FRANKLIN OPHTHALMIC INSTRUMENTS CO INC, 10KSB, 1997-01-14

FRANKLIN OPHTHALMIC INSTRUMENTS CO INC
10KSB, 1997-01-14
PROFESSIONAL & COMMERCIAL EQUIPMENT & SUPPLIES

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996

[ ] TRANSITION REPORT UNDER SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 0-21852
______________
FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
(Name of small business issuer in its charter)
Delaware 94-3123210
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)

1265 Naperville Drive, Romeoville, Illinois 60446, (630) 759-7666
(Address and telephone number of principal executive offices)
_____________

Securities registered pursuant to Section 12(b) of the Exchange Act: None.

Securities registered pursuant to Section 12(g) of the Exchange Act: Common
Stock, $0.001 par value; Redeemable Common Stock Purchase Warrants and Units,
each Unit consisting of one share of Common Stock, $0.001 par value, and one
Redeemable Common Stock Purchase Warrant.

Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past twelve months (or for such
shorter period that the Registrant was required to file such reports); and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
--- ---

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]

The Registrant's revenues for the fiscal year ended September 30, 1996 totaled
$8,469,994.

As of December 11, 1996 , the aggregate market value of the voting stock held by
non-affiliates of the Registrant (assuming for this purpose that only directors
and officers of the Registrant are affiliates of the Registrant), based on the
average of the closing bid and asked prices on that date, was approximately $
9,284,581.

As of December 31 , 1996, there were 16,276,057 shares of Common Stock
outstanding.

Documents incorporated by reference: None

Transitional Small Business Disclosure Format: Yes No X
--- ---

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INDEX TO FORM 10-KSB
OF
FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.

Page
----
PART I

ITEM 1. DESCRIPTION OF BUSINESS ..........................................1

ITEM 2. DESCRIPTION OF PROPERTY ..........................................6

ITEM 3. LEGAL PROCEEDINGS ................................................6

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ..............7

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDERS MATTERS .............................................7

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION ................................................8

ITEM 7. FINANCIAL STATEMENTS .............................................F-1

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE ...........................13

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A)
OF THE EXCHANGE ACT ..............................................13

ITEM 10. EXECUTIVE COMPENSATION ...........................................15

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT ............................................17

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ...................18

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K .................................20

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PART I

ITEM 1. DESCRIPTION OF BUSINESS

General - The Company

Franklin Ophthalmic Instruments Co., Inc., a Delaware corporation (the
"Company"), was incorporated pursuant to the laws of the State of Delaware in
November 1992. Franklin Ophthalmic Instruments Co., Inc., a California
corporation ("FOI-California"), was incorporated pursuant to the laws of the
State of California in September 1990. Effective January 1993, FOI-California
was merged with and into the Company. The Company was formed by FOI-California
in order to enable FOI-California to reincorporate in the State of Delaware.
Unless otherwise indicated, references made hereinafter to the Company include
FOI-California.

FOI-California was incorporated for the purpose of acquiring the ophthalmic
instrument distribution division of Franklin Optical Company ("Franklin
Optical"), which was incorporated in the State of California in 1932. Franklin
Optical's primary business was operating retail locations in California and
Hawaii which dispensed prescription eyeglasses and contact lenses. Franklin
Optical also operated an ophthalmic instrument distribution division. In June
1990 and September 1990, respectively, Franklin Optical sold its two lines of
business in separate transactions. The ophthalmic instrument distribution
division was purchased by the Company. The retail dispensing business was sold
by Franklin Optical to a third party and continued to operate in California as
Franklin Optical Company. Franklin Optical Company is not affiliated with the
Company.

In July 1993, the Company completed its initial public offering (the
"Initial Public Offering") at which time the Company issued 1,437,500 Units (the
"Units"). The initial offering price of each Unit was $4.00 per Unit. The
components of each Unit were immediately separable and consisted of one share of
Common Stock and one Class A Common Stock Purchase Warrant each exercisable to
purchase one share of Common Stock at an exercise price of $5.00 per share
through July 1998 (the "Class A Warrants"). The Company received net proceeds
from the Initial Public Offering, after deducting offering expenses, of
$4,084,766.

In January 1994, the Company acquired certain of the assets and assumed
certain of the liabilities of Progressive Ophthalmic Instruments, Inc., a
Florida corporation ("POI"). Shortly thereafter, the Company relocated its
operations from Hayward, California to Jacksonville, Florida, where POI was
located.

In July 1994, the Company acquired all of the issued and outstanding shares
of common stock of Midwest Ophthalmic Instruments, an Illinois corporation
("MOI"). MOI initially operated as a wholly owned subsidiary, and was
eventually dissolved and merged into the Company in March 1995. In connection
with the dissolution and merger of MOI, the Company closed its operations in
Jacksonville, Florida and a sales office in Lawrenceville, Georgia, and
relocated its sales and operational functions to Romeoville, Illinois. In
addition, along with a change of management of the Company during fiscal 1995,
the management of MOI became management for the Company, and the office in
Hayward, California, which then served as the Company's executive office, was
closed. As a result of the above, all functions of the Company have been
consolidated into Romeoville, Illinois.

THE BUSINESS

The Company's business consists primarily of the sale and servicing of
high-quality examination instruments and equipment required to furnish and
outfit examination rooms of ophthalmologists, optometrists, medical
organizations and clinics. The Company currently distributes over 2,000
products from over 40 manufacturers. The Company's operations and primary
distribution functions are located in Romeoville, Illinois.

THE INDUSTRY

According to the National Eye Institute, the annual expenditures to society
of eye disorders, visual impairments and blindness exceed $5 billion. Disorders
of the eye represent one of the most widespread health

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care conditions in the world today. It has been estimated that more than 67% of
the world's population suffers from one or more treatable eye disorders. The
most common of these disorders are cataracts, glaucoma, and refractive error.
It has been forecasted that by the year 2000, the number of people aged 65 and
older in the United States will approach 35 million and the rate of eye disease
will increase to eight out of ten people. This is expected to result in a
significant growth in the number of ophthalmologists, optometrists and eye care
centers. (Source: U.S. Ophthalmic Diagnostic Instruments & Intraocular Lens
Market, Theta Corporation, February 1991, referred to hereinafter as the "Theta
Report").

The Company believes there are over 50,000 ophthalmologists and
optometrists that the Company and its competitors sell to and service in the
United States. Within these groups there are several sub-specialties including
retina and vitreous, glaucoma, neuro, ocularplastics, pediatric, cataract,
cornea, and refractive surgery. Such practitioners provide services through
entities such as private individual practices, private group practices, private
multi-specialty clinics, hospitals, universities and governmental agencies. The
Company's belief is based upon information the Company received from Optometry
Today, a leading industry publication.

The suppliers of product and services within the ophthalmic industry can be
categorized by the following: (i) ophthalmic diagnostic equipment firms ( the
category in which the Company is classified), (ii) optical (glasses, frames, and
contact lenses) manufacturing/fabricating and distribution firms, (iii) surgical
manufacturing and distribution firms, and (iv) pharmaceutical manufacturing and
distribution firms. Many firms in the industry can be further characterized as
doing business in more than one of the above categories.

The Company believes that it can be characterized as being somewhat
"unique" in the marketplace because of: (i) its level of high-tech service
capability; (ii) its more than 10 years experience in developing and integrating
digital imaging products for the ophthalmic marketplace; (iii) its development
and integration of products such as ophthalmic workstations; and (iv) its status
as the only ophthalmic distributor that is publicly owned.

A majority of the Company's sales are comprised of products that can be
characterized as "capital purchases" and users strongly scrutinize each
instrument according to its price and operational efficiency. Customers often
do not expect to pay list price. In addition, many of the products are very
durable, making for a long replacement cycle. Users also take advantage of
refurbished units.

Despite the foregoing, the Company believes that innovations in equipment
development will support growth in the marketplace. According to a report by
Frost & Sullivan, the ophthalmic diagnostic marketplace is expected to grow at
an annualized rate between 5 and 10% per year through the year 2000. The
projected growth is expected as a result of clinical acceptance and new
technologies becoming more affordably priced. In addition, end users that had
been postponing purchases of traditional equipment are expected to replace
existing devices with the latest technology during the period of projected
growth. (Source: U.S. Ophthalmic Diagnostic Equipment Markets, Frost and
Sullivan, 1994, referred to hereinafter as the "Frost and Sullivan Report").

PRINCIPAL PRODUCTS AND SERVICES

CHAIRS AND STANDS. A mandatory component of any ophthalmic examination
room is the chair in which the patient will sit and/or lie while being examined.
There are several types of chairs, which may adjust automatically or manually to
allow for several patient positions for different examinations or surgical
procedures. Instrument stands provide for one or an array of examination
instruments to be available to the examiner at the patient examinations chair
through use of counterbalanced articulating arms. The Company distributes
chairs and instrument stands manufactured by Reliance Medical Products
("Reliance") and Marco Ophthalmic Inc. ("Marco Ophthalmic").

OPHTHALMIC WORKSTATIONS. The ophthalmic workstation primarily consists of
a station allowing for the adaptation of certain instrumentation and for the
control of electrical functions (illumination and instrument controls) in an
examination room. The Company currently is a systems integrator of such
workstations and customizes the material for such products to meet the
specifications of the ophthalmic practitioner.

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SLIT LAMPS. A slit lamp is used for examinations of all portions of the
eye. It projects a slit of light onto the eye itself (slit illumination) which
can then be viewed at variable magnifications and illuminations. Although the
slit lamp is primarily utilized by ophthalmic practitioners, many emergency
rooms in hospitals are equipped with slit lamps. The slit lamp can be expanded
by adding photographic adaptations and/or digital applications through the use
of video or digital cameras which allows the user to receive hard copy
information or transmit data through phone lines. The Company sells slit lamps
manufactured by Haag-Streit Service, Inc. (Haag-Streit), Marco Ophthalmic, Nikon
Inc. Instrument Group ("Nikon"), and Reichert/Leica.

REFRACTORS. A refractor, also known as a phoroptor, is used for exact
diagnosis of a person's "refraction acuity." The refractor determines
exactly how well a person sees without glasses and what prescription lenses
are required to correct that person's vision. Refractors can be categorized
as manual (an instrument where lenses are manually adjusted to the patient's
needs) and automated (an instrument utilizing microprocessor technology and
infrared light to determine a person's refractive error). As automated
refractors become more approachable in price and continue to allow for
increased efficiencies in determining diagnosing refractive error, there
is a gradual tendency to up-grade to the automated technology. In addition,
automated refractors provide for hard copy print-outs of refractive
measurements and/or provide the ability for the practitioner to transfer
refractive measurements to computers through networking. The Company sells
manual phoroptors manufactured by Reichert/Leica and Marco Ophthalmic, and
automated refractors manufactured by Canon U.S.A., Inc. ("Canon") and Nikon.

RETINAL/FUNDUS CAMERAS. A retinal or fundus camera is an instrument with
optical components that allows the user to capture images primarily through the
posterior portion of the eye utilizing various fields of view and
magnifications. Retinal cameras are classified as either mydriatic or
non-mydriatic. The non-mydriatic type is utilized by users that do not dilate
the patient's pupil and is primarily used for general diagnosis purposes.
Mydriatic cameras are used in conjunction with a fluid which causes full
dilation of the pupil and allows for larger fields of view for the observation
of problems, including tissue degeneration and vein enlargement and/or
hemorrhages. Mydriatic cameras offer versatile photographic applications,
including external and color fundus photography, fluorescein photography, and
stereo photography. Images are acquired from retinal/fundus cameras by using
film (35mm or Polaroid film), video and/or digital cameras. The Company sells
retinal/fundus cameras manufactured by Canon and Nikon.

TONOMETERS. The tonometer measures intra-ocular pressure, a measure for
the incidence of glaucoma. Tonometers are either manual or automated (utilizing
micro-processor technology). The Company distributes manual tonometers
manufactured by Clement-Clarke, Inc., Haag-Streit and Nikon. The Company
distributes automated tonometers manufactured by Keeler Instruments,
Reichert/Leica and Mentor Corporation ("Mentor").

KERATOMETERS. A keratometer measures the curvature of a patient's cornea.
Keratometers are either manual or automated. Automated keratometers utilize
micro-processor technology and allow for hard copy print-outs of measurements
and/or the transfer of information digitally into a computer. Automated
keratometers are also available with a combined autorefraction capability (see
Refractors) which allows for dual functionality. The Company distributes manual
keratometers manufactured by Reichert/Leica and Marco Ophthalmic. The Company
distributes automated keratometers manufactured by Canon and Nikon.

LENSOMETERS. The lensometer is used to measure the curvature of prescribed
lenses in order to verify that the lens is appropriate prior to dispensing.
Lensometers may be manual or automated. Manual lensometers involve greater
knowledge of the process and require more time for measurements. Automatic
lensometers utilize microprocessor technology and allow for hard copy print-outs
of measurements and/or the transfer of information digitally. The Company
distributes manual and automatic lensometers manufactured by Marco Ophthalmic,
Nikon and Reichert/Leica.

PROJECTION SYSTEMS. The Company distributes a range of projection systems
which project acuity testing characters (arrangements of letters, numbers,
and/or symbols) onto a screen in an examination room. Projection systems of
standard manual type projectors, automated projectors which utilize
microprocessor technology and infrared controls, and projection systems
utilizing computer monitors to display the aforementioned testing characters.
The Company distributes projection systems manufactured by Reichert/Leica and
Marco Ophthalmic, and automated systems by Reichert/Leica, Marco Ophthalmic,
Mentor and Nikon.

3
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USED AND REFURBISHED EQUIPMENT. The Company also purchases and acquires,
through trade-in, used equipment. After the equipment is checked and, if
applicable, refurbished, the equipment is then re-marketed providing customers
with a lower priced alternative to new equipment.

OTHER. In addition to the above, the Company sells other items such as
hand held diagnostic instruments, diagnostic and laser lenses, charts,
disposables and parts.

TECHNICAL SERVICE AND SUPPORT. Approximately 75% of the Company's
personnel are trained to provide technical service and support for ophthalmic
instrumentation. In addition, as technology in the ophthalmic marketplace
continues to evolve, the Company believes this area will provide the Company
with a competitive advantage in the marketplace.

MARKETING

DIRECT MAIL. In the past, the Company has used direct mailing of catalogs
as a method of marketing the equipment and services that the Company provides.
However, as a result of the Company's restructuring and its fiscal constraints,
the Company has not distributed a catalog since approximately May, 1994. Thus,
the Company's sales in recent years have been primarily created by the
Company's direct sales force and past reputation. The Company has recently
completed a new catalog and is currently in the process of distributing it
throughout the United States, thus constituting the Company's re-introduction
into this type of marketing.

SALES REPRESENTATIVES. The Company maintains a sales and service force of
approximately 22 representatives located in locations throughout the United
States. It is the sales/service representative's responsibility to follow-up on
sales leads provided as a result of past business, marketing efforts, and from
equipment manufacturers of the equipment that the Company sells. Sales and
service personnel are required to complete formal training sponsored by
ophthalmic manufacturers and the Company in order to maintain familiarity with
the latest technical developments.

TRADE SHOWS. The Company attends and exhibits at approximately 15 trade
shows or conventions per year including regional and national shows and
conventions (including the American Academy of Ophthalmology, American Academy
of Optometry and Vision Expo-East & West). The Company has recently reduced the
number of trade shows it attends in comparison to past years in response to what
the Company believes is a trend in the industry for its customers to attend
fewer of the local trade shows in favor of the larger meetings that offer more
training sessions, industry updates and larger displays of technology.

CUSTOMERS

The end-user marketplace in the United States for ophthalmic instruments is
comprised of different classifications of eye practitioners, and a diverse base
of institutional private and public health care providers.

THE OPHTHALMOLOGIST. The ophthalmologist is a medical doctor specializing
in the diagnosis, treatment and care of the eye and related systems. The
ophthalmologist may prescribe glasses, contact lenses and medication and perform
surgical procedures.

THE OPTOMETRIST. An optometrist is a licensed doctor trained in the
diagnosis of refractive errors and the diagnosis (and the treatment in some
procedures) of diseases the eye.

OTHER CUSTOMERS. In addition to the eye-care professional described above
that work in individual and group practices, the Company sells to hospitals,
hospital groups, medical clinics, health maintenance organizations, surgical
centers, universities, teaching colleges, and various state and federal
agencies.

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BUSINESS STRATEGY

OPERATIONS. Over the past 24 months, much of the Company's attention has
been devoted to the consolidation of locations into Romeoville, Illinois, the
reorganization of operations and the restructuring of the Company's financial
situation. With the completion of the financial restructuring and the receipt
of funds from a private placement of equity during the first quarter of fiscal
1997, the Company is shifting strategy from restructuring to more actively
seeking sales growth through the re-introduction of a direct mail catalog and
the addition of sales and service personnel. See Item 6 for further discussion.

In connection with the financial restructuring the Company has recently
completed, the Company had reached agreement with Silicon Valley Bank
("Silicon"), the Company's primary lender, in which $3,160,327 owing to
Silicon was converted into 2,079,163 shares of the Company's Common Stock at a
conversion rate of $1.52 per share, and the remaining $1.8 million owed to
Silicon was transferred to a new credit facility with Silicon. Silicon's
agreement was conditioned on, among other things: (i) the Company's simultaneous
receipt of at least $1 million of proceeds from the private placement of its
securities; and (ii) personal guaranty (for an amount not to exceed $200,000 in
the aggregate) of certain officers of the Company.

The Company reached agreements with certain trade creditors pursuant to
which such creditors: (i) would convert an aggregate of approximately $530,000
owed to them into shares of Common Stock at a price of $1.52 per share; and (ii)
would forgive, and/or repay pursuant to terms of certain promissory notes
(having a maturity date up to twenty-four months from the date thereof and an
applicable interest rate of 10%), approximately $540,000.

The Company plans to continue to grow the Company through the addition of
outside sales/service representatives and the reinstatement of its catalog
distribution. The Company currently has sales/service representatives primarily
located in the Midwest and Southeast. It is the Company's intention to expand
its representation by seeking sales candidates to represent the Company in other
heavily-populated parts of the United States.

Prior to the acquisition of MOI in 1994, much of the sales of the Company
and that of MOI were derived from the bi-annual and annual distribution of a
catalog that displayed products and provided pricing information. The Company
had not distributed a catalog in approximately three years, however, during the
first quarter of fiscal 1997, the Company has again commenced distributing a
sales catalog.

ACQUISITIONS. After a period of new instrument companies being organized,
the industry has now begun to consolidate following the recent trend of many
other industries. This is evidenced by a number of consolidations in the
industry and by a trend in ophthalmic instrument manufacturers to reduce the
number of distributors primarily through sales quotas. In addition, management
believes that industry characteristics, such as having numerous privately held
regional ophthalmic instrument distribution companies, has and will continue to
contribute to the Company's ability (assuming the Company is financially able)
to effectively pursue a program of growth through acquisition.

COMPETITION

The distribution of ophthalmic instruments is competitive. The Company has
historically competed on the basis of price, service, promptness of delivery,
reputation and relationship with customers. The distribution of ophthalmic
instruments has traditionally been accomplished by many regionally-located,
owner operated distributors located in significant population centers throughout
the United States. These distributors sell and service most well-known brands
of equipment in certain geographical areas and often have established
relationships with their clientele. Other than Lombart Instrument Company (the
largest ophthalmic instrument distributor in the United States), management
believes that there is no other ophthalmic distributor with greater geographical
coverage than the Company.

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BACKLOG

Although backlog has not been material to the Company in prior years,
because of the financial constraints the Company has experienced with regard to
cash flow and reduced credit limits from its suppliers, the Company has started
to experience increasing backlogs and delays in supplying orders.
With the restructuring that occurred during the first quarter of fiscal 1997,
the Company believes that it should be better equipped to address the
aforementioned delays in supplying orders.

EMPLOYEES

As of September 30, 1996, the Company employed 29 full-time employees,
including 7 in accounting and operations, and 22 sales and service
representatives. Of the 29 employees, 6 are in management positions. The
Company considers its relationship with its employees satisfactory and is not a
party to any collective bargaining agreement.

GOVERNMENT REGULATION

The Company has no knowledge of any governmental regulations which
materially adversely affect its business operations.

ENVIRONMENTAL PROTECTION COMPLIANCE

The Company has no knowledge of any federal, state or local environmental
compliance regulations which affect its business activities. The Company has
not expended any capital to comply with environmental protection statutes, and
does not anticipate that such expenditures will be necessary in the future.

ITEM 2. DESCRIPTION OF PROPERTY

The Company maintains all executive, administrative, operational and
inventory distribution functions in a 19,000 square foot building located in
Romeoville, Illinois, a suburb of Chicago, Illinois. The building is rented
pursuant to a lease at a rate of $10,240 per month and which will expire on
April 2, 2001. The Company also maintains a facility in Jacksonville, Florida
which the Company subleases to tenants. The lease and the sublease on the
facility in Florida are scheduled to expire in October 1999. The monthly rental
under the lease is $5,425, and the sublease of the Company provides for
escalating monthly rent, which is currently at $4,501. Management believes that
the condition of the aforementioned property is suitable for its intended
purposes.

The Company owns no real estate and does not intend to invest in real
estate or interests in real estate, real estate mortgages, or securities of or
interests in persons primarily engaged in real estate activities for the
foreseeable future.

ITEM 3. LEGAL PROCEEDINGS

In connection with the Company's restructuring efforts, Eastman Kodak
Company ("Kodak") agreed to dismiss a complaint filed against the Company on
April 26, 1996 in the United States District Court for the Northern District of
Illinois, Eastern Division (Docket No. 96C 2519), alleging default by the
Company under the provisions of a certain promissory note (the "Kodak Note") and
seeking to recover amounts outstanding under the Kodak Note. The Kodak Note,
dated March 7, 1996, was in the principal amount of $296,604 and was issued by
the Company in favor of Kodak in connection with repayment of amounts owed by
the Company to Kodak for products acquired by the Company. Interest under the
Kodak Note accrued at the rate of 11% per annum subject to increase upon default
to 15% per annum. Repayment of principal and interest under the Kodak Note was
payable in installments upon the last day of each month through July 31, 1996.
A portion of the principal under the Kodak Note was repaid and reduced by the
return to Kodak of unused product. The complaint alleged that there remained
outstanding $222,104 (exclusive of interest, fees , costs and late charges).
Kodak has agreed to convert approximately $155,473 of the foregoing debt into
shares of Common Stock at

<PAGE>
$1.52 per share and to permit the Company to repay the balance under the Kodak
Note on a monthly basis (pursuant to the terms of a new promissory note) over 24
months beginning December 1, 1996.

On December 5,1996, the Company filed a complaint against the accounting
and auditing firm of Marinelli & Scott (the Company's predecessor accounting and
auditing firm) in the United States District Court for the Northern District of
Illinois, Eastern Division (Docket No. 96C 7982), alleging professional
malpractice/negligence arising in connection with auditing and accounting
services performed by Marinelli & Scott. The Company is seeking damages in
excess of $50,000. Other than as set forth herein, the Company is not aware of
any material pending or ongoing litigation to which the Company is or would be a
party.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

During the year ended September 30, 1996, no matters were placed before the
stockholders of the Company for consideration.

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

In July 1993, in connection with the Initial Public Offering, the Company
applied for and was granted inclusion of its securities for quotation on the
Nasdaq SmallCap Market-SM- ("NASDAQ"). Consequently, the Units, the Common
Stock and the Class A Warrants commenced quotation on NASDAQ on July 23, 1993
under the symbols "FKLNU", "FKLN", and "FKLNW", respectively. Due to the
Company's inability to fulfill the maintenance criteria for continued listing
of its securities on NASDAQ, the Company was delisted from NASDAQ on April
27, 1995, at which time the Company's securities commenced listing on the OTC
Electronic Bulletin Board.

The following table sets forth, for the periods indicated, the reported
high and low bid and asked price quotations for the Units, Common Stock and
Class A Warrants for the last two fiscal years ended September 30, 1995 and
1996. Such quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.

<TABLE>
<CAPTION>
Common Stock Class A Warrants
------------ ----------------
Bid ($) Asked ($) Bid ($) Asked ($)
------- --------- ------- ---------
Period of Quotation High Low High Low High Low High Low
- ------------------- ---- --- ---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>

Fiscal 1995: First Quarter 2-5/8 1-1/4 3-3/8 1-3/8 6/8 2/8 1-1/8 2/8
Second Quarter 1-3/8 3/8 1-5/8 3/8 2/8 1/8 3/8 1/8
Third Quarter 13/16 3/81 3/16 1/2 N/A N/A N/A N/A
Fourth Quarter 3/4 3/8 3/4 3/8 N/A N/A N/A N/A

Fiscal 1996: First Quarter 5/8 1/8 1 7/32 3/100 1/100 3/50 7/200
Second Quarter 3/4 5/32 7/8 7/32 2/25 1/100 1/10 7/200
Third Quarter 11/16 15/16 27/32 7/16 9/50 7/200 3/10 11/200
Fourth Quarter 1-7/25 1/4 1-3/10 11/25 17/100 6/100 23/100 1/10

Units
-----
Bid ($) Asked ($)
------- ---------
Period of Quotation High Low High Low
- ------------------- ---- --- ---- ---

Fiscal 1995: First Quarter 2-3/48 1-3/8 2-3/4 3/4
Second Quarter 1-3/8 3/4 1-3/8 3/4
Third Quarter 1/2 1/2 1/2 1/2
Fourth Quarter 1/2 1/2 5/8 1/2

Fiscal 1996: First Quarter 1/4 1/8 7/8 7/16
Second Quarter 9/16 1/8 1-1/2 7/16
Third Quarter 1/2 1/2 5/8 1/2
Fourth Quarter 1 1/4 1-3/4 3/4
</TABLE>
7
<PAGE>

As of December 11, 1996, there were 197 holders of record of Common Stock
and 79 holders of record of the Class A Warrants based upon information
furnished by Continental Stock Transfer and Trust Company, New York, New York,
the transfer agent for the Company's securities. There have been no cash
dividends paid in fiscals 1995 and 1996.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

During the first two quarters of fiscal 1995, the Company underwent
significant structural, management and operational change whereas fiscal 1996
reflects the results of the Company operating under new management and the
completion of the aforementioned structural and operational consolidations. As
a result of the items described below, the operating results for the fiscal year
ended September 30, 1996 lack in several aspects, comparability to the results
of operations for the fiscal year ended September 30, 1995.

Until the second quarter of fiscal 1995, the Company operated a facility in
Hayward, California, a facility in Lawrenceville, Georgia, a Jacksonville,
Florida facility (which was added with the Company's acquisition of Progressive
Ophthalmic Instruments Co., Inc. previously defined as "POI") and a Romeoville,
Illinois facility (which was added with the Company's acquisition of Midwest
Ophthalmic Instruments, Inc. previously defined as "MOI"). See "Description of
Property". During the second quarter of fiscal 1995, the Company underwent a
change in management, as described below, and under new management, decided to
close all but the Romeoville, Illinois facility.

Pursuant to an agreement, dated April 1, 1995, between the Company, Robert
A. Davis (the Company's former chief executive officer, chief financial officer,
and president), and certain partnerships in which Mr. Davis has an interest, and
Michael J. Carroll, James J. Urban and Brian M. Carroll (the "Separation
Agreement"), Mr. Davis and Mr. Dallas Talley, resigned their positions with the
Company and Messrs. Michael Carroll and James Urban were elected to fill
vacancies on the Company's Board of Directors (the "Board of Directors"). The
Separation Agreement also provided that: (i) Mr. Davis would contribute 800,000
shares of Common Stock back to the Company; and (ii) Mr. Davis would forgive
$200,000 owed to him by the Company. Under the Separation Agreement, the
Company agreed to release and indemnify Mr. Davis for any claims, other than
claims for fraud and certain types of negligence, which might be made in
connection with Mr. Davis service as an officer or director of the Company.

In January 1995, the new management of the Company commenced its attempt to
restructure the Company's operations around the MOI operations acquired by the
Company in July 1994, and commenced operating under the trade name Franklin.MOI.
Also, as part of the restructuring efforts, the Hayward, California facility,
the Lawrenceville, Georgia facility and the Jacksonville, Florida facility were
closed. Additionally, the Company instituted throughout its sales force
compensation structures and other policies similar to those historically used by
MOI, which included: (i) the use of sales quotas and scheduling requirements;
(ii) a commission structure that contained lower base and higher incentive
components; (iii) greater accountability for expenses and inventory; and (iv)
limits on competitive activities. As a result of the aforementioned changes,
approximately 50% of the Company's prior sales representatives terminated their
representation of the Company or were dismissed. Some but not all of the these
representatives have been replaced and, as a result, the Company has lost
representation in certain geographic areas or with certain accounts previously
serviced by it.

It is as a result of these substantial changes in the Company's operations,
that operating results for the fiscal year ended September 30, 1995 and 1996
lack comparability. The results for fiscal 1995 reflect the Company operating
through the transition described above, which was initiated by current
management during the second quarter of fiscal 1995. Conversely, the operating
results for fiscal 1996 reflect the results of the Company under the MOI
structure, which formed the core after the changes discussed above.

As previously mentioned, fiscal 1996 reflects the first full year of the
Company operating under new management and the results of the Company's efforts
to reduce costs through the consolidation of sales and operational functions.
In addition, much effort by the Company during fiscal 1996 was directed to the
restructuring of its bank and trade credit. As a result of the restructuring
efforts, the Company reached agreements during the fourth quarter of fiscal 1996
and the first quarter of fiscal 1997 with bank and trade

<PAGE>

creditors such that over $3,000,000 of bank debt was converted to common stock
in the Company at a rate of $1.52 per share, and an amount in excess of
$1,000,000 of trade debt was (i) converted to stock at a rate of $1.52; (ii)
forgiven; or (iii) converted to 24 month promissory notes. See Notes 2,3,5 and
6 of the Financial Statements included elsewhere herein.

GOING CONCERN AND MANAGEMENT'S 1997 PLANS

The report of the Company's independent certified public accountants
contains an explanatory paragraph as to the substantial doubts that exist
concerning the Company's ability to continue as a going concern.

As discussed in the notes to the financial statements and elsewhere herein,
the Company at the end of fiscal 1996 was in default under the terms of its
revolving credit facility with Silicon Valley Bank, which is the Company's
primary credit facility. Additionally, in part because of that default and the
resulting inability to obtain additional working capital, the Company has been
unable to make timely reductions in the amount owed to its product suppliers.
As a consequence, the Company was unable to obtain otherwise customary trade
credit and was limited to purchases of product on limited credit terms or with
payment on delivery.

The Company's ability to continue as a going concern is ultimately
dependent on its ability to increase its sales to a level that will allow it to
operate profitably and generate positive cash flows, and to refinance
outstanding debt when it comes due. Although the reduction of expenses (which
was begun in the last half of fiscal 1995 and continued into fiscal 1996) can
contribute to the necessary return to profitability, achieving profitability
without an increase in sales would require much greater levels of expense
reductions and in all likelihood could only be accomplished through a
significant reduction and restructuring of the nature and scope of the Company's
operations.

In addition, the Company's sales have been adversely affected by its lack
of working capital and liquidity, which has limited its marketing efforts and in
certain instances has prevented it from obtaining products to fill customer
orders. Accordingly, to increase sales the Company must first resolve its
working capital shortage.

In connection with the Company's financial restructuring efforts, the
Company reached agreements with Silicon Valley Bank, its primary trade creditors
and certain debtholders during the fourth quarter of fiscal 1996 and the first
quarter of fiscal 1997. In addition, during the first quarter of fiscal 1997,
the Company was able to raise $1,200,250 in new capital through the private
placement of equity.

The restructuring agreement with Silicon provided that Silicon would
convert approximately $3,000,000 owing to Silicon into shares of the Company's
Common Stock at a conversion rate of $1.52 per share, and transfer the remaining
1.8 million owing to Silicon into a new credit facility with Silicon. The
agreement with Silicon was conditioned on, amongst other things: (i) the
Company's simultaneous receipt of at least $1 million of proceeds from the
private placement of its securities; (ii) the Company's best efforts in
converting certain amounts owed to trade suppliers into equity securities or
long-term notes, and (iii) the personal guarantees of Messrs. Michael Carroll,
James Urban, and Brian Carroll for an amount not to exceed an aggregate of
$200,000. The Company met the conditions of the Silicon agreement during the
first quarter of fiscal 1997 and the new line of credit became effective in
November 1996. See Note 3 to the Financial Statements included elsewhere
herein.

In connection with the restructuring of trade debt during the fourth
quarter of fiscal 1996: (i) approximately $155,473 of trade debt was converted
to stock in the Company at a rate of $1.52 per share which resulted in a gain
from restructuring of $129,902; (ii) $101,358 was forgiven; and (iii)
approximately $106,000 was converted to promissory notes with terms up to 24
months. This resulted in an extraordinary gain of $231,260. Subsequent to the
fiscal year ended September 30, 1996, the Company completed agreements with
trade debt such that (i) $378,000 of trade debt was converted to stock at the
rate $1.52 per share (ii) $100,000 was forgiven; and (iii) $162,000 was
converted to a 24 month promissory note.

<PAGE>

With regard to the restructuring of certain notes payable, $292,500 was
converted to shares of the Company's common stock at a rate of $.25 per share
(the same pro rata price per share as sold in the Company's private placement)
during the fourth quarter of fiscal 1996.

The Company believes that with (i) the completion of the above mentioned
restructuring of its debt; (ii) the equity infusion that it has received
subsequent to the Company's fiscal year end September 30, 1996, (iii) the
increase in trade credit which the Company has received upon the aforementioned
debt restructuring; and (iv) the expansion of the Company's marketing efforts
and sales territory expansion; the Company will be able to achieve sales
increases by reducing the limiting effects that the Company's lack of working
capital have had on marketing and the ability to obtain products necessary to
accept and fill customer orders on a timely basis and allow the Company to
refinance outstanding debt when it comes due in fiscal 1997. The Company
believes that increases in sales should ultimately allow the Company to return
to profitability and generate positive cash flows.

There can be no assurance that with the aforementioned restructuring that
the Company will be able to increase sales levels that would achieve
profitability which could force the Company to significantly reduce its
operations in order to reduce expenses or take other actions to resolve
liquidity constraints that may arise.

RESULTS OF OPERATIONS

Sales declined by $4,846,955 or 36.4% from $13,316,949 in fiscal 1995 to
$8,469,994 for the year ended September 30, 1996. The previously discussed
restructuring of the Company's sales operations, and the Company's lack of
working capital, were the dominant reasons for the overall decline in sales
volume.

The Company's gross margin on sales declined from $2,653,669 for fiscal
1995 to $2,102,251 for the fiscal year ended September 30, 1996 as a result of
the decline in sales. Gross margin as a percentage of sales increased from
19.9% in fiscal 1995 to 24.8%. The increase in gross margin as a percentage of
sales for the fiscal year ended September 30, 1996 is primarily attributable to
the predominance of MOI's operations in the operating results for fiscal 1996.
MOI's sales include a greater level of products it has designed, and related
technical services, and as a result have historically generated a higher gross
margin than those of the Company's other operations prior to the integration of
MOI. The Company believes that MOI's historical gross margin levels can be
maintained while efforts are made to increase sales, however, there can be no
assurance that attempts to increase sales may not require incentive pricing that
would adversely affect the gross margin percentage.

Selling, general and administrative ("SG&A") expenses decreased from
$5,315,753 in fiscal 1995 to $3,571,619 in fiscal 1996. The reduction in
expenses related to SG&A was primarily attributed to the consolidation of all
operations into a single facility located in Romeoville, Illinois, and the
reduction in personnel and related overhead that had been associated with
Franklin's previous operations. Of the SG&A attributed to fiscal 1996,
approximately $500,000 was attributed to professional fees related to
restructuring and the expense associated with the issuance of 600,000 shares to
Tiger Eye Capital. In looking forward, as a result of the completion of the
aforementioned restructuring, the Company believes that it should be able to
reduce the level of costs attributable to these events.

Interest expense increased from $688,345 for fiscal 1995 to $737,942. The
interest charged to the Company consisted of: (i) approximately $515,000 of
interest associated with the Company's line of credit with Silicon; and (ii)
approximately $187,942 of interest related to trade creditors and short term
borrowings. As a result of the conversion of over $3,000,000 owed to Silicon
into equity and the conversions to equity and/or forgiveness of over $700,000 of
trade debt, which was completed subsequent to fiscal 1996, management believes
that this should be reduced going forward.

As a result of the foregoing factors, the Company reported a loss of
$1,977,939 for fiscal 1996 as compared to a loss of $4,336,499 for fiscal 1995.

<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

Cash flow from operations was a negative $390,916 and $51,980 in fiscal
1995 and 1996 respectively. This change can be attributable to management's
efforts in reducing costs.

The Company's principal credit facility is a revolving credit facility with
Silicon. The line of credit, which is secured by essentially all of the
Company's assets, initially provided for borrowings of up to $4,000,000, limited
to (i) 80% of the amount of eligible accounts receivable; and (ii) the lesser of
$1,500,000 or 50% of the book value of eligible inventories, reduced by trade
accounts payable. The line of credit provided for the payment of interest
monthly at the rate of 1% over the bank's prime rate for borrowings
collateralized by accounts receivable and 3% over the bank's prime rate for
borrowings collateralized by inventory. The line of credit was scheduled to
mature on February 5, 1995. See Notes 3 and 5 to the Financial Statements
included elsewhere herein.

During fiscal 1995, the balance outstanding under the line of credit
exceeded the amount available under the borrowing formula and the Company was
otherwise in default with respect to certain provisions of the line of credit
agreement. On April 1, 1995, Silicon agreed to extend the terms of the
Company's line of credit, as generally in effect in the original agreement,
through February 6, 1996 (subsequently extended to April 15, 1996), and agreed
to forbear in the exercise of its rights resulting from the Company's past
defaults or defaults in the future compliance with the financial covenants, and
to advance the Company an additional $500,000 (the "flat rate loan"),
conditioned upon the Company's agreement to make certain scheduled reductions in
both: (a) the amount of the total borrowings outstanding; and (b) the amount by
which total borrowings exceeded the amount available under the collateral
formula. Under the extended agreement all borrowings bear interest, payable
monthly, at the annual rate of 3% above Silicon's prime rate, subject to
reduction as the amount of the Company's over formula borrowings decrease. In
addition, the Company agreed to modify the terms of warrants to purchase 44,119
shares of common stock to provide for exercise at a price of $.50 per share
through March 31, 2000.

Throughout fiscal 1996, the Company continued to be in default of the
provisions in the credit agreement with Silicon. At September 30, 1996,
principal of $4,375,304 and accrued interest of $443,394 were outstanding under
the line of credit.

In September 1996, the Company reached agreement with Silicon on an Amended
and Restated Loan and Security Agreement ("Amended Agreement") such that Silicon
agreed to convert approximately $3 million of amounts owed to it by the Company
under its Line of Credit into shares of the Company's common stock at the rate
of $1.52 per share. Silicon further agreed to extend the maturity date with
respect to the remaining $1.8 million under the Line of Credit to July 29, 1997.
The agreement was conditioned on, amongst other things, the Company's receipt of
at least $1 million in capital and the personal guarantees (for an amount not to
exceed $200,000 in the aggregate) of Michael J. Carroll, James J. Urban, and
Brian M. Carroll, officers of the Company.

In November 1996, in connection with a private placement of equity, the
Company exceeded the $1,000,000 raising of capital and Messrs. M. Carroll, J.
Urban, and B. Carroll executed personal guaranty agreements thus satisfying the
remaining conditions on the Amended Agreement.

The Amended Agreement provides a line of credit to the Company such that
advances against the line of credit for the lower of $1.8 million or the amounts
supported by a formula derived borrowing base. The borrowing base is equal to
(i) 80% of the amount of eligible accounts receivable and (ii) 50% of eligible
inventories. The lending rate on the Amended Agreement is 2% over Silicon's
prime rate and is payable on a monthly basis. See Note 3 to the Financial
Statements included elsewhere herein.

INFLATION

While inflation has not had a material effect on the Company's operations
in the past, there can be no assurance that the Company will be able to continue
to offset the effects of inflation on the costs of its products or services
through price increases to its customers without experiencing a reduction in the
demand for its

<PAGE>

products; or that inflation will not have an overall effect on the ophthalmic
medical instruments market that would have a material affect on the Company.

IMPLEMENTATION OF NEW ACCOUNTING STANDARDS

In March 1995, the FASB issued Statement Number 121, "Accounting for the
Impairment of Long Lived Assets and for Long-Lived Assets to be Disposed Of"
which requires the Company to review long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The assessment of
the impairment is based upon the estimated undiscounted future cash flows from
operating activities compared with the carrying value of the assets. If the
undiscounted future cash flows of an asset are less than the carrying value, a
write-down would be recorded measured by the amount of the difference between
the carrying value of the asset and the fair value of the asset. The Statement
is required for financial statements for fiscal years beginning after December
15, 1995. The Company will adopt this Statement during fiscal 1997 and
management believes it will not have a significant impact on the Financial
Statements when implemented.

In December 1995, the FASB issued Statement Number 123, "Accounting for
Stock-Based Compensation." Statement number 123 is effective for fiscal years
beginning after December 15, 1995, and requires either the application of an
option pricing model measurement for stock compensation, or, if a Company elects
to continue to measure stock compensation based on the difference between the
market price of the Company's common stock and the exercise price of the
employer stock option, disclosure of what the effects of the application of
option pricing model measurement would have been. The Company will initially
apply Statement Number 123 in fiscal 1997 and will elect to disclose the effect
that the application of option pricing model measurement would have had for
options granted from October 1, 1996.

<PAGE>

ITEM 7. FINANCIAL STATEMENTS

FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
INDEX TO FINANCIAL STATEMENTS

Page
----

Report of Independent Certified Public Accountants....................... F-2

Balance Sheets........................................................... F-3

Statements of Operations................................................. F-5

Statements of Cash Flow.................................................. F-6

Statements of Stockholders' Equity (Deficit)............................. F-7

Notes to the Financial Statements........................................ F-8

F-1

<PAGE>

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors
of Franklin Ophthalmic Instruments Co., Inc.
Romeoville, Illinois

We have audited the accompanying balance sheets of Franklin Ophthalmic
Instruments Co., Inc. as of September 30, 1995 and 1996 and the related
statements of operations, stockholders' equity (deficit), and cash flows for the
years then ended. 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, the financial statements referred to above present fairly,
in all material respects, the financial position of Franklin Ophthalmic
Instruments Co., Inc. at September 30, 1995 and 1996, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
and has a deficiency in stockholders' equity. In addition, notes payable under
the Company's bank credit agreement are due on July 29, 1997. The Company does
not have the ability to pay these debts should the lender demand payment. These
factors raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also discussed
in Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

/s/ BDO Seidman, LLP
- -------------------------------

Chicago, Illinois
December 23, 1996

F-2

<PAGE>

FRANKLIN OPHTHALMIC INSTRUMENTS CO, INC.
BALANCE SHEETS
ASSETS

SEPTEMBER 30, SEPTEMBER 30,
1995 1996
------------ ------------
Current assets:
Cash and cash equivalents $ - $ -
Accounts receivable, less allowance for doubtful
accounts of $349,852 and $40,135, respectively 1,331,184 720,277
Inventory, less valuation allowance of
$150,000 and $100,000, respectively 2,545,940 1,356,057
Prepaid expenses 28,296 19,027
------------ ------------

Total current assets 3,905,420 2,095,361
------------ ------------

Property and equipment, at cost:
Furniture and equipment 599,307 605,638
Automobiles and trucks 119,193 119,193
Leasehold improvements 109,408 109,408
------------ ------------
827,908 834,239
Less: Accumulated depreciation and amortization 515,042 618,394
------------ ------------

Total property and equipment 312,866 215,845
------------ ------------

Other assets:
Deposits 28,298 13,935
Intangible assets, net of accumulated amortization
of $382,019 and $706,623, respectively 2,596,875 2,272,271
------------ ------------

Total other assets 2,625,173 2,286,206
------------ ------------

Total assets $ 6,843,459 $ 4,597,412
------------ ------------
------------ ------------

THE ACCOMPANYING NOTES ARE AN INTEGRAL
PART OF THESE FINANCIAL STATEMENTS.

F-3

<PAGE>

FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
BALANCE SHEETS
(CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

SEPTEMBER 30, SEPTEMBER 30,
1995 1996
------------- -----------

Current liabilities:
Bank overdrafts $ 251,078 $ 55,597
Current portion of long-term debt 324,660 567,395
Accounts payable 2,070,526 1,180,475
Notes payable to bank 4,396,126 4,375,304
Current portion of capitalized lease obligations 14,687 16,125
Deposits 359,762 429,844
Accrued liabilities 666,346 859,279
Notes payable to related parties 207,679 215,188
------------- -----------

Total current liabilities 8,290,864 7,699,207
------------- -----------

Long-term debt:
Long-term debt, less current portion 378,128 93,722
Capitalized lease obligations, less current
portion 53,186 30,695
------------- -----------

Total long-term debt 431,314 124,417
------------- -----------

Total liabilities 8,722,178 7,823,624
------------- -----------

Stockholders' equity (deficit):
Common stock: $0.001 par value; authorized
25,000,000 shares; 7,656,025 issued and
outstanding at September 30, 1995 and
9,544,810 issued and outstanding at
September 30, 1996 7,656 9,545
Additional paid-in capital 8,240,020 8,868,577
Accumulated deficit (10,126,395) (12,104,334)
------------- -----------

Total stockholders' equity (deficit) (1,878,719) (3,226,212)
------------- -----------

Total liabilities and stockholders'
equity (deficit) $ 6,843,459 $ 4,597,412
------------- -----------
------------- -----------

THE ACCOMPANYING NOTES ARE AN INTEGRAL
PART OF THESE FINANCIAL STATEMENTS.

F-4

<PAGE>

FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
STATEMENTS OF OPERATIONS

FOR THE YEAR ENDED
SEPTEMBER 30,
-----------------------------

1995 1996
---- ----
Sales $ 13,316,949 $ 8,469,994

Less:
Cost of sales 10,663,280 6,367,743
Selling, general and
administrative expenses 5,315,753 3,575,555
Inventory loss 770,033 -
Restructuring charge 241,415 -
------------- ------------
Loss from operations (3,673,532) (1,473,304)
------------- ------------

Other income (expense):
Interest income 7,545 54
Interest expense (688,345) (737,942)
Other income (expense) 17,833 1,993
------------- ------------

Other expense, net (662,967) (735,895)
------------- ------------
Loss before extraordinary item (4,336,499) (2,209,199)

Extraordinary item, gain from debt restructuring - 231,260
------------- ------------

Net loss $ (4,336,499) $ (1,977,939)
------------- ------------
------------- ------------

Loss per common share:

Loss before extraordinary item $ (0.80) $ (0.28)
------------- ------------
------------- ------------

Net loss $ (0.80) $ (0.25)
------------- ------------
------------- ------------

Weighted average # of common shares outstanding 5,395,182 7,854,393
------------- ------------
------------- ------------

THE ACCOMPANYING NOTES ARE AN INTEGRAL
PART OF THESE FINANCIAL STATEMENTS.

F-5

<PAGE>

FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
STATEMENTS OF CASH FLOWS

FOR THE YEAR ENDED
SEPTEMBER 30,
----------------------------------
1995 1996
---- ----

Cash flows from operating activities:
Net loss $ (4,336,499) $ (1,977,939)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation 117,648 103,351
Amortization 390,526 324,604
Gain from debt restructuring - (231,260)
Professional services performed in
exchange for common stock - 312,374
Loss on sale of equipment 2,720 -
Changes in current assets and liabilities:
Accounts receivable 1,888,585 610,907
Inventory 2,229,681 1,189,883
Prepaid expenses 148,258 9,269
Other assets 19,609 14,363
Customer deposits 133,530 70,083
Accounts payable, trade and accrued
liabilities (984,974) (373,655)
---------- ----------
Net cash used in operating activities (390,916) 51,980
---------- ----------

Cash flows from investing activities:
Proceeds from sale of equipment 53,790 -
Acquisition of equipment (85,053) (6,331)
Acquisition of software rights (23,252) -
---------- ----------
Net cash used in investing activities (54,515) (6,331)
---------- ----------

Cash flows from financing activities:
Loan origination fees (40,848) -
Net change in bank overdrafts (370,549) (195,481)
Payments on capital leases (23,578) (21,053)
Net change in borrowings under line of credit 20,822 (20,822)
Net proceeds from issuance of common stock 189,200 -
Proceeds from exercise of bridge warrants 31,250 -
Increase in long-term debt 200,000 4,198
Repayment of debt (38,747) (27,679)
Proceeds from issuance of promissory
notes to related parties 200,000 215,188
---------- ----------
Net cash provided by (used in) financing
activities 167,550 (45,649)
---------- ----------
Net decrease in cash and cash equivalents (277,881) -
Cash and cash equivalents at beginning of year 277,881 -
---------- ----------
Cash and cash equivalents at end of year $ - $ -
---------- ----------

THE ACCOMPANYING NOTES ARE AN INTEGRAL
PART OF THESE FINANCIAL STATEMENTS.

F-6

<PAGE>

FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

Common stock
$0.001 par value Total
------------- Additional stockholders'
Number of paid-in equity
shares Amount capital Deficit (deficit)
-------- ------- ------- ------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, September 30, 1994 4,037,673 $ 4,037 6,490,688 (5,789,896) $ 704,829

Exercise of bridge unit warrants 62,500 63 31,188 - 31,251
Sale of stock for cash 81,378 82 64,118 - 64,200
Conversion of MOI acquisition notes (Note 6) 600,000 600 299,400 - 300,000
Issuance of shares related to MOI acquisition
notes (Note 6) 1,389,474 1,389 (1,389) - -
Sale of stock to related parties (Note 6) 250,000 250 124,750 - 125,000
Conversion of 5% notes (Note 5) 1,975,000 1,975 985,525 - 987,500
Davis separation agreement (Note 1 (b))
Return of stock (800,000) (800) 800 - -
Contribution of equity - - 200,000 - 200,000
Issuance of stock for software rights 60,000 60 44,940 - 45,000
Net loss - - - (4,336,499) (4,336,499)
------------- ----------- ----------- ------------ ------------

BALANCE, September 30, 1995 7,656,025 7,656 8,240,020 (10,126,395) (1,878,719)

Issuance of stock for services 16,500 17 12,358 - 12,375
Issuance of stock for services (Note 6) 600,000 600 299,400 - 300,000
Conversion of accounts payable (Note 5) 102,285 102 25,469 - 25,571
Conversion of shareholder notes payable (Note 4) 720,000 720 179,280 - 180,000
Conversion of 9% notes (Note 5) 450,000 450 112,050 - 112,500
Net loss - - - (1,977,939) (1,977,939)
------------- ----------- ----------- ------------ ------------

BALANCE, September 30, 1996 9,544,810 $ 9,545 $ 8,868,577 $(12,104,334) $ (3,226,212)
------------- ----------- ----------- ------------ ------------
------------- ----------- ----------- ------------ ------------

</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL
PART OF THESE FINANCIAL STATEMENTS.

F-7

<PAGE>

FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
NOTES TO FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(A) NATURE OF BUSINESS

Franklin Ophthalmic Instruments Co., Inc. (the "Company"), located in
Romeoville, Illinois, is engaged in the national retail sale of ophthalmic
instruments which are marketed to doctors, hospitals, universities and the
military through the use of catalogs and outside sales representatives. The
Company's principal markets are located in the Midwest, Southeast and West Coast
of the United States. The Company's operations involve granting credit to
local, regional and national medical practices, hospitals, universities and to
the military. Concentrations of credit risk are limited by the large number of
entities comprising the Company's customer base and by the geographic diversity
of the Company's customers. The Company operates under the trade name "Franklin
MOI".

(B) SIGNIFICANT MATTERS AFFECTING COMPARABILITY

During the fiscal year ended September 30, 1995, the Company underwent
significant structural, management and operational changes, whereas fiscal 1996
reflects the results of the Company operating under new management and the
completion of the aforementioned structural and operational changes. As a
result, the operating results for fiscal 1996 lack, in several respects,
comparability to the results of operations for the fiscal year ended September
30, 1995.

Until the second quarter of fiscal 1995, the Company operated facilities in
Hayward, California and Lawrenceville, Georgia (which represented the Company's
original operations), Jacksonville, Florida (which was acquired in January 1994
in the Company's acquisition of certain assets of Progressive Ophthalmic
Instruments, Inc., "POI") and Romeoville, Illinois (which was added with the
Company's July 1994 acquisition of MOI). During the second quarter of fiscal
1995, the Company underwent a change in management, as previously described and
further described below, and under new management, decided to close all but the
Romeoville, Illinois facility.

Pursuant to an agreement, dated April 1, 1995, between the Company, Robert
A. Davis (the Company's former Chief Executive Officer, Chief Financial Officer,
and President), certain partnerships in which Mr. Davis has an interest, Michael
J. Carroll, James J. Urban and Brian M. Carroll (the "Separation Agreement"),
Mr. Davis and Mr. Dallas Talley resigned their positions with the Company and
Messrs. Michael Carroll and James Urban were elected to fill the vacancies on
the Company's Board of Directors. The Separation Agreement also provided that:
(i) Mr. Davis would contribute 800,000 shares of the common stock back to the
Company; and (ii) Mr. Davis would forgive $200,000 owed to him by the Company.
Under the Separation Agreement , the Company agreed to indemnify Mr. Davis for
and against any claims, other than claims for fraud and certain types of
negligence, which might be made in connection with Mr. Davis' service as an
officer or director of the Company.

Subsequently, new management of the Company decided to attempt to
restructure the Company's operations around the MOI operations acquired in July
1994. As a result, the California, Florida and Georgia facilities were closed.
A result of these substantial changes in the Company's operations, is that
operating results for fiscal 1995 and fiscal 1996 lack comparability. Until the
second quarter of fiscal 1995, the Company operated the Hayward Facility, the
Georgia Facility, a Jacksonville, Florida Facility (which was added with the
Company's acquisition of Progressive Ophthalmic Instruments) and a Romeoville
facility (which was added with the Company's acquisition of Midwest Ophthalmic
Instruments, Inc., previously defined as "MOI").

F-8

<PAGE>

FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)

The preparation of the 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.

(D) INVENTORIES

Inventories consisting of new equipment, used equipment and parts, are
valued at the lower of cost (using the first in first-out method) or market.

(E) PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost. Depreciation is provided
using straight-line and accelerated methods over the estimated useful lives of
three to seven years. Leasehold improvements are amortized on a straight-line
basis over the lesser of the estimated useful lives of the assets or the related
lease terms.

(F) INTANGIBLE ASSETS

Intangible assets include employment contracts and goodwill, which
represents the excess of cost over fair market value of net assets acquired in
the purchase of MOI and in the acquisitions of individual distributorships.

It is the Company's policy to periodically evaluate the carrying value of
its operating assets, including goodwill, and to recognize impairments when the
estimated future net operating cash flows to be generated from the use of the
assets are less than their carrying value. The Company measures impairment of
goodwill by the difference between the carrying value and the estimated
discounted cash flows from the assets.

Effective July 1, 1995, the Company reduced the estimated useful life for
goodwill related to the acquisition of MOI from 30 years to 15 years. This
change was made, retroactively to the beginning of fiscal 1995, to reflect
management's revised estimate of the useful life of the MOI goodwill, which was
revised to reflect the significance of certain key personnel at MOI and the rate
at which the ophthalmic industry could change. The effect of this change was a
fourth quarter increase in net loss of approximately $90,000 or $.02 per share
for fiscal 1995.

Amortization expense related to intangible assets was $390,526 for the year
ended September 30, 1995 and $324,604 for the year ended September 30, 1996.

(G) INCOME TAXES

The Company provides for deferred taxes on the difference between the
financial reporting and tax bases of assets and liabilities in accordance with
Statement of Financial Accounting Standards No. 109.

F-9

<PAGE>

FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)

(H) NET LOSS PER SHARE

Net loss per common share is computed by dividing net loss by the weighted
average number of common shares outstanding. Outstanding common stock options,
warrants and shares of common stock issuable upon the conversion of outstanding
convertible debentures have been excluded from the computation of net loss per
share as their effect would be anti-dilutive.

(I) CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments that have maturity of
three months or less on the date of purchase to be cash equivalents.

(J) FINANCIAL INSTRUMENTS

Financial instruments which potentially subject the Company to
concentrations of risk consist principally of accounts receivable. The accounts
receivable is from numerous entities located throughout the United States and
the associated credit risks are limited. The carrying values reflected in the
balance sheet at September 30, 1996 reasonably approximate the fair values for
accounts receivable and payable.

(K) ADVERTISING

Advertising costs are expensed as incurred and included in "selling,
general and administrative expenses". Advertising expenses amounted to
approximately $181,000 in fiscal 1995 and approximately $44,000 in fiscal 1996.

(L) RECLASSIFICATIONS

Certain reclassifications have been made to prior year for consistency
purposes.

2. GOING CONCERN

The accompanying financial statements have been prepared on the assumption
that the Company will continue as a going concern and therefore assume the
realization of the Company's assets and the satisfaction of its liabilities in
the normal course of operations.

As discussed below, the Company was in default under the terms of its
revolving credit facility with Silicon Valley Bank ("Silicon"), which is the
Company's primary credit facility through the end of fiscal year 1996.
Additionally, in part because of that default and the resulting inability to
obtain additional working capital, the Company has been unable to make timely
reductions in the amount owed to its product suppliers. As a consequence, the
Company was unable to obtain otherwise customary trade credit and was limited to
purchases of product on limited credit terms or with payment on delivery.

The Company's ability to continue as a going concern is ultimately
dependent on its ability to increase its sales to a level that will allow it to
operate profitably, generate positive operating cash flows, and to refinance
outstanding debt when it comes due. Although the reduction of expenses (which
was begun in the last half of fiscal 1995 and continued into fiscal 1996) can
contribute to the necessary return to profitability, achieving profitability
without an increase in sales would require much greater levels of expense
reductions and in all likelihood could only be accomplished through a
significant reduction and restructuring of the nature and scope of the Company's
operations.

F-10
<PAGE>

FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)

In connection with the Company's financial restructuring efforts, the
Company reached agreements with Silicon, its primary trade creditors and certain
debtholders during the fourth quarter of fiscal 1996, and the first quarter of
fiscal 1997. See Note 3 to the Financial Statements included elsewhere herein.
In addition, the Company raised $1,200,250 in new capital through the private
placement of equity in the first quarter of fiscal 1997.

The restructuring agreement with Silicon provided that Silicon would
convert approximately $3,000,000 owing to Silicon into shares of the Company's
common stock at a conversion rate of $1.52 per share, and transfer the remaining
$1.8 million owing to Silicon into a new credit facility with Silicon. The
agreement with Silicon was conditioned on, among other things: (i) the Company's
simultaneous receipt of at least $1 million of proceeds from the private
placement of its securities; (ii) the Company's best efforts in converting
certain amounts owed to trade suppliers into equity securities or long-term
notes; and (iii) the personal guarantees of certain officers of the Company for
an amount not to exceed an aggregate of $200,000. The Company met the
conditions of the Silicon agreement during the first quarter of fiscal 1997 and
the new line of credit became effective in November 1996.

In connection with the restructuring of trade debt during the fourth
quarter of fiscal 1996: (i) $155,473 of trade debt was converted to stock in the
Company at a rate of $1.52 per share which resulted in a gain from restructuring
of $129,902; (ii) $101,358 was forgiven; and (iii) approximately $106,000 was
converted to promissory notes with terms of up to 24 months. This resulted in
an extraordinary gain of $231,260. Subsequent to the fiscal year ended
September 30, 1996, the Company completed agreements with trade creditors such
that (i) $378,000 of trade payables were converted to stock at the rate $1.52
per share; (ii) $100,000 was forgiven; and (iii) $162,000 was converted to a 24
month promissory note.

Management believes that with: (i) the completion of the above mentioned
restructuring of its debt; (ii) the equity infusion that it has received
subsequent to the Company's fiscal year end September 30, 1996; (iii) the
increase in trade credit which the Company has received upon the aforementioned
debt restructuring; and (iv) the expansion of the Company's marketing efforts
and sales territory expansion the Company will be able to achieve sales
increases by reducing the limiting effects that the Company's lack of working
capital have had on marketing and the ability to obtain products necessary to
accept and fill customer orders on a timely basis, and allow the Company to
refinance outstanding debt when it comes due in fiscal 1997. The increases in
sales should ultimately allow the Company to return to profitability and
generate positive cash flows.

There can be no assurance that the Company will be able to increase sales
levels to achieve profitability which could force the Company to significantly
reduce its operations in order to reduce expenses or take other actions to
resolve liquidity constraints that may arise.

F-11

<PAGE>

FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)

3. NOTES PAYABLE - BANK

In January 1994, Silicon extended the Company a supplemental $1,000,000
revolving line of credit facility, $750,000 of which was to be used solely for
the acquisition of POI, with the remaining $250,000 for the use in the future
acquisition of a separate distributorship. Silicon also agreed to increase the
limit on inventory borrowings to the lesser of $2,000,000 or 50% of the book
value of eligible inventories, net of trade accounts payable, upon the Company's
repayment of the supplemental line of credit. The supplemental line of credit
was repaid in August 1994. In March 1994, in connection with the Company's
acquisition of MOI, Silicon increased the overall limit on the line of credit to
$5,500,000.

In connection with the increase in the line of credit and the extension of
a supplemental credit facility, the Company paid loan origination fees of $2,500
and issued to Silicon warrants to purchase an aggregate of 40,000 shares of
common stock at an exercise price of $5.00 per share exercisable through March
31, 1999. In October 1994, the Company reduced the exercise price of the
warrant to purchase 40,000 shares of common stock and that of the warrant to
purchase 4,119 shares of common stock issued to Silicon in April 1992, to $1.30
per share for exercises before January 31, 1995. In November 1994, the exercise
price was further reduced to $1.00 per share for exercises before February 28,
1995.

During fiscal 1995, the balance outstanding under the line of credit
exceeded the amount available under the borrowing formula and the Company was
otherwise in default with respect to certain provisions of the line of credit
agreement. On April 1, 1995, Silicon agreed to extend the terms of the
Company's line of credit, as generally in effect in the original agreement,
through February 6, 1996 (subsequently extended to April 15, 1996), and agreed
to forbear in the exercise of its rights resulting from the Company's past
defaults or defaults in the future compliance with the financial covenants, and
to advance the Company an additional $500,000 (the "flat rate loan"),
conditioned upon the Company's agreement to make certain scheduled reductions in
both: (a) the amount of the total borrowings outstanding; and (b) the amount by
which total borrowings exceeded the amount available under the collateral
formula. Under the extended agreement all borrowings bear interest, payable
monthly, at the annual rate of 3% above Silicon's prime rate, subject to
reduction as the amount of the Company's over formula borrowing decreases. In
addition, the Company agreed to modify the terms of warrants to purchase 44,119
shares of common stock to provide for exercise at a price of $.50 per share
through March 31, 2000.

In September 1996, the Company reached an agreement with Silicon on an
Amended and Restated Loan and Security Agreement ("Amended Agreement") such that
Silicon agreed to convert approximately $3 million of amounts owed to it by the
Company under its Line of Credit into shares of the Company's common stock at
the rate of $1.52 per share. As a result of the conversion, Silicon further

F-12
<PAGE>

FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)

agreed to extend the maturity date with respect to the remaining $1.8 million
under the Line of Credit to July 1997. The agreement was conditioned on,
amongst other things, the Company's receipt of at least $1 million in cash and
the personal guarantees (for an amount not to exceed $200,000 in the aggregate)
of certain officers of the Company.

In November 1996, in connection with a private placement of equity, the
Company exceeded the $1,000,000 receipt of capital requirement and its officers
executed personal guarantees. As a result of the conversion of $3,160,327, the
amount owed to Silicon less the $1.8 million facility, the Company will record
an extraordinary gain of $2,495,412 during the first quarter of fiscal 1997.
See Note 11.

The Amended Agreement provides for the Company to receive advances against
the line of credit for the lower of $1.8 million or the amounts supported by a
formula derived borrowing base. The borrowing base is equal to (i) 80% of the
amount of eligible accounts receivable and (ii) 50% of eligible inventories or
$1,000,000. The lending rate on the Amended Agreement is 2% over Silicon's
prime rate and is payable on a monthly basis.

4. SHORT TERM DEBT - RELATED PARTY

In September 1995, Michael J. Carroll and James J. Urban, the Company's
President/Chief Executive Officer and Senior Vice President/Chief Operating
Officer, respectively, loaned an aggregate of $100,000 to the Company in
exchange for 90-day promissory notes. In addition, Linda Zimdars, a member of
the Company's Board of Directors, loaned $100,000 to the Company in exchange for
90-day promissory notes. The notes to Ms. Zimdars were personally guaranteed by
Messrs. M. Carroll and Urban. The notes bear interest at 15% per annum. In
December 1995, a payment of $10,000 was made on the note to Messrs. Carroll and
Urban and a payment of $10,000 was made on the note to Ms. Zimdars. In April
1996, the notes were amended to extend their maturity to July 1, 1996, and in
September 1996, the notes were converted to common stock in the Company at the
conversion rate of $.25 per share.

In December 1995, the Company borrowed an additional $280,000 under 60-day
promissory notes bearing interest at 6% per annum and note origination fees of
$17,000 (6%). Of the aggregate of $280,000: (i) $50,000 was borrowed from each
of Michael Carroll and James Urban; (ii) $80,000 was borrowed from Ms. Zimdars;
and (iii) $100,000 was borrowed from Tiger Eye Capital, L.L.C. ("Tiger Eye").
The notes were repaid in February 1996. Tiger Eye has consulting agreements
with the Company which provide for the issuance of 600,000 shares of common
stock in connection with the rendering of investor and public relations
services. (see Note 6).

In February 1996, the Company borrowed $150,000 from Messrs. M. Carroll and
Urban, and Ms. Zimdars under 24-day promissory notes bearing interest at the
rate of 1% per annum above the prime lending rate in effect from time to time.
A loan origination fee of 6% was also paid. Of the aggregate of $150,000,
$50,000 was borrowed from each of Messrs. M. Carroll and Urban, and Ms. Zimdars.
In March 1996, a payment of $12,500 was made to each of Messrs. M. Carroll and
Urban, and in May 1996, the balance of the notes to Messrs. M. Carroll and Urban
were repaid. The note to Ms. Zimdars was also repaid in May 1996.

During August 1996, the Company borrowed $215,000 from an individual under
a 30 day promissory note bearing interest at 10% per annum and a note
origination fee of $6,450. In October, the note was converted to 860,000 shares
of common stock in the Company as participation in the Company's Private
Placement offering which commenced on October 1, 1996. In addition, warrants
exercisable for $1.00 were also issued as part of the participation in the
aforementioned Private Placement offering.

F-13
<PAGE>

FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)

5. LONG-TERM DEBT

Long-term debt consists of the following:
<TABLE>
<CAPTION>

September 30,
-------------
1995 1996
---- ----
<S> <C> <C>
Notes payable collateralized by automobiles and trucks,
with interest rates between 4.8% and 9.3%, principal
and interest payable monthly, due on or before February 1998 $ 30,288 $ 16,161

9% notes payable, due on July 1, 1996 137,500 25,000

5% convertible notes payable 25,000 -

6.3% trade creditor promissory note payable monthly
through November 1998 510,000 540,000

10% trade creditor promissory note payable monthly
from December 1996 through November 1998
of which $13,326 represents amounts for deferred interest - 79,956
--------- --------

Total long-term debt 702,788 661,117

Less current portion 324,660 567,395
--------- --------

Long-term debt, less current portion $ 378,128 $ 93,722
--------- --------
--------- --------
</TABLE>

The aggregate amounts of long term debt mature as follows:

Year ending September 30, Amount
------------------------- ------

1997 $567,395
1998 90,947
1999 2,775
---- --------
Total $661,117
--------
--------

During 1994, the Company issued $1,150,000 in principal amount of 5%
convertible promissory notes (the "5% Notes") and 9% promissory notes (the "9%
Notes"). The net proceeds were used to fund the cash consideration paid in
connection with the Company's acquisition of MOI.

The outstanding principal of the 5% Notes was convertible into shares of
Common Stock at the rate of $3.00 per share, or $2.50 per share if the holder
elected to extend the maturity date of a note past December 31, 1995, on an all
or none basis, by notice of conversion to the Company after June 30, 1995 and up
to the maturity date, or at any time within thirty days of issuance of a notice
of prepayment by the Company. In the event that the closing bid price per share
of common stock equaled or exceeded $8.00 for five consecutive trading days,
then, at the Company's election and immediately upon the issuance of a notice by
the Company, the outstanding principal and interest under each 5% Note would be
converted into shares of common stock at the rate of $3.00 per share.

F-14

<PAGE>

FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)

During fiscal 1995, the Company on three occasions elected to reduce the
conversion rate applicable to the 5% Notes, first in October 1994 to $1.50 per
share, then in December 1994 to $1.00 per share, and then in April 1995 (and to
extend the maturity date of the 5% Notes) to $.50 per share. During the third
quarter of fiscal 1995, the holders of an aggregate of $987,500 of the 5% Notes
elected conversion at $.50 per share and were issued an aggregate of 1,975,000
shares of common stock.

Officers or directors of the Company were purchasers of an aggregate of
$362,500 of 5% Notes (which were subsequently converted into 725,000 shares of
common stock in connection with the third quarter fiscal 1995 conversion
described above) and $62,500 of 9% Notes.

In September 1996, in connection with the Company's debt restructuring, the
Company elected to provide a conversion rate on the 9% Notes such that the
amounts outstanding under the 9% Notes could be converted at the rate of $.25
per share (the rate at which the Company commenced a Private Placement of Equity
in the Company on October 1, 1996).

During August 1996, the Company reached agreement with a trade creditor in
which of the $222,104 owed, $66,631 would be converted to a 24 month promissory
note with simple interest at 10%, and the balance, $155,473, would be converted
into 102,285 shares of the Company's common stock (a conversion rate of $1.52
per share).

The Company believes that the interest rates on its long-term debt are
generally below the rates that would currently be available for similar debt
instruments issued by similar borrowers, and that as a result, the market value
of the Company's long-term debt is less than the carrying amount. However, a
determination of the specific market value of the Company's long-term debt would
involve excessive costs.

6. STOCKHOLDERS' EQUITY (DEFICIT)

(A) COMMON STOCK AND COMMON STOCK WARRANT TRANSACTIONS (THE "SECURITIES
TRANSACTIONS")

In addition to the Securities Transactions described in Notes 3, 4 and 5
above, the following occurred during fiscal 1995 and 1996:

In connection with the Company's July 1994 acquisition of MOI, the Company
entered into an agreement with MOI's owners, who are now the Company's chief
executive officer and chief operating officer (Michael J. Carroll and James
J. Urban, respectively), to issue common stock with an aggregate value of
$800,000, ($400,000 in July 1995 and $400,000 in July 1996) at the then
market prices. The agreement was amended in April, 1995 to provide for
immediate settlement, and the Company satisfied the total obligation by
issuing 1,600,000 shares of common stock at a value of $.50 per share, which
reflected the current market price.

The issuance of 210,526 of such shares at a value of $800,000 had been
reflected in the financial statements at the time of the acquisition, and in
the third quarter of 1995 the Company recorded the issuance of the 1,389,474
shares.

F-15

<PAGE>

FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)

The MOI acquisition also resulted in the issuance of a $300,000 note
payable, due $150,000 in July, 1995 and $150,000 July, 1996. During the third
quarter of 1995 the holders of note (Michael J. Carroll and James J. Urban),
agreed to convert the note into common stock at the rate of $.50 per share,
resulting in the issuance of 600,000 shares.

In April 1995, the Company issued an aggregate of 250,000 shares of Common
Stock to Michael Carroll and James Urban for cash proceeds of $125,000.

In June 1995, the Company entered into a consulting agreement and a finders
agreement with Tiger Eye, which agreements contemplated the issuance of an
aggregate of 500,000 shares of common stock by the Company in exchange for the
services to be provided by Tiger Eye thereunder. In April 1996, such agreements
were amended to provide for performance thereunder at such time as the Company
became current in its public reporting under the Securities Exchange Act of 1934
(the "Exchange Act").

In December 1995, the Company entered into a consulting agreement with
Tiger Eye which provides for the rendering of investor and public relations
services. Pursuant to such agreement, Tiger Eye was entitled to receive 300,000
shares of common stock: 100,000 of which were issuable upon execution of the
agreement and 33,333 of which were issuable each month through June 1996. The
initial term of the agreement commenced January 1, 1996. Such agreement was
amended to provide for performance thereunder at such time as the Company became
current in its public reporting under the Exchange Act.

In July, pursuant to the terms of the aforementioned agreements, as
amended, between the Company and Tiger Eye, the Company issued 600,000 shares of
the Company's common stock to Tiger Eye. As a result of the above, the Company
recorded an expense of $300,000 during the fourth quarter of fiscal 1996.

(B) OUTSTANDING STOCK PURCHASE WARRANTS

The following sets forth the common stock purchase warrants outstanding
which were exercisable as of September 30, 1996:

Shares Obtainable Per Share Exercisable
on Exercise Exercise Price Through
----------- -------------- -------

44,119 $.50 March 2000

25,000 $1.00 December 1997

2,187,500 $5.00 July 1998

In addition, the underwriters of the Company's initial public offering
received a warrant to purchase 125,000 units, exercisable at $6.40 per unit
through July 1998. Each unit consists of one share of common stock and one
warrant exercisable at $5.00 per share through July 1998.

F-16

<PAGE>

FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)

In February 1993, the Company adopted the Franklin Ophthalmic Instruments
Co., Inc. 1993 Stock Option and Appreciation Rights Plan (the "1993 Plan") which
provides for the grant of options to officers, directors, employees and
consultants to purchase not more than an aggregate of 200,000 shares of common
stock. The 1993 Plan provides for the grant of options intended to qualify as
"incentive stock options" under Section 422 of the Internal Revenue Code, as
amended, as well as options which do not so qualify.

With respect to qualified options, no option may be granted more than ten
years after the effective date of the 1993 Plan or exercised more than ten years
after the date of grant (five years if the optionee owns more than ten percent
of the common stock of the Company). The option price may not be less than 100
percent of the fair market value of the common stock on the date of the grant
(110 percent if the optionee owns more than ten percent of the common stock of
the Company). Subject to certain limited exceptions, options may not be
exercised unless, at the time of exercise, the optionee is in the service of the
Company. The options to be granted under the 1993 Plan included options to
purchase shares of common stock pursuant to a formula by which each non-employee
director is granted non-qualified options to purchase 15,000 shares of common
stock each year.

The 1993 Plan was subsequently amended in December 1993 and January 1994 to
ensure compliance with federal and state securities laws, and to permit an
option holder to arrange for a "cashless exercise" wherein an option may be
exercised and the common stock sold on the same day with a portion of the
proceeds from the sale delivered to the Company to pay the exercise price of the
option. These amendments were approved by the shareholders at the annual
shareholders' meeting held on March 11, 1994.

In December 1993, the Company's Board of Directors adopted (subject to
shareholder approval which was subsequently obtained) the Franklin Ophthalmic
Instruments Co., Inc., 1994 Combined Stock Option and Appreciation Rights Plan
(the "1994 Plan"). The 1994 Plan was also amended to conform with state
securities laws. The shareholders approved the adoption of the 1994 Plan and
its amendments at the annual shareholders' meeting held on March 11, 1994.

The terms and conditions of the 1994 Plan are substantially identical to
those of the 1993 Plan with the following two significant differences: (i) the
number of shares of common stock available to purchase through the grant of
options and rights under the 1994 Plan aggregates 330,000; and (ii) directors
who are not also employees are not eligible to participate in the 1994 Plan.

The following sets forth the activity for the 1993 Plan and the 1994 Plan
for fiscal 1995 and 1996:
<TABLE>
<CAPTION>

1993 Plan 1994 Plan
---------- ----------
Shares Exercise Price Shares Exercise Price
------- -------------- ------ --------------
<S> <C> <C> <C> <C>
Outstanding at September 30, 1994 120,000 $ 4.00-5.625 249,000 $2.625-3.19
Fiscal 1995
Granted 30,000 $ .75 - -
Forfeited (60,000) $4.625-5.625 (153,000) $2.625-3.19
------- ----------- -------- ----------
Outstanding at September 30, 1995 90,000 $ .75 -4.625 96,000 $2.625-3.19

Fiscal 1996
Granted 30,000 $ .50 - -
Forfeited - - (28,500) $2.625-3.19
------------------------ -------------------------
Outstanding at September 30, 1996 120,000 $ 50- 4.625 67,500 $2.625-3.19
</TABLE>

All outstanding options reflected above are currently exercisable.

F-17

<PAGE>

FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)

7. INCOME TAXES

The following sets forth the deferred tax assets and liabilities resulting
from temporary differences between the financial reporting and tax bases of
assets and liabilities:

September 30,
-------------
1995 1996
---- ----
Deductible temporary differences
Net operating loss carryforwards $ 3,000,000 $3,700,000
Allowance for doubtful accounts 140,000 16,000
Valuation reserve for inventory obsolescence 60,000 40,000
Valuation allowance for deferred tax assets (3,200,000) (3,756,000)
----------- ----------
Net deferred tax asset $ - $ -
----------- ----------

Due to the uncertainty of realizing the deferred tax asset in the future,
the Company has recorded a valuation allowance equaling the deferred tax asset.

As of September 30, 1996, the Company has net operating loss carryforwards
of approximately $9,300,000 which may be used to reduce taxable income and
income taxes in future years. The availability of certain operating loss
carryforwards to offset future years' taxable income is subject to certain
limitations due to changes in the Company's ownership during the year ended
September 30, 1993. The carryforwards expire from fiscal 2006 to fiscal 2011.

8. COMMITMENTS AND CAPITAL LEASE OBLIGATIONS

The Company leases office, warehouse and service facilities under operating
leases through 2001. Rent expense (net of sublease income) was $143,523 for the
year ended September 30, 1995 and $157,411 for the year ended September 30,
1996.

Future obligations under the noncancellable operating leases with initial
remaining terms in excess of one year at September 30, 1996 are as follows:

Year Ending Minimum Minimum
September 30, Rental Payments Sublease Income Net
------------- --------------- --------------- ---

1997 $188,100 $54,015 $134,085
1998 188,100 55,464 132,636
1999 182,665 56,907 125,758
2000 122,880 - 122,880
2001 71,680 - 71,680
-------- -------- --------

Total $753,425 $166,386 $587,039
-------- -------- --------
-------- -------- --------

The Company leases equipment under capital lease financing arrangements.
Amortization expense associated with the equipment leases for the years ended
September 30, 1995 and 1996 was $25,964 and $15,974 respectively.

F-18
<PAGE>

FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)

Future minimum capital lease payments are as follows:

Year Ending September 30, Amount
------------------------- ------
1997 $21,079
1998 21,079
1999 15,994
2000 205
-------
Total before interest deduction 58,357
Less amount representing interest 9,729
-------
Capital lease obligations $48,628
-------
-------

9. STATEMENTS OF CASH FLOWS

FOR THE YEAR
ENDED SEPTEMBER 30,
-------------------
1995 1996
---- ----
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the year for
Interest $ 607,840 $ 400,846
----------- -----------
----------- -----------
Income taxes $ - $ 3,000
----------- -----------
----------- -----------

Supplemental schedule of non-cash investing and
financing activities:

Contribution to capital (forgiveness of debt) $ 200,000 $ -
Note payable issued to vendor for trade debt from
inventory purchases 510,000 66,631
Common stock issued for software rights 45,000 -
Common stock issued in connection with the
conversion of debt 1,287,500 318,071
Common stock issued for services - 312,374
----------- -----------

Total non-cash investing and financing activities $ 2,042,500 $ 697,076
----------- -----------
----------- -----------
</TABLE>

10. RELATED PARTY TRANSACTIONS

The Company has an agreement with a sole proprietorship, owned by Linda S.
Zimdars, a member of the Board of Directors, to provide consulting services.
Fees paid to this sole proprietorship during fiscal 1995 and 1996 were $15,750
and $21,000, respectively.

F-19

<PAGE>

FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)

11. SUBSEQUENT EVENTS (UNAUDITED)

During the first quarter of fiscal 1997, the Company raised $1,200,250 of
capital through the sale of 2,400,500 Units which were sold pursuant to a
private placement of Units (each Unit consisting of two shares of common stock
and one common stock purchase warrant). The sale of the 2,400,500 Units
exceeded the minimum of 2,000,000 Units required pursuant to the terms of the
private placement, which is being conducted by the Company on a "best efforts"
basis and provides for the sale and offer of up to a maximum of 3,200,000 Units.
With the amount raised in the aforementioned private placement, the Company met
the $1 million capital-raising requirement that was conditioned in its agreement
with Silicon, and together with the effectiveness of personal guarantees by
Messrs. M. Carroll, J. Urban and B. Carroll, the Company has met all remaining
conditions necessary for the execution of the Company's agreement with Silicon.
In addition, the Company has completed agreements with trade creditors during
November and December 1996 such that: (i) $378,000 of trade-debt would be
converted to common stock at a price of $1.52 per share; (ii) $162,000 would be
converted to a 24 month promissory note commencing November 15, 1996; and (iii)
$100,000 would be forgiven.

Supplementary earnings per share data to reflect the impact of these
transactions during the year ended September 30, 1996 are as follows:

Supplementary Loss Before Extraordinary Item $1,826,485
----------
----------

Supplementary Net Loss $1,595,325
----------
----------

Supplementary Loss Before Extraordinary Item Per Share .12
----------
----------

Supplementary Net Loss Per Share .11
----------
----------

Supplementary Weighted Average Shares Outstanding 14,983,240
----------
----------

F-20
<PAGE>

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE

On November 27, 1995, the Company's Board of Directors dismissed the firm
of Marinelli & Scott as the Company's independent public accountants. Effective
as of the same date, the Company retained BDO Seidman LLP to serve as its
independent public accountants. The forgoing events were reported and are more
fully described in the Amended and Restated Current Report on Form 8-K/A #1,
dated November 27, 1995, which was filed by the Company with the Securities and
Exchange Commission (the "Commission") on December 6, 1995 (File No. 0-21852)
and is herein incorporated by reference.

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

The names and ages of all directors and executive officers of the Company
are as follows:

Name Age Position with the Company
- ---- --- -------------------------

Michael J. Carroll 57 President, Chief Executive Officer and
Director

James J. Urban 59 Senior Vice President, Chief Operating
Officer and Director

Brian M. Carroll 33 Vice-President and Chief Financial Officer

Philip G. Winters 47 Director

Linda S. Zimdars 34 Secretary and Director

MANAGEMENT BIOGRAPHIES

MICHAEL J. CARROLL was appointed President of the Company effective January
1, 1995. In April 1995, Mr. Carroll was also appointed Chief Executive Officer
and a director of the Company upon the resignation of Robert A. Davis, the
Company's previous President and Chief Executive Officer. Prior to joining the
Company, Mr. Carroll, along with James J. Urban, was a stockholder/founder of
MOI, until July 1994 when all of the outstanding capital stock of MOI was
acquired by the Company. Mr. Carroll was Vice President and Sales Manager of
MOI. Prior to the organization of MOI in 1982, Mr. Carroll held various
executive positions in ophthalmic instrument and optical firms including Vice
President of House of Vision, Inc. (a firm in the business of manufacturing
optical products and the distribution of ophthalmic instruments with over 150
locations and approximately 1,100 employees).

JAMES J. URBAN was appointed Executive Vice President effective January 1,
1995 and Chairman of the Board of Directors upon the resignation of Dallas
Talley on April 1, 1995. Prior to joining the Company, Mr. Urban, along with
Mr. Carroll was stockholder/founder of MOI, until July 1994 when all of the
outstanding capital stock of MOI was acquired by the Company. Mr. Urban served
as President of MOI from its incorporation in 1982. Prior to the inception of
MOI, Mr. Urban held various executive positions with several ophthalmic
instrument distribution companies.

BRIAN M. CARROLL was appointed Vice President and Chief Financial Officer
effective April 1, 1995. Mr. Carroll was co-founder of MOI's digital imaging
division and Doctors Financial Services, Inc. ("DFS"). DFS was a
finance/leasing company concentrating in the ophthalmic industry. Mr. Carroll
holds a B.A. degree in finance from Loyola University of Chicago, an M.B.A.
degree in accounting from DePaul University and a J.D. degree from The John
Marshall Law School. Brian M. Carroll is the son of Michael J. Carroll.

<PAGE>

PHILIP G. WINTERS has been a Director of the Company since October 1992.
Dr. Winters is a dentist and has owned and operated his own general dentistry
practice in San Mateo, California since 1976.

LINDA S. ZIMDARS has been a Director and Secretary of the Company since
June 1992. Ms. Zimdars currently serves as a consultant to the Company. See
"Consulting and Other Arrangements" below. Prior to 1995, Ms. Zimdars was Vice
President and Branch Manager of Redwood Bank, with whom the Company had a
banking relationship from 1984 until approximately April 1995.

CLASSIFICATION OF THE BOARD OF DIRECTORS

The Board of Directors is classified into three classes: Class I, Class
II, and Class III. Each member of the Board of Directors serves for a term of
three years or until a successor has been elected and qualified. The structure
of the Board of Directors contemplates that the members of one class thereof
would be elected at each annual meeting of stockholders. Class II were expected
to stand for re-election in 1996. Class I directors were expected to stand for
re-election at the annual meeting of shareholders in 1995. Each member of the
Board of Directors the elected will serve a term of three years or until a
successor has been elected and qualified. The classification of the Board of
Directors, with staggered terms of office, was implemented for the purpose of
maintaining continuity of management and of the Board of Directors.

The Board of Directors has designated the following persons to serve in the
respective classes as noted: Class I - Michael J. Carroll; Class II - James J.
Urban; and Class III - Linda S. Zimdars and Philip G. Winters. Messrs. Carroll
and Urban succeeded to such classes upon the respective resignations of Messrs.
Davis and Talley.

INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 145 of the Delaware General Corporation Law empowers a corporation
to indemnify its directors and officers and to purchase insurance with respect
to liability arising out of their capacity or status as directors and officers
provided that this provision shall not eliminate or limit the liability of a
director (i) for any breach of the director's duty of loyalty to the corporation
or its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) arising
under Section 174 of the Delaware general Corporation Law, or (iv) for any
transaction from which the director derived an improper personal benefit. The
Delaware General Corporation Law provides further that the indemnification
permitted thereunder shall not be deemed exclusive of any other rights to which
the directors and officers may be entitled under the corporation's by-laws, any
agreement, vote of shareholders or otherwise. The Company's Certificate of
Incorporation eliminates the personal liability of directors to the fullest
extent permitted by Section 102(b)(7) of the Delaware General Corporation Law.

The effect of the foregoing is to require the Company to indemnify the
officers and directors of the Company for any claim arising against such persons
in their official capacities if such person acted in good faith and in a manner
that he reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.

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

COMMITTEES OF THE BOARD OF DIRECTORS

The Board of Directors has established an Audit Committee, an Executive
Compensation Committee and a Stock Option Committee. Mr. Winters and Ms.
Zimdars are the only members of the above referenced Committees. The Audit
Committee recommends to the Board of Directors' independent public accountants
for the Company and reviews related matters. The Executive Compensation
Committee reviews and recommends

<PAGE>

the compensation of executive officers and key employees. The Stock Option
Committee administers the Company's stock option plans.

COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT OF 1934

Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's officers and directors, and persons who
own more than ten percent of a registered class of the Company's equity
securities, to file reports of ownership and changes in ownership of equity
securities of the Company with the Securities and Exchange Commission (the
"Commission") and NASDAQ. Officers, directors and greater than ten percent
stockholders are required by regulation to furnish the Company with copies of
all Section 16(a) forms that they file.

Based solely upon a review of Forms 3, Forms 4 and Forms 5 furnished to the
Company pursuant to Rule 16a-3 under the Exchange Act, it is the Company's
belief that, other than as set forth below, any such forms required to be filed
pursuant to Section 16(a) of the Exchange Act were filed, as necessary, by the
officers, directors and securityholders required to file the same.

ITEM 10. EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The following sets forth the aggregate compensation paid to the Company's
Chief Executive Officer for services rendered to the Company during the fiscal
years indicated. None of the Company's executive officers who served as such at
the end of the last fiscal year earned in excess of $100,000 during the fiscal
years ended September 30, 1995 and 1996.

Annual Compensation Long Term Compensation

Name and Position Year Salary Bonus Compensation Awards SARS (#) Compensation
- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Michael J. Carroll 1996 $66,000 - $6,000 - - -
President & Chief 1995 $78,445 - $6,000 - - -
Executive Officer

</TABLE>

STOCK OPTION PLANS

The Company currently has two stock option plans: (i) the Franklin
Ophthalmic Instruments, Co., Inc. 1993 Stock Option and Appreciation Rights Plan
(the "1993 Stock Option Plan"); and (ii) the Franklin Ophthalmic Instruments
Co., Inc. 1994 Stock Option and Appreciation Rights Plan (the "1994 Stock Option
Plan").

The 1993 Stock Option Plan provides for the grant of options to officers,
directors (including employee and non-employee directors), employees and
consultants to purchase not more than an aggregate of 200,000 shares of common
stock of the Company. The 1994 Stock Option Plan is substantially similar to
the 1993 Stock Option Plan except that it provides for the grant of options to
officers, directors (who are also employees), employees and consultants to
purchase not more than an aggregate of 330,000 shares of common stock. The 1993
Stock Option Plan and the 1994 Stock Option Plan (collectively the "Stock Option
Plans" ) provide for: (i) the grant of options intended to qualify as "incentive
stock options" under Section 422 of the Internal Revenue Code of 1986, as
amended; and (ii) the grant of options which do not so qualify. As of the date
hereof, there are two employee directors (Messrs. M. Carroll and J. Urban), two
non-employee directors (Dr. Winters and Ms. Zimdars) and 2 additional employees
that are eligible participants in the 1994 Stock Option Plan. In addition,
stock appreciation rights may be granted in conjunction with the grant of
options under the Stock Option Plans.

Subject to Rule 16b-3 under the Exchange Act, each Stock Option Plan shall
be administered by: (i) the Board of Directors, if each member of the Board of
Directors is a "disinterested person" (as defined under Rule 16b-3); or (ii) a
committee (the "Committee") of not less than two members of the Board of
Directors, each of

<PAGE>

whom is a "disinterested person." The Board of Directors or the Committee
generally has the authority, subject to the provisions of the Stock Option
Plans, to determine the individuals to whom and the date on which discretionary
options and rights are to be granted, the number of shares to be subject to
options and rights, the exercise price of shares subject to options and rights,
the terms of any vesting forfeiture schedule and the other terms and provisions
of options and rights. The 1993 Stock Option Plan and the 1994 Stock Option
Plan are separately administered by the Committee comprised of Linda S. Zimdars
and Philip G. Winters.

While the price at which shares of common stock subject to an option may be
purchased shall be determined by the Board of Directors or the Committee, as
applicable, pursuant to the provisions of the Stock Options Plans, the purchase
price of shares of common stock issuable upon exercise of an incentive option
must not be less than 100% of the fair market value of such shares on the date
such incentive option is granted and the exercise price of a non-qualified
option shall not be less than 85% of the fair market value of the common stock
on the date of grant thereof.

The 1993 Stock Option Plan includes a formula granting (on a non-
discretionary basis) each director in office, who is not also an employee, on
the third Monday in June of each year in which the 1993 Stock Option Plan is in
effect, non-qualified options to purchase 15,000 shares of common stock at price
per share determined by a formula set forth in the provisions of the 1993 Stock
Option Plan based on the trading price of the common stock on the date of grant
of such options. The 1994 Stock Option Plan does not provide a formula for non-
discretionary grants of options.

Pursuant to the formula contained in the 1993 Stock Option Plan, non-
qualified options to purchase an aggregate of 120,000 shares of common stock had
been issued as of June 1995 to two non-employee directors (Dr. Winters and Ms.
Zimdars) at exercise prices of $4.00, $4.625, $.75 per share, and $.50 per
share. Options previously issued to Messrs. Davis and Talley expired
unexercised during fiscal 1995. Except as set forth above, no other options or
rights were granted during fiscal 1995 or fiscal 1996 under the Stock Option
Plans.

The Board of Directors or the Committee, as applicable, may require as a
condition to the grant of any option or right, that the grantee enter into a
stock option agreement which shall require, among other things, that with
respect to any options granted to directors or officers, at least six months
must elapse from the date such options are granted to the date on which any
share of common stock underlying such options are sold or any right associated
with such option is exercised, unless the Board of Directors or the Committee,
as applicable, otherwise consents in writing. No options may be granted under
the Stock Option Plans more than ten years after the date of approval of the
Stock Option Plans by the stockholders. Options granted under the Stock Option
Plans are not transferable except upon death. Except for options granted to
non-employee directors under the non-discretionary formula, options may be
exercised only while the option holder is employed by the Company, or in some
cases, within three months of termination of employment.

OPTIONS/SARA GRANTS IN LAST FISCAL YEAR

None.

AGGREGATE OPTION/SARA EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SARA VALUES

None.

EMPLOYMENT AGREEMENTS

In connection with the purchase of MOI, , the Company entered into
employment agreements with Michael J. Carroll, currently President, Chief
Executive Officer and Director of the Company, James J. Urban, currently Senior
Vice President and Chief Operating Officer, and Brian M. Carroll, currently Vice
President and Chief Financial Officer. Pursuant to the terms thereof, each such
employment agreement provides for an initial term of three years ending June 29,
1997, subject to automatic extension for a period of two years, unless earlier
terminated by the Company. Thereafter, each employment agreement provides for
extension on a year to year basis. Such agreements provided that Michael
Carroll and James Urban were to receive salaries of $78,000 per year and Brian
Carroll was to receive a salary of $60,000. Michael Carroll and James Urban
voluntarily reduced

<PAGE>

their salary in fiscal 1995 such that each now receives an annual salary of
$66,000. Each of the employment agreements provides for bonuses at the
discretion of the Company and reimbursement of business expenses and each such
agreement contains a non-compete and confidentiality provision. Such agreements
may be terminated by the Company for "Just Cause" (as such term is defined in
the employment agreements including, without limitation, violations of the
Company's policies and indictment or conviction for criminal acts) or at the
Company's sole discretion (in which case severance payments must be made by the
Company equal to nine months of salary under the terminated agreement).

CONSULTING AND OTHER ARRANGEMENTS

In December 1994, the Company entered into a one year consulting agreement
with Marketing and Acquisition Concepts pursuant to which such company will
receive consulting fees in exchange for marketing services rendered to the
Company. During fiscal years ended September 30, 1995 and 1996, Linda S.
Zimdars, a director of the Company, received consulting fees plus expenses in
connection with rendering consulting services relating to investor relations and
other financial matters. Ms. Zimdars received consulting fees, under the above
mentioned agreements of $15,750 for the fiscal year ended September 30, 1995 and
$21,000 for the fiscal year ended September 30, 1996. Pursuant to the terms of
the consulting agreement, such agreement is automatically renewed for one year
periods unless terminated by the Company.

REMUNERATION OF DIRECTORS

Until March 31, 1995, directors who are not employees of the Company
received compensation of $750 per meeting attended. Since April 1, 1995, all
meetings attended by non-employee directors have not been compensated except for
expenses incurred.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT

The following table sets forth as of the date hereof, certain information
with respect to stock ownership of (i) all persons known by the Company to be
beneficial owners of five percent or more of its outstanding Common Stock, (ii)
each of the Company's directors and executive officers, and (iii) all directors
and executive officers as a group (5 persons). Unless otherwise indicated, the
beneficial owners have sole voting and investment power over the shares of
Common Stock listed below.

% of Outstanding Shares of
Name and Address Number of Shares Common Stock Beneficially
of Beneficial Owner(1) Beneficially Owned(2) Owned
- ------------------- ------------------ -----

Michael J. Carroll (3) 1,561,711 (4) 16.34%

James J. Urban (3) 1,561,710 (5) 16.34%

Brian M. Carroll 22,105 (6) .23%

Philip G. Winters 660,000 (7) 6.87%

Linda S. Zimdars 670,000 (8) 6.98%

All Executive Officers
& Directors as a Group
(5 Persons) 4,474,526 46.76%

(1) Michael J. Carroll, James J. Urban, Brian M. Carroll and Linda S. Zimdars
may be contacted at 1265 Naperville Drive, Romeoville, Illinois 60446. Philip
G. Winters may be contacted at 324 North San Mateo Drive, San Mateo, California
94401.

(2) Unless otherwise noted, the Company believes that all of such shares are
owned of record by each individual named as beneficial owner and that such
individual has sole voting and dispositive power with respect to the shares of
common stock owned by each of them. Such person's percentage ownership is
determined by assuming that the options or convertible securities that are held
by such person which are exercisable within 60 days from the date hereof have
been exercised or converted, as the case may be. Does not give effect to the

<PAGE>

exercise of: (i) an outstanding option granted to the underwriter of IPO (or the
securities underlying the same); (ii) outstanding Class A Warrants; or (iii)
other outstanding options and warrants, including those previously issued by the
Company to the Bank.

(3) The named securityholder is an officer and director of the Company.

(4) Includes: (a) 71,711 shares of common stock issued by the Company in
connection with the acquisition of MOI; (b) 125,000 shares of common stock
issued by the Company in connection with the Company's execution of a
forbearance agreement with the Bank; (c) 1,100,000 shares of common stock
issued upon conversion of $550,000 in debt owed to the noted stockholder in
connection with the Company's acquisition of MOI; (d) 255,000 shares of common
stock issued to the noted stockholder in connection with the conversion of
certain promissory notes; and (e) 10,000 shares of common stock issuable upon
exercise of stock options.

(5) Includes: (a) 71,710 shares of common stock issued by the Company in
connection with the acquisition of MOI; (b) 125,000 shares of common stock
issued by the Company in connection with the Company's execution of a
forbearance agreement with the Bank; (c) 1,100,000 shares of common stock
issued upon conversion of $550,000 in debt owed to the noted stockholder in
connection with the Company's acquisition of MOI; (d) 255,000 shares of common
stock issued to the noted stockholder in connection with the conversion of
certain promissory notes; and (e) 10,000 shares of common stock issuable upon
exercise of stock options.

