lessor execute, acknowledge and deliver to Lessor a
statement in writing (i) certifying that this Lease is unmodified and in full
force and effect (or, if modified, stating the nature of such modification and
certifying that this Lease, as so modified, is in full force and effect) and
the date to which the rent and other charges are paid in advance, if any, and
(ii) acknowledging that there are not, to Lessee's knowledge, any uncured
defaults on the part of Lessor hereunder, or specifying such defaults if any
are claimed. Any such statement may be conclusively relied upon by any
prospective purchaser or encumbrancer of the Premises.

(b) At Lessor's option, Lessee's failure to deliver such
statement within such time shall be a material breach of this Lease or shall be
conclusive upon Lessee (i) that this Lease is in full force and effect without
modifications except as may be represented by Lessor, (ii) that there are no
uncured defaults in Lessor's performance, and (iii) that not more than one
month's rent has been paid in advance or such failure may be considered by
Lessor as a default by Lessee under this Lease.

(c) If Lessor desires to finance, refinance, or sell the
Premises, or any part thereof, Lessee hereby agrees to deliver to any lender or
purchaser designated by Lessor such financial statements of Lessee as may be
reasonably required by such lender or purchaser. Such statements shall include
the past three years' financial statements of Lessee. All such financial
statements shall be received by Lessor and such lender or purchaser in
confidence and shall be used only for the purposes herein set forth.

17. LESSOR'S LIABILITY. The term "Lessor" as used herein shall mean
only the owner or owners at the time in question of the fee title or a lessee's
interest in a ground lease of the Premises, and except as expressly provided in
Paragraph 15, in the event of any transfer of such title or interest, Lessor
herein named (and in case of any subsequent transfers then the grantor) shall
be relieved from and after the date of such transfer of all liability as
respects Lessor's obligations thereafter to be performed, provided that any
funds in the hands of Lessor or the then grantor at the time of such transfer,
in which Lessee has an interest, shall be delivered to the grantee. The
obligations contained in this Lease to be performed by Lessor shall, subject as
aforesaid, be binding on Lessor's successors and assigns, only during their
respective periods of ownership.

18. SEVERABILITY. The invalidity of any provision of this Lease as
determined by a court of competent jurisdiction, shall in no way affect the
validity of any other provision hereof.

19. INTEREST ON PAST-DUE OBLIGATIONS. Except as expressly herein provided,
any amount due to Lessor not paid when due shall bear interest at the maximum
rate then allowable by law from the date due. Payment of such interest shall
not excuse or cure any default by Lessee under this Lease, provided, however,
that interest shall not be payable on late charges incurred by Lessee nor on any
amounts upon which late charges are paid by Lessee.

20. TIME OF ESSENCE. Time is of the essence.

21. ADDITIONAL RENT. Any monetary obligations of Lessee to Lessor under
the terms of this Lease shall be deemed to be rent.

22. INCORPORATION OF PRIOR AGREEMENTS; AMENDMENTS. This Lease contains
all agreements of the parties which respect to any matter mentioned herein. No
prior agreement or understanding pertaining to any such matter shall be
effective. This Lease may be modified in writing only, signed by the parties
in interest at the time of the modification.

- 12 -
<PAGE> 13
Except as otherwise stated in this Lease, Lessee hereby acknowledges that
neither the real estate broker listed in Paragraph 15 hereof nor any
cooperating broker on this transaction nor the lessor or any employees or
agents of any of said persons has made any oral or written warranties or
representations to Lessee relative to the condition or use by Lessee of said
Premises and Lessee acknowledges that Lessee assumes all responsibility
regarding the Occupational Safety Health Act, the legal use and adaptability of
the Premises and the compliance thereof with all applicable laws and
regulations in effect during the term of this Lease except as otherwise
specifically stated in this Lease.

23. NOTICES. Any notice required or permitted to be given hereunder shall
be in writing and may be given by personal delivery or by certified mail, and
if given personally or by mail, shall be deemed sufficiently given if addressed
to Lessee or to Lessor at the address noted below the signature of the
respective parties, as the case may be. Either party may by notice to the
other specify a different address for notice purposes except that upon Lessee's
taking possession of the Premises, the Premises shall constitute Lessee's
address for notice purposes. A copy of all notices required or permitted to be
given to Lessor hereunder shall be concurrently transmitted to such party or
parties at such addresses as Lessor may from time to time hereafter designate
by notice to Lessee.

24. WAIVERS. No waiver by Lessor or any provision hereof shall be deemed
a waiver of any other provision hereof or of any subsequent breach by Lessee of
the same or any provision. Lessor's consent to, or approval of, any act shall
not be deemed to render unnecessary the obtaining of Lessor's consent to or
approval of any subsequent act by Lessee. The acceptance of rent hereunder by
Lessor shall not be a waiver of any preceding breach by Lessee of any provision
hereof, other than the failure of Lessee to pay the particular rent so
accepted, regardless of Lessor's knowledge of such preceding breach at the time
of acceptance of such rent.

25. RECORDING. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a "short form" memorandum of this
Lease for recording purposes.

26. HOLDING OVER. If Lessee, with Lessor's consent, remains in possession
of the Premises or any part thereof after the expiration of the term hereof,
such occupancy shall be a tenancy from month to month upon all the provision of
this Lease pertaining to the obligations of Lessee, but all options and rights
of first refusal, if any, granted under the terms of this Lease shall be deemed
terminated and be of no further effect during said month to month tenancy.

27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies
at law or in equity.

28. COVENANTS AND CONDITIONS. Each provision of this Lease performable by
Lessee shall be deemed both a covenant and a condition.

29. BINDING EFFECT; CHOICE OF LAW. Subject to any provisions hereof
restricting assignment or subletting by Lessee and subject to the provisions of
Paragraph 17, this Lease shall bind the parties, their personal
representatives, successors and assigns. This Lease shall be governed by the
laws of the State wherein the Premises are located.

30. SUBORDINATION.

(a) This Lease, at Lessor's option, shall be subordinate
to any ground lease, mortgage, deed of trust, or any other hypothecation or
security now or hereafter placed upon the real property of which the Premises
are a part and to any and all advances made on the security thereof and to all
renewals, modifications, consolidations, replacements and extensions thereof.
Notwithstanding such subordination, Lessee's right to quiet possession of the
Premises shall not be disturbed if Lessee is not in default and so long as
Lessee shall pay the rent and observe and perform all of the provisions of this
Lease, unless this Lease is otherwise terminated pursuant to its terms. If any
mortgagee, trustee or ground lessor shall elect to have this Lease prior to the
lien of its mortgage, deed of trust or ground lease, and shall give written
notice thereof to Lessee, this Lease shall be deemed prior to such mortgage,
deed of trust, or ground lease, whether this Lease is dated prior or subsequent
to the date of said mortgage, deed of trust or ground lease or the date of
recording thereof.

- 13 -
<PAGE> 14
(b) Lessee agrees to execute any documents required to
effectuate an attornment, a subordination or to make this Lease prior to the
lien of any mortgage, deed of trust or ground lease, as the case may be.
Lessee's failure to execute such documents within 10 days after written demand
shall constitute a material default by Lessee hereunder, or, at Lessor's
option, Lessor shall execute such documents on behalf of Lessee as Lessee's
attorney-in-fact. Lessee does hereby make, constitute and irrevocably appoint
Lessor as Lessee's attorney-in-fact and in Lessee's name, place and stead, to
execute such documents in accordance with this paragraph 30(b).

31. ATTORNEY'S FEES. If either party or the broker named herein brings an
action to enforce the terms hereof or declare rights hereunder, the prevailing
party in any such action, on trial or appeal, shall be entitled to his
reasonable attorney's fees to be paid by the losing party as fixed by the
court. The provisions of this paragraph shall inure to the benefit of the
broker named herein who seeks to enforce a right hereunder.

32. LESSOR'S ACCESS. Lessor and Lessor's agents shall have the right to
enter the Premises except those areas designated as housing trade secrets at
reasonable times for the purpose of inspecting the same, showing the same to
prospective purchasers, lenders, or lessees, and making such alterations,
repairs, improvements or additions to the Premises or to the building of which
they are a part as Lessor may deem necessary or desirable. Lessor may at any
time place on or about the Premises any ordinary "For Sale" signs and Lessor
may at any time during the last 120 days of the term hereof place on or about
the Premises any ordinary "For Lease" signs, all without rebate of rent or
liability to Lessee. Lessee must be given notice of such inspection and Lessor
or Lessor's agent must be accompanied by an officer of Lessee during any and
all such inspections.

33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted,
either voluntarily or involuntarily, any auction upon the Premises without
first having obtained Lessor's prior written consent. Notwithstanding anything
to the contrary in this Lease, Lessor shall not be obligated to exercise any
standard of reasonableness in determining whether to grant such consent.

34. SIGNS. Lessee shall not place any sign upon the Premises without
Lessor's prior written consent except that Lessee shall have the right, without
the prior permission of Lessor to place ordinary and usual for rent or sublet
signs thereon. Installed signs may be bolted into grout but not into bricks.

35. MERGER. The voluntary or other surrender of this Lease by Lessee, or
a mutual cancellation thereof, or a termination by Lessor, shall not work a
merger, and shall, at the option of Lessor, terminate all or any existing
subtenancies or may, at the option of Lessor, operate as an assignment to
Lessor of any or all of such subtenancies.

36. CONSENTS. Except for paragraph 33 hereof, wherever in this Lease the
consent of one party is required to an act of the other party such consent
shall not be unreasonably withheld.

37. GUARANTOR. In the event that there is a guarantor of this Lease, said
guarantor shall have the same obligations as Lessee under this Lease.

38. QUIET POSSESSION. Upon Lessee paying the rent for the Premises and
observing and performing all of the covenants, conditions and provisions on
Lessee's part to be observed and performed hereunder, Lessee shall have quiet
possession of the Premises for the entire term hereof subject to all of the
provisions of this Lease. The individuals executing this Lease on behalf of
Lessor represent and warrant to Lessee that they are fully authorized and
legally capable of executing this Lease on behalf of Lessor and that such
execution is binding upon all parties holding an ownership interest in the
Premises.

39. OPTIONS.

39.1 DEFINITION. As used in this paragraph the word "Options" has
the following meaning: (1) the right or option to extend the term of this
Lease or to renew this Lease or to extend or renew any lease that Lessee has on
other property of Lessor; (2) the option or right of first refusal to lease the
Premises or the right of first offer to lease the Premises or the right of
first refusal to lease other

- 14 -
<PAGE> 15
property of Lessor or the right of first offer to lease other property of
Lessor; (3) the right or option to purchase the Premises, or the right of first
refusal to purchase the Premises, or the right of first offer to purchase the
Premises or the right or option to purchase other property of Lessor, or the
right of first refusal to purchase other property of Lessor or the right of
first offer to purchase other property of Lessor.

39.2 OPTIONS PERSONAL. Each Option granted to Lessee in this Lease
are personal to Lessee and may not be exercised or be assigned, voluntarily or
involuntarily, by or to any person or entity other than Lessee, provided,
however, the Option may be exercised by or assigned to any Lessee Affiliate as
defined in paragraph 12.2 of this Lease. The Options herein granted to Lessee
are not assignable separate and apart from this Lease.

39.3 MULTIPLE OPTIONS. In the event that Lessee has any multiple
options to extend or renew this Lease a later option cannot be exercised unless
the prior option to extend or renew this Lease has been so exercised.

39.4 EFFECT OF DEFAULT ON OPTIONS.

(a) Lessee shall have no right to exercise an Option,
notwithstanding any provision in the grant of Option to the contrary, (i)
during the time commencing from the date Lessor gives to Lessee a notice of
default pursuant to paragraph 13.1(b) or 13.1(c) and continuing until the
default alleged in said notice of default is cured, or (ii) during the period
of time commencing on the day after a monetary obligation to Lessor is due from
Lessee and unpaid (without any necessity for notice thereof to Lessee)
continuing until the obligation is paid, or (iii) at any time after an event of
default described in paragraphs 13.1(a), 13.1(d), or 13.1(e) (without any
necessity of Lessor to give notice of such default to Lessee), or (iv) in the
event that Lessor has given to Lessee three or more notices of default under
paragraph 13.1(b), where a late charge has become payable under paragraph 13.4
for each of such defaults, or paragraph 13.1(c), whether or not the defaults
are cured, during the 12 month period prior to the time that Lessee intends to
exercise the subject Option.

(b) The period of time within which an Option may be
exercised shall not be extended or enlarged by reason of Lessee's inability to
exercise an Option because of the provisions of paragraph 39.4(a).

(c) All rights of Lessee under the provisions of an
Option shall terminate and be of no further force or effect, notwithstanding
Lessee's due and timely exercise of the Option, if, after such exercise and
during the term of this Lease, (i) Lessee fails to pay to Lessor a monetary
obligation of Lessee for a period of 30 days after such obligation becomes due
(without any necessity of Lessor to give notice thereof to Lessee), or (ii)
Lessee fails to commence to cure a default specified in paragraph 13.1(c)
within 30 days after the date that Lessor gives notice to Lessee of such
default and/or Lessee fails thereafter to diligently prosecute said cure to
completion, or (iii) Lessee commits a default described in paragraph 13.1(a),
13.1(d) or 13.1(e) (without any necessity of Lessor to give notice of such
default to Lessee), or (iv) Lessor gives to Lessee three or more notices of
default under paragraph 13.1(b), where a late charge becomes payable under
paragraph 13.4 for each such default, or paragraph 13.1(c), whether or not the
defaults are cured.

40. MULTIPLE TENANT BUILDING. In the event that the Premises are part of
a larger building or group of buildings then Lessee agrees that it will abide
by, keep and observe all reasonable rules and regulations which Lessor may make
from time to time for the management, safety, care, and cleanliness of the
building and grounds, the parking of vehicles and the preservation of good
order therein as well as for the convenience of other occupants and tenants of
the building. The violations of any such rules and regulations shall be deemed
a material breach of this Lease by Lessee.

41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable
to Lessor hereunder does not include the cost of guard service or other
security measures, and that Lessor shall have not obligation whatsoever to
provide same. Lessee assumes all responsibility for the protection of Lessee,
its agents and invitees from acts of third parties.

- 15 -
<PAGE> 16
42. EASEMENTS. Lessor reserves to itself the right, from time to time, to
grants such easements, rights and dedications that Lessor deems necessary or
desirable, and to cause the recordation of Parcel Maps and restrictions, so
long as such easements, rights, dedications, Maps and restrictions do not
unreasonably interfere with the use of the Premises by Lessee. Lessee shall
sign any of the aforementioned documents upon request of Lessor and failure to
do so shall constitute a material breach of this Lease.

43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to
any amount or sum of money to be paid by one party to the other under the
provisions hereof, the party against whom the obligation to pay the money is
asserted shall have the right to make payment "under protest" and such payment
shall not be regarded as a voluntary payment, and there shall survive the right
on the part of said party to institute suit for recovery of such sum. If it
shall be adjudged that there was no legal obligation on the part of said party
to pay such sum or any part thereof, said party shall be entitled to recover
such sum or so much thereof as it was not legally required to pay under the
provisions of this Lease.

44. AUTHORITY. If Lessee is a corporation, trust, or general or limited
partnership, each individual executing this Lease on behalf of such entity
represents and warrants that he or she is duly authorized to execute and
deliver this Lease on behalf of said entity. If Lessee is a corporation, trust
or partnership, Lessee shall, within thirty (30) days after execution of this
Lease, deliver to Lessor evidence of such authority satisfactory to Lessor.

45. CONFLICT. Any conflict between the printed provisions of this Lease
and the typewritten or handwritten provisions shall be controlled by the
typewritten or handwritten provisions.

46. INSURING PARTY. The insuring party under this lease shall be the
Lessor.

47. ADDENDUM. Attached hereto is an addendum or addenda containing
paragraphs 48 through 54 which constitutes a part of this Lease.

See Addendum.

LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN AND, BY EXECUTION OF THIS LEASE, SHOW THEIR INFORMED
AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME
THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND
EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.

IF THIS LEASE HAS BEEN FILLED IN IT HAS BEEN PREPARED FOR SUBMISSION
TO YOUR ATTORNEY FOR HIS APPROVAL. NO REPRESENTATION OR
RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE
ASSOCIATION OR BY THE REAL ESTATE BROKER OR ITS AGENTS OR EMPLOYEES AS
TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS
LEASE OR THE TRANSACTION RELATING THERETO; THE PARTIES SHALL RELY
SOLELY UPON THE ADVICE OF THEIR OWN LEGAL COUNSEL AS TO THE LEGAL AND
TAX CONSEQUENCES OF THIS LEASE.

THE PARTIES HERETO HAVE EXECUTED THIS LEASE AT THE PLACE ON THE DATES
SPECIFIED IMMEDIATELY ADJACENT TO THEIR RESPECTIVE SIGNATURES.

Executed at Phillip Rossman & Ruth Rossman Trust
--------------------- ---------------------------------------

on By /s/ Ruth Rossman
------------------------------ ------------------------------------

Address By /s/ Phillip Rossman
-------------------------- -------------------------------------

- 16 -
<PAGE> 17
"LESSOR" (Corporate seal)
- --------------------------------

Executed at Comdisc Technologies, Inc.
--------------------- ---------------------------------------

on By /s/ Terrence Conway, Treasurer
----------------------------- -------------------------------------

Address By
------------------------- --------------------------------------

"LESSEE" (Corporate seal)
- --------------------------------

- 17 -
<PAGE> 18
ADDENDUM

1510 Cotner Avenue

48. While the lease is to start September 1, 1985, possession will be
delivered upon execution of leases. All terms and conditions will be in full
force and effect during this rent period.

49. Paragraph 7.1 is hereby amended by adding thereto the following:

"Notwithstanding anything to the contrary expressed or implied
in any party of this lease, the parties hereto agree that the
Lessee shall not be required or obligated to pay more than a
total of Ten Thousand Dollars ($10,000.00) for any and all
maintenance and repair of the leased premises during the term
of this lease."

50. Lessor will install a 12' x 12' steel overhead door at Lessor's sole
cost and expense. Lessee will have the right to approve the type of door
needed for their operation. The total cost is not to exceed $2,000.00.

51. Lessee shall, at its sole cost and expense, improve the two bathrooms
on the premises to comply with applicable building codes, remove any walls on
the premises as shown in the floor plan submitted by Lessee to Lessor and paint
those portions of the premises as are reasonably necessary. In no event shall
leasehold improvements performed by Lessee cost less than $5,000.00.

52. If during the term of this lease, the Lessee shall decide to sublease
the premises, then the Lessor shall be entitled to any excess rent over and
above the existing rental amount. Lessor may make a direct lease with any
prospective subtenant or assignee, in which event, Lessee shall be relieved of
any further liability or obligations under this lease, provided however, that
the new tenant has a financial statement that is equal to or greater than that
of the existing Lessee.

LESSOR: LESSEE:

/s/ PR RR /s/ TC
- ------------------------ -----------------------------------
Initial Initial
<PAGE> 19
ADDENDUM TO
STANDARD INDUSTRIAL LEASE

Dated July 10, 1985
By and Between Phillip Rossman and Ruth Rossman Trust-Lessor
and Comdisc Technologies, Inc. Lessee

53. RENT ESCALATIONS.

(a) On September 1, 1986, and every year thereafter; the monthly
rent payable under paragraph 4 of the attached Lease shall be adjusted by the
increase, if any, from the date this Lease commenced, in the Consumer Price
Index of the Bureau of Labor Statistics of the U.S. Department of Labor for
Urban Wage Earners and Clerical Workers, Los Angeles-Long Beach-Anaheim,
California (1967=100), "All Items", herein referred to as "C.P.I."

(b) The monthly rent payable in accordance with paragraph (a) of
this Addendum shall be calculated as follows: the rent payable for the first
month of the term of this Lease, as set forth in paragraph 4 of the attached
Lease, shall be multiplied by a fraction the numerator of which shall be the
C.P.I. of the month immediately preceding the effective date of the subject
rent escalation, and the denominator of which shall be the C.P.I. for the first
month of the Lease term. The sum so calculated shall constitute the new
monthly rent hereunder, but, in no event, shall such new monthly rent be less
than the rent payable for the month immediately preceding the date for rent
adjustment.

(c) In the event the compilation and/or publication of the C.P.I.
shall be transferred to any other governmental department or bureau or agency
or shall be discontinued, then the index most nearly the same as the C.P.I.
shall be used to make such calculation. In the event that Lessor and Lessee
cannot agree on such alternative index, then the matter shall be submitted for
decision to the American Arbitration Association in accordance with the then
rules of said association and the decision of the arbitrators shall be binding
upon the parties. The cost of said Arbitrators shall be paid equally by Lessor
and Lessee.

(d) In no event shall the monthly rental escalation exceed 8% per
annum during the term of this lease.

(e) Upon receipt of notice of Insurance Premium covering Fire and
Public Liability and/or Real Property Taxes, Lessee shall have five (5) working
days to reimburse Lessor. If Lessee fails to pay Insurance Premium and Real
Property Taxes within that time, there will be a penalty charge of $25.00 per
day from the day of receipt of notice.
<PAGE> 20
ADDENDUM TO
STANDARD INDUSTRIAL LEASE

Dated July 10, 1985
By and Between Phillip Rossman and Ruth Rossman Trust-Lessor
and Comdisc Technologies, Inc. Lessee

54. OPTION TO EXTEND.

A. Lessor hereby grants to Lessee the option to extend the term
of this Lease for a (5) year period commencing when the prior term expires upon
each and all of the following terms and conditions:

(i) Lessee gives to Lessor and Lessor receives written
notice of the exercise of the option to extend this Lease for said additional
term no earlier than nine months and no later than six months prior to the time
that the option period would commence if the option were exercised, time being
of the essence. If said notification of the exercise of said option is not so
given and received, this option shall automatically expire;

(ii) The provisions of paragraph 39, including the
provision relating to default of Lessee set forth in paragraph 39.4 of this
Lease are conditions of this Option;

(iii) All of the terms and conditions of this Lease except
where specifically modified by this option shall apply;

(iv) The monthly rent for each month of the option period
shall be calculated as follows:

(v) The fair market rental value for the option period
will be determined by the Laswell Company and George Elkins Company and an
outside Broker if necessary. There will be annual cost of living adjustments
as spelled out in paragraph 53 of this lease for the option period.
<PAGE> 21
EXTENSION OF LEASE

This Extension of Lease is entered by and between RUTH and PHILLIP L. ROSSMAN
TRUST as Lessor; and SPECTRATEK CORP., Assignee of Lessee, which Lease is dated
July 10 1985, with Lessor, and COMDISC TECHNOLOGIES, INC., as Lessee, covering
the real property commonly described as 1510 Cotner Avenue, Los Angeles, CA
90025, for the term ending August 31, 1990.

Said Lease has been assigned to Spectratek Corp., and extended to and including
August 31, 1993.

The parties hereto hereby agree to modify the terms and provisions of said
Lease in each of the following respects:

1. Said Lease is hereby extended for three (3) years, commencing
September 1, 1993, and ending August 31, 1996, subject to the
provisions of Article 26 of said Lease relative to "Holding Over."

2. The basic rent for said extended term shall be Four Thousand Two
Hundred Fifty Dollars ($4,250.00) per month.

3. Article 53 in the Addendum to said Lease, covering Rent Escalations,
shall apply to this Extension of Lease, provided that the base rent
applicable to Extension of Lease shall be $4,250.00, the monthly rent
for September 1993.

