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                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
(Mark One)                        FORM 10-K
   x     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
          EXCHANGE ACT OF 1934

For the fiscal year ended      December 31, 1996
                         ---------------------------------------------------
                                             OR
         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
          EXCHANGE ACT OF 1934
For the  transition  period  from--------------------to---------------------
                       Commission file number   0-13121
                                               ---------
                            HMG WORLDWIDE CORPORATION
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            (Exact name of registrant as specified in its charter)
       DELAWARE                                          13-3402432
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    (State or other jurisdiction of                   (I.R.S. Employer
     incorporation or organization)                   Identification No.)

475 Tenth Avenue, New York, New York                           10018
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(Address of principal executive offices)                     (Zip Code)
Registrant's telephone number, including area code(212) 736-2300
                                                  ---------------

Securities registered pursuant to Section 12(b) of the Act:

 Title of each class              Name of each exchange on which registered
---------------------             -----------------------------------------
      None
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Securities registered pursuant to Section 12(g) of the Act:
                           Common Stock, $.01 par  value
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                                  (Title of class)

     Indicated  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..X... No......

     Indicate by check mark if disclosure of delinquent  filers pursuant to Item
405 of Regulation S-K 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 III of this Form 10-K or any amendment to this
Form 10-K. (X)

                    APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
                         PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

     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. Yes....... No.........

     The  number of  shares  outstanding  of the  Registrant's  common  stock is
8,504,589 (as of 3/19/97) The aggregate market value of the voting stock held by
non-affiliated stockholders of the Registrant is $6,088,372 (as of 3/19/97)

                      DOCUMENTS INCORPORATED BY REFERENCE



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                                            PART I

Item 1. Business.

General Development of Business

        HMG Worldwide  Corporation  ("the  Company"),  which was incorporated in
1984, is one of the leading companies in the in-store  marketing  industry.  The
Company  identifies  the  in-store  marketing  objectives  of  its  clients  and
integrates research,  creative design, engineering,  production,  package design
and related services to provide point-of-purchase  merchandising display systems
intended  to meet such  objectives.  The  Company's  merchandising  systems  are
designed to increase retail sales by attracting and influencing consumers at the
point of sale. Such systems frequently  incorporate  interactive  displays (from
basic flip-charts to touchscreen  computer systems) to guide purchase decisions.
The Company's  merchandising  systems are also designed to improve  retail space
utilization and product organization, facilitate retail inventory management and
reduce retail labor costs.

        The  Company's  clients  include  national and  multi-national  consumer
products  companies.  The Company is  increasingly  providing  its  products and
services to mass merchandisers, as well as chain drugstores and supermarkets.

     The  Company's   operations   are  conducted   through  five   wholly-owned
subsidiaries  being,  respectively,   HMG  Worldwide  In-Store  Marketing,  Inc.
("HMG"),  Intermark Corp. ("Intermark"),  HMG Intermark Worldwide Manufacturing,
Inc. ("HMG  Intermark"),  Creative  Displays,  Inc.  ("CDI") and HMG Europe B.V.
("HMGBV")  with  facilities  in  New   York, Pennsylvania   and   Illinois.

RecentDevelopments

     During 1996, the Company  implemented a three pronged  strategic plan which
focused upon (i) the  expansion of the  Company's  existing  client  revenue and
service base,  (ii) the  elimination  of redundant and other  overhead costs and
(iii) the consolidation of the manufacturing operations. The Company's strategic
plan included both  opportunistic  investment as well as the  implementation  of
operational cost  reductions.  For the year ended December 31, 1996, the Company
accomplished the following strategic objectives:

      (i) renovated and expanded theCompany's 140,000 square foot manufacturing
facility in Reading, Pennsylvania("Reading") at a cost of approximately
$928,000;

     (ii) closed the first of two New Jersey  manufacturing  facilities in May
1996 and moved its  operations  to Reading;

       (iii)  restructured  the  Company's  New York and Chicago  offices and
closed the Company's satellite sales office in Detroit, Michigan;

       (iv)  entered into a one year lease  agreement  in September  1996 for a
second facility in Reading, with an option to extend the lease for an additional
5 years or exercise an option to purchase  the facility  for $1.2  million.  The
facility is comprised of 72,500  square feet of  manufacturing  and  warehousing
space on approximately 5 acres of property;

       (v)  renovated  and upgraded the  Company's  plastic  injection  molding
division in Reading,  including  the purchase of  additional  injection  molding
equipment in October and November 1996 at a cost of approximately $160,000;

        (vi) consummated a new Loan and Security Agreement in November 1996 with
a  financial  institution  whereby  the  Company  obtained a secured $11 million
revolving  line of credit  and term loan  facility  ("Credit  Agreement").  This
facility,  which  expires  in  November  1999,  bears  interest  at the  lending
institution's prime rate plus 1% per annum and is secured by the Company's cash,
cash  equivalents,   marketable  securities,  accounts  receivable,   inventory,
equipment and all other tangible and  intangible  assets and a pledge of all the
common stock of the Company's wholly-owned subsidiaries;

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        (vii)  extended the  Company's  $32.2 million  supply  contract with the
Foster  Grant  Group L.P.  ("Foster  Grant")  from  seven to ten years  expiring
December 2005,  continued the  requirement of Foster Grant to purchase a minimum
of 70% of its annual in-store  merchandising  display purchases from the Company
and modified the minimum annual dollar purchases  required in any one given year
to be no less than $2.5 million per year;

        (viii) centralized a portion of the Company's  purchasing  operations in
New York, New Jersey,  Pennsylvania  and Illinois to better utilize and leverage
the Company's new consolidated plant operating capacity in Reading;

     (ix) closed the second New Jersey  manufacturing  facility in December 1996
and moved its operations to Reading;

     (x) closed, as of December 31, 1996, its European operations, HMGBV; and

     (xi)  expanded  its client base during 1996 to include new clients  such as
Black & Decker, Inc. ("Black & Decker"), The Nestle Beverage Company ("Nestle"),
Peerless  Faucet Company  ("Peerless")  and Target Stores,  Inc.  ("Target") and
expanded  existing  and  new  merchandising   programs  with  existing  clients,
including Motorola Cellular Subscriber Group ("Motorola"),  Procter & Gamble Co.
("P&G") and Wal*Mart Stores, Inc. ("Wal*Mart").

        Management  estimates the combined  effects of the above  strategic plan
provides  for  significant  cost  savings to be realized in 1997  including  (i)
approximately  $1.6  million  in savings  relating  to the  reduction  of direct
manufacturing labor, fringe,  overhead and facility expenses as a consequence of
the plant  consolidation in Reading,  (ii) approximately $1.3 million in savings
relating to  non-manufacturing  personnel  reductions as a consequence of office
consolidations,  (iii) forecasted improvement in manufacturing gross profit as a
result of the consolidation of the  manufacturing  operations in Reading through
increased   manufacturing   efficiencies  and  reduced   operating  costs,  (iv)
anticipated further improvement in selling, general and administrative expenses,
as a percentage of revenues, as the Company realizes further savings in overhead
expenses  and (v) an  expected  favorable  contribution  by new  clients  to the
operations of the Company as these new clients establish  merchandising programs
with the Company during 1997.

        The above  statements  and certain  other  statements  contained in this
annual report on Form 10-K are based on current  expectations.  Such  statements
are forward looking statements that involve a number of risks and uncertainties.
Factors  that could  cause  actual  results  to differ  materially  include  the
following (i) general economic  conditions at retail,  (ii)  competitive  market
influences,  (iii)  client  budgetary  restrictions  (iv)  delays in shipment of
scheduled  programs to clients (v) delay in or inability to expand the Company's
client  base  and/or  (vi) the loss of or  reduction  in  spending  of  existing
clients.

        In  addition  to  the  above  and  in  conjunction  with  the  strategic
positioning of the Company,  in December  1996, the Company  initiated a private
placement ("HMG Private Placement") whereby the Company offered for sale up to 2
million shares of common stock at $1.00 per share.  Pursuant to the terms of the
HMG Private  Placement,  as of December 31, 1996 the Company sold 377,500 shares
of its common  stock at $1.00 per share from which it derived  net  proceeds  of
approximately  $377,000 and subsequent to December 31, 1996, the Company sold an
additional   375,000  shares  of  common  stock  and  derived  net  proceeds  of
approximately $375,000 as of March 19, 1997. The aggregate net proceeds received
from the HMG  Private  Placement  as of March 19,  1997 is  $752,000.  All stock
issued  pursuant to the terms of the HMG Private  Placement is restricted  stock
which has not been registered under the Securities Act of 1933, as amended ("the
Securities  Act"),  and may not be resold by the respective  purchasers  thereof
absent  registration  under  the  Securities  Act  or  the  availability  of  an
applicable exemption from such registration statement.

        Contemporaneous  with the HMG Private  Placement,  in December  1996 the
Company derived net proceeds of  approximately  $272,000 through the exercise of
stock options for which the Company issued 184,572 shares.

        Pursuant to an agreement  dated January 16, 1997,  the Company agreed to
engage an  investment  banker to act as a  placement  agent on a "best  efforts"
basis in a proposed private  offering ("1997 Private  Offering") of a minimum of
60 units and a maximum of 120 units at a price of $25,000 per unit aggregating a
minimum gross proceeds of $1.5 million and a maximum of $3.0 million, within 120
days of the issuance of the 1997  Private  Offering  memorandum.  Each unit will
consist of 25,000 shares of the Company's common stock.  The anticipated  timing
for the  consummation of the 1997 Private  Offering is during the second quarter
1997. Upon consummation of the 1997 Private Offering,  management estimates that
the net

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proceeds to be derived  from this  transaction  will range from $1.2  million to
$2.5  million  and the Company  would issue  between 1.5 million and 3.0 million
shares of common stock. All stock to be issued pursuant to the terms of the 1997
Private  Placement will be restricted  stock which will not be registered  under
the Securities Act and may not be resold by the  respective  purchasers  thereof
absent  registration  under  the  Securities  Act  or  the  availability  of  an
applicable exemption from such registration statement.

        In addition, upon consummation of the 1997 Private Offering, the Company
will  issue 10% of the  aggregate  number of shares of common  stock sold in the
form of five year  warrants to the  investment  banker at an  exercise  price of
$1.10 per share. Furthermore,  as part of the 1997 Private Offering, the Company
also agreed to engage its investment banker to provide  consulting  services and
assist  the  Company in the  pursuit  of  potential  business  acquisitions  and
combinations.  Under the consulting provisions,  the Company has agreed to (i) a
one year,  $4,000 per month consulting  retainer,  (ii) a finders fee associated
with the successful closure of an acquisition,  restructuring,  joint venture or
merger and (iii) the  Company  will  issue an  aggregate  of  200,000  five year
warrants to the investment  banker of which 100,000 are exercisable at $2.00 per
share and the remaining 100,000 are exercisable at $2.50 per share.

Executive Offices

        The   Company's   executive   offices,   together   with  those  of  its
subsidiaries,  are located at 475 Tenth Avenue, New York, New York 10018 and its
telephone number is (212) 736-2300.  Unless otherwise indicated,  all references
to the Company include all of its subsidiaries.

Industry Overview

        The in-store  marketing  industry is an estimated $12 billion  industry.
The Company  believes  point-of-purchase  merchandising  systems  provide a more
effective, measurable and low-cost means of attracting and influencing consumers
than television, print or other traditional mass advertising media.

        While television advertising costs have risen, the number of viewers per
commercial  has decreased  because cable  television has increased the number of
channels   available  to  viewers.   Furthermore,   remote   control  units  and
videocassette  recorders have enabled viewers to avoid commercials.  The growing
number of special-interest  magazines,  which segment reader  demographics,  has
similarly  limited the effectiveness of print advertising while the cost of such
advertising  has also  increased.  The Company  believes  that a majority of all
consumer  brand  purchase  decisions  are made on  impulse at the point of sale.
Point-of-purchase  merchandising systems thus attract and influence consumers at
the time when the majority of brand purchase decisions are made.

        The Company  believes  retailers are also driving the growth of in-store
marketing. Computerized bar-coding and scanner systems have enabled retailers to
identify high-margin, high-turnover products and more effectively allocate floor
or shelf space to such products. Concurrently,  consumer products companies have
been  faced  with  an  increasing  number  of  competitive  products,  including
private-label  offerings  of  retailers.  As a result,  many  consumer  products
companies have sought to maximize the appeal and  efficiency of their  allocated
space in retail stores.  In-store merchandising systems are designed to increase
retail sales by attracting and influencing  consumers at the point of sale. Such
systems  also are  designed  to improve  retail  space  utilization  and product
organization,  facilitate  retail  inventory  management and reduce retail labor
costs.
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<PAGE>

Operations

General

     The Company identifies the in-store marketing objectives of its clients and
integrates research,  creative design, engineering,  production,  package design
and related services to provide point-of-purchase  merchandising display systems
intended to meet such  objectives.  The Company's  systems are generally  custom
designed to fit each client's requirements and specifications. Typically, at the
request of a client, the Company creates a customized  prototype display system,
which  often  includes  packaging  for the  client's  product in addition to the
in-store  merchandising  display.  Although  clients  occasionally  provide  the
Company's creative design department with specific  merchandising ideas, in most
instances clients merely  indicate the general nature of the display they desire
and rely upon the Company's  creative  design  department to conceive and create
the merchandising system.

        The  Company's  design and  engineering  departments  work  closely from
conception  through  final  assembly and field  installation  with each client's
marketing  and  sales  representatives  and  the  retailers  to  facilitate  the
development of a  merchandising  system.  The Company's  design  department,  in
concert  with the  client,  develops  alternative  marketing  ideas,  which  the
Company's engineering  department,  upon approval by the client, develops into a
prototype  system.  The  Company's  design and  engineering  departments  employ
CAD/CAM and Auto-CAD equipment which, among other things, enables the Company to
design stock parts which can be easily  incorporated  into  various  projects as
well as change project designs more easily and quickly in response to a client's
needs.

        If a  client,  after  reviewing  the  Company's  prototype,  decides  to
test-market  the  display,  the Company  provides  in-store  research and market
feasibility services to test such prototype. A client is often able to ascertain
from  the  results  of  the  Company's  market  studies  whether  the  Company's
merchandising  systems are likely to lead to improved sales. If indicated by the
results of its  research,  the Company will  fine-tune  or modify its  prototype
system for the client.  The period from  development to a volume  purchase order
typically spans 6 to 18 months.  There can be no assurances that the development
and  test-marketing  of a  prototype  for a client will  ultimately  lead to any
volume orders.

Production and Assembly

        The  Company has the  internal  capability  to  injection  mold  plastic
components and to assemble its merchandising systems, as compared to many of its
competitors  which have no  injection  molding or assembly  facilities  and must
outsource  to third  parties.  Once the Company  enters  into a contract  with a
client to manufacture display units for installation,  it makes a determination,
generally  based upon cost  considerations,  whether to undertake the production
and assembly in its own  facilities or to outsource it to others.  The Company's
production and assembly  facilities are  principally  employed for larger orders
and  facilitate  better client  service,  inventory  management  and  production
controls.

        All display systems, whether assembled by the Company or its independent
subcontractors,  are  delivered to the  Company's  clients or directly to retail
locations.  Typically,  there is some simple on-site assembly required, which is
usually  performed  by the  client's  own  personnel,  although the Company will
assist in on-site assembly if requested. The Company often provides clients with
an "800"  telephone  service  number to call for  assistance in connection  with
on-site assembly.

Suppliers

        The  Company  uses and has  available  a variety of  outside  sources to
supply the raw materials and fabricated  components used in its display systems.
Such material and  components  are readily  available  from a number of sources.
Although the Company designs the software for its interactive  computer systems,
it procures hardware components from a variety of third parties,  which are also
readily available from a number of sources.  The Company has not experienced any
significant disruptions from shortages or delivery delays, and believes that its
present sources of supply are adequate.

International

        The Company has a three year European Marketing Agreement, which expires
October  1,  1998,  with a  wholly-owned  subsidiary  of  Tchai  Holdings,  B.V.
("Tchai"),  whereby the Company will receive production and product  development
support.  Each  company has agreed to supply one another with  marketing  leads.
Commissions  ranging from 2% to 10% of resulting sales will be paid to the party
which supplies the successful introduction.

Products

        The  Company's  merchandising  systems are  designed to increase  retail
sales by attracting and influencing consumers at the point of sale. Such systems
frequently   incorporate   interactive   displays  (from  basic  flip-charts  to
touchscreen  computer  systems)  to  guide  purchase  decisions.  The  Company's
merchandising  systems are also designed to improve retail space utilization and
product  organization,  facilitate retail inventory management and reduce retail
labor costs.

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Custom Displays

        The Company  designs,  assembles  and markets  in-store  custom  display
systems  for  consumer  products  companies  as well as  national  and  regional
retailers.   Its  systems  include  in-store  fixtures,   shelf-management   and
category-management   systems,   freestanding   displays  and  sales   promotion
materials.  Examples of the  Company's  systems  include the  L'eggs(R)  hosiery
merchandising  systems,  the Pillsbury(R) dough display system and the shelf and
pegboard system for Procter & Gamble's Cover Girl(R) and Max Factor(R) cosmetics
line. The Company has also  developed  several  "store-within-a-store"  systems,
whereby retail space is specifically  devoted to a particular  brand or category
and is distinctly  identifiable by appearance  within the context of the overall
retail environment. An example of a "store-within-a-store" designed and produced
by the Company is the Bali(R) Boutique located in a variety of department stores
and Wal*Mart stores cosmetic centers.

Stock Displays

        Although  many of the Company's  clients  require  custom  merchandising
systems,  certain components therein can frequently be used in other systems. As
a result,  the Company has  accumulated  tools and molds for component parts and
displays  which are  included in a catalogue  and  marketed to existing  and new
clients.  Since  the  investment  in time  and  money  for the  development  and
production of the tooling for the components and displays has already been made,
the Company can provide many of its clients with a timely,  low-cost solution to
certain of their in-store merchandising needs. For example, the Company's System
35 is a freestanding display that can be ordered in 30 different size variations
with multiple shelf  configurations.  The System 35 addresses  consumer products
companies'  and retailers'  needs for permanent  island  displays that,  through
color,  size, number of shelves and header  treatments,  can be customized for a
multitude  of  consumer  products.   The  Company  also  markets  a  variety  of
standardized  on-shelf  modifications  such as extrusions  and  dividers.  These
modifications  offer the ability to  differentiate  display space by identifying
brand or category space and provide an area for communication of information.

Interactive Systems

        The  Company's   interactive  display  systems  include  shelf-edge  and
freestanding flip-charts, mechanical demonstration units and battery-powered and
touchscreen  computer  systems.  Computer-based  systems  are  useful  both as a
point-of-purchase  merchandising  tool and an effective  means of collecting and
disseminating information.  The interactive computer-based systems ask consumers
to respond to a series of questions.  After analyzing the consumer's  responses,
the system makes  recommendations of appropriate  products which are immediately
available for purchase on the surrounding display.  Computer-based  systems also
enable consumer products companies to retrieve market research information based
upon consumers'  responses,  give consumers  comprehensive  and accurate product
information  and assist  consumers  when sales  personnel are  unavailable.  The
Company's  sales of  computer-based  systems are directed  toward large consumer
products  companies  and  mass  merchandisers,  which  potentially  can use such
systems in quantities of 250 or more units.

Clients

        The  Company's  clients  include  national and  multi-national  consumer
products  companies such as Sara Lee  Corporation  ("Sara Lee") and P&G, both of
which have been clients for more than 20 years,  as well as Clairol  Corporation
("Clairol"),  Foster Grant,  Hallmark Cards, Inc.  ("Hallmark"),  Motorola,  The
Pillsbury  Company and Wal*Mart.  During 1996,  the Company has been able to add
such  clients as Black & Decker,  Nestle,  Peerless,  and Target and continue to
expand its services supplied to Wal*Mart.

        With the greater availability of information  regarding in-store product
turnover,  the Company is  increasingly  providing  its products and services to
mass merchandisers, as well as chain drugstores and supermarkets.  Wal*Mart, for
example,  has engaged the Company to design and assemble  "store-within-a-store"
systems to provide its stores with visually discreet merchandising displays that
maximize  space  efficiencies.  In  addition,  the  Company  works with  certain
consumer products companies and retailers which have recently entered into joint
arrangements to  develop and purchase  their own "store-within-a-store"  display

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     systems with the intention of leasing portionsthereof to yet other consumer
products companies.

        For the year  ended  December  31,1996,  P&G,  Sara  Lee,  and  Wal*Mart
accounted for approximately  17%, 12%, and 11%,  respectively,  of the Company's
net revenues.  For the year ended December 31, 1995,  Sara Lee, P&G and Wal*Mart
accounted for approximately 24%, 11% and 13%, respectively, of the Company's net
revenues.  For the year ended  December  31,  1994,  Sara Lee,  P&G and Hallmark
accounted for approximately 31%, 15% and 11%, respectively, of the Company's net
revenues.  Although the Company's  relationship with both Sara Lee and P&G spans
more than 20 years,  neither of such concerns is contractually bound to purchase
the Company's  products or services.  The loss of either or both of such clients
would have a material adverse effect on the Company.

Backlog

        At December 31, 1996, the Company's aggregate backlog was $15.6 million,
as compared to $23.8  million and $19.5  million at December  31, 1995 and 1994,
respectively.   Of  such  aggregate  backlog  at  December  31,  1996,  22%  was
attributable to one client. The Company  anticipates that substantially all such
backlog at December 31, 1996,  will be filled during the next twelve months.  In
addition to the $15.6 million backlog at December 31, 1996, the Company's Supply
Contract,   with  Foster  Grant  requires  Foster  Grant,   subject  to  certain
limitations,  to purchase at least 70% of all its in-store merchandising display
purchases  from the Company with average  annual  purchases to aggregate no less
than $2.5 million.  The aggregate  value of the Foster Grant Supply  Contract at
December  31, 1996 was $29.2  million of which the Company  estimates  that $2.5
million will be shipped within the next twelve months. Due to quarter to quarter
fluctuations in the Company's backlog levels due to the timing,  nature and size
of its  merchandising  system programs for its clients,  such backlog levels are
not necessarily an indicator of future net revenue levels.

Marketing and Sales

        Sales of the  Company's  merchandising  displays  and  point-of-purchase
services are generated by Michael Wahl, its chief executive  officer,  and by 35
other sales  employees.  The Company  typically sells its in-store  displays and
display systems pursuant to separate purchase orders following customer approval
of a prototype.  However, the Company is also paid for its services in creating,
developing  and  testing  in-store   merchandising  systems  and  in  assembling
prototypes  prior to receipt of production run approvals.  To a limited  extent,
sales are also generated through independent sales representatives.

Warranties

        The Company  generally  does not warrant its display  systems to be free
from defects in  materials or  workmanship  but  generally  replaces any display
system found to be defective.  Such  replacement  costs  historically  have been
minimal.  The  Company  generally  warrants  its  interactive  point-of-purchase
systems to be free from defects in materials or workmanship  for periods ranging
from 3 to 12 months.  The particular  warranty granted on each sale is generally
determined on a client-by-client, product-by-product basis.

Patents

        The Company has been issued  numerous  United States and foreign patents
relating to certain  components  of its  merchandising  display  systems and has
several  additional  patent  applications  pending.  The Company does not regard
patent protection as being of material importance to its ability to successfully
compete in the in-store  merchandising  display  industry.  The Company does not
hold any patents or material  copyrights with respect to its computer  software.
The Company relies upon confidentiality  agreements,  as well as restrictions on
dissemination  of  information  to  employees,  to  safeguard  its  confidential
information.

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Competition

        The custom display segment of the in-store  marketing  industry in which
the  Company  primarily  competes  is very  fragmented  and highly  competitive.
Certain of the Company's  competitors,  including several diversified  companies
that not only design and assemble  merchandising systems for their own products,
but also provide such systems and services to  unaffiliated  concerns,  may have
greater  financial and other resources than the Company.  In addition,  although
the  Company  believes  that  it has  certain  creative  design,  technological,
managerial and other advantages over its competitors,  there can be no assurance
that the Company will maintain such advantages.

        Most  competitors  generally  operate  on a  local  or  regional  level.
Additionally,  competitors often specialize in only one particular aspect of the
custom  display  segment.  As a  result,  the  Company  is one  of  the  largest
participants  in this  segment.  As consumer  products  companies  and retailers
increasingly  require vendors to offer comprehensive  services and sophisticated
technologies,  many smaller operators,  which are primarily  privately held, may
not have the  capital  resources,  management  skills  and  technical  expertise
necessary  to compete.  Consequently,  the Company  believes  the demand for its
products and services will increase and industry  consolidation  will occur. The
Company   further   believes  it  is  well  positioned  to  capitalize  on  such
consolidation.