(6) Includes (a) 17,105 shares of common stock issued to the noted stockholder
in connection with the acquisition of MOI; and (b) 5,000 shares of common stock
issuable upon exercise of stock options.

(7) Includes (a) 60,000 shares of common stock issuable upon exercise of stock
options held by Dr. Winters; and (b) 600,000 shares of common stock issued to
Dr. Winters in connection with the conversion of a certain convertible
promissory note.

(8) Includes (a) 585,000 shares issued to Ms. Zimdars in connection with the
conversion of certain promissory notes; (b) 60,000 shares of common stock
issuable upon exercise of stock options, and (c) 25,000 shares of common stock
issuable upon exercise of certain warrants held by Ms. Zimdars.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Michael Carroll and James Urban (each an officer and director of the
Company) along with Linda Zimdars (a director) and Dr. Philip Winters (a
director), acquired promissory notes in connection with a private debt offering
commenced by the Company in April 1994. In connection therewith, Messrs. Carroll
and Urban each purchased a 5% Convertible Note in the amount of $12,500 and each
purchased a 9% Non-Convertible Note, in the amount of $12,500. In addition, Ms.
Zimdars purchased a 5% Convertible Note and a 9% Convertible Note, each in the
amount of $37,500. Dr. Winters purchased a 5% Convertible Note in the principal
amount of $300,000.

In December 1994, the Company issued a warrant exercisable to purchase
25,000 shares of Common Stock to Linda Zimdars, secretary and a director of the
Company. Such warrant is exercisable for a period of three years at an exercise
price of $1.00 per share.

In April 1995, Robert A. Davis, formerly an officer and director of the
Company, entered into a Separation Agreement with the Company pursuant to which
Mr. Davis resigned his position with the Company, surrendered shares of Common
Stock to the Company and forgave $200,000 in debt owed to him by the Company.
The terms of such agreements are described: (i) elsewhere in "Management's
Discussion and Analysis of Financial Condition and Results of Operations"; and
(ii) in the Current Report on Form 8-K, dated April 1, 1995, which was filed
with the Commission on May 3, 1995 (File No. 0-21852) and is incorporated herein
by reference in its entirety, along with the exhibits thereto.

<PAGE>

Also in April 1995, the Company issued an aggregate of 250,000 shares of
Common Stock to Michael Carroll and James Urban for cash proceeds of $125,000.
See Note 8 to the Financial Statements set forth elsewhere herein.

During September 1995, Michael Carroll and James Urban loaned an aggregate
of $100,000 to the Company in exchange for a demand promissory note. In
addition, Linda Zimdars loaned an aggregate of $100,000 to the Company in
exchange for a demand promissory note. The promissory note to Linda Zimdars was
personally guaranteed by Michael Carroll and James Urban, and during September
of 1996 the balance due of $90,000 was converted to shares of the Company's
Common Stock at the rate of $.25 per share. In addition, during September of
1996, the balance due of $90,000 to Messrs. Carroll and Urban was converted to
Common Stock in the Company at the rate of $.25 per share (the same price per
share as offered in the Company's Private Placement of Equity that was commenced
on October 1, 1996). Each of the above conversions to Messrs. Carroll and
Urban, and Ms. Zimdars provided for piggyback registration rights.

In December 1995, in order to allow the Company to fill a large order,
promissory notes were issued by the Company in exchange for loans to the Company
by : (a) Tiger Eye for $100,000; (b) Michael Carroll for $50,000; (c) James
Urban for $50,000; and (d) Linda Zimdars for $85,000. The promissory notes were
for a period of 60 days and interest accrued at the rate of 6% per annum (with a
loan origination fee of 6%). See Note 6 to the Financial Statements included
elsewhere herein.

The Company will not permit loans or other transactions between the Company
and the officers, directors, principal shareholders, or affiliates for other
than bona fide business purposes or on terms less favorable than could be
obtained from third parties, unless approved by a majority of the disinterested
directors and the independent directors, if any, of the Company.

For a discussion of the employment and consulting agreements to which the
Company is a party and payments of consulting and other fees to executive
officers of the Company, see "Item 10: Executive Compensation" and Notes 4(B)
and 12 to the Consolidated Financial Statements.

<PAGE>

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(a) EXHIBITS

EXHIBIT
NUMBER TITLE OF EXHIBIT

2.1 Asset Purchase Agreement, dated January 27, 1994, by and
between Franklin Ophthalmic Instruments Co., Inc. and
Progressive Ophthalmic Instruments, Inc. filed with the
Securities and Exchange Commission (the "Commission") on
February 14, 1994 (File No. 0-21852) as an exhibit to the
Company's Current Report on Form 8-K, dated January 27,
1994, and incorporated herein by reference.

2.2 Stock Purchase Agreement, dated June 24, 1994, by and among
Franklin Ophthalmic Instruments Co., Inc., Midwest
Ophthalmic Instruments, Inc., Michael J. Carroll and James
J. Urban filed with the Securities and Exchange Commission
as an exhibit to the Company's Current Report on 8-K, dated
July 1, 1994 (File No. 0-21852), and incorporated herein by
reference.

2.3 Letter Agreement, dated June 29, 1994, by and among Franklin
Ophthalmic Instruments Co, Inc., Midwest
Ophthalmic Instruments, Inc., Michael J. Carroll and James
J. Urban filed with the Securities and Exchange Commission
on July 15, 1994 as Exhibit 2.02 to the Company's Current
Report on Form 8-K (File No. 0-21852) and incorporated
herein by reference.

3.1 Articles of Incorporation of Franklin Ophthalmic Instruments
Co., Inc., Delaware (Registrant) filed with the Securities
and Exchange Commission on March 10, 1993 as an exhibit to
the Company's Registration Statement on Form SB-2 (File No.
33-59340) and incorporated herein by reference.

3.2 Articles of Incorporation of Franklin Ophthalmic Instruments
Co, Inc. (California) filed with the Securities and Exchange
Commission on March 10, 1993 as an exhibit to the Company's
Registration Statement on Form SB-2 (File No. 33-59340) and
incorporated herein by reference.

3.3 Agreement and Plan of Merger Certificate between Franklin
Ophthalmic Instruments Co., Inc. (Delaware) and Franklin
Ophthalmic Instruments Co., Inc. (California) filed with the
Securities and Exchange Commission on March 10, 1993 as an
exhibit to the Company's Registration Statement on Form SB-2
(File No. 33-59340) and incorporated herein by reference.

3.4 Bylaws of Franklin Ophthalmic Instruments Co., Inc.
(Registrant) filed with the Securities and Exchange
Commission on March 10, 1993 as an exhibit to the Company's
Registration Statement on Form SB-2 (File No. 33-59340) and
incorporated herein by reference.

3.5 Certificate of Stock Designation, Franklin Ophthalmic
Instruments Co., Inc. (Delaware) filed with the Securities
and Exchange Commission on March 10, 1993 as an exhibit to
the Company's Registration Statement on Form SB-2 (File No.
33-59340) and incorporated herein by reference.

<PAGE>

EXHIBIT
NUMBER TITLE OF EXHIBIT

4.1 Specimen Common Stock Certificate filed with the Securities
and Exchange Commission on June 16, 1993 as an exhibit to
the Company's Registration Statement on Form SB-2 (File No.
33-59340) and incorporated herein by reference.

4.2 Form of Class A Warrant filed with the Securities and
Exchange Commission on June 16, 1993 as an exhibit to the
Company's Registration Statement on Form SB-2 (File No. 33-
59340) and incorporated herein by reference.

4.3 Form of Unit Purchase Option Certificate filed with the
Securities and Exchange on March 10, 1993 as an exhibit to
the Company's Registration Statement on Form SB-2 (File No.
33-59340) and incorporated herein by reference.

4.4 Form of Bridge Lenders' Unit Purchase Warrant filed with the
Securities and Exchange Commission on March 10, 1993 as an
exhibit to the Company's Registration Statement on Form SB-2
(File No. 33-59340) and incorporated by reference.

4.5 Form of Warrant Agreement among the Company, J. Gregory and
Company, Inc. and Continental Stock Transfer and Trust
Company filed with the Securities and Exchange Commission on
June 16, 1993 as an exhibit to the Company's Registration
Statement on Form SB-2 (File No. 33-59340) and incorporated.

4.6 Warrant issued by the Company, to Silicon Valley Bank, filed
with the Securities and Exchange Commission on May 10, 1993
as an exhibit to the Company's Registration Statement on
Form SB-2 (File No. 33-59340) and incorporated herein by
reference.

4.7 Warrant, dated January 21, 1994, issued by the Company to
Silicon Valley Bank, filed with the Securities and Exchange
Commission as Exhibit 10.02 to the Company's Current Report
on Form 8-K, dated January 27, 1994 (File No. 0-21852), and
incorporated herein by reference.

4.8 Warrant, dated March 31, 1994, issued by the Company to
Silicon Valley Bank, and corresponding Registration Rights
Agreement, filed with the Securities and Exchange Commission
as an exhibit to the Company's Current Report on Form 8-K,
dated July 1, 1994 (File No. 0-21852), and incorporated
herein by reference.

4.9 Franklin Ophthalmic Instruments Co, Inc. 1994 Stock Option
and Appreciation Rights Plan, filed with the Securities and
Exchange Commission as an exhibit to the Company's
Registration Statement on Form S-8 (File No. 0-21852) and
incorporated herein by reference.

4.10 Franklin Ophthalmic Instruments Co., Inc. 1993 Stock Option
and Appreciation Rights Plan filed with the Securities and
Exchange Commission on March 10, 1993 as Exhibit 10.14 to
the Company's Registration Statement on Form SB-2 (File No.
33-59340) and incorporated herein by reference.

<PAGE>

EXHIBIT
NUMBER EXHIBIT

4.11 Promissory Note, dated January 20, 1994, executed by
Franklin Ophthalmic Instruments Co., Inc. in favor of
Silicon Valley Bank filed with the Securities and Exchange
Commission on February 14, 1994 (File No. 0-21852) as
Exhibit 10.01 to the Company's Current Report on Form 8-K,
dated January 27, 1994, and incorporated herein by
reference.

4.12 Warrant to Purchase Common Stock, dated January 21, 1994,
issued by Franklin Ophthalmic Instruments, Inc. to Silicon
Valley Bank and corresponding Antidilution Agreement and
Registration Rights Agreement, filed with the Securities and
Exchange Commission on February 14, 1994 (File No. 0-21852)
as Exhibit 10.02 to the Company's Current Report on Form 8-
K, dated January 27, 1994, and incorporated herein by
reference.

4.13 Form of Non-Negotiable 5% Convertible Promissory Note filed
with the Securities and Exchange Commission on August 12,
1994 as Exhibit 10.21 to the Company's Post-Effective
Amendment No. 1 to the Registration Statement on Form SB-2
(File No. 33-59340) and incorporated herein by reference.

4.14 Form of Non-Negotiable 9% Promissory Note filed with the
Securities and Exchange Commission on August 12, 1994 as
Exhibit 10.22 to the Company's Post-Effective Amendment No.
1 to the Registration Statement on Form SB-2 (File No. 33-
59340) and incorporated herein by reference.

4.15 Common Stock Purchase Warrants issued by Franklin Ophthalmic
Instruments Co., Inc. in December 1994 to each of Linda S.
Zimdars, an officer and director of the Company, and Dwayne
Podgurski, an employee of the Company filed with the
Securities and Exchange Commission as Exhibit 4.15 to the
Company's Annual Report on Form 10-KSB for the fiscal year
ended September 30, 1994 (File No. 0-21852) and incorporated
herein by reference.

10.1 Loan documents evidencing loans and/or lines of credit
extended to the Company by Silicon Valley Bank, filed with
the Securities and Exchange Commission on March 10, 1993 as
an exhibit to the Company's Registration Statement on Form
SB-2 (File No. 33-59340) and incorporated herein by
reference.

10.2 Loan Modification Agreement, dated January 20, 1994, between
Franklin Ophthalmic Instruments Co., Inc. and Silicon Valley
Bank filed as Exhibit 10.03 to the Company's Current Report
on Form 8-K, dated January 27, 1994, filed with
the Commission on February 14, 1994 (File No. 0-21852) and
incorporated herein by reference.

10.3 Loan Modification Agreement, dated March 31, 1994 between
Franklin Ophthalmic Instruments Co., Inc. and Silicon Valley
Bank filed with the Securities and Exchange Commission on
July 15, 1994 as Exhibit 10.01 to the Company's Form 8-K
(File No. 0-21852) and incorporated herein by reference.

<PAGE>

EXHIBIT
NUMBER EXHIBIT

10.4 Form of Employment between Franklin Ophthalmic Instruments
Co., Inc. and each of Michael J. Carroll and James J. Urban
included as an exhibit to the Stock Purchase Agreement
identified in Exhibit to the Stock Purchase Agreement
identified in Exhibit 2.2 above which was filed with the
Securities and Exchange Commission as an exhibit to the
Company's Current Report on Form 8-K, dated July 1, 1994
(File No. 0-21852), and incorporated herein by reference.

10.5 Consulting Agreement, dated December 1, 1994, between
Franklin Ophthalmic Instruments, Co., Inc. and Marketing and
Acquisition Concepts, a Wisconsin sole proprietorship of
which Linda S. Zimdars, an officer and director of the
Company, is the sole proprietor, filed with the Securities
and Exchange Commission as Exhibit 10.5 to the Company's
Annual Report on Form 10-KSB for the fiscal year ended
September 30, 1994 (File No. 0-21852) and incorporated
herein by reference.

10.6 Separation Agreement, dated April 1, 1995, by and among the
Company, Robert A. Davis, certain partnerships in which Mr.
Davis is a partner, Michael J. Carroll, and James J. Urban,
filed as an exhibit to the Company's Current Report on Form
8-K (File No. 0-21852) which was filed with the Securities
and Exchange Commission on May 3, 1995 and incorporated
herein by reference of its entirety.

10.7 Forms of Letters of Notice to Securityholders relating to
modification of the terms of certain of the Company's
securities, filed as an exhibit to the Company's Current
Report on Form 8-K (File No. 0-21852) which was filed with
the Securities and Exchange Commission on May 3, 1995 and
incorporated herein by reference in its entirety.

10.8 Amended Loan and Forbearance Agreement, dated April 1, 1995,
between the Company and Silicon Valley Bank, filed as an
exhibit to the Company's Current Report on Form 8-K (File
No. 0-21852) which was filed with the Securities and
Exchange Commission on May 3, 1995 and incorporated herein
by reference in its entirety.

10.9 Agreement, dated April 20, 1995, by and among the Company,
Michael J. Carroll and James J. Urban, filed as an exhibit
to the Company's Current Report on Form 8-K (File No. 0-
21852) which was filed with the Securities and Exchange
Commission on May 3, 1995 and incorporated herein by
reference in its entirety.

10.10 Letter of Intent, dated April 27, 1995, between the Company
and Diversified Ophthalmics, Inc., filed as an exhibit to
the Company's Current Report on Form 8-K (File No. 0-21852)
which was filed with the Securities and Exchange Commission
on May 3, 1995 and incorporated herein by reference in its
entirety.

<PAGE>

EXHIBIT
NUMBER TITLE OF EXHIBIT

10.11 Forms of notice dismissing the firm of Marinelli and Scott
as the Company's independent public accountants and
Company's retaining the firm of BDO Seidman, LLP to serve as
its independent public accountants, filed as an exhibit to
the Company's Amended and Restated Current Report on Form 8-
K/A #1, dated November 27, 1995, which was filed by the
Company with the Securities and Exchange Commission on
December 6, 1995 (File No. 0-21852) and is incorporated
herein by reference in its entirety.

10.12 Form of notice dated September 4, 1996 relating to agreement
between the Company and Silicon Valley Bank, filed as an
exhibit to the Company's Current Report on Form 8-K (File
No. 0-21852) which was filed with the Securities and
Exchange Commission on September 6, 1996 and incorporated
herein by reference in its entirety.

10.13 Form of notice dated September 4, 1996 relating to
agreements between the Company and certain trade vendors,
filed as an exhibit to the Company's Current Report on Form
8-K (File No. 0-21852) which was filed with the Securities
and Exchange Commission on October 1, 1996
and incorporated herein by reference in its entirety.

10.14* Agreement, dated August 20, 1996, between the Company and
Silicon Valley Bank.

*Filed herewith.

(b) REPORTS ON FORM 8-K.

During the fourth quarter of the fiscal year ended September 30, 1996, the
Company filed the following reports on Form 8-K:(1) a Current Report on Form 8-K
filed on September 6, 1996 relating to an agreement between the Company and
Silicon Valley Bank (Item 5); and (2) a Current Report on Form 8-K filed on
October 1, 1996 relating to agreements between the Company and certain
trade vendors (Item 5).

<PAGE>

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized, on January 14, 1997.

Franklin Ophthalmic Instruments Co., Inc.

By:/s/ Michael J. Carroll
----------------------
Michael J. Carroll, President and
Chief Executive Officer

In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the Registrant, in the Capacities and on the
dates indicated.

SIGNATURE TITLE DATE

/s/ Michael J. Carroll President, Chief Executive January 14, 1997 ---
- ---------------------------- Officer and Director
Michael J. Carroll

/s/ James J. Urban Executive Vice President, January 14, 1997 ---
- ---------------------------- Chief Operating Officer
James J. Urban and Director

/s/ Brian M. Carroll Vice President and January 14, 1997
- ---------------------------- Chief Financial Officer
Brian M. Carroll

/s/ Philip G. Winters Director January 14, 1997
- ----------------------------
Philip G. Winters

/s/ Linda S. Zimdars Secretary and Director January 14, 1997
- ----------------------------
Linda S. Zimdars

<PAGE>

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

AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT

DATED AS OF AUGUST 20, 1996

FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC.

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

<PAGE>

TABLE OF CONTENTS

PAGE
----

1. DEFINITIONS AND CONSTRUCTION . . . . . . . . . . . . . . . . 2

1.1 DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . 2

1.2 ACCOUNTING TERMS. . . . . . . . . . . . . . . . . . . . 11

2. LOAN AND TERMS OF PAYMENT. . . . . . . . . . . . . . . . . . 11

2.1 ADVANCES. . . . . . . . . . . . . . . . . . . . . . . . 11

2.2 INTEREST RATES, PAYMENTS, AND CALCULATIONS. . . . . . . 12

2.3 CREDITING PAYMENTS. . . . . . . . . . . . . . . . . . . 13

2.4 FEES . . . . . . . . . . . . . . . . . . . . . . . . . 14

2.5 ADDITIONAL COSTS. . . . . . . . . . . . . . . . . . . . 14

2.6 TERM . . . . . . . . . . . . . . . . . . . . . . . . . 15

2.7 EXCHANGE. . . . . . . . . . . . . . . . . . . . . . . . 15

3. CONDITIONS . . . . . . . . . . . . . . . . . . . . . . . . . 18

3.1 CONDITIONS PRECEDENT TO EFFECTIVENESS . . . . . . . . . 18

3.2 CONDITIONS PRECEDENT TO ADVANCES. . . . . . . . . . . . 18

4. CREATION OF SECURITY INTEREST. . . . . . . . . . . . . . . . 19

4.1 GRANT OF SECURITY INTEREST. . . . . . . . . . . . . . . 19

4.2 DELIVERY OF ADDITIONAL DOCUMENTATION REQUIRED . . . . . 19

4.3 RIGHT TO INSPECT. . . . . . . . . . . . . . . . . . . . 19

5. REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . 19

5.1 DUE ORGANIZATION AND QUALIFICATION. . . . . . . . . . . 19

5.2 DUE AUTHORIZATION; NO CONFLICT. . . . . . . . . . . . . 19

5.3 NO PRIOR ENCUMBRANCES . . . . . . . . . . . . . . . . . 20

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5.4 BONA FIDE ELIGIBLE ACCOUNTS . . . . . . . . . . . . . . 20

5.5 MERCHANTABLE INVENTORY. . . . . . . . . . . . . . . . . 20

5.6 NAME; LOCATION OF CHIEF EXECUTIVE OFFICE. . . . . . . . 20

5.7 LITIGATION. . . . . . . . . . . . . . . . . . . . . . . 20

5.8 NO MATERIAL ADVERSE CHANGE IN FINANCIAL STATEMENTS. . . 20

5.9 REGULATORY COMPLIANCE . . . . . . . . . . . . . . . . . 21

5.10 ENVIRONMENTAL CONDITION . . . . . . . . . . . . . . . . 21

5.11 TAXES . . . . . . . . . . . . . . . . . . . . . . . . . 21

5.12 SUBSIDIARIES. . . . . . . . . . . . . . . . . . . . . . 21

5.13 GOVERNMENT CONSENTS . . . . . . . . . . . . . . . . . . 22

5.14 FULL DISCLOSURE . . . . . . . . . . . . . . . . . . . . 22

6. AFFIRMATIVE COVENANTS. . . . . . . . . . . . . . . . . . . . 22

6.1 GOOD STANDING . . . . . . . . . . . . . . . . . . . . . 22

6.2 GOVERNMENT COMPLIANCE . . . . . . . . . . . . . . . . . 23

6.3 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES . . . . . . 23

6.4 INVENTORY; RETURNS. . . . . . . . . . . . . . . . . . . 24

6.5 TAXES . . . . . . . . . . . . . . . . . . . . . . . . . 24

6.6 INSURANCE . . . . . . . . . . . . . . . . . . . . . . . 24

6.7 PRINCIPAL DEPOSITORY. . . . . . . . . . . . . . . . . . 25

6.8 CONVERSION OF ACCOUNTS PAYABLE TO EQUITY. . . . . . . . 25

6.9 FURTHER ASSURANCES. . . . . . . . . . . . . . . . . . . 25

7. NEGATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . 25

7.1 DISPOSITIONS. . . . . . . . . . . . . . . . . . . . . . 26

7.2 CHANGE IN BUSINESS. . . . . . . . . . . . . . . . . . . 26

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7.3 MERGERS OR ACQUISITIONS . . . . . . . . . . . . . . . . 26

7.4 INDEBTEDNESS. . . . . . . . . . . . . . . . . . . . . . 26

7.5 ENCUMBRANCES. . . . . . . . . . . . . . . . . . . . . . 26

7.6 DISTRIBUTIONS . . . . . . . . . . . . . . . . . . . . . 26

7.7 INVESTMENTS . . . . . . . . . . . . . . . . . . . . . . 26

7.8 TRANSACTIONS WITH AFFILIATES. . . . . . . . . . . . . . 26

7.9 SUBORDINATED DEBT . . . . . . . . . . . . . . . . . . . 27

7.10 INVENTORY . . . . . . . . . . . . . . . . . . . . . . . 27

7.11 COMPLIANCE. . . . . . . . . . . . . . . . . . . . . . . 27

8. EVENTS OF DEFAULT. . . . . . . . . . . . . . . . . . . . . . 27

8.1 PAYMENT DEFAULT . . . . . . . . . . . . . . . . . . . . 27

8.2 COVENANT DEFAULT. . . . . . . . . . . . . . . . . . . . 27

8.3 MATERIAL ADVERSE CHANGE . . . . . . . . . . . . . . . . 28

8.4 ATTACHMENT. . . . . . . . . . . . . . . . . . . . . . . 28

8.5 INSOLVENCY. . . . . . . . . . . . . . . . . . . . . . . 28

8.6 OTHER AGREEMENTS. . . . . . . . . . . . . . . . . . . . 29

8.7 SUBORDINATED DEBT . . . . . . . . . . . . . . . . . . . 29

8.8 MANAGEMENT. . . . . . . . . . . . . . . . . . . . . . . 29

8.9 JUDGMENTS . . . . . . . . . . . . . . . . . . . . . . . 29

8.10 MISREPRESENTATIONS. . . . . . . . . . . . . . . . . . . 29

8.11 GUARANTY. . . . . . . . . . . . . . . . . . . . . . . . 29

9. BANK'S RIGHTS AND REMEDIES . . . . . . . . . . . . . . . . . 29

9.1 RIGHTS AND REMEDIES . . . . . . . . . . . . . . . . . . 29

9.2 POWER OF ATTORNEY . . . . . . . . . . . . . . . . . . . 31

9.3 ACCOUNTS COLLECTION . . . . . . . . . . . . . . . . . . 31

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9.4 BANK EXPENSES . . . . . . . . . . . . . . . . . . . . . 32

9.5 BANK'S LIABILITY FOR COLLATERAL . . . . . . . . . . . . 32

9.6 REMEDIES CUMULATIVE . . . . . . . . . . . . . . . . . . 32

9.7 DEMAND; PROTEST . . . . . . . . . . . . . . . . . . . . 32

10. NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . 32

11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER . . . . . . . . . 33

12. GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . 33

12.1 SUCCESSORS AND ASSIGNS. . . . . . . . . . . . . . . . . 33

12.2 INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . 34

12.3 TIME OF ESSENCE . . . . . . . . . . . . . . . . . . . . 34

12.4 SEVERABILITY OF PROVISIONS. . . . . . . . . . . . . . . 34

12.5 AMENDMENTS IN WRITING, INTEGRATION. . . . . . . . . . . 34

12.6 COUNTERPARTS. . . . . . . . . . . . . . . . . . . . . . 34

12.7 SURVIVAL. . . . . . . . . . . . . . . . . . . . . . . . 34

12.8 CONFIDENTIALITY . . . . . . . . . . . . . . . . . . . . 35

12.9 RELEASE BY BORROWER . . . . . . . . . . . . . . . . . . 35

EXHIBITS

EXHIBIT A - COLLATERAL
EXHIBIT B - DAILY TRANSACTION REPORT
EXHIBIT C - BORROWING BASE CERTIFICATE
EXHIBIT D - FORM OF NOTIFICATION AND ACKNOWLEDGEMENT FOR PLEDGED DEPOSIT
EXHIBIT E - CAPITALIZATION
EXHIBIT F - COMPLIANCE CERTIFICATE
EXHIBIT G - INVESTMENT INTENT LETTER

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<PAGE>

This AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT (this
"Agreement"), dated as of August 20, 1996, is among SILICON VALLEY BANK ("Bank")
and FRANKLIN OPHTHALMIC INSTRUMENTS CO., INC., a Delaware corporation
("Borrower").

RECITALS

A. Borrower and Bank were the original parties to that certain Business
Loan Agreement, dated as of August 20, 1993 (the "Original Loan Agreement").

B. The "Original Loan Agreement" was amended by (1) a Loan Modification
Agreement, dated as of November 22, 1993, between Borrower and Bank, (2) a Loan
Modification Agreement, dated as of January 20, 1994 (although inadvertently
dated as of "January 20, 1993"), between Borrower and Bank, (3) a Loan
Modification Agreement, dated as of March 31, 1994, between Borrower and Bank,
and (4) a Loan Modification Agreement, dated as of July 8, 1994, among Borrower,
Midwest Ophthalmic Instruments, Inc., an Illinois corporation ("Midwest"), and
Bank, which amendment, INTER ALIA, added Midwest as a co-borrower under the
Original Loan Agreement, with Midwest assuming, jointly and severally with
Borrower, all of the obligations of Borrower as the "Borrower" under the
Original Loan Agreement (the Original Loan Agreement, as amended by the
foregoing described Loan Modification Agreements and as otherwise amended as of
the date hereof, being herein collectively called the "Existing Loan
Agreement").

C. In connection with the Existing Loan Agreement, Borrower has granted
Bank a security interest in substantially all of Borrower's property, pursuant
to that certain Commercial Security Agreement, dated as of August 20, 1993,
between Borrower as grantor, and Bank, as secured party, and that certain
Commercial Security Agreement, dated as of July 8, 1994, between Midwest, as
grantor, and Bank, as secured party (collectively the "Existing Security
Agreement" -- the Existing Loan Agreement and the Existing Security Agreement
are herein called the "Existing Loan Documents").

D. Midwest has dissolved and no longer exists as a corporation, and in
connection therewith Borrower has succeeded to all the assets, and assumed all
the liabilities of Midwest.

E. Bank and Borrower now desire to amend and restate the Existing Loan
Agreement and the Existing Security Agreement in their entirety as herein set
forth.

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<PAGE>

AGREEMENT

NOW, THEREFORE, the parties hereto agree as follows:

1. DEFINITIONS AND CONSTRUCTION

1 DEFINITIONS. As used in this Agreement, the following terms
shall have the following definitions:

"Accounts" means all presently existing and hereafter arising
accounts, contract rights, and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods (including, without limitation, the
licensing of software and other technology) or the rendering of services by
Borrower, whether or not earned by performance, and any and all credit
insurance, guaranties, and other security therefor, as well as all merchandise
returned to or reclaimed by Borrower and Borrower's Books relating to any of the
foregoing.

"Affiliate" means, with respect to any Person, any Person that
owns or controls directly or indirectly such Person, any Person that controls or
is controlled by or is under common control with such Person, and each of such
Person's senior executive officers, directors, or partners.

"Bank Expenses" means all: reasonable costs or expenses
(including reasonable attorneys' fees and expenses) incurred in connection with
the preparation, negotiation, administration, and enforcement of the Loan
Documents; and Bank's reasonable attorneys' fees and expenses incurred in
amending, enforcing or defending the Loan Documents, whether or not suit is
brought.

"Borrower's Books" means all of Borrower's books and records
including: ledgers; records concerning Borrower's assets or liabilities, the
Collateral, business operations or financial condition; and all computer
programs, or tape files, and the equipment, containing such information.

"Bank Share Percentage" means at any time, the result, stated as
a percentage, of DIVIDING (a) the number of Exchange Shares received by the Bank
on the Closing Date LESS the amount, if any, by which (x) the total number of
shares of Common Stock sold or otherwise disposed of by the Bank or its
Affiliates (other than transfers or other dispositions to the Bank or an
Affiliate of the Bank) after the Closing Date EXCEEDS (y) the total number of
shares of Common Stock acquired by the Bank or its Affiliates after Closing Date
(whether upon exercise of any Existing Warrant or otherwise) BY (b) the total
number of issued and outstanding shares of Common Stock PLUS the total maximum

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<PAGE>

number of shares of Common Stock directly or indirectly issuable upon the
exercise of all outstanding Options (whether or not such Options are immediately
exercisable or exercisable at a later date or upon the occurrence of certain
contingencies).

"Borrowing Base" has the meaning set forth in Section 2.1 hereof.

"Borrowing Base Certificate" means the certificate of a
Responsible Officer in the form attached as Exhibit C.

"Business Day" means any day that is not a Saturday, Sunday, or
other day on which banks in the State of California are authorized or required
to close.

"Closing Date" means the date on which this Agreement becomes
effective pursuant to Section 3.1.

"Code" means the California Uniform Commercial Code.

"Collateral" means the property described on EXHIBIT A attached
hereto.

"Committed Revolving Line" means One Million Eight Hundred
Thousand and 00/100 Dollars ($1,800,000.00).

"Common Stock" means the common stock of Borrower.

"Compliance Certificate" means a certificate of a Responsible
Officer in the form attached as Exhibit F.

"Contingent Obligation" means, as applied to any Person, any
direct or indirect liability, contingent or otherwise, of that Person with
respect to (i) any indebtedness, lease, dividend, letter of credit or other
obligation of another, including, without limitation, any such obligation
directly or indirectly guaranteed, endorsed, co-made or discounted or sold with
recourse by that Person, or in respect of which that Person is otherwise
directly or indirectly liable; (ii) any obligations with respect to undrawn
letters of credit issued for the account of that Person; and (iii) all
obligations arising under any interest rate, currency or commodity swap
agreement, interest rate cap agreement, interest rate collar agreement, or other
agreement or arrangement designated to protect a Person against fluctuation in
interest rates, currency exchange rates or commodity prices; provided, however,
that the term "Contingent Obligation" shall not include endorsements for
collection or deposit in the ordinary course of business. The amount of any
Contingent Obligation shall be deemed to be an amount equal to

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<PAGE>

the stated or determined amount of the primary obligation in respect of which
such Contingent Obligation is made or, if not stated or determinable, the
maximum reasonably anticipated liability in respect thereof as determined by
such Person in good faith; provided, however, that such amount shall not in any
event exceed the maximum amount of the obligations under the guarantee or other
support arrangement.

"Current Assets" means, as of any applicable date, all amounts
that should, in accordance with GAAP, be included as current assets on the
consolidated balance sheet of Borrower and its Subsidiaries as at such date.

"Current Liabilities" means, as of any applicable date, all
amounts that should, in accordance with GAAP, be included as current liabilities
on the consolidated balance sheet of Borrower and its Subsidiaries, as at such
date, plus, to the extent not already included therein, all outstanding Advances
made under this Agreement, including all Indebtedness that is payable upon
demand or within one year from the date of determination thereof unless such
Indebtedness is renewable or extendable at the option of Borrower or any
Subsidiary to a date more than one year from the date of determination, but
excluding Subordinated Debt.

"Daily Balance" means the amount of the Obligations owed at the
end of a given day.

"Daily Transaction Report" means a report and
disbursement/payment request in the form of Exhibit A.

"Eligible Accounts" means those Accounts that arise in the
ordinary course of Borrower's business that comply with all of Borrower's
representations and warranties to Bank set forth in Section 5.4; PROVIDED that
standards of eligibility may be fixed and revised from time to time by Bank in
Bank's reasonable judgment and upon notification thereof to Borrower in
accordance with the provisions hereof. Unless otherwise agreed to by Bank,
Eligible Accounts shall not include the following:

(a) Accounts that the account debtor has failed to pay within
ninety (90) days of invoice date;

(b) Accounts with respect to an account debtor, fifty percent
(50%) of whose Accounts the account debtor has failed to pay within ninety (90)
days of invoice date;

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<PAGE>

(d) Accounts with respect to which goods are placed on
consignment, guaranteed sale, sale or return, sale on approval, bill and hold,
or other terms by reason of which the payment by the account debtor may be
conditional;

(e) Accounts with respect to which the account debtor is an
Affiliate (other than by virtue of being directly or indirectly under common
ownership or control with Borrower) of Borrower;

(f) Accounts with respect to which the account debtor does not
have its principal place of business in the United States, except for Eligible
Foreign Accounts, and Accounts arising from products shipped to or services
provided to branches or offices located in the United States of any account
debtor that does not have its principal place of business in the United States;

(g) Accounts with respect to which the account debtor is a
federal, state, or local governmental entity or any department, agency, or
instrumentality thereof.

(h) Accounts with respect to which Borrower is liable to the
account debtor for goods sold or services rendered by the account debtor to
Borrower, but only to the extent of any amounts owing to the account debtor
against amounts owed to Borrower;

(i) Accounts with respect to an account debtor, including
Subsidiaries and Affiliates, whose total obligations to Borrower exceed
twenty-five percent (25%) of all Accounts, to the extent such obligations exceed
the aforementioned percentage, except as approved in writing by Bank;

(j) Accounts with respect to which the account debtor disputes
liability or makes any claim with respect thereto as to which Bank believes, in
its sole discretion, that there may be a basis for dispute (but only to the
extent of the amount subject to such dispute or claim), or is subject to any
Insolvency Proceeding, or becomes insolvent, or goes out of business; and

(k) Accounts the collection of which Bank reasonably determines
to be doubtful.

"Eligible Foreign Accounts" means Accounts with respect to which
the account debtor does not have its principal place of business in the
United States and that are: (1) covered by credit insurance in form and amount,
and by an insurer satisfactory to Bank less the amount of any deductible(s)
which

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<PAGE>

may be or become owing thereon; or (2) supported by one or more letters of
credit in favor of Bank as beneficiary, in an amount and of a tenor, and issued
by a financial institution, acceptable to Bank; or (3) that Bank approves on a
case-by-case basis.

"Eligible Inventory" means that portion of Borrower's Inventory
that is located at Borrower's principal place of business or such other
locations as are permitted under Section 7.10 and that complies with the
representations and warranties set forth in Section 5.5; PROVIDED that standards
of eligibility may be fixed and revised from time to time by Bank in Bank's
reasonable judgment and upon notification thereof to Borrower in accordance with
the provisions hereof.

"Equipment" means all present and future machinery, equipment,
tenant improvements, furniture, fixtures, vehicles, tools, parts and attachments
in which Borrower has any interest.

"ERISA" means the Employment Retirement Income Security Act of
1974, as amended, and the regulations thereunder.

"Exchange" means the exchange of the Exchange Amount for Common
Stock pursuant to Section 2.7.

"Exchange Amount" means the sum of (a) the Existing Non-Principal
Obligations and (b) the amount by which the principal amount of the Existing
Obligations (determined as of the Closing Date and immediately prior to giving
effect to the Exchange) exceeds the Committed Revolving Line; the Exchange
Amount shall be determined pursuant to a certificate of Bank setting forth the
amount and calculation thereof, which certificate shall be delivered to Borrower
one day prior to the Closing Date and shall be conclusive absent manifest error;
such certificate, in the case of the Existing Non-Principal Obligations, may be
based on reasonable estimates.

"Exchange Shares" has the meaning set forth in Section 2.7.

"Existing Non-Principal Obligations" means, as of the Closing
Date and immediately prior to giving effect to the Exchange, that portion of the
Existing Obligations consisting of accrued and unpaid interest, accrued and
unpaid fees, costs and expenses (including attorneys fees) paid or incurred by
the Bank, and, without duplication, costs and expenses (including Bank Expenses)
paid or incurred by the Bank in connection with the negotiation, preparation and
closing of this Agreement.

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<PAGE>

"Existing Obligations" means all liability and indebtedness of
Borrower to Bank under the Existing Loan Documents.

"Existing Warrants" means the warrants to purchase the Common
Stock of the Company issued to Bank, and respectively dated March 31, 1994,
January 21, 1994, and April 8, 1992, all as amended to the date hereof.

"GAAP" means generally accepted accounting principles as in
effect from time to time.

"Guarantors" means any guarantor of the Obligations, including,
without limitation, Michael J. Carroll, Brian Carroll and James J. Urban.

"Guaranty" means a guaranty executed by Guarantors in the form
previously provided by Bank to Borrower.

"Indebtedness" means (a) all indebtedness for borrowed money or
the deferred purchase price of property or services, including without
limitation reimbursement and other obligations with respect to surety bonds and
letters of credit, (b) all obligations evidenced by notes, bonds, debentures or
similar instruments, (c) all capital lease obligations and (d) all Contingent
Obligations.

"Insolvency Proceeding" means any proceeding commenced by or
against any person or entity under any provision of the United States Bankruptcy
Code, as amended, or under any other bankruptcy or insolvency law, including
assignments for the benefit of creditors, formal or informal moratoria,
compositions, extension generally with its creditors, or proceedings seeking
reorganization, arrangement, or other relief.

"Inventory" means all present and future inventory in which
Borrower has any interest, including merchandise, raw materials, parts,
supplies, packing and shipping materials, work in process and finished products
intended for sale or lease or to be furnished under a contract of service, of
every kind and description now or at any time hereafter owned by or in the
custody or possession, actual or constructive, of Borrower, including such
inventory as is temporarily out of its custody or possession or in transit and
including any returns upon any accounts or other proceeds, including insurance
proceeds, resulting from the sale or disposition of any of the foregoing and any
documents of title representing any of the above, and Borrower's Books relating
to any of the foregoing.

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<PAGE>

"Investment" means any beneficial ownership of (including stock,
partnership interest or other securities) any Person, or any loan, advance or
capital contribution to any Person.

"IRC" means the Internal Revenue Code of 1986, as amended, and
the regulations thereunder.

"Lien" means any mortgage, lien, deed of trust, charge, pledge,
security interest or other encumbrance.

"Loan Documents" means, collectively, this Agreement, any note or
notes executed by Borrower in favor of Bank, and any other agreement entered
into between Borrower and Bank in connection with this Agreement, all as amended
or extended from time to time.

"Material Adverse Effect" means a material adverse effect on (i)
the business operations or condition (financial or otherwise) of Borrower and
its Subsidiaries taken as a whole, (ii) the ability of Borrower to repay the
Obligations or otherwise perform its obligations under the Loan Documents, or
(iii) the value or priority of Bank's security interests in the Collateral.

"Minimum Percentage" means the product of multiplying 8.5% by a
fraction the denominator of which is the sum of the number of Exchange Shares
received by the Bank on the Closing Date plus the number of shares of Common
Stock at any time received by the Bank or its Affiliates after the Closing Date
as a stock dividend or equivalent distribution with respect to the Exchange
Shares, and the numerator of which is (a) the denominator PLUS (b) the total
number of shares of Common Stock acquired by the Bank or its Affiliates after
Closing Date (whether upon exercise of any Existing Warrant or otherwise), MINUS
(c) the total number of shares of Common Stock sold or otherwise disposed of by
the Bank or its Affiliates (other than transfers or other dispositions to the
Bank or an Affiliate of the Bank) after the Closing Date; PROVIDED that the
Minimum Percentage shall not exceed 8.5%.

"Negotiable Collateral" means all of Borrower's present and
future letters of credit of which it is a beneficiary, notes, drafts,
instruments, securities, documents of title, and chattel paper, and Borrower's
Books relating to any of the foregoing.

"Obligations" means all debt, principal, interest, Bank Expenses
and other amounts owed to Bank by Borrower pursuant to this Agreement or any
other agreement, whether absolute or

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<PAGE>

contingent, due or to become due, now existing or hereafter arising, including
any interest that accrues after the commencement of an Insolvency Proceeding and
including any debt, liability, or obligation owing from Borrower to others that
Bank may have obtained by assignment or otherwise.

"Options" means (a) any rights to subscribe for or to purchase,
or any warrants or options for the purchase of Common Stock or any stock or
securities convertible into or exchangeable for Common Stock or (b) any stock or
securities convertible into or exchangeable for Common Stock. An Option for any
securities convertible into or exchangeable for Common Stock shall be treated as
an Option for the Common Stock into or for which such stock or securities are
convertible or exchangeable.

"Payment Date" means the fifth (5th) calendar day of each month.

"Periodic Payments" means all installments or similar recurring
payments that Borrower may now or hereafter become obligated to pay to Bank
pursuant to the terms and provisions of any instrument, or agreement now or
hereafter in existence between Borrower and Bank.

"Permitted Indebtedness" means:

(a) Indebtedness of Borrower in favor of Bank arising under this
Agreement or any other Loan Document;

(b) Indebtedness existing on the Closing Date and disclosed in
the Schedule;

(d) Indebtedness to trade creditors incurred in the ordinary
course of business.

"Permitted Investment" means:

(a) Investments existing on the Closing Date disclosed in the
Schedule; and

(b) (i) marketable direct obligations issued or unconditionally
guaranteed by the United States of America or any agency or any State thereof
maturing within one (1) year from the date of acquisition thereof,
(ii) commercial paper maturing no more than one (1) year from the date of
creation thereof and currently having the highest rating obtainable from either
Standard & Poor's Corporation or Moody's Investors Service, Inc.,

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and (iii) certificates of deposit maturing no more than one (1) year from the
date of investment therein issued by Bank.

"Permitted Liens" means the following:

(a) Any Liens existing on the Closing Date and disclosed in the
Schedule or arising under this Agreement or the other Loan Documents;

(b) Liens for taxes, fees, assessments or other governmental
charges or levies, either not delinquent or being contested in good faith by
appropriate proceedings, PROVIDED the same have no priority over any of Bank's
security interests;

(c) Liens (I) upon or in any equipment acquired or held by
Borrower or any of its Subsidiaries to secure the purchase price of such
equipment or indebtedness incurred solely for the purpose of financing the
acquisition of such equipment, or (ii) existing on such equipment at the time of
its acquisition, PROVIDED that the Lien is confined solely to the property so
acquired and improvements thereon, and the proceeds of such equipment;

(d) Liens incurred in connection with the extension, renewal or
refinancing of the indebtedness secured by Liens of the type described in
clauses (a) through (c) above, PROVIDED that any extension, renewal or
replacement Lien shall be limited to the property encumbered by the existing
Lien and the principal amount of the indebtedness being extended, renewed or
refinanced does not increase.

"Person" means any individual, sole proprietorship, partnership,
limited liability company, joint venture, trust, unincorporated organization,
association, corporation, institution, public benefit corporation, firm, joint
stock company, estate, entity or governmental agency.

"Prime Rate" means the variable rate of interest, per annum, most
recently announced by Bank, as its "prime rate," whether or not such announced
rate is the lowest rate available from Bank.

"Registration Rights Agreement" means the Registration Rights
Agreement, dated as of March 31, 1994, between Bank and Borrower.

"Released Parties" means, collectively, Bank and its affiliated
corporations, and all of its current and former directors, officers, agents,
employees, shareholders, and attorneys, and all of their respective successors
and assigns.

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<PAGE>
"Responsible Officer" means each of the Chief Executive Officer,
Chief Operating Officer, and the Chief Financial Officer of Borrower.

"Revolving Maturity Date" means July 29, 1997.

"Schedule" means the schedule of exceptions attached hereto.

"Subordinated Debt" means any debt incurred by Borrower that is
subordinated to the debt owing by Borrower to Bank on terms acceptable to Bank
(and identified as being such by Borrower and Bank).

"Subsidiary" means any corporation or partnership in which (i)
any general partnership interest or (ii) more than 50% of the stock of which by
the terms thereof ordinary voting power to elect the Board of Directors,
managers or trustees of such entity shall, at the time as of which any
determination is being made, be owned by Borrower, either directly or through an
Affiliate. A reference to any Subsidiary or Subsidiaries of Borrower means such
Subsidiary or Subsidiaries, if any.

2. ACCOUNTING TERMS. All accounting terms not specifically defined
herein shall be construed in accordance with GAAP and all calculations made
hereunder shall be made in accordance with GAAP. When used herein, the terms
"financial statements" shall include the notes and schedules thereto.

2. LOAN AND TERMS OF PAYMENT

1. ADVANCES. Subject to and upon the terms and conditions of this
Agreement, Bank agrees to make Advances to Borrower in an aggregate amount not
to exceed the Committed Revolving Line or the Borrowing Base, whichever is less.
For purposes of this Agreement, "Borrowing Base" shall mean an amount equal to
(i) eighty percent (80%) of Eligible Accounts plus (ii) the lesser of fifty
percent (50%) of the value of Borrower's Eligible Inventory (valued at the lower
of cost or wholesale fair market value) or $1,000,000.00. Subject to the terms
and conditions of this Agreement, amounts borrowed pursuant to this Section 2.1
may be repaid and reborrowed at any time during the term of this Agreement.
Notwithstanding anything to the contrary contained in this Section 2.1, Borrower
shall be permitted to incur (and to allow to remain outstanding) Obligations of
not more than $500,000 in excess of that permitted by the first two sentences of
this Section 2.1 until December 23, 1996, upon which date and thereafter there
shall not be permitted to exist or

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remain outstanding Obligations in excess of that permitted by the first two
sentences of this Section 2.1.

Whenever Borrower desires an Advance, Borrower will notify Bank by
facsimile transmission or telephone no later than 3:00 p.m. Pacific time, on the
Business Day that the Advance is to be made. Each such notification shall be
promptly confirmed by a Payment/Advance Form in substantially the form of
EXHIBIT B hereto. Bank is authorized to make Advances under this Agreement,
based upon instructions received from a Responsible Officer, or without
instructions if in Bank's discretion such Advances are necessary to meet
Obligations which have become due and remain unpaid. Bank shall be entitled to
rely on any telephonic notice given by a person who Bank reasonably believes to
be a Responsible Officer, and Borrower shall indemnify and hold Bank harmless
for any damages or loss suffered by Bank as a result of such reliance. Bank
will credit the amount of Advances made under this Section 2.1 to Borrower's
deposit account.

The Committed Revolving Line shall terminate on the Revolving Maturity
Date, at which time all Advances under this Section 2.1 and other amounts due
under this Agreement (except as otherwise expressly specified herein) shall be
immediately due and payable.

2 INTEREST RATES, PAYMENTS, AND CALCULATIONS.

(a) INTEREST RATE. Except as set forth in Section 2.3(b),
any Advances shall bear interest, on the average Daily Balance, at a rate equal
to two (2) percentage points above the Prime Rate.

(b) DEFAULT RATE. All Obligations shall bear interest,
from and after the occurrence of an Event of Default, at a rate equal to three
percentage points above the interest rate applicable immediately prior to the
occurrence of the Event of Default.

(c) PAYMENTS. Accrued interest hereunder shall be due and
payable on the Payment Date of each month during the term hereof. Any interest
not paid when due shall be compounded by becoming a part of the Obligations, and
such interest shall thereafter accrue interest at the rate then applicable
hereunder.

(d) LOCKBOX. Borrower shall maintain a lockbox account (the
"Lockbox") with Bank and shall cause all of Borrower's accounts receivable
collections to be remitted directly to the Lockbox. Bank will transfer good
funds in the Lockbox to a cash collateral account (the "Cash Collateral
Account"). Borrower hereby grants Bank a security interest in

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<PAGE>

the Lockbox and Cash Collateral Account to secure the Obligations. Bank shall
have exclusive possession, dominion, and control over the Lockbox and Cash
Collateral Account. Borrower may request that funds in the Cash Collateral
Account either be released to Borrower or applied to pay the Obligations;
PROVIDED that each such request shall be in writing and shall be accompanied by
a fully completed Daily Transaction Report in the form heretofore provided by
the Bank to Borrower and FURTHER PROVIDED that Bank may at any time and from
time to time in its sole and absolute discretion apply any and all funds in the
Lockbox or Cash Collateral Account toward payment of the Obligations in such
order of priority as shall be determined by Bank.

(e) DIRECT DEBIT.

(i) The Borrower agrees that interest and principal
payments and any fees will be deducted automatically on the Payment Dates,
Maturity Date or other applicable due dates, as the case may be, from the
Borrower's account number 0400 994070, or such other of the Borrower's accounts
with the Bank as designated in writing by the Borrower.

(ii) The Bank will debit such account on the dates
the payments become due. If a due date does not fall on a banking day, the Bank
will debit the account on the first banking day following the due date.

(iii) The Borrower will maintain sufficient funds in
the account on the dates the Bank enters debits authorized by this Agreement.
If there are insufficient funds in the account on the date the Bank enters any
debit authorized by this Agreement, the debit will be reversed.

(f) COMPUTATION. In the event the Prime Rate is changed
from time to time hereafter, the applicable rate of interest hereunder shall be
increased or decreased effective as of 12:01 a.m. on the day the Prime Rate is
changed, by an amount equal to such change in the Prime Rate. All interest
chargeable under the Loan Documents shall be computed on the basis of a three
hundred sixty (360) day year for the actual number of days elapsed.

3 CREDITING PAYMENTS. No payment shall be considered a payment on
account of the Obligations unless such payment is of immediately available
federal funds or unless and until such check or other item of payment is honored
when presented for payment. Notwithstanding anything to the contrary contained
herein, any wire transfer or payment received by Bank after 12:00 noon Pacific
time shall be deemed to have been

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received by Bank as of the opening of business on the immediately following
Business Day. Whenever any payment to Bank under the Loan Documents would
otherwise be due (except by reason of acceleration) on a date that is not a
Business Day, such payment shall instead be due on the next Business Day, and
additional fees or interest, as the case may be, shall accrue and be payable for
the period of such extension.

4 FEES. Borrower shall pay to Bank the following:

(a) FINANCIAL EXAMINATION AND APPRAISAL FEES. Bank's
reasonable and customary fees and out-of-pocket expenses for Bank's audits of
Borrower's Accounts and Inventory, and for each appraisal of Collateral and
financial analysis and examination of Borrower performed from time to time by
Bank or its agents (the time and frequency of which are to be determined by Bank
in the exercise of its absolute discretion); and

(b) BANK EXPENSES. Upon demand by Bank, all Bank Expenses,
including, without limitation, all Bank Expenses incurred through the date
hereof (except to the extent such expenses are included as Existing Non-
Principal Obligations in the Exchange Amount).

5 ADDITIONAL COSTS. In case any law, regulation, treaty or
official directive or the interpretation or application thereof by any court or
any governmental authority charged with the administration thereof or the
compliance with any guideline or request of any central bank or other
governmental authority (whether or not having the force of law):

(a) subjects Bank to any tax with respect to payments of
principal or interest or any other amounts payable hereunder by Borrower or
otherwise with respect to the transactions contemplated hereby (except for taxes
on the overall net income of Bank (including taxes on capital gains, if any,
resulting from the sale or other disposition of the Exchange Shares) imposed by
the United States of America or any political subdivision thereof);

(b) imposes, modifies or deems applicable any deposit
insurance, reserve, special deposit or similar requirement against assets held
by, or deposits in or for the account of, or loans by, Bank; or

and the result of any of the foregoing is to increase the cost to Bank, reduce
the income receivable by Bank or impose any expense

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upon Bank with respect to any loans, Bank shall notify Borrower thereof.
Borrower agrees to pay to Bank the amount of such increase in cost, reduction in
income or additional expense as and when such cost, reduction or expense is
incurred or determined, upon presentation by Bank of a statement of the amount
and setting forth Bank's calculation thereof, all in reasonable detail, which
statement shall be deemed true and correct absent manifest error.

6 TERM. Except as otherwise set forth herein, this Agreement shall
become effective on the Closing Date and, subject to Section 12.7, shall
continue in full force and effect for a term ending on the Revolving Maturity
Date. Notwithstanding the foregoing, Bank shall have the right to terminate its
obligation to make Advances under this Agreement immediately and without notice
upon the occurrence and during the continuance of an Event of Default.
Notwithstanding termination, Bank's Lien on the Collateral shall remain in
effect for so long as any Obligations are outstanding.

7 EXCHANGE.

(a) EXCHANGE OF EXCHANGE SHARES. Subject to the terms and
conditions hereof, Borrower will issue to Bank and Bank will accept Common Stock
in a number of shares which equal the quotient of dividing the Exchange Amount
by $1.52 (the "Exchange Shares") and in exchange for such issuance and in
consideration therefor, Bank shall cancel that portion of the Existing
Obligations represented by the Exchange Amount and thereafter the Exchange
Amount shall be deemed to have been satisfied in full.

(b) CLOSING. The Exchange shall occur contemporaneously upon
the effectiveness of this Agreement pursuant to Section 3.1. On the Closing
Date, Borrower will deliver to Bank a share certificate registered in the name
of Bank representing the number of Exchange Shares, such certificate to be in a
form reasonably acceptable to Bank, and the Bank will deliver to Borrower an
investment intent letter in the form of Exhibit G.

(c) LEGENDS. In addition to any legend required under state
securities laws, each certificate representing the Exchange Shares shall be
endorsed with the following legend:

"THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED,
ASSIGNED OR HYPOTHECATED UNLESS PURSUANT TO SEC RULE 144 OR THERE IS AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE 1933 ACT COVERING SUCH SECURITIES OR
THE COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THESE

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SECURITIES REASONABLY SATISFACTORY TO THE COMPANY, STATING THAT SUCH SALE,
TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND
PROSPECTUS DELIVERY REQUIREMENTS OF THE SECURITIES ACT OF 1933."

Borrower need not register a transfer of the Exchange Shares unless the
conditions specified in the foregoing legend are satisfied. Borrower may also
instruct its transfer agent not to register the transfer of any of the Exchange
Shares unless the conditions specified in the foregoing legend is satisfied.
Except as provided in this Section 2.7(c), the Exchange Shares shall not be
subject to any legend or other restrictions (other than restrictions generally
applicable to securities under Federal and state securities laws), whether on
transfer, voting, or otherwise.

(d) REMOVAL OF LEGENDS AND TRANSFER RESTRICTIONS. The legend
relating to the Securities Act of 1933 endorsed on a stock certificate pursuant
to paragraph 4.2 of this Agreement and the stop transfer instructions with
respect to the Exchange Shares represented by such certificate shall be removed
and Borrower shall issue a certificate without such legend to the holder of such
shares if such shares are included in a registration statement declared
effective by the Securities and Exchange Commission and a prospectus meeting the
requirements of Section 10 of the 1933 Act is available, or if such holder
provides to Borrower an opinion of counsel for such holder of the Exchange
Shares reasonably satisfactory to Borrower or a no-action letter or interpretive
opinion of the staff of the SEC to the effect that a public sale, transfer or
assignment of the Exchange Shares may be made without registration and without
compliance with any restriction imposed on restricted securities such as Rule
144.

(e) REGISTRATION RIGHTS. The Registration Rights Agreement is
hereby amended so that: (i) the term "Registerable Securities" as therein
defined shall include the Exchange Shares and any Common Stock issued as (or
issuable upon the conversion or exercise of any warrant, right, or other
security which is issued as) a dividend or other distribution with respect to,
or in exchange for or in replacement of, any Exchange Shares, and (ii) the terms
"Holder" or "Holders" as therein defined shall include any present or future
holder or holders of the Exchange Shares; without limiting the generality of the
foregoing, such holders of the Exchange Shares shall have all benefits of the
Registration Rights Agreement, including those arising under Sections 1.2
through 1.5 and 1.7 thereof.

(f) BOARD VISITATION. So long as Bank holds at least 5% of the
outstanding Common Stock, a representative of

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Bank shall have the right to attend each meeting of Borrower's board of
directors as an observer (at Bank's option, such attendance may be in person or
by telephone or other electronic means), and Bank shall receive at least the
same notice of each such board meeting as is received by the directors and shall
receive a copy of all information, reports and other materials distributed to
Borrower's directors at the same time such materials are so distributed.

(g) EXISTING WARRANTS. The Existing Warrants are not affected
by this Agreement and shall remain in full force and effect.

(h) ANTI-DILUTION PROTECTION.

(i) Borrower shall not issue, sell or otherwise distribute
any shares of Common Stock or any Options if, as a result thereof, the Bank
Share Percentage will be less than the Minimum Percentage; PROVIDED that
Borrower may (A) issue warrant shares upon exercise of the Existing Warrants,
(B) issue, sell or grant before or after the date hereof to any director,
officer or employee of Borrower Common Stock or of any Option, bonus or other
award exercisable into Common Stock approved by the Board of Directors of
Borrower or any duly authorized committee thereof (PROVIDED FURTHER that the
aggregate amount of all such Common Stock and Common Stock for which such
options, bonuses and other awards are exercisable does not exceed 5% of the
Common Stock outstanding on the date hereof), or (C) issue additional shares of
Common Stock (but not Options) if Borrower also, without any further
consideration being paid or payable by Bank, contemporaneously issues
additional shares of Common Stock to Bank, so that after giving effect to both
such issuances, the Bank Share Percentage will not be less than the Minimum
Percentage.

(ii) If there shall be any consolidation or merger to which
Borrower is a party, other than a consolidation or a merger of which Borrower is
the continuing corporation and which does not result in any reclassification of,
or change in, outstanding shares of Common Stock, or any sale or conveyance of
the property of Borrower as an entirety or substantially as an entirety, or any
recapitalization of Borrower (any such event being called a "Capital
Reorganization"), then, effective upon the effective date of such Capital
Reorganization, the provisions of this Section 2.7(h) shall no longer apply to
the Common Stock, but shall instead apply to the stock and other securities
which the Bank or its Affiliates are entitled to receive pursuant to such
Capital Reorganization. As a condition to effecting any Capital Reorganization,
Borrower or the successor or surviving corporation, as the case may be, shall
execute and deliver to

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Bank and/or its Affiliates an agreement as to the Bank or such Affiliates with
rights in accordance with this Section 2.7(h),

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<PAGE>

providing, to the extent of any right to issuance of additional equity
securities hereunder, for issuance rights as nearly equivalent as may be
practicable to the adjustments provided for in this Section 2.7(h). The
provisions of this Section 2.7(h) shall similarly apply to successive capital
reorganizations.

[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]

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3. CONDITIONS

1 CONDITIONS PRECEDENT TO EFFECTIVENESS. The effectiveness of this
Agreement is subject to the condition precedent that Bank shall have received,
in form and substance satisfactory to Bank, the following:

(a) this Agreement;

(b) corporate resolution to borrow and issue the Exchange
Shares;

(d) insurance certificate(s) demonstrating compliance with
Section 6.6;

(e) evidence that Borrower has irrevocably received an
additional equity infusion of $1,000,000 in cash or cash equivalents in exchange
for the issuance of Common Stock;

(f) Evidence that Midwest has been duly dissolved and has ceased
to exist as a legal entity and that all assets of Midwest have been transferred
to Borrower;

(g) a share certificate evidencing the Exchange Shares; and

(h) such other documents, and completion of such other matters,
as Bank may reasonably deem necessary or appropriate.

2 CONDITIONS PRECEDENT TO ADVANCES. The obligation of Bank to make
each additional advance or to release any funds from the Cash Collateral Account
is further subject to the following conditions:

(a) timely receipt by Bank of a Daily Transaction Report as
provided in Section 2.1; and

(b) the representations and warranties contained in Section 5
shall be true and correct in all material respects on and as of the date of such
Payment/Advance Form and on the effective date of each Advance as though made at
and as of each such date, and no Event of Default shall have occurred and be
continuing, or would result from such Advance. The making of each Advance shall
be deemed to be a representation and warranty by Borrower on the date of such
Advance as to the accuracy of the facts referred to in this Section 3.2(b).

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4. CREATION OF SECURITY INTEREST

1 GRANT OF SECURITY INTEREST. Borrower grants and pledges to Bank
a continuing security interest in all presently existing and hereafter acquired
or arising Collateral in order to secure prompt repayment of any and all
Obligations and in order to secure prompt performance by Borrower of each of its
covenants and duties under the Loan Documents. Such security interest
constitutes a valid, first priority security interest in the presently existing
Collateral, and will constitute a valid, first priority security interest in
Collateral acquired after the date hereof. Borrower acknowledges that Bank may
place a "hold" on any deposit account pledged as Collateral to secure the
Obligations. The security interest granted hereby is a continuation of the
security interests granted pursuant to the Existing Loan Documents.

2 DELIVERY OF ADDITIONAL DOCUMENTATION REQUIRED. Borrower shall
from time to time execute and deliver to Bank, at the request of Bank, all
Negotiable Collateral, all financing statements and other documents that Bank
may reasonably request, in form satisfactory to Bank, to perfect and continue
perfected Bank's security interests in the Collateral and in order to fully
consummate all of the transactions contemplated under the Loan Documents.

3 RIGHT TO INSPECT. Bank (through any of its officers, employees,
or agents) shall have the right, upon reasonable prior notice, from time to time
during Borrower's usual business hours, to inspect Borrower's Books and to make
copies thereof and to check, test, and appraise the Collateral in order to
verify Borrower's financial condition or the amount, condition of, or any other
matter relating to, the Collateral.

5. REPRESENTATIONS AND WARRANTIES

Borrower represents and warrants as follows:

1 DUE ORGANIZATION AND QUALIFICATION. Borrower and each Subsidiary
(if any) is a corporation duly existing and in good standing under the laws of
its state of incorporation and qualified and licensed to do business in, and is
in good standing in, any state in which the conduct of its business or its
ownership of property requires that it be so qualified, except where the failure
to be so qualified would not have a Material Adverse Effect. On the Closing
Date, Borrower has no Subsidiaries.

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2 DUE AUTHORIZATION; NO CONFLICT. The execution, delivery, and
performance of the Loan Documents are within Borrower's corporate powers, have
been duly authorized, and are not in conflict with nor constitute a breach of
any provision contained in Borrower's Articles of Incorporation or Bylaws, nor
will they constitute an event of default under any material agreement to which
Borrower is a party or by which Borrower is bound. Borrower is not in default
under any agreement to which it is a party or by which it is bound, which
default would have, or is likely to cause, a Material Adverse Effect.

3 NO PRIOR ENCUMBRANCES. Borrower has good and indefeasible title
to the Collateral, free and clear of Liens, except for Permitted Liens.

4 BONA FIDE ELIGIBLE ACCOUNTS. The Eligible Accounts are bona fide
existing obligations. The property giving rise to such Eligible Accounts has
been delivered to the account debtor or to the account debtor's agent for
immediate shipment to and unconditional acceptance by the account debtor.
Borrower has not received notice of actual or imminent Insolvency Proceeding of
any account debtor that is included in any Borrowing Base Certificate as an
Eligible Account.

5 MERCHANTABLE INVENTORY. All Eligible Inventory is in all
material respects of good and marketable quality, free from all material
defects.

6 NAME; LOCATION OF CHIEF EXECUTIVE OFFICE. Except as disclosed in
the Schedule, Borrower has not done business under any name other than that
specified on the signature page hereof within the last five years. The chief
executive office of Borrower is located at the address indicated in Section 10
hereof.

7 LITIGATION. Except as set forth in the Schedule, there are no
actions or proceedings pending by or against Borrower or any Subsidiary before
any court or administrative agency in which an adverse decision would have, or
is likely to cause, a Material Adverse Effect. Borrower does not have knowledge
of any such pending or threatened actions or proceedings.

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8 NO MATERIAL ADVERSE CHANGE IN FINANCIAL STATEMENTS. All
consolidated financial statements related to Borrower and any Subsidiary that
have been delivered by Borrower to Bank fairly present in all material respects
Borrower's consolidated financial condition as of the date thereof and
Borrower's consolidated results of operations for the period then ended. Since
the date of the most recent of such financial statements submitted to Bank there
has been no change, event, or condition which has had, or is likely to result
in, a Material Adverse Effect.

9 REGULATORY COMPLIANCE. Borrower and each Subsidiary has met the
minimum funding requirements of ERISA with respect to any employee benefit plans
subject to ERISA. No event has occurred resulting from Borrower's failure to
comply with ERISA that is reasonably likely to result in Borrower's incurring
any liability that would have, or is likely to cause, a Material Adverse Effect.
Borrower is not an "investment company" or a company "controlled" by an
"investment company" within the meaning of the Investment Company Act of 1940.
Borrower is not engaged principally, or as one of the important activities, in
the business of extending credit for the purpose of purchasing or carrying
margin stock (within the meaning of Regulations G, T and U of the Board of
Governors of the Federal Reserve System). Borrower has complied with all the
provisions of the Federal Fair Labor Standards Act. Borrower has not violated
any statutes, laws, ordinances or rules applicable to it, violation of which
would have, or is likely to cause, a Material Adverse Effect.

10 ENVIRONMENTAL CONDITION. None of Borrower's or any Subsidiary's
properties or assets has ever been used by Borrower or any Subsidiary or, to the
best of Borrower's knowledge, by previous owners or operators, in the disposal
of, or to produce, store, handle, treat, release, or transport, any hazardous
waste or hazardous substance other than in accordance with applicable law; to
the best of Borrower's knowledge, none of Borrower's properties or assets has
ever been designated or identified in any manner pursuant to any environmental
protection statute as a hazardous waste or hazardous substance disposal site, or
a candidate for closure pursuant to any environmental protection statute; no
lien arising under any environmental protection statute has attached to any
revenues or to any real or personal property owned by Borrower or any
Subsidiary; and neither Borrower nor any Subsidiary has received a summons,
citation, notice, or directive from the Environmental Protection Agency or any
other federal, state or other governmental agency concerning any action or
omission by Borrower or any Subsidiary resulting in the releasing, or otherwise
disposing of hazardous waste or hazardous substances into the environment.

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11 TAXES. Borrower and each Subsidiary has filed or caused to be
filed all tax returns required to be filed, and has paid, or has made adequate
provision for the payment of, all taxes reflected therein.

12 SUBSIDIARIES. Borrower does not own any stock, partnership
interest or other equity securities of any Person, except for Permitted
Investments.

13 GOVERNMENT CONSENTS. Borrower and each Subsidiary has obtained
all consents, approvals and authorizations of, made all declarations or filings
with, and given all notices to, all governmental authorities that are material
to the continued operation of Borrower's business as currently conducted.

14 FULL DISCLOSURE. No representation, warranty or other statement
made by Borrower in any certificate or written statement furnished to Bank
contains any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements contained in such certificates or
statements not misleading.

15 CAPITALIZATION. The authorized, issued and outstanding capital
stock of Borrower is as set forth on Exhibit E. All of such issued and
outstanding shares of capital stock have been duly authorized and validly issued
and are fully paid and nonassessable. Except as set forth on Exhibit E, there
are no equity securities of any class of Borrower issued, reserved for issuance
or outstanding and Borrower has no commitment or obligation to issue, deliver or
sell, or cause to be issued, delivered or sold any shares of the capital stock
or other securities of Borrower. On the Closing Date, after giving effect to
all Common Stock and Options issued or contemplated to be issued by the Company,
including any such issuances in connection with Section 6.8 of this Agreement or
the private placement now being pursued by the Company, the Bank Share
Percentage shall not be less than 8.5%.

16 VALIDITY OF STOCK. The Exchange Shares are validly issued, fully
paid, and nonassessable, and are free of any liens or encumbrances;
PROVIDED that the Exchange Shares may be subject to restrictions on transfer
under state and/or federal securities laws and otherwise as set forth in this
Agreement.

6. AFFIRMATIVE COVENANTS

Borrower covenants and agrees that, until payment in full of all
outstanding Obligations, and for so long as Bank may

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have any commitment to make an Advance hereunder, Borrower shall do all of the
following:

1 GOOD STANDING. Borrower shall maintain Borrower's and each
Subsidiaries' corporate existence and good standing in its jurisdiction of
incorporation and maintain qualification in each jurisdiction in which the
failure to so qualify would have, or is likely to cause, a Material Adverse
Effect. Borrower shall maintain, and shall cause each of its Subsidiaries to
maintain, to the extent consistent with prudent management of Borrower's
business, in force all licenses, approvals and agreements, the loss of which
could have a Material Adverse Effect.

2 GOVERNMENT COMPLIANCE. Borrower shall meet, and shall cause each
Subsidiary to meet, the minimum funding requirements of ERISA with respect to
any employee benefit plans subject to ERISA. Borrower shall comply, and shall
cause each Subsidiary to comply, with all statutes, laws, ordinances and
government rules and regulations to which it is subject, noncompliance with
which could have a Material Adverse Effect.

3 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES. Borrower shall
deliver to Bank:

(a) as soon as available, but in no event later than thirty (30)
days after the end of each calendar month, Borrower's unaudited balance sheet
and profit and loss statement for such month, together with an inventory aging,
prepared and certified as correct to the best knowledge and belief by a
Responsible Officer, together with a Compliance Certificate;

(b) within five days of the last day of each month, an aged list
of Borrower's accounts receivable and an aged list of Borrower's accounts
payable, together with a Borrowing Base Certificate prepared and executed by a
Responsible Officer;

(c) at the time of every Advance and/or paydown request, a Daily
Transaction Report, together with supporting schedules, prepared and executed by
a Responsible Officer;

(d) as soon as available, but in no event later than ninety (90)
days after the end of each fiscal year, a balance sheet and income statement for
the year ended, audited by a certified public accountant reasonably satisfactory
to Bank;

(e) a copy of its annual federal tax return within 15 days of
the filing thereof with the Internal Revenue Service;

(f) a copy of any 10-Q and 10-K reports (or equivalent forms for
a "small business issuer" under Rule 12b-2)

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within five (5) days of the filing thereof with the Securities and Exchange
Commission;

(g) promptly upon receipt of notice thereof, a report of any
legal actions pending or threatened against Borrower or any Subsidiary that
could result in damages or costs to Borrower or any Subsidiary of $100,000.00 or
more; and

(h) such budgets, sales projections, operating plans or other
financial information as Bank may reasonably request from time to time.

Bank shall have a right from time to time hereafter to audit and
examine Borrower's Accounts and Inventory at Borrower's expense, provided that
such audits will be conducted no more often than every three months unless an
Event of Default has occurred and is continuing.

4 INVENTORY; RETURNS. Borrower shall keep all Inventory in good
and marketable condition, free from all material defects. Returns and
allowances, if any, as between Borrower and its account debtors shall be on the
same basis and in accordance with the usual customary practices of Borrower, as
they exist at the time of the execution and delivery of this Agreement.
Borrower shall promptly notify Bank of all returns and recoveries and of all
disputes and claims, where the return, recovery, dispute or claim involves more
than $50,000.00.

5 TAXES. Borrower shall make, and shall cause each Subsidiary to
make, due and timely payment or deposit of all material federal, state, and
local taxes, assessments, or contributions required of it by law, and will
execute and deliver to Bank, on demand, appropriate certificates attesting to
the payment or deposit thereof; and Borrower will make, and will cause each
Subsidiary to make, timely payment or deposit of all material tax payments and
withholding taxes required of it by applicable laws, including, but not limited
to, those laws concerning F.I.C.A., F.U.T.A., state disability, and local,
state, and federal income taxes, and will, upon request, furnish Bank with proof
satisfactory to Bank indicating that Borrower or a Subsidiary has made such
payments or deposits; provided that Borrower or a Subsidiary need not make any
payment if the amount or validity of such payment is contested in good faith by
appropriate proceedings and is reserved against (to the extent required by GAAP)
by Borrower.

6 INSURANCE.

(a) Borrower, at its expense, shall keep the Collateral insured
against loss or damage by fire, theft,

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explosion, sprinklers, and all other hazards and risks, and in such amounts, as
ordinarily insured against by other owners in similar businesses conducted in
the locations where Borrower's business is conducted on the date hereof.
Borrower shall also maintain insurance relating to Borrower's ownership and use
of the Collateral in amounts and of a type that are customary to businesses
similar to Borrower's.

(b) All such policies of insurance shall be in such form, with
such companies, and in such amounts as reasonably satisfactory to Bank. All
such policies of property insurance shall contain a lender's loss payable
endorsement, in the form of a 438 BFU or other form reasonably satisfactory to
Bank, showing Bank as an additional loss payee thereof and all liability
insurance policies shall show the Bank as an additional insured, and shall
specify that the insurer must give at least twenty (20) days notice to Bank
before canceling its policy for any reason. Borrower shall deliver to Bank
certified copies of such policies of insurance and evidence of the payments of
all premiums therefor. All proceeds payable under any such policy shall, at the
option of Bank, be payable to Bank to be applied on account of the Obligations.

7 PRINCIPAL DEPOSITORY. Borrower shall maintain its primary
banking relationship with Bank, provided, that Borrower shall be permitted to
maintain a deposit account with a local banking institution located in proximity
to its chief executive offices (the "Local Deposit Account"), subject to the
following:

(a) the balance on deposit in the Local Deposit Account shall
not exceed $50,000.00 at any time;

(b) Borrower shall provide Bank with a copy of each monthly
statement with respect to the Local Deposit Account within five (5) days of its
receipt thereof; and

(c) Borrower shall, simultaneously with the opening of the Local
Deposit Account (or, if the Local Deposit Account is already in existence,
within five (5) days of the execution and delivery of this Agreement by
Borrower), provide the depository bank with written notice of Bank's security
interest in the Local Deposit Account (with a copy thereof delivered to Bank)
pursuant to the Form of Notification and Acknowledgment for Pledged Deposit
attached as EXHIBIT D hereto.

8 CONVERSION OF ACCOUNTS PAYABLE TO EQUITY. Borrower shall use
its best efforts to effect an exchange, within 90 days of the Closing Date,
of not less than $1,000,000.00 of its existing trade accounts payable for
Common Stock at an

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exchange price of not less than $1.52 of trade accounts payable per share of
Common Stock.

9 FURTHER ASSURANCES. At any time and from time to time Borrower
shall execute and deliver such further instruments and take such further action
as may reasonably be requested by Bank to effect the purposes of this Agreement.

7. NEGATIVE COVENANTS

Borrower covenants and agrees that, so long as any credit hereunder
shall be available and until payment in full of the outstanding Obligations or
for so long as Bank may have any commitment to make any Advances, Borrower will
not do any of the following:

1 DISPOSITIONS. Convey, sell, lease, transfer or otherwise dispose
of (collectively, a "Transfer"), or permit any of its Subsidiaries to Transfer,
all or any part of its business or property, other than: (i) Transfers of
Inventory in the ordinary course of business; (ii) Transfers of non-exclusive
licenses and similar arrangements for the use of the property of Borrower or its
Subsidiaries; or (iii) Transfers of worn-out or obsolete Equipment.

2 CHANGE IN BUSINESS. Engage in any business, or permit any of its
Subsidiaries to engage in any business, other than the businesses currently
engaged in by Borrower and any business substantially similar or related thereto
(or incidental thereto), or suffer a material change in Borrower's ownership,
management or directors. Borrower will not, without thirty (30) days prior
written notification to Bank, relocate its chief executive office.

3 MERGERS OR ACQUISITIONS. Merge or consolidate, or permit any of
its Subsidiaries to merge or consolidate, with or into any other business
organization, or acquire, or permit any of its Subsidiaries to acquire, all or
substantially all of the capital stock or property of another Person.

4 INDEBTEDNESS. Create, incur, assume or be or remain liable with
respect to any Indebtedness, or permit any Subsidiary so to do, other than
Permitted Indebtedness.

5 ENCUMBRANCES. Create, incur, assume or suffer to exist any Lien
with respect to any of its property, or assign or otherwise convey any right to
receive income, including the sale of any Accounts, or permit any of its
Subsidiaries so to do, except for Permitted Liens.

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6 DISTRIBUTIONS. Pay any dividends or make any other distribution
or payment on account of or in redemption, retirement or purchase of any capital
stock.

7 INVESTMENTS. Directly or indirectly acquire or own, or make any
Investment in or to any Person, or permit any of its Subsidiaries so to do,
other than Permitted Investments.

8 TRANSACTIONS WITH AFFILIATES. Directly or indirectly enter into
or permit to exist any material transaction with any Affiliate of Borrower
except for transactions that are in the ordinary course of Borrower's business,
upon fair and reasonable terms that are no less favorable to Borrower than would
be obtained in an arm's length transaction with a nonaffiliated Person.

9 SUBORDINATED DEBT. Make any payment in respect of any
Subordinated Debt, or permit any of its Subsidiaries to make any such payment,
except in compliance with the terms of such Subordinated Debt, or amend any
provision contained in any documentation relating to the Subordinated Debt
without Bank's prior written consent.

10 INVENTORY. Store the Inventory with a bailee, warehouseman, or
similar party unless Bank has received a pledge of the warehouse receipt
covering such Inventory. Except for Inventory sold in the ordinary course of
business and except for such other locations as Bank may approve in writing,
Borrower shall keep the Inventory only at the location set forth in Section 10
hereof and such other locations of which Borrower gives Bank prior written
notice and as to which Borrower signs and files a financing statement where
needed to perfect Bank's security interest.

11 COMPLIANCE. Become an "investment company" controlled by an
"investment company," within the meaning of the Investment Company Act of 1940,
or become principally engaged in, or undertake as one of its important
activities, the business of extending credit for the purpose of purchasing or
carrying margin stock, or use the proceeds of any Advance for such purpose.
Fail to meet the minimum funding requirements of ERISA, permit a Reportable
Event or Prohibited Transaction, as defined in ERISA, to occur, fail to comply
with the Federal Fair Labor Standards Act or violate any law or regulation,
which violation could have a Material Adverse Effect, or permit any of its
Subsidiaries to do any of the foregoing.

8. EVENTS OF DEFAULT

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Any one or more of the following events shall constitute an Event of
Default by Borrower under this Agreement:

1 PAYMENT DEFAULT. If Borrower fails to pay, when due, any of the
Obligations.

2 COVENANT DEFAULT.

(a) If Borrower fails to perform any obligation under Sections
6.7, 6.8 or 6.9 or violates any of the covenants contained in Article 7 of this
Agreement, or

(b) If Borrower fails or neglects to perform, keep, or observe
any other material term, provision, condition, covenant, or agreement contained
in this Agreement, in any of the Loan Documents, or in any other present or
future agreement between Borrower and Bank and as to any default under such
other term, provision, condition, covenant or agreement that can be cured, has
failed to cure such default within ten (10) days after Borrower receives notice
thereof or any officer of Borrower becomes aware thereof; provided, however,
that if the default cannot by its nature be cured within the ten (10) day period
or cannot after diligent attempts by Borrower be cured within such ten (10) day
period, and such default is likely to be cured within a reasonable time, then
Borrower shall have an additional reasonable period (which shall not in any case
exceed thirty (30) days) to attempt to cure such default, and within such
reasonable time period the failure to have cured such default shall not be
deemed an Event of Default (provided that no Advances will be required to be
made during such cure period);

3 MATERIAL ADVERSE CHANGE. If there occurs any change, event, or
condition which causes a Material Adverse Effect;

4 ATTACHMENT. If any material portion of Borrower's assets is
attached, seized, subjected to a writ or distress warrant, or is levied upon, or
comes into the possession of any trustee, receiver or person acting in a similar
capacity and such attachment, seizure, writ or distress warrant or levy has not
been removed, discharged or rescinded within ten (10) days, or if Borrower is
enjoined, restrained, or in any way prevented by court order from continuing to
conduct all or any material part of its business affairs, or if a judgment or
other claim becomes a lien or encumbrance upon any material portion of
Borrower's assets, or if a notice of lien, levy, or assessment is filed of
record with respect to any of Borrower's assets by the United States Government,
or any department, agency, or instrumentality thereof, or by any state, county,
municipal, or governmental agency, and the same is not paid within ten (10) days
after

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Borrower receives notice thereof, provided that none of the foregoing shall
constitute an Event of Default where such action or event is stayed or an
adequate bond has been posted pending a good faith contest by Borrower (provided
that no Advances will be required to be made during such cure period);

5 INSOLVENCY. If Borrower becomes insolvent, or if an Insolvency
Proceeding is commenced by Borrower, or if an Insolvency Proceeding is commenced
against Borrower and is not dismissed or stayed within ten (10) days (provided
that no Advances will be made prior to the dismissal of such Insolvency
Proceeding);

6 OTHER AGREEMENTS. If there is a default in any agreement to
which Borrower is a party with a third party or parties resulting in a right by
such third party or parties, whether or not exercised, to accelerate the
maturity of any Indebtedness in an amount in excess of $100,000.00 or that is
likely to have a Material Adverse Effect;

7 SUBORDINATED DEBT. If Borrower makes any payment on account of
Subordinated Debt, except to the extent such payment is allowed under any
subordination agreement entered into with Bank;

8 MANAGEMENT. Any of Michael J. Carroll, Brian Carroll, and
James J. Urban shall cease to remain in their current capacities as President
and Chief Executive Officer (Michael J. Carroll), Chief Financial Officer (Brian
Carroll), and Chief Operating Officer (James J. Urban) of Borrower;

9 JUDGMENTS. If a judgment or judgments for the payment of money
in an amount, individually or in the aggregate, of at least $100,000.00 shall be
rendered against Borrower and shall remain unsatisfied and unstayed for a period
of ten (10) days (provided that no Advances will be made prior to the
satisfaction or stay of such judgment);

10 MISREPRESENTATIONS. If any material misrepresentation or
material misstatement exists now or hereafter in any warranty or representation
set forth herein or in any certificate delivered to Bank by any Responsible
Officer pursuant to this Agreement or to induce Bank to enter into this
Agreement or any other Loan Document; or

11 GUARANTY. The Guaranty ceases for any reason to be in full force
and effect, or any Guarantor fails to perform any obligation under the Guaranty,
or any material misrepresentation or material misstatement exists now or
hereafter in any warranty or representation set forth in the

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Guaranty or in any certificate delivered to Bank in connection with the
Guaranty.

9. BANK'S RIGHTS AND REMEDIES

1 RIGHTS AND REMEDIES. Upon the occurrence and during the
continuance of an Event of Default, Bank may, at its election, without notice of
its election and without demand, do any one or more of the following, all of
which are authorized by Borrower:

(a) Declare all Obligations, whether evidenced by this
Agreement, by any of the other Loan Documents, or otherwise, immediately due and
payable (provided that upon the occurrence of an Event of Default described in
Section 8.5 all Obligations shall become immediately due and payable without any
action by Bank);

(b) Cease advancing money or extending credit to or for the
benefit of Borrower under this Agreement or under any other agreement between
Borrower and Bank;

(c) Settle or adjust disputes and claims directly with account
debtors for amounts, upon terms and in whatever order that Bank reasonably
considers advisable;

(d) Without notice to or demand upon Borrower, make such
payments and do such acts as Bank considers necessary or reasonable to protect
its security interest in the Collateral. Borrower agrees to assemble the
Collateral if Bank so requires, and to make the Collateral available to Bank as
Bank may designate. Borrower authorizes Bank to enter the premises where the
Collateral is located, to take and maintain possession of the Collateral, or any
part of it, and to pay, purchase, contest, or compromise any encumbrance,
charge, or lien which in Bank's determination appears to be prior or superior to
its security interest and to pay all expenses incurred in connection therewith.
With respect to any of Borrower's owned premises, Borrower hereby grants Bank a
license to enter into possession of such premises and to occupy the same,
without charge, for up to one hundred twenty (120) days in order to exercise any
of Bank's rights or remedies provided herein, at law, in equity, or otherwise;

(e) Without notice to Borrower set off and apply to the
Obligations any and all (i) balances and deposits of Borrower held by Bank, or
(ii) indebtedness at any time owing to or for the credit or the account of
Borrower held by Bank;

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(f) Ship, reclaim, recover, store, finish, maintain, repair,
prepare for sale, advertise for sale, and sell (in the manner provided for
herein) the Collateral. Bank is hereby granted a license or other right, solely
pursuant to the provisions of this Section 9.1, to use, without charge,
Borrower's labels, patents, copyrights, rights of use of any name, trade
secrets, trade names, trademarks, service marks, and advertising matter, or any
property of a similar nature, as it pertains to the Collateral, in completing
production of, advertising for sale, and selling any Collateral and, in
connection with Bank's exercise of its rights under this Section 9.1, Borrower's
rights under all licenses and all franchise agreements shall inure to Bank's
benefit;

(g) Sell the Collateral at either a public or private sale, or
both, by way of one or more contracts or transactions, for cash or on terms, in
such manner and at such places (including Borrower's premises) as Bank
determines is commercially reasonable;

(h) Bank may credit bid and purchase at any public sale; and

(i) Any deficiency that exists after disposition of the
Collateral as provided above will be paid immediately by Borrower.

2 POWER OF ATTORNEY. Effective only upon the occurrence and during
the continuance of an Event of Default, and for the purpose of protecting and
preserving Bank's security interest in the Collateral and the proceeds thereof,
Borrower hereby irrevocably appoints Bank (and any of Bank's designated
officers, or employees) as Borrower's true and lawful attorney to: (a) send
requests for verification of Accounts or notify account debtors of Bank's
security interest in the Accounts; (b) endorse Borrower's name on any checks or
other forms of payment or security that may come into Bank's possession;
(c) sign Borrower's name on any invoice or bill of lading relating to any
Account, drafts against account debtors, schedules and assignments of Accounts,
verifications of Accounts, and notices to account debtors; (d) make, settle, and
adjust all claims under and decisions with respect to Borrower's policies of
insurance; and (e) settle and adjust disputes and claims respecting the accounts
directly with account debtors, for amounts and upon terms which Bank determines
to be reasonable; provided Bank may exercise such power of attorney to sign the
name of Borrower on any of the documents described in Section 4.2 regardless of
whether an Event of Default has occurred. The appointment of Bank as Borrower's
attorney in fact, and each and every one of Bank's rights and powers, being
coupled with an

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interest, is irrevocable until all of the Obligations have been fully repaid and
performed and Bank's obligation to provide advances hereunder is terminated.

3 ACCOUNTS COLLECTION. At any time from the date of this
Agreement, Bank may notify any Person owing funds to Borrower of Bank's security
interest in such funds and verify the amount of such Account. Borrower shall
collect all amounts owing to Borrower for Bank, receive in trust all payments as
Bank's trustee, and immediately deliver such payments to Bank in their original
form as received from the account debtor, with proper endorsements for deposit.

4 BANK EXPENSES. If Borrower fails to pay any amounts or furnish
any required proof of payment due to third persons or entities, as required
under the terms of this Agreement, then Bank may do any or all of the following:
(a) make payment of the same or any part thereof; (b) set up such reserves under
the Committed Revolving Line as Bank deems necessary to protect Bank from the
exposure created by such failure; or (c) obtain and maintain insurance policies
of the type discussed in Section 6.6 of this Agreement, and take any action with
respect to such policies as Bank deems prudent. Any amounts so paid or
deposited by Bank shall constitute Bank Expenses, shall be immediately due and
payable, and shall bear interest at the then applicable rate hereinabove
provided, and shall be secured by the Collateral. Any payments made by Bank
shall not constitute an agreement by Bank to make similar payments in the future
or a waiver by Bank of any Event of Default under this Agreement.

5 BANK'S LIABILITY FOR COLLATERAL. So long as Bank complies with
reasonable banking practices, Bank shall not in any way or manner be liable or
responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage
thereto occurring or arising in any manner or fashion from any cause; (c) any
diminution in the value thereof; or (d) any act or default of any carrier,
warehouseman, bailee, forwarding agency, or other person whomsoever. All risk
of loss, damage or destruction of the Collateral shall be borne by Borrower.

6 REMEDIES CUMULATIVE. Bank's rights and remedies under this
Agreement, the Loan Documents, and all other agreements shall be cumulative.
Bank shall have all other rights and remedies not inconsistent herewith as
provided under the Code, by law, or in equity. No exercise by Bank of one right
or remedy shall be deemed an election, and no waiver by Bank of any Event of
Default on Borrower's part shall be deemed a continuing waiver. No delay by
Bank shall constitute a waiver, election, or acquiescence by it. No waiver by
Bank shall be effective unless

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<PAGE>

made in a written document signed on behalf of Bank and then shall be effective
only in the specific instance and for the specific purpose for which it was
given.

7 DEMAND; PROTEST. Borrower waives demand, protest, notice of
protest, notice of default or dishonor, notice of payment and nonpayment, notice
of any default, nonpayment at maturity, release, compromise, settlement,
extension, or renewal of accounts, documents, instruments, chattel paper, and
guarantees at any time held by Bank on which Borrower may in any way be liable.

10. NOTICES

Unless otherwise provided in this Agreement, all notices or demands by
any party relating to this Agreement or any other agreement entered into in
connection herewith shall be in writing and (except for financial statements and
other informational documents which may be sent by first-class mail, postage
prepaid) shall be personally delivered or sent by a recognized overnight
delivery service, certified mail, postage prepaid, return receipt requested, or
by telefacsimile to Borrower or to Bank, as the case may be, at its addresses
set forth below:

If to Borrower: Franklin Ophthalmic Instruments Co., Inc.
1237 Naperville Drive
Romeoville, IL 60441
Attn: Brian Carroll
FAX: (708) 759-1744

If to Bank: Silicon Valley Bank
3003 Tasman Drive
Santa Clara, California 95054
Attn: Marc Cadieux
FAX: (408) 727-8728

The parties hereto may change the address at which they are to receive
notices hereunder, by notice in writing in the foregoing manner given to the
other.

11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER

This Agreement shall be governed by, and construed in accordance with,
the internal laws of the State of California, without regard to principles of
conflicts of law. Each of Borrower and Bank hereby submits to the exclusive
jurisdiction of the state and Federal courts located in the County of Santa
Clara, State of California. BORROWER AND BANK EACH HEREBY WAIVE THEIR
RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF

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<PAGE>

ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE
TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS,
BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH PARTY
RECOGNIZES AND AGREES THAT THE FOREGOING WAIVER CONSTITUTES A MATERIAL
INDUCEMENT FOR IT TO ENTER INTO THIS AGREEMENT. EACH PARTY REPRESENTS AND
WARRANTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT
KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION
WITH LEGAL COUNSEL.

12. GENERAL PROVISIONS

1 SUCCESSORS AND ASSIGNS. This Agreement shall bind and inure to
the benefit of the respective successors and permitted assigns of each of the
parties; PROVIDED, HOWEVER, that neither this Agreement nor any rights hereunder
may be assigned by Borrower without Bank's prior written consent, which consent
may be granted or withheld in Bank's sole discretion. Bank shall have the right
without the consent of or notice to Borrower to sell, transfer, negotiate, or
grant participation in all or any part of, or any interest in, Bank's
obligations, rights and benefits hereunder.

2 INDEMNIFICATION. Borrower shall defend, indemnify and hold
harmless Bank and its officers, employees, and agents against: (a) all
obligations, demands, claims, and liabilities claimed or asserted by any other
party in connection with the transactions contemplated by this Agreement; and
(b) all losses or Bank Expenses in any way suffered, incurred, or paid by Bank
as a result of or in any way arising out of, following, or consequential to
transactions between Bank and Borrower whether under this Agreement, or
otherwise (including without limitation reasonable attorneys fees and expenses),
except for losses caused by Bank's gross negligence or willful misconduct.

3 TIME OF ESSENCE. Time is of the essence for the performance of
all obligations set forth in this Agreement.

4 SEVERABILITY OF PROVISIONS. Each provision of this Agreement
shall be severable from every other provision of this Agreement for the purpose
of determining the legal enforceability of any specific provision.

5 AMENDMENTS IN WRITING, INTEGRATION. This Agreement cannot be
amended or terminated orally. All prior agreements, understandings,
representations, warranties, and negotiations between the parties hereto with
respect to the subject matter of this Agreement, if any, are merged into this
Agreement and the Loan Documents.

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<PAGE>

6 COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by different parties on separate counterparts, each of which,
when executed and delivered, shall be deemed to be an original, and all of
which, when taken together, shall constitute but one and the same Agreement.

7 SURVIVAL. All covenants, representations and warranties made in
this Agreement shall continue in full force and effect so long as any
Obligations remain outstanding. The obligations of Borrower to indemnify Bank
with respect to the expenses, damages, losses, costs and liabilities described
in Section 12.2 shall survive until all applicable statute of limitations
periods with respect to actions that may be brought against Bank have run,
provided that so long as the obligations set forth in the first sentence of this
Section 12.7 have been satisfied, and Bank has no commitment to make any
Advances or to make any other loans to Borrower, Bank shall release all security
interests granted hereunder and redeliver all Collateral held by it in
accordance with applicable law.

8 CONFIDENTIALITY. In handling any confidential information Bank
shall exercise the same degree of care that it exercises with respect to its own
proprietary information of the same types to maintain the confidentiality of any
non-public information thereby received or received pursuant to this Agreement
except that disclosure of such information may be made (i) to the subsidiaries
or affiliates of Bank in connection with their present or prospective business
relations with Borrower, (ii) to prospective transferees or purchasers of any
interest in the Loans, provided that they have entered into a comparable
confidentiality agreement in favor of Borrower and have delivered a copy to
Borrower, (iii) as required by law, regulations, rule or order, subpoena,
judicial order or similar order and (iv) as may be required in connection with
the examination, audit or similar investigation of Bank. Confidential
information hereunder shall not include information that either: (a) is in the
public domain or in the knowledge or possession of Bank when disclosed to Bank,
or becomes part of the public domain after disclosure to Bank through no fault
of Bank; or (b) is disclosed to Bank by a third party, provided Bank does not
have actual knowledge that such third party is prohibited from disclosing such
information.

9 RELEASE BY BORROWER.

(a) NO PRESENT CLAIMS. Borrower acknowledges and agrees that:
(i) Borrower has no claim or cause of action against any Released Party; (ii)
Borrower has no offset right, counterclaim, or defense of any kind against any
of the Indebtedness; and (iii) each Released Party has heretofore

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<PAGE>

properly performed and satisfied in a timely manner any and all of such Released
Party's obligations, if any, to Borrower. Bank desires, and Borrower agrees, to
eliminate any possibility that any past conditions, acts, omissions, events,
circumstances, or matters would impair or otherwise adversely affect any of
Bank's rights, interests, collateral security, or remedies. Therefore,
Borrower, on behalf of Borrower and all successors and assigns of Borrower and
any and all other parties claiming rights through Borrower, unconditionally
releases, acquits, and forever discharges each and every Released Party from:
(1) any and all liabilities, obligations, duties, or indebtedness of any of the
Released Parties to Borrower, whether known or unknown, arising prior to the
date hereof, and (2) any and all claims, offsets, causes of action, suits, or
defenses, whether known or unknown, which Borrower might otherwise have against
any of the Released Parties on account of any condition, act, omission, event,
contract, liability, obligation, indebtedness, claim, cause of action, defense,
circumstance, or matter of any kind which existed, arose or occurred at any time
prior to the date hereof. As further consideration for the above release,
Borrower specifically agrees, represents, and warrants that the matters released
herein are not limited to matters which are known or disclosed, and Borrower
hereby waives any and all rights and benefits which Borrower now has, or in the
future may have, conferred upon Borrower by virtue of the provisions of Section
1542 of the Civil Code of the State of California which provides as follows:

A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR
DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF
EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY
AFFECTED HIS SETTLEMENT WITH THE DEBTOR.

(b) WAIVER OF UNKNOWN CLAIMS. Borrower is aware that Borrower
may later discover facts in addition to or different from those which Borrower
now knows or believes to be true with respect to the releases given herein, and
that it is nevertheless Borrower's intention to settle, release, and discharge
fully, finally, and forever all of these matters, known or unknown, suspected or
unsuspected, which previously existed, now exist, or may exist. In furtherance
of such intention, Borrower specifically acknowledges and agrees that the
releases given in this Agreement shall be and shall remain in effect as full and
complete releases of the matters being released, notwithstanding the discovery
or existence of any such additional or different facts and that such releases
shall not be subject to termination or rescission by reason of any such
additional or different facts.

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<PAGE>

(c) WARRANTY OF NON-ASSIGNMENT. Borrower hereby represents and
warrants that it has not previously assigned or transferred, or purported to
assign or transfer, to any person or entity any of the claims, demands,
grievances, liabilities, debts, accounts, obligations, costs, expenses, liens,
rights, actions, or causes of action released by the terms of this Agreement.

-37-

<PAGE>

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed as of the date first above written.

Borrower: FRANKLIN OPHTHALMIC INSTRUMENTS CO.,
INC.

By: /s/Michael J. Carroll
---------------------

Name: Michael J. Carroll
------------------

Title: President & CEO
---------------

Bank: SILICON VALLEY BANK

By: /s/Marc C. Cadieux
------------------

Name: Marc C. Cadieux
---------------

Title: Vice President
--------------

-38-

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 720,277
<ALLOWANCES> 40,135
<INVENTORY> 1,356,057
<CURRENT-ASSETS> 2,095,361
<PP&E> 834,239
<DEPRECIATION> 618,394
<TOTAL-ASSETS> 4,597,412
<CURRENT-LIABILITIES> 7,699,207
<BONDS> 0
0
0
<COMMON> 9,545
<OTHER-SE> (3,235,757)
<TOTAL-LIABILITY-AND-EQUITY> 4,597,412
<SALES> 8,469,994
<TOTAL-REVENUES> 0
<CGS> 6,367,743
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 737,942
<INCOME-PRETAX> (1,977,939)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,977,939)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,977,939)
<EPS-PRIMARY> (0.25)
<EPS-DILUTED> 0

</TABLE>