4. This Lease, as extended, is intended to be a net, net, net lease, so
that Assignee of Lessee shall be responsible for real property taxes,
extended property and public liability insurance, and maintenance of
the demised premises at the cost of said Assignee.

5. After the expiration of said Extension of Lease, said Lease shall
continue as a month-to-month tenancy in accordance with Article 26
(Holding Over) of said Lease, until six (6) months after Assignee
shall serve on Lessor written notice of its intention to terminate
said term of the Extension of Lease.

6. Lessor shall have the right to place a "For Rent" sign in a prominent
place at the demised premises and show the property to prospective
lessees on and after the date said Assignee serves the notice to
terminate the extension provided in Article 5 hereof.

7. Said Assignee agrees to inform Lessor, in writing, forthwith upon
learning of any hazardous substance, or a condition involving or
resulting from same, that has become associated in, on or under the
demised premises. Said Assignee shall hold Lessor free and harmless
from any loss of income and from the incurrence of any expense,
including without limitation, damages, claims, penalties, attorney's
fees and consultant's fees, arising out of or involving substances
brought onto the demised premises by Assignee, or any agent of
Assignee.

- 21 -
<PAGE> 22
8. Except as modified or augmented hereby, all the terms and conditions
of said Lease shall remain in full force and effect for the period of
the extension period provided hereby.

Dated: May 13, 1993 RUTH and PHILLIP L. ROSSMAN TRUST

By /s/ Ruth Rossman, Trustee
---------------------------------
RUTH ROSSMAN, Trustee
Lessor

Dated: May 31, 1993 SPECTRATEK CORP.

By /s/ Terrence Conway
--------------------------------
TERRENCE CONWAY

/s/ President Title
---------------------------------
Assignee of Lessee

- 22 -
<PAGE> 23
LASWELL
COMPANY
CORPORATE REAL ESTATE BROKERAGE # INVESTMENT PROPERTIES

COMMERCIAL # INDUSTRIAL # SALES # LEASING
11600 WASHINGTON PLACE, WEST LOS ANGELES, CALIFORNIA 90066

LEASE EXTENSION
1510 COTNER AVENUE
WEST LOS ANGELES, CALIFORNIA

This letter is in reference to the lease dated July 10, 1985 by and between
Ruth and Phillip L. Rossman Trust covering the property located at 1510 Cotner
Avenue, West Los Angeles, California.

The lease is hereby extended for an additional two years commencing September
1, 1990 and ending August 31, 1992. Thereafter, month to month unless either
party terminates. The monthly rental shall be $5,720.00 per month during the
entire two year extension.

The LESSOR or LESSEE mentioned herein shall have the right to terminate this
lease. Termination shall require six (6) months written notice effective on or
after September 1, 1991. The soonest that this lease could be terminated would
be March 1, 1992. The minimum lease term extension is for a period of eighteen
months and the maximum lease term would be for a period of twenty-four months.

Lessor will have the right to place a "For Lease" sign on the property upon the
Lessor receiving written notice to terminate this lease.

All other terms and conditions of the above referenced lease will remain in
full force and effect during the lease extension period.

AGREED: AGREED:

/s/ Terrence Conway /s/ Ruth Rossman, Trustee
- ---------------------------------- -----------------------------------
COMDISC TECHNOLOGIES, INC. RUTH AND PHILLIP L. ROSSMAN
TRUST

Dated: /s/ 7/2/90 Dated: /s/ July 3, 1990
--------------------------- ----------------------------

/s/ Terrence Conway
- ----------------------------------
SPECTRATEK CORP.

Dated: /s/ 7/2/90
----------------------------

- 23 -
<PAGE> 24
LASWELL
COMPANY
CORPORATE REAL ESTATE BROKERAGE # INVESTMENT PROPERTIES

COMMERCIAL # INDUSTRIAL # SALES # LEASING
11600 WASHINGTON PLACE, WEST LOS ANGELES, CALIFORNIA 90066

LEASE EXTENSION
1510 COTNER AVENUE
WEST LOS ANGELES, CALIFORNIA

This letter shall supersede the attached lease extension by and between
[/s/TC] [/s/ TC] SPECTRATEK CORP. as LESSEE and Ruth and Phillip L. Rossman
Trust as LESSOR covering the property located at 1510 Cotner Avenue, West Los
Angeles, California.

The lease is hereby extended for an additional three years commencing September
1, 1990 and ending on August 31, 1993. Thereafter, month to month unless
either party terminates. The monthly rental shall be $5,720.00 per month
commencing on September 1, 1990 and there shall be a cost of living adjustment
on February 1, 1992 in accordance with paragraph (53) of the original lease
dated July 10, 1985. The base month shall be September 1990. The base rental
amount shall be $5,720.00.

All other terms and conditions of the above reference lease shall remain in
full force and effect during the lease extension period.

LESSEE shall notify the LESSOR at least six months prior to the expiration of
the lease term to extend or terminate the lease. LESSOR shall have the right
to show the property six months prior to the expiration of the lease term if
LESSEE elects to terminate.

AGREED: AGREED:

- ----------------------------------- -------------------------------------
COMDISC TECHNOLOGIES, INC. (LESSEE) RUTH AND PHILLIP L. ROSSMAN
TRUST (LESSOR)

DATED: DATED:
------------------------------ -------------------------------

/s/ Terrence Conway
- -----------------------------
SPECTRATEK CORP. (LESSEE)

DATED: /s/ 8/7/90
-----------------------

- 24 -

<PAGE> 1
EXHIBIT 10.4

STANDARD SUBLEASE

AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION

1. PARTIES. This Sublease, dated, for reference purposes only, May 8,
1996, is made by and between LEGASYS LEGAL SYSTEMS, a California corporation
(herein called "Sublessor") and SPECTRATEK CORP. (herein called "Sublessee").

2. PREMISES. Sublessor hereby subleases to Sublessee and Sublessee
hereby subleases from Sublessor for the term, at the rental, and upon all of
the conditions set forth herein, that certain real property situated in the
County of Los Angeles State of California, commonly known as 1506-1508 Cotner
Avenue, W.L.A. and described as approximately 2,500 square feet of the easterly
half of a 5,000 square foot industrial building. Said real property, including
the land and all improvements thereon, is hereinafter called the "Premises".

3. TERM.

3.1 TERM. The term of this Sublease shall be for 12 Months
commencing on May 15, 1996 and ending on May 14, 1997 unless sooner terminated
pursuant to any provision hereof.

3.2 DELAY IN COMMENCEMENT. Notwithstanding said commencement
date, if for any reason Sublessor cannot deliver possession of the Premises to
Sublessee on said date, Sublessor shall not be subject to any liability
therefore, nor shall such failure affect the validity of this Lease or the
obligations of Sublessee hereunder or extend the term hereof, but in such case
Sublessee shall not be obligated to pay rent until possession of the Premises
is tendered to Sublessee, provided, however, that if Sublessor shall not have
delivered possession of the Premises within sixty (60) days from said
commencement date. Sublessee may, at Sublessee's option, by notice in writing
to Sublessor within ten (10) days thereafter, cancel this Sublease in which
event the parties shall be discharged from all obligations thereunder. If
Sublessee occupies the Premises prior to said commencement date such occupancy
shall be subject to all provisions hereof such occupancy shall not advance the
termination date and Sublessee shall pay rent for such period at the initial
monthly rates set forth below.

4. RENT. Sublessee shall pay to Sublessor as rent for the Premises equal
monthly payments of $2,175.00, in advance, on the 1st day of each month of the
term hereof. Sublessee shall pay Sublessor upon the execution hereof $3,262.50
as rent for May 15, 1996 thru June 30, 1996 Rent for any period during the term
hereof which is for less than one month shall be a prorata portion of the
monthly installment. Rent shall be payable in lawful money of the United
States to Sublessor at the address stated herein or to such other persons or at
such other places as Sublessor may designate in writing.

5. SECURITY DEPOSIT. Sublessee shall deposit with Sublessor upon
execution hereof $1,500.00 as security for Sublessee's faithful performance of
Sublessee's obligations hereunder. If Sublessee fails to pay rent or other
charges due hereunder, or otherwise defaults with respect to any provision of
this Sublease, Sublessor may use, apply or retain all or any portion of said
deposit for the payment of any rent or other charge in default or for the
payment of any other sum to which Sublessor may become obligated by reason of
Sublessee's default, or to compensate Sublessor for any loss or damage which
Sublessor may suffer thereby. If Sublessor so uses or applies all or any
portion of said deposit, Sublessee shall within ten (10) days after written
demand therefore deposit cash with Sublessor in an amount sufficient to restore
said deposit to the full amount hereinabove stated and Sublessee's failure to
do so shall be a material breach of this Sublease. Sublessor shall not be
required to keep said deposit separate from its general accounts. If Sublessee
performs all of Sublessee's obligations hereunder, said deposit, or so much
thereof as has not theretofore been applied by Sublessor, shall be returned,
without payment of interest or other increment for its use to Sublessee (or at
Sublessor's option, to the last assignee, if any, of Sublessee's interest
hereunder) at the expiration of the term hereof, and after Sublessee has
vacated the Premises. No trust relationship is created herein between
Sublessor and Sublessee with respect to said Security Deposit.

- 1 -
<PAGE> 2
6. USE.

6.1 USE. The Premises shall be used and occupied only for
production, storage and shipping of holograms and for no other purpose.

6.2 COMPLIANCE WITH LAW.

(a) Sublessor warrants to Sublessee that the Premises, in
its existing state but without regard to the use for which Sublessee will use
the Premises, does not violate any applicable building code regulation or
ordinance at the time that this Sublease is executed. In the event that it is
determined that this warranty has been violated, then it shall be the
obligation of the Sublessor after written notice from Sublessee, to promptly,
at Sublessor's sole cost and expense, rectify any such violation. In the event
that Sublessee does not give to Sublessor written notice of the violation of
this warranty within 1 year from the commencement of the term of this Sublease,
it shall be conclusively deemed that such violation did not exist and the
correction of the same shall be the obligation of the Sublessee.

(b) Except as provided in paragraph 6.2(a), Sublessee
shall, at Sublessee's expense, comply promptly with all applicable statutes,
ordinances, rules, regulations, orders, restrictions of record, and
requirements in effect during the term or any part of the term hereof
regulating the use by Sublessee of the Premises. Sublessee shall not use or
permit the use of the Premises in any manner that will tend to create waste or
a nuisance or if there shall be more than one tenant of the building containing
the Premises, which shall tend to disturb such other tenants.

6.3 CONDITION OF PREMISES. Except as provided in paragraph 6.2(a)
Sublessee hereby accepts the Premises in their condition existing as of the
date of the execution hereof, subject to all applicable zoning, municipal,
county and state laws, ordinances, and regulations governing and regulating the
use of the Premises, and accepts this Sublease subject thereto and to all
matters disclosed thereby and by any exhibits attached hereto. Sublessee
acknowledges that neither Sublessor nor Sublessor's agents have made any
representation or warranty as to the suitability of the Premises for the
conduct of Sublessee's business.

7. MASTER LEASE.

7.1 Sublessor is the lessee of the Premises by virtue of a lease,
hereinafter referred to as the "Master Lease", a copy of which is attached
hereto marked Exhibit 1, dated May 8, 1996 wherein Joanna K. Morgan is the
lessor, hereinafter referred to as the "Master Lessor"

7.2 This Sublease is and shall be at all times subject and
subordinate to the Master Lease

7.3 The terms, conditions and respective obligations of Sublessor
and Sublessee to each other under this Sublease shall be the terms and
conditions of the Master Lease except for those provisions of the Master Lease
which are directly contradicted by this Sublease in which event the terms of
this Sublease document shall control over the Master Lease. Therefore, for the
purposes of this Sublease, wherever in the Master Lease the word "Lessor" is
used it shall be deemed to mean the Sublessor herein and wherever in the Master
Lease the word "Lessee" is used it shall be deemed to mean the Sublessee
herein.

7.4 During the term of this Sublease and for all periods
subsequent for obligations which have arisen prior to the termination of this
Sublease, Sublessee does hereby expressly assume and agree to perform and
comply with, for the benefit of Sublessor and Master Lessor, each and every
obligation of Sublessor under the Master Lease except for the following
paragraphs which are excluded therefrom: ____________________________________
_____________________________________________________________________________

7.5 The obligations that Sublessee has assumed under paragraph 7.4
hereof are hereinafter referred to as the "Sublessee's Assumed Obligations".
The obligations that Sublessee has not assumed under paragraph 7.4 hereof are
hereinafter referred to as the "Sublessor's Remaining Obligations".

- 2 -
<PAGE> 3
7.6 Sublessee shall hold Sublessor free and harmless of and from
all liability, judgments, costs, damages, claims or demands, including
reasonable attorneys fees, arising out of Sublessee's failure to comply with or
perform Sublessee's Assumed Obligations.

7.7 Sublessor agrees to maintain the Master Lease during the
entire term of this Sublease, subject, however, to any earlier termination of
the Master Lease without the fault of the Sublessor, and to comply with or
perform Sublessor's Remaining Obligations and to hold Sublessee free and
harmless of and from all liability, judgments, costs, damages, claims or
demands arising out of Sublessor's failure to comply with or perform
Sublessor's Remaining Obligations.

7.8 Sublessor represents to Sublessee that the Master Lease is in
full force and effect and that no default exists on the part of any party to
the Master Lease.

8. ASSIGNMENT OF SUBLEASE AND DEFAULT.

8.1 Sublessor hereby assigns and transfers to Master Lessor the
Sublessor's interest in this Sublease and all rentals and income arising
therefrom, subject however to terms of Paragraph 8.2 hereof.

8.2 Master Lessor, by executing this document, agrees that until a
default shall occur in the performance of Sublessor's Obligations under the
Master Lease, that Sublessor may receive, collect and enjoy the rents accruing
under this Sublease. However, if Sublessor shall default in the performance of
its obligations to Master Lessor then Master Lessor may, at its option, receive
and collect, directly from Sublessee, all rent owing and to be owed under this
Sublease. Master Lessor shall not, by reason of this assignment of the
Sublease nor by reason of the collection of the rents from the Sublessee, be
deemed liable to Sublessee for any failure of the Sublessor to perform and
comply with Sublessor's Remaining Obligations.

8.3 Sublessor hereby irrevocably authorizes and directs Sublessee,
upon receipt of any written notice from the Master Lessor stating that a
default exists in the performance of Sublessor's obligations under the Master
Lease, to pay the Master Lessor the rents due and to become due under the
Sublease. Sublessor agrees that Sublessee shall have the right to rely upon
any such statement and request from Master Lessor, and that notice from or
claim from Sublessor to the contrary and Sublessor shall have no right or claim
against Sublessee for any such rents so paid by Sublessee.

8.4 No changes or modifications shall be made to this Sublease
without the consent of Master Lessor.

9. CONSENT OF MASTER LESSOR.

9.1 In the event that the Master Lease requires that Sublessor
obtain the consent of Master Lessor to any subletting by Sublessor then this
Sublease shall not be effective unless within 10 days of the date hereof,
Master Lessor signs this Sublease thereby giving its consents to this
Subletting.

9.2 In the event that the obligations of the Sublessor under the
Master Lease have been guaranteed by third parties then this Sublease, nor the
Master Lessor's consent, shall not be effective unless, within 10 days of the
date hereof, said guarantors sign this Sublease thereby giving guarantors
consent to this Sublease and the terms thereof.

9.3 In the event that Master Lessor does give such consent then

(a) Such consent will not release Sublessor of its
obligations or alter the primary liability of Sublessor to pay the rent and
perform and comply with all of the obligations of Sublessor to be performed
under the Master Lease.

- 3 -
<PAGE> 4
(b) The acceptance of rent by Master Lessor from
Sublessee or any one else liable under the Master Lease shall not be deemed a
waiver by Master Lessor of any provisions of the Master Lease.

(d) In the event of any default of Sublessor under the
Master Lease, Master Lessor may proceed directly against Sublessor, any
guarantors or any one else liable under the Master Lease or this Sublease
without first exhausting Master Lessor's remedies against any other person or
entity liable thereon to Master Lessor.

(e) Master Lessor may consent to subsequent sublettings
and assignments of the Mater Lease or this Sublease or any amendments or
modifications thereto without notifying Sublessor nor any one else liable under
the Master Lease and without obtaining their consent and such action shall not
relieve such persons from liability.

(f) In the event that Sublessor shall default in its
obligations under the Master Lease, then Master Lessor, at its option and
without being obligated to do so, may require Sublessee to attorn to Master
Lessor in which event Master Lessor shall undertake the obligations of
Sublessor under this Sublease from the time of the exercise of said option to
termination of this Sublease but Master Lessor shall not be liable for any
prepaid rents nor any security deposit paid by Sublessee, nor shall Master
Lessor be liable for any other defaults of the Sublessor under the Sublease.

9.4 The signatures of the Master Lessor and any Guarantors of
Sublessor at the end of this document shall constitute their consent to the
terms of this Sublease.

9.5 Master Lessor acknowledges that, to the best of Master
Lessor's knowledge, no default presently exists under the Master Lease of
obligations to be performed by Sublessor and that the Master Lease is in full
force and effect.

9.6 In the event that Sublessor defaults under its obligations to
be performed under the Master Lease by Sublessor, Master Lessor agrees to
deliver to Sublessee a copy of any such notice of default. Sublessee shall
have the right to cure any default of Sublessor described in any notice of
default within ten days after service of such notice of default on Sublessee.
If such default is cured by Sublessee then Sublessee shall have the right of
reimbursement and offset from and against Sublessor.

10. BROKERS FEE.

10.1 Upon execution hereof by all parties, Sublessor shall pay to
N/A a licensed real estate broker (herein called "Broker"), a fee as set
forth in a separate agreement between Sublessor and Broker, or in the event
there is no separate agreement between Sublessor and Broker, the sum of $ N/A
for brokerage services rendered by Broker to Sublessor in this transaction.

10.2 Sublessor agrees that if Sublessee exercises any option or
right of first refusal granted by Sublessor herein, or any option or right
substantially similar thereto, either to extend the term of this Sublease, to
renew this Sublease, to purchase the Premises, or to lease or purchase adjacent
property which Sublessor may own or in which Sublessor has an interest, or if
Broker is the procuring cause of any lease, sublease, or sale pertaining to the
Premises or any adjacent property which Sublessor may own or in which Sublessor
has an interest, then as to any of said transactions Sublessor shall pay to
Broker a fee, in cash, in accordance with the schedule of Broker in effect at
the time of the execution of this Sublease. Notwithstanding the foregoing,
Sublessor's obligation under this Paragraph 10.2 is limited to a transaction in
which Sublessor is acting as a sublessor, lessor or seller.

10.3 Master Lessor agrees, by it consent to this Sublease, that if
Sublessee shall exercise any option or right of first refusal granted to
Sublessor by Master Lessor in connection with this Sublease or any option or
right substantially similar thereto, either to extend the Master Lease, to
renew the Master Lease, to purchase the Premises

- 4 -
<PAGE> 5
or any part thereof or to lease or purchase adjacent property which Master
Lessor may own or in which Master Lessor has an interest, or if Broker is the
procuring cause of any other lease or sale entered into between Sublessee and
Master Lessor pertaining to the Premises, any part thereof, or any adjacent
property which Master Lessor owns or in which it has an interest, then as to
any of said transactions Master Lessor shall pay to Broker a fee, in cash, in
accordance with the schedule of Broker in effect at the time of its consent to
this Sublease.

10.4 Any fee due from Sublessor or Master Lessor hereunder shall be
due and payable upon the exercise of any option to extend or renew, as to any
extension or renewal, upon the execution of any new lease, as to a new lease
transaction or the exercise of a right to first refusal to lease, or at the
close of escrow, as to the exercise of any option to purchase or other sale
transaction.

10.5 Any transferee of Sublessor's interest in this Sublease, or of
Master Lessor's interest in the Master Lease, by accepting an assignment
thereof, shall be deemed to have assumed the respective obligations of
Sublessor or Master Lessor under this Paragraph 10. Broker shall be deemed to
be a third-party beneficiary of this paragraph 10.

11. ATTORNEY'S FEES. If any party or the Broker named herein brings an
action to enforce the terms hereof or to declare rights hereunder, the
prevailing party in any such action, on trial and appeal, shall be entitled to
his reasonable attorney's fees to be paid by the losing party as fixed by the
Court. The provision of this paragraph shall inure to the benefit of the
Broker named herein who seeks to enforce a right hereunder.

12. ADDITIONAL PROVISIONS. [If there are no additional provisions draw a
line from this point to the next printed word after the space left here. If
there are additional provisions place the same here.]

- 5 -
<PAGE> 6
If this Sublease has been filled in it has been prepared for submission to your
attorney for his approval. No representation or recommendation is made by the
real estate broker or its agents or employees as to the legal sufficiency,
legal effect, or tax consequences of this Sublease or the transaction relating
thereto.

Executed at LEGASYS LEGAL SYSTEMS
---------------------

on /s/ 5/9/96 By /s/ (signature illegible)
------------------------ ---------------------------

address By
-------------------- ----------------------------

- -----------------------------
"Sublessor" (Corporate seal)

Executed at SPECTRATEK CORP.
----------------- --------------------------------

on /s/ 5/9/96 By /s/ Terrence Conway
-------------------------- -----------------------------

address By
---------------------- ------------------------------

- ----------------------------- "Sublessee" (Corporate seal)

Executed at JOANNA K. MORGAN
-------------------- ---------------------------------

on By /s/ Joanna K Morgan
----------------------------- ----------------------------------

address By
------------------------- --------------------------------

- -------------------------------- "Master Lessor" (Corporate seal)

Executed at

on By
------------------------------ --------------------------------

address By
--------------------------- -------------------------------

- ---------------------------------- "Guarantors" (Corporate seal)

- 6 -
<PAGE> 7
ADDENDUM TO SUBLEASE DATED MAY 8, 1996
BY AND BETWEEN
SUBLESSOR, LEGASYS LEGAL SYSTEMS, A CALIFORNIA CORPORATION
AND
SPECTRATEK CORP.
FOR THE PREMISES LOCATED AT
1506-1508 COTNER AVENUE, LOS ANGELES

13. Spectratek Corp. shall maintain the electrical service under the name
until the Sublease expires or terminates by earlier cancellation. Legasys
shall pay a "fair portion" of said electrical expense, however it is mutually
understood that the major usage of electrical power will be consumed by
Spectratek's production. Spectratek shall provide Legasys with history of past
electrical bills from their prior occupancy of said space to help establish an
equitable proration of said electrical expense upon Legasys request.

14. All other utilities, such as gas, and water shall be prorated on a
50/50 basis.

15. Spectratek shall have common use of the restrooms during normal
business hours Monday through Friday.

16. Spectratek shall deposit with Legasys a Last Month's Rent in the
amount of $2,175.00 upon execution of said Sublease.

17. Spectratek shall have the right to terminate the Sublease early by
delivering to Legasys in writing with at least three months prior written
notice of their intention to cancel said Sublease.

18. The Sublease is subject to a new Master Lease, as specified under
paragraph 7.1 of said Sublease, being fully executed and contemporaneous
therewith a Termination of Lease Agreement regarding the Lease dated July 31,
1990 by and between Joanna K. Morgan as Lessor and Spectratek Corp. as Lessee
being fully executed.

19. During the term of the within Sublease, Spectratek shall have the
exclusive use of the two parking spaces located adjacent to the loading doors
of the demised premises.
<PAGE> 8
TERMINATION OF LEASE AGREEMENT

Joanna K. Morgan as Lessor and Spectrak Corp. as Lessee, hereby agree
to the early termination of that certain Standard Industrial Lease - Net dated
July 31, 1990 by and between Joanna K. Morgan as Lessor and Spectratek Corp. as
Lessee for the Premises located at 1506-1508 Cotner Avenue, West Los Angeles,
California, and that certain Extension of Lease executed and dated May 14,
1993, in connection therewith, subject to the following terms and conditions:

1. Joanna K. Morgan shall enter into a new Lease for the demised
premises located at 1506-1508 Cotner Avenue with Legasys Legal Systems and
Legasys shall accept possession thereunder;

2. Legasys Legal Systems as Sublessor shall enter into a Sublease
with Spectratek and the same shall be approved by Joanna K. Morgan;

3. Spectratek Corp. and Joanna K. Morgan shall agree upon
Spectratek's obligation regarding the repair of the roof of the demised
premises and the same shall be memorialized in a written agreement.

4. Joanna K. Morgan shall apply the existing security deposit
moneys towards the above roof expense obligation with any balance of funds to
be returned to Spectratek upon commencement of said Sublease.

5. Spectratek shall pay $763.54 to Joanna K. Morgan as the rent
differential from May 15, 1996 through August 31, 1996 that Joanna K. Morgan
would have realized had Spectratek completed the lease term.

Executed on the date set forth below at Los Angeles, California.

LESSOR:

_____________________________ Dated:___________________________
JOANNA K. MORGAN

LESSEE:

- 8 -
<PAGE> 9

SPECTRATEK CORP.

By /s/ Terrence Conway Dated: /s/ 5/9/96
------------------- ------------
TERRENCE CONWAY

- 9 -
<PAGE> 10
EXHIBIT 10.4

STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE -- GROSS

AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION

1. BASIC PROVISIONS ("BASIC PROVISIONS")

1.1 PARTIES: This Lease ("LEASE"), dated for reference purposes
only, May 8, 1996, is made by and between JOANNA K. MORGAN ("LESSOR") and
LEGASYS LEGAL SYSTEMS, INC., a California corporation ("LESSEE") (collectively
the "PARTIES," or individually a "PARTY").

1.2 PREMISES: That certain real property, including all
improvements therein or to be provided by Lessor under the terms of this Lease,
and commonly known by the street address of 1506-1508 Cotner Avenue, Los
Angeles, located in the County of Los Angeles, State of California and
generally described as (describe briefly the nature of the property) a brick
industrial building consisting of approximately 5,000 square feet with front
and rear parking ("PREMISES"). (See Paragraph 2 for further provisions.)

1.3 TERM: Three (3) years and -0- months ("ORIGINAL TERM")
commencing May 15, 1996 ("COMMENCEMENT DATE") and ending May 14, 1999
("EXPIRATION DATE"). (See Paragraph 3 for further provisions.)

1.4 EARLY POSSESSION: Not Applicable ("EARLY POSSESSION DATE").
(See Paragraphs 3.2 and 3.3 for further provisions.)

1.5 BASE RENT: $4,350.00 per month ("BASE RENT"), payable on the
first day of each month commencing May 15, 1996, with rental prepaid for the
period May 15, 1996 through June 30, 1996, as set forth below. Base rent shall
be subject to the increases set forth in the Addendum hereto. (See Paragraph 4
for further provisions.)

[X] If this box is checked, there are provisions in this Lease for the Base
Rent to be adjusted.

1.6 BASE RENT PAID UPON EXECUTION: $Ten Thousand Thirty-Seven and
50/100 Dollars ($10,037.50) as Base Rent for the periods as follows: $2,175.00
for 5/15/96 - 5/31/96; $3,262.50 for 6/1/96 - 6/30/96; and $4,600.00 for
4/15/99 - 5/14/99

1.7 SECURITY DEPOSIT: $3,000.00 ("SECURITY DEPOSIT"). (See
Paragraph 5 for further provisions.)

1.8 PERMITTED USE: Office, Warehouse, Sales and repair of
computers and other lawfully related uses (See Paragraph 6 for further
provisions.)

1.9 INSURING PARTY: Lessor is the "INSURING PARTY."
$_______________ is the "BASE PREMIUM." (See Paragraph 8 for further
provisions.)

ZAMEL & ASSOCIATES represents

[ ] Lessor exclusively ("LESSOR'S BROKER"); [x] both Lessor and Lessee, and

Not Applicable represents

Lessee exclusively ("LESSEE'S BROKER"); [ ] both Lessor and Lessee. (See
Paragraph 15 for further provisions.)

- 10 -
<PAGE> 11
1.11 GUARANTOR. The obligations of the Lessee under this Lease are to be
guaranteed by Not Applicable ("GUARANTOR"). (See Paragraph 37 for further
provisions.)

1.12 ADDENDA. Attached hereto is an Addendum or Addenda consisting
of Paragraphs 49 thallgof5which constitute a part of this Lease.

2. PREMISES.

2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby
leases from Lessor, the Premises, for the term, at the rental, and upon all of
the terms, covenants and conditions set forth in this Lease. Unless otherwise
provided herein, any statement of square footage set forth in this Lease, or
that may have been used in calculating rental, is an approximation which Lessor
and Lessee agree is reasonable and the rental based thereon is not subject to
revision whether or not the actual square footage is more or less.

2.2 CONDITION. Lessor shall deliver the Premises to Lessee clean
and free of debris on the Commencement Date and warrants to Lessee that the
existing plumbing, fire sprinkler system, lighting, air conditioning, heating,
and loading doors, if any, in the Premises, other than those constructed by
Lessee, shall be in good operating condition on the Commencement Date. If a
non-compliance with warranty exists as of the Commencement Date, Lessor shall,
except as otherwise provided in this Lease, promptly after receipt of written
notice form Lessee setting forth with specificity the nature and extent of such
non-compliance, rectify same at Lessor's expense. If Lessee does not give
Lessor written notice of a non-compliance with this warranty within ninety (90)
days after the Commencement Date, correction of that non- compliance shall be
the obligation of Lessee at Lessee's sole cost and expense.

2.3 COMPLIANCE WITH COVENANTS, RESTRICTIONS AND BUILDING CODE.
Lessor warrants to Lessee that the improvements on the Premises comply with all
applicable covenants or restrictions of record and applicable building codes,
regulations and ordinances in effect on the Commencement Date. Said warranty
does not apply to the use to which Lessee will put the Premises or to any
Alterations or Utility Installations (as defined in Paragraph 7.3(a)) made or
to be made by Lessee. If the Premises do not comply with said warranty, Lessor
shall, except as otherwise provided in this Lease, promptly after receipt of
written notice from Lessee setting forth with specificity the nature and extent
of such non-compliance, rectify the same at Lessor's expense. If Lessee does
not give Lessor written notice of a non-compliance with this warranty within
six (6) months following the Commencement Date, correction of that
non-compliance shall be the obligation of Lessee at Lessee's sole cost and
expense.

2.4 ACCEPTANCE OF PREMISES. Lessee hereby acknowledges: (a) that
it has been advised by the Brokers to satisfy itself with respect to the
condition of the Premises (including but not limited to the electrical and fire
sprinkler systems, security, environmental aspects, compliance with Applicable
Law, as defined in Paragraph 6.3) and the present and future suitability of the
Premises for Lessee's intended use, (b) that Lessee has made such investigation
as it deems necessary with reference to such matters and assumes all
responsibility therefor as the same relate to Lessee's occupancy of the
Premises and/or the term of this Lease, and (c) that neither Lessor, nor any of
LESsor's agents, has made any oral or written representations or warranties
with respect to the said matters other than as set forth in this Lease.

2.5 LESSEE PRIOR OWNER/OCCUPANT. The warranties made by Lessor in
this Paragraph 2 shall be of no force or effect if immediately prior to the
date set forth in Paragraph 1.1 Lessee was the owner or occupant of the
Premises. In such event, Lessee shall, at Lessee's sole cost and expense,
correct any non-compliance of the Premises with said warranties.

3. TERM.

3.1 TERM. The Commencement Date, Expiration Date and Original
Term of this Lease are as specified in Paragraph 1.3.

- 11 -
<PAGE> 12
3.2 EARLY POSSESSION. If Lessee totally or partially occupies the
Premises prior to the Commencement Date, the obligation to pay Base Rent shall
be abated for the period of such early possession. All other terms of this
Lease, however, shall be in effect during such period. Any such early
possession shall not affect nor advance the Expiration Date of the Original
Term.

4. RENT.

4.1 BASE RENT. Lessee shall cause payment of Base Rent and other
rent or charges, as the same may be adjusted from time to time, to be received
by Lessor in lawful money of the United States, without offset or deduction, on
or before the day on which it is due under the terms of this Lease. Base Rent
and all other rent and charges for any period during the term hereof which is
for less than one (1) full calendar month shall be prorated based upon the
actual number of days of the calendar month involved. Payment of Base Rent and
other charges shall be made to Lessor at its address stated herein or to such
other persons or at such other addresses as Lessor may from time to time
designate in writing to Lessee.

5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution
hereof the Security Deposit set forth in Paragraph 1.7 as security for Lessee's
faithful performance of Lessee's obligations under this Lease. If Lessee fails
to pay Base Rent or other rent or charges due hereunder, or otherwise Defaults
under this Lease (as defined in Paragraph 13.1), Lessor may use, apply or
retain all or any portion of said Security Deposit for the payment of any
amount due Lessor or to reimburse or compensate Lessor for any liability, cost,
expense, loss or damage (including attorneys' fees) which Lessor may suffer or
incur by reason thereof. If Lessor uses or applies all or any portion of said
Security Deposit, Lessee shall within ten (10) days after written request
therefor deposit moneys with Lessor sufficient to restore said Security Deposit
to the full amount required by this Lease. Any time the Base Rent increases
during the term of this Lease, Lessee shall, upon written request from Lessor,
deposit additional moneys with Lessor sufficient to maintain the same ratio
between the Security Deposit and the Base Rent as those amounts are specified
in the Basic Provisions. Lessor shall not be required to keep all or any part
of the Security Deposit separate from its general accounts. Lessor shall, at
the expiration or earlier termination of the term hereof and after Lessee has
vacated the Premises, return to Lessee (or, at Lessor's option, to the last
assignee, if any, of Lessee's interest herein), that portion of the Security
Deposit not used or applied by Lessor. Unless otherwise expressly agreed in
writing by Lessor, no part of the Security Deposit shall be considered to be
held in trust, to bear interest or other increment for its use, or to be
prepayment for any moneys to be paid by Lessee under this Lease.

6. USE.

6.1 USE. Lessee shall use and occupy the Premises only for the
purposes set forth in Paragraph 1.8, or any other use which is comparable
thereto, and for no other purpose. Lessee shall not use or permit the use of
the Premises in a manner that creates waste or a nuisance, or that disturbs
owners and/or occupants of, or causes damage to, neighboring premises or
properties. Lessor hereby agrees to not unreasonably withhold or delay its
consent to any written request by Lessee, Lessee's assignees or subtenants, and
by prospective assignees and subtenants of the Lessee, its assignees and
subtenants, for a modification of said permitted purpose of which the premises
may be used or occupied, so long as the same will not impair the structural
integrity of the improvements on the Premises, the mechanical or electrical
systems therein, is not significantly more burdensome to the Premises and the
improvements thereon, and is otherwise permissible pursuant to this Paragraph
6. If Lessor elects to withhold such consent, Lessor shall within five (5)
business days give a written notification of same, which notice shall include
an explanation of Lessor's reasonable objections to the change in use.

6.2 HAZARDOUS SUBSTANCES.

- 12 -
<PAGE> 13
or (iii) a basis for liability of Lessor to any governmental agency or third
party under any applicable statute or common law theory. Hazardous Substance
shall include, but not be limited to, hydrocarbons, petroleum, gasoline, crude
oil or any products, by-products or fractions thereof. Lessee shall not engage
in any activity in, on or about the Premises which constitutes a Reportable Use
(as hereinafter defined) of Hazardous Substances without the express prior
written consent of Lessor and compliance in a timely manner (at Lessee's sole
cost and expense) with all Applicable Law (as defined in Paragraph 6.3).
"REPORTABLE USE" shall mean (i) the installation or use of any above or below
ground storage tank, (ii) the generation, possession, storage, use,
transportation, or disposal of a Hazardous Substance that requires a permit
from, or with respect to which a report, notice, registration or business plan
is required to be filed with, any governmental authority. Reportable Use shall
also include Lessee's being responsible for the presence in, on or about the
Premises of a Hazardous Substance with respect to which any Applicable Law
requires that a notice be given to persons entering or occupying the Premises
or neighboring properties. Notwithstanding the foregoing, Lessee may, without
Lessor's prior consent, but in compliance with all Applicable Law, use any
ordinary and customary materials reasonably required to be used by Lessee in
the normal course of Lessee's business permitted on the Premises, so long as
such use is not a Reportable Use and does not expose the Premises or
neighboring properties to any meaningful risk of contamination or damage or
expose Lessor to any liability therefor. In addition, Lessor may (but without
any obligation to do so) condition its consent to the use or presence of any
Hazardous Substance, activity or storage tank by Lessee upon Lessee's giving
Lessor such additional assurances as Lessor, in its reasonable discretion,
deems necessary to protect itself, the public, the Premises and the environment
against damage, contamination or injury and/or liability therefrom or therefor,
including, but not limited to, the installation (and removal on or before Lease
expiration or earlier termination) of reasonably necessary protective
modifications to the Premises (such as concrete encasements) and/or the deposit
of an additional Security Deposit under Paragraph 5 hereof.

(b) DUTY TO INFORM LESSOR. If Lessee knows, or has
reasonable cause to believe, that a Hazardous Substance, or a condition
involving or resulting from same, has come to be located in, on, under or about
the Premises, other than as previously consented to by Lessor, Lessee shall
immediately give written notice of such fact to Lessor. Lessee shall also
immediately give Lessor a copy of any statement, report, notice, registration,
application, permit, business plan, license, claim, action or proceeding given
to, or received from, any governmental authority or private party, or persons
entering or occupying the Premises, concerning the presence, spill, release,
discharge of, or exposure to, any Hazardous Substance or contamination in, on,
or about the Premises, including but not limited to all such documents a may be
involved in any Reportable Uses involving the Premises.

(c) INDEMNIFICATION. Lessee shall indemnify, protect,
defend and hold Lessor, its agents, employees, lenders and ground lessor, if
any, and the Premises, harmless from and against any and all loss of rents
and/or damages, liabilities, judgments, costs, claims, liens, expenses,
penalties, permits and attorney's and consultant's fees arising out of or
involving any Hazardous Substance or storage tank brought onto the Premises by
or for Lessee or under Lessee's control. Lessee's obligations under this
Paragraph 6 shall include, but not be limited to, the effects of any
contamination or injury to person, property or the environment created or
suffered by Lessee, and the cost of investigation (including consultant's and
attorney's fees and testing), removal, remediation, restoration and/or
abatement thereof, or of any contamination therein involved, and shall survive
the expiration or earlier termination of this Lease. No termination,
cancellation or release agreement entered into by Lessor and Lessee shall
release Lessee from its obligations under this Lease with respect to Hazardous
Substances or storage tanks, unless specifically so agreed by Lessor in writing
at the time of such agreement.

- 13 -
<PAGE> 14
any previously existing policy. Lessee shall, within five (5) days after
receipt of Lessor's written request, provide Lessor with copies of all
documents and information, including, but not limited to, permits,
registrations, manifests, applications, reports and certificates, evidencing
Lessee's compliance with any Applicable Law specified by Lessor, and shall
immediately upon receipt, notify Lessor in writing (with copies of any
documents involved) of any threatened or actual claim, notice, citation,
warning, complaint or report pertaining to or involving failure by Lessee or
the Premises to comply with any Applicable Law.

6.4 INSPECTION; COMPLIANCE. Lessor and Lessor's Lender(s) (as
defined in Paragraph 8.3(a)) shall have the right to enter the Premises at any
time, in the case of an emergency, and otherwise at reasonable times, for the
purpose of inspecting the condition of the Premises and for verifying
compliance by Lessee with this Lease and all Applicable Laws (as defined in
Paragraph 6.3), and to employ experts and/or consultants in connection
therewith and/or to advise Lessor with respect to Lessee's activities,
including but not limited to the installation, operation, use, monitoring,
maintenance, or removal of any Hazardous Substance or storage tank on or from
the Premises. The costs and expenses of any such inspections shall be paid by
the party requesting same, unless a Default or Breach of this Lease, violation
of Applicable Law, or a contamination, caused or materially contributed to by
Lessee is found to exist or be imminent, or unless the inspection is requested
or ordered by a governmental authority as the result of any such existing or
imminent violation or contamination. In any such case, Lessee shall upon
request reimburse Lessor or Lessor's Lender, as the case may be, for the costs
and expenses of such inspections.

7. MAINTENANCE; REPAIRS; UTILITY INSTALLATIONS; TRADE FIXTURES AND
ALTERATIONS.

7.1 LESSEE'S OBLIGATIONS.

(a) Subject to the provisions of Paragraphs 2.2 (Lessor's
warranty as to condition), 2.3 (Lessor's warranty as to compliance with
covenants, etc.) _______________________________________________ (Lessor's
obligations to repair), 9 (damage and destruction), and 14 (condemnation),
Lessee shall, at Lessee's sole cost and expense and at all times, keep the
Premises and every part thereof in good order, condition and repair, (whether
or not such portion of the Premises requiring repair, or the means of repairing
the same, are reasonably or readily accessible to Lessee, and whether or not
the need for such repairs occurs as a result of Lessee's use and prior use, the
elements or the age of such portion of the Premises), including, without
limiting the generality of the foregoing, all equipment or facilities serving
the Premises, such as plumbing, heating, air conditioning, ventilating,
electrical, lighting facilities, boilers, fired or unfired pressure vessels,
fixtures, walls (interior and exterior), ceilings, floors, windows, doors,
plate glass, skylights, landscaping, retaining walls, signs, located in, on,
about, or adjacent to the Premises, but excluding foundations, the exterior
roof and the structural aspects of the Premises. Lessee shall not cause or
permit any Hazardous Substance to be spilled or released in, on, under or about
the Premises (including through the plumbing or sanitary sewer system) and
shall promptly, at Lessee's expense, take all investigatory and/or remedial
action reasonably recommended, whether or not formally ordered or required, for
the cleanup of any contamination of, and for the maintenance, security and/or
monitoring of, the Premises, the elements surrounding same, or neighboring
properties, that was caused or materially contributed to by Lessee, or
pertaining to or involving any Hazardous Substance and/or storage tank brought
onto the Premises by or for Lessee or under its control. Lessee, in keeping
the Premises in good order, condition and repair, shall exercise and perform
good maintenance practices. Lessee's obligations shall include restorations,
replacements or renewals when necessary to keep the Premises and all
improvement thereon or a part thereof in good order, condition and state of
repair.

(b) Lessee shall, at Lessee's sole cost and expense,
procure and maintain contracts, with copies to Lessor, in customary form and
substance for and with contractors specializing and experienced in, the
inspection, maintenance and service of the following equipment and
improvements, if any, located on the Premises: (i) heating, air conditioning
and ventilation equipment, (ii) boiler, fired or unfired pressure vessels,
(iii) fire sprinkler and/or standpipe and hose or other automatic fire
extinguishing systems, including fire alarm and/or smoke detection, (iv)
landscaping and irrigation systems, (v) roof covering and drain maintenance and
(vi) asphalt and parking lot maintenance.

- 14 -
<PAGE> 15
7.2 LESSOR'S OBLIGATIONS. Upon receipt of written notice of the
need for such repairs and subject to Paragraph 13.5, Lessor shall, at Lessor's
expense, keep the foundations, exterior roof and structural aspects of the
Premises in good order, condition and repair, Lessor shall not, however, be
obligated to paint the exterior surface of the exterior walls or to maintain
the windows, doors or plate glass or the interior surface of exterior walls.
Lessor shall not, in any event, have any obligation to make any repairs until
Lessor receives written notice of the need for such repairs. It is the
intention of the Parties that the terms of this Lease govern the respective
obligations of the Parties as to maintenance and repair of the Premises.
Lessee and Lessor expressly waive the benefit of any statute now or hereafter
in effect to the extent it is inconsistent with the terms of this Lease with
respect to, or which affords Lessee the right to make repairs at the expense of
Lessor or to terminate this Lease by reason of, any needed repairs.

7.3 UTILITY INSTALLATIONS; TRADE FIXTURES; ALTERATIONS.

(a) DEFINITIONS; CONSENT REQUIRED. The term "UTILITY
INSTALLATIONS" is used in this Lease to refer to all carpeting, window
coverings, air lines, power panels, electrical distribution, security, fire
protection systems, communications systems, lighting fixtures, heating,
ventilating, and air conditioning equipment, plumbing, and fencing in, on or
about the Premises. The term "TRADE FIXTURES" shall mean Lessee's machinery
and equipment that can be removed without doing material damage to the
Premises. The term "ALTERATIONS" shall mean any modification of the
improvements on the Premises from that which are provided by Lessor under the
terms of this Lease, other than Utility Installations or Trade Fixtures,
whether by addition or deletion. "LESSEE OWNED ALTERATIONS AND/OR UTILITY
INSTALLATIONS" are defined as Alterations and/or Utility Installations made by
Lessee that are not yet owned by Lessor as defined in Paragraph 7.4(a). Lessee
shall not make any Alterations or Utility Installations in, on, under or about
the Premises without Lessor's prior written consent. Lessee may, however, make
non-structural Utility Installations to the interior of the Premises (excluding
the roof), as long as they are not visible from the outside, do not involve
puncturing, relocating or removing the roof or any existing walls, and the
cumulative cost thereof during the term of this Lease as extended does not
exceed $25,000.

(b) CONSENT. Any Alterations or Utility Installations
that Lessee shall desire to make and which require the consent of the Lessor
shall be presented to Lessor in written form with proposed detailed plans. All
consents given by Lessor, whether by virtute of Paragraph 7.3(a) or by
subsequent specific consent, shall be deemed conditioned upon: (i) Lessee's
acquiring all applicable permits required by governmental authorities, (ii) the
furnishing of copies of such permits together with a copy of the plans and
specifications for the Alteration or Utility Installation to Lessor prior to
commencement of the work thereon, and (iii) the compliance by Lessee with all
conditions of said permits in a prompt and expeditious manner. Any Alterations
or Utility Installations by Lessee during the term of this Lease shall be done
in a good and workmanlike manner, with good and sufficient materials, and in
compliance with all Applicable Law. Lessee shall promptly upon completion
thereof furnish Lessor with as-built plans and specifications therefor. Lessor
may (but without obligation to do so) condition its consent to any requested
Alteration or Utility Installation that costs $10,000 or more upon Lessee's
providing Lessor with a lien and completion bond in an amount equal to one and
one-half times the estimated cost of such Alteration or Utility Installation
and/or upon Lessee's posting an additional Security Deposit with Lessor under
Paragraph 36 hereof.