Employees

        As of December 31, 1996, the Company  employed 217 persons,  including 4
executive  officers,  99  in  production  and  assembly,  17  in  design,  23 in
purchasing and engineering,  35 in marketing and sales and 39 in administration.
Approximately  68  of  the  Company's  employees  are  covered  by a  collective
bargaining  agreement  between  the  Company  and  Local  241  of  the  National
Federation of Independent  Unions,  which expires December 31, 1999. The Company
believes that its current labor relations are good.

Financial Information about Foreign Operations and Export Sales

        Reference  is  made  to  Note  11 in  Notes  to  Consolidated  Financial
Statements included in Item 8 hereof.

Item 2. Facilities.

        The Company's  executive  offices are located at 475 Tenth  Avenue,  New
 York, New York 10018, where it leases 48,000 square feet pursuant to two leases
 that expire in October 2002. The aggregate annual base rentals for such floors
is  $482,000.   The  Company  sublets  8,750  square  feet  of  such  space  for
approximately  $89,000  annually,  expiring in October  2002.  The Company  also
leases  approximately 16,000 square feet of office space at 230 East Ohio Street
in Chicago, Illinois at an annual base rental of approximately $244,000 pursuant
to a lease which  expires in June 1997.  In June 1997,  the  Company  expects to
obtain a new lease for approximately 5,000 square feet of office space either at
its existing location or another location yet to be determined.

        The Company operates two production and assembly  facilities  located in
Reading, Pennsylvania. The Company's principal Reading, Pennsylvania facility is
owned by the  Company and is  comprised  of a 140,000  square  foot  multi-story
production facility on three acres of property. The Company leases 56,000 square
feet of a 72,500 square foot production  facility which expires in October 1997,
at an annual base rental of $159,000. The Company has an option to purchase this
leased production  facility prior to October 1, 1997 for $1.2 million or, at the
Company's option, extend the lease for an additional 5 years.

                                        8


<PAGE>



Item 3. Legal Proceedings.

        The Company is subject to certain  legal  proceedings  and claims  which
have  arisen  in  the  ordinary  course  of its  business.  These  actions  when
ultimately  concluded  will not, in the opinion of  management,  have a material
adverse effect upon the financial  position,  results of operations or liquidity
of the Company.

Item 4. Submission of Matters to a Vote of Security Holders.

        There were no matters submitted to a vote of stockholders of the Company
during the fourth quarter of the fiscal year ended December 31, 1996.

                                          9


<PAGE>



                                            Part II

Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters.

Market Information

        The  Company's  Common  Stock is quoted on The  Nasdaq  SmallCap  Market
("Nasdaq")  tier of the  Nasdaq  Stock  Market  under  the  symbol  "HMGC".  The
following  table  sets  forth the range of the high and low  quotations  for the
common  stock  for  the  periods  indicated.   Such  market  quotations  reflect
inter-dealer  prices,  without  mark-up,  mark-down  or  commission  and may not
necessarily represent actual transactions.


                                                       High         Low


     1996
     First quarter                                 $   3          $ 1-1/2
     Second quarter                                    2-1/4        1-1/4
     Third quarter                                     1-3/4          7/8
     Fourth quarter                                    1-7/8        1


     1995
     First quarter                                  $  3-3/4      $ 2-31/64
     Second quarter                                    3            1-1/4
     Third quarter                                     3-1/4        1-3/4
     Fourth quarter                                    3-1/16       1-15/16


        At March 19,  1997,  there were 358 holders of record and  approximately
1,450 beneficial  stockholders of the Company's common stock and the closing bid
quotation of the common stock on Nasdaq was $1-3/16 per share.

Dividend Policy

        The  Company  has not paid  dividends  on the  Common  Stock  since  its
inception.  The Company  intends to  reinvest  any  earnings in its  business to
finance future growth.  Accordingly,  the Board of Directors does not anticipate
declaring any cash dividends in the foreseeable  future. In addition,  under the
terms of its revolving  credit  facility,  the Company is prohibited from paying
cash dividends. See Note 5 in Notes to the Consolidated Financial Statements.

                                              11


<PAGE>



Item 6. Selected Historical Financial Data.

    The selected  historical  financial data  presented  below as of and for the
years ended  December 31, 1996,  1995 and 1994 have been derived from and should
be read  in  conjunction  with  the  Company's  audited  Consolidated  Financial
Statements  and related  notes  thereto and with  "Management's  Discussion  and
Analysis of Financial  Condition and Historical Results of Operations"  included
elsewhere  herein.  The  selected  financial  data of the Company at and for the
years  ended  December  31,  1996,  1995  and 1994  has  been  derived  from the
Consolidated  Financial  Statements  of the Company,  which have been audited by
Friedman Alpren & Green LLP, Independent Certified Public Accountants.



                                              Year Ended December 31,
                                              -----------------------
                                    1996       1995      1994    1993(a)   1992
                                    ----       ----      ----    ------    ----
                                         (in thousands, except per share data)


Statement of Operations Data

  Net revenues                    $45,552    $47,641   $55,578  $20,375  $3,750

  Loss from operations             (5,040)   (10,009)     (795)    (290) (1,007)

  Net loss                       ($ 5,535)  ($10,118) ($   963)($   528)($1,083)
                                  =======    =======   =======  =======  ======

  Net loss per common and
   common equivalent share        ($0.73)     ($1.34)   ($0.17)  ($0.13) ($0.36)
                                   =====       =====     =====    =====   =====

  Weighted average number of
   common and common
   equivalent shares outstanding   7,614       7,568    5,643     4,052   3,047
                                   =====       =====    =====     =====   =====


                                                  December  31,
                                                  -------------
                                    1996       1995      1994   1993(a)   1992
                                    ----       ----      ----   -------    ----
 Balance Sheet Data:                             (in thousands)

  Cash and cash equivalents       $6,950     $8,139    $6,469   $5,205     $428
  Working capital                 (3,236)     2,624    14,119    2,579      599
  Total assets                    28,755     32,648    36,718   33,022    3,637
  Long-term debt                     266      -         3,182    6,330      398
  Stockholders' equity             5,191     10,076    20,223    3,191    1,352



(a) Amounts  reflect the  consummation  of the acquisition of HMG, CDI and HMGBV
from Saatchi & Saatchi PLC and certain of its subsidiaries on October 1, 1993.

                                               12


<PAGE>



Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations.

General

       During 1996, the Company implemented a three pronged strategic plan which
focused upon (i) the  expansion of the  Company's  existing  client  revenue and
service base,  (ii) the  elimination  of redundant and other  overhead costs and
(iii) the consolidation of the manufacturing operations. The Company's strategic
plan included both  opportunistic  investment as well as the  implementation  of
operational cost reductions.

       For the year ended  December  31,  1996,  the  Company  accomplished  the
following strategic objectives; (i) renovated and expanded the Company's 140,000
square foot manufacturing  facility in Reading, (ii) closed the first of two New
Jersey manufacturing facilities in May 1996 and moved its operations to Reading,
(iii)  restructured  the Company's  New York and Chicago  offices and closed the
Company's  satellite sales office in Detroit, Michigan,  (iv) entered into a one
year lease agreement in September 1996 for a second facility in Reading, with an
option to extend the lease for an additional 5 years or to exercise an option to
purchase the facility for $1.2 million  which is comprised of 72,500 square feet
of manufacturing and warehousing space on approximately 5 acres of property, (v)
renovated  and upgraded the  Company's  plastic  injection  molding  division in
Reading,  including the purchase of additional  injection molding equipment,  in
October and November 1996,  (vi)  consummated  the Credit  Agreement in November
1996 with a financial  institution  whereby  the Company  obtained a secured $11
million  revolving  line of credit and term loan  facility,  (vii)  extended the
Company's  $32.2  million  supply  contract  with Foster Grant from seven to ten
years  expiring  December  2005,  continued the  requirement  of Foster Grant to
purchase a minimum of 70% of its annual in-store merchandising display purchases
from the Company and modified the minimum  annual dollar  purchases  required in
any one given year to be no less than $2.5 million per year, (viii)  centralized
a portion  of the  Company's  purchasing  operations  in New York,  New  Jersey,
Pennsylvania  and  Illinois to better  utilize and leverage  the  Company's  new
consolidated  plant  operating  capacity in Reading,  (ix) closed the second New
Jersey  manufacturing  facility in  December  1996 and moved its  operations  to
Reading, (x) closed as of December 31, 1996, its European operations, HMGBV, and
(xi) expanded its client base during 1996 to include new clients.

       Management  estimates the combined  effects of the above  strategic  plan
provides  for  significant  cost  savings to be realized in 1997  including  (i)
approximately  $1.6  million  in savings  relating  to the  reduction  of direct
manufacturing labor, fringe,  overhead and facility expenses as a consequence of
the plant  consolidation in Reading,  (ii) approximately $1.3 million in savings
relating to  non-manufacturing  personnel  reductions as a consequence of office
consolidations,  (iii) forecasted improvement in manufacturing gross profit as a
result of the consolidation of the  manufacturing  operations in Reading through
increased   manufacturing   efficiencies  and  reduced   operating  costs,  (iv)
anticipated further improvement in selling, general and administrative expenses,
as a percentage of revenues, as the Company realizes further savings in overhead
expenses  and (v) an  expected  favorable  contribution  by new  clients  to the
operations of the Company as these new clients establish  merchandising programs
with the Company during 1997.

Results of Operations

Year Ended December 31, 1996 as Compared to
  Years Ended December 31, 1995 and 1994

       Net  revenues  decreased  by $2.1  million to $45.5  million for the year
ended December 31, 1996 from $47.6 million for the year ended December 31, 1995.
The  decrease in net  revenues  from 1995 to 1996 was  principally  due to (i) a
reduction in marketing  expenditures of one significant  client of $6.1 million,
offset by (ii) an increase  in net  revenues of $3.3  million  derived  from the
operations of HMG Intermark.  The decrease in net revenues from such significant
client was  principally  the result of the  client's  reduction  in capital  and
marketing  expenses for budgetary and other reasons.  Reduced  shipments to this
client may continue if such budgetary  reductions and deferrals continue.  There
can be no  assurance  that net  revenues  to this  client  will  continue at the
current  levels or resume at  historical  levels.  Net revenues  decreased  $8.0
million to $47.6 million for the year ended December 31, 1995 from $55.6 million
for the year ended  December 31, 1994. The decrease in net revenues from 1994 to
1995 was  principally  due to the net effect of (i) deferrals and  reductions in
capital and marketing expenditures with the Company of two significant clients


                                               13


<PAGE>



of $7.1 million, (ii) a reduction in net revenues from international  operations
of $1.9  million and (iii) an increase in net  revenues of $1.2  million for the
period October 1, 1995 through  December 31, 1995 due to the  acquisition of HMG
Intermark.

      Gross  profit  decreased  $1.2 million to $8.0 million for the year ended
December 31, 1996 from $9.2 million for the year ended  December 31, 1995 due to
the decrease in the Company's  net revenues and a decrease in gross margin.  For
the year ended  December  31,  1996,  the gross  margin was 17.5% as compared to
19.2% for the 1995  comparable  period.  The 1.7%  decrease in gross  margin was
principally  due to a  favorable  production  revenue  mix  resulting  in a 0.3%
increase, and the under absorption of fixed overhead expenses as a percentage of
net revenues of 2.0%,  which includes the net effect of (i) an increase in fixed
overhead  expense  relating  to HMG  Intermark's  operations  of 4.6% and (ii) a
decrease in fixed  overhead  expenses at the  Company's  New Jersey  facility of
2.6%.  Gross  profit  decreased  $5.2 million to $9.2 million for the year ended
December 31, 1995 from $14.4 million for the  comparable  1994 period due to the
decrease in the Company's  net revenues and a decrease in gross margin.  For the
year ended  December 31,  1995,  gross margin was 19.2% as compared to 25.9% for
the comparable 1994 period.  The decrease in gross margin was principally due to
(i) unfavorable  production revenue mix which resulted in a 5.1% decrease,  (ii)
the Company's acceptance and shipment of a new program valued at $807,000 with a
new client at a negligible  margin in order for the Company to  demonstrate  its
capabilities which resulted in a 0.4% decrease and (iii) the  underabsorption of
fixed overhead expenses as a percent of net revenues of 1.2%.

       Selling,  general and  administrative  expenses  ("SG&A)  decreased  $3.0
million to $13.0  million  for the year ended  December  31, 1996 as compared to
$16.0  million for the year ended  December 31, 1995.  The decrease in SG&A from
1995 to 1996 was  principally  a result of the  Company's  efforts to reduce its
expenses  and  restructure  its  operations,   including  the  consolidation  of
manufacturing  facilities,  resulting in (i) a reduction  in personnel  costs of
approximately $2.4 million,  (ii) reduction in European expense of operations of
$243,000 and (iii) decreased spending in other general expenses.  SG&A increased
to $16.0  million  for the year ended  December  31,  1995 as  compared to $15.2
million  for the  comparable  1994  period.  The  increase  in SG&A  expenses of
$800,000 was principally due to the net effect of (i) the addition of new senior
marketing  personnel,  (ii) the expenses  attributable to the establishment of a
new  marketing  office in  Detroit,  Michigan  and (iii)  the  increase  in SG&A
associated with HMG Intermark acquired as of September 30, 1995.

       In December  1995,  restructuring  costs of $3.2  million were charged to
operations which principally  related to the  implementation of a cost reduction
program to be primarily implemented through consolidation and selective closures
of the  Company's  offices and  manufacturing  facilities.  These  closures  and
consolidations  are a direct result of (i) competitive  conditions in the market
place and the  corresponding  impact on the Company,  (ii) budgetary  restraints
and/or  reductions  implemented  by some of the Company's  clients and (iii) the
acquisition of HMG  Intermark's  140,000 square foot  manufacturing  facility in
Reading,  Pennsylvania.  The  restructuring  consisted  of a series  of  planned
actions   including  (i)  a  reduction  in  personnel,   (ii)  the  closure  and
consolidation of plant facilities into the Company's Reading facility, (iii) the
closure or  reduction  in offices in New York,  Chicago and Detroit and (iv) the
disposal  of  assets  that are no  longer  required  due to the  elimination  of
selected programs or site consolidations.

       The  restructuring  cost were  comprised  principally  of a $1.1  million
non-cash  write-off  of property  and  equipment  and $2.1  million of projected
expenditures  related  to the cost  reduction  program.  The  provision  for the
reduction of employees was approximately  $600,000 which included  approximately
50  employees  from  all  areas  including  manufacturing,  development,  sales,
marketing and  administration.  Approximately  $1.5 million was provided for the
costs  related to the closing and  consolidation  of production  facilities  and
offices.

         For the year ended  December 31, 1996, the Company  generated  interest
income of $351,000 as compared to $578,000 and $301,000, for the comparable 1995
and 1994 periods, respectively. The decrease in interest income of approximately
$227,000 from 1995 to 1996 was  attributable  principally to a reduction in cash
and cash  equivalents  invested in interest  bearing  marketable  securities and
commercial paper. The increase from 1994 to 1995 is attributable to that portion
of the net proceeds of the Company's  public offering not  immediately  required
for the Company's  operations that were invested in interest bearing  marketable
securities and commercial paper.

                                               14


<PAGE>



       Interest  expense was  $834,000  for the year ended  December 31, 1996 as
compared to $793,000  and  $642,000 for the  comparable  1995 and 1994  periods,
respectively.  The  increase in interest  expense of  approximately  $41,000 was
principally due to the increased average borrowings in 1996 as compared to 1995.
The  increase in interest  expense of $151,000  for the year ended  December 31,
1995 was principally due to the increased average borrowings in 1995 as compared
with the average borrowings for the comparable 1994 period.

       The Company recorded a gain from foreign currency  translation of $90,000
for the year ended December 31, 1995 as a consequence of the European  Marketing
Agreement with Tchai and the reduction in the scope of HMGBV's operations.

       As a consequence  of the foregoing  factors,  the Company  incurred a net
loss of $5.5 million,  or $0.73 per share,  for the year ended December 31, 1996
as compared  to a net loss of $10.1  million,  or $1.34 per share,  for the year
ended  December 31,  1995.  For the year ended  December  31, 1994,  the Company
incurred a net loss of $963,000, or $0.17 per share.

Stockholders' Equity

       Stockholders'  equity  decreased $4.9 million to $5.2 million at December
31,  1996  from  $10.1  million  at  December  31,  1995.  The net  decrease  in
stockholders' equity was principally due to the net loss of $5.5 million, offset
by (i) proceeds  derived from the HMG Private  Placement of common stock whereby
the Company  issued  377,500  shares of common stock for an  aggregate  value of
$377,000  and (ii) the  exercise of stock  options  whereby  the Company  issued
184,572 shares of common stock and derived net proceed of $273,000.

       In conjunction with the strategic positioning of the Company, in December
1996,  the  Company  initiated  the HMG  Private  Placement  whereby the Company
offered  for sale up to 2 million  shares of  common  stock at $1.00 per  share.
Pursuant to the terms of the HMG Private Placement,  as of December 31, 1996 the
Company sold 377,500 shares of its common stock at $1.00 per share from which it
derived net proceeds of  approximately  $377,000 and  subsequent to December 31,
1996, the Company sold an additional  375,000 shares of common stock and derived
net proceeds of  approximately  $375,000 as of March 19, 1997. The aggregate net
proceeds  received  from  the HMG  Private  Placement  as of March  19,  1997 is
$752,000. All stock issued pursuant to the terms of the HMG Private Placement is
restricted  stock which has not been registered under the Securities Act and may
not be resold by the respective purchasers thereof absent registration under the
Securities  Act  or  the  availability  of an  applicable  exemption  from  such
registration statement.

       Pursuant to an agreement  dated January 16, 1997,  the Company  agreed to
engage an  investment  banker to act as a  placement  agent on a "best  efforts"
basis in a proposed private  offering ("1997 Private  Offering") of a minimum of
60 units and a maximum of 120 units at a price of $25,000 per unit,  aggregating
a minimum gross  proceeds of $1.5 million and a maximum of $3.0 million,  within
120 days of the issuance of the 1997 Private Offering memorandum. Each unit will
consist of 25,000 shares of the Company's common stock.  The anticipated  timing
for the  consummation of the 1997 Private  Offering is during the second quarter
1997. Upon consummation of the 1997 Private Offering,  management estimates that
the net  proceeds  to be  derived  from this  transaction  will  range from $1.2
million to $2.5 million and the Company  would issue between 1.5 million and 3.0
million  shares of common stock.  All stock issued  pursuant to the terms of the
1997 Private  Placement is restricted  stock which has not been registered under
the Securities Act and may not be resold by the  respective  purchasers  thereof
absent  registration  under  the  Securities  Act  or  the  availability  of  an
applicable exemption from such registration statement.

       In addition,  upon consummation of the 1997 Private Offering, the Company
will  issue 10% of the  aggregate  number of shares of common  stock sold in the
form of five year  warrants to the  investment  banker at an  exercise  price of
$1.10 per share. Furthermore,  as part of the 1997 Private Offering, the Company
also agreed to engage its investment banker to provide  consulting  services and
assist  the  Company in the  pursuit  of  potential  business  acquisitions  and
combinations.  Under the consulting provisions,  the Company has agreed to (i) a
one year,  $4,000 per month consulting  retainer,  (ii) a finders fee associated
with the successful closure of any acquisition,  restructuring, joint venture or
merger and (iii) the  Company  will  issue an  aggregate  of  200,000  five year
warrants to the investment  banker of which 100,000 are exercisable at $2.00 per
share and the remaining 100,000 are exercisable at $2.50 per share.

                                               15


<PAGE>



Income Taxes

       At December  31, 1996,  the Company had  available  $27.5  million of net
operating loss carryforwards which expire during the years 2001 through 2011. No
benefit  from  these  loss  carryforwards  are  reflected  in  the  consolidated
financial statements.

       The Company's  income tax provision for the year ended  December 31, 1996
was $12,000 as compared to $14,000 and $13,000 for the years ended  December 31,
1995 and December 31, 1994,  respectively,  and resulted  principally from state
and local alternative minimum taxes.

Backlog

       At December 31, 1996, the Company's  aggregate backlog was $15.6 million,
as compared to $23.8  million and $19.5  million at December  31, 1995 and 1994,
respectively.   Of  such  aggregate  backlog  at  December  31,  1996,  22%  was
attributable to one client. The Company  anticipates that substantially all such
backlog at December 31, 1996,  will be filled during the next twelve months.  In
addition to the $15.6 million backlog at December 31, 1996, the Company's Supply
Contract  with  Foster  Grant   requires   Foster  Grant,   subject  to  certain
limitations,  to purchase at least 70% of all its in-store merchandising display
purchases  from the Company with average  annual  purchases to aggregate no less
than $2.5 million.  The aggregate  value of the Foster Grant Supply  Contract at
December  31, 1996 was $29.2  million of which the Company  estimates  that $2.5
million will be shipped within the next twelve months. Due to quarter to quarter
fluctuations in the Company's backlog levels due to the timing,  nature and size
of its  merchandising  system programs for its clients,  such backlog levels are
not necessarily an indicator of future net revenue levels.

Inflation

       The  effect  of  inflation  on the  Company's  operations  has  not  been
significant to date.

Liquidity and Capital Resources

       Cash and cash  equivalents at December 31, 1996, 1995 and 1994 aggregated
approximately $6.9 million, $8.1 million and $6.5 million, respectively. For the
years ended  December  31,  1996,  1995 and 1994 the  Company's  cash flows from
operating, investing and financing activities are summarized below:



                                            Year Ended December 31,

                                                     1996      1995       1994
                                                     ----      ----       ----
                                                          (in millions)

Net cash used in
  operating activities                              ($2.0)    ($7.7)    ($ 4.6)
                                                     ----      ----      -----
Investing activities:
  Redemption (purchase) of marketable securities                6.8       (6.8)
  Acquisition, net of cash acquired                            (0.2)
  Capital expenditures                               (1.6)     (0.4)      (0.8)
                                                      ---       ---        ---
  Net cash provided by (used in) investing activities(1.6)      6.2       (7.6)
                                                      ---       ---        ---

Financing activities:
  Net proceeds from sale of common stock              0.4                 17.8
  Proceeds from exercise of
    stock options                                     0.3                  0.1
  Proceeds from issuance of  notes, net                         0.7        7.0
  Net increase (decrease) in indebtedness             1.7       2.5      (11.4)
                                                     ----       ---       ----
    Net cash provided by
      financing activities                            2.4       3.2       13.5
                                                     ----      ----      -----

  Net increase (decrease) in cash
     and cash equivalents                           ($1.2)     $1.7      $ 1.3
                                                     ====      ====      =====


                                               16


<PAGE>



        The Company's  decrease in cash and cash equivalents of $1.2 million for
the year ended  December  31, 1996 was  principally  due to (i) net cash used in
operating  activities  of $2.0  million and (ii)  capital  expenditures  of $1.6
million,  offset by (iii) net borrowings  under the Company's credit facility of
$1.7  million,  (iv) net proceeds  from the sale of common  stock  pursuant to a
private  placement of $377,000  and (v) net proceeds  from the exercise of stock
options of $273,000.  The Company's  negative cash flow from  operations for the
year ended  December 31, 1996  principally  resulted  from (i) the net loss from
operations  of  $5.5  million  and  (ii)  the  aggregate  reduction  in  general
liabilities of $780,000,  offset by (iii) decreases in current and other assets,
other than cash and cash  equivalents of $3.5 million and (iv) non-cash  charges
of $856,000 for depreciation and amortization.

        The Company's  increase in cash and cash equivalents of $1.7 million for
the year ended  December 31, 1995 was  principally  due to (i) the redemption of
marketable  securities  of $6.8  million  and  (ii)  net  borrowings  under  the
Company's bank credit facility of $2.5 million, offset by (iii) net cash used in
operating  activities  of $7.7 million.  The Company's  negative cash flows from
operations  for the year ended December 31, 1995  principally  resulted from (i)
the net loss from operations of $10.1 million,  offset by (ii) non-cash  charges
of $1.3 million for depreciation and amortization and $1.1 million for the write
off of property and equipment.

        The Company's  increase in cash and cash equivalents of $1.3 million for
the year ended  December 31, 1994 was  principally  due to the proceeds from the
public  offering  of its  Common  Stock  offset  in part by (i) net cash used in
operating activities of $4.6 million, (ii) the purchase of marketable securities
of $6.8 million and (iii) net principal  payments of $4.4 million made to reduce
the Company's  aggregate  borrowings under the Company's bank credit  facilities
and the acquisition note. The Company's  negative cash flows from operations for
the year  ended  December  31,  1994  principally  resulted  from the  aggregate
reduction  in $8.4  million  of the  Company's  general  liabilities  offset  by
decreases in current and other assets, other than cash and marketable securities
of $3.6 million.

        On November 22, 1996,  the Company  consummated a $11.0  million  Credit
Agreement  with a financial  institution  in the form of a revolving  credit and
term loan facility. The Credit Agreement provides for a secured revolving credit
facility  which  advances  up to of  the  sum of (i)  85% of  eligible  accounts
receivable,  (ii) the lesser of 60% of  eligible  finished  goods  inventory  or
$750,000  and  (iii)  the  Company's  cash,  cash   equivalents  and  marketable
securities.  The Company  used funds  available  under the Credit  Agreement  to
retire its previous credit facility with a bank. The Credit Agreement is secured
by a lien on and a security  interest in the Company's cash,  cash  equivalents,
marketable  securities,  accounts receivable,  inventory,  and equipment and all
other tangible and intangible assets and a pledge of the common stock of each of
the Company's wholly-owned subsidiaries.

        Borrowings under the Credit Agreement bear interest at the institution's
prime  rate plus 1% per  annum.  The  Company  is  required  to pay a  quarterly
commitment  fee at the rate of one half of 1% per  annum  of the  average  daily
unused amount of funds available.  Additionally,  the Credit Agreement  contains
certain customary  affirmative and negative  covenants which require the Company
to maintain certain financial ratios, and, among other things,  restrict (i) the
declaration  or  payment  of  dividends,   (ii)  the  incurrence  of  additional
indebtedness  and  (iii)  the  sale  of  certain  assets.  The  average  balance
outstanding  under the Company's credit  agreements for the years ended December
31,  1996,  1995 and 1994 was  approximately  $8.8  million,  $5.1  million  and
$527,000,  respectively, at the weighted average interest rate of 8.6%, 9.8% and
8.2%, respectively.

        Pursuant to the terms of the Credit Agreement, the lender can advance up
to $1.6  million  in the form of a term  loan  collateralized  by the  Company's
current  and future  real  estate and  equipment.  The term loan  portion of the
Credit  Agreement is  amortized on a sixty month basis with a final  payment due
upon  the  termination  of  the  Credit  Agreement  and  bears  interest  at the
institution's  prime rate plus 1% per annum.  At December 31, 1996,  the balance
outstanding on the term loan component of the Credit Agreement was $334,000.

        The Company's working capital at December 31, 1996 was a deficit of $3.2
million,  inclusive of  borrowings  of $9.4  million  pursuant to the three year
Credit  Agreement.  The  working  capital  deficit  was due  principally  to (i)
negative cash flows from operations of $2.0 million and (ii) increased borrowing
under the Company's credit facilities  whereby such proceeds were used, in part,
to finance capital  expenditures  of $1.6 million,  inclusive of $1.1 million in
one-time  facility  renovations  and equipment  upgrades at Reading.  Due to the
working capital deficit,  the Company  experiences  temporary liquidity problems
from  time to time due to the  timing of cash  flows  while  the  Company  is in
production and building inventory. However, management believes that through the

                                               17


<PAGE>



implementation  of its  1996  strategic  plan  whereby  the  Company  moved  and
consolidated its manufacturing facilities in Reading, restructured the Company's
New York and Chicago offices, upgraded the Company's injection molding division,
closed  its  European  office,   significant  cost  savings  will  be  realized.
Furthermore, management believes that its current cash and cash equivalents, its
backlog,  anticipated future cash flows from operations,  availability under its
Credit Agreement and the proceeds derived from the HMG Private Placement will be
sufficient  to support its debt service  requirements  and its other capital and
operating  needs for the next fiscal year. In addition,  the Company has engaged
its investment  banker to act as a placement agent on a "best efforts" basis for
the 1997  Private  Placement.  Management  believes  that each of the above cost
reduction components, an expanded client base, future cash flows from operations
and the HMG and 1997 Private  Placements  developed  and/or  implemented  by the
Company  provide an  important  basis for future  profitability  and  liquidity,
however,  there can be no  assurance  that such belief will prove to be correct,
that additional financing will not be required,  or that any such financing will
be available on commercially reasonable terms or otherwise.

        The above  statements  and certain  other  statements  contained in this
annual report on Form 10-K are based on current  expectations.  Such  statements
are forward looking statements that involve a number of risks and uncertainties.
Factors  that could  cause  actual  results  to differ  materially  include  the
following (i) general economic  conditions at retail,  (ii)  competitive  market
influences,  (iii)  client  budgetary  restrictions  (iv)  delays in shipment of
scheduled  programs to clients (v) delay in or inability to expand the Company's
client  base  and/or  (vi) the loss of, or  reduction  in  spending  of existing
clients.

                                               18


<PAGE>



Item 8.  Financial Statements and Supplementary Data.

                           INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

HMG WORLDWIDE CORPORATION AND SUBSIDIARIES                             PAGE

        Independent Auditors' Report                                    F-2

        Consolidated Balance Sheets at December 31, 1996 and 1995       F-3

        Consolidated Statements of Operations for the Years Ended
          December 31, 1996, 1995 and 1994                              F-4

        Consolidated Statements of Cash Flows for the Years Ended
          December 31, 1996, 1995 and 1994                              F-5

        Consolidated Statements of Changes in Stockholders' Equity

          for the Years Ended December 31, 1996, 1995 and 1994          F-7

        Notes to Consolidated Financial Statements                      F-8

                                               F-1

                                               19


<PAGE>









                                  INDEPENDENT AUDITORS' REPORT

TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
HMG WORLDWIDE CORPORATION

        We have  audited the  accompanying  consolidated  balance  sheets of HMG
WORLDWIDE CORPORATION AND SUBSIDIARIES as of December 31, 1996 and 1995, and the
related  consolidated  statements  of  operations,  cash  flows and  changes  in
stockholders' equity for the years ended December 31, 1996, 1995 and 1994. These
consolidated  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 consolidated  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 consolidated  financial statements referred to above
present  fairly,  in  all  material  respects,  the  financial  position  of HMG
WORLDWIDE CORPORATION AND SUBSIDIARIES as of December 31, 1996 and 1995, and the
results of their  operations  and their cash flows for the years ended  December
31,  1996,  1995 and  1994 in  conformity  with  generally  accepted  accounting
principles.

                                                   FRIEDMAN ALPREN & GREEN LLP

New York, New York
March 20, 1997

                                               F-2

                                               20


<PAGE>



                         HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
                                CONSOLIDATED BALANCE SHEETS

                             (in thousands, except share data)

                                                             December 31,
                                                          1996           1995
                                                          ----           ----

                                      ASSETS

Current assets:

  Cash and cash equivalents (Note 1)                   $  6,950    $  8,139
  Accounts receivable - less allowance
    for doubtful accounts of $577 and $596 (Note 14)      6,454       8,681
  Inventory (Notes 1 and 3)                               4,214       5,254
  Prepaid expenses                                           95         440
  Other current assets                                      240         225
                                                       --------    --------
     Total current assets                                17,953      22,739

Property and equipment - net (Notes 1 and 4)              3,349       2,143
Excess of cost over fair market value
  of assets acquired, less accumulated
  amortization of $1,207 and $799 (Notes 1 and 2)         6,952       7,360
Other assets                                                501         406
                                                       --------    --------
                                                       $ 28,755    $ 32,648
                                                       ========    ========
                              LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

  Current maturities of long-term obligations (Note 5)   $9,439    $  7,557
  Note payable (Note 2)                                     338         714
  Accounts payable                                        5,803       4,331
  Accrued employee compensation and benefits              1,033       1,571
  Deferred revenue (Note 1)                               1,835         696
  Accrued expenses                                        1,566       1,533
  Restructuring costs (Note 12)                             623       1,973
  Other current liabilities                                 552       1,740
                                                       --------    --------
    Total current liabilities                            21,189      20,115

Pension obligation (Notes 1 and 6)                        1,684       1,965
Other long-term liabilities                                 691         492
                                                       --------    --------
                                                         23,564      22,572
                                                       ========    ========
Stockholders' equity:

  Common stock, par value $0.01; 50,000,000 shares
    authorized; 8,129,589 and 7,567,517 shares
    issued and outstanding (Notes 8 and 15)                  81          76
  Additional paid-in capital (Notes 8 and 15)            33,903      33,258
  Accumulated deficit                                   (28,793)    (23,258)
                                                       --------    --------
                                                          5,191      10,076
                                                       --------    --------
                                                       $ 28,755    $ 32,648
                                                       ========    ========
                  See accompanying notes to consolidated financial statements.

                                               F-3

                                               21


<PAGE>



                           HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
                              CONSOLIDATED STATEMENTS OF OPERATIONS

                                (in thousands, except share data)

                                         Year Ended December 31,
                                       -------------------------
                                         1996        1995        1994
                                         ----        ----        ----


Net revenues (Notes 1 and 10)     $    45,552   $   47,641   $  55,578

Cost of revenues                       37,589       38,479      41,147
                                   ----------   ----------   ---------

  Gross profit                          7,963        9,162      14,431

Selling, general and administrative

  expenses                             13,003       15,996      15,226

Restructuring  costs (Note 12)                       3,175
                                  -----------   ----------    --------

  Loss from operations                (5,040)      (10,009)       (795)

Interest income                          351           578         301

Interest expense (Note 5)               (834)         (793)       (642)

Other income                                            30         186

Gain from foreign currency
  translation (Note 1)                                  90
                                  ----------    ----------   ---------

  Loss before provision for income

    taxes                             (5,523)      (10,104)       (950)

Provision for income taxes (Note 7)      (12)          (14)        (13)
                                  ----------    ----------   ---------

  Net loss                       ($    5,535)  (   $10,118) ($     963)
                                  ==========    ==========   =========

Net loss per common and

  common equivalent share             ($0.73)      ($1.34)      ($0.17)
                                       =====        =====        =====

Weighted average number of common
  and common equivalent shares
  outstanding                      7,614,356    7,567,517    5,642,613
                                   =========    =========    =========




                  See accompanying notes to consolidated financial statements.

                                               F-4

                                               22


<PAGE>



                           HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
                              CONSOLIDATED STATEMENTS OF CASH FLOWS

                                         (in thousands)

                                                   Year Ended December 31,
                                                1996         1995        1994
                                                ----         ----        ----
Cash flows from operating activities:
  Cash received from customers              $ 48,930    $ 46,275    $ 57,021
  Interest received                              351         578         301
  Cash paid to suppliers                     (39,739)    (42,326)    (48,738)
  Cash paid to employees                     (10,671)    (11,400)    (12,375)
  Income taxes paid                              (12)        (14)        (46)
  Interest paid                                 (816)       (793)       (804)
                                            --------    --------    --------
    Net cash used in operating
       activities                             (1,957)     (7,680)     (4,641)
                                            --------    --------    --------

Cash flows from investing activities:
  Acquisitions, net of cash acquired                        (176)
  Proceeds from redemption
    of marketable securities                               6,828
  Purchases of marketable securities                                 (6,828)
  Capital expenditures                        (1,654)       (419)      (814)
                                            --------    --------    --------
     Net cash provided by (used in)
         investing activities                 (1,654)      6,233     (7,642)
                                            --------    --------    --------

Cash flows from financing activities:
  Net proceeds from the sale of common stock
     as part of a public offering                                     17,818
  Net proceeds from the sale of common
    stock as part of  a private placement        377
  Net proceeds from exercise of stock
    options                                      273          10         132
  Proceeds derived  from a term loan             340
  Proceeds derived from a credit
    agreement, net                             1,814       6,483       1,075
  Principal payment of a note payable
    issued in connection with an
    acquisition                                                       (9,630)
  Proceeds from issuance of notes, net                       714       7,000
 Principal payments of outstanding debt
    obligations                                 (382)     (4,161)     (2,945)
                                            --------    --------    --------
     Net cash provided by  financing
       activities                              2,422       3,046      13,450
                                            --------    --------    --------

Effect of exchange rate changes                               71          97
                                            --------    --------    --------

Net increase (decrease) in cash
  and cash equivalents                        (1,189)      1,670       1,264

Cash and cash equivalents at
  beginning of year                            8,139       6,469       5,205
                                            --------    --------    --------

Cash and cash equivalents at end of year    $  6,950    $  8,139    $  6,469
                                            ========    ========    ========



                  See accompanying notes to consolidated financial statements.

                                               F-5

                                               23


<PAGE>



                           HMG WORLDWIDE CORPORATION AND SUBSIDIARIES

                       CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
                                         (in thousands)

                                                     Year Ended December 31,
                                                   ----------------------------
                                                   1996        1995        1994
                                                   ----        ----        ----

Reconciliation of net loss to net cash
  used in operating activities:

  Net loss                                     ($ 5,535)   ($10,118)   ($   963)

Adjustments to reconcile  net loss
  to net cash provided by (used in)
  operating activities:
  Depreciation and amortization                     856       1,283       1,256
  Restructuring costs - non-cash                              1,146
  Other income                                                              (94)
  Gain on foreign currency translation                          (90)

Decrease (increase) in assets,
  net of effects of acquisition:
  Accounts receivable                             2,227        (760)      1,695
  Inventory                                       1,040         202       2,228
  Prepaid expenses                                  345         286          32
  Other assets                                     (110)        285        (402)

Increase (decrease) in liabilities,
  net of effects of acquisition:
  Accounts payable                                1,472         (46)     (2,566)
  Deferred revenue                                1,139        (678)       (232)
  Accrued expenses                               (1,760)        810      (5,595)
  Restructuring costs                            (1,350)
  Pension obligation                               (281)
                                                 ------     -------     -------

    Net cash used in operating activities      ($ 1,957)   ($ 7,680)   ($ 4,641)
                                               ========    ========    ========

  Fair value of assets acquired in
    connection with an acquisition                         $  2,218
  Fair value of liabilities assumed
    in connection with an acquisition                      $  3,226

                  See accompanying notes to consolidated financial statements.

                                               F-6

                                               24


<PAGE>



<TABLE>

<CAPTION>

                          HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                               (in thousands, except share data)

                                                                                                   Foreign           Total
                                                                    Additional                     Currency          Stock-
                                          Common Stock              Paid-in        Accumulated     Translation       holders'
                                     Shares          Amount         Capital        Deficit         Adjustments       Equity
                                     ------          ------         ----------     -----------     -----------       --------
<S>                                 <C>            <C>              <C>            <C>             <C>             <C>

Balance at December 31, 1993        4,439,772      $       44      $   15,330     ($  12,177)     ($       6)     $     3,191

Issuance of shares as part of
  exercise of stock options            92,925               1             131                                            132
Shares sold as part of
  Public Offering                   3,024,654              31          17,787                                         17,818
Foreign currency
  translation adjustment                                                                                  45              45
Net loss                                                                                (963)                           (963)
                                   ----------      ----------      ----------     ----------      ----------      ----------

Balance at December 31, 1994        7,557,351              76          33,248        (13,140)             39          20,223


Issuance of shares as part of
  exercise of stock options            10,166                              10                                             10
Foreign currency
  translation adjustment                                                                                 (39)            (39)
Net loss                                                                             (10,118)                        (10,118)
                                   ----------      ----------     ----------      ----------      ----------       ---------
Balance at December 31, 1995        7,567,517              76          33,258        (23,258)           --            10,076

Issuance of shares as part of
  exercise of stock options           184,572               2             271                                            273
Shares sold as part of a
  private placement                   377,500               3             374                                            377
Net loss                                                                              (5,535)                         (5,535)
                                   ----------      ----------      ----------     ----------      ----------      ----------

Balance at December 31, 1996        8,129,589      $       81      $   33,903     ($  28,793)     $     --        $    5,191
                                   ==========      ==========      ==========     ==========      ==========      ==========


</TABLE>



          See  accompanying  notes  to  consolidated  financial statements.

                                                       F-7

                                                        25


<PAGE>



                           HMG WORLDWIDE CORPORATION
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 - Organization and Significant Accounting Policies

     Organization:  The  Company  was  incorporated  in New  York  in  1984,  as
MarkitStar,  Inc.  and changed its  corporate  domicile to Delaware in 1986.  On
October 4,  1993,  MarkitStar,  Inc.  effected  a name  change to HMG  Worldwide
Corporation (the "Company").

     The Company, using its marketing resources and expertise, is engaged in the
design, development,  production and assembly of in-store, or point-of-purchase,
marketing and merchandising  displays and systems.  The Company's operations are
conducted through five operating  wholly-owned  subsidiaries  being respectively
HMG Worldwide In-Store Marketing,  Inc. ("HMG"),  Intermark Corp. ("Intermark"),
HMG  Intermark  Worldwide  Manufacturing,   Inc.  ("HMG  Intermark"),   Creative
Displays,  Inc. ("CDI") and HMG Europe B.V.  ("HMGBV").  Effective  December 31,
1996, the Company  closed HMGBV's office and terminated its remaining  employee.
The Company conducts its operations in New York, Illinois and Pennsylvania.

    Pursuant to a purchase  agreement  dated  September  30,  1995,  the Company
consummated a series of transactions with Benson Eyecare Corporation  ("Benson")
whereby  Benson's  Foster Grant Group L.P.  ("Foster  Grant") entered into a ten
year supply contract,  as amended,  ("Supply Contract") with the Company and the
Company acquired Benson's  merchandising  display  operations,  now known as HMG
Intermark (see Notes 2 and 6).

    Principles  of  Consolidation:   The  accompanying   Consolidated  Financial
Statements  include  the  accounts  of the  Company  and its  subsidiaries.  All
significant  intercompany  balances and  transactions  have been  eliminated  in
consolidation.

    The  acquisition  of HMG Intermark  effective  September 30, 1995,  has been
accounted for as a purchase. The Consolidated  Statements of Operations and Cash
Flows for the year ended December 31, 1995 include the results of operations and
cash flows of HMG Intermark for the period October 1, 1995 through  December 31,
1995.  Pro  forma  financial  information  for  this  acquisition  has not  been
presented  because it is not deemed  significant to the  Consolidated  Financial
Statements.

    Use of Estimates:  Management  uses  estimates and  assumptions in preparing
financial  statements.  Those  estimates  and  assumptions  affect the  reported
amounts of assets and  liabilities,  the  disclosure  of  contingent  assets and
liabilities, and the reported revenues and expenses.

    Cash  and  Cash  Equivalents:   The  Company  considers  all  highly  liquid
investments  purchased  with an original  maturity of three months or less to be
cash equivalents.

    Inventory:   Inventory,  consisting  principally  of  merchandising  display
components,  is stated at the lower of cost or market on a  standard  cost basis
which approximates average cost (see Note 3).

    Property and Equipment: Property and equipment are stated at cost. Equipment
under capital leases are recorded at the present value of minimum lease payments
at the inception of the lease. Depreciation is computed based upon the estimated
useful lives of the assets using the straight-line method.  Equipment held under
capital  leases and leasehold  improvements  are amortized on the  straight-line
method over the shorter of the lease term or estimated useful life of the asset.

                                             F-8

                                              26


<PAGE>



                                   HMG WORLDWIDE CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Note 1 - Organization and Significant Accounting Policies  (continued)

    Excess of Cost Over Fair Market Value of Assets Acquired: The excess of cost
over fair market value of assets acquired arising from acquisitions is amortized
on the straight-line  method over a period of twenty years. Related amortization
expense was approximately  $408,000,  $363,000 and $349,000 for the years ending
December 31, 1996, 1995 and 1994, respectively.  The periods of amortization are
reviewed on a quarterly  basis to  determine  whether  events and  circumstances
warrant  revised  estimates of useful lives.  This evaluation  considers,  among
other  factors,  expected cash flows and profits of the  businesses to which the
excess of cost over fair market value of assets acquired relates.  The excess of
cost over fair market value of assets acquired will be written off if it becomes
evident that it has been permanently impaired.

    Fair Value of Financial Instruments:  The fair value of the revolving credit
facility  and  note  payable  approximates  carrying  value  due  to  the  short
maturities.

    Foreign Currency Translation:  The functional currency of HMGBV is the Dutch
Guilder.  Assets and  liabilities  are  translated  into U.S.  dollars using the
current  exchange  rate  at the  Balance  Sheet  date.  Translation  adjustments
resulting  from  fluctuation  in  exchange  rates  are  recorded  as a  separate
component of  stockholders'  equity.  Income and expense items are translated at
the average  exchange  rates  during the  respective  periods.  All  translation
adjustments  realized  by the  Company  during  1996,  which in  total  were not
material, were charged to operations.

    Revenue  recognition:  Revenue  is  recognized  when a display  or system is
shipped and when services are performed.

     Reclassification:  Certain  reclassifications have been made to conform the
presentation of prior years to the current year presentation.

     Research and  Development:  Research and  development  costs are charged to
operations as incurred.

    Income  Taxes:  Income  taxes are  provided on the  liability  method on all
revenues and expenses  included in the  Consolidated  Statements of  Operations,
regardless  of the  period in which  such  items are  recognized  for income tax
purposes,  except for items representing a permanent  difference between pre-tax
accounting  income or loss and  taxable  income or loss (see Note 7).  Under the
liability  method of accounting  for income taxes,  deferred  taxes are based on
rates that are expected to be in effect when temporary differences are scheduled
to reverse.

    Earnings  per Share:  Earnings  per share  amounts are based on the weighted
average number of common shares  outstanding  during each period.  Common shares
issuable  upon  exercise of stock options are included in the earnings per share
computation unless they are immaterial in amount or anti-dilutive (see Note 8).

    Employee Benefit Plans: The Company and its subsidiaries sponsor a series of
defined  benefit  and  defined  contribution  plans for its union and  non-union
employees.  For the defined benefit plans, the Company has adopted  Statement of
Financial Accounting Standards ("SFAS") 87 "Employers'  Accounting for Pensions"
and SFAS 106  "Employers'  Accounting  for  Postretirement  Benefits  Other Than
Pensions" (see Note 6).

                                             F-9

                                              27


<PAGE>



                                  HMG WORLDWIDE CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Note 1 - Organization and Significant Accounting Policies  (continued)

    Accounting  for  Stock-Based  Compensation:  Prior to January  1, 1996,  the
Company  accounted  for its stock option  plans in  accordance  with  Accounting
Principles  Board  ("APB")  Opinion  No.  25,  Accounting  for  Stock  Issued to
Employees, and related  interpretations.  As such, compensation expense would be
recorded on the date of grant only if the current market price of the underlying
stock exceeded the exercise  price. On January 1, 1996, the Company adopted SFAS
123,  Accounting  for  Stock-Based  Compensation,   which  permits  entities  to
recognize as expense over the vesting  period the fair value of all  stock-based
awards on the date of grant.  Alternatively,  SFAS 123 also  allows  entities to
continue to apply the provisions of APB Opinion No. 25 and provide pro forma net
income and pro forma  earnings per share  disclosures  for employee stock grants
made in 1995 and future years as if the fair-value-based  method defined in SFAS
123 has been  applied.  The  Company  has  elected  to  continue  to  apply  the
provisions  of APB No.  25 in  accounting  for its  plan  and,  accordingly,  no
compensation  cost has been  recognized  for its stock  options in the financial
statements.

     Recently Issued Accounting  Standards:  The Financial  Accounting Standards
Board has issued SFAS No. 121,  "Accounting  For The  Impairment  Of  Long-Lived
Assets And For Long-Lived  Assets To Be Disposed Of", which is effective for the
years  beginning  after December 15, 1995. The provisions of this statement have
not had a material  impact on the  Company's  results of operations or financial
position

     Note 2 - Acquisition  of HMG Intermark and Long-Term  Supply  Contract with
Foster Grant

    Pursuant to a purchase  agreement  dated  September  30,  1995,  the Company
consummated a series of transactions  with Benson whereby  Benson's Foster Grant
subsidiary entered into the in-store  merchandising display Supply Contract with
the Company and the Company acquired Benson's  merchandising display operations,
now known as HMG Intermark.

    The Supply Contract requires Foster Grant, subject to certain conditions, to
purchase at least 70% of its in-store  merchandising  display purchases from the
Company through December 2005 with average annual purchases to aggregate no less
than $2.5 million.  The Supply Contract  contains  provisions  which include (i)
Foster Grant's right to competitively  bid its  merchandising  display purchases
with  comparable  suppliers of the  Company,  (ii) the Company must meet certain
price  criteria  with its  services  and (iii) the Company has the right of last
refusal on all merchandising  display programs on which it has placed a bid with
Foster Grant.

    In  addition,  Benson  advanced  through its Foster  Grant  subsidiary  $1.0
million  to  the  Company  as  a  deposit  against  the  first  year's  in-store
merchandising  display purchases.  The Company issued to Benson a corresponding,
non-interest  bearing note payable of $1.0  million.  During the first  eighteen
months of the Supply Contract,  the Company shall apply a 25% credit against the
cost of display  shipments to Foster Grant up to an aggregate of $4.0 million in
merchandising  display shipments as repayment of the note payable.  In the event
that the 25% credits  issued to Foster  Grant do not  aggregate  to $1.0 million
prior to March 31,  1997,  the  Company  shall remit the  shortfall,  if any, to
Benson to retire the note  payable.  At December 31, 1996,  the  Company's  note
payable to Benson was approximately $338,000.

    In addition to the Supply  Contract,  the Company  acquired  from Benson the
merchandising  display production and assembly  operations,  located in Reading,
Pennsylvania, by acquiring all of the outstanding shares of capital stock of HMG
Intermark.  The Company  recorded HMG Intermark's  assets and liabilities  based
upon their estimated fair market value as of the acquisition date. Additionally,
the Company  recorded  approximately  $1.2  million as the excess cost over fair
market value of assets acquired.

                                             F-10

                                              28


<PAGE>



                                  HMG WORLDWIDE CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Note 3 - Inventory

 Inventory consisted of the following components at December 31, 1996 and 1995:

                                            December 31,
                                         -----------------
                                          1996      1995
                                          ----      ----
                                          (in thousands)

    Finished goods                      $1,312    $1,000
    Work-in-proess                         653     1,353
    Raw materials                        2,249     2,901
                                        ------    ------
                                        $4,214    $5,254
                                        ======    ======

Note 4 - Property and Equipment

    The following is a summary of property and equipment, estimated useful lives
and accumulated depreciation and amortization at December 31, 1996 and 1995:

                                            December 31,
                                          ----------------
    Description                           1996      1995  Estimated Useful Life
    -----------                           ----      ----
                                          (in thousands)
    Land                                $  103    $  103
    Buildings                            1,755       813  32 years
    Equipment                            1,143       854  3-7 years
    Furniture and fixtures                 192       192  5 years
    Leasehold improvements                 586       539  Lesser of lease term
                                                           or eight years

    Tooling                                960       726  3-7 years
                                        ------     -----
                                         4,739     3,227
    Less:  accumulated
      depreciation and
      amortization                       1,390     1,084
                                        ------     -----

                                        $3,349    $2,143
                                        ======    ======

    Depreciation  and  amortization  expense for property and  equipment for the
years  ended  December  31,  1996,  1995 and 1994  was  approximately  $448,000,
$920,000 and $907,000, respectively.

Note 5 - Credit Facilities

    Long-term obligations at December 31, 1996 and 1995 are as follows:

                                            December 31,
                                          ---------------
                                          1996      1995
                                           (in thousands)

     Revolving credit facility          $9,371    $7,557
     Term loan                             334
                                        ------    ------
                                         9,705     7,557

     Less: current maturities            9,439     7,557
                                        ------    ------
                                        $  266    $ --
                                        ======    ======
                                             F-11

                                              29


<PAGE>



                                  HMG WORLDWIDE CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Note 5 - Credit Facilities (continued)

Revolving Credit Facility

    On November 22, 1996,  the Company  consummated  a $11.0  million three year
Loan and Security Agreement ("Credit Agreement") with a financial institution in
the form of a revolving  credit  facility and a term loan. The Credit  Agreement
provides for a secured revolving credit facility which advances up to of the sum
of (i) 85% of eligible accounts  receivable,  (ii) the lesser of 60% of eligible
finished  goods  inventory  or  $750,000  and (iii)  the  Company's  cash,  cash
equivalents  and marketable  securities.  The Company used funds available under
the Credit  Agreement to retire its previous  credit  facility with a bank.  The
Credit  Agreement  is  secured  by a lien  on  and a  security  interest  in the
Company's cash, cash equivalents,  marketable  securities,  accounts receivable,
inventory,  and equipment  and all other  tangible and  intangible  assets and a
pledge of the common stock of each of the Company's wholly-owned subsidiaries.

    Borrowings  under the Credit  Agreement  bear interest at the  institution's
prime  rate plus 1% per  annum.  The  Company  is  required  to pay a  quarterly
commitment  fee at the rate of one half of 1% per  annum  of the  average  daily
unused amount of funds available.  Additionally,  the Credit Agreement  contains
certain customary  affirmative and negative  covenants which require the Company
to maintain certain financial ratios, and, among other things,  restrict (i) the
declaration  or  payment  of  dividends,   (ii)  the  incurrence  of  additional
indebtedness and (iii) the sale of certain assets.

    Pursuant to the terms of the Credit Agreement,  the lender can advance up to
$1.6 million in the form of a term loan  collateralized by the Company's current
and  future  real  estate  and  equipment.  The term loan  portion of the Credit
Agreement is amortized on a sixty month basis with a final  payment due upon the
termination  of the Credit  Agreement  and bears  interest at the  institution's
prime rate plus 1% per annum.  At December 31, 1996, the balance  outstanding on
the term loan component of the Credit Agreement was $334,000.

    Prior to November 22, 1996, the Company  maintained a credit facility with a
bank which provided for a secured  revolving line of credit which advanced up to
the lesser of 80% of eligible  accounts  receivable  and the Company's  cash and
cash equivalents and marketable securities,  or $10.0 million.  Borrowings under
the prior credit  facility were charged  interest at either the banks prime rate
plus 1% per annum or the  Eurodollar  rate plus 2% per  annum and  required  the
Company to pay a quarterly  commitment  fee at a rate of half of 1% per annum of
the average unused amount of funds available.

    The average balance  outstanding  under the Company's credit  agreements for
the years ended December 31, 1996, 1995 and 1994 was approximately $8.8 million,
$5.1 million and $527,000,  respectively,  at the weighted average interest rate
of 8.6%, 9.8% and 8.2%, respectively.

Note 6 -  Employee Benefit Plans

    The Company  and its  subsidiaries  sponsor a series of defined  benefit and
defined  contribution  employee  benefit plans covering both union and non-union
personnel. A summary of each of these sponsored plans is as follows:

HMG Intermark Pension and Health Care Plans

    HMG Intermark  sponsors a defined  benefit plan ("Pension  Plan") and a post
retirement  plan for certain health care benefits  ("Health Care Plan") covering
all union employees  pursuant to agreements  between HMG Intermark and Local 241
of the National Federation of Independent Unions.

                                             F-12

                                              30


<PAGE>



                                  HMG WORLDWIDE CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Note 6 -  Employee Benefit Plans (continued)

    Pursuant to the terms of the Pension Plan,  HMG Intermark  union  employees,
with  dates of hire  prior to March 31,  1996,  generally  become  eligible  for
retirement benefits after reaching age 55 with 10 years of continuous service or
after reaching age 65. Retirees are entitled to receive pension benefits,  based
upon date of retirement,  of between $4.00 and $13.50 per month for each year of
credited  service.  HMG Intermark funds the actuarially  determined costs of the
Pension Plan,  including the  amortization of prior service costs over 30 years.
HMG  Intermark's  actuarial  assumptions  are based upon an  expected  return on
assets of 8% and a discount rate of 7%. HMG Intermark union employees with dates
of hire  subsequent to March 31, 1996 are not eligible for  retirement  benefits
pursuant to the terms of this Pension Plan.  Alternatively,  such post March 31,
1996  hirees  and all other HMG  Intermark  union  employees  shall be  covered,
effective  January 1, 1997, by the HMG Intermark  Capital  Accumulation  Plan, a
defined  contribution  plan qualifying  under the IRC Section  401(k).  The plan
permits all  employees  who are 21 years of age and who have one year of service
to  contribute up to 10% of their salary to the plan.  Additional  discretionary
contributions can be made at the option of HMG Intermark.

    The  following  is a summary  of the  components  of  pension  costs and the
accumulated pension obligation of HMG Intermark at December 31, 1996 and 1995:

                                                        For the Period
                                                        October 1, 1995
                                                        (date of acquisition)
                                     For the Year Ended      through
                                     December 31, 1996  December 31, 1995
                                     ------------------ -------------------
  Net periodic cost:
  Service cost - benefits
   earned during
    the period with interest                 $      45    $       9
  Interest cost on accumulated
    benefit obligation                             341           89
  Actual return on assets                         (270)        (102)
  Net amortization and deferral                     55           52
                                             ---------    ---------
     Net periodic pension cost               $     171    $      48
                                             =========    =========


                                                    December 31,
                                             ----------------------
                                                  1996         1995
                                             ---------    ---------
Accumulated pension obligation:

  Vested benefits obligation                 ($  5,083)  ($  5,073)
  Non-vested benefit obligation                                 (2)
                                             ---------    --------
  Accumulated benefit obligation
    and projected benefit obligation            (5,083)     (5,075)
  Fair market value of plan assets               3,228       2,899
                                             ---------   ---------
  Funded status of projected
    benefit obligation                          (1,855)     (2,176)
  Unrecognized net loss                            170         231
  Adjustment to recognized
    minimum liability                             (170)       (231)
                                             ---------   ---------
    Accrued pension benefit obligation          (1,855)     (2,176)

    Less: current portion                          171         211
                                             ---------   ---------
    Pension obligation - long-term           ($  1,684)  ($  1,965)
                                             =========   =========





                                             F-13

                                              31


<PAGE>



                                   HMG WORLDWIDE CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Note 6 - Employee Benefit Plans  (continued)

    Pursuant  to  the  terms  of the  Health  Care  Plan,  HMG  Intermark  union
employees,  with  dates of hire prior to March 31,  1996,  become  eligible  for
retirement  health care benefits after the years of credited  service plus their
age at the time of  retirement  is equal to or greater  than 85 (Rule of 85). If
any  employee,  at the time of their  retirement,  meets the Rule of 85 prior to
reaching age 65, HMG Intermark  shall  continue to provide  health care benefits
under the Health Care Plan until the retiree  reaches age 65. HMG Intermark does
not  pre-fund  the cost of the Health Care Plan.  At December 31, 1996 and 1995,
the  Company  has  included  as  a  component  of  other  long-term  liabilities
approximately  $334,000  and  $325,000,  respectively,  relating to the unfunded
Health Care Plan  obligation.  The accrued post retirement  obligation under the
Health Care Plan is actuarially  determined based upon the following significant
assumptions,  (i)  retirement  age of 63, (ii) a discount rate of 7% and (iii) a
gross  medical cost  increase of an average of 9% for the next five years and 6%
increase thereafter.

    The  following is a summary of the  components of the Health Care Plan costs
and the accumulated health care obligation of HMG Intermark at December 31, 1996
and 1995:

                                                            For the Period
                                                            October 1, 1995
                                                           (date of acquisition)
                                        For the Year Ended      through
                                        December 31, 1996   December 31, 1995
                                        -----------------   -----------------

  Service cost - benefits
    earned during the period                        $  44       $  13
                                                    =====       =====
  Net premiums paid during the period               $  49       $  12
                                                    =====       =====
  Net periodic cost:
   Service cost - benefits
     earned during the
     the period with interest                       $   5       $   2
   Interest cost on accumulated
     benefit obligation                                33           9
  Actual loss on benefit payments                       6           2
                                                    -----       -----
     Net periodic health care cost                  $  44       $  13
                                                    =====       =====

                                                      December 31,
                                                    -----------------
                                                     1996        1995
                                                    -----       -----
Accumulated health care obligation:
  Accumulated benefit obligation and
    projected benefit obligation                    ($489)      ($489)
                                                    -----       -----
  Funded status of projected
    benefit obligation                               (489)       (489)
 Unrecognized net loss                                104          99
                                                    -----       -----
     Health care obligation                          (385)       (390)

       Less: current portion                           51          65
                                                    -----       -----
       Health care obligation
        long-term                                   ($334)      ($325)
                                                    =====       =====

Capital Accumulation Plan

    The HMG  Worldwide  Corporation  Capital  Accumulation  Plan and  Trust is a
defined  contribution  plan  qualifying  under IRC Section  401(k)  covering all
employees  not  participating  in a collective  bargaining  agreement.  The plan
permits all  employees  who are 21 years of age and who have one year of service
to  contribute  up to 10% of their  salary  to the  plan.  In  addition  the HMG
Worldwide  Corporation  Capital  Accumulation Plan provides an employer matching
provision  whereby the Company  matches fifty cents for every dollar of employee
contribution  up  to  6%  of  base   compensation.   Company   contributions  of
approximately  $155,000,  $114,000,  and  $161,000  were  made  and  charged  to
operations for the years ended

                                             F-14

                                              32


<PAGE>



                                  HMG WORLDWIDE CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Note 6- Employee Benefit Plans  (continued)

December 31, 1996,  1995 and 1994  respectively.  The HMG Worldwide  Corporation
Capital  Accumulation  Plan also  provides  for a fixed  contribution  provision
whereby the Company  annually  contributes 3% of base  compensation for any plan
participant  employed on December 31.  Company  contributions  of  approximately
$160,000,  $155,000 and  $175,000  were made and charged to  operations  for the
years ended  December  31, 1996,  1995,  and 1994,  respectively.  The plan also
allows the Company to make  discretionary  contributions  at the end of the plan
year. The Company did not make any discretionary contributions for these years.

Multi-Employer Benefit Plans

    HMG  participated  in two  multi-employer  benefit plans  covering all union
employees  pursuant to agreements between HMG and Local 2682, United Brotherhood
of Carpenters  and Joiners.  These plans were defined  benefit  plans;  however,
specific benefit levels were not negotiated with, or known by the employer.  The
pension plan required HMG to contribute 6% of each employee's  wages,  excluding
overtime,  on a monthly  basis.  Pension  plan  contributions  of  approximately
$82,000, $99,000, and $119,000 were made and charged to operations for the years
ended December 31, 1996, 1995 and 1994, respectively.  The welfare plan required
HMG to make a specified  contribution  for each  employee per month and for each
hour for all regular and overtime hours worked.  Welfare plan  contributions  of
approximately  $142,000,  $187,000 and $235,000  were made and charged to income
during the  periods  noted  above.  Pursuant  to the closing of HMG's New Jersey
manufacturing  facility  effective  December 31, 1996,  the Company is no longer
subject  to  sponsoring  these  plans  and  has  accordingly   discontinued  its
participation in the plans.

Note 7- Income Taxes

    The components of the provisions for income taxes are as follows:
                                               Year Ended December 31,
                                               ------------------------
                                               1996      1995      1994
                                               ----      ----      ----
                                                      (in thousands)
        Current:

           Federal                             $ -       $ -      $ -
           State and local                       12        14       13
                                               ----      ----     ----
                                                 12        14       13
                                               ----      ----     ----

        Deferred:

           Federal                               -         -        -
           State and local                       -         -        -
                                               ----      -----    ----
                                                 -         -        -
                                               ----      -----    ----
                                               $ 12      $ 14     $ 13
                                               ====      ====     ====

    Deferred  income taxes reflect the net tax effects of temporary  differences
between the carrying  value of assets and  liabilities  for financial  reporting
purposes and the amounts used for income tax purposes as well as operating  loss
carryforwards.

                                             F-15

                                              33


<PAGE>



                                  HMG WORLDWIDE CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Note 7 -  Income Taxes  (continued)

    The  following is a summary of the  significant  components of the Company's
deferred taxes:

                                                    December 31,
                                                    ------------
                                                 1996            1995
                                                 ----           -----
                                                   (in thousands)
    Deferred taxes:

      Net operating loss carryforwards         $10,316          $7,232
      Accruals not currently deductible            441           1,390
      Inventory capitalization                      83            ( 61)
      Depreciation                                 744             869
      Other                                        136              89
                                              --------         -------
        Subtotal                                11,720           9,519
    Less: Valuation allowance                  (11,720)         (9,519)
                                              --------         -------
       Net deferred taxes                     $   -            $   -
                                              ========         =======

    At December  31,  1996,  the Company had net  operating  loss  carryforwards
("NOL")  of  approximately  $27.5  million  which  expire  during the years 2001
through 2011.

    A reconciliation  of the tax provisions and amounts computed by applying the
federal income tax rate of 34% to the loss before income taxes is as follows:

                                                    Year Ended December 31,
                                                    -----------------------
                                                    1996     1995    1994
                                                    ----     ----    ----
                                                        (in thousands)

  Computed tax benefit, net of increase
    in valuation allowance                         $  -      $   -   $   -
  State and local income taxes                       12         14      13
                                                  -----      -----   -----
                                                   $ 12      $  14   $  13
                                                  =====      =====   =====

Note 8 - Common Stock

    In August  1994,  the Company,  in an  underwritten  offering  pursuant to a
registration  statement  with  the  Securities  and  Exchange  Commission,  sold
3,024,654  shares of its  common  stock at $6.75 per share from which it derived
net proceeds of $17.8 million.

    The Company  maintains  four stock  options plans which have been adopted by
the Board and  subsequently  approved  by its  stockholders.  Three of the stock
option plans are comprised of two option categories; incentive stock options for
full-time  employees and  consultants,  including  officers and  directors,  and
nonstatutory stock options for full-time  employees and non-employee  directors.
The one  additional  plan  provided for  incentive  stock  options for full-time
employees,  officers and directors and non-statutory stock options for employees
and consultants and non-employee directors.  The total number of shares reserved
and available under the four plans are 2,543,012 shares.

    The following is a summary of transactions  for the years ended December 31,
1996, 1995 and 1994:

                                                  1996       1995      1994
                                                  ----       ----      ----
Options outstanding at January 1             2,031,450  2,157,225  2,330,600
Incentive options granted at $1.25             599,450
Options exercised                             (184,572)   (10,166)   (92,925)
Options canceled                               (69,000)  (115,609)   (80,450)
                                             ---------  ---------  ---------
Options outstanding at December 31           2,377,328  2,031,450  2,157,225
                                             =========  =========  =========

                                             F-16

                                              34


<PAGE>



                                   HMG WORLDWIDE CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Note 8 - Common Stock (continued)

     At December 31, 1996,  the Company has 177,450,  23,500,  599,450,  38,600,
1,334,528 and 203,800 options outstanding  exercisable at $0.9375, $1.00, $1.25,
$1.56, $1.625 and $7.625 per share,  respectively.  Pursuant to the terms of one
plan,   244,944  options  are  subject  to  a  vesting  period  of  five  years.
Additionally, in August 1995, the Company issued 50,000 five year warrants at an
exercise  price of $2.00 per share to an individual to assist the Company in its
marketing endeavors.  The weighted average exercise price and period of exercise
of all outstanding stock options and warrants at December 31, 1996 was $1.99 per
share and 7.7 years, respectively.

     The Company  applies APB  Opinion  No. 25 and  related  interpretations  in
accounting  for its  employee  stock  options.  Under APB No.  25,  because  the
exercise  price of the Company's  employee  stock options  equals or exceeds the
market  price of the  underlying  stock on the date of  grant,  no  compensation
expense is recognized.

    Pro  forma  information  regarding  net  income  and  earnings  per share is
required by SFAS 123 and has been determined as if the Company had accounted for
its employee stock options under the fair value method of SFAS 123. The weighted
average fair value of options granted during 1996 was $0.31 per share.  The fair
value for these options was estimated at the date of grant using a Black Scholes
option pricing model with the following weighted average assumptions;  risk free
interest  rate of  6.8%;  volatility  factor  of  expected  market  price of the
Company's common stock of 53% and a weighted average expected life of the option
of 8  years.  Under  the  provisions  of  SFAS  123,  the  Company's  pro  forma
compensation  expense arising from the grant of stock options for the year ended
December 31, 1996 was approximately $160,000 and pro forma net loss and net loss
per share  would  have been  approximately  $5.7  million  and $0.75 per  share,
respectively.

Note 9 - Lease Commitments

    The Company  leases  manufacturing,  warehousing  and office  facilities and
production and office equipment, under leases expiring at various dates. Certain
facility leases contain renewal  provisions and generally require the Company to
pay increases over base period amounts for taxes and other  operating  expenses.
At December 31, 1996,  future minimum  payments under  noncancellable  operating
leases are as follows:

                      Year                     Amount
                      ----                     ------
                                               (in thousands)
                      1997                       $  739
                      1998                          511
                      1999                          482
                      2000                          482
                      2001                          482
                      Thereafter                    402
                                                 ------
                                                 $3,098
                                                 ======
    Rent  expense  for the years  ended  December  31,  1996,  1995 and 1994 was
approximately $1.6 million, $2.1 million and $1.9 million, respectively.

    At December 31, 1996, the Company had letters of credit outstanding totaling
approximately $132,000 to guarantee obligations under certain leases.

                                             F-17

                                              35


<PAGE>



                                   HMG WORLDWIDE CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Note 10 - Significant Clients

    Net revenues from  individual  clients of the Company  accounting for 10% or
more of net revenues for the years ended December 31, 1996, 1995 and 1994 are as
follows:

                                                   1996     1995    1994
                                                   ----     ----    ----
        Sara Lee Corporation                        12%      24%     31%
        Procter & Gamble Co.                        17%      11%     15%
        Wal*Mart Stores, Inc.                       11%      13%
        Hallmark Cards, Inc.                                         11%


Note 11 - Foreign Operations

    HMGBV, headquartered in the Netherlands, entered into the European Marketing
Agreement on October 1, 1995 with Turbo Screen B.V., a  wholly-owned  subsidiary
of Tchai Holdings B.V.  ("Tchai") of the  Netherlands.  Pursuant to the terms of
the European Marketing Agreement, Tchai will provide the Company with production
and product  development support and employ four of HMGBV's then five employees.
In addition,  Tchai paid  approximately  $30,000 for certain  equipment owned by
HMGBV.  The  Company  and Tchai  have also  agreed to supply  one  another  with
marketing leads.  Commissions  ranging from 2% to 10% of resulting sales will be
paid to the party  which  supplies  the  successful  introduction.  Pursuant  to
European Marketing Agreement, the Company has earned commission of approximately
$71,000 for the year ended  December 31, 1996.  The Company has not incurred any
commission expense under this agreement to date.

    Financial information for HMGBV is as follows:

                                                 Year Ended December 31,
                                                 -----------------------
                                                 1996     1995     1994
                                                 ----     ----     ----
                                                     (in thousands)

  Net revenues                                 $   90    $ 390   $2,331
                                               ======    =====   ======

  Operating income (loss)                     ($   99)  ($ 631)  $    4
                                                =====    =====   ======

  Identifiable assets                          $  102     $173   $1,130
                                               ======    =====   ======

    Effective  December  31,  1996,  the  Company  closed  its HMGBV  office and
terminated its remaining  employee.  All future operations and services required
by the Company's  clients in Holland will be handled  through Tchai  pursuant to
the terms of the European Marketing Agreement.

    In addition to the net  revenues  noted  above,  other  subsidiaries  of the
Company have sales to various  foreign  countries,  principally  to customers in
Europe and the Far East.  For the years  ended  December  31,  1995 and 1994 the
Company has included in its  Consolidated  Statements of Operations,  net sales,
exclusive  of  HMGBV   revenues,   of   approximately   $624,000  and  $708,000,
respectively, relating to the export of products to Europe and the Far East. The
Company did not engage in any export sales for the year ended December 31, 1996.

                                             F-18

                                              36


<PAGE>



                                   HMG WORLDWIDE CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Note 12 - Restructuring Costs

    In  December  1995,  restructuring  costs of $3.2  million  were  charged to
operations which principally  related to the  implementation of a cost reduction
program to be primarily implemented through consolidation and selective closures
of the  Company's  offices and  manufacturing  facilities.  These  closures  and
consolidations  are a direct result of (i) competitive  conditions in the market
place and the  corresponding  impact on the Company,  (ii) budgetary  restraints
and/or  reductions  implemented  by some of the Company's  clients and (iii) the
acquisition of and subsequent  renovation of HMG Intermark's 140,000 square foot
manufacturing facility in Reading, Pennsylvania. The restructuring consists of a
series of planned  actions  including  (i) a reduction  in  personnel,  (ii) the
closure  and  consolidation  of  plant  facilities  into the  Company's  Reading
facility,  (iii) the closure or  reduction  in offices in New York,  Chicago and
Detroit and (iv) the  disposal of assets that are no longer  required due to the
elimination of selected programs or site consolidations.

    The restructuring costs are comprised principally of a $1.1 million non-cash
write-off of property and equipment  and $2.1 million of projected  expenditures
related to the cost  reduction  program.  The  provision  for the  reduction  of
employees was approximately  $600,000 which includes  approximately 50 employees
from all  areas  including  manufacturing,  development,  sales,  marketing  and
administration. Approximately $1.5 million was provided for the costs related to
the closing and consolidation of production  facilities and offices. The Company
completed most of the  consolidation by December 31, 1996 with the balance to be
completed by June 30, 1997.

Note 13 - Related Party Transactions

    For the years ended December 31, 1996,  1995, and 1994, the Company incurred
a total of  approximately  $200,000,  $142,000 and $482,000,  respectively,  for
various  legal and  consulting  services  provided  by firms  whose  members  or
officers are stockholders or directors of the Company.

Note 14 - Commitments and Contingent Liabilities

    The Company is subject to certain  legal  proceedings  and claims which have
arisen in the ordinary  course of its business.  These  actions when  ultimately
concluded will not, in the opinion of management, have a material adverse effect
upon the financial position, results of operations or liquidity of the Company.

    In  April  1984,  HMG  entered  into  an  agreement  with  one of its  sales
representatives,  Howard Displays, Inc. ("HDI"), whereby HMG is required to make
contingent  consideration  payments to the former principal  shareholder of HDI.
Such  payments are based upon the net revenues  derived from sales to active HDI
clients.  These  payments  continue  until  one  year  after  the  death of this
individual. For the years ended December 31, 1996, 1995, and 1994, approximately
$234,000, $525,000, and $733,000, respectively, were charged to operations.

    The Company is potentially  subject to significant  concentrations of credit
risk on its cash and  short-term  investments  (cash  equivalents)  and accounts
receivable.  Short-term investments are in commercial paper of corporations with
high credit ratings and securities of U.S.  Government  agencies and are held by
one financial institution with a high credit standing.  Receivables, which under
normal trade terms are not secured, are from a large number of consumer products
companies. The two customers with the largest balances account for approximately
28% of accounts receivable at December 31, 1996.

                                             F-19

                                              37


<PAGE>



                                   HMG WORLDWIDE CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Note 15 - Private Placement and Exercise of Options

    In December 1996, the Company  initiated a private  placement  ("HMG Private
Placement")  whereby  the  Company  offered  for sale up to 2 million  shares of
common  sock at $1.00  per  share.  Pursuant  to the  terms  of the HMG  Private
Placement, as of December 31, 1996 the Company sold 377,500 shares of its common
stock at $1.00 per share from which it derived  net  proceeds  of  approximately
$377,000.  Subsequent  to December  31,  1996,  the Company  sold an  additional
375,000  shares  of  common  stock  pursuant  to the  terms  of the HMG  Private
Placement  and derived net  proceeds of  approximately  $375,000 as of March 19,
1997. The aggregate net proceeds  received from the HMG Private  Placement as of
March 19, 1997 is $752,000.  All stock  issued  pursuant to the terms of the HMG
Private  Placement is restricted  stock which has not been registered  under the
Securities Act of 1933, as amended ("the Securities Act"), and may not be resold
by the respective  purchasers  thereof absent  registration under the Securities
Act or the  availability  of an  applicable  exemption  from  such  registration
statement.

    Contemporaneous with the HMG Private Placement, in December 1996 the Company
derived net  proceeds of  approximately  $272,000  through the exercise of stock
options for which the Company issued 184,572 shares.

    Pursuant to an  agreement  dated  January 16,  1997,  the Company  agreed to
engage an  investment  banker to act as a  placement  agent on a "best  efforts"
basis in a proposed private  offering ("1997 Private  Offering") of a minimum of
60 units and a maximum of 120 units at a price of $25,000 per unit aggregating a
minimum gross proceeds of $1.5 million and a maximum of $3.0 million, within 120
days of the issuance of the 1997  Private  Offering  memorandum.  Each unit will
consist of 25,000 shares of the Company's common stock.  The anticipated  timing
for the  consummation of the 1997 Private  Offering is during the second quarter
1997. Upon consummation of the 1997 Private Offering,  management estimates that
the net  proceeds  to be  derived  from this  transaction  will  range from $1.2
million to $2.5 million and the Company  would issue between 1.5 million and 3.0
million shares of common stock.  All stock to be issued pursuant to the terms of
the 1997 Private Placement will be restricted stock which will not be registered
under the  Securities  Act and may not be resold  by the  respective  purchasers
thereof absent  registration  under the Securities Act or the availability of an
applicable exemption from such registration statement.

    In addition,  upon  consummation of the 1997 Private  Offering,  the Company
will  issue 10% of the  aggregate  number of shares of common  stock sold in the
form of five year  warrants to the  investment  banker at an  exercise  price of
$1.10 per share. Furthermore,  as part of the 1997 Private Offering, the Company
also agreed to engage its investment banker to provide  consulting  services and
assist  the  Company in the  pursuit  of  potential  business  acquisitions  and
combinations.  Under the consulting provisions,  the Company has agreed to (i) a
one year,  $4,000 per month consulting  retainer,  (ii) a finders fee associated
with the successful closure of an acquisition,  restructuring,  joint venture or
merger and (iii) the  Company  will  issue an  aggregate  of  200,000  five year
warrants to the investment  banker of which 100,000 are exercisable at $2.00 per
share and the remaining 100,000 are exercisable at $2.50 per share.

                                             F-20

                                              38


<PAGE>






     Item 9. Changes in and  Disagreements  with  Accountants  on Accounting and
Financial Disclosure.

    There have been no changes in accountants due to disagreements on accounting
and financial disclosure during the 24 months prior to December 31, 1996.

                                              18

                                              39


<PAGE>



                                           PART III

Item 10. Directors and Executive Officers of the Registrant.

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

                                                                     Associated
                                                                       with the
                                                                        Company
Name                           Age                   Offices Held         Since
----                           ---                   ------------        ------
Michael Wahl                   59             Chairman of the Board and    1984
                                              Chief Executive Officer

Andrew Wahl                    36             President and Director       1984

Robert V. Cuddihy, Jr.         37             Chief Operating Officer,     1987
                                              Chief Financial Officer
                                              and Director

L. Randy Riley                 45             Executive Vice President     1993
                                              and Director

Herbert F. Kozlov              44             Secretary and Director       1988

Lawrence J. Twill, Sr.         59             Director                     1987


     MICHAEL WAHL has been a director of the Company  since its inception in May
1984.  Mr. Wahl  became the  Company's  Chairman  and Chief  Executive  Officer,
effective  October 1, 1993.  Since 1984,  Mr. Wahl has served as the Chairman of
the Board of the Company.  Since May 1986, Mr. Wahl has also served as the chief
executive officer of the Company. Mr. Wahl served as the Company's HMG President
from 1976 to April 1986.

     ANDREW WAHL has been a director of the Company  since its  inception in May
1984. Mr. Wahl became the President  effective October 1, 1993, and relinquished
his roles as  Chairman  and Chief  Executive  Officer.  From May 1984 to October
1993,  Mr. Wahl served as the Company's  Chief  Executive  Officer.  In December
1990,  Mr. Wahl became the  Secretary of the Company.  From July 1987 to October
1993,  Mr.  Wahl  has  also  served  as the  Company's  Chairman  of the  Board.
Additionally,  Mr. Wahl served as the  Company's  President  from May 1984 until
December  1990.  From  September  1980 until May 1984,  Mr.  Wahl served as Vice
President for HMG, where his primary  responsibilities  were in the areas of new
business development and pension and profit-sharing management.

     ROBERT V. CUDDIHY,  JR. has been the Company's chief financial  officer and
Secretary since July 1987 and a director since February 1988. In March 1989, Mr.
Cuddihy  also assumed the  responsibilities  of chief  operating  officer of the
Company.  In December  1990,  Mr.  Cuddihy  became the  Company's  President and
discontinued his function as its Secretary. Mr. Cuddihy relinquished his role as
President,  effective  October  1, 1993.  From July 1981  until  July 1987,  Mr.
Cuddihy was with KPMG Peat Marwick, Certified Public Accountants,  where he last
served as a senior audit manager.

     L. RANDY  RILEY has been a director of the  Company  since March 1994.  Mr.
Riley is, and for at least the past five years has been,  employed  by HMG in an
executive  capacity,  most  recently  as  President  of HMG.  He was  previously
employed  by Ernest & Julio  Gallo and by  Colgate-Palmolive  Company  in senior
marketing positions.

                                              19

                                              40


<PAGE>




     HERBERT F. KOZLOV has been a director of the Company since  February  1988.
From August 1989 until  December  1995,  Mr. Kozlov has also served as the chief
executive  officer of  Electronic  Voting  Systems,  Inc., a  subsidiary  of the
Company.  Effective October 1, 1993, Mr. Kozlov assumed the  responsibilities of
Corporate  Secretary.  Mr.  Kozlov is a member of Parker  Duryee  Rosoff & Haft,
counsel to the Company.  Mr. Kozlov has been a practicing attorney for more than
ten years.

     LAWRENCE J. TWILL,  SR. has been a director of the Company since July 1987.
Mr. Twill has been President of Ashwood Capital,  a private merchant bank, since
March 1991.  From  February 1990 to February  1991, he was Managing  Director of
Peers & Co., which at the time was a subsidiary of Kemper Securities,  Inc. From
June 1988 to February  1990, he served as Executive Vice  President,  Investment
Banking  and a member  of the  Executive  Committee  of  Bateman  Eichler,  Hill
Richards,  a subsidiary  of Kemper  Securities,  Inc. From February 1986 to June
1988,  Mr.  Twill was the  Chairman  and Chief  Executive  Officer of Woolcott &
Company,  an investment  banking firm,  and from April 1984 to March 1985 he was
the  President  and Chief  Executive  Officer of New York Air, Inc. Mr. Twill is
also a member of the Board of Directors of United Waste Systems, Inc.

        Michael  Wahl is the father of Andrew  Wahl.  There are no other  family
relationships among the Company's officers and directors.

        All directors hold office until the next annual meeting of  stockholders
and the election and qualification of their successors.  Executive  officers are
elected  annually  by the  Board of  Directors  to hold  office  until the first
meeting of the Board following the next annual meeting of stockholders and until
their successors are chosen and qualified.

        Section  16(a)  of the  Securities  Exchange  Act of 1934,  as  amended,
requires the Company's officers and directors, and persons who own more than 10%
of the  Company's  Common  Stock,  to file reports of  ownership  and changes in
ownership  with  the  Securities  and  Exchange  Commission  ("SEC").  Officers,
directors and greater than 10%  stockholders are required by the SEC regulations
to furnish the Company with copies of all Section 16(a) forms they file.

     Based  solely on its review of the copies of such forms  received by it, or
written  representations  from  certain  reporting  persons that no Forms 5 were
required for those persons, the Company believes that through December 31, 1996,
all filing requirements  applicable to its officers,  directors and greater than
10% beneficial owners were complied with.

                                              20

                                              41


<PAGE>





Item 11. Executive Compensation.

Summary Compensation

        Set forth below is the aggregate  compensation for services  rendered in
all  capacities to the Company  during its fiscal years ended December 31, 1996,
1995 and 1994 by its chief executive officer and each of its executive  officers
whose  compensation  exceeded $100,000 during its fiscal year ended December 31,
1996.


<TABLE>
<CAPTION>
                             Summary Compensation Table

                                                              Long-Term Compensation
                                                              ----------------------
                          Annual Compensation                Awards               Payouts
                          -------------------           ----------------          -------
                                           Other                Number of                     All
Name and                                   Annual    Restricted Securities       Long-Term    Other
Principal                                  Compen-   Stock      Underlying       Incentive    Compen-
Position           Year Salary     Bonus   sation(1) Awards     Options          Payouts      sation
---------          ---- ------     -----   --------- ------     ----------       ---------    ------
 <S>               <C>  <C>       <C>       <C>      <C>         <C>             <C>          <C>

 Michael Wahl      1996 $250,000  $   -                          140,000
 Chief Executive   1995 $250,000  $100,000
 Officer           1994 $250,000  $100,000

Andrew Wahl        1996 $250,000  $    -                         140,000
 President         1995 $190,000  $ 76,500
                   1994 $190,000  $125,000

Robert V.
Cuddihy, Jr.       1996 $200,000  $    -                          70,000
 Chief Operating   1995 $150,000  $100,000
 Officer           1994 $150,000  $125,000
 Chief Financial
 Officer

L. Randy Riley     1996 $250,000  $ 70,000                       129,450
  Executive Vice   1995 $210,000  $   -
  President        1994 $210,000  $ 70,000
</TABLE>

(1)   Personal benefits provided to Messrs.  Michael Wahl, Andrew Wahl,  Cuddihy
      and Riley did not exceed the disclosure  thresholds  established under SEC
      rules and therefore are not included in this table.

      Set forth below is  information  with  respect to options to purchase  the
Company's  Common  Stock  granted in the year ended  December 31, 1996 and prior
years under the Company's 1986, 1991 1993 and 1994 Stock Option Plans.

                       Aggregated Option Exercises in Last Fiscal Year
                              and Fiscal Year End Option Values

                                   Number of Securities
             Number of             Underlying Unexercised  Value of Unexercised
             Shares                Options at              In-the-Money Options
             Acquired              December 31, 1996       at December 31, 1996
             on         Value                    Unexer-                Unexer-
Name         Exercise  Realized   Exercisable   cisable   Exercisable   cisable
----         --------  --------   -----------   -------   -----------   -------
Michael Wahl   184,572  $272,430    599,828                 $   -

Andrew Wahl                         516,750                 $21,199

Robert V.
 Cuddihy, Jr.                       223,850                 $14,981

L. Randy
 Riley                              223,850                 $   -

                                          21

Employment Agreements

      Effective October 1, 1993,  Michael Wahl became the Company's  Chairman of
the  Board and  Chief  Executive  Officer  pursuant  to a five  year  employment
contract ("Wahl Employment Agreement") at a base salary of no less than $250,000
per year.  He is also  entitled to receive such bonuses as may be awarded to him
from time to time by the Board in its sole discretion.

      Upon  termination of the Wahl Employment  Agreement by the Company for any
reason  other than for cause,  the Company will be obligated to continue to make
salary payments to Mr. Wahl, or to his estate in the event of his death, for

                                              42


<PAGE>



a  period  of up to two  years  after  such  termination.  The  Wahl  Employment
Agreement  also  precludes Mr. Wahl from competing with the Company for a period
of two years following termination of employment.

      With the  exception of Michael  Wahl,  none of the  executive  officers is
employed by the Company pursuant to an employment agreement.

Compensation of Directors

      The   Company's   policy  is  to  reimburse   directors   for  travel  and
out-of-pocket  expenses incurred, if any, to attend its directors' meetings. See
"Compensation Committee Interlocks and Insider Participation".

Board Compensation Committee Report on Executive Compensation

      Although the Company has a  Compensation  Committee,  the Board as a whole
rather than the  Compensation  Committee has set  compensation for its executive
officers for each of the past three years. Four of such directors  received cash
compensation as executive officers of the Company.

      Effective October 1, 1993, Michael Wahl, who had previously been the chief
executive  officer  of HMG,  became  Chairman  of the Board and Chief  Executive
Officer of the Company pursuant to an employment agreement (the "Wahl Employment
Agreement").  In  negotiating  the  Wahl  Employment  Agreement,  the  Board  of
Directors  determined  that Mr. Wahl should  receive a base salary equal to that
which he received under a five year  employment  agreement  entered into in 1990
with HMG under the former owners. In order to induce Mr. Wahl to enter into such
prior employment agreement, HMG had agreed to pay Mr. Wahl the additional sum of
$1.0 million,  of which $750,000 had been paid,  with the balance payable to Mr.
Wahl in two  installments  of $125,000 each due in 1994 and 1995,  respectively.
The Wahl Employment  Agreement  superseded Mr. Wahl's prior employment agreement
with  HMG and  released  HMG from  its  obligation  to pay Mr.  Wahl  these  two
remaining $125,000 installments and provided for no new inducement payments. The
Board of  Directors  granted Mr. Wahl  options to acquire the  Company's  Common
Stock in lieu of any such payments (the "Wahl Options").

      Compensation  levels afforded to Andrew Wahl,  Robert V. Cuddihy,  Jr., L.
Randy  Riley  and to  the  Company's  other  executive  officers  are  based  in
substantial  part  upon a  comparative  evaluation  by the  Company's  Board  of
Directors of each such person's  functional  responsibility  and  performance in
that  particular  segment  of  the  Company's   operations  for  which  each  is
responsible and, where discernable, the profitability of that segment.

    During  1996,  the Board  approved  the  payment of bonuses and the grant of
stock options, to a number of employees,  including  executive  officers.  These
bonuses and grant of options were approved  after  considering  the  significant
transactions  initiated and  consummated by the executive  officers on behalf of
the Company during the past year.  The Board noted that the Company's  executive
officers  accomplishments  included (i)  renovated  and  expanded the  Company's
140,000 square foot manufacturing  facility in Reading, (ii) closed the first of
two New Jersey manufacturing  facilities in May 1996 and moved its operations to
Reading,  (iii)  restructured  the  Company's  New York and Chicago  offices and
closed the Company's  satellite sales office in Detroit  Michigan,  (iv) entered
into a one year lease  agreement  in  September  1996 for a second  facility  in
Reading,  with an  option to extend  the lease for an  additional  5 years or to
exercise an option to purchase such facility for $1.2 million which is comprised
of 72,500 square feet of manufacturing  and warehousing space on approximately 5

                                              22

                                              43


<PAGE>



acres of property,  (v) renovated and upgraded the Company's  plastic  injection
molding  division in Reading,  including  the purchase of  additional  injection
molding  equipment,  in October and November 1996,  (vi)  consummated the Credit
Agreement  in  November  1996 with a financial  institution  whereby the Company
obtained  a secured  $11  million  line  revolving  line of credit and term loan
facility, (vii) extended the Company's $32.2 million supply contract with Foster
Grant from seven to ten years expiring December 2005,  continued the requirement
of  Foster  Grant  to  purchase  a  minimum  of  70%  of  its  annual   in-store
merchandising display purchases from the Company and modified the minimum annual
dollar purchases  required in any one given year to be no less than $2.5 million
per year, (viii) centralized a portion of the Company's purchasing operations in
New York, New Jersey,  Pennsylvania  and Illinois to better utilize and leverage
the Company's new consolidated plant operating capacity in Reading,  (ix) closed
the second New Jersey  manufacturing  facility  in  December  1996 and moved its
operations  to  Reading,  (x) closed,  as of December  31,  1996,  its  European
operations,  HMGBV, and (xi) expanded its client base during 1996 to include new
clients.

    March 1, 1997

                        Michael Wahl - Chairman   Herbert F. Kozlov
                        Andrew Wahl               Robert V. Cuddihy, Jr
                        L. Randy Riley            Lawrence J. Twill, Sr.

Performance Graph

    The following graph compares the yearly  percentage  change in the Company's
cumulative  total  stockholder  return on its Common  Stock (based on the market
price of the Company's  Common Stock) with the  cumulative  total return of U.S.
companies on The Nasdaq Stock Market and  non-financial  companies on The Nasdaq
Stock Market.

                     1/1/92   12/31/92  12/31/93  12/31/94  12/31/95  12/31/96
                     ---------------------------------------------------------
HMG Worldwide        $100     $ 31      $346      $120      $106      $ 40

Nasdaq US            $100     $116      $134      $131      $185      $227

Nasdaq Non-Financial $100     $109      $126      $121      $169      $206

Compensation Committee Interlocks and Insider Participation

     Each member of the Board of Directors  participated in the determination of
the level of  compensation  of the Company's  executive  officers.  Five of such
directors  are officers of the  Company,  i.e.,  Michael Wahl - Chief  Executive
Officer,  Andrew Wahl -  President,  Robert V.  Cuddihy,  Jr. - Chief  Operating
Officer and Chief Financial  Officer,  L. Randy Riley,  Executive Vice President
and Herbert F. Kozlov - Secretary.

     Herbert F. Kozlov, a director of the Company,  is a member of Parker Duryee
Rosoff & Haft, counsel to the Company. Fees paid to such firm by the Company for
the year ended December 31, 1996 were approximately $200,000.

    Lawrence J. Twill,  Sr., a director of the Company,  is President of Ashwood
Capital.  Such firm,  from time to time,  also serves as an  investment  banking
advisor to the Company.

                                              23

                                              44


<PAGE>




Item 12. Security Ownership of Certain Beneficial Owners and Management.

    The  following  table sets forth  information  as of March 19, 1997 based on
information  obtained  from  the  persons  named  below,  with  respect  to  the
beneficial  ownership  of  shares  of the  Company's  Common  Stock  by (i) each
director of the Company,  (ii) certain executive officers of the Company,  (iii)
each  person  known  by the  Company  to be the  owner  of  more  than 5% of its
outstanding shares of Common Stock and (iv) all executive officers and directors
as a group:

Name and Address of                          Number of         Approximate
Beneficial Holder                            Shares(1)      Percentage of Class
-------------------                          ---------      -------------------
Michael Wahl                                1,262,875 (2)           13.9%
475 Tenth Avenue
New York, NY 10018

Andrew Wahl                                   715,203 (3)            7.9%
475 Tenth Avenue
New York, NY 10018

Robert V. Cuddihy, Jr.                        350,308 (4)            4.0%
475 Tenth Avenue
New York, NY  10018

Herbert F. Kozlov                             202,976 (5)            2.3%
529 Fifth Avenue
New York, NY  10017

L. Randy Riley                                332,583 (6)            3.8%
475 Tenth Avenue
New York, NY  10018

Lawrence J. Twill, Sr.                         91,150 (7)            1.1%
111 East 30th Street (16A)
New York, NY  10016

Gilmour 1994 Jersey Trust                     972,222 (8,9)         11.4%
7 Bond Street
St. Helier
Jersey, Channel Island

State of Wisconsin Investment Board           740,000                8.7%
P.O. Box 7842
Madison, WI  53707

Great Court Analysis LLC
5150 Overland Avenue
Culver City, CA 90230                         540,000               6.3%


All executive officers                      2,955,095 (10)         28.6%
and directors as a group
(6 persons)

                                              24

                                              45


<PAGE>



(1)   Includes shares  issuable  pursuant to currently  exercisable  options and
      options which will be exercisable within 60 days of March 19, 1997. Except
      as  otherwise  indicated,  the persons  named  herein have sole voting and
      disposition power with respect to the shares beneficially owned.
(2)   Includes 599,828 shares issuable upon exercise of options.
(3)   Includes 516,750 shares issuable upon exercise of options.
(4)   Includes 223,850 shares issuable upon exercise of options.
(5)   Includes 185,100 shares issuable upon exercise of options.
(6)   Includes 223,850 shares issuable upon exercise of options.
(7)   Includes 80,400 shares issuable upon exercise of options.
(8)   The trustee of the Gilmour 1994 Jersey Trust (the  "Trust") is Hill Samuel
      (Channel Islands) Trust Company Limited. The directors of the trustee have
      indirect shared voting and dispositive powers with respect to such shares.
(9)   Does not  include  35,000  shares  beneficially  owned  by David  Harrison
      Gilmour,   a  primary   beneficiary  of  the  Trust,  and  100,002  shares
      beneficially owned by Mr. Gilmour's spouse.
(10) Includes  1,829,778  shares issuable upon exercise of options owned by
     such executive officers and directors.


Item 13.   Certain Relationships and Related Transactions.

      In 1994,  the  Company  advanced  $250,000 to Robert V.  Cuddihy,  Jr., an
officer and  Director.  Such amount is due to be repaid in one  installment  due
January 31, 1998.  Unpaid  amounts bear interest at a fluctuating  rate equal to
the six months U.S.  Treasury  bill rate.  In 1995 and 1996,  Mr.  Cuddihy  made
prepayments  of $66,422  and $4,906  respectively,  plus  accrued  interest.  At
December 31, 1996, the unpaid balance of such advance was $178,672.

      In 1995,  the Company  advanced  $100,000 to Andrew  Wahl,  an officer and
Director.  Such  amount is due to be repaid in one  installment  due  January 1,
1998. Unpaid amounts bear interest at a fluctuating rate equal to the six months
U.S.  Treasury  bill rate. In 1995,  Mr. Wahl made a prepayment  of $25,000.  At
December 31, 1996, the unpaid principal  balance of such advance was $75,000 and
no interest was paid during 1996.

      Herbert F. Kozlov, a director of the Company, is a member of Parker Duryee
Rosoff & Haft, counsel to the Company. Fees paid to such firm by the Company for
the year ended December 31, 1996 were approximately $200,000.

      Lawrence J. Twill, Sr., a director of the Company, is President of Ashwood
Capital.  Such firm,  from time to time,  also serves as an  investment  banking
advisor to the Company.

                                              25

                                              46


<PAGE>



                                            PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.

 (a)  (1)  Financial  Statements.   See  Index  to  Consolidated   Financial
           Statements in Item 8 hereof.

      (2)  Financial Statement Schedules.
             Schedule II - Valuation and Qualifying Accounts and Reserves
      (3)  Exhibits

    Exhibit

     Number    Description of Exhibit
     ------    ----------------------
      3(a)Certificate of Incorporation, as amended (6)

       (b)By-laws(1)
     10(a)1986 Stock Option Plan(1)*
       (b)1991 Stock Option Plan(2)*
       (c)1993 Stock Option Plan(3)*
       (d)Agreement  between  Louis Adler  Realty  Company and  Registrant,
          dated   December  16,  1993,  for the lease of the 12th Floor at
          475 Tenth  Avenue,  New York, New York(4)
       (e)Agreement  between Louis Adler Realty Company and  Registrant,  dated
          December  16,  1993,  for the  lease of the 8th  Floor  at 475  Tenth
          Avenue, New York, New York(4)
       (f)Purchase and Exchange  Agreement,  dated as of April 30, 1993, by and
          among Saatchi & Saatchi  Company PLC, a corporation  organized  under
          the laws of  England,  Saatchi & Saatchi  Marketing  Services  Group,
          Inc., a Delaware  corporation,  Saatchi & Saatchi Advertising B.V., a
          corporation  organized  under  the  laws  of  the  Netherlands,   and
          Registrant(3)
       (g)Supplement,  dated as of August 20,  1993,  to Purchase  and Exchange
          Agreement  dated as of April 30, 1993 by and among  Saatchi & Saatchi
          Company  PLC,  a  corporation  organized  under the laws of  England,
          Saatchi  &  Saatchi  Marketing   Services  Group,  Inc.,  a  Delaware
          corporation,  Saatchi  &  Saatchi  Advertising  B.V.,  a  corporation
          organized under the laws of the Netherlands, and Registrant(3)
       (h)Employment  Agreement,  dated  April 30,  1993,  between  Registrant,
          Marlboro  Marketing,  Inc.,  a  New  York  corporation,  and  Michael
          Wahl(3)*
       (i)1994 Stock Option Plan  (5)*
       (j)Stock Purchase  Agreement,  dated as of September  30, 1995,  between
          Benson Eyecare Corporation and Intermark Corp (6)
       (k)Display Purchase Agreement, dated as of September 30, 1995, between
          HMG Worldwide In-Store Marketing, Inc., and Foster Grant Group L.P.
          and Benson Eyecare Corporation (6)
       (l)Marketing Support and Equipment Sale Agreement, dated as of
          October 1, 1995, between Turbo Screen B.V., Tchai Holdings B.V.,
          HMG Europe B.V. and HMG Worldwide In-Store Marketing, Inc. (6)
       (m)Loan and Security Agreement between Congress Financial Corporation
          and Registrant dated November 22, 1996
     21   Subsidiaries of the Registrant (6)
     23   Consents of Friedman Alpren & Green LLP
     27   Financial Data Schedule

       (b)  Registrant  did not file any reports on Form 8-K during
            the last quarter of the period ended December 31, 1996.
                                              26

                                              47


<PAGE>



(1)   Denotes  document  filed as an exhibit to  Registrant's  Proxy  Statement,
      dated November 25, 1986, and incorporated herein by reference.
(2)   Denotes  document  filed as an exhibit to  Registrant's  Proxy  Statement,
      dated February 7, 1992, and incorporated herein by reference.
(3)   Denotes  document  filed as an exhibit to  Registrant's  Proxy  Statement,
      dated September 7, 1993, and incorporated herein by reference.
(4)   Denotes document filed as an exhibit to Registrant's Registration
      Statement on Form S-2 dated August 9, 1994 (File No. 33-44832) and
      incorporated herein by reference.
(5)   Denotes document filed as an exhibit to Registrant's Proxy Statement,
      dated October 21, 1994.
(6)   Denotes document filed as an exhibit to Registrant's Annual Report
      on Form 10-K dated December 31, 1995,and incorporated herein by reference

 *    Management contract or compensatory plan or arrangement

                                              27

                                              48


<PAGE>



                                          SIGNATURES

      Pursuant to the  requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                               HMG WORLDWIDE CORPORATION

    Date: March  28, 1997                      By:/s/Robert V. Cuddihy, Jr.
                                                  -------------------------
                                                    Robert V. Cuddihy, Jr.
                                                    Chief Operating Officer and
                                                    Chief Financial Officer


      Pursuant to the requirements of the Securities  Exchange Act of 1934, this
Report has been signed below by the following  persons in the  capacities and on
the dates indicated:

/s/Michael Wahl
-----------------------    Chairman of the                     March  28, 1997
Michael Wahl               Board and Chief
                           Executive Officer

/s/Andrew Wahl
-----------------------    President and                       March  28, 1997
Andrew Wahl                Director

/s/Robert V. Cuddihy, Jr.
------------------------  Chief Operating                      March  28, 1997
Robert V. Cuddihy, Jr.    Officer, Chief
                          Financial Officer
                          and Director

/s/L. Randy Riley
------------------------  Executive Vice                       March  28, 1997
L. Randy Riley            President


/s/Herbert F. Kozlov      Director                             March  28, 1997
------------------------
Herbert F. Kozlov

/s/Lawrence J. Twill, Sr. Director                             March 28, 1997
------------------------
Lawrence J. Twill, Sr.






                                              28

                                              49


<PAGE>



                            INDEX TO FINANCIAL STATEMENT SCHEDULES

The following financial statement schedules are filed as part of this Report:

                                                                        PAGE

      Independent Auditors' Report                                       A-2

      Schedule II - Valuation and Qualifying Accounts and Reserves       A-3

Schedules other than those listed are omitted as not required or applicable.

                                              A-1

                                              50


<PAGE>



                    INDEPENDENT AUDITOR'S REPORT ON SUPPLEMENTAL SCHEDULES

TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
HMG WORLDWIDE CORPORATION

        We  have  audited,   in  accordance  with  generally  accepted  auditing
standards,  the financial  statements  included in HMG  WORLDWIDE  CORPORATION'S
annual  report to  shareholders  in this FORM 10-K,  and have  issued our report
thereon dated March 20, 1997. Our audits were made for the purpose of forming an
opinion on those  statements taken as a whole. The schedules listed in the index
above are presented for purposes of complying  with the  Securities and Exchange
Commission's  rules and are not part of the basic  financial  statements.  These
schedules have been subjected to the auditing  procedures  applied in our audits
of the basic  financial  statements  and, in our  opinion,  fairly  state in all
material  respects  the  financial  data  required  to be set forth  therein  in
relation to the basic financial statements taken as a whole.

                                                FRIEDMAN ALPREN & GREEN LLP
                                                CERTIFIED PUBLIC ACCOUNTANTS

New York, New York
March 20, 1997

                                             A - 2


<PAGE>

<TABLE>
<CAPTION>


                          HMG WORLDWIDE CORPORATION AND SUBSIDIARIES
                                          SCHEDULE II
                        VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
                                        (in thousands)


                                               Additions/
                                               Deductions
                                 Balance at    Charged to       Charged to                   Balance
                                 Beginning     Costs and        Other                        at End
                                 of Period     Expenses         Accounts      Deductions(a)  of Period
                                 ----------    ----------       ----------    -------------  ---------
<S>                               <C>          <C>             <C>            <C>            <C>

Year ended December 31, 1996:

   Allowance for doubtful accounts $ 596       $  64           $ -            ($ 83)          $ 577
                                   =====       =====           =====           ====           =====

Year ended December 31, 1995:

  Allowance for doubtful accounts  $ 773      ($  47)          $ -            ($130)          $ 596
                                   =====       =====           =====           ====           =====

Year ended December 31, 1994:

  Allowance for doubtful accounts  $ 518      $  265           $ -            ($ 10)          $ 773
                                   =====      ======           =====           ====           -----



</TABLE>


(a) Specified write-off of accounts receivable.

                                              A-3



<PAGE>



                                        Exhibit 10(m)


<PAGE>











                                  Loan and Security Agreement

                                         by and among

                                CONGRESS FINANCIAL CORPORATION

                                           as Lender

                                              and

                                  HMG WORLDWIDE CORPORATION,
                            HMG WORLDWIDE IN-STORE MARKETING, INC.,

                         HMG/INTERMARK WORLDWIDE MANUFACTURING, INC.,

                                              and

                                        INTERMARK CORP.

                                         as Borrowers

                                   Dated:  November 22, 1996


<PAGE>



                                  TABLE OF CONTENTS
                                  -----------------
                                                                   Page

SECTION 1.     DEFINITIONS..........................................-1-

SECTION 2.     CREDIT FACILITIES...................................-13-
               -----------------
       2.1     Revolving Loans.....................................-13-
               ---------------
       2.2     Letter of Credit Accommodations.....................-15-
               -------------------------------
       2.3     Initial Term Loans..................................-17-
               ------------------
               ....................................................-18-
       2.4  Additional Real Property Term Loan.....................-18-

SECTION 3.     INTEREST AND FEES...................................-21-
               -----------------
       3.1     Interest............................................-21-
               --------
       3.2     Closing Fee.........................................-22-
               -----------
       3.3     Servicing Fee.......................................-22-
               -------------
       3.4     Unused Line Fee.....................................-22-
               ---------------

SECTION 4.     CONDITIONS PRECEDENT................................-23-

       4.1     Conditions Precedent to Initial Loans and Letter of
               Credit Accommodations...............................-23-

       4.2     Conditions Precedent to All Loans and Letter of
               Credit Accommodations...............................-25-

SECTION 5.     GRANT OF SECURITY INTEREST..........................-25-
       5.1     Collateral..........................................-25-
       5.2     Senior Real Property Lien...........................-27-

SECTION 6.     COLLECTION AND ADMINISTRATION.......................-27-
               -----------------------------
       6.1     Borrowers' Loan Accounts............................-27-
               ------------------------
       6.2     Statements..........................................-27-
               ----------
       6.3     Collection of Accounts..............................-28-
               ----------------------
       6.4     Payments............................................-29-
               --------
       6.5     Authorization to Make Loans.........................-30-
               ---------------------------
       6.6     Use of Proceeds.....................................-30-
               ---------------
       6.7     Appointment of HMG Worldwide as Agent for
               Borrowers...........................................-30-

SECTION 7.     COLLATERAL REPORTING AND COVENANTS..................-31-
               ----------------------------------
       7.1     Collateral Reporting................................-31-
               --------------------
       7.2     Accounts Covenants..................................-31-
               ------------------
       7.3     Inventory Covenants.................................-33-
               -------------------
       7.4     Equipment Covenants.................................-34-
               -------------------
       7.5     Power of Attorney...................................-35-
               -----------------
       7.6     Right to Cure.......................................-35-
               -------------
       7.7     Access to Premises..................................-36-
               ------------------

SECTION 8.     REPRESENTATIONS AND WARRANTIES......................-36-

       8.1     Corporate Existence, Power and Authority;
               Subsidiaries........................................-36-
               ------------
       8.2     Financial Statements; No Material Adverse Change....-37-
               ------------------------------------------------
       8.3     Chief Executive Office; Collateral Locations........-37-
               --------------------------------------------
       8.4     Priority of Liens; Title to Properties..............-37-
               --------------------------------------
       8.5     Tax Returns.........................................-37-
               -----------
       8.6     Litigation..........................................-38-
               ----------
       8.7     Compliance with Other Agreements and Applicable
               -----------------------------------------------
               Laws................................................-38-
               ----
                                             (i)


<PAGE>



       8.8     Bank Accounts.......................................-38-
               -------------
       8.9     Environmental Compliance............................-38-
               ------------------------
       8.10    Employee Benefits...................................-39-
               -----------------
       8.11    Accuracy and Completeness of Information............-40-
               ----------------------------------------
       8.12    Interrelated Business...............................-40-
               ---------------------
       8.13    Survival of Warranties; Cumulative..................-41-
               ----------------------------------

SECTION 9.     AFFIRMATIVE AND NEGATIVE COVENANTS..................-41-
               ----------------------------------
       9.1     Maintenance of Existence............................-41-
               ------------------------
       9.2     New Collateral Locations............................-41-
               ------------------------
       9.3     Compliance with Laws, Regulations, Etc..............-42-
               ---------------------------------------
       9.4     Payment of Taxes and Claims.........................-43-
               ---------------------------
       9.5     Insurance...........................................-43-
               ---------
       9.6     Financial Statements and Other Information..........-44-
               ------------------------------------------
       9.7     Sale of Assets, Consolidation, Merger, Dissolution,
               ---------------------------------------------------
               Etc.................................................-46-
               ----
       9.8     Encumbrances........................................-46-
               ------------
       9.9     Indebtedness........................................-47-
               ------------
       9.10    Loans, Investments, Guarantees, Etc.................-51-
               ------------------------------------
       9.11    Dividends and Redemptions...........................-52-
               -------------------------
       9.12    Transactions with Affiliates........................-52-
               ----------------------------
       9.13    Custodial Account; Additional Bank Accounts.........-53-
               -------------------------------------------
       9.14    Compliance with ERISA...............................-53-
               ---------------------
       9.15    Tangible Net Worth..................................-54-
               ------------------
       9.16    Costs and Expenses..................................-54-
               ------------------
       9.17    Further Assurances..................................-55-
               ------------------

SECTION 10.           EVENTS OF DEFAULT AND REMEDIES...............-55-
                      ------------------------------
       10.1    Events of Default...................................-55-
               -----------------
       10.2    Remedies............................................-57-
               --------
       10.3    CONFESSION OF JUDGMENT AND WAIVERS..................-59-
               ----------------------------------

SECTION 11.           JURY TRIAL WAIVER; OTHER WAIVERS
                      AND CONSENTS; GOVERNING LAW     .............-60-
                      --------------------------------
       11.1    Governing Law; Choice of Forum; Service of Process;
               --------------------------------------------------
               Jury Trial Waiver...................................-60-
               -----------------
       11.2    Waiver of Notices...................................-61-
               -----------------
       11.3    Amendments and Waivers..............................-61-
               ----------------------
       11.4    Waiver of Counterclaims.............................-62-
               -----------------------
       11.5    Indemnification.....................................-62-
               ---------------

SECTION 12.           TERM OF AGREEMENT; MISCELLANEOUS.............-62-
                      --------------------------------
       12.1    Term................................................-62-
               ----
       12.2    Notices.............................................-64-
               -------
       12.3    Partial Invalidity..................................-64-
               ------------------
       12.4    Successors..........................................-65-
               ----------
       12.5    Entire Agreement....................................-65-
               ----------------


                                             (ii)


<PAGE>




                                           INDEX TO

                                    EXHIBITS AND SCHEDULES

               Exhibit A                    Information Certificate

               Exhibit B                    Form of Additional Real Property
                                            Term Loan Note

               Exhibit C                    Description of Easement to be
                                            granted in favor of Albright College

               Schedule 1.11(o)             Certain Account Debtor
                                            Concentrations

               Schedule 8.4                 Existing Liens

               Schedule 8.8                 Bank Accounts

               Schedule 8.9                 Environmental Matters

               Schedule 8.10                Employee Benefit Plans

               Schedule 9.9                 Existing Indebtedness

               Schedule 9.10                Existing Loans, Advances and
                                            Guarantees

                                            (iii)


<PAGE>



                                  LOAN AND SECURITY AGREEMENT

       This Loan and Security  Agreement dated November 22, 1996 is entered into
by and among Congress Financial Corporation, a California corporation ("Lender")
and HMG Worldwide  Corporation,  a Delaware  corporation ("HMG Worldwide"),  HMG
Worldwide  In-Store  Marketing,  Inc., a New York corporation  ("HMG In-Store"),
HMG/Intermark  Worldwide  Manufacturing,  Inc.,  a  Delaware  corporation  ("HMG
Manufacturing")  and Intermark Corp., a New York corporation  ("Intermark";  and
together with HMG Worldwide,  HMG In-Store and HMG  Manufacturing,  individually
referred to as a "Borrower" and collectively, as "Borrowers").

                                     W I T N E S S E T H:

       WHEREAS,   Borrowers  have  requested  that  Lender  enter  into  certain
financing  arrangements  with Borrowers  pursuant to which Lender may make loans
and provide other financial accommodations to Borrowers; and

       WHEREAS,  Lender is willing to make such loans and provide such financial
accommodations on the terms and conditions set forth herein;

       NOW, THEREFORE,  in consideration of the mutual conditions and agreements
set forth herein, and for other good and valuable consideration, the receipt and
sufficiency  of  which is  hereby  acknowledged,  the  parties  hereto  agree as
follows:

SECTION

1.     DEFINITIONS

       All terms used herein  which are defined in Article 1 or Article 9 of the
Uniform  Commercial Code shall have the meanings given therein unless  otherwise
defined in this  Agreement.  All references to the plural herein shall also mean
the singular and to the singular  shall also mean the plural  unless the context
otherwise  requires.  All  references  to  Borrowers  shall,  unless the context
otherwise expressly provides, mean any Borrower and all Borrowers,  individually
and collectively,  jointly and severally.  All references to Borrower and Lender
pursuant to the  definitions set forth in the recitals  hereto,  or to any other
person herein, shall include their respective  successors and assigns. The words
"hereof",  "herein",  "hereunder",  "this Agreement" and words of similar import
when used in this Agreement shall refer to this Agreement as a whole and not any
particular  provision of this  Agreement and as this Agreement now exists or may
hereafter be amended,  modified,  supplemented,  extended,  renewed, restated or
replaced.   The  word  "including"  when  used  in  this  Agreement  shall  mean
"including,  without limitation". An Event of Default shall exist or continue or
be continuing  until such Event of Default is waived in accordance  with Section
11.3 or is cured in a manner  satisfactory  to Lender.  Any accounting term used
herein  unless  otherwise  defined in this  Agreement  shall  have the  meanings
customarily given to such term in accordance with GAAP. For

                                             -1-


<PAGE>



purposes  of this  Agreement,  the  following  terms  shall have the  respective
meanings given to them below:

       1.1 "Accounts"  shall mean, as to each  Borrower,  all present and future
rights of such  Borrower  to payment  for goods  sold or leased or for  services
rendered,  which are not evidenced by instruments or chattel paper,  and whether
or not earned by performance.

       1.2 "Additional Real Property Term Loan" shall mean the term loan made by
Lender to HMG  Manufacturing  after the date  hereof as  provided in Section 2.4
hereof.

       1.3 "Availability  Reserves" shall mean, as of any date of determination,
such amounts as Lender may from time to time  establish and revise in good faith
reducing the amount of Revolving Loans and Letter of Credit  Accommodations that
would otherwise be available to Borrowers under the lending formula(s)  provided
for herein: (a) to reflect events,  conditions,  contingencies or risks that, as
determined by Lender in good faith,  do or may  adversely  affect either (i) the
Collateral or any other  property  which is security for the  Obligations or its
value, (ii) the assets,  business or prospects of any Borrower or any Obligor or
(iii)  the  security  interests  and other  rights  of Lender in the  Collateral
(including  the  enforceability,  perfection  and  priority  thereof)  or (b) to
reflect  Lender's  good faith  belief that any  collateral  report or  financial
information  furnished  by or on behalf of any Borrower or any Obligor to Lender
is or may have been incomplete, inaccurate or misleading in any material respect
or (c) to reflect  outstanding  Letter of Credit  Accommodations  as provided in
Section  2.2  hereof  or (d) in  respect  of any  state  of facts  which  Lender
determines in good faith  constitutes an Event of Default or may, with notice or
passage of time or both, constitute an Event of Default.

       1.4     "Blocked Accounts" shall have the meaning set forth in
Section 6.3 hereof.

       1.5 "Cash Equivalents"  shall mean cash and other investments  consisting
of the following:  (a) direct obligations of the United States of America or any
agency thereof, or obligations guaranteed by the United States of America or any
agency thereof,  in each case having a maturity not beyond ninety (90) days, (b)
time deposit  accounts,  certificates of deposit and money market  deposits,  in
each case having maturity not beyond ninety (90) days, issued by a bank or trust
company which is organized under the laws of the United States of America or any
state thereof  whose debt is rated "A" (or such similar  rating) or higher by at
least one nationally  recognized  statistical rating organization (as defined in
Rule 436 under the  Securities Act of 1933, as amended),  (c)  commercial  paper
with a rating of "P-1" (or higher) according to Moody's Investors Service,  Inc.
or "A-1" (or higher)  according  to  Standard  and Poor's  Corporation  having a
maturity not beyond  ninety (90) days,  and (d) money market funds  sponsored by
any registered broker dealer or mutual fund  distributor,  which invests only in
one or more of the securities referred to in clauses (a), (b) or (c) above.

                                             -2-


<PAGE>



       1.6 "Code" shall mean the Internal  Revenue Code of 1986, as the same now
exists or may from time to time  hereafter be amended,  modified,  recodified or
supplemented,   together  with  all  rules,   regulations  and   interpretations
thereunder or related thereto.

       1.7     "Collateral" shall have the meaning set forth in Section
5 hereof.

       1.8 "Custodial  Account" shall mean account no. 09923-00-J in the name of
HMG Worldwide at the Custodian Bank, or such other account at the Custodian Bank
as Lender shall approve in writing.

       1.9 "Custodial  Account  Agreement"  shall mean, as to HMG Worldwide,  an
agreement among such Borrower,  Lender and the Custodian Bank, pursuant to which
the Custodian Bank (i) acknowledges Lender's first priority security interest in
and lien upon the Cash  Equivalents  and other property now or hereafter held in
or credited to the Custodial Account and the proceeds thereof,  (ii) accepts the
appointment  as bailee or third party in  possession  for Lender for purposes of
the applicable  regulations of the United States  Department of the Treasury and
as bailee and  financial  intermediary  for Lender for  purposes  of the Uniform
Commercial Code or applicable law, and; (iii) agrees to follow  instructions not
to, without Lender's prior written instructions,  take any action to encumber or
transfer  any  interest in any Cash  Equivalents  or other  property  held in or
credited to the  Custodial  Account or the  proceeds  thereof,  or any  interest
therein and to follow only Lender's written  instructions  regarding the sale or
other  disposition of the Cash Equivalents or other property held in or credited
to the Custodial Account,  except for such Borrower's direction of investment or
reinvestment  of the Cash  Equivalents  and any proceeds  thereof into different
Cash Equivalents.

       1.10 "Custodian  Bank" shall mean CoreStates Bank, N.A., of Philadelphia,
Pennsylvania, and its successors and assigns.

       1.11  "Eligible  Accounts"  shall  mean,  as to each  Borrower,  Accounts
created by such Borrower which are and continue to be acceptable to Lender based
on the  criteria set forth below.  In general,  Accounts of a Borrower  shall be
Eligible Accounts if:

               (a) such  Accounts  arise  from the actual and bona fide sale and
shipment of goods (other than bill and hold  invoices  satisfying  the exception
set forth in  Section  1.11(f)  below),  or  delivery  of goods if  delivery  is
required under the terms of the sale, by such Borrower in the ordinary course of
its business which  transactions  are completed in accordance with the terms and
provisions contained in any documents related thereto;

               (b)    such Accounts are not unpaid more than ninety (90)
days after the date of the original invoice for them;

               (c)    such Accounts comply with the terms and conditions
contained in Section 7.2(c) of this Agreement;

               (d) such  Accounts  do not  arise  from  sales on  consign  ment,
guaranteed sale, sale and return, sale on approval, or other

                                             -3-


<PAGE>



terms under which payment by the account debtor may be conditional
or contingent;

               (e) the chief executive office of the account debtor with respect
to such  Accounts is located in the United  States of  America,  or, at Lender's
option,  if such  Accounts  are  payable in the United  States of America and in
United States  dollars and either:  (i) the account debtor has delivered to such
Borrower  an  irrevocable  letter  of  credit  issued  or  confirmed  by a  bank
satisfactory  to  Lender  and  sufficient  to cover  such  Account,  in form and
substance  satisfactory  to Lender and, if required by Lender,  the  original of
such letter of credit has been  delivered  to Lender or  Lender's  agent and the
issuer  thereof  notified of the  assignment  of the  proceeds of such letter of
credit to Lender, or (ii) such Account is subject to credit insurance payable to
Lender issued by an insurer and on terms and in an amount  acceptable to Lender,
or (iii) such Account is otherwise acceptable in all respects to Lender (subject
to such lending formula with respect thereto as Lender may determine); provided,
that,  notwithstanding  the foregoing,  foreign  Accounts  payable in the United
States of America in United States dollars by Canadian  account debtors shall be
treated as  domestic  Accounts  if all  perfection  steps  deemed  necessary  or
appropriate  by Lender have been taken with respect to such foreign  Accounts of
such  Borrower  in  the  province  where  the  account  debtor  is  located  and
Availability  Reserves are established by Lender to cover any potential liens or
claims  against such  Accounts  entitled to preference or priority over Lender's
interests therein under Canadian Federal or provincial law;

               (f) such Accounts do not consist of progress  billings,  bill and
hold invoices or retainage  invoices,  except as to bill and hold  invoices,  if
Lender shall have received an agreement in writing from the account  debtor,  in
form  and  substance  satisfactory  to  Lender,   confirming  the  unconditional
obligation of the account debtor to take the goods related  thereto and pay such
invoice;

               (g) the account  debtor  with  respect to such  Accounts  has not
asserted a  counterclaim,  defense or  dispute  and does not have,  and does not
engage in transactions  which may give rise to, any right of setoff against such
Accounts  (but the portion of the Accounts of such  account  debtor in excess of
the amount at any time and from time to time owed by  Borrowers  to such account
debtor or claimed owed by such account debtor may be deemed Eligible Accounts);

               (h) there are no facts,  events or occurrences which would impair
the validity,  enforceability  or  collectability of such Accounts or reduce the
amount payable or delay payment thereunder;

               (i) such  Accounts are subject to the first  priority,  valid and
perfected security interest of Lender and any goods giving rise thereto are not,
and were not at the time of the sale thereof,  subject to any liens except those
permitted in this Agreement;

               (j) neither the account debtor nor any officer or employee of the
account debtor with respect to such Accounts is an officer, employee or agent of
or affiliated with Borrowers directly

                                             -4-


<PAGE>



or indirectly by virtue of family membership, ownership, control,
management or otherwise;

               (k) the account debtors with respect to such Accounts are not any
foreign  government,   the  United  States  of  America,  any  State,  political
subdivision,  department,  agency or  instrumentality  thereof,  unless,  if the
account  debtor  is  the  United  States  of  America,   any  State,   political
subdivision,  department,  agency  or  instrumentality  thereof,  upon  Lender's
request, the Federal Assignment of Claims Act of 1940, as amended or any similar
State  or  local  law,  if  applicable,  has  been  complied  with  in a  manner
satisfactory to Lender;

               (l) there are no  proceedings  or actions which are threatened or
pending  against the account  debtors with respect to such Accounts  which might
result in any material  adverse  change in any such account  debtor's  financial
condition;

               (m) such Accounts are not subject to any arrangement  between the
account debtor invoiced on such Account and another  person,  whereby such other
person does or is claimed to have an obligation to such invoiced  account debtor
to pay the Account or reimburse  the  invoiced  account  debtor,  in whole or in
part;

               (n) such  Accounts  do not  include  amounts  due from an account
debtor for services  rendered in excess of $250,000 in the  aggregate at any one
time  outstanding for all such Eligible  Accounts of all Borrowers on a combined
basis (but the portion of the Accounts arising from the sale of Inventory may be
deemed Eligible Accounts);

               (o) such Accounts of a single account debtor or its affiliates do
not constitute  more than  twenty-five  (25%) percent of all otherwise  Eligible
Accounts of  Borrowers  or, in  Lender's  discretion,  exercised  in good faith,
thirty-five (35%) percent of all otherwise Eligible Accounts of Borrowers in the
case of any of the  account  debtors  listed on Schedule  1.11(o)  hereof or its
affiliates  (but the portion of the Accounts owed by such account  debtor not in
excess of such percentage may be deemed Eligible Accounts);

               (p) such  Accounts  are not  owed by an  account  debtor  who has
Accounts  unpaid more than  ninety  (90) days (or, in the case of such  Accounts
owed by L'eggs Products,  Inc., more than one hundred twenty (120) days),  after
the date of the original  invoice for them which  constitute (i) more than fifty
(50%) percent of the total Accounts owed to Borrowers by such account debtor, or
(ii) in the case of any of the account debtors listed on Schedule 1.11(o) hereto
("Scheduled  Account Debtors") during any time when the Eligible Accounts of all
Borrowers  owed by such  Scheduled  Account  Debtor  exceeds  twenty-five  (25%)
percent  of  all  otherwise  Eligible  Accounts  of  all  Borrowers,  more  than
thirty-three  (33%) percent of the total  Accounts owed to all Borrowers by such
Scheduled Account Debtor;

               (q)  such  Accounts  are  owed by  account  debtors  whose  total
indebtedness  to Borrowers does not exceed the credit limit with respect to such
account debtors as determined in good faith by

                                             -5-


<PAGE>



Lender from time to time (but the portion of the  Accounts not in excess of such
credit limit may be deemed Eligible Accounts); and

               (r) such Accounts are owed by account debtors deemed creditworthy
at all times by Lender, as determined by Lender in good faith.

General criteria for Eligible  Accounts may be established and revised from time
to time by Lender in good faith.  Any Accounts  which are not Eligible  Accounts
shall nevertheless be part of the Collateral.

       1.12 "Eligible Additional Real Property" shall mean Real Property located
in the  Commonwealth  of  Pennsylvania  that is  purchased  for all  cash by HMG
Manufacturing  from a non-affiliated  party after the date hereof,  suitable and
intended to be used by such Borrower in such Borrower's manufacturing operations
and as to which good and marketable title has passed to such Borrower.

       1.13 "Eligible Cash  Equivalents"  shall mean, as to HMG Worldwide,  Cash
Equivalents  owned by HMG  Worldwide  that are and continue to be  acceptable to
Lender in good faith based on the following criteria:

               (a)  such Cash Equivalents are held in the Custodial Account;

               (b)  such Cash Equivalents are subject to the first priority,
valid and perfected security interest of Lender;

               (c)  Lender   shall  have   received,   in  form  and   substance
satisfactory  to  Lender,  and there  shall  remain in full  force and  effect a
Custodial Account Agreement.

       1.14 "Eligible  Inventory" shall mean, as to each Borrower,  Inventory of
such  Borrower  consisting  of  finished  goods held for resale in the  ordinary
course  of the  business  of such  Borrower  supported  by a valid,  signed  and
confirmed  purchase order for such Inventory,  and which Inventory is acceptable
to Lender based on the criteria set forth below. In general,  Eligible Inventory
shall not  include (a)  finished  goods  other than  finished  point-of-purchase
merchandising  display  systems,  (b) raw materials,  (c)  work-in-process;  (d)
components  which are not part of finished goods; (e) spare parts for equipment;
(f)  packaging  and shipping  materials;  (g) supplies  used or consumed in such
Borrower's  business;  (h)  Inventory  at  premises  other than those  owned and
controlled  by a Borrower,  except if Lender shall have received an agreement in
writing  from the person in  possession  of such  Inventory  and/or the owner or
operator  of  such  premises  in  form  and  substance  satisfactory  to  Lender
acknowledging  Lender's  first  priority  security  interest  in the  Inventory,
waiving  security  interests and claims by such person against the Inventory and
permitting  Lender  access to, and the right to remain on, the premises so as to
exercise  Lender's  rights and remedies and otherwise deal with the  Collateral;
(i)  Inventory  subject  to a security  interest  or lien in favor of any person
other than Lender,  except those (if any) permitted in this Agreement;  (j) bill
and hold goods;  (k)  unserviceable,  obsolete or slow moving  Inventory  (which
includes,

                                             -6-


<PAGE>



without  limitation,  finished  goods that have  remained  on hand more than one
hundred  twenty  (120)  days  following  their   acquisition  or  production  by
Borrowers,  whether or not such  Inventory is subject to a  subsisting  purchase
order);  (l)  Inventory  which is not subject to the first  priority,  valid and
perfected  security interest of Lender;  (m) returned,  damaged and/or defective
Inventory; and (n) Inventory purchased or sold on consignment.  General criteria
for  Eligible  Inventory  may be  established  and revised  from time to time by
Lender in good  faith.  Any  Inventory  which is not  Eligible  Inventory  shall
nevertheless be part of the Collateral.

       1.15 "Environmental Laws" shall mean all federal, state, district,  local
and foreign laws, rules, regulations,  ordinances,  and consent decrees relating
to health, safety, hazardous substances, pollution and environmental matters, as
now or at any time hereafter in effect,  applicable to any  Borrower's  business
and  facilities  (whether  or not  owned  by it),  including  laws  relating  to
emissions,   discharges,   releases  or  threatened   releases  of   pollutants,
contamination, chemicals, or hazardous, toxic or dangerous substances, materials
or wastes into the  environment  (including,  without  limitation,  ambient air,
surface  water,  ground water,  land surface or subsurface  strata) or otherwise
relating  to  the  generation,  manufacture,   processing,   distribution,  use,
treatment, storage, disposal, transport or handling of pollutants, contaminants,
chemicals, or hazardous, toxic or dangerous substances, materials or wastes.

       1.16 "Equipment" shall mean, as to each Borrower,  all of such Borrower's
now owned and hereafter acquired  equipment,  machinery,  computers and computer
hardware and software (whether owned or licensed),  vehicles,  tools, furniture,
fixtures,  all  attachments,  accessions  and property now or hereafter  affixed
thereto or used in connection  therewith,  and  substitutions  and  replacements
thereof, wherever located.

       1.17 "ERISA"  shall mean the United  States  Employee  Retirement  Income
Security Act of 1974, as the same now exists or may hereafter  from time to time
be amended,  modified,  recodified  or  supplemented,  together  with all rules,
regulations and interpretations thereunder or related thereto.

       1.18 "ERISA  Affiliate"  shall mean any person  required to be aggregated
with Borrower or any of its Subsidiaries under Sections 414(b),  414(c),  414(m)
or 414(o) of the Code.

       1.19 "Event of Default"  shall mean the  occurrence  or  existence of any
event or condition described in Section 10.1 hereof.

       1.20  "Excess  Availability"  shall mean the  amount,  as  determined  by
Lender, calculated at any time, equal to:

               (a) the  lesser  of: (i) the  aggregate  amount of the  Revolving
Loans  available to Borrowers  as of such time based on the  applicable  lending
formulas  set forth in Section  2.1(a)  hereof,  as  determined  by Lender,  and
subject to the sublimits and Availability Reserves from time to time established
by Lender  hereunder,  and (ii) the Maximum  Credit,  less the then  outstanding
principal amount of the Term Loans, minus

                                             -7-


<PAGE>



               (b) the sum of: (i) the amount of all then outstanding and unpaid
Obligations (but not including for this purpose the then  outstanding  principal
amount  of the  Term  Loans),  plus  (ii)  the  aggregate  amount  of  all  then
outstanding and unpaid trade payables of Borrowers which are past due as of such
time.

       1.21 "Financing Agreements" shall mean, collectively,  this Agreement and
all notes,  guarantees,  mortgages,  security  agreements and other  agreements,
documents and instruments now or at any time hereafter executed and/or delivered
by any Borrower or any Obligor in connection  with this  Agreement,  as the same
now  exist  or may  hereafter  be  amended,  modified,  supplemented,  extended,
renewed, restated or replaced.

       1.22 "GAAP" shall mean generally  accepted  accounting  principles in the
United  States of  America  as in  effect  from time to time as set forth in the
opinions and pronouncements of the Accounting  Principles Board and the American
Institute of Certified Public  Accountants and the statements and pronouncements
of the  Financial  Accounting  Standards  Boards  which  are  applicable  to the
circumstances as of the date of determination consistently applied, except that,
for purposes of Section 9.15 hereof,  GAAP shall be  determined  on the basis of
such  principles in effect on the date hereof and consistent  with those used in
the preparation of the audited financial statements delivered to Lender prior to
the date hereof.

       1.23 "Hazardous  Materials" shall mean any hazardous,  toxic or dangerous
substances,  materials and wastes, including,  without limitation,  hydrocarbons
(including   naturally   occurring  or  man-made  petroleum  and  hydrocarbons),
flammable  explosives,  asbestos,  urea  formaldehyde  insulation,   radioactive
materials,   biological  substances,   polychlorinated  biphenyls,   pesticides,
herbicides  and any  other  kind  and/or  type  of  pollutants  or  contaminants
(including, without limitation, materials which include hazardous constituents),
sewage,  sludge,  industrial slag, solvents and/or any other similar substances,
materials,  or wastes and  including any other  substances,  materials or wastes
that are or become  regulated under any  Environmental  Law (including,  without
limitation  any that are or become  classified  as  hazardous or toxic under any
Environmental Law).

       1.24 "Information Certificate" shall mean the Information  Certificate(s)
of Borrowers  constituting Exhibit A hereto containing material information with
respect to  Borrowers,  their  business  and assets  provided by or on behalf of
Borrowers to Lender in connection with the preparation of this Agreement and the
other Financing Agreements and the financing arrangements provided for herein.

       1.25 "Initial Term Loans" shall mean the term loans made by Lender to HMG
In-Store and HMG Manufacturing as provided for in Section 2.3 hereof.

       1.26 "Inventory" shall mean, as to each Borrower,  all of such Borrower's
now owned and  hereafter  existing or acquired raw  materials,  work in process,
finished goods and all other  inventory of whatsoever  kind or nature,  wherever
located.

                                             -8-


<PAGE>



       1.27 "Letter of Credit  Accommodations" shall mean the letters of credit,
merchandise  purchase or other guaranties which are from time to time either (a)
issued or opened by Lender for the account of any Borrower or any Obligor or (b)
with respect to which Lender has agreed to indemnify the issuer or guaranteed to
the issuer the performance by a Borrower of its obligations to such issuer.

       1.28    "Loans" shall mean the Revolving Loans and the Term Loans.

       1.29 "Market Value" shall mean, with respect to Cash Equivalents or other
property held in or credited to the Custodial Account, the amount which could be
realized upon the immediate sale of such Cash Equivalents or other property, net
of all  commissions  and expenses that would be payable in connection  with such
sale, as determined by Lender based on information supplied from time to time at
Lender's request by the Custodian Bank or other source deemed reliable by Lender
in good faith.

       1.30    "Maximum Credit" shall mean the amount of $12,000,000.

       1.31 "Mortgages"  shall mean any mortgage,  deed of trust, deed to secure
debt or other  instrument  now or  hereafter  granting a lien in favor of Lender
upon any  Real  Property  of a  Borrower,  including,  without  limitation,  the
Open-End Mortgage and Security  Agreement,  dated of even date herewith,  by HMG
Manufacturing  in favor of Lender with respect to the Real  Property and related
assets  of  HMG  Manufacturing  located  at  234  South  8th  Street,   Reading,
Pennsylvania,  as the same now  exist or may  hereafter  be  amended,  modified,
supplemented, extended, renewed, restated or replaced.

       1.32 "Net Amount of  Eligible  Accounts"  shall mean the gross  amount of
Eligible Accounts less (a) sales, excise or similar taxes included in the amount
thereof and (b) returns, discounts, claims, credits and allowances of any nature
at any time  issued,  owing,  granted,  outstanding,  available  or claimed with
respect thereto.

       1.33 "Net  Income"  shall  mean as to any  Person,  with  respect  to any
period,  the net income (loss) of such Person for such period  (excluding to the
extent  included  therein any  extraordinary  gains) after deducting all charges
which  should be  deducted  before  arriving  at the net income  (loss) for such
period,  all in accordance with GAAP and after deducting the Provision for Taxes
for such period.  For the purposes of this  definition,  (a) net income excludes
any gain (but not loss)  together with any related  Provision for Taxes for such
gain (but not loss)  realized upon the sale or other  disposition  of any assets
that  are not  sold in the  ordinary  course  of  business  (including,  without
limitation,  dispositions pursuant to sale and leaseback transactions) or of any
capital  stock of such Person or a subsidiary  of such Person and any net income
realized  as a result of changes in  accounting  principles  or the  application
thereof to such  Person,  and (b) the term  "Provision  for Taxes" shall mean an
amount equal to all taxes imposed on or measured by net income, whether federal,
state or local, and whether foreign or domestic, that are paid or payable by any
Person in respect of any period in accordance with GAAP.

                                             -9-


<PAGE>



       1.34  "Obligations"  shall  mean any and all  Revolving  Loans,  the Term
Loans,  Letter of Credit  Accommodations and all other obligations,  liabilities
and  indebtedness  of every  kind,  nature and  description  owing by any or all
Borrowers  to Lender  and/or  its  affiliates,  including  principal,  interest,
charges,  fees,  costs and expenses,  however  evidenced,  whether as principal,
surety, endorser,  guarantor or otherwise,  whether arising under this Agreement
or otherwise, whether now existing or hereafter arising, whether arising before,
during or after the initial or any renewal  term of this  Agreement or after the
commencement  of any case with respect to any or all Borrowers  under the United
States Bankruptcy Code or any similar statute (including the payment of interest
and other amounts which would accrue and become due but for the  commencement of
such case,  whether or not such  amounts are allowed or allowable in whole or in
part in such case), whether direct or indirect, absolute or contingent, joint or
several,  due or not due,  primary or  secondary,  liquidated  or  unliquidated,
secured or unsecured, and however acquired by Lender.

       1.35 "Obligor" shall mean any guarantor,  endorser,  acceptor,  surety or
other person liable on or with respect to the Obligations or who is the owner of
any property which is security for the Obligations, other than a Borrower.

       1.36  "Payment  Account"  shall have the meaning set forth in Section 6.3
hereof.

       1.37 "Person" or "person" shall mean any individual, sole proprietorship,
partnership,  corporation  (including any corporation  which elects subchapter S
status under the Code, limited liability company, limited liability partnership,
business trust,  unincorporated  association,  joint stock  corporation,  trust,
joint venture or other entity or any government or any agency or instrumentality
or political subdivision thereof.

       1.38    "PIDA" shall have the meaning set forth in Section 2.4 (c) (x)
hereof.

       1.39 "PIDA Loans"  shall have the meaning set forth in Section  2.4(c)(x)
hereof.

       1.40  "Prime  Rate"  shall  mean  the  rate  from  time to time  publicly
announced  by  CoreStates  Bank,  N.A.,  or its  successors,  at its  office  in
Philadelphia,  Pennsylvania,  as its prime rate,  whether or not such  announced
rate is the best rate available at such bank.

       1.41 "Real Property"  shall mean, as to each Borrower,  all now owned and
hereafter  acquired  real  property  of  such  Borrower,   including   leasehold
interests,  together  with all  buildings,  structures,  and other  improvements
located thereon and all licenses,  easements and appurtenances relating thereto,
wherever located,  including,  without limitation, the real property and related
assets more particularly described in the Mortgages.

       1.42 "Records"  shall mean, as to each Borrower,  all of such  Borrower's
present and future  books of account of every kind or nature,  purchase and sale
agreements, invoices, ledger cards, bills

                                             -10-


<PAGE>



of lading and other shipping evidence,  statements,  correspondence,  memoranda,
credit files and other data relating to the  Collateral  or any account  debtor,
together with the tapes,  disks,  diskettes and other data and software  storage
media and devices,  file cabinets or containers in or on which the foregoing are
stored  (including  any rights of such  Borrower  with respect to the  foregoing
maintained with or by any other person).

       1.43  "Revolving  Loans"  shall mean the loans now or  hereafter  made by
Lender to or for the  benefit  of  Borrowers  on a  revolving  basis  (involving
advances, repayments and readvances) as set forth in Section 2.1 hereof.

       1.44  "Tangible  Net Worth" shall mean as to any Person,  at any time, in
accordance with GAAP (except as otherwise  specifically  set forth below),  on a
consolidated  basis for such Person and its  subsidiaries  (if any),  the amount
equal to the difference between:  (i) the aggregate net book value of all assets
of such Person and its subsidiaries, calculating the book value of inventory for
this purpose on a first-in-first-out  basis, after excluding prepaid items, good
will and other  intangible  assets and after deducting from such book values all
appropriate  reserves  in  accordance  with GAAP  (including  all  reserves  for
doubtful receivables, obsolescence,  depreciation and amortization) and (ii) the
aggregate amount of the  indebtedness  and other  liabilities of such Person and
its subsidiaries (including tax and other proper accruals).

       1.45  "Term Loans" shall mean, individually and collectively, the Initial
Term Loans and the Additional Real Property Term Loan.

       1.46 "Value"  shall mean,  as  determined  by Lender in good faith,  with
respect to  Inventory,  the lower of (a) cost  computed on a  first-in-first-out
basis in accordance with GAAP or (b) market value.

SECTION 2.     CREDIT FACILITIES

       2.1     Revolving Loans.

               (a)  Subject  to and  upon the  terms  and  conditions  contained
herein, Lender agrees to make Revolving Loans to each Borrower from time to time
in amounts requested by such Borrower up to the amount equal to the sum of:

                      (i)     in the case of HMG Worldwide, one hundred
               (100%) percent of the Market Value of the Eligible Cash
               Equivalents of HMG Worldwide;

                      (ii)    eighty-five (85%) percent of the Net
               Amount of Eligible Accounts of such Borrower, plus

                   (iii) sixty (60%) percent of the Value of Eligible  Inventory
               of such  Borrower,  subject  to a  sublimit  of  $750,000  in the
               aggregate for all Borrowers, less

                      (iv)    any Availability Reserves.

                                             -11-


<PAGE>



               (b) Lender may, in its  discretion,  from time to time,  upon not
less than five (5) days prior  notice to HMG  Worldwide,  (i) reduce the lending
formula with respect to Eligible  Accounts to the extent that Lender  determines
in good faith that: (A) the dilution with respect to the Accounts for any period
(based on the ratio of (1) the aggregate  amount of reductions in Accounts other
than as a result of payments in cash to (2) the aggregate amount of total sales)
has  increased  in any  material  respect or may be  reasonably  anticipated  to
increase in any material  respect above  historical  levels,  or (B) the general
creditworthiness  of account  debtors  has  declined  or (ii) reduce the lending
formula(s)  with  respect  to  Eligible  Inventory  to the  extent  that  Lender
determines that: (A) the number of days of the turnover of the Inventory for any
period has changed in any material  respect or (B) the liquidation  value of the
Eligible Inventory,  or any category thereof,  has decreased,  or (C) the nature
and quality of the Inventory has deteriorated.  In determining whether to reduce
the lending formula(s), Lender may consider events, conditions, contingencies or
risks which are also  considered  in  determining  Eligible  Accounts,  Eligible
Inventory or in establishing Availability Reserves.

               (c) Except in Lender's  discretion,  the aggregate  amount of the
Loans and the Letter of Credit Accommodations  outstanding at any time shall not
exceed  the  Maximum  Credit.  In the event that the  outstanding  amount of any
component of the Loans,  or the aggregate  amount of the  outstanding  Loans and
Letter of Credit Accommodations,  exceed the amounts available under the lending
formulas,  the sublimit for Letter of Credit Accommodations set forth in Section
2.2(d) or the Maximum Credit, as applicable,  such event shall not limit,  waive
or otherwise  affect any rights of Lender in that  circumstance or on any future
occasions and Borrowers shall,  upon demand by Lender,  which may be made at any
time or from time to time,  immediately repay to Lender the entire amount of any
such excess(es) for which payment is demanded.

               (d) For purposes only of applying the sublimit on Revolving Loans
based on Eligible  Inventory pursuant to Section  2.1(a)(iii),  Lender may treat
the  amount  of  its  reliance  on  Eligible  Inventory  to be  purchased  under
outstanding  Letter  of  Credit  Accommodations  as a  Revolving  Loan  based on
Eligible  Inventory pursuant to Section  2.1(a)(iii).  In determining the actual
amount of such  reliance,  the  outstanding  Revolving  Loans  and  Availability
Reserves in respect of each Borrower shall be attributed first to any components
of the lending formulas in Section 2.1(a) that are not subject to such sublimit,
before being  attributed to the  components of the lending  formulas  subject to
such sublimit.

               (e)  Notwithstanding  anything to the contrary  contained in this
Section 2.1 or Section 2.2, Lender shall not make any Revolving Loans or provide
or arrange for Letter of Credit  Accommodations  to any Borrower  based upon the
Value of  Eligible  Inventory  of such  Borrower  until  such  time as Lender is
satisfied, in its sole discretion, with the internal Inventory recordkeeping and
reporting  procedures  established  and maintained by all  Borrowers;  provided,
however,  that  during the period  commencing  on the date  hereof and ending on
January 31, 1997, if a Borrower shall provide Lender with adequate  records with
regard to any otherwise

                                             -12-


<PAGE>



Eligible  Inventory  consisting of finished goods purchased and received by such
Borrower  under Letter of Credit  Accommodations  provided or arranged by Lender
for the  account  of such  Borrower,  such  Eligible  Inventory  shall be deemed
eligible  for lending  purposes  during such  period,  but in no event shall the
amount  of  Revolving  Loans  available  based  on the  Value  of such  Eligible
Inventory  exceed  the  amount  of  $200,000  in the  aggregate  at any one time
outstanding  during such period for all  Borrowers  on a combined  basis.  After
January 31, 1997, the proviso to the preceding sentence shall be inapplicable.

       2.2     Letter of Credit Accommodations.

               (a)  Subject  to,  and upon the  terms and  conditions  contained
herein,  at the request of a Borrower,  Lender  agrees to provide or arrange for
Letter of Credit  Accommodations  for the  account of such  Borrower  containing
terms and conditions  acceptable to Lender and the issuer thereof.  Any payments
made by Lender to any issuer thereof and/or related  parties in connection  with
the Letter of Credit  Accommodations shall constitute additional Revolving Loans
to such Borrower pursuant to this Section 2.

               (b) In addition to any charges,  fees or expenses  charged by any
bank or issuer in  connection  with the  Letter of Credit  Accommodations,  each
Borrower  shall pay to Lender a letter of credit  fee at a rate equal to one and
one-half (1.5%) percent per annum on the daily outstanding balance of the Letter
of  Credit   Accommodations  issued  for  its  account  outstanding  during  the
immediately  preceding  month (or part  thereof),  payable  in arrears as of the
first day of each  month,  except  that each  Borrower  shall pay to Lender such
letter of credit fee, at Lender's  option,  without  notice,  at a rate equal to
three and one-half  (3.5%) percent per annum on such daily  outstanding  balance
for: (i) the period from and after the date of termination or non-renewal hereof
until  Lender  has  received   full  and  final   payment  of  all   Obligations
(notwithstanding  entry of judgment  against any  Borrower)  and (ii) the period
from and after the date of the  occurrence of an Event of Default for so long as
such Event of Default is  continuing  as  determined  by Lender.  Such letter of
credit fee shall be  calculated  on the basis of a three hundred sixty (360) day
year and actual days elapsed and the obligation of such Borrower to pay such fee
shall survive the termination or non-renewal of this Agreement.

               (c) No Letter of Credit  Accommodations  shall be  available to a
Borrower  unless on the date of the  proposed  issuance  of any Letter of Credit
Accommodations,  the Revolving Loans available to such Borrower  (subject to the
Maximum Credit and any Availability  Reserves) are equal to or greater than: (i)
if the proposed Letter of Credit  Accommodation is for the purpose of purchasing
Eligible  Inventory,  the sum of (A) forty  (40%)  percent  of the Value of such
Eligible Inventory, plus (B) freight, taxes, duty and other amounts which Lender
estimates  must be paid in connection  with such  Inventory upon arrival and for
delivery to one of such Borrower's  locations for Eligible  Inventory within the
United States of America and (ii) if the proposed Letter of Credit Accommodation
is for any other  purpose,  an amount equal to one hundred (100%) percent of the
face amount of the Letter of Credit  Accommodation and all other commitments and
obligations made or

                                             -13-


<PAGE>



incurred by Lender  with  respect  thereto.  Effective  on the  issuance of each
Letter of Credit Accommodation,  an Availability Reserve shall be established in
the applicable amount set forth in Section 2.2(c)(i) or Section 2.2(c)(ii).

               (d) Except in Lender's discretion,  the amount of all outstanding
Letter of Credit  Accommodations  and all other commitments and obligations made
or incurred by Lender in connection  therewith shall not at any time exceed,  in
the aggregate  for all  Borrowers,  $1,000,000.  At any time an Event of Default
exists or has occurred and is continuing,  upon Lender's request, Borrowers will
either furnish cash  collateral to secure the  reimbursement  obligations to the
issuer in connection  with any Letter of Credit  Accommodations  or furnish cash
collateral  to Lender  for the  Letter of Credit  Accommodations,  and in either
case, the Revolving Loans otherwise  available to Borrowers shall not be reduced
as provided in Section 2.2(c) to the extent of such cash collateral.

               (e) Borrowers  shall  indemnify and hold Lender harmless from and
against any and all losses,  claims,  damages,  liabilities,  costs and expenses
which  Lender  may  suffer  or incur in  connection  with any  Letter  of Credit
Accommodations  and any  documents,  drafts  or  acceptances  relating  thereto,
including any losses, claims,  damages,  liabilities,  costs and expenses due to
any action  taken by any issuer or  correspondent  with respect to any Letter of
Credit  Accommodation.  Borrowers  assume all risks with  respect to the acts or
omissions  of  the  drawer  under  or   beneficiary  of  any  Letter  of  Credit
Accommodation  and for such purposes the drawer or  beneficiary  shall be deemed
the agent of  Borrowers.  Borrowers  assume all risks for, and agree to pay, all
foreign, Federal, State and local taxes, duties and levies relating to any goods
subject  to any  Letter of Credit  Accommodations  or any  documents,  drafts or
acceptances  thereunder.  Borrowers hereby release and hold Lender harmless from
and against any acts, waivers,  errors,  delays or omissions,  whether caused by
Borrowers,  by any  issuer or  correspondent  or  otherwise  with  respect to or
relating to any Letter of Credit  Accommodation.  The provisions of this Section
2.2(e)  shall  survive  the  payment  of  Obligations  and  the  termination  or
non-renewal of this Agreement.

               (f) Nothing  contained  herein  shall be deemed or  construed  to
grant  Borrowers  any right or  authority  to pledge the credit of Lender in any
manner. Lender shall have no liability of any kind with respect to any Letter of
Credit  Accommodation  provided by an issuer other than Lender unless Lender has
duly  executed and  delivered to such issuer the  application  or a guarantee or
indemnification in writing with respect to such Letter of Credit  Accommodation.
Borrowers shall be bound by any interpretation  made in good faith by Lender, or
any other  issuer or  correspondent  under or in  connection  with any Letter of
Credit  Accommodation  or  any  documents,  drafts  or  acceptances  thereunder,
notwithstanding   that  such   interpretation   may  be  inconsistent  with  any
instructions  of Borrowers.  Lender shall have the sole and exclusive  right and
authority  to,  and  Borrowers  shall  not:  (i) at any time an Event of Default
exists or has occurred and is  continuing,  (A) approve or resolve any questions
of non-compliance of documents, (B) give any instructions as to acceptance or

                                             -14-


<PAGE>



rejection of any documents or goods or (C) execute any and all  applications for
steamship or airway guaranties,  indemnities or delivery orders, and (ii) at all
times, (A) grant any extensions of the maturity of, time of payment for, or time
of presentation of, any drafts,  acceptances, or documents, and (B) agree to any
amendments, renewals, extensions, modifications, changes or cancellations of any
of  the  terms  or  conditions  of any of the  applications,  Letter  of  Credit
Accommodations, or documents, drafts or acceptances thereunder or any letters of
credit  included in the  Collateral.  Lender may take such actions either in its
own name or in the name of a Borrower.

               (g) Any  rights,  remedies,  duties  or  obligations  granted  or
undertaken by a Borrower to any issuer or  correspondent  in any application for
any  Letter of Credit  Accommodation,  or any  other  agreement  in favor of any
issuer or correspondent relating to any Letter of Credit Accommodation, shall be
deemed to have been granted or undertaken by such Borrower to Lender. Any duties
or  obligations  undertaken  by Lender to any  issuer  or  correspondent  in any
application  for any Letter of Credit  Accommodation,  or any other agreement by
Lender in favor of any issuer or correspondent  relating to any Letter of Credit
Accommodation,  shall  be  deemed  to have  been  undertaken  by the  applicable
Borrower to Lender and to apply in all respects to such Borrower.

       2.3     Initial Term Loans.

               (a) Lender is, on the date hereof, making an Initial Term Loan to
HMG In-Store in the original principal amount of $50,000.  The Initial Term Loan
to HMG In-Store is (i)  evidenced  by a Term  Promissory  Note in such  original
principal  amount  duly  executed  and  delivered  by  HMG  In-Store  to  Lender
concurrently  herewith;  (ii) to be repaid,  together  with  interest  and other
amounts,  in accordance with this Agreement,  such Term Promissory Note, and the
other Financing Agreements; and (iii) secured by all of the Collateral.

               (b) Lender is, on the date  hereof,  also making an Initial  Term
Loan to HMG  Manufacturing  in the original  principal  amount of $290,000.  The
Initial Term Loan to HMG  Manufacturing  is (i)  evidenced by a Term  Promissory
Note in such  original  principal  amount duly  executed  and  delivered  by HMG
Manufacturing to Lender concurrently herewith;  (ii) to be repaid, together with
interest  and  other  amounts,  in  accordance  with this  Agreement,  such Term
Promissory Note and the other Financing Agreements;  and (iii) secured by all of
the Collateral.

       2.4  Additional Real Property Term Loan.

               (a)  Subject  to,  and upon the  terms and  conditions  contained
herein,  including the Maximum Credit, Lender agrees to make the Additional Real
Property  Term Loan to HMG  Manufacturing  in a single  advance  in  respect  of
Eligible  Additional  Real  Property,  in an amount of up to the  lesser of: (i)
$750,000 and (ii) sixty (60%) percent of the "quick sale"  liquidation  value of
such Eligible  Additional  Real  Property,  as set forth in an appraisal  report
addressed  to  Lender,  or upon which  Lender is  expressly  permitted  to rely,
prepared at Borrowers' expense, by independent

                                             -15-


<PAGE>



appraisers acceptable to Lender,  having form, scope and methodology  acceptable
to Lender;  provided,  however, that the Additional Real Property Term Loan will
not be made available unless all of the conditions set forth below are fulfilled
and such loan is made prior to the first anniversary of the date hereof.

               (b) The proceeds of the Additional  Real Property Term Loan shall
be used by HMG Manufacturing, together with other funds of HMG Manufacturing (up
to a total  amount,  including  the  Additional  Real  Property  Term  Loan,  of
$1,250,000),  to pay the purchase price to acquire good and marketable  title to
the Eligible  Additional  Real  Property,  free and clear of all liens,  claims,
security  interests  and  other  encumbrances,  except in favor of  Lender.  The
Additional  Real Property Term Loan shall be (i) evidenced by a Term  Promissory
Note in the form  annexed  hereto as  Exhibit  B, which  shall be  executed  and
delivered by HMG  Manufacturing  to evidence the  Additional  Real Property Term
Loan made by Lender to such Borrower,  concurrently with the disbursement of the
Additional Real Property Term Loan, (ii) repaid together with interest and other
amounts payable  thereunder,  and in accordance with the provisions of such Term
Promissory Note and the other  Financing  Agreements and (iii) secured by all of
the Collateral, including the Eligible Additional Real Property.

               (c) Without  limiting  the  foregoing,  the  availability  of the
Additional Real Property Term Loan to HMG Manufacturing  shall be subject to the
satisfaction of each of the following additional conditions precedent:

                      (i)     Lender shall have received from such Borrower,
prior to  September  22, 1997 (A) not less than thirty (30) days' prior  written
notice of the requested  Additional Real Property Term Loan,  which notice shall
specify  the  following:  (I) the  proposed  date and  amount  of the  requested
Additional Real Property Term Loan, (II) a description of the proposed  Eligible
Additional Real Property and (III) the purchase price of the Eligible Additional
Real  Property;  and (B) a copy of the purchase  agreement,  contract of sale or
other similar  agreements  with respect to such  Borrower's  acquisition  of the
Eligible Additional Real Property,  together with a copy of the appraisal report
as required under Section 2.4(a) above;

                      (ii)     such Borrower shall have acquired or shall
acquire,  contemporaneously  with  the  disbursement  of  such  Additional  Real
Property Term Loan, good and marketable  title to and possession of the Eligible
Additional  Real  Property,  free and clear of all  liens,  security  interests,
claims or other encumbrances, except for (A) a perfected first priority security
interest  in and lien upon the  Eligible  Additional  Real  Property in favor of
Lender,  (B) a second priority  security  interest in and lien upon the Eligible
Additional  Real  Property  securing  certain of the PIDA Loans  which  security
interest and lien is subordinate  to the security  interest and liens therein of
Lender and is otherwise  permitted in Section  9.8(g)  hereof and (C)  customary
utility and other  easements  and  encroachments,  of the type  permitted  under
Section 9.8(d) hereof,  including, if applicable,  the easement to be granted by
HMG Manufacturing to Albright College as described in Exhibit C hereto;

                                             -16-


<PAGE>



                      (iii)  Lender shall have received a Phase I
environmental  audit of the Eligible  Additional  Real Property  conducted by an
independent  environmental  engineering firm acceptable to Lender,  and in form,
scope  and  methodology  satisfactory  to  Lender,  confirming,  as  of  a  date
acceptable  to Lender (A) that the Eligible  Additional  Real  Property does not
contain any Hazardous Materials, (B) the seller of such Eligible Additional Real
Property is in compliance with all material  applicable  Environmental  Laws and
(C) the absence of any material potential or actual liability of such seller for
any  remedial  action with respect to any  environmental  condition or any other
material  environmental  problem with respect to the  Eligible  Additional  Real
Property;

                      (iv)    Lender shall have received an Open-End Mortgage
and Security Agreement in form and substance satisfactory to Lender, which shall
be executed and  delivered by such  Borrower to grant in favor of Lender a first
priority  mortgage  lien upon and security  interest in the Eligible  Additional
Real Property and related assets;

                      (v)     Lender shall have received, in form and
substance  satisfactory to Lender,  a valid and effective title insurance policy
issued by a title insurance  company and agent acceptable to Lender (A) insuring
the  priority,  amount and validity of the Mortgage with respect to the Eligible
Additional Real Property,  (B) insuring  against matters that would be disclosed
by surveys and (C) containing any legally available endorsements,  assurances or
affirmative coverage requested by Lender for protection of its interests;

                      (vi)     Lender shall have received, in form and
substance  satisfactory  to  Lender,  financial  projections  of  such  Borrower
evidencing that such Borrower has sufficient cash flow to service the additional
indebtedness  and costs incurred in connection with the Additional Real Property
Term Loan and the PIDA Loans (as defined below);

                      (vii)  Lender shall have received the most recent
unaudited  financial  statements of Borrowers  prepared in accordance  with GAAP
required  to be  delivered  to  Lender  pursuant  to  Section  9.6(a)(i)  hereof
reflecting that, in the determination of Lender,  Borrowers have met or exceeded
their financial  projections,  as set forth on the HMG Worldwide Budget Analysis
1997,  dated as of  October  10,  1996,  delivered  to Lender  prior to the date
hereof;

                      (viii)  Borrowers shall, in the aggregate, have
Excess  Availability  as determined by Lender,  as of the date of the Additional
Real  Property  Term Loan,  in an amount not less than  $500,000,  after  giving
effect to the disbursement of the Additional Real Property Term Loan and payment
of or provision for the fees and expenses of the transaction;

                      (ix)  no Event of Default or event or condition
which,  with notice or passage of time,  or both,  would  constitute an Event of
Default,  shall exist or have  occurred  and,  if required by Lender,  Borrowers
shall have delivered a certificate signed on behalf of each Borrower by a senior
officer of each Borrower

                                             -17-


<PAGE>



certifying the absence of any such Event of Default, event or
condition;

                      (x)     HMG Manufacturing shall have obtained, on terms
and  conditions  satisfactory  to Lender,  an  additional  loan or loans  either
directly from a Pennsylvania Industrial Development Authority ("PIDA") or from a
financial  institution  which loans are  sponsored or guaranteed by PIDA, in the
aggregate   amount  of  not  less  than  $500,000  (the  "PIDA  Loans"),   which
indebtedness,  to the  extent  secured  by a  mortgage  lien  upon the  Eligible
Additional  Real Property,  is subject to and subordinate in right of payment to
the right of Lender to receive the prior  indefeasible  payment and satisfaction
in full payment of all of the Obligations and which indebtedness,  to the extent
secured  by a  mortgage  lien upon the Real  Property  located  at 234 South 8th
Street,  Reading,  Pennsylvania,  is in compliance with the terms and conditions
set forth in Section 9.8(f) hereof, in each case pursuant to such  subordination
and intercreditor  agreements as are required to be delivered to Lender pursuant
hereto;

                      (xi)  Lender shall have received an original
executed  Term  Promissory  Note in the form of Exhibit B hereto,  appropriately
completed,  inter  alia,  to set  forth  the date and  principal  amount  of the
Additional  Real  Property Term Loan and to set forth the amount of each monthly
principal  installment  in the amount of  one-sixtieth  (1/60th) of the original
principal  amount of such  Additional  Real Property Term Loan, and to set forth
the dates of the first monthly  payments of principal and interest as determined
by  Lender,  such  Term  Promissory  Note to be duly  authorized,  executed  and
delivered  by such  Borrower  to Lender,  which note  shall  thereupon  evidence
obligations of such Borrower  unconditionally  owed to Lender,  without  offset,
defense or counterclaim of any kind, nature or description whatsoever; and

                      (xii)  Lender shall have received, in form and
substance  satisfactory to Lender,  such opinion letters of counsel to Borrowers
with respect to the Mortgage upon the Eligible Additional Real Property and such
other matters as Lender may request.

       2.5  Availability  Reserves.  All Revolving Loans otherwise  available to
Borrowers pursuant to the lending formulas and subject to the Maximum Credit and
other applicable limits hereunder shall be subject to Lender's  continuing right
to establish and revise Availability Reserves.

SECTION 3.     INTEREST AND FEES

       3.1     Interest.

               (a) Subject to a one time  reduction in the rates  referred to in
Section 3.1(c) below,  Borrowers shall pay to Lender interest on the outstanding
principal  amount  of the  non-contingent  Obligations  at the  rate of one (1%)
percent per annum in excess of the Prime Rate,  except that Borrowers  shall pay
to Lender  interest,  at Lender's option,  without notice,  at the rate of three
(3%) percent per annum in excess of the Prime Rate:  (i) on the non-  contingent
Obligations  for (A) the  period  from  and  after  the date of  termination  or
non-renewal hereof until such time as Lender has received full and final payment
of  all  such  Obligations   (notwithstanding  entry  of  judgment  against  any
Borrower),  and (B) the period from and after the date of the  occurrence  of an
Event  of  Default  for so  long as such  Event  of  Default  is  continuing  as
determined by Lender and (ii) on the Revolving Loans at any time  outstanding to
a Borrower in excess of the amounts  available to such Borrower  under Section 2
(whether  or not such  excess(es),  arise or are made with or  without  Lender's
knowledge or consent and whether made before or after an Event of Default).  All
interest  accruing  hereunder on and after the  occurrence  of any of the events
referred  to in  Sections  3.1(a)(i)  or  3.1(a)(ii)  above  shall be payable on
demand.

               (b) Interest  shall be payable by Borrowers to Lender  monthly in
arrears  not  later  than the  first  day of each  calendar  month  and shall be
calculated  on the basis of a three hundred sixty (360) day year and actual days
elapsed. The interest rate shall increase or decrease by an amount equal to each
increase or decrease in the Prime Rate  effective  on the first day of the month
after any change in such Prime Rate is announced. The increase or decrease shall
be based on the  Prime  Rate in effect on the last day of the month in which any
such change occurs. In no event shall charges  constituting  interest payable by
Borrowers to Lender exceed the maximum  amount or the rate  permitted  under any
applicable law or regulation,  and if any part or provision of this Agreement is
in contravention of any such law or regulation,  such part or provision shall be
deemed amended to conform thereto.

               (c) The rates of  interest  referred to in Section  3.1(a)  above
shall be  automatically  reduced,  but not more than once, by one-quarter of one
(.25%) percent per annum,  provided,  that, (i) the Net Income of HMG Worldwide,
for its fiscal  year  ending  December  31,  1997 based upon its annual  audited
financial  statements on a  consolidated  basis for such fiscal year received by
Lender,  is greater  than  $250,000  and (ii) as of the  effective  date of such
reduction,  no Event of Default and no event or condition which,  with notice or
passage of time or both,  would  constitute an Event of Default,  shall exist or
have  occurred and be  continuing.  Such interest  rate  reduction  shall become
effective upon delivery and  acceptance of such financial  statements by Lender,
provided the conditions referred to above are then satisfied.

       3.2  Closing  Fee.  Borrowers  shall pay to  Lender as a closing  fee the
amount of $150,000,  which fee shall be fully  earned as of the date hereof,  of
which  $75,000  shall be payable on the date hereof and $75,000 shall be payable
six (6)  months  from the date  hereof;  such  amount to be paid  after the date
hereof shall become  immediately due and payable,  at Lender's option,  upon the
occurrence of an Event of Default.

       3.3 Servicing Fee.  Borrowers  shall pay to Lender  quarterly a servicing
fee in an amount  equal to $6,000  in  respect  of  Lender's  services  for each
calendar  quarter (or part thereof) while this  Agreement  remains in effect and
for so long  thereafter as any of the  Obligations  are  outstanding,  which fee
shall be fully earned as

                                             -18-


<PAGE>



of and payable in advance on the date hereof and on the first day
of each calendar quarter hereafter.

       3.4 Unused Line Fee.  Borrower shall pay to Lender monthly an unused line
fee at a rate equal to  one-half  (.5%)  percent per annum  calculated  upon the
amount by which  $11,000,000  exceeds the average daily principal balance of the
outstanding  Revolving  Loans and  Letter of Credit  Accommodations  during  the
immediately  preceding month (or part thereof) while this Agreement is in effect
and for so long thereafter as any of the Obligations are outstanding,  which fee
shall be payable on the first day of each month in arrears.

SECTION 4.     CONDITIONS PRECEDENT

     4.1   Conditions   Precedent   to  Initial   Loans  and  Letter  of  Credit
Accommodations.  Each of the following is a condition precedent to Lender making
the initial  Loans and  providing  the initial  Letter of Credit  Accommodations
hereunder:

               (a)  Lender   shall  have   received,   in  form  and   substance
satisfactory to Lender,  all releases,  terminations and such other documents as
Lender may request to evidence and  effectuate  the  termination by the existing
lender or lenders to Borrowers of their respective  financing  arrangements with
Borrowers and the  termination and release by it or them, as the case may be, of
any interest in and to any assets and  properties of Borrowers and each Obligor,
duly authorized,  executed and delivered by it or each of them,  including,  but
not limited to, (i) UCC termination  statements for all UCC financing statements
previously  filed by it or any of them or their  predecessors,  as secured party
and any Borrower or any Obligor, as debtor and (ii) satisfactions and discharges
of any  mortgages,  deeds of trust or deeds to secure debt by  Borrowers  or any
Obligor in favor of such  existing  lender or lenders,  in form  acceptable  for
recording in the appropriate government office;

               (b) Lender shall have  received  evidence,  in form and substance
satisfactory  to Lender,  that  Lender has valid  perfected  and first  priority
security interests in and liens upon the Collateral and any other property which
is intended to be security for the  Obligations  or the liability of any Obligor
in respect thereof,  subject only to the security  interests and liens permitted
herein or in the other Financing Agreements;

               (c) all requisite  corporate action and proceedings in connection
with this Agreement and the other Financing  Agreements shall be satisfactory in
form and substance to Lender, and Lender shall have received all information and
copies of all documents,  including  records of requisite  corporate  action and
proceedings  which  Lender may have  requested  in  connection  therewith,  such
documents  where  requested  by  Lender  or  its  counsel  to  be  certified  by
appropriate corporate officers or governmental authorities;

               (d) no material adverse change shall have occurred in the assets,
business or prospects of any  Borrower  since the date of Lender's  latest field
examination  and no change or event shall have  occurred  which would impair the
ability of any Borrower or any Obligor to perform its  obligations  hereunder or
under any of the

                                             -19-


<PAGE>



other Financing Agreements to which it is a party or of Lender to
enforce the Obligations or realize upon the Collateral;

               (e) Lender shall have completed a field review of the Records and
such other  information  with respect to the Collateral as Lender may require to
determine the amount of Revolving Loans available to each Borrower,  the results
of which shall be satisfactory to Lender,  not more than seven (7) business days
prior to the date hereof;

               (f)  Lender   shall  have   received,   in  form  and   substance
satisfactory  to  Lender,  all  consents,  waivers,  acknowledgments  and  other
agreements  from third persons  which Lender may deem  necessary or desirable in
order to permit,  protect and perfect its  security  interests in and liens upon
the Collateral or to effectuate the provisions or purposes of this Agreement and
the  other  Financing   Agreements,   including   acknowledgements  by  lessors,
mortgagees and  warehousemen of Lender's  security  interests in the Collateral,
waivers by such persons of any security interests, liens or other claims by such
persons to the Collateral and  agreements  permitting  Lender access to, and the
right to remain on, the  premises  to  exercise  its  rights  and  remedies  and
otherwise deal with the Collateral;

               (g)  Lender   shall  have   received,   in  form  and   substance
satisfactory to Lender,  an absolute and unconditional  continuing  guarantee by
each of the Borrowers of payment and  performance of the  Obligations of each of
the other Borrowers,  and an absolute and unconditional  continuing guarantee by
Electronic Voting Systems, Inc., Display Depot, Inc. and Creative Displays, Inc.
of payment and  performance of the  Obligations  of the Borrowers,  secured by a
first  and only  security  interest  in favor of Lender  granted  by each of the
foregoing Obligors on all of their existing and future assets;

               (h) Lender shall have  received the Custodial  Account  Agreement
with the Custodian  Bank,  together with  evidence  satisfactory  to Lender that
Eligible Cash Equivalents having a Market Value of at least $5,600,000 are being
held in the Custodial Account subject to such agreement;

               (i) Borrower  shall have Excess  Availability  as  determined  by
Lender,  as of the date  hereof,  in an amount  not less than  $1,000,000  after
giving  effect  to the  initial  Loans  made or to be made and  Letter of Credit
Accommodations   issued  or  to  be  issued  in  connection   with  the  initial
transactions hereunder;

               (j) Lender shall have  received  evidence of  insurance  and loss
payee endorsements  required hereunder and under the other Financing Agreements,
in form and substance  satisfactory  to Lender,  and  certificates  of insurance
policies and/or endorsements naming Lender as loss payee;

               (k)  Lender   shall  have   received,   in  form  and   substance
satisfactory to Lender, such opinion letters of counsel to Borrower with respect
to the Financing Agreements and such other matters as Lender may request; and

                                             -20-


<PAGE>



               (l) Lender  shall  have  received  evidence  of the  transfer  of
ownership of the machinery and equipment  described in the Machinery,  Equipment
and Vehicles Auction Sale Value Appraisal Report,  dated October 1996,  prepared
by Daley-Hodkin Appraisal Corporation from HMG In-Store to HMG Manufacