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<B><FONT SIZE=4><P ALIGN="CENTER">UNITED STATES</P>
<P ALIGN="CENTER">SECURITIES AND EXCHANGE COMMISSION</P>
<P ALIGN="CENTER">Washington, D.C.  20549</P>
</B></FONT><FONT SIZE=3><P ALIGN="CENTER"></P>
<P ALIGN="CENTER">FORM 10-K/A No. 2</P>
<P ALIGN="CENTER"></P>
<P ALIGN="CENTER">[x]	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE </P>
<P ALIGN="CENTER">	SECURITIES EXCHANGE ACT OF 1934</P>
<P ALIGN="CENTER"></P>
<P ALIGN="CENTER">For the fiscal year ended:	December 31, 1998</P>
</FONT><FONT SIZE=2><P ALIGN="CENTER"><HR ALIGN="RIGHT" WIDTH="20%" SIZE=0></P>
</FONT><FONT SIZE=3><P ALIGN="CENTER">OR</P>
<P ALIGN="CENTER"></P>
<P ALIGN="CENTER">[   ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR (15d) OF THE</P>
<P ALIGN="CENTER">	SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]</P>
<P ALIGN="CENTER"></P>
<P ALIGN="CENTER">For the transition period from  ______  to  ______</P>
<P ALIGN="CENTER"></P>
<P ALIGN="CENTER"> </P>
<P ALIGN="CENTER">Commission File No.:	0-11927</P>
</FONT><FONT SIZE=2><P ALIGN="CENTER"><HR WIDTH="9%" SIZE=0></P>
</FONT><FONT SIZE=3><P ALIGN="CENTER"></P>
<P ALIGN="CENTER">MOTO PHOTO, INC.</P>
</FONT><FONT SIZE=2><P ALIGN="CENTER"><HR WIDTH="47%" SIZE=0></P>
</FONT><FONT SIZE=3><P ALIGN="CENTER">(Exact name of registrant as specified in its charter)</P>
<P ALIGN="CENTER"></P>
<P ALIGN="CENTER"> </P><DIR>
<DIR>
<DIR>
<DIR>
<DIR>
<DIR>