(c) INDEMNIFICATION. Lessee shall pay, when due, all
claims for labor or materials furnished or alleged to have been furnished to or
for Lessee at or for use on the Premises, which claims are or may be secured by
any mechanics' or materialmen's lien against the Premises or any interest
therein. Lessee shall give Lessor not less than ten (10) days' notice prior to
the commencement of any work in, on or about the Premises, and Lessor shall
have the right to post notices of non-responsibility in or on the Premises as
provided by law. If Lessee shall, in good faith, contest the validity of any
such lien, claim or demand, then Lessee shall, at its sole expense defend and
protect itself, Lessor and the Premises against the same and shall pay and
satisfy any such adverse judgment that may be rendered thereon before the
enforcement thereof against the Lessor or the Premises. If Lessor shall
require, Lessee shall furnish to Lessor a surety bond satisfactory to Lessor in
an amount equal to one and one-half times the amount of such contested lien
claim or demand, indemnifying Lessor against liability for the same, as
required by law for the holding of the Premises free from the effect of such
lien or claim. In addition, Lessor may require lessee to pay Lessor's
attorney's fees and costs in participating in such action if Lessor shall
decide it is to its best interest to do so.

- 15 -
<PAGE> 16
7.4 OWNERSHIP; REMOVAL; SURRENDER; AND RESTORATION.

(a) OWNERSHIP. Subject to Lessor's right to require
their removal or become the owner thereof as hereinafter provided in this
Paragraph 7.4, all Alterations and Utility Additions made to the Premises by
Lessee shall be the property of and owned by Lessee, but considered a part of
the Premises. Lessor may, at any time and at its option, elect in writing to
Lessee to be the owner of all or any specified part of the Lessee Owned
Alterations and Utility Installations. Unless otherwise instructed per
subparagraph 7.4(b) hereof, all Lessee Owned Alterations and Utility
Installations shall, at the expiration or earlier termination of this Lease,
become the property of Lessor and remain upon and be surrendered by Lessee with
the Premises.

(b) REMOVAL. Unless otherwise agreed in writing, Lessor
may require that any or all Lessee Owned Alterations or Utility Installations
be removed by the expiration or earlier termination of this Lease,
notwithstanding their installation may have been consented to by Lessor.
Lessor may require the removal at any time of all or any part of any Lessee
Owned alterations or Utility Installations made without the required consent of
Lessor.

(c) SURRENDER/RESTORATION. Lessee shall surrender the
Premises by the end of the last day of the Lease term or any earlier
termination date, with all of the improvements, parts and surfaces thereof
clean and free of debris and in good operating order, condition and state of
repair, ordinary wear and tear excepted. "ORDINARY WEAR AND TEAR" shall not
include any damage or deterioration that would have been prevented by good
maintenance practice or by Lessee performing all of its obligations under this
Lease. Except as otherwise agreed or specified in writing by Lessor, the
Premises, as surrendered, shall include the Utility Installations. The
obligation of Lessee shall include the repair of any damage occasioned by the
installation, maintenance or removal of Lessee's Trade Fixtures, furnishings,
equipment, and Alterations and/or Utility Installations, as well as the removal
of any storage tank installed by Applicable Law and/or good service practice.
Lessee's Trade Fixtures shall remain the property of Lessee and shall be
removed by Lessee subject to its obligation to repair and restore the Premises
per this Lease.

8. INSURANCE; INDEMNITY.

8.1 [Deleted]

8.2 LIABILITY INSURANCE.

(a) CARRIED BY LESSEE. Lessee shall obtain and keep in
force during the term of this Lease a Commercial General Liability policy of
insurance protecting Lessee and Lessor (as an additional insured) against
claims for bodily injury, personal injury and property damage based upon,
involving or arising out of the ownership, use, occupancy or maintenance of the
Premises and all areas appurtenant thereto. Such insurance shall be on an
occurrence basis providing single limit coverage in an amount not less than
$1,000,000 per occurrence with an "Additional Insured-Managers or Lessors of
Premises" Endorsement and contain the "Amendment of the Pollution Exclusion"
for damage caused by heat, smoke or fumes from a hostile fire. The policy
shall not contain any intra-insured exclusions as between insured persons or
organizations, but shall include coverage for liability assumed under this
Lease as an "insured contract" for the performance of Lessee's indemnity
obligations under this Lease. The limits of said insurance required by this
Lease or as carried by Lessee shall not, however, limit the liability of Lessee
nor relieve Lessee of any obligation hereunder. All insurance to be carried by
Lessee shall be primary to and not contributory with any similar insurance
carried by Lessor, whose insurance shall be considered excess insurance only.

(b) CARRIED BY LESSOR. In the event Lessor is the
Insuring Party, Lessor shall also maintain liability insurance described in
Paragraph 8.2(a), above, in addition to, and not in lieu of, the insurance
required to be maintained by Lessee. Lessee shall not be named as an
additional insured therein.

8.3 PROPERTY INSURANCE -- BUILDING, IMPROVEMENTS AND RENTAL VALUE.

- 16 -
<PAGE> 17
mortgages, deeds of trust or ground leases on the Premises ("LENDER(S)"),
insuring loss or damage to the Premises. The amount of such insurance shall be
equal to the full replacement cost of the Premises, as the same shall exist
from time to time, or the amount required by Lenders, but in no event more than
the commercially reasonable and available insurable value thereof if, by reason
of the unique nature or age of the improvements involved, such latter amount is
less than full replacement cost. Lessee Owned Alterations and Utility
Installations shall be insured by Lessee under Paragraph 8.4. If the coverage
is available and commercially appropriate, such policy or policies shall inure
against all risks of direct physical loss or damage (except the perils of flood
and/or earthquake unless required by a Lender), including coverage for any
additional costs resulting from debris removal and reasonable amounts of
coverage for the enforcement of any ordinance or law regulating the
reconstruction or replacement of any undamaged sections of the Premises
required to be demolished or removed by reason of the enforcement of any
building, zoning, safety or land use laws as the result of a covered cause of
loss, but not including plate glass insurance. Said policy or policies shall
also contain an agreed valuation provision in lieu of any coinsurance clause,
waiver of subrogation, and inflation guard protection causing an increase in
the annual property insurance coverage amount by a factor of not less than the
adjusted U.S. Department of Labor Consumer Price Index for All Urban Consumers
for the city nearest to where the Premises are located.

(b) RENTAL VALUE. Lessor shall, in addition, obtain and
keep in force during the term of this Lease a policy or policies in the name of
Lessor, with loss payable to Lessor and Lender(s), insuring the loss of the
full rental and other charges payable by Lessee to Lessor under this Lease for
one (1) year (including all real estate taxes, insurance costs, and any
scheduled rental increases). Said insurance shall provide that in the event
the Lease is terminated by reason of an insured loss, the period of indemnity
for such coverage shall be extended beyond the date of the completion of
repairs or replacement of the Premises, to provide for one full year's loss of
rental revenues from the date of any such loss. Said insurance shall contain
an agreed valuation provision in lieu of any coinsurance clause, and the amount
of coverage shall be adjusted annually to reflect the projected rental income,
property taxes, insurance premium costs and other expenses, if any, otherwise
payable by Lessee, for the next twelve (12) month period.

(c) ADJACENT PREMISES. If the Premises are part of a
larger building, or if the Premises are part of a group of buildings owned by
Lessor which are adjacent to the Premises, the Lessee shall pay for any
increase in the premiums for the property insurance of such building or
buildings if said increase is caused by Lessee's acts, omissions, use or
occupancy of the Premises.

(d) TENANT'S IMPROVEMENTS. Since Lessor is the Insuring
Party, the Lessor shall not be required to insure Lessee Owned Alterations and
Utility Installations unless the item in question has become the property of
Lessor under the terms of this Lease.

8.4 LESSEE'S PROPERTY INSURANCE. Subject to the requirements of
Paragraph 8.5, Lessee at its cost shall either by separate policy or, at
Lessor's option, by endorsement to a policy already carried, maintain insurance
coverage on all of Lessee's personal property, Lessee Owned Alterations and
Utility Installations in, on, or about the Premises similar in coverage to that
carried by the Insuring Party under Paragraph 8.3. Such insurance shall be
full replacement cost coverage with a deductible of not to exceed $1,000 per
occurrence. The proceeds from any such insurance shall be used by Lessee for
the replacement of personal property or the restoration of Lessee Owned
Alterations and Utility Installations. Lessee shall be the Insuring Party with
respect to the insurance required by this Paragraph 8.4 and shall provide
Lessor with written evidence that such insurance is in force.

- 17 -
<PAGE> 18
of such policies, furnish Lessor with evidence of renewals or "insurance
binders" evidencing renewal thereof, or Lessor may order such insurance and
charge the cost thereof to Lessee, which amount shall be payable by Lessee to
Lessor upon demand.

8.6 WAIVER OF SUBROGATION. Without affecting any other rights or
remedies, Lessee and Lessor ("WAIVING PARTY") each hereby release and relieve
the other, and waive their entire right to recover damages (whether in contract
or in tort) against the other, for loss or damage to the Waiving Party's
property arising out of or incident to the perils required to be insured
against under Paragraph 8. The effect of such releases and waivers of the
right to recover damages shall not be limited by the amount of insurance
carried or required, or by any deductibles applicable thereto.

8.7 INDEMNITY. Except for Lessor's gross negligence or willful
misconduct and/or breach of express warranties, Lessee shall indemnify,
protect, defend and hold harmless the Premises, Lessor and its agents, Lessor's
master or ground lessor, partners and Lenders, from and against any and all
claims, loss of rents and/or damages, costs, liens, judgments, penalties,
permits, attorney's and consultant's fees, expenses and/or liabilities arising
out of, involving, or in dealing with, the occupancy of the Premises by Lessee,
the conduct of Lessee's business, any act, omission or neglect of Lessee, its
agents, contractors, employees or invitees, and out of any Default or Breach by
Lessee in the performance in a timely manner of any obligation on Lessee's part
to be performed under this Lease. The foregoing shall include, but not be
limited to, the defense or pursuit of any claim or any action or proceeding
involved therein, and whether or not (in the case of claims made against
Lessor) litigated and/or reduced to judgment, and whether well founded or not.
In case any action or proceeding be brought against Lessor by reason of any of
the foregoing matters, Lessee upon notice from Lessor shall defend the same at
Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall
cooperate with Lessee in such defense. Lessor need not have first paid any
such claim in order to be so indemnified.

8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessor shall not be
liable for injury or damage to the person or goods, wares, merchandise or other
property of Lessee, Lessee's employees, contractors, invitees, customers, or
any other person in or about the Premises, whether such damage or injury is
caused by or results from fire, steam, electricity, gas, water or rain, or from
the breakage, leakage, obstruction or other defects of pipes, fire sprinklers,
wires, appliances, plumbing, air conditioning or lighting fixtures, or from any
other cause, whether the said injury or damage results from conditions arising
upon the Premises or upon other portions of the building of which the Premises
are a part, or from other sources or places, and regardless of whether the
cause of such damage or injury or the means of repairing the same is accessible
or not. Lessor shall not be liable for any damages arising from any act or
neglect of any other tenant of Lessor. Notwithstanding Lessor's negligence or
breach of this Lease, Lessor shall under no circumstances be liable for injury
to Lessee's business or for any loss of income or profit therefrom.

9. DAMAGES OR DESTRUCTION.

9.1 DEFINITIONS.

(a) "PREMISES PARTIAL DAMAGE" shall mean damage or
destruction to the improvements on the Premises, other than Lessee Owned
Alterations and Utility Installations, the repair cost of which damage or
destruction is less than 50% of the then Replacement Cost of the Premises
immediately prior to such damage or destruction, excluding from such
calculation the value of the land and Lessee Owned Alterations and Utility
Installations.

(b) "PREMISES TOTAL DESTRUCTION" shall mean damage or
destruction to the Premises, other than Lessee Owned Alterations and Utility
Installations the repair cost of which damage or destruction is 50% or more of
the then Replacement Cost of the Premises immediately prior to such damage or
destruction, excluding from such calculation the value of the land and Lessee
Owned Alterations and Utility Installations.

- 18 -
<PAGE> 19
(c) "INSURED LOSS" shall mean damage or destruction to
improvements on the Premises, other than Lessee Owned Alterations and Utility
Installations, which was caused by an event required to be covered by the
insurance described in Paragraph 8.3(a), irrespective of any deductible amounts
or coverage limits involved.

(d) "REPLACEMENT COST" shall mean the cost to repair or
rebuild the improvements owned by Lessor at the time of the occurrence to their
condition existing immediately prior thereto, including demolition, debris
removal and upgrading required by the operation of applicable building codes,
ordinances or laws, and without deduction for depreciation.

(e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the
occurrence or discovery of a condition involving the presence of, or a
contamination by, a Hazardous Substance as defined in Paragraph 6.2(a), in, on,
or under the Premises.

9.2 PARTIAL DAMAGE -- INSURED LOSS. If a Premises Partial Damage
that is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair
such damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and
Utility Installations) as soon as reasonably possible and this Lease shall
continue in full force and effect. Notwithstanding the foregoing, if the
required insurance was not in force or the insurance proceeds are not
sufficient to effect such repair, the Insuring Party shall promptly contribute
the shortage in proceeds as and when required to complete said repairs. In the
event, however, the shortage in proceeds was due to the fact that, by reason of
the unique nature of the improvements, full replacement cost insurance coverage
was not commercially reasonable and available, Lessor shall have no obligation
to pay for the shortage in insurance proceeds or to fully restore the unique
aspects of the Premises unless Lessee provides Lessor with the funds to cover
same, or adequate assurance thereof, within ten (10) days following receipt of
written notice of such shortage and request therefore. If Lessor receives said
funds or adequate assurance thereof within said ten (10) day period, the party
responsible for making the repairs shall complete them as soon as reasonably
possible and this Lease shall remain in full force and effect. If Lessor does
not receive such funds or assurance within said period, Lessor may nevertheless
elect by written notice to Lessee within ten (10) days thereafter to make such
restoration and repair as is commercially reasonable with Lessor paying any
shortage in proceeds, in which case the Lease shall remain in full force and
effect. If in such case Lessor does not so elect, then this Lease shall
terminate sixty (60) days following the occurrence of the damage or
destruction. Unless otherwise agreed, Lessee shall in no event have any right
to reimbursement from Lessor for any funds contributed by Lessee to repair any
such damage or destruction. Premises Partial Damage due to flood or earthquake
shall be subject to Paragraph 9.325 rather than Paragraph 9.2, notwithstanding
that there may be some insurance coverage, but the net proceeds of any such
insurance shall be made available for the repairs if made by either Party.

9.3 PARTIAL DAMAGE -- UNINSURED LOSS. If a Premises Partial
Damage that is not an Insured Loss occurs, unless caused by a negligent or
willful act, Lessee (in which event Lessee shall make the repairs at Lessee's
expense and this Lease shall continue in full force and effect, but subject to
Lessor's rights under Paragraph 13), Lessor may at Lessor's option, either:
(i) repair such damage as soon as reasonably possible at Lessor's expense, in
which event this Lease shall continue in full force and effect, or (ii) give
written notice to Lessee within thirty (30) days after receipt by Lessor of
knowledge of the occurrence of such damage of Lessor's desire to terminate this
Lease as of the date sixty (60) days following the giving of such notice. In
the event Lessor elects to give such notice of Lessor's intention to terminate
this Lease, Lessee shall have the right within ten (10) days after the receipt
of such notice to give written notice to Lessor of Lessee's commitment to pay
for the repair of such damage totally at Lessee's expense and without
reimbursement from Lessor. Lessee shall provide Lessor with the required funds
or satisfactory assurance thereof within thirty (30) days following Lessee's
said commitment. In such event this Lease shall continue in full force and
effect and Lessor shall proceed to make such repairs as soon as reasonably
possible and the required funds are available. If Lessee does not give such
notice and provide the funds or assurance thereof within the times specified
above, this Lease shall terminate as of the date specified in Lessor's notice
of termination.

- 19 -
<PAGE> 20
Loss or was caused by a negligent or willful act of Lessee. In the event,
however, that the damage or destruction was caused by Lessee, Lessor shall have
the right to recover Lessor's damages from Lessee except as released and waived
in Paragraph 8.6.

9.5 DAMAGE NEAR END OF TERM. If at any time during the last six
(6) months of the term of this Lease there is damage for which the cost to
repair exceeds one (1) month's Base Rent, whether or not an Insured Loss,
Lessor may, at Lessor's opinion, terminate this Lease effective sixty (60) days
following the date of occurrence of such damage by giving written notice to
Lessee of Lessor's election to do so within thirty (30) days after the date of
occurrence of such damage. Provided, however, if Lessee at that time has an
exercisable option to extend this Lease or to purchase the Premises, then
Lessee may preserve this Lease by, within twenty (20) days following the
occurrence of the damage, or before the expiration of the time provided in such
option for its exercise, whichever is earlier ("EXERCISE PERIOD"), (i)
exercising such option and (ii) providing Lessor with any shortage in insurance
proceeds (or adequate assurance thereof) needed to make the repairs. If Lessee
duly exercises such option during said Exercise Period and provides Lessor with
funds (or adequate assurance thereof) to cover any shortage in insurance
proceeds, Lessor shall, at Lessor's expense repair such damage as soon as
reasonably possible and this Lease shall continue in full force and effect. If
Lessee fails to exercise such option and provide such funds or assurance during
said Exercise Period, then Lessor may at Lessor's option terminate this Lease
as of the expiration of the expiration of said sixty (60) day period following
the occurrence of such damage by giving written notice to Lessee of Lessor's
election to do so within ten (10) days after the expiration of the Exercise
Period, notwithstanding any term or provision in the grant of option to the
contrary.

9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES.

(a) In the event of damage described in Paragraph 9.2
(Partial Damage--Insured), whether or not Lessor or Lessee repairs or restores
the Premises, the Base Rent, Real Property Taxes, insurance premiums, and other
charges, if any, payable by Lessee hereunder for the period during which such
damage, its repair or the restoration continues (not to exceed the period for
which rental value insurance is required under Paragraph 8.3(b)), shall be
abated in proportion to the degree to which Lessee's use of the Premises is
impaired. Except for abatement of Base Rent, Real Property Taxes, insurance
premiums, and other charges, if any, as aforesaid, all other obligations of
Lessee hereunder shall be performed by Lessee, and Lessee shall have no claim
against Lessor for any damage suffered by reason of any such repair or
restoration.

(b) If Lessor shall be obligated to repair or restore the
Premises under the provisions of this Paragraph 9 and shall not commence, in a
substantial and meaningful way, the repair or restoration of the Premises
within ninety (90) days after such obligation shall accrue, Lessee may, at
anytime prior to the commencement of such repair or restoration, given written
notice to Lessor and to any Lenders of which Lessee has actual notice of
Lessee's election to terminate this Lease on a date not less than sixty (60)
days following the giving of such notice. If Lessee gives such notice to
Lessor and such Lenders and such repair or restoration is not commenced within
thirty (30) days following the giving of such notice. If Lessee gives such
notice to Lessor and such Lenders and such repair or restoration is not
commenced within thirty (30) days after receipt of such notice, this Lease
shall terminate as of the date specified in said notice. If Lessor or a Lender
commences the repair or restoration of the Premises within thirty (30) days
after receipt of such notice, this Lease shall continue in full force and
effect "COMMENCE" as used in this Paragraph shall mean either the
unconditional authorization of the preparation of the required plans, or the
beginning of the actual work on the Premises, whichever first occurs.

- 20 -
<PAGE> 21
to terminate this Lease as of the date sixty (60) days following the giving of
such notice. In the event Lessor elects to give such notice of Lessor's
intention to terminate this Lease, Lessee shall have the right within ten (10)
days after the receipt of such notice to give written notice to Lessor of
Lessee's commitment to pay for the investigation and remediation of such
Hazardous Substance Condition totally at Lessee's expense and without
reimbursement from Lessor except to the extent of an amount equal to twelve
(12) times the then monthly Base Rent or $100,000, whichever is greater, Lessee
shall provide Lessor with the funds required of Lessee or satisfactory
assurance thereof within thirty (30) days following Lessee's said commitment.
In such event this Lease shall continue in full force and effect, and Lessor
shall proceed to make such investigation and remediation as soon as reasonably
possible and the required funds are available. If Lessee does not give such
notice and provide the required funds or assurance thereof within the times
specified above, this Lease shall terminate as of the date specified in
Lessor's notice of termination. If a Hazardous Substance Condition occurs for
which lessee is not legally responsible, there shall be abatement of Lessee's
obligations under this Lease to the same extent as provided in Paragraph 9.6(a)
for a period of not to exceed twelve (12) months.

9.8 TERMINATION -- ADVANCE PAYMENTS. Upon termination of this
Lease pursuant to this Paragraph 9, an equitable adjustment shall be made
concerning advance Base Rent and any other advance payments made by Lessee to
Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's
Security Deposit as has not been, or is not then required to be, used by Lessor
under the terms of this Lease.

9.9 WAIVE STATUTES. Lessor and Lessee agree that the terms of
this Lease shall govern the effect of any damage to or destruction of the
Premises with respect to the termination of this Lease and hereby waive the
provisions of any present or future statute to the extent inconsistent
herewith.

10. [Deleted]

10.1 [Deleted]

10.2 [Deleted]

10.3 [Deleted]

10.4 PERSONAL PROPERTY TAXES. Lessee shall pay prior to
delinquency all taxes assessed against and levied upon Lessee Owned
Alterations, Utility Installations, Trade Fixtures, furnishings, equipment and
all personal property of Lessee contained in the Premises or elsewhere. When
possible, Lessee shall cause its Trade Fixtures, furnishings, equipment and all
other personal property to be assessed and billed separately from the real
property of Lessor. If any of Lessee's said personal property shall be
assessed with Lessor's real property, Lessee shall pay Lessor the taxes
attributable to Lessee within ten (10) days after receipt of a written
statement setting forth the taxes applicable to Lessee's property or, at
Lessor's option, as provided in Paragraph 10.1(b).

11. UTILITIES. Lessee shall pay for all water, gas, heat, light, power,
telephone, trash disposal and other utilities and services supplied to the
Premises, together with any taxes thereon. If any such services are not
separately metered to Lessee, Lessee shall pay a reasonable proportion, to be
determined by Lessor, of all charges jointly metered with other premises.

12. ASSIGNMENT AND SUBLETTING.

12.1 LESSOR'S CONSENT REQUIRED.

(a) Lessee shall not voluntarily or by operation of law
assign, transfer, mortgage or otherwise transfer or encumber (collectively,
"ASSIGNMENT") or sublet all or any part of Lessee's interest in this Lease or
in the Premises without Lessor's prior written consent given under the subject
to the terms of Paragraph 36.

- 21 -
<PAGE> 22
(b) A change in the control of Lessee shall constitute an
alignment requiring Lessor's consent. The transfer, on a cumulative basis, of
twenty-five percent (25%) or more of the voting control of Lessee shall
constitute a change in control for this purpose.

(c) The involvement of Lessee or its assets in any
transaction, or series of transactions (by way of merger, sale, acquisition,
financing, refinancing, transfer, leveraged buy-out or otherwise), whether or
not a formal assignment or hypothecation of this Lease or Lessee's assets
occurs, which results or will result in a reduction of the Net Worth of Lessee,
as hereinafter defined, by an amount equal to or greater than twenty-five
percent (25%) of such Net Worth of Lessee as it was represented to Lessor at
the time of the execution by Lessor of this Lease or at the time of the most
recent assignment to which Lessor has consented, or as it exists immediately
prior to said transaction or transactions constituting such reduction, at
whichever time said Net Worth of Lessee was or is greater, shall be considered
an assignment of this Lease by Lessee to which lessor may reasonably withhold
its consent. "NET WORTH OF LESSEE" for purposes of this Lease shall be the net
worth of Lessee (excluding any guarantors) established under generally accepted
accounting principles consistently applied.

(d) As assignment or subletting of Lessee's interest in
this Lease without Lessor's specific prior written consent shall, at Lessor's
option, be a Default curable after notice per Paragraph 13.1(c), or a
noncurable Breach without the necessity of any notice and grace period. If
Lessor elects to treat such unconsented to assignment or subletting as a
noncurable Breach, Lessor shall have the right to either: (i) terminate this
Lease, or (ii) upon thirty (30) days written notice ("Lessor's Notice"),
increase the monthly Base Rent to fair market rental value or one hundred ten
percent (110%) of the Base Rent then in effect, whichever is greater. Pending
determination of the new fair market rental value, if disputed by Lessee,
Lessee shall pay the amount set forth in Lessor's Notice, with any overpayment
credited against the next installment(s) of Base Rent coming due, and any
underpayment for the period retroactively to the effective date of the
adjustment being due and payable immediately upon the determination thereof.
Further, in the event of such Breach and market value adjustment, (i) the
purchase price of any option to purchase the Premises held by Lessee shall be
subject to similar adjustment to the then fair market value (without the Lease
being considered an encumbrance or any deduction for depreciation or
obsolescence, and considering the Premises at its highest and best use and in
good condition), or one hundred ten percent (110%) of the price previously in
effect, whichever is greater, (ii) any index-oriented rental or price
adjustment formulas contained in this Lease shall be adjusted to require that
the base index be determined with reference to the index applicable to the time
of such adjustment, and (iii) any fixed rental adjustments scheduled during the
remainder of the Lease term shall be increased in the same ratio as the new
market rental bears to the Base Rent in effect immediately prior to the market
value adjustment.

(e) Lessee's remedy for any breach of this Paragraph 12.1
by Lessor shall be limited to compensatory damages and injunctive relief.

12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING.

(a) Regardless of Lessor's consent, any assignment or
subletting shall not: (i) be effective without the express written assumption
by such assignee or sublessee of the obligations of Lessee under this Lease,
(ii) release Lessee of any obligations hereunder, or (iii) alter the primary
liability of Lessee for the payment of Base Rent and other sums due Lessor
hereunder or for the performance of any other obligations to be performed by
Lessee under this Lease.

(b) Lessor may accept any rent or performance of Lessee's
obligations from any person other than Lessee pending approval or disapproval
of an assignment. Neither a delay in the approval or disapproval of such
assignment nor the acceptance of any rent or performance shall constitute a
waiver or estoppel of Lessor's right to exercise its remedies for the Default
or Breach by Lessee of any of the terms, covenants or conditions of this Lease.

- 22 -
<PAGE> 23
amendments or modifications thereto without notifying Lessee or anyone else
liable on the Lease or sublease and without obtaining their consent, and such
action shall not relieve such persons from liability under this Lease or
sublease.

(d) In the event of any Default or Breach of Lessee's
obligations under this Lease, Lessor may proceed directly against Lessee, any
Guarantors or any one else responsible for the performance of the Lessee's
obligations under this Lease, including the sublessee, without first exhausting
Lessor's remedies against any other person or entity responsible therefor to
Lessor, or any security held by Lessor or Lessee.

(e) Each request for consent to an assignment or
subletting shall be in writing, accompanied by information relevant to Lessor's
determination as to the financial and operational responsibility and
appropriateness of the proposed assignee or sublessee, including but not
limited to the intended use and/or required modification of the Premises, if
any. Lessee agrees to provide Lessor with such other or additional information
and/or documentation as may be reasonably requested by Lessor.

(f) Any assignee of, or sublessee under, this Lease shall
by reason of accepting such assignment or entering into such sublease, be
deemed, for the benefit of Lessor, to have assumed and agreed to conform and
comply with each and every term, covenant, condition and obligation herein to
be observed or performed by Lessee during the term of said assignment or
sublease, other than such obligations as are contrary to or inconsistent with
provisions of an assignment or sublease to which Lessor has specifically
consented in writing.

(g) [Deleted]

(h) [Deleted]

12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The
following terms and conditions shall apply to any subletting by Lessee of all
or any part of the Premises and shall be deemed included in all subleases under
this Lease whether or not expressly incorporated therein:

(a) Lessee hereby assigns and transfers to Lessor all of
Lessee's interest in all rentals and income arising from any sublease of all or
a portion of the Premise heretofore or hereafter made by Lessee, and Lessor may
collect such rent and income and apply same toward Lessee's obligations under
this Lease; provided, however, that until a Breach (as defined in Paragraph
13.1) shall occur in the performance of Lessee's obligations under this Lease,
Lessee may, except as otherwise provided in this Lease, receive, collect and
enjoy the rents accruing under such sublease. Lessor shall not, by reason of
this or any other assignment of such sublease to Lessor, nor by reason of the
collection of the rents from a sublessee, be deemed liable to the sublessee for
any failure of Lessee to perform and comply with any of Lessee's obligations to
such sublessee under such sublease. Lessee hereby irrevocably authorizes and
directs any such sublessee, upon receipt of a written notice from Lessor
stating that a Breach exists in the performance of Lessee's obligations under
this Lease, to pay to Lessor the rents and other charges due and to become due
under the sublease. Sublessee shall relay upon any such statement and request
from Lessor and shall pay such rents and other charges to Lessor without any
obligation or right to inquire as to whether such Breach exists and
notwithstanding any notice from or claim from Lessee to the contrary. Lessee
shall have no right or claim against said sublessee, or, until the Breach has
been cured, against Lessor, for any such rents and other charges so paid by
said sublessee to Lessor.

(b) In the event of a Breach by Lessee in the performance
of its obligations under this Lease, Lessor, at its option and without any
obligation to do so, may require any sublessee to attorn to Lessor, in which
event Lessor shall undertake the obligations of the sublessor under such
sublease from the time of the exercise of said option to the expiration of such
sublease; provided, however, Lessor shall not be liable for any prepaid rents
or security deposit paid by such sublessee to such sublessor or for any other
prior Defaults or Breaches of such sublessor under such sublease.

- 23 -
<PAGE> 24
(c) Any matter or thing requiring the consent of the
sublessor under a sublease shall also require the consent of Lessor herein.

(d) No sublessee shall further assign or sublet all or
any part of the Premises without Lessor's prior written consent.

(e) Lessor shall deliver a copy of any notice of Default
or Breach by Lessee to the sublessee, who shall have the right to cure the
Default of Lessee within the grace period, if any, specified in such notice.
The sublessee shall have a right of reimbursement and offset from and against
Lessee for any such Defaults cured by the sublessee.

13. DEFAULT; BREACH; REMEDIES.

13.1 DEFAULT; BREACH. Lessor and Lessee agree that if an attorney
is consulted by Lessor in connection with a Lessee Default or Breach (as
hereinafter defined), $350.00 is a reasonable minimum sum per such occurrence
for legal services and costs in the preparation and service of a notice of
Default, and that Lessor may include the cost of such services and costs in
said notice as rent due and payable to cure said Default. A "DEFAULT" is
defined as a failure by the Lessee to observe, comply with or perform any of
the terms, covenants, conditions or rules applicable to Lessee under this
Lease. A "BREACH" is defined as the occurrence of any one or more of the
following Defaults, and, where a grace period for cure after notice is
specified herein, the failure by Lessee to cure such Default prior to the
expiration of the applicable grace period, shall entitle Lessor to pursue the
remedies set forth in Paragraph 13.2 and/or 13.3:

(a) The vacating of the Premises without the intention to
reoccupy same, or the abandonment of the Premises, unless Lessee continues to
pay.

(b) Except as expressly otherwise provided in this Lease,
the failure by Lessee to make any payment of Base Rent or any other monetary
payment required to be made by Lessee hereunder, whether to Lessor or to a
third party, as and when due, the failure by Lessee to provide Lessor with
reasonable evidence of insurance or surety bond required under this Lease, or
failure of Lessee to fulfill any obligation under this Lease which endangers or
threatens life or property, where such failure continues for a period of three
(3) days following written notice thereof by or on behalf of Lessor to Lessee.

(c) Except as expressly otherwise provided in this Lease,
the failure by Lessee to provide Lessor with reasonable written evidence (in
duly executed original form, if applicable) of (i) compliance with applicable
law per Paragraph 6.3, (ii) the inspection, maintenance and service contracts
required under Paragraph 7.1(b), (iii) the rescission of an unauthorized
assignment or subletting per Paragraph 12.1(b), (iv) a Tenancy Statement per
Paragraphs 16 or 37, (v) the subordination or non-subordination of this Lease
per Paragraph 30, (vi) the guaranty of the performance of Lessee's obligations
under this Lease if required under Paragraphs 1.11 and 37, (vii) the execution
of any document requested under Paragraph 42 (easements), or (viii) any other
documentation or information which Lessor may reasonably require of Lessee
under the terms of this Lease, where any such failure continues for a period of
ten (10) days following written notice by or on behalf of Lessor to Lessee.

(d) A Default by Lessee as to the terms, covenants,
conditions or provisions of this Lease, or of the rules adopted under Paragraph
40 hereof, that are to be observed, complied with or performed by Lessee, other
than those described in subparagraphs (a), (b) or (c), above, where such
Default continues for a period of thirty (30) days after written notice thereof
by or on behalf of Lessor to Lessee; provided, however, that if the nature of
Lessee's Default is such that more than thirty (30) days are reasonably
required for its cure, then it shall not be deemed to be a Breach of this Lease
by Lessee if Lessee commences such cure within said thirty (30) day period and
thereafter diligently prosecutes such cure to completion.

- 24 -
<PAGE> 25
(e) The occurrence of any of the following events: (i)
The making by lessee of any general arrangement or assignment for the benefit
of creditors; (ii) Lessee's becoming a "debtor" as defined in 11 U.S.C Section
101 or any successor statute thereto (unless, in the case of a petition filed
against Lessee, the same is dismissed within sixty (60) days; (iii) the
appointment of a trustee or receiver to take possession of substantially all of
Lessee's assets located at the Premises or of Lessee's interest in this Lease,
where possession is not restore to Lessee within thirty (30) days; or (iv) the
attachment, execution or other judicial seizure of substantially all of
Lessee's assets located at the Premises or of Lessee's interest in this Lease,
where such seizure is not discharged within thirty (30) days; provided,
however, in the vent that any provision of this subparagraph (e) is contrary to
any applicable law, such provision shall be of no force or effect, and not
affect the validity of the remaining provisions.

(f) The discover by Lessor that any financial statement
given to Lessor by Lessee or any Guaranty of Lessee's obligations hereunder was
materially false.

(g) If the performance of Lessee's obligations under this
Lease is guaranteed: (i) the death of a guarantor; (ii) the termination of a
guarantor's liability with respect to this Lease other than in accordance with
the terms of such guaranty, (iii) a guarantor's becoming insolvent or the
subject of a bankruptcy filing, (iv) a guarantor's refusal to honor the
guaranty, or (v) a guarantor's breach of its guaranty obligation of an
anticipatory breach basis, and Lessee's failure, within sixty (60) days
following written notice by or on behalf of Lessor to Lessee of any such event,
to provide Lessor with written alternative assurance or security, which, when
coupled with the then existing resources of Lessee, equals or exceeds the
combined financial resources of Lessee and the guarantors that existed at the
time of execution of this Lease.

13.2 REMEDIES. If Lessee fails to perform any affirmative duty or
obligation of Lessee under this Lease, within ten (10) days after written
notice to Lessee (or in case of an emergency, without notice), Lessor may at
its option (but without obligation to do so), perform such duty or obligation
on Lessee's behalf, including but not limited to the obtaining of reasonably
required bonds, insurance policies, or governmental licenses, permits or
approvals. The costs and expenses of any such performance by Lessor shall be
due and payable by Lessee to Lessor upon invoice therefor. If any check given
to Lessor by Lessee shall not be honored by the bank upon which it is drawn,
Lessor, at its option, may require all future payments to be made under this
Lease by Lessee to be made only by cashier's check. In the event of a Breach
of this Lease by Lessee, as defined in Paragraph 13.1, with or without further
notice or demand, and without limiting Lessor in the exercise of any right or
remedy which Lessor may have by reason by such Breach, Lessor may:

(a) Terminate Lessee's right to possession of the
Premises by any lawful means, in which case this Lease and the term hereof
shall terminate and Lessee shall immediately surrender possession of the
Premises to Lessor. In such event Lessor shall be entitled to recover from
Lessee: (i) the worth at the time of the award of the unpaid rent which had
been earned at the time of termination; (ii) the worth at the time of award of
the amount by which the unpaid rent which would have been earned after
termination until the time of award exceeds the amount of such rental loss that
the Lessee proves could have been reasonably avoided; (iii) the worth at the
time of award of the amount by which the unpaid rent for the balance of the
term after the time of award exceed the amount of such rental loss that the
Lessee proves could be reasonably avoided; and (iv) any other amount necessary
to compensate Lessor for all the detriment proximately caused by the Lessee's
failure to perform its obligations under this Lease or which in the ordinary
course of things would be likely to result therefrom, including but not limited
to the cost of recovering possession of the Premises, expenses of reletting,
including necessary renovation and alteration of the Premises, reasonable
attorneys' fees,and that portion of the leasing commission paid by Lessor
applicable to the unexpired term of this Lease. The worth at the time of award
of the amount referred to in provision (iii) of the prior sentence shall be
computed by discounting such amount at the discount rate of the Federal Reserve
Bank of San Francisco at the time of award plus one percent (1%). Efforts by
Lessor to mitigate damages caused by Lessee's Default or Breach of this Lease
shall not waive Lessor's right to recover damages under this Paragraph. If
termination of this Lease is obtained through the provisional remedy of
unlawful detainer, Lessor shall have the right to recover in such proceeding
the unpaid rent and damages as are recoverable therein, or Lessor may reserve
therein the right to recover all or any part thereof in a separate suit for
such rent and/or damages. If a notice and grace period required under
subparagraphs 13.1(b), (c) or (d) was not previously given, a notice to pay
rent or quit, or to perform or quit,

- 25 -
<PAGE> 26
as the case may be, given to Lessee under any statute authorizing the
forfeiture of leases for unlawful detainer shall also constitute the applicable
notice for grace period purposes required by subparagraphs 13.1(b), (c) or (d).
In such case, the applicable grace period under subparagraphs 13.1(b), (c) or
(d) and under the unlawful detainer statute shall run concurrently after the
one such statutory notice, and the failure of Lessee to cure the Default within
the greater of the two such grace periods shall constitute both an unlawful
detainer and a Breach of this Lease entitling Lessor to the remedies provided
for in this Lease and/or by said statute.

(b) Continue the Lease and Lessee's right to possession
in effect (in California under California Civil Code Section 1951.4) after
Lessee's Breach and abandonment and recover the rent as it becomes due,
provided Lessee has the right to sublet or assign, subject only to reasonable
limitations. See Paragraphs 12 and 36 for the limitations on assignment and
subletting which limitations Lessee and Lessor agree are reasonable. Acts of
maintenance or preservation, efforts to relet the Premises, or the appointment
of a receiver to protect the Lessor's interest under the Lease, shall not
constitute a termination of the Lessee's right to possession.

(c) Pursue any other remedy now or hereafter available to
Lessor under the laws or judicial decisions of the state wherein the Premises
are located.

(d) The expiration or termination of this Lease and/or
the termination of Lessee's right to possession shall not relieve Lessee from
liability under any indemnity provisions of this Lease as to matters occurring
or accruing during the term hereof or by reason of Lessee's occupancy of the
Premises.

13.3 INDUCEMENT RECAPTURE IN EVENT OF BREACH. Any agreement by
Lessor for free or abated rent or other charges applicable to the Premises, or
for the giving or paying by Lessor to or for Lessee of any cash or other bonus,
inducement or consideration for Lessee's entering into this Lease, all of which
concessions are hereinafter referred to as "INDUCEMENT PROVISIONS," shall be
deemed conditioned upon Lessee's full and faithful performance of all of the
occurrence of a Breach of this Lease by Lessee, as defined in Paragraph 13.1,
any such Inducement Provision shall automatically be deemed deleted from this
Lease and of no further force or effect, and any rent, other charge, bonus,
inducement or consideration theretofore abated, given or paid by Lessor under
such an Inducement Provision shall be immediately due and payable by Lessee to
Lessor, and recoverable by Lessor as additional rent due under this Lease,
notwithstanding any subsequent cure of said Breach by Lessee. The acceptance
by Lessor of rent or the cure of the Breach which initiated the operation of
this Paragraph shall not be deemed a waiver by Lessor of the provisions of this
Paragraph unless specifically so stated in writing by Lessor at the time of
such acceptance.

13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by
Lessee to Lessor of rent and other sums due hereunder will cause Lessor to
incur costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited to,
processing and accounting charges, and late charges which may be imposed upon
Lessor by the terms of any ground lease, mortgage or trust deed covering the
Premises. Accordingly, if any installment of rent or any other sum due form
Lessee shall not be received by Lessor or Lessor's designee within five (5)
days after such amount shall be due, then, without any requirement for notice
to Lessee, Lessee shall pay to Lessor a late charge equal to six percent (6%)
of such overdue amount. The parties hereby agree that such late charge
represents a fair and reasonable estimate of the costs Lessor will incur by
reason of late payment by Lessee. Acceptance of such late charge by Lessor
shall in no event constitute a waiver of Lessee's Default or Breach with
respect to such overdue amount, nor prevent Lessor from exercising any of the
other rights and remedies granted hereunder. In the event that a late charge
is payable hereunder, whether or not collected, for three (3) consecutive
installments of Base Rent, then notwithstanding Paragraph 4.1 or any other
provision of this Lease to the contrary, Base Rent shall, at Lessor's option,
become due and payable quarterly in advance.

13.5 BREACH BY LESSOR. Lessor shall not be deemed in breach of
this Lease unless Lessor fails within a reasonable time to perform an
obligation required to be performed by Lessor. For purposes of this Paragraph
13.5, a reasonable time shall in no event be less than thirty (30) days after
receipt by Lessor, and by the holders of any ground lease, mortgage or deed of
trust covering the Premises whose name and address shall have been furnished
Lessee in writing for such purpose, of written notice specifying wherein such
obligation of Lessor has not been performed; provided, however, that if the
nature of Lessor's obligation is such that more than thirty (30) days after

- 26 -
<PAGE> 27
such notice are reasonably required for its performance, the Lessor shall not
be in breach of this Lease if performance is commenced within such thirty (30)
day period and thereafter diligently pursued to completion.

14. CONDEMNATION. If the Premises or any portion thereof are taken under
the power of eminent domain or sold under the threat of the exercise of said
power (all of which are herein called "CONDEMNATION"), this Lease shall
terminate as to the part so taken as of the date the condemning authority takes
title or possession, whichever first occurs. If more than ten percent (10%) of
the floor area of the Premises, or more than twenty-five percent (25%) of the
land area not occupied by any building, is taken by condemnation, Lessee may,
at Lessee's option, to be exercised in writing within ten (10) days after
Lessor shall have given Lessee written notice of such taking (or in the absence
of such notice, within ten (10) days after the condemning authority shall have
taken possession) terminate this Lease as to the date the condemning authority
takes such possession. If Lessee does not terminate this lease in accordance
with the foregoing, this Lease shall remain in full force and effect as to the
portion of the Premises remaining, except that the Base Rent shall be reduced
in the same proportion as the rentable floor area of the Premises taken bears
to the total rentable floor area of the building located on the Premises. No
reduction of Base Rent shall occur if the only portion of the Premises taken is
land on which there is no building. Any award for the taking of all or any
part of the Premises under the power of eminent domain or any payment made
under threat of the exercise of such power shall be the property of Lessor,
whether such award shall be made as compensation for diminution in value of the
leaseholder or for taking of the fee, or as severance damages; provided,
however, that Lessee shall be entitled to any compensation separately awarded
to Lessee for Lessee's relocation expenses and/or loss of Lessee's Trade
Fixtures. In the event that this Lease is not terminated by reason of such
condemnation, Lessor shall to the extent of its net severance damages received,
over and above the legal and other expenses incurred by Lessor in the
condemnation matter, repair any damage to the Premises caused by such
condemnation, except to the extent that Lessee has been reimbursed therefor by
the condemning authority. Lessee shall be responsible for the payment of any
amount in excess of such net severance damages required to complete such
repair.

15. BROKER'S FEE.

15.1 The Brokers named in Paragraph 1.10 are the procuring causes
of this Lease.

15.2 Upon execution of this Lease by both Parties, Lessor shall pay
to said Brokers jointly, or in such separate shares as they may mutually
designate in writing, a fee as set forth in a separate written agreement
between Lessor and said Brokers (or in the event there is no separate written
agreement between Lessor and said Brokers, the sum of $__________________) for
brokerage services rendered by said Brokers to Lessor in this transaction.

15.3 Unless Lessor and Brokers have otherwise agreed in writing,
Lessor further agrees that: (a) if Lessee exercises any Option (as defined in
Paragraph 39.1) or any Option subsequently granted which is substantially
similar to an Option granted to Lessee in this Lease, or (b) if Lessee acquires
any rights to the Premises or other premises described in this Lease which are
substantially similar to what Lessee would have acquired had an Option herein
granted to Lessee been exercised, or (c) if Lessee remains in possession of the
Premises, with the consent of Lessor, after the expiration of the term of this
Lease after having failed to exercise an Option, or (d) if said Brokers are the
procuring cause of any other lease or sale entered into between the Parties
pertaining to the Premises and/or any adjacent property in which Lessor has an
interest, or (e) if Base Rent is increased, whether by agreement or operation
of an escalation clause herein, then as to any of said transactions, Lessor
shall pay said Brokers a fee in accordance with the schedule of said Brokers in
effect at the time of the execution of this Lease.

15.4 Any buyer or transferee of Lessor's interest in this Lease,
whether such transfer is by agreement or by operation of law, shall be deemed
to have assumed Lessor's obligation under this Paragraph 15. Each Broker shall
be a third party beneficiary of the provisions of this Paragraph 15 to the
extent of its interest in any commissions arising from this Lease and may
enforce that right directly against Lessor and its successors.

- 27 -
<PAGE> 28
person, firm or entity other than said named Brokers is entitled to any
commissions or finder's fee in connection with said transaction. Lessee and
Lessor do each hereby agree to indemnify, protect, defend and hold the other
harmless form and against liability for compensation of charges which may be
claimed by any such unnamed broker, finder or other similar party by reason of
any dealings or actions of the indemnifying Party, including any costs,
expenses, attorneys' fees reasonably incurred with respect thereto.

15.6 Lessor and Lessee hereby consent to and approve all agency
relationships, including any dual agencies, indicated in Paragraph 1.10.

16. TENANCY STATEMENT.

16.1 Each Party (as "RESPONDING PARTY") shall within ten (10) days
after written notice from the other Party (the "REQUESTING PARTY") execute,
acknowledge and deliver to the Requesting party a statement in writing in form
similar to the then most current "TENANCY STATEMENT" form published by the
American Industrial Real Estate Association, plus such additional information,
confirmation and/or statements as may be reasonably requested by the Requesting
Party.

16.2 If Lessor desires to finance, refinance, or sell the Premises,
any part thereof, or the building of which the Premises are a part, Lessee and
all Guarantors of Lessee's performance hereunder shall deliver to any potential
lender or purchaser designated by Lessor such financial statements of Lessee
and such Guarantors as may be reasonably required by such lender or purchaser,
including but not limited to Lessee's financial statements for the past three
(3) years. All such financial statements shall be received by Lessor and such
lender or purchaser in confidence and shall be used only for the purposes
herein set forth.

17. LESSOR'S LIABILITY. The term "LESSOR" as used herein shall mean the
owner or owners at the time in question of the fee title to the Premises, or,
if this is a sublease, of the Lessee's interest in the prior lease. In the
event of a transfer of Lessor's title or interest in the Premises or in this
Lease, Lessor shall deliver to the transferee or assignee (in cash or by
credit) any unused Security Deposit held by Lessor at the time of such transfer
or assignment. Except as provided in Paragraph 15, upon such transfer or
assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor
shall be relieved of all liability with respect to the obligations and/or
covenants under this Lease thereafter to be performed by the Lessor. Subject
to the foregoing, the obligations and/or covenants in this Lease to be
performed by the Lessor shall be binding only upon the Lessor as hereinafter
defined.

18. SEVERABILITY. The invalidity of any provision of this Lease, as
determined by a court of competent jurisdiction, shall in no way affect the
validity of any other provision hereof.

20. TIME OF ESSENCE. Time is of the essence with respect to the
performance of all obligations to be performed or observed by the Parties under
this Lease.

21. RENT DEFINED. All monetary obligations of Lessee to Lessor under the
terms of this Lease are deemed to be rent.

22. NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER. This Lease contains
all agreements between the Parties with respect to any matter mentioned herein
and no other prior or contemporaneous agreement or understanding shall be
effective. Lessor and Lessee each represents and warrants to the Brokers that
it has made, and is relying solely upon, its own investigation as to the
nature, quality, character and financial responsibility of the other Party to
this Lease and as to the nature, quality and character of the Premises.
Brokers have no responsibility with respect thereto or with respect to any
default or breach hereof by either Party.

- 28 -
<PAGE> 29
23. NOTICES.

23.1 All notices required or permitted by this Lease shall be in
writing and may be delivered in person (by hand or by messenger or courier
service) or may be sent by regular, certified or registered mail or U.S. Postal
Service Express Mail, with postage prepaid, or by facsimile transmission, and
shall be deemed sufficiently given if served in a manner specified in this
Paragraph 23. The addresses noted adjacent to a Party's signature on this
Lease shall be that Party's address for delivery or mailing of notice purposes.
Either Party may by written notice to the other specify a different address for
notice purposes, except that upon Lessee's taking possession of the Premises,
the Premises shall constitute Lessee's address for the purpose of mailing or
delivering notices to Lessee. A copy of all notices required or permitted to
be given to Lessor hereunder shall be concurrently transmitted to such party or
parties at such addresses as Lessor may from time to time hereafter designate
by written notice to Lessee.

23.2 Any notice sent by registered or certified mail, return
receipt requested, shall be deemed given on the date of delivery shown on the
receipt card or if no delivery date is shown, the postmark thereon. If sent by
regular mail the notice shall be deemed given forty-eight (48) hours after the
same is addressed as required herein and mailed with postage prepaid. Notices
delivered by United States Express Mail or overnight courier that guarantees
next day delivery shall be deemed given twenty-four (24) hours after delivery
of the same to the United States Postal Service or courier. If any notice is
transmitted by facsimile transmission or similar means, the same shall be
deemed served or delivered upon telephone confirmation of receipt of the
transmission thereof, provided a copy is also delivered via delivery of mail.
If notice is received on a Sunday or legal holiday, it shall be deemed received
on the next business day.

24. WAIVERS. No waiver by Lessor of the Default or Breach of any term,
covenant or condition hereof by Lessee, shall be deemed a waiver of any other
term, covenant or condition hereof, or of any subsequent Default or Breach by
Lessee of the same or of any other term, covenant or condition hereof Lessor's
consent to, or approval of, any act shall not be deemed to render unnecessary
the obtaining of Lessor's consent to, or approval of, any subsequent or similar
act by Lessee, or be construed as the basis of an estoppel to enforce the
provision or provisions of this Lease requiring such consent. Regardless of
Lessor's knowledge of a Default or Breach at the time of accepting rent, the
acceptance of rent by Lessor shall not be a waiver of any preceding Default or
Breach by Lessee of any provision hereof, other than the failure of Lessee to
pay the particular rent so accepted. Any payment given Lessor by Lessee may be
accepted by Lessor on account of moneys or damages due Lessor, notwithstanding
any qualifying statements or conditions made by Lessee in connection therewith,
which such statements and/or conditions shall be of no force or effect
whatsoever unless specifically agreed to in writing by Lessor at or before the
time of deposit of such payment.

25. RECORDING. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
Lease for recording purposes. The Party requesting recordation shall be
responsible for payment of any fees or taxes applicable thereto.

26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or earlier termination of
this Lease.

27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies
at law or in equity.

28. COVENANTS AND CONDITIONS. All provisions of this Lease to be observed
or performed by Lessee are both covenants and conditions.

- 29 -
<PAGE> 30
30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE.

30.1 SUBORDINATION. This Lease and any Option granted hereby shall
be subject and subordinate to any ground lease, mortgage, deed of trust, or
other hypothecation or security device (collectively, "SECURITY DEVICE"), now
or hereafter placed by Lessor upon the real property of which the Premises are
a part, to any and all advanced made on the security thereof, and to all
renewals, modifications, consolidations, replacements and extensions thereof.
Lessee agrees that the Lenders holding any such Security Device shall have no
duty, liability or obligation to perform any of the obligations of Lessor under
the Lease, but that in the event of Lessor's default with respect to any such
obligation, Lessee will give any Lender whose name and address have been
furnished Lessee in writing for such purpose notice of Lessor's default and
allow such Lender thirty (30) days following receipt of such notice for the
cure of said default before invoking any remedies Lessee may have by reasons
thereof. If any Lender shall elect to have this Lease and/or any Option
granted hereby superior to the lien of its Security Device and shall give
written notice thereof to Lessee, this Lease and such Options shall be deemed
prior to such Security Device, notwithstanding the relative dates of the
documentation or recordation thereof.

30.2 ATTORNMENT. Subject to the non-disturbance provisions of
Paragraph 30.3, Lessee agrees to attorn to a Lender or any other party who
acquires ownership of the Premises by reasons of a foreclosure of a Security
Device, and that in the event of such foreclosure, such new owner shall not:
(i) be liable for any act or omission of any prior lessor or with respect to
events occurring prior to acquisition of ownership, (ii) be subject to any
offsets or defenses which Lessee might have against any prior lessor, or (iii)
be bound by prepayment of more than one (1) month's rent.

30.3 NON-DISTURBANCE. With respect to Security Devices entered
into by Lessor after the execution of this Lease, Lessee's subordination of
this Lease shall be subject to receiving assurance (a "NON-DISTURBANCE
AGREEMENT") from the Lender that Lessee's possession and this Lease, including
any options to extend the term hereof, will not be disturbed so long as Lessee
is not in Breach hereof and attorns to the record owner of the Premises.

30.4 SELF-EXECUTING. The agreements contained in this Paragraph 30
shall be effective without the execution of any further documents; provided,
however, that, upon written request from Lessor or a Lender in connection with
a sale, financing or refinancing of the Premises, Lessee and Lessor shall
execute such further writings as may be reasonably required to separately
document any such subordination or non-subordination, attornment and/or
non-disturbance agreement as is provided for herein.

31. ATTORNEY'S FEES. If any Party or Broker brings an action or
proceeding to enforce the terms hereof or declare rights hereunder, the
Prevailing Party (as hereafter defined) or Broker in any such proceeding,
action, or appeal thereon, shall be entitled to reasonable attorney's fees.
Such fees may be awarded in the same suit or recovered in a separate suit,
whether or not such action or proceeding is pursued to decision or judgment.
The term, "PREVAILING PARTY" shall include, without limitation, a Party or
Broker who substantially obtains or defeats the relief sought, as the case may
be, whether by compromise, settlement, judgment, or the abandonment by the
other Party or Broker of its claim or defense. They attorney's fee award shall
not be computed in accordance with any court fee schedule, but shall be such as
to fully reimburse all attorney's fees reasonably incurred. Lessor shall be
entitled to attorney's fees, costs and expenses incurred in the preparation and
service of notices of Default and consultations in connection therewith,
whether or not a legal action is subsequently commenced in connection with such
Default or resulting Breach.

32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's
agents shall have the right to enter the Premises at any time, in the case of
an emergency, and otherwise at reasonable times for the purpose of showing the
same to prospective purchasers, lenders, or lessees, and making such
alterations, repairs, improvements or additions to the Premises or to the
building of which they are a part, as Lessor may reasonably deem necessary.
Lessor may at any time place on or about the Premises or building any ordinary
"For Sale" signs and Lessor may at any time during the last one hundred twenty
(120) days of the term hereof place on or abut the Premises any ordinary "For
Lease" signs. All such activities of Lessor shall be without abatement of rent
or liability to Lessee.

- 30 -
<PAGE> 31
33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted,
either voluntarily or involuntarily, any auction upon the Premises without
first having obtained Lessor's prior written consent. Notwithstanding anything
to the contrary in this Lease, Lessor shall not be obligated to exercise any
standard of reasonableness in determining whether to grant such consent.

34. SIGNS. Lessee shall not place any sign upon the Premises, except that
Lessee may, with Lessor's prior written consent, install (but not on the roof)
such signs as are reasonably required to advertise Lessee's own business. The
installation of any sign on the Premises by or for Lessee shall be subject to
the provisions of Paragraph 7 (Maintenance, Repairs, Utility installations,
Trade Fixtures and Alterations). Unless otherwise expressly agreed herein,
Lessor reserves all rights to the use of the roof and the right to install, and
all revenues from the installation of, such advertising signs on the Premises,
including the roof, as do not unreasonably interfere with the conduct of
Lessee's business.

35. TERMINATION; MERGER. Unless specifically stated otherwise in writing
by Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for
Breach by Lessee, shall automatically terminate any sublease or lesser estate
in the Premises; provided, however, Lessor shall, in the event of any such
surrender, termination or cancellation, have the option to continue any one or
all of any existing subtenancies. Lessor's failure within ten (10) days
following any such event to make a written election to the contrary by written
notice to the holder of any such lesser interest, shall constitute Lessor's
election to have such event constitute the termination of such interest.

36. CONSENTS.

(a) Except for Paragraph 33 hereof (Auctions) or as otherwise
provided herein, wherever in this Lease the consent of a Party is required to
an act by or for the other Party, such consent shall not be unreasonably
withheld or delayed. Lessor's actual reasonable costs and expenses (including
but not limited to architects', attorneys', engineers' or other consultants'
fees) incurred in the consideration of, or response to, a request by Lessee for
any Lessor consent pertaining to this Lease or the Premises, including but not
limited to consents to an assignment, a subletting or the presence or use of a
Hazardous Substance, practice or storage tank, shall be paid by Lessee to
Lessor upon receipt of an invoice and supporting documentation therefor.
Subject to Paragraph 12.2(e) (applicable to assignment or subletting), Lessor
may, as a condition to considering any such request by Lessee, require that
Lessee deposit with Lessor an amount of money (in addition to the Security
Deposit held under Paragraph 5) reasonably calculated by Lessor to represent
the cost Lessor will incur in considering and responding to Lessee's request.
Except as otherwise provided, any unused portion of said deposit shall be
refunded to Lessee without interest. Lessor's consent to any act, assignment
of this Lease or subletting of the Premises by Lessee shall not constitute an
acknowledgement that no Default or Breach by Lessee of this Lease exists, nor
shall such consent be deemed a waiver of any then existing Default or Breach,
except as may be otherwise specifically stated in writing by Lessor at the time
of such consent.

(b) All conditions to Lessor's consent authorized by this Lease
are acknowledged by Lessee as being reasonable. The failure to specify herein
any particular condition to Lessor's consent shall not preclude the imposition
by Lessor at the time of consent of such further or other conditions as are
then reasonable with reference to the particular matter for which consent is
being given.

37. GUARANTOR.

37.1 If there are to be any Guarantors of this Lease per Paragraph
1.11, the form of the guaranty to be executed by each such Guarantor shall be
in the form most recently published by the American Industrial Real Estate
Association, and each said Guarantor shall have the same obligations as Lessee
under this Lease, including but not limited to the obligation to provide the
Tenancy Statement and information called for by Paragraph 16.

- 31 -
<PAGE> 32
including the authority of the Guarantor (and of the party signing on
Guarantor's behalf) to obligate such Guarantor on said guaranty, and including
in the case of a corporate Guarantor, a certified copy of a resolution of its
board of directors authorizing the making of such guaranty, together with a
certificate of incumbency showing the signature of the persons authorized to
sign on its behalf, (b) current financial statements of Guarantor as may from
time to time be requested by Lessor, (c) a Tenancy Statement, or (d) written
confirmation that the guaranty is still in effect.

39. OPTIONS.

39.1 DEFINITION. As used in this Paragraph 39 the word "OPTION"
has the following meaning: (a) the right to extend the term of this Lease or
to renew this Lease or to extend or renew any lease that Lessee has on other
property of Lessor; (b) the right of first refusal to lease the Premises or the
right of first offer to lease the Premises or the right of first refusal to
lease other property of Lessor or the right of first offer to lease other
property of Lessor; (c) the right to purchase the Premises, or the right of
first refusal to purchase the Premises, or the right of first offer to purchase
the Premises, or the right to purchase other property of Lessor, or the right
of first refusal to purchase other property of Lessor, or the right of first
offer to purchase other property of Lessor.

39.2 [Deleted]

39.3 MULTIPLE OPTIONS. In the event that Lessee has any Multiple
Options to extend or renew this Lease, a later Option cannot be exercised
unless the prior Options to extend or renew this Lease have been validly
exercised.

39.4 EFFECT OF DEFAULT ON OPTIONS.

(a) Lessee shall have no right to exercise an Option,
notwithstanding any provision in the grant of Option to the contrary: (i)
during the period commencing with the giving of any notice of Default under
Paragraph 13.1 and continuing until the noticed Default is cured, or (ii)
during the period of time any monetary obligation due Lessor from Lessee is
unpaid (without regard to whether notice thereof is given Lessee), or (iii)
during the time Lessee is in Breach of this Lease, or (iv) in the event that
Lessor has given to Lessee three (3) or more notices of Default under Paragraph
13.1, whether or not the Defaults are cured, during the twelve (12) month
period immediately preceding the exercise of the Option.

(b) The period of time within which an Option may be
exercised shall not be extended or enlarged by reasons of Lessee's inability to
exercise an Option because of the provisions of Paragraph 39.4(a).

40. MULTIPLE BUILDINGS. If the Premises are part of a group of buildings
controlled by Lessor, Lessee agrees that it will abide by, keep and observe all
reasonable rules and regulations which Lessor may make from time to time for
the management, safety, care, and cleanliness of the grounds, the parking and
unloading of vehicles and the preservation of good order, as well as for the
convenience of other occupants or tenants of such other buildings and their
invitees, and that Lessee will pay its fair share of common expenses incurred
in connection therewith.

- 32 -
<PAGE> 33
41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable
to Lessor hereunder does not include the cost of guard service or other
security measures, and that Lessor shall have no obligation whatsoever to
provide same. Lessee assumes all responsibility for the protection of the
Premises, Lessee, its agents and invitees and their property from the acts of
third parties.

42. RESERVATIONS. Lessor reserves to itself the right, from time to time,
to grant, without the consent or joinder of Lessee, such easements, rights and
dedications that Lessor deems necessary, and to cause the recordation of parcel
maps and restrictions, so long as such easements, rights, dedications, maps and
restrictions do not unreasonably interfere with the use of the Premises by
Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to
effectuate any such easement rights, dedication, map or restrictions.

43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to
any amount or sum of money to be paid by one Party to the other under the
provisions hereof, the Party against whom the obligation to pay the money is
asserted shall have the right to make payment "under protest" and such payment
shall not be regarded as a voluntary payment and there shall survive the right
on the part of said Party to institute suit for recovery of such sum if it
shall be adjudged that there was no legal obligation on the part of said Party
to pay such sum or any part thereof, said Party shall be entitled to recover
such sum or so much thereof as it was not legally required to pay under the
provisions of this Lease.

44. AUTHORITY. If either Party hereto is a corporation, trust, or general
or limited partnership, each individual executing this Lease on behalf of such
entity represents and warrants that he or she is duly authorized to execute and
deliver this lease on its behalf. If Lessee is a corporation, trust or
partnership, Lessee shall, within thirty (30) days after request by Lessor,
deliver to Lessor evidence satisfactory to Lessor of such authority.

45. CONFLICT. Any conflict between the printed provisions of this Lease
and the typewritten or handwritten provisions shall be controlled by the
typewritten or handwritten provisions.

48. MULTIPLE PARTIES. Except as otherwise expressly provided herein, if
more than one person or entity is named herein as either Lessor or Lessee, the
obligations of such Multiple Parties shall be the joint and several
responsibility of all persons or entities named herein as such Lessor or
Lessee.

LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY
REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH
RESPECT TO THE PREMISES.

- 33 -
<PAGE> 34
NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL
REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKER(S) OR THEIR
AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX
CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES; THE
PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN COUNSEL AS TO
THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. IF THE SUBJECT PROPERTY
IS LOCATED IN A STATE OTHER THAN CALIFORNIA, AN ATTORNEY FROM THE
STATE WHERE THE PROPERTY IS LOCATED SHOULD BE CONSULTED.

The Parties hereto have executed this Lease at the place on the dates specified
above to their respective signatures.

Executed at Executed at
----------------- --------------------

on May 10, 1996 on May 9, 1996
------------------------ ---------------------------

by LESSOR: JOANNA K. MORGAN by LESSEE: LEGASYS LEGAL SYSTEMS, INC.

a California corporation
- ----------------------------- --------------------------------

- ----------------------------- --------------------------------

By /s/ Joanna K. Morgan By /s/ (signature unreadable)
-------------------------- -----------------------------

Name Printed: Joanna K. Morgan Name Printed: Douglas (last name
------------------------- unreadable)
----------------------------
Title: President
--------------------------

By By
----------------------------- -------------------------------

Name Printed: Name Printed:
------------------- ----------------------

Title: Title:
--------------------------- ----------------------------

Address: Address:
------------------------- --------------------------

- --------------------------------- -----------------------------------

Tel. No. ( ) Fax No. ( ) Tel. No. ( ) Fax No. ( )
- ---- -- ------ - --- - ---------

- 34 -
<PAGE> 35
ADDENDUM TO LEASE FOR THE PROPERTY LOCATED AT
1506-1508 COTNER AVENUE, LOS ANGELES, CALIFORNIA 90025
BY AND BETWEEN
JOANNA K. MORGAN, LESSOR
AND
LEGASYS LEGAL SYSTEMS, A CALIFORNIA CORPORATION
DATED MAY 8, 1996

49. Said Lease is contingent upon:

(a) Lessor's terminating the existing lease with Lessee,
Spectratek Corporation by 5/15/96; and

(b) Legasys, as Sublessor, executing a sublease with Spectratek
for a portion of the Premises.

50. Lessee shall pay a fixed monthly rental increase as follows:

(a) For the period, May 15, 1998, through May 14, 1999, monthly
base rent shall be $4,600.00.

51. Options to extend.

(a) Lessee is given the option to extend the term of this Lease
for one additional three (3) year period (Extended Term) following expiration
of the initial term by giving written notice of exercise of the option (Option
Notice) to Lessor at least one hundred eighty (180) days but not more than two
hundred seventy (270) days before the expiration of the initial term.

(b) The initial Base Rent for the Extended Term shall be the sum
of $4,600.00 per month for the period May 15, 1999, through May 14, 2000.
Thereafter, for the period commencing on May 15, 2000 and continuing until the
conclusion of the extended term, the Base Rent shall be $4,850.00.

(c) The provisions of paragraph 39, including the provision
relating to default of Lessee set forth in paragraph 39.4 of this lease are
conditions of this Option.

(d) In each and every other respect the remaining terms,
covenants, conditions and provisions of the Lease shall remain in full force
and effect during the Extended Term.

52. Subject to the provisions of Section 6.2 of the Lease, Lessor shall be
responsible for any prior existing code violations in said building. Lessor
shall not be responsible for any injury that occurs on the existing northerly
stairway within said Premises.

53. As a lease allowance for Lessee, Lessee shall only pay the monthly
rental of Three Thousand, Two Hundred and Sixty-Two Dollars and Fifty Cents
($3,262.50) for the months of June, 1996, and the month of October, 1996.

54. Notwithstanding anything to the contrary regarding Paragraph 7.2(a)
and (b):

(a) Lessee shall within thirty (30) days from the date Lessee is
given possession of the premises by Lessor obtain a service contract for
repairs and maintenance of the HVAC system; said maintenance contract to
conform to the requirements under the warranty, if any, on said system. A
duplicate copy of such contract and any amendments or renewals thereof shall be
delivered to Lessor within five (5) days after Lessee first obtains such
contract, renewal or amendments.

(b) Provided that Lessee shall comply with the provisions of
Section 54a, above, Lessee shall not be responsible for replacement of any air
conditioning or heating units in said space. However, Lessee shall maintain
responsibility of keeping said units in the same working condition as Lessee
received them on the commencement date of said Lease.

- 35 -
<PAGE> 36
(c) In the event any of the HVAC systems need replacing as
determined by a licensed professional of Lessor's choice, Lessor shall be
responsible for said replacement. However, if it is determined that Lessee was
negligent in the maintenance of said systems, Lessee shall be responsible for
such replacement.

(d) Lessee shall not be responsible for replacement of any
plumbing that is attributed to old age, unless attributed to Lessee's abuse or
negligence.

(e) It is understood that Spectratek has run a power line to the
demised premises which feeds 1510 Cotner. Lessee shall have no responsibility
for any portion of the electrical installation running from the breaker box to
1510 Cotner.

55. Lessee shall pay a "Last Months Rent" of $4,600.00 upon execution of
the Lease.

- 36 -

<PAGE> 1
EXHIBIT 10.5

REVOLVING CREDIT PROMISSORY NOTE
BUSINESS & PROFESSIONAL
VARIABLE RATE

Name and Address of Borrower(s):

Spectral Holding Corporation dba Spectratek Corporation
5405 Jandy Place
Los Angeles, CA 90066

FOR VALUE RECEIVED, the undersigned ("Borrower") promises to pay in
U.S. Dollars on or before April 1, 1998 (the "Maturity Date"), to the order of
Citibank, Federal Savings Bank with its principal offices located in San
Francisco, California, or at such other place as Citibank or the holder hereof
(the "Holder") may from time to time designate, the unpaid principal balance of
all sums that have been advanced to or for the benefit of Borrower in
accordance with the terms of this Revolving Credit Promissory Note Variable
Rate (the "Note"), that certain Credit Agreement by and between Borrower and
Holder (the "Credit Agreement") or any other document applicable to this
revolving line of credit. Advances will be made in accordance with this Note
and the Credit Agreement. Holder may, but is not required to, honor a request
for an advance if a default as defined in the Credit Agreement has occurred, or
if the amount requested, when added to the then total outstanding unpaid
balance, would exceed the sum of Three Million Five Hundred Thousand and No/100
Dollars ($3,500,000.00) (the "Credit Limit"). Subject to the terms of this
Note and the Credit Agreement, Borrower may borrow, repay and reborrow under
this Note from time to time and at any time prior to the earliest of demand,
acceleration, or Maturity Date of this Note, on which date the outstanding
principal balance, accrued but unpaid interest and any and all fees and charges
advanced pursuant to this Note, the Credit Agreement or any security agreement
entered into between Borrower and Holder securing Borrower's performance
pursuant to the Note or Credit Agreement are due and payable in full.

Interest will be charged on the unpaid principal balance of this Note
to the date all sums are paid on a daily basis for the actual number of days
any portion of the principal is outstanding, at a rate per annum (the "Note
Rate") equal to the sum of three quarters of one percentage point (.75%) plus
the rate of interest established by Citibank, N.A., from time to time as its
Base Rate, with the Note Rate to be adjusted on the effective date of each
change in the Base Rate. The Base Rate is that rate announced from time to
time as the Base Rate by Citibank, N.A., at its head office in New York, New
York and Borrower agrees that Holder may charge any other borrower a rate or
rates different from, above or below the Base Rate established by Citibank,
N.A. If, at any time, the Base Rate is no longer announced by or available
from Citibank, N.A., the Holder may choose a different index, in its
discretion.

Interest will be computed on the basis of a 360 day year and the
actual number of days elapsed and will be due and payable monthly, on the first
day of each month, commencing with the first day of the calendar month
immediately succeeding the date of this note, except that if the date of this
note is on or after the fifteenth (15th) day of the month, payments will
commence on the first day of the second succeeding calendar month until all
principal, interest and other fees and charges are paid. Borrower agrees to
the rate of interest represented by the Note Rate and to pay any additional
charges, costs and fees arising out of or relating to the transaction evidenced
by this Note including, but not limited to, advances or fees pursuant to the
Credit Agreement or any security agreement given in connection with this
transaction.

Borrower acknowledges that the Note Rate has been determined, in part,
on Borrower's maintaining its primary deposit account with Citibank and further
that if, at any time when Citibank holds this Note and such deposit account is
not maintained with Citibank, the interest rate will be changed as provided
herein. If for any reason Borrower fails to maintain its primary deposit
account with Citibank, the Note Rate will be increased by the numeral one (1).
For the purpose of this Note, the term "primary deposit account" will mean the
deposit account into which substantially all of Borrower's receipts from its
operations are deposited and from which substantially all of Borrower's
disbursements for its operations are made.

1
CITIBANK
<PAGE> 2
All obligations under this Note (including principal, interest, costs
and fees) not discharged when due, or after any default, or in any event not
discharged on the Maturity Date, will bear interest thereafter at a rate per
annum equal to the rate calculated by adding the numeral three (3) to the
otherwise applicable Note Rate (the "Default Rate"). In the event that any
payment becomes overdue for a period in excess of fifteen (15) days and Holder
does not exercise its option to accelerate the maturity of this Note, a late
charge of five percent (5%) of the overdue payment or twenty five dollars
($25.00), whichever is greater, will be charged by Holder for the purpose of
defraying the costs and expenses incident to such delinquency. Borrower
recognizes that its default in making payments, or otherwise causing an event
of default to occur will require Holder to incur additional expense in
servicing this loan, in loss to Holder of the use of money due and in
frustration to Holder in meeting other financial and loan commitments and that
damages caused thereby would be extremely difficult and impractical to
ascertain. Borrower agrees that an amount equal to the late charge plus
interest at the Default Rate is a reasonable estimate of the damage to Holder
in the event of late payment and that the accrual of interest at the Default
Rate following any default is a reasonable estimate of the damage to Holder in
such event regardless of whether there has been an acceleration of the
outstanding balance.

Borrower promises to pay all costs of collection, including reasonable
attorneys' fees, incurred in the collection of this Note. Payments will be
first applied to accrued costs, expenses and fees, if any, then to interest due
and then to the reduction of the principal amount outstanding.

This Note will be governed by Federal laws and to the extent that
state law applies, it shall be interpreted and enforced under the laws of the
State of California.

Borrower hereby waives diligence, presentment, protest, demand and
notice of every kind, and to the fullest extent permitted by law, all rights to
plead any statute of limitations as a defense to any action hereunder.

If more than one person signs this Note, then all words used herein in
the singular will be deemed to have been used in the plural as the context and
construction so require, and when this Note is executed by more than one
person, the term "Borrower" will mean each and all of them, jointly and
severally.

Borrower represents and warrants that the indebtedness represented by
this Note is for commercial, agricultural or business purposes.

DATE: March 24, 1997

BORROWER(S):

Spectral Holding Corporation dba Spectratek Corporation

By: /s/ Terrence Conway
-------------------------------
Terrence Conway, President

2
CITIBANK

<PAGE> 1
EXHIBIT 10.7

OPTION AGREEMENT

THIS OPTION AGREEMENT (the "Agreement") is made and entered into this 1st
day of October 1997 by and among SPECTRATEK TECHNOLOGIES, INC., a California
corporation ("Spectratek"), FOSTERCO INC., a California corporation
("FosterCo"), MICHAEL FOSTER, an individual ("Foster") and TERRENCE CONWAY, an
individual ("Conway"). Conway and Foster are sometimes collectively referred to
herein as the "Shareholders."

RECITALS

A. Foster is the owner of five hundred (500) shares of Common Stock of
FosterCo, representing fifty percent (50%) of the issued and outstanding shares
of Common Stock of FosterCo.

B. Conway is the owner of five hundred (500) shares of Common Stock of
FosterCo, representing the remaining fifty percent (50%) of the issued and
outstanding shares of Common Stock of FosterCo.

C. The parties hereto desire to enter into this Agreement to provide
Spectratek with the option to purchase all of the Shareholders' interest in
FosterCo.

D. The parties acknowledge that Spectratek will be reincorporated in
the State of Delaware in the near future, and that such Delaware corporation
shall succeed to all of Spectratek's rights under this Agreement without the
consent of any party hereto.

AGREEMENT

NOW, THEREFORE, the parties agree as follows:

1. Grant to Optionee.

The Shareholders hereby grant to Spectratek, subject to the terms and
conditions set forth herein, an option (the "Option") to purchase from the
Shareholders all, but not less than all, of the shares of capital stock of
FosterCo now or hereinafter directly or indirectly held by each of the
Shareholders and their transferees (the "Shares").

2. Exercise of the Option.

2.1 Exercise Price. The aggregate exercise price (the "Exercise Price")
for the Shares subject to this Option shall be equal to the greater of (i)
$5,000,000 or (ii) fifty percent (50%) of the Appraised Value of FosterCo as of
the day on which the Exercise Notice is delivered to the Shareholders in
accordance with Section 2.3 herein. The Exercise Price shall be allocated
between the Shareholders based on their pro rata share of the outstanding
capital stock of FosterCo as of the date of Exercise. If this Option is
exercised in accordance with Section 2.3, payment of the Exercise Price shall
become due and payable as follows: (i) $5,000,000 at the date of delivery of the
Exercise

<PAGE> 2
Notice to the Shareholders if payable in cash (or as soon thereafter as
reasonably practicable if payable in Spectratek Common Stock), and (ii) the
remainder, if any, within fifteen (15) business days following the determination
of the Appraised Value. Spectratek, at its sole option, may elect, to the extent
permitted by applicable statutes and regulations, to make payment of the
Exercise Price in one or more of the following forms:

(a) in cash or cash equivalent (including certified check); or

(b) provided Spectratek's Common Stock is publicly traded and
quoted regularly in the Wall Street Journal at the time the Exercise
Notice is delivered, in shares of Spectratek Common Stock registered
pursuant to an effective registration statement filed with the Securities
and Exchange Commission and valued at their deemed Fair Market Value on
the date such Exercise Notice is delivered. All costs and expenses of such
registration shall be paid by the Company.

For the purposes of this Agreement, the "Fair Market Value" per
share of Spectratek Common Stock shall be determined as follows:

(i) If the Common Stock of Spectratek is listed on any
established stock exchange or national market system, including
(without limitation) the Nasdaq National Market, the Fair Market
Value per share of such Common Stock shall be deemed equal to the
average of the closing selling prices per share for the twenty (20)
consecutive trading day period ending immediately prior to the date
the Exercise Notice is given to FosterCo, as such prices are
reported in the Wall Street Journal or such other source as the
Board of Directors of Spectratek deems reliable;

(ii) If the Common Stock of Spectratek is quoted on the
Nasdaq Stock Market (but not on the National Market thereof) or is
regularly quoted by a recognized securities dealer but sales prices
are not reported, the Fair Market Value per share of such Common
Stock shall be deemed equal to the average of the average daily
highestp bid and lowest asked prices for the Common Stock of
Spectratek for the twenty (20) consecutive trading day period ending
immediately prior to the date the Exercise Notice is given by
FosterCo, as such prices are reported by the National Association of
Securities Dealers or such other source as the Board of Directors of
Spectratek deems reliable.

2.2 Appraised Value. For the purposes of this Agreement, "Appraised
Value" means, as of any date, the value of the Shares as mutually agreed to by
the Shareholders and the Fairness Committee, or if there shall be no agreement,
the Appraised Value of the Common Stock of FosterCo shall be determined as
follows:

(a) If Spectratek exercises this Option in accordance with
Paragraph 2.3, Conway and Foster shall together appoint, and the Fairness
Committee shall also appoint, a Qualified Appraiser within fifteen (15)
business days following the receipt of such notice.

(b) If either party shall fail to appoint its Qualified Appraiser
within the time period specified above, the other Qualified Appraiser
shall unilaterally establish the

2.
<PAGE> 3
Appraised Value of the Shares by a written opinion. If both parties shall
appoint a Qualified Appraiser within the time period specified above, the
Qualified Appraisers shall establish the Appraised Value of the Shares in
a single written opinion agreed to by both of them, which opinion shall be
addressed to the Shareholders and the Fairness Committee. If the two
Qualified Appraisers cannot agree on the price of the Shares within
fifteen (15) business days after the appointment of the latter of them,
the two appointed Qualified Appraisers shall together appoint a third
Qualified Appraiser whose sole written opinion shall establish the
Appraised Value of the Shares, which opinion shall be addressed to the
Shareholders and the Fairness Committee and shall be delivered within
thirty (30) calendar days following such appointment and shall be final,
binding and nonappealable and may be enforced by legal proceeding. The
Qualified Appraisers shall take into consideration (i) the fair market
value of all tangible and intangible assets of FosterCo, including but not
limited to, its licenses, patents, trade secrets, know-how, business
prospects, equipment and machinery, accounts receivable and contract
rights, (ii) past, current and projected profits of FosterCo, (iii) all
liabilities of FosterCo, (iv) FosterCo's net sales and goodwill, and (v)
FosterCo's experience with collections. The appraisal method should also
take into consideration what an independent third party would be willing
to pay for all or a part of FosterCo. Each party shall compensate the
Qualified Appraiser appointed by it, and the compensation of the third
Qualified Appraiser, if any, shall be borne equally by the Shareholders on
one hand and Spectratek on the other hand. For purposes of this Section
2.2(b), a "Qualified Appraiser" is a professional appraiser or certified
public accountant who is qualified by experience and ability to appraise
the Shares. The appointment of a Qualified Appraiser shall be made by a
written instrument delivered to Spectratek and the Shareholders.

2.3 Exercise Notice. In order to exercise this Option, Spectratek, its
successors, or any other person or persons entitled to exercise the Option,
shall give written notice of such exercise (the "Exercise Notice"), in
substantially the form set forth on Exhibit A attached hereto, to both Foster
and Conway or to such other person as either or both of them may have previously
designated in writing to Spectratek.

3. Exercise Period; Termination Date.

This Option may be exercisable only during the twelve (12)-month period
commencing on October 1, 2002 and ending on September 30, 2003 (the "Exercise
Period"), provided, however, that this Option shall become immediately
exercisable in the event Cyberwerks Interactive, L.L.C. files a registration
statement on Form S-1 with the Securities and Exchange Commission to register
shares of its Common Stock in which case the Option shall continue to be
exercisable until the Termination Date as defined below. The Option shall
terminate and expire at 6:00 p.m., Pacific time, on September 30, 2003 (the
"Termination Date"). In no event may this Option be exercised after such
Termination Date.

4. Option Transferability/Transferability of the Shares.

This Option is not transferable except to a successor of Spectratek in the
event Spectratek is merged into, consolidated with or acquired by another
corporation or entity, in which case no consent of the Shareholders or FosterCo
shall be required to assign this Option to Spectratek's successor. Neither of
the Shareholders shall transfer, sell, assign, pledge, encumber or otherwise

3.
<PAGE> 4
convey ("Transfer") any direct or indirect interest in any of the Shares while
this Option remains outstanding, except for Transfers by gift, by will or by the
laws of descent and distribution, provided, however, that any transferee (i)
shall take such Shares subject to all of the terms and conditions of this
Agreement and shall agree in writing to be bound by this Agreement, and (ii)
shall make no further Transfers except as permitted herein. Any such transferee
shall be deemed to be a Shareholder for the purposes of this Agreement.

5. No Rights as a Shareholder.

The holder of this Option shall not have any of the rights of a
shareholder of FosterCo with respect to the Shares subject to the Option until
such holder shall have exercised the Option and paid the Exercise Price
therefor.

6. Adjustments for Stock Splits, Dividends, Etc.

The parties hereto intend that this Option shall cover all of the capital
stock of FosterCo now or hereinafter held by the Shareholders. If at any time
while this Option remains outstanding and unexpired, FosterCo shall pay a
dividend with respect to the Shares payable in capital stock, or make any other
distribution in capital stock with respect to the Shares, or shall split,
subdivide or combine its capital stock, then any such shares of capital stock
issued to the Shareholders shall be deemed to be Shares for the purposes of this
Agreement and shall automatically be subject to this Option. In addition, if the
Company shall, at any time, subdivide, combine, reorganize or reclassify any of
its Common Stock into the same or a different number of securities of any other
class or classes, this Option shall thereafter represent the right to acquire
all of such securities issuable as a result of such subdivision, combination,
reorganization, reclassification or other change. In no event shall the
aggregate Exercise Price of the Option be increased as a result of additional
shares or different securities being purchased hereunder.

7. Representations and Warranties.

Each of the Shareholders and FosterCo hereby represent and warrant to
Spectratek as follows:

7.1 Corporate Existence, Good Standing and Authority. FosterCo is a
corporation duly organized, validly existing and in good standing under the laws
of the State of California. FosterCo has full corporate power and authority to
carry on its business as is now being conducted and as proposed to be conducted
and owns, leases or otherwise is entitled to operate the property and assets now
owned, leased or operated by it. Each Shareholder and FosterCo have power and
authority to enter into this Agreement, to grant the Option and to consummate
the transactions contemplated hereby. This Agreement has been duly executed and
delivered by each of the Shareholders and FosterCo and constitutes a legal,
valid and binding obligation against each Shareholder and FosterCo, enforceable
against each such party in accordance with its terms, except as enforcement may
be limited by equitable principles or bankruptcy, insolvency, reorganization,
moratorium or similar laws relating to creditors' rights generally.

7.2 Capitalization. The authorized capital stock of FosterCo consists of
ten thousand (10,000) shares of Common Stock, no par value, of which one
thousand (1,000) shares of Common

4.
<PAGE> 5
Stock are issued and outstanding as of the date hereof. All of the outstanding
shares of capital stock of FosterCo are owned beneficially and of record by the
Shareholders and are owned free and clear from any charge, lien, adverse claim
or encumbrance of any kind whatsoever. The Shareholders have the absolute and
unrestricted right, power and authority to sell, transfer, vote and deliver the
Shares to Spectratek upon exercise of the Option. Upon such exercise and payment
of the Exercise Price therefor, Spectratek will acquire the legal and beneficial
ownership of, good and valid title to, and all stockholder rights with respect
to, all of the outstanding capital stock of FosterCo. All of the Shares have
been duly authorized, validly issued and fully paid and are nonassessable. There
are no options, warrants, conversion rights, rights of exchange or any other
rights, plans, agreements or commitments of any nature whatsoever (including
without limitation conversion or preemptive rights) providing for the purchase,
issuance or sale of any shares of capital stock of FosterCo or any securities
convertible into or exchangeable for shares of capital stock of FosterCo.

7.3 Subsidiaries. Except for its 50% membership interest in Cyberwerks
Interactive, L.L.C., FosterCo does not presently own, directly or indirectly, an
interest in any other corporation, association, joint venture or other business
venture.

7.4 Indebtedness. FosterCo has no outstanding indebtedness for borrowed
money in excess of $50,000. FosterCo is not in default under any such agreement
or instrument.

7.5 Litigation. Except as set forth on Exhibit A, no litigation,
arbitration or other proceeding is pending or, to the best knowledge of FosterCo
or the Shareholders, has been threatened against FosterCo, its properties or
assets, or the Shares, before any court or governmental agency, other than the
dispute outlined in correspondence dated August 14, 1997 from Kenton Cobb, Esq.
on behalf of Herbert Paige. Except as set forth on Exhibit A, to the knowledge
of FosterCo and the Shareholders, FosterCo is not the subject of any
investigation for violation of any laws, regulations or administrative orders
applicable to its business.

7.6 Title to Property. To the knowledge of FosterCo and the
Shareholders, FosterCo has good and valid title to all its properties and assets
and FosterCo owns, licenses or otherwise has legally enforceable rights to use
all patents, trademarks, copyrights, trade secrets and other tangible or
intangible proprietary information used or proposed to be used in its business.

7.7 Update. The foregoing representations and warranties shall be true
and correct (i) as of the date of this Agreement, and (ii) as of the closing
date of the purchase and sale of the Shares pursuant to the exercise of this
Option, and such closing shall be conditioned upon the delivery by the
Shareholders and FosterCo to Spectratek of a written acknowledgment that such
warranties and representations remain true and correct as of the closing date,
unless such condition is waived in writing by Spectratek.

8. Covenants of the Shareholders and FosterCo.

From the date hereof until the earlier of the Termination Date or the
consummation of the sale of the Shares to Spectratek upon exercise of this
Option, each of the Shareholders and FosterCo hereby covenant and agree not to
engage in, approve, authorize or take any of the following actions without the
prior written consent of the committee of the Board of Directors of Spectratek
designated to oversee this Agreement (the "Fairness Committee"), which committee
shall be comprised of two

5.
<PAGE> 6
members of the Board of Directors who qualify as independent directors under the
rules promulgated by the National Association of Securities Dealers.

8.1 Sell, Issue or Transfer Any Securities. Except as set forth in
Section 4, offer, sell, contract to sell, issue, pledge, loan, or grant any
rights with respect to or otherwise dispose of any shares of capital stock of
FosterCo, any options or warrants to purchase any shares of capital stock of
FosterCo, or any securities convertible into or exercisable or exchangeable for
shares of capital stock of FosterCo.

8.2 Dividends. Pay any dividend or make any distribution upon any of
FosterCo's equity securities, except that FosterCo may declare and pay cash
dividends to the Shareholders in an aggregate amount not to exceed the product
of (i) the combined individual federal and state statutory income tax rates then
in effect and (ii) the net income of FosterCo.

8.3 Redemptions. Redeem, purchase or otherwise acquire any equity
securities of FosterCo.

8.4 Indebtedness. Create or incur (i) any indebtedness for borrowed
money or for the deferred purchase price of property or services, except in the
ordinary course of business, or (ii) any obligations under direct or indirect
guaranties.

8.5 Sale or Transfer of Assets. Sell, convey or otherwise dispose of or
encumber all or substantially all of FosterCo's property or business, in one or
a series of transactions, or merge FosterCo into or consolidate with any other
corporation or entity or effect any transaction or series of related
transactions disposing of any of the voting power of FosterCo. Notwithstanding
the foregoing, FosterCo may, without the consent of Spectratek, transfer certain
of its assets as contemplated by the Exclusive Manufacturing Agreement dated
June 28, 1995 among FosterCo, Cyberwerks Interactive, L.L.C. and The Upper Deck
Company, LLC.

8.6 Other Agreements. Enter into any agreement or instrument, which by
its terms would restrict Spectratek's right to purchase the Shares or which
would limit the Shareholders' or FosterCo's ability to perform any of its
obligations pursuant to the terms of this Agreement.

9. General Provisions.

9.1 Further Information. During the Exercise Period, FosterCo and the
Shareholders agree to provide to Spectratek any such further information
relating to FosterCo, its business and the Shares, which may be reasonably
requested by Spectratek; provided, however, that any such requests may not be
made more frequently than every three months.

9.2 Saturdays, Sundays, Holidays, Etc. If the last or appointed day for
the taking of any action or the expiration of any right required or granted
hereunder shall be on a Saturday, Sunday or on a legal holiday, then such action
may be taken or such right may be exercised on the next succeeding weekday that
is not a legal holiday.

9.3 Notice of Litigation/Adverse Developments. During the Exercise
Period, each of the Shareholders and FosterCo agree to provide written notice to
Spectratek in the event any of such

6.
<PAGE> 7
parties receive notice of any lawsuit, action or proceeding involving FosterCo
or its business or assets.

9.4 Notices. All notices or other communications permitted or required
under this Agreement shall be in writing and shall be sufficiently given if and
when hand delviered to the persons set forth below, or if sent by documented
overnight delivery service or registered or certified mail, postage prepaid,
return receipt requested, or by telegram, telex or facsimile, receipt
acknowledged, addressed as set forth below or to such other person or persons
and/or at such other address or addresses as shall be furnished in writing by
any party hereto to the others. Any such notice or communication shall be deemed
to have been given as of the date received, in the case of personal delivery, on
the date mailed, or on the date shown of the receipt or confirmation therefor in
all other cases.

Spectratek: Spectratek Technologies, Inc.
5405 Jandy Place
Los Angeles, California 90066
Attn: Chief Financial Officer
Telephone No.: (310) 822-2400
Facsimile No.: (310) 822-2660

Conway: Mr. Terrence Conway
134 Eighth Street, #C
Hermosa Beach, California 90254
Telephone No.: (310) 372-4154
Facsimile No.:____________

Foster: Mr. Michael Foster
1551 North Orange Grove Avenue
Los Angeles, California 90046
Telephone No.: (213) 874-0520
Facsimile No.:____________

FosterCo: FosterCo Inc.
c/o Mr. Terrence Conway
134 Eighth Street, #C
Hermosa Beach, California 90254
Telephone No.: (310) 372-4154
Facsimile No.:____________

9.5 Governing Law. The interpretation, performance and enforcement of
this Agreement shall be governed by the laws of the State of California without
resort to that State's conflict-of-law rules.

9.6 Successors and Assigns. Except to the extent otherwise provided in
Section 4, the provisions of this Agreement shall inure to the benefit of, and
be binding upon FosterCo and

7.
<PAGE> 8
Spectratek and their successors and assigns, and upon the Shareholders and their
legal representatives, heirs and legatees of such Shareholders' estates.

9.7 Loss, Theft, Destruction or Mutilation of Option. Upon receipt by
the Shareholders and FosterCo of evidence reasonably satisfactory to them of the
loss, theft, destruction or mutilation of this Option, and upon reimbursement to
the Shareholder and FosterCo of all reasonable expenses incidental thereto, and
upon surrender and cancellation of this Option if mutilated, the Shareholders
and FosterCo agree to execute and deliver a new Option of like tenor, dated as
of such cancellation, in lieu of this Option.

9.8 Amendments. This Agreement may be amended and the observance of any
term of this Agreement may be waived only with the written consent of each of
the Shareholders, FosterCo and the holder hereof.

9.9 Entire Agreement. This Agreement and Exhibits hereto constitute the
entire agreement among the parties, and no party shall be liable or bound to any
other party in any manner by any warranties, representations or covenants except
as specifically set forth herein or therein.

9.10 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.

9.11 Titles and Subtitles. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.

9.12 Survival of Warranties. The warranties, representations and
covenants of the Shareholders and FosterCo contained in this Agreement shall
survive the execution and delivery of this Agreement and shall be subject to
update pursuant to Paragraph 7.7 of this Agreement.

IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
as of the date first set forth above.

"Spectratek" SPECTRATEK TECHNOLOGIES, INC.,
a California corporation

By:________________________

Title:_____________________

"Conway" ___________________________
TERRENCE CONWAY

8.
<PAGE> 9
"Foster" ___________________________
MICHAEL FOSTER

"FosterCo" FOSTERCO INC.,
a California corporation

By:________________________

Title:_____________________

9.
<PAGE> 10
EXHIBIT A

Exercise Notice

Mr. Terrence Conway
134 Eighth Street, #C
Hermosa Beach, California 90254

Mr. Michael Foster
1551 North Orange Grove Avenue
Los Angeles, California 90046

Re: Exercise of Stock Option

Gentlemen:

Pursuant to Section 2 of that certain Option Agreement (the "Agreement")
among FosterCo Inc. ("FosterCo"), Spectratek Technologies, Inc., Terrence Conway
and Michael Foster, the undersigned hereby elects to exercise the Option granted
thereby to purchase all of the outstanding shares of Common Stock of FosterCo
held by each of you at an exercise price equal to the greater of $5,000,000 or
fifty percent (50%) of the Appraised Value of FosterCo to be determined in
accordance with the terms of the Agreement.

Dated:______________ ________________________________________
Signature

_______________________________________
Print Name

_______________________________________
Please print here the exact name
desired to be on the stock
certificate and the records of the
Company.

10.
<PAGE> 11
SPOUSE'S CONSENT TO AGREEMENT

The undersigned, being the spouse of Michael Foster who has signed the
foregoing Agreement, acknowledges that she has read the foregoing Option
Agreement (the "Agreement"), among FosterCo Inc., Spectratek Technologies, Inc.,
Terrence Conway and Michael Foster, knows its contents and understands the
meaning and legal consequences of the Agreement. She is aware that under the
provisions of this Agreement she and/or her spouse agree to sell the Shares on
the occurrence of certain events. The undersigned hereby agrees that those
Shares and any interest, community or otherwise, she has in them, are subject to
the provisions of the foregoing Agreement. The undersigned also agrees that her
spouse may join in any future amendments or modifications of said Agreement
without any further signature, acknowledgment, agreement or consent on her part.
Furthermore, the undersigned agrees to take no action at any time to hinder the
operation of the Agreement as to those Shares or her interest in them, and
agrees that in her Will she will not bequeath any interest that she now owns or
hereafter acquires in the Shares, other than outright and free of trust to her
spouse, or other than to a trust of which her spouse is the sole trustee.

Dated: October 1, 1997 Signature:______________________________

Print Name:_____________________________

11.
<PAGE> 12
EXHIBIT A

Litigation

None.

12.

<PAGE> 1
EXHIBIT 10.8
EMPLOYEE
PROPRIETARY INFORMATION
AND INVENTIONS AGREEMENT

The following confirms my agreement with Spectratek Technologies, Inc., a
California corporation (the "Company"), which is a material part of the
consideration for my employment with the Company:

1. I understand that my job may give me access to Proprietary
Information (information developed by the Company or acquired by it including,
without limitation, product plans, trade secrets, manufacturing techniques,
customer information, financial data and other business information,
intellectual property, technology, ideas and the like) which has value in the
Company's business. I understand that this Proprietary Information is
confidential and I agree that I will not disclose it or use it for any purpose
other than in connection with my employment with the Company. I also agree that
I will not disclose proprietary information of others which has been disclosed
to the Company in confidence.

2. I understand that my job may give me access to the Company's plans
and documents. I understand that this information is confidential and I won't
not disclose it or use it for any purpose other than my employment with the
Company.

3. While employed with the Company, I will be developing, conceiving,
and manufacturing holographic products, engaging in the microreplication process
which transfers structures onto polymer films and developing and conceiving
other improvements, inventions (whether or not patentable), works of authorship,
derivative works, trade secrets, technology, computer software, formulas,
compositions, ideas, designs, processes, techniques, know-how and data
("Inventions"). I understand that in consideration of my employment by the
Company, all rights (including, without limitation, patent rights, copyright
rights, trade secret rights and other intellectual property rights) anywhere in
the world (collectively "Rights") in and to any Inventions belong only to the
Company. I understand that all Rights in and to any Inventions I develop,
invent, conceive, write or otherwise create using the Company's resources belong
only to the Company. I understand that all Rights in and to any Inventions I
develop, invent, conceive, write or otherwise create that relate to the
Company's current or anticipated business belong only to the Company. I
understand that I have no personal ownership interest in any Inventions and no
right to use those Inventions when my employment at the Company ends. I hereby
assign all Inventions and all Rights therein to the Company.

4. The Company may provide me with manuals, equipment, software and
other things to enable me to do my work. I understand that these things are
provided to me because I am an employee and that they belong to the Company. I
will just take my personal things with me when my employment comes to an end at
the Company. I will leave everything else behind.

<PAGE> 2

5. I agree that I will disclose the results of my work (including,
without limitation, all Inventions) to management at the Company immediately. If
I come up with something (Inventions, equipment or anything that might
reasonably have value to the Company) within six months after I leave the
Company, I will bring that to the attention of the Company too, but I do not
mean to give the Company any right to any inventions I might conceive, develop
or otherwise create after I leave. Such disclosures will be held in confidence
by the Company to the extent they are not assigned in Section 3 above.

6. I understand that in California, there is a statute, Section 2870
of the California Labor Code, which protects my rights regarding things that I
might create or invent. The Company does not intend that this agreement or the
assignments in this Agreement extend to inventions the assignment of which are
prohibited by Section 2870. A copy of Section 2870 is attached to this
agreement.

7. As the Company works to establish its rights to products,
processes, inventions, written works, software, creations and the like in the
United States and throughout the world, it may need my assistance. I agree to
help and irrevocably name the Company as my attorney-in-fact, with full power of
substitution, to execute and file any documents on my behalf but solely to
establish and protect the Company's rights as to products, inventions, written
works, creations, software and the like.

8. Some countries respect "moral rights" as to ideas, inventions and
writings, including software. To the extent that applicable law allows, the
assignment herein includes all such moral rights. To the extent that such moral
rights cannot be assigned under applicable law, I agree not to assert such moral
rights and I agree to waive them in any circumstance where they might apply.

9. If I have invented anything in the past, I understand that the
Company needs to know about it so that there will be no confusion regarding the
origin of the invention. So if I have invented any such things, I will complete
Exhibit B attached to this agreement which describes the inventions. If I do not
complete Exhibit B, it is because I claim no inventions.

10. While I work for the Company, I will not try to get my fellow
employees to leave the Company, unless, as a supervisor, it is my job to do
that. For one year after I leave I will not try to recruit the Company's
employees.

11. While I work for the Company, I will not be involved in any
activity that competes with the Company, either for pay or even as a volunteer.
I will not assist companies that compete with the Company or employees of
companies that compete with the Company, except as directed by the Company. This
is a twenty-four hour a day, seven day a week agreement.

12. I promise that my performance of my duties at the Company will
not violate any agreement that I have made with another employer.

<PAGE> 3

13. I understand that this agreement is not an employment contract
and my employment is and will remain "at-will." I can quit at any time for any
reason or no reason at all. Similarly, the Company can terminate my employment
at any time, for any reason and with or without cause.

14. Since this is not an employment agreement, it does not describe
my job or all the conditions of my employment. However, this agreement is the
complete statement of the agreement between the Company and me regarding the
subject matter of this agreement. I understand that I have obligations to the
Company that are not described in this agreement.

15. I agree to honor the commitments have made in this agreement
even after my employment at the Company ends and without regard to the
circumstances which might bring my employment to an end.

16. If there is a dispute as to what this agreement means or as to
anything else pertaining to this agreement, I agree such dispute will be
governed by California law except if the California conflicts of laws provisions
apply, in which case we will ignore those conflict of law provisions. If it is
determined that some part of this agreement is illegal or cannot be enforced, it
will not cause the entire agreement to be invalid. We will just ignore the
illegal or unenforceable parts.

17. This agreement will be effective when it is signed and will my
agreement will also constitute the agreement of my successors and assigns,
heirs, legal representatives and anyone who might inherit or otherwise obtain my
rights. The benefit of this agreement belongs to the Company.

18. If we want to change this agreement, both the President of the
Company and I must agree to the changes and such changes must be in writing.

I HAVE READ THIS AGREEMENT. I KNOW WHAT IT SAYS AND I INTEND TO MAKE THE
COMMITMENT IT REQUIRES. NO ONE HAS INDUCED ME, WITH PROMISES OR ANYTHING ELSE,
TO SIGN THIS AGREEMENT. I AM DOING IT FREELY AND VOLUNTARILY AND IN DUPLICATE,
ONE FOR THE COMPANY AND ONE FOR ME.

[SIGNATURE PAGE FOLLOWS]

<PAGE> 4

Dated: , 19
-----------------
--------------------------------------------
Employee Signature

--------------------------------------------
Name (type or print)

Accepted and Agreed to:

SPECTRATEK TECHNOLOGIES, INC.

By:
---------------------------------
Terrence Conway, President

<PAGE> 5

ATTACHMENT A

Spectratek Technologies, Inc.
5405 Jandy Place
Los Angeles, CA 90066

Gentlemen:

1. The following is a complete list of inventions, developments,
equipment, processes or other creations relevant to the subject matter of my
employment (the "Inventions") with Spectratek Technologies, Inc. (the "Company")
that I have made, conceived, developed or first reduced to practice, either by
myself or with other, prior to my employment by the Company. I desire to clarify
that such Inventions are not subject to the Company's Employee Proprietary
Information and Inventions Agreement.

No Inventions
- ------

See below:
- ------

Additional sheets attached
- ------

2. I propose to bring to my employment the following materials and
documents of a former employer:

No materials or documents
- ------

See below:
- ------

--------------------------------------------
Employee Signature

--------------------------------------------
Name (type or print)

<PAGE> 6

ATTACHMENT B

SECTION 2870. APPLICATION OF PROVISION PROVIDING THAT EMPLOYEE SHALL
ASSIGN OR OFFER TO ASSIGN RIGHTS IN INVENTION TO EMPLOYER.

(a) Any provision in an employment agreement which provides that an
employee shall assign, or offer to assign, any of his or her rights in an
invention to his or her employer shall not apply to an invention that the
employee developed entirely on his or her own time without using the employer's
equipment, supplies, facilities, or trade secret information except for those
inventions that either:

(1) Relate at the time of conception or reduction to practice
of the invention to the employer's business, or actual or demonstrably
anticipated research or development of the employer; or

(2) Result from any work performed by the employee for the
employer.

(b) To the extent a provision in an employment agreement purports to
require an employee to assign an invention otherwise excluded from being
required to be assigned under subdivision (a), the provision is against the
public policy of this state and is unenforceable.

<PAGE> 1
EXHIBIT 10.9

TECHNOLOGY ASSIGNMENT AGREEMENT

THIS TECHNOLOGY ASSIGNMENT AGREEMENT (the "Agreement") is entered
into this 1st day of October, 1997 by and between MICHAEL S. FOSTER, an
individual ("Inventor") and SPECTRATEK TECHNOLOGIES, INC., a California
corporation ("Company").

1. DEFINITIONS.

1.1 "Information Storage Products" means products in disc or
other form incorporating media having serially encoded digital and/or analog
information stored thereon in the form of surface texturing (which subsequently
may be covered in a laminating process by another layer or substance) including,
but not limited to, audio discs, video discs, read/write discs, erasable discs
and read only memory ("ROM") computer discs.

1.2 "Inventions" means inventions (whether or not patentable),
improvements, formulae, ideas, processes, techniques, know-how, data and
technology developed or made or conceived or reduced to practice or learned by
Inventor alone or together with others on or prior to the date of this Agreement
including, without limitation, designs, drawings, plans, specifications,
experimental models or prototypes, memoranda, notes, source and object codes and
related documentation and any other information or materials embodying any
research or experimentation performed in connection with the development of the
Technology that disclose any portion of the Technology.

1.3 "Proprietary Rights" means patents, patent applications
and patent rights, copyright rights, trade secret rights and other intellectual
property and proprietary rights anywhere in the world.

1.4 "Technology" includes (i) the process of microreplicating
structures on polymer film to produce a holographic or decorative effect, (ii)
products comprising holograms, diffraction gratings or holographic optical
elements, (iii) equipment and tools (including, without limitation, mastering
tools) useful in microreplicating or embossing polymer film to produce a
holographic or decorative effect and (iv) the photo-thermographic process for
impressing microscopic textures into the surface of plastics, but specifically
excludes any Information Storage Product.

2. ASSIGNMENT; WARRANTIES; CONSENT.

2.1 In consideration of the Company's obligations hereunder,
Inventor hereby assigns to the Company all rights, title and interest throughout
the world in all Inventions

<PAGE> 2

(excluding Inventions assigned to Comdisc Technologies, Inc. ("Comdisc")
pursuant to that certain Nondisclosure and Confidentiality Agreement between
Comdisc and Foster dated June 13, 1985) relating to the Technology (the
"Assigned Property") including, without limitation, any and all Proprietary
Rights in connection therewith. The foregoing assignment may be referred to
herein as the "Assignment."

2.2 Inventor represents and warrants to the Company that the
Inventor (i) is the sole owner of all rights, title and interest in and to the
Assigned Property and the Proprietary Rights therein immediately prior to the
Assignment, (ii) has not assigned, transferred, licensed, pledged or otherwise
encumbered any of the Assigned Property or the Proprietary Rights therein or
agreed to do so, (iii) has full power and authority to enter into this Agreement
and to make the Assignment, (iv) is not aware of any actual or potential
violation, infringement or misappropriation of any third party's rights (or any
claim or potential claim thereof) by the Assigned Property or the Proprietary
Rights therein and (v) is not aware of any questions or challenges with respect
to the patentability or validity of any claims of any existing patents or patent
applications relating to the Assigned Property.

2.3 Inventor agrees to assist the Company in every proper way
to evidence and perfect the Assignment and to apply for and obtain and from time
to time enforce, maintain, and defend the Proprietary Rights in any and all
countries the Company may designate from time to time. Inventor will execute all
documents Company may request for such purposes.

2.4 In the event that the Company is unable for any reason
whatsoever to secure Inventor's signature to any document Inventor is required
to execute pursuant to the foregoing, Inventor hereby irrevocably designates and
appoints the Company and its duly authorized officers and agents, as his agents
and attorneys-in-fact, with full power of substitution, to act for and in his
behalf and instead of the Inventor, to execute and file any such document and to
do all other lawfully permitted acts to further the purposes of the foregoing
with the same legal force and effect as if executed by Inventor.

3. PAYMENT.

3.1 As the payment and consideration for the Assignment,
together with such other good and legal consideration, the Company agrees to pay
to Inventor $5,000, payable in one lump sum payment due upon execution of this
Agreement.

4. GENERAL PROVISIONS.

4.1 Notices. Any notice required in connection with this Agreement
shall be given in writing and shall be deemed effective upon delivery by
facsimile (with written confirmation sent by registered or certified mail),
overnight courier with tracking capabilities and

<PAGE> 3

written confirmation of receipt or upon deposit in the United States mail,
postage prepaid, certified or registered mail, return receipt requested and
addressed to the party entitled to such notice at the address indicated below
such party's signature line on this Agreement or at such other address as such
party may designate by ten (10) days advance written notice under this Section
4.1 to the other party to this Agreement.

4.2 No Waiver; Amendment. No waiver of any breach or condition of
this Agreement shall be deemed to be a waiver of any other or subsequent breach
or condition, whether of like or different nature. This Agreement may be amended
or modified only by a writing executed by both parties.

4.3 Severability. If any provision of this Agreement shall be
adjudged by any court of competent jurisdiction to unenforceable or invalid,
that provision shall be limited or eliminated to the minimum extent necessary so
that this Agreement shall otherwise remain in full force and effect and
enforceable.

4.4 Governing Law. This Agreement shall be construed pursuant to the
laws of the State of California without regard to conflicts of laws provisions
thereof.

4.5 Entire Agreement. This Agreement constitutes the entire
agreement between the parties hereto with regard to the subject matter hereof.

SPECTRATEK TECHNOLOGIES, INC.

By: /s/ Terrence Conway
---------------------------------------
Terrence Conway, President

Address: 5406 Jandy Place
Los Angeles, CA 90066

INVENTOR

/s/ Michael S. Foster
--------------------------------------------
MICHAEL S. FOSTER

<PAGE> 4

Address: 1551 North Orange Grove Ave.
Los Angeles, CA 90046

<PAGE> 1
EXHIBIT 10.11

SPECTRATEK TECHNOLOGIES, INC.

PROMISSORY NOTE

For value received, SPECTRATEK TECHNOLOGIES, INC., a California
corporation ("Borrower"), hereby promises to pay to the order of ____________,
an individual (the "Lender"), the principal amount equal to _____% of the
Undistributed S Corporation Earnings as defined below. The principal sum due
hereunder shall bear simple interest from the closing date of the Borrower's
initial public offering (the "IPO Closing Date"), until maturity, at five and
one-half percent (5.5%) per annum. Interest shall accrue annually on the unpaid
principal balance. Unpaid principal and accrued interest shall be payable in
their entirety on April 1, 1998. Nothing in this Note shall require the Borrower
to pay interest at a rate in excess of the maximum rate permitted by applicable
law. For purposes of this Note, the term "Undistributed S Corporation Earnings"
shall mean the Lender's accumulated adjustment account, determined in accordance
with applicable accounting methods pursuant to the Internal Revenue Code of
1986, from January 1, 1997 through the IPO Closing Date.

The principal amount of this Promissory Note (the "Note") and all interest
payments hereunder shall be payable to the Lender hereof in lawful money of the
United States of America, at the Borrower's principal place of business, 5405
Jandy Place, Los Angeles, California 90066, or at such place as the Lender may
from time to time, in writing direct. All payments received hereunder shall be
applied first to accrued but unpaid interest and then to outstanding principal.

If the Borrower shall not pay, when due, the principal amount hereof and
all interest due hereunder, and such nonpayment shall have continued for ten
(10) business days after written notice thereof to Borrower, then Lender, in
addition to any other remedies available at law or in equity, may declare due
and payable the entire principal amount outstanding under the Note, together
with accrued interest thereon. Any amount hereunder (whether principal, interest
or both) which is not paid when due shall bear interest at the highest rate
permitted by law.

The entire unpaid principal amount of the Note, together with accrued
interest thereon, shall become payable on demand in the event of insolvency,
appointment of a receiver for any part of the property of Borrower, or a general
assignment for the benefit of creditors of Borrower, or the commencement of any
proceeding under any bankruptcy or insolvency laws by or against Borrower.

If this Note is not paid when due, whether at maturity or by acceleration,
the Borrower promises to pay all costs of collection, including, but not limited
to, reasonable attorneys' fees, and all costs and expenses incurred by the
holder hereof, on account of any such collection.

1.
<PAGE> 2
No delay or omission of Lender to exercise his rights under this Note
shall impair any such right or power or shall be construed to be a waiver of any
such default or an acquiescence therein. No waiver of any default shall be
construed, taken or held to be a waiver of any other default, or waiver,
acquiescence in, or consent to, any further or succeeding default of the same
nature.

Borrower shall have the right to prepay this Note in whole or in part, at
any time, without penalty, together with interest accrued on this Note at the
time of such prepayment by Borrower. The obligation evidenced by this Note has
been made, and the Note has been delivered, in Los Angeles, California, and
shall be governed by and construed in accordance with the laws of the State of
California.

Dated: October 1, 1997 LENDER:

________________________________________

Dated: October 1, 1997 BORROWER:

SPECTRATEK TECHNOLOGIES, INC.

By:_____________________________________
Michael Foster,
Chairman of the Board
and Chief Technology Officer

<PAGE> 1

EXHIBIT 11.1
SPECTRATEK TECHNOLOGIES, INC.
STATEMENT RE: COMPUTATION OF NET INCOME PER SHARE
AND OF PRO FORMA NET INCOME PER SHARE

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------ -----------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net income........................... $1,012,763 $1,374,428 $1,294,235 $ 639,447
Pro forma net income................. $ 928,079
Weighted average number of shares
outstanding........................ 3,000,000 3,000,000 3,015,000 3,000,000 3,030,000
Dilutive effect of stock options
using the treasury stock method.... 48,273 48,273 34,636 48,273 21,000
Effect of common stock issued in
connection with the IPO to pay-off
Stockholder Notes..................
---------- ---------- ---------- ---------- ----------
Number of shares used to compute net
income and pro forma net income per
share.............................. 3,048,273 3,048,273 3,049,636 3,048,273
========== ========== ========== ========== ==========
Net income per share................. $ 0.33 $ 0.45 $ 0.42 $ 0.21
========== ========== ========== ==========
Pro forma net income per share.......
==========
</TABLE>

<PAGE> 1

EXHIBIT 23.1

INDEPENDENT AUDITORS' CONSENT

We consent to the use in this Registration Statement of Spectratek
Technologies, Inc. on Form S-1 of our report dated October 17, 1997, appearing
in the Prospectus, which is part of this Registration Statement.

We also consent to the reference to us under the headings "Selected
Financial Data" and "Experts" in such Prospectus.

/s/ DELOITTE & TOUCHE LLP

Los Angeles, California
October 21, 1997

<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the
Company's consolidated financial statements for the year ended December
31, 1996 and June 30, 1997 (unaudited) and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 462
<SECURITIES> 0
<RECEIVABLES> 1,484
<ALLOWANCES> 155
<INVENTORY> 3,958
<CURRENT-ASSETS> 6,527
<PP&E> 2,792
<DEPRECIATION> 771
<TOTAL-ASSETS> 8,764
<CURRENT-LIABILITIES> 2,431
<BONDS> 0
0
0
<COMMON> 10
<OTHER-SE> 60
<TOTAL-LIABILITY-AND-EQUITY> 8,764
<SALES> 12,003
<TOTAL-REVENUES> 12,003
<CGS> 7,115
<TOTAL-COSTS> 7,115
<OTHER-EXPENSES> 2,432
<LOSS-PROVISION> 155
<INTEREST-EXPENSE> 157
<INCOME-PRETAX> 2,145
<INCOME-TAX> 851
<INCOME-CONTINUING> 1,294
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,294
<EPS-PRIMARY> 0.42
<EPS-DILUTED> 0.42

</TABLE>

<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the
Company's consolidated financial statement for the year ended December 31, 1996
and June 30, 1997 (unaudited) financial statements.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 872
<SECURITIES> 0
<RECEIVABLES> 1,586
<ALLOWANCES> 59
<INVENTORY> 4,060
<CURRENT-ASSETS> 7,155
<PP&E> 2,995
<DEPRECIATION> 969
<TOTAL-ASSETS> 9,182
<CURRENT-LIABILITIES> 2,036
<BONDS> 0
0
0
<COMMON> 10
<OTHER-SE> 60
<TOTAL-LIABILITY-AND-EQUITY> 9,182
<SALES> 7,622
<TOTAL-REVENUES> 7,622
<CGS> 4,525
<TOTAL-COSTS> 4,525
<OTHER-EXPENSES> 1,476
<LOSS-PROVISION> 19
<INTEREST-EXPENSE> 55
<INCOME-PRETAX> 1,547
<INCOME-TAX> 643
<INCOME-CONTINUING> 904
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 904
<EPS-PRIMARY> 0
<EPS-DILUTED> 0

</TABLE>