<P>Delaware						31-1080650</P></DIR>
</DIR>
</DIR>
</DIR>
</DIR>
</DIR>

</FONT><FONT SIZE=2><P ALIGN="CENTER"><HR ALIGN="RIGHT" WIDTH="29%" SIZE=0><HR ALIGN="LEFT" WIDTH="21%" SIZE=0></P>
</FONT><FONT SIZE=3><P ALIGN="CENTER">(State of Incorporation)			(Employer Identification No.)</P>
<P ALIGN="CENTER"></P>
<U><P ALIGN="CENTER"> </P>
</U><P ALIGN="CENTER">4444 Lake Center Dr. Dayton, OH			45426</P>
</FONT><FONT SIZE=2><P ALIGN="CENTER"><HR WIDTH="35%" SIZE=0><HR ALIGN="RIGHT" WIDTH="9%" SIZE=0></P>
</FONT><FONT SIZE=3><P ALIGN="CENTER">(Address of principal executive offices)		(Zip Code)</P>
<P ALIGN="CENTER"></P>
</FONT><FONT SIZE=2><P ALIGN="CENTER"><HR WIDTH="50%" SIZE=0></FONT><FONT SIZE=3>(937) 854-6686</P>
<P ALIGN="CENTER"></P>
<P ALIGN="CENTER">(Registrant's telephone number, including area code)</P>
<P ALIGN="CENTER"></P>
<P ALIGN="CENTER">Securities registered pursuant to Section 12(b) of the Act: 	None</P>
</FONT><FONT SIZE=2><P ALIGN="CENTER"><HR ALIGN="RIGHT" WIDTH="7%" SIZE=0></P>
</FONT><FONT SIZE=3><P ALIGN="CENTER">Securities registered pursuant to Section 12(g) of the Act:</P>
<P ALIGN="CENTER"></P>
<P ALIGN="CENTER">Voting Common Stock, $.01 per share value</P>
<P ALIGN="CENTER">Common Stock Purchase Warrants, exercisable</P>
<P ALIGN="CENTER">on or before December 31, 1999</P>
</FONT><FONT SIZE=2><P></P>
</FONT>
<P ALIGN="CENTER">Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 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  <U>X  </U> No  <U>	</P>
</U><P ALIGN="JUSTIFY"></P>
<P ALIGN="JUSTIFY"> </P>
<P ALIGN="CENTER">Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in part of this Form 10-K or any amendment to this Form 10-K. [X]</P>
<P ALIGN="JUSTIFY"></P>
<P ALIGN="JUSTIFY"> </P>
<P ALIGN="CENTER">State the aggregate market value of the voting stock held by non-affiliates of the registrant:</P>
<P ALIGN="CENTER"></P>
<P ALIGN="CENTER"> </P>
<P ALIGN="CENTER">$8,085,570 in Voting Common Stock </P>
<P ALIGN="CENTER">as of March 25, 1999</P>
<P ALIGN="CENTER">(last actual transaction price)</P>
<P ALIGN="CENTER"></P>
<P ALIGN="CENTER"> </P>
<P ALIGN="CENTER"> </P>
<P ALIGN="CENTER">APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY</P>
<P ALIGN="CENTER">PROCEEDINGS DURING THE PRECEDING FIVE YEARS:</P>
<P ALIGN="CENTER"></P>
<P ALIGN="CENTER"> </P>
<P ALIGN="CENTER">Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed
by a court.</P>
<P ALIGN="CENTER"></P>
<P ALIGN="CENTER">Yes  _____  No _____</P>
<P ALIGN="CENTER"></P>
<P ALIGN="CENTER"> </P>
<P ALIGN="CENTER">Indicate the number of shares outstanding of each of the Registrant's classes of Common Stock</P>
<P ALIGN="CENTER">as of March 25, 1999:</P>
<P ALIGN="CENTER"></P>
<P ALIGN="CENTER">7,840,173 shares of Voting Common</P>
<P ALIGN="CENTER">0 shares of Non-Voting Common</P>
<P ALIGN="CENTER"></P>
<P ALIGN="CENTER"> </P>
<P ALIGN="CENTER">DOCUMENTS INCORPORATED BY REFERENCE</P>
<P ALIGN="CENTER"></P>
<P ALIGN="CENTER">Portions of the definitive proxy statement for the 1999 annual shareholders' meeting, to be filed pursuant to Regulation 14A, are incorporated by reference into Part III.</P>
<FONT SIZE=2><P ALIGN="JUSTIFY"></P>
</FONT><P><A NAME="WexPlaceHolder"></A></P>
<P>This form 10-K-A, Amendment No. 2, is being filed to incorporate additional disclosures related to the disposal of fixed assets, allowances for accounts and notes receivable and a revised Supplemental Schedule II, which discloses the reserve activity
separately for accounts and notes receivable.</P>
<P><A NAME="_Toc447092113"></P>
<B><P>Management's Discussion and Analysis of Financial Condition and Results of Operations</A></P>
</B>
<P ALIGN="JUSTIFY"> </P>
<B><P><A NAME="_Toc442589389"><A NAME="_Toc443124370"><A NAME="_Toc445892850"><A NAME="_Toc447092114">General</A></A></A></A></P>
</B><P ALIGN="JUSTIFY"></P>
<P ALIGN="JUSTIFY">Through the granting of franchises, conversion of independent stores, and acquisitions, Moto Photo, Inc. and its subsidiaries ("the Company") have developed a system of 427 operational stores at December 31, 1998 compared to 433 at
December 31, 1997.</P>
<P ALIGN="JUSTIFY"></P>
<P ALIGN="JUSTIFY">Systemwide sales increased to approximately $143,000,000 in 1998 from $140,000,000 in 1997.  The Company plans to grow through granting new franchises, conversion of independent stores to franchise stores, opening Company stores and
selective acquisitions, as well as increasing the average annual sales per store older than one year from approximately $400,000 to $550,000 or more over the next several years.</P>
<P ALIGN="JUSTIFY"></P>
<P ALIGN="JUSTIFY">The Company operates primarily in the specialty retail channel of the photo processing industry (see "Item 1.  Business-Competition" on page 3).  There is a consolidation of photographic specialty retail outlets occurring and the
Company estimates that the three largest chains, of which the Company is one, have approximately 35-40% of the U.S. specialty retail photo processing market.  The Company estimates its share at approximately 8% of the U.S. stand-alone one-hour processing
market.  </P>
<P ALIGN="JUSTIFY"></P>
<P ALIGN="JUSTIFY">The Company believes it is well positioned to be one of the major chains in the market as the consolidation continues because of its unique advantage of being the only significant franchisor in the industry.  Furthermore, the Company
believes its product offerings are different from those of many of its competitors, thereby giving the Company a further advantage.  </P>
<P ALIGN="JUSTIFY"></P>
<P ALIGN="JUSTIFY">The more system stores in a given local market, the better the stores in that market will generally do.  Therefore, continued growth in target markets and opening new markets with multiple stores are important strategies for the
Company's long-range growth.</P>
<P ALIGN="JUSTIFY"></P>
<P ALIGN="JUSTIFY">The Company believes it operates a "recession resistant" business; however, a growing economy is beneficial for demand for the Company's products and services.  Favorable weather, particularly on weekends, is important to store results
and, therefore, Company results.</P>
<P ALIGN="JUSTIFY"></P>
<P ALIGN="JUSTIFY">The Company's business as a whole is subject to seasonal fluctuations. The demand for photo processing services is lowest in the first quarter and highest in the fourth quarter of the year. </P>
<P ALIGN="JUSTIFY"></P>
<P ALIGN="JUSTIFY">The Company has market risk exposure to interest rates.  At December 31, 1998, the Company has interest bearing debt obligations that are subject to market risk exposure relating to changes in interest rates.  At December 31, 1998,
$2,124,360 of outstanding debt is at fixed rates with a weighted average interest rate of 9.29% and $2,375,000 is at variable rates with a weighted average rate of 8.5%.  The estimated fair value of the Company's debt at December 31, 1998 is equal to its
carrying amount.</P>
<P ALIGN="JUSTIFY"></P>
<P ALIGN="JUSTIFY">The aggregate annual maturities of the Company's variable interest debt obligations for the five years subsequent to December 31, 1998 are as follows:  $583,333, $625,000, $625,000, $250,000 and $291,667.</P>
<P ALIGN="JUSTIFY"></P>
<P ALIGN="JUSTIFY">Foreign currency transactions are not material to the Company because transactions with the Company's suppliers are in U.S. dollars and the majority of the key supplier's manufacturing is currently done domestically.  However, costs of
certain photoprocessing equipment could be influenced by exchange rates.</P>
<P ALIGN="JUSTIFY"> </P>
<B><P><A NAME="_Toc443124371"><A NAME="_Toc445892851"><A NAME="_Toc447092115">Year 2000</A></A></A></P>
</B><P ALIGN="JUSTIFY"></P>
<P ALIGN="JUSTIFY">The year 2000 issue, or Y2K, refers to computer programs or computer embedded chips which use two digits rather than four digits to define the applicable year.  Any of the Company's computer software, hardware or other equipment having
date sensitive software or embedded chips could recognize a "00" date as year 1900 rather than year 2000.  If this happened, it could result in miscalculations or system failures which could be disruptive to normal business activities.  The Company has a
plan to prepare its systems for the Y2K issue.  This plan includes obtaining reasonable assurance that its critical business partners are also prepared.</P>
<P ALIGN="JUSTIFY"></P>
<P ALIGN="JUSTIFY">The Company's plan for resolving Y2K issues has the following phases: assessment, remediation, testing, and implementation.  The Company has completed assessment of its internal software and computer hardware that could be significantly
affected by the year 2000 issue.  The Company believes that it is currently Y2K compliant on all critical internal systems with the exception of certain computer hardware used in some Company store point of sale systems, as discussed below.</P>
<P ALIGN="JUSTIFY"></P>
<P ALIGN="JUSTIFY">The Company is still in the process of gathering information about the Y2K compliance status of key third party suppliers.  The Company has received written notification from most of its key suppliers that they plan to be Y2K compliant
by October 1, 1999. The Company has been informed by its primary bank that it believes it is Y2K compliant.  The Company will be requesting certification by May 1, 1999 from depository banks.  If the review and evaluation of responses indicate lack of Y2K
compliance by September 30, 1999, the Company will change its depository banking relationships as required.</P>
<P ALIGN="JUSTIFY"></P>
<P ALIGN="JUSTIFY">The Company is in the implementation phase on certain of the older computer hardware used in its approved point of sale systems in both franchise and Company stores.  A software modification is currently available, at no cost, to
achieve Y2K compliance for this hardware.  It will be implemented in Company stores by June 30, 1999, and will be installed in all franchise stores as they request it. </P>
<P ALIGN="JUSTIFY"></P>
<P ALIGN="JUSTIFY">There are several versions of the Company sponsored point of sale software in use in franchise stores, all of which are believed to be Y2K compliant except for certain operating systems which are no longer supported by their provider.
Accordingly, the provider will not certify as to its Y2K compliance.  However, the Company has tested the software and believes that it will operate without any critical failures after December 31, 1999.  The Company will continue its testing and will
attempt to develop solutions if any disruptions occur during test.  The worst case solution would be for the franchisee to upgrade software and hardware at a cost of $2,000 to $7,000 per store.  Currently 53 franchise stores use the subject operating
system.  Seven other stores are using a POS system that has not been supported by the Company since 1997.  These franchisees are being notified of where to obtain assistance on Y2K compliance for these systems.</P>
<P ALIGN="JUSTIFY"></P>
<P ALIGN="JUSTIFY">The Company believes that all significant non-information systems are either Y2K compliant or has received notification that the vendors will make them Y2K compliant by no later than September 30, 1999.  The Company plans to continue
testing its operating equipment and other equipment to ensure that it is operable in 2000 and beyond.</P>
<P ALIGN="JUSTIFY"></P>
<P ALIGN="JUSTIFY">By April 30, 1999, the Company intends to further notify its franchisees of the steps they should take to ensure that there are no disruptions to their operations as a result of the Y2K issue.  The Company cannot guarantee that each
franchisee will follow through on the necessary steps, and accordingly, some short-term interruptions could occur in certain franchise stores.  The Company does not believe that this disruption will have a material impact on the Company's results of
operations, financial condition or cash flows.  The Company will develop contingency plans to assist franchisees if any significant disruption risks are identified.</P>
<P ALIGN="JUSTIFY"></P>
<P ALIGN="JUSTIFY">The Company has spent no significant incremental funds to date to achieve Y2K compliance and does not anticipate doing so in the future. All expenses paid to date as well as in the future will be funded through existing cash resources
and future operating cash flows.</P>
<P ALIGN="JUSTIFY"></P>
<P ALIGN="JUSTIFY">While the Company believes it has an effective plan to resolve the Y2K issue in a timely manner, lack of historical experience and the forward-looking nature of the issues involved make it difficult to predict with certainty what will
happen on January 1, 2000 and thereafter.  It is possible that there will be disruption and unexpected business problems during the early months of 2000.  The Company intends to make contingency plans if any critical systems or suppliers are identified as
representing a significant risk of Y2K failure. Unfortunately, despite the Company's efforts, unanticipated third party failures may occur, particularly in general public infrastructures.  If this were to occur, it could have a material adverse impact on
the Company's results of operations, financial condition or cash flows.  The amount of potential loss cannot be reasonably estimated at this time.</P>
<P ALIGN="JUSTIFY"> </P>
<B><P><A NAME="_Toc443124372"><A NAME="_Toc445892852"><A NAME="_Toc447092116">Results of Operation 1998 vs. 1997</A></A></A></P>
</B><P ALIGN="JUSTIFY"></P>
<P ALIGN="JUSTIFY">In 1998 the Company recorded net income of $1,690,253, or $.18 per common share (basic and diluted), compared to net income of $1,703,535 or $.18 per common share (basic and diluted), in 1997.  Due to the Company's common share price of
approximately $1.25, certain securities could become dilutive and have a significant impact on diluted earnings per common share in 1999 and subsequent periods (See Note G).</P>
<P ALIGN="JUSTIFY"></P>
<P ALIGN="JUSTIFY">Development segment revenue increased $78,000, or 16%, in 1998 compared to 1997 due primarily to the sale of development rights to Canada which was partially offset by 11 U.S. franchise openings in 1998 versus 14 in 1997.  Costs
associated with the introduction of the MotoPhoto QuickStart<SUP>SM</SUP> financing program more than offset the increased revenue.  The Company anticipates increased operating segment contributions in 1999 because in 1998, the Company began offering the MotoPhoto QuickStart<SUP>SM</SUP> financing program which
requires a lower initial investment and allows the franchisee to lease a significant portion of the store investment and pay a lease payment as a percentage of sales rather than a fixed monthly loan payment. In 1999, the Company anticipates offering
variations of this program, each of which is targeted toward a specific franchisee prospect profile which the Company believes is a good fit for its concept.  The Company believes that these new programs will increase the number of franchises sold.  (See
"Item 1 -- Business")</P>
<P ALIGN="JUSTIFY"></P>
<P ALIGN="JUSTIFY">Company store revenue declined by $3.4 million, or 20%, in 1998 compared to 1997.  One Company store was sold to a franchisee in 1998 and five others were closed.  The decrease in Company store sales and related expenses were a result
of the decrease in the number of Company stores operated and, along with a 3% or $437,000 decrease in Company comparable store sales, lead to a decreased contribution from the Company store segment, and Company comparable stores sales decrease of
$437,000, or 3%.  The Company plans to open approximately twenty Company stores in 1999 which would lead to increased revenues and associated costs and expenses.  A new store is budgeted to lose approximately $16,000 during its first year open. </P>
<P ALIGN="JUSTIFY"></P>
<P ALIGN="JUSTIFY">Royalty and advertising revenues increased $157,000 or 3% in 1998 compared to 1997 primarily due to a 4% increase in comparable franchise store sales offset by fewer stores.  This increase in revenue was approximately equal to the
increase in costs and expenses in this segment.  The Company anticipates continued growth in royalty and advertising revenue as a result of continued increases in comparable franchise stores sales, addition of new franchise stores, continuing improvement
in the quality of the average franchisee, and better site selection.</P>
<P ALIGN="JUSTIFY"></P>
<P ALIGN="JUSTIFY">Wholesale revenue decreased $1.7 million, or 9%, in 1998 compared to 1997.  During the first half of 1998 the Company suffered sales declines due to uncompetitive pricing on certain products, primarily photographic paper and film.  In
the third and fourth quarter of 1998, the Company lowered certain prices to remain competitive and also obtained cost concessions from its vendors late in the year.  The Company estimates that approximately 6% of its 1997 revenue was lost in 1998 due to
franchisees purchasing merchandise from alternative suppliers.  The Company believes that its new pricing and cost programs have corrected this weakness and does not expect the trend to continue. The Company anticipates a 6% increase in wholesale revenue
in 1999.  Additionally, operating segment contribution was adversely impacted by $161,000 more losses in 1998 than 1997 in the Company's telemarketing operations which were closed in December 1998.  </P>
<P ALIGN="JUSTIFY"></P>
<P ALIGN="JUSTIFY">In 1998, the Company closed it telemarketing operation and incurred a loss on the disposal of equipment, furniture, and fixtures and wrote off unamortized leaseholds totaling $75,443.  No further losses from telemarketing are
anticipated in 1999 and subsequent years.  The Company also disposed of certain fixed assets from its stores at a loss aggregating $136,858.  The Company disposes of various fixed assets in the ordinary course of its business and will likely continue to
do so in future years.  It is not possible to predict the timing of such disposals or whether they will create gains or losses.</P>
<P ALIGN="JUSTIFY"></P>
<P ALIGN="JUSTIFY">Selling, general and administrative expenses decreased $288,000, or 4%, in 1998 compared to 1997, primarily due to reduced bonuses paid on lower pretax profits. </P>
<P ALIGN="JUSTIFY"></P>
<P ALIGN="JUSTIFY">Advertising expenses increased by $83,000, or 6%, in 1998 compared to 1997 due to increases associated with the initiation of the MotoPhoto QuickStart<SUP>SM </SUP>financing program.</P>
<P ALIGN="JUSTIFY"></P>
<P ALIGN="JUSTIFY">Depreciation and amortization expenses increased by $168,000, or 20%, in 1998 compared to 1997 primarily as a result of depreciation on additions to property and equipment in Company stores.  In 1999 depreciation and amortization
expenses are planned to increase by approximately $450,000 because of full year of depreciation for 1998 additions as well as the Company continuing to add new services, such as 24 mm Advanced Photo System processing, digital and kiosks, upgrading the
design of certain Company stores, and opening new Company stores.</P>
<P ALIGN="JUSTIFY"></P>
<P ALIGN="JUSTIFY">Interest expense decreased $34,000, or 8%, in 1998 compared to 1997 due to lower levels of interest bearing debt. Interest expense is planned to increase approximately 10% in 1999 as a result of borrowings to support Company store
expansion discussed above.  Interest and investment income, which is primarily interest income from notes receivable and temporary investments of cash, increased in 1998 due to improved liquidity and collection of interest on certain notes classified as
impaired at December 31, 1997.  The Company anticipates interest income in 1999 to approximate the 1998 amount.  </P>
<P ALIGN="JUSTIFY"></P>
<P ALIGN="JUSTIFY">Income tax benefit in 1998 was $360,000, with an effective tax benefit rate of 27% compared to $800,000 of tax expense with an effective rate of 32% in 1997.  The reduction is due primarily to the closing of certain Company stores which
created a deductible tax expense for assets previously written off for book purposes, generating a realization of tax deductions for which no net deferred tax asset recognition was available to the Company as of December 31, 1997.  The Company does not
believe it will generate a tax benefit in 1999 but is not yet certain as to what its expected tax expense will be due to various options the Company is currently investigating.</P>
<P ALIGN="JUSTIFY"> </P>
<B><P><A NAME="_Toc443124373"><A NAME="_Toc445892853"><A NAME="_Toc447092117">Results of Operation 1997 vs </A>1996</A></A></P>
</B><P ALIGN="JUSTIFY"></P>
<P ALIGN="JUSTIFY">In 1997 the Company recorded net income of $1,703,535, or $.18 per common share (basic and diluted), compared to net income of $1,073,873 or $.10 per common share (basic and diluted), in 1996.  Company revenue decreased by $1.4 million
or 3% in 1997 compared to 1996.</P>
<P ALIGN="JUSTIFY"></P>
<P ALIGN="JUSTIFY">In 1997 development revenue was 42% lower than in 1996, reflecting the opening of 14 stores in the US in 1997 compared to 22 stores in 1996.  Of the stores opened in 1997, 11 were either conversions or stores added by existing
franchisees, both of which carry lower initial franchise fees.  This mix accounted for the further reduction of 1997 development revenue as compared to 1996 and largely accounted for the decrease in operating segment contribution.</P>
<P ALIGN="JUSTIFY"></P>
<P ALIGN="JUSTIFY">The Company refranchised six stores in 1997 at a loss of $48,280 compared to five stores refranchised in 1996 at a gain of $78,051.  In 1997, the loss on sales of stores is included in selling, general, and administrative expenses.</P>
<P ALIGN="JUSTIFY"></P>
<P ALIGN="JUSTIFY">Company store revenue declined by $1.6 million, or 9%, in 1997 compared to 1996.  Six Company stores were sold to franchisees in 1997 and two others were closed.  Company store revenue and related costs and operating expenses and
operating segment contributions declined as a result of the decrease in the number of Company stores operated.  Company comparable stores sales increased $230,000 or 2% in 1997.  </P>
<P ALIGN="JUSTIFY"></P>
<P ALIGN="JUSTIFY">Royalty and advertising revenue increased by $294,000, or 6%, in 1997 compared to 1996, primarily due to an 8% increase in comparable franchise store sales offset by a net reduction of approximately 2% in the number of stores.
Furthermore, segment expenses were approximately $100,000 less in 1997 than 1996.</P>
<P ALIGN="JUSTIFY"></P>
<P ALIGN="JUSTIFY"> </P>
<P ALIGN="JUSTIFY">Wholesale revenue increased by $590,000 or 3%, in 1997 compared to 1996 as a result of an 8% increase in franchise comparable store sales being partially offset by lower prices on film due to spot market conditions and a net reduction
of approximately 2% in the number of stores. Wholesale segment contribution was favorably impacted because of a 2% of revenue decrease in bad debt expense and a .5% of revenue decrease in paper costs as a result of the systems using Fuji paper for the
full year in 1997 as opposed to only a partial year in 1996.</P>
<P ALIGN="JUSTIFY"></P>
<P ALIGN="JUSTIFY">Selling, general and administrative expenses were about the same in 1997 compared to 1996.  In 1997 certain increases in selling, general and administrative expenses were largely offset by lower selling expenses on lower franchise fee
revenue and reduced bad debt expenses. </P>
<P ALIGN="JUSTIFY"></P>
<P ALIGN="JUSTIFY">Advertising expenses decreased by $136,000, or 9%, in 1997 compared to 1996 as the Company operated fewer stores in 1997 and implemented a planned decrease in advertising expenditures. </P>
<P ALIGN="JUSTIFY"></P>
<P ALIGN="JUSTIFY">Depreciation and amortization expenses increased by $90,000, or 12%, in 1997 compared to 1996 as a result of depreciation on additions to fixed assets in 1997.  </P>
<P ALIGN="JUSTIFY"></P>
<P ALIGN="JUSTIFY">Interest expense remained relatively constant in 1997 compared to 1996 as the Company had slightly lower average borrowing in 1997 at slightly higher interest rates.  Investment income, which is primarily interest income from notes
receivable and temporary investments of cash, increased in 1997 due to increased notes receivable and improved liquidity. </P>
<P ALIGN="JUSTIFY"></P>
<P ALIGN="JUSTIFY">Income tax expense in 1997 was $800,000, with an effective tax rate of 32% compared to $850,000, or a rate of 44% in 1996.  The reduction is due primarily to the closing of two Company stores which created a deductible tax expense for
assets previously written off for book purposes and to realization of other tax deductions for which no net deferred tax asset recognition was available to the Company.</P>
<P ALIGN="JUSTIFY"> </P>
<B><P><A NAME="_Toc443124374"><A NAME="_Toc445892854"><A NAME="_Toc447092118">Liquidity and Capital Resources</A></A></A></P>
</B><P ALIGN="JUSTIFY"></P>
<P ALIGN="JUSTIFY">In 1998 the Company's operating activities provided  $1.4 million more cash than in 1997.  The primary reason for the increase is due to a decrease of payments on accounts payable in 1998 versus unusually high payments on payables
otherwise due in 1996 as noted below.  This decrease was offset by an increase in inventory generated by stockpiling certain products at year end.</P>
<P ALIGN="JUSTIFY"></P>
<P ALIGN="JUSTIFY">In 1997 the Company's operating activities provided  $2 million less cash than in 1996.  The primary reasons for the decrease were $2 million in increased accounts payable resulting from paper stockpiling purchases of late 1994, and
payment of another $1.1 million in accounts payable due to payments made in early 1997 that would have otherwise been made in 1996.  These payments were partially offset by a reduction in net accounts receivable of $1.1 million due to more stringent
credit practices with franchisees and a generally overall improved franchise store performance.</P>
<P ALIGN="JUSTIFY"></P>
<P ALIGN="JUSTIFY">In 1998 the combined allowances on current notes receivable and long-term notes receivable increased $382,000 as a result of $432,000 being transferred from accounts receivable allowances to notes receivable allowances when the Company
obtained notes from certain franchisees whose accounts were excessively delinquent.  This also accounts for a corresponding decrease in the allowance from accounts receivable.  </P>
<P ALIGN="JUSTIFY"></P>
<P ALIGN="JUSTIFY">decreased $50,000 primarily due to the effects of a more stringent credit practice and generally overall improved franchise store performance.</P>
<P ALIGN="JUSTIFY"></P>
<P ALIGN="JUSTIFY">In 1998 net cash utilized by investing activities was $664,000 as compared to net cash provided by investing activities of $485,000 in 1997.  Increased purchases of property and equipment in 1998 accounted for about $900,000 of the
change with about $400,000 more accounted for by lower proceeds on sales of assets. In 1999 the Company anticipates investing about $3 million in opening Company stores, service expansion, and equipment replacement.  The Company plans to enter into
operating leases for a substantial amount of the assets needed to open new Company stores.</P>
<P ALIGN="JUSTIFY"></P>
<P ALIGN="JUSTIFY">In 1997 net cash provided by investing activities decreased $358,000 as compared to 1996.  Increased purchases of property and equipment in 1997 accounted for most of the change because of a 1996 reduction of the Company's capital
spending program due to stores sold and closed.  The other major factor was $142,000 more in proceeds from sales of assets in 1996 compared to 1997.</P>
<P ALIGN="JUSTIFY"></P>
<P ALIGN="JUSTIFY">In 1998 the Company borrowed $1.25 million for capital expenditures and made principal payments of $1.9 million which, along with dividend payments, generated a $1.2 million use of cash from financing activities.  In 1999 the Company
anticipates increasing its net borrowing by approximately $1.5 million to help fund its investing  activities.  </P>
<P ALIGN="JUSTIFY"></P>
<P ALIGN="JUSTIFY">In 1997 the Company entered into a five year financing arrangement with a bank which resulted in a net increase of approximately $4,000,000 in proceeds less repayments on borrowed funds as compared to 1996.  This generated $1 million in
cash from financing as compared to a $3.2 million use in 1996 as funded debt was reduced in 1996 as compared to 1995. </P>
<P ALIGN="JUSTIFY"></P>
<P ALIGN="JUSTIFY">The Company's material capital commitments consist primarily of long-term obligations (See Notes E and F).  Additionally, the Company has a dividend commitment on its Series G Stock of $700,000 in 1999.  Funds for repaying these
commitments are anticipated to be generated primarily from operations in 1999 and beyond.</P>
<P ALIGN="JUSTIFY"></P>
<P ALIGN="JUSTIFY">The Company has available a $2 million line of credit, none of which was borrowed as of December 31, 1998.  This line expires April 30, 2000.  The Company believes this is adequate to finance its seasonal working capital needs.</P>
<P ALIGN="JUSTIFY"></P>
<P ALIGN="JUSTIFY">At December 31, 1998, the Company had working capital of $3.5 million.  The Company has historically operated with a working capital deficit.  The Company believes that the nature of its business allows it to operate adequately with a
working capital deficit.  The factors that contribute to this are the substantial percentage of sales from cash, favorable terms with suppliers, non-cash charges to income resulting from depreciation and amortization expenses, and the line of credit to
meet seasonal needs. </P>
<P ALIGN="JUSTIFY"></P>
<P ALIGN="JUSTIFY"> </P>
<P ALIGN="JUSTIFY">On December 31, 1998, the Company had income tax loss carryforwards, tax credits and deductible temporary differences with a tax benefit of approximately $3.4 million.   The tax benefit of these carryforwards has a $2 million valuation
allowance for financial reporting purposes (See Note I).  These items, if and when used for tax purposes, preserve liquidity and capital resources because tax payments are reduced by realization of these deferred tax assets.</P>
<P ALIGN="JUSTIFY"></P>
<P ALIGN="JUSTIFY">The Company has $10,000,000 of Series G Stock outstanding which is due in 2000 or earlier under certain circumstances.  (See Note G and Item 1 - Business - Supply Contract and Series G Preferred Stock)  These shares can be retired only
by an exchange for common shares or from the proceeds of an equity offering.  The Company is uncertain at this time as to how or when the Series G Stock will be retired.  </P>
<P ALIGN="JUSTIFY"> </P>
<B><P><A NAME="_Toc447092119">Forward Looking Statements</A></P>
</B><FONT SIZE=2>
</FONT><P ALIGN="JUSTIFY">All statements, other than statements of historical fact included in this report, which address activities, events or developments which the Company expects or anticipates will or may occur in the future constitute "forward
looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  These statements are based on certain assumptions and analyses made by the Company in
light of its experience and its perception of historical trends, current conditions, and expected future developments, as well as other factors it believes are appropriate in the circumstances.  These forward looking statements are subject to all the
risks, and uncertainties incident to the Company's business, including, without limitation, competition in the photo processing industry, possible development of new technology affecting the Company's ability to compete, uncertainties with respect to the
ability of the Company to expand its business through franchising, new store development, the level of consumer acceptance of the Company's programs and services, continued stability in market prices of key supply items, decline in demand for the products
and services offered, continuity of management, liquidity of the franchise system, the ability of the Company to locate and obtain favorable store sites at acceptable lease terms, management's ability to manage its franchisee, lender and supply
relationships, economic conditions, the effect of severe weather or natural disasters, and competitive pressure from other retailers.  For all of the foregoing reasons, actual results may vary materially from the forward looking statements.  The Company
assumes no obligation to update any forward looking statements.</P>

<P> </P>
<B><P>Moto Photo, Inc. and Subsidiaries</P>
</B>
<B><P>Schedule II - Valuation and Qualifying Accounts</P>
</B>
<P> </P>
<TABLE BORDER CELLSPACING=1 CELLPADDING=7 WIDTH=732>
<TR><TD WIDTH="26%" VALIGN="TOP">
<B><P ALIGN="CENTER"> </P>
<P ALIGN="CENTER">Year Ended</P>
<P ALIGN="CENTER">December 31, 1998</B></TD>
<TD WIDTH="15%" VALIGN="TOP">
<B><P ALIGN="CENTER">Balance at Beginning of Period</B></TD>
<TD WIDTH="14%" VALIGN="TOP">
<B><P ALIGN="CENTER">Charged to Costs and Expenses</B></TD>
<TD WIDTH="14%" VALIGN="TOP">
<B><P ALIGN="CENTER">Charged to Other Accounts</B></TD>
<TD WIDTH="16%" VALIGN="TOP">
<B><P ALIGN="CENTER"></P>
<P ALIGN="CENTER"> </P>
<P ALIGN="CENTER">Deductions</B></TD>
<TD WIDTH="15%" VALIGN="TOP">
<B><P ALIGN="CENTER">Balance at End of Period</B></TD>
</TR>
<TR><TD WIDTH="26%" VALIGN="TOP"> </TD>
<TD WIDTH="15%" VALIGN="TOP"> </TD>
<TD WIDTH="14%" VALIGN="TOP"> </TD>
<TD WIDTH="14%" VALIGN="TOP"> </TD>
<TD WIDTH="16%" VALIGN="TOP"> </TD>
<TD WIDTH="15%" VALIGN="TOP"> </TD>
</TR>
<TR><TD WIDTH="26%" VALIGN="TOP">
<P>Reserves and Allowances deducted from Accounts Receivable</TD>
<TD WIDTH="15%" VALIGN="TOP">

<P> </P>
<P>$    1,590,000</TD>
<TD WIDTH="14%" VALIGN="TOP">

<P> </P>
<P>$     224,000</TD>
<TD WIDTH="14%" VALIGN="TOP">

<P> </P>
<P>       (227,000)</TD>
<TD WIDTH="16%" VALIGN="TOP">

<P> </P>
<P>$  (495,000)(1)</TD>
<TD WIDTH="15%" VALIGN="TOP">

<P> </P>
<P>$   1,092,000</TD>
</TR>
<TR><TD WIDTH="26%" VALIGN="TOP"> </TD>
<TD WIDTH="15%" VALIGN="TOP"> </TD>
<TD WIDTH="14%" VALIGN="TOP"> </TD>
<TD WIDTH="14%" VALIGN="TOP"> </TD>
<TD WIDTH="16%" VALIGN="TOP"> </TD>
<TD WIDTH="15%" VALIGN="TOP"> </TD>
</TR>
<TR><TD WIDTH="26%" VALIGN="TOP">
<P>Reserves and Allowances deducted from Notes Receivable</TD>
<TD WIDTH="15%" VALIGN="TOP">

<P> </P>
<P>     1,018,000</TD>
<TD WIDTH="14%" VALIGN="TOP">

<P> </P>
<P>      225,000</TD>
<TD WIDTH="14%" VALIGN="TOP">

<P> </P>
<P>        432,000</TD>
<TD WIDTH="16%" VALIGN="TOP">

<P> </P>
<P>    (275,000)(1)</TD>
<TD WIDTH="15%" VALIGN="TOP">

<P> </P>
<P>     1,400,000</TD>
</TR>
<TR><TD WIDTH="26%" VALIGN="TOP"> </TD>
<TD WIDTH="15%" VALIGN="TOP"> </TD>
<TD WIDTH="14%" VALIGN="TOP"> </TD>
<TD WIDTH="14%" VALIGN="TOP"> </TD>
<TD WIDTH="16%" VALIGN="TOP"> </TD>
<TD WIDTH="15%" VALIGN="TOP"> </TD>
</TR>
<TR><TD WIDTH="26%" VALIGN="TOP"> </TD>
<TD WIDTH="15%" VALIGN="TOP"> </TD>
<TD WIDTH="14%" VALIGN="TOP"> </TD>
<TD WIDTH="14%" VALIGN="TOP"> </TD>
<TD WIDTH="16%" VALIGN="TOP"> </TD>
<TD WIDTH="15%" VALIGN="TOP"> </TD>
</TR>
<TR><TD WIDTH="26%" VALIGN="TOP">
<P>Allowance for Cash Discounts</TD>
<TD WIDTH="15%" VALIGN="TOP">

<P>           45,000</TD>
<TD WIDTH="14%" VALIGN="TOP"> </TD>
<TD WIDTH="14%" VALIGN="TOP">

<P>            1,000</TD>
<TD WIDTH="16%" VALIGN="TOP"> </TD>
<TD WIDTH="15%" VALIGN="TOP">

<P>          46,000</TD>
</TR>
<TR><TD WIDTH="26%" VALIGN="TOP"> </TD>
<TD WIDTH="15%" VALIGN="TOP"> </TD>
<TD WIDTH="14%" VALIGN="TOP"> </TD>
<TD WIDTH="14%" VALIGN="TOP"> </TD>
<TD WIDTH="16%" VALIGN="TOP"> </TD>
<TD WIDTH="15%" VALIGN="TOP"> </TD>
</TR>
<TR><TD WIDTH="26%" VALIGN="TOP">
<P>Allowance for Inventory Obsolescence</TD>
<TD WIDTH="15%" VALIGN="TOP">

<P>         115,000</TD>
<TD WIDTH="14%" VALIGN="TOP">

<P>         94,000</TD>
<TD WIDTH="14%" VALIGN="TOP"> </TD>
<TD WIDTH="16%" VALIGN="TOP">
<B>
</B><P>      (59,000)(2)</TD>
<TD WIDTH="15%" VALIGN="TOP">

<P>      150,000</TD>
</TR>
<TR><TD WIDTH="26%" VALIGN="TOP"> </TD>
<TD WIDTH="15%" VALIGN="TOP"> </TD>
<TD WIDTH="14%" VALIGN="TOP"> </TD>
<TD WIDTH="14%" VALIGN="TOP"> </TD>
<TD WIDTH="16%" VALIGN="TOP"> </TD>
<TD WIDTH="15%" VALIGN="TOP"> </TD>
</TR>
<TR><TD WIDTH="26%" VALIGN="TOP">
<P>Total</TD>
<TD WIDTH="15%" VALIGN="TOP">
<P>$    2,768,000</TD>
<TD WIDTH="14%" VALIGN="TOP">
<P>$     543,000</TD>
<TD WIDTH="14%" VALIGN="TOP">
<P>$      206,000</TD>
<TD WIDTH="16%" VALIGN="TOP">
<P>$  (829,000)</TD>
<TD WIDTH="15%" VALIGN="TOP">
<P>$   2,688,000</TD>
</TR>
</TABLE>

<B>
</B><P>(1) Uncollectible accounts written-off</P>
<P>(2) Disposal of Inventory</P>

<B><P> </P>
</B><P> </P>
<B><P>Moto Photo, Inc. and Subsidiaries</P>
</B>
<B><P>Schedule II - Valuation and Qualifying Accounts</P>
</B>
<P> </P>
<TABLE BORDER CELLSPACING=1 CELLPADDING=7 WIDTH=732>
<TR><TD WIDTH="26%" VALIGN="TOP">
<B><P> </P>
<P ALIGN="CENTER">Year Ended</P>
<P ALIGN="CENTER">December 31, 1997</B></TD>
<TD WIDTH="15%" VALIGN="TOP">
<B><P ALIGN="CENTER">Balance at Beginning of Period</B></TD>
<TD WIDTH="14%" VALIGN="TOP">
<B><P ALIGN="CENTER">Charged to Costs and Expenses</B></TD>
<TD WIDTH="14%" VALIGN="TOP">
<B><P ALIGN="CENTER">Charged to Other Accounts</B></TD>
<TD WIDTH="16%" VALIGN="TOP">
<B><P ALIGN="CENTER"></P>
<P ALIGN="CENTER"> </P>
<P ALIGN="CENTER">Deductions</B></TD>
<TD WIDTH="15%" VALIGN="TOP">
<B><P ALIGN="CENTER">Balance at End of Period</B></TD>
</TR>
<TR><TD WIDTH="26%" VALIGN="TOP"> </TD>
<TD WIDTH="15%" VALIGN="TOP"> </TD>
<TD WIDTH="14%" VALIGN="TOP"> </TD>
<TD WIDTH="14%" VALIGN="TOP"> </TD>
<TD WIDTH="16%" VALIGN="TOP"> </TD>
<TD WIDTH="15%" VALIGN="TOP"> </TD>
</TR>
<TR><TD WIDTH="26%" VALIGN="TOP">
<P>Reserves and Allowances deducted from Accounts Receivable</TD>
<TD WIDTH="15%" VALIGN="TOP">

<P> </P>
<P>$     1,218,000</TD>
<TD WIDTH="14%" VALIGN="TOP">

<P> </P>
<P>$      587,000</TD>
<TD WIDTH="14%" VALIGN="TOP"> </TD>
<TD WIDTH="16%" VALIGN="TOP">

<P> </P>
<P>$  (215,000)(1)</TD>
<TD WIDTH="15%" VALIGN="TOP">

<P> </P>
<P>$     1,590,000</TD>
</TR>
<TR><TD WIDTH="26%" VALIGN="TOP"> </TD>
<TD WIDTH="15%" VALIGN="TOP"> </TD>
<TD WIDTH="14%" VALIGN="TOP"> </TD>
<TD WIDTH="14%" VALIGN="TOP"> </TD>
<TD WIDTH="16%" VALIGN="TOP"> </TD>
<TD WIDTH="15%" VALIGN="TOP"> </TD>
</TR>
<TR><TD WIDTH="26%" VALIGN="TOP">
<P>Reserves and Allowances deducted from Notes Receivable</TD>
<TD WIDTH="15%" VALIGN="TOP">

<P> </P>
<P>          993,000</TD>
<TD WIDTH="14%" VALIGN="TOP">

<P> </P>
<P>        222,000</TD>
<TD WIDTH="14%" VALIGN="TOP">

<P> </P>
<P>        226,000</TD>
<TD WIDTH="16%" VALIGN="TOP">

<P> </P>
<P>    (423,000)(1)</TD>
<TD WIDTH="15%" VALIGN="TOP">

<P> </P>
<P>       1,018,000</TD>
</TR>
<TR><TD WIDTH="26%" VALIGN="TOP"> </TD>
<TD WIDTH="15%" VALIGN="TOP"> </TD>
<TD WIDTH="14%" VALIGN="TOP"> </TD>
<TD WIDTH="14%" VALIGN="TOP"> </TD>
<TD WIDTH="16%" VALIGN="TOP"> </TD>
<TD WIDTH="15%" VALIGN="TOP"> </TD>
</TR>
<TR><TD WIDTH="26%" VALIGN="TOP"> </TD>
<TD WIDTH="15%" VALIGN="TOP"> </TD>
<TD WIDTH="14%" VALIGN="TOP"> </TD>
<TD WIDTH="14%" VALIGN="TOP"> </TD>
<TD WIDTH="16%" VALIGN="TOP"> </TD>
<TD WIDTH="15%" VALIGN="TOP"> </TD>
</TR>
<TR><TD WIDTH="26%" VALIGN="TOP">
<P>Allowance for Cash Discounts</TD>
<TD WIDTH="15%" VALIGN="TOP">

<P>            61,000</TD>
<TD WIDTH="14%" VALIGN="TOP"> </TD>
<TD WIDTH="14%" VALIGN="TOP"> </TD>
<TD WIDTH="16%" VALIGN="TOP">

<P>      (16,000)</TD>
<TD WIDTH="15%" VALIGN="TOP">

<P>            45,000</TD>
</TR>
<TR><TD WIDTH="26%" VALIGN="TOP"> </TD>
<TD WIDTH="15%" VALIGN="TOP"> </TD>
<TD WIDTH="14%" VALIGN="TOP"> </TD>
<TD WIDTH="14%" VALIGN="TOP"> </TD>
<TD WIDTH="16%" VALIGN="TOP"> </TD>
<TD WIDTH="15%" VALIGN="TOP"> </TD>
</TR>
<TR><TD WIDTH="26%" VALIGN="TOP">
<P>Allowance for Inventory Obsolescence</TD>
<TD WIDTH="15%" VALIGN="TOP">

<P>          126,000</TD>
<TD WIDTH="14%" VALIGN="TOP">

<P>         99,000</TD>
<TD WIDTH="14%" VALIGN="TOP"> </TD>
<TD WIDTH="16%" VALIGN="TOP">

<P>    (110,000)(2)</TD>
<TD WIDTH="15%" VALIGN="TOP">

<P>          115,000</TD>
</TR>
<TR><TD WIDTH="26%" VALIGN="TOP"> </TD>
<TD WIDTH="15%" VALIGN="TOP"> </TD>
<TD WIDTH="14%" VALIGN="TOP"> </TD>
<TD WIDTH="14%" VALIGN="TOP"> </TD>
<TD WIDTH="16%" VALIGN="TOP"> </TD>
<TD WIDTH="15%" VALIGN="TOP"> </TD>
</TR>
<TR><TD WIDTH="26%" VALIGN="TOP">
<P>Total</TD>
<TD WIDTH="15%" VALIGN="TOP">
<P>$     2,398,000</TD>
<TD WIDTH="14%" VALIGN="TOP">
<P>$     908,000</TD>
<TD WIDTH="14%" VALIGN="TOP">
<P>$     226,000</TD>
<TD WIDTH="16%" VALIGN="TOP">
<P>$  (764,000)</TD>
<TD WIDTH="15%" VALIGN="TOP">
<P>$     2,768,000</TD>
</TR>
</TABLE>


<P>(1) Uncollectible accounts written-off</P>
<P>(2) Disposal of Inventory</P>

<P> </P>
<B><P>Moto Photo, Inc. and Subsidiaries</P>
</B>
<B><P>Schedule II - Valuation and Qualifying Accounts</P>
</B>
<P> </P>
<TABLE BORDER CELLSPACING=1 CELLPADDING=7 WIDTH=732>
<TR><TD WIDTH="26%" VALIGN="TOP">
<B><P> </P>
<P ALIGN="CENTER">Year Ended</P>
<P ALIGN="CENTER">December 31, 1996</B></TD>
<TD WIDTH="15%" VALIGN="TOP">
<B><P ALIGN="CENTER">Balance at Beginning of Period</B></TD>
<TD WIDTH="14%" VALIGN="TOP">
<B><P ALIGN="CENTER">Charged to Costs and Expenses</B></TD>
<TD WIDTH="14%" VALIGN="TOP">
<B><P ALIGN="CENTER">Charged to Other Accounts</B></TD>
<TD WIDTH="16%" VALIGN="TOP">
<B><P ALIGN="CENTER"></P>
<P ALIGN="CENTER"> </P>
<P ALIGN="CENTER">Deductions</B></TD>
<TD WIDTH="15%" VALIGN="TOP">
<B><P ALIGN="CENTER">Balance at End of Period</B></TD>
</TR>
<TR><TD WIDTH="26%" VALIGN="TOP"> </TD>
<TD WIDTH="15%" VALIGN="TOP"> </TD>
<TD WIDTH="14%" VALIGN="TOP"> </TD>
<TD WIDTH="14%" VALIGN="TOP"> </TD>
<TD WIDTH="16%" VALIGN="TOP"> </TD>
<TD WIDTH="15%" VALIGN="TOP"> </TD>
</TR>
<TR><TD WIDTH="26%" VALIGN="TOP">
<P>Reserves and Allowances deducted from Accounts Receivable</TD>
<TD WIDTH="15%" VALIGN="TOP">

<P> </P>
<P>$        769,000</TD>
<TD WIDTH="14%" VALIGN="TOP">
<B>
<P> </P>
<P>$ </B>    940,000</TD>
<TD WIDTH="14%" VALIGN="TOP"> </TD>
<TD WIDTH="16%" VALIGN="TOP">

<P> </P>
<P>$  (491,000)(1)</TD>
<TD WIDTH="15%" VALIGN="TOP">

<P> </P>
<P>$     1,218,000</TD>
</TR>
<TR><TD WIDTH="26%" VALIGN="TOP"> </TD>
<TD WIDTH="15%" VALIGN="TOP"> </TD>
<TD WIDTH="14%" VALIGN="TOP"> </TD>
<TD WIDTH="14%" VALIGN="TOP"> </TD>
<TD WIDTH="16%" VALIGN="TOP"> </TD>
<TD WIDTH="15%" VALIGN="TOP"> </TD>
</TR>
<TR><TD WIDTH="26%" VALIGN="TOP">
<P>Reserves and Allowances deducted from Notes Receivable</TD>
<TD WIDTH="15%" VALIGN="TOP">

<P> </P>
<P>          585,000</TD>
<TD WIDTH="14%" VALIGN="TOP">
<B>
<P> </P>
<P>     </B>  304,000</TD>
<TD WIDTH="14%" VALIGN="TOP">
<B>
<P> </P>
</B><P>         359,000</TD>
<TD WIDTH="16%" VALIGN="TOP">

<P> </P>
<P>    (255,000)(1)</TD>
<TD WIDTH="15%" VALIGN="TOP">

<P> </P>
<P>          993,000</TD>
</TR>
<TR><TD WIDTH="26%" VALIGN="TOP"> </TD>
<TD WIDTH="15%" VALIGN="TOP"> </TD>
<TD WIDTH="14%" VALIGN="TOP"> </TD>
<TD WIDTH="14%" VALIGN="TOP"> </TD>
<TD WIDTH="16%" VALIGN="TOP"> </TD>
<TD WIDTH="15%" VALIGN="TOP"> </TD>
</TR>
<TR><TD WIDTH="26%" VALIGN="TOP"> </TD>
<TD WIDTH="15%" VALIGN="TOP"> </TD>
<TD WIDTH="14%" VALIGN="TOP"> </TD>
<TD WIDTH="14%" VALIGN="TOP"> </TD>
<TD WIDTH="16%" VALIGN="TOP"> </TD>
<TD WIDTH="15%" VALIGN="TOP"> </TD>
</TR>
<TR><TD WIDTH="26%" VALIGN="TOP">
<P>Allowance for Cash Discounts</TD>
<TD WIDTH="15%" VALIGN="TOP">

<P>            73,000</TD>
<TD WIDTH="14%" VALIGN="TOP">

<P>        (12,000)</TD>
<TD WIDTH="14%" VALIGN="TOP"> </TD>
<TD WIDTH="16%" VALIGN="TOP"> </TD>
<TD WIDTH="15%" VALIGN="TOP">

<P>            61,000</TD>
</TR>
<TR><TD WIDTH="26%" VALIGN="TOP"> </TD>
<TD WIDTH="15%" VALIGN="TOP"> </TD>
<TD WIDTH="14%" VALIGN="TOP"> </TD>
<TD WIDTH="14%" VALIGN="TOP"> </TD>
<TD WIDTH="16%" VALIGN="TOP"> </TD>
<TD WIDTH="15%" VALIGN="TOP"> </TD>
</TR>
<TR><TD WIDTH="26%" VALIGN="TOP">
<P>Allowance for Inventory Obsolescence</TD>
<TD WIDTH="15%" VALIGN="TOP">
<P><BR>
            70,000</TD>
<TD WIDTH="14%" VALIGN="TOP">

<P>         93,000</TD>
<TD WIDTH="14%" VALIGN="TOP"> </TD>
<TD WIDTH="16%" VALIGN="TOP">

<P>      (37,000)(2)</TD>
<TD WIDTH="15%" VALIGN="TOP">

<P>          126,000</TD>
</TR>
<TR><TD WIDTH="26%" VALIGN="TOP"> </TD>
<TD WIDTH="15%" VALIGN="TOP"> </TD>
<TD WIDTH="14%" VALIGN="TOP"> </TD>
<TD WIDTH="14%" VALIGN="TOP"> </TD>
<TD WIDTH="16%" VALIGN="TOP"> </TD>
<TD WIDTH="15%" VALIGN="TOP"> </TD>
</TR>
<TR><TD WIDTH="26%" VALIGN="TOP">
<P>Total</TD>
<TD WIDTH="15%" VALIGN="TOP">
<P>$     1,497,000</TD>
<TD WIDTH="14%" VALIGN="TOP">
<P>$  1,325,000</TD>
<TD WIDTH="14%" VALIGN="TOP">
<P>$       359,000</TD>
<TD WIDTH="16%" VALIGN="TOP">
<P>$  (783,000)</TD>
<TD WIDTH="15%" VALIGN="TOP">
<P>$     2,398,000</TD>
</TR>
</TABLE>


<P>(1) Uncollectible accounts written-off</P>
<P>(2) Disposal of Inventory</P>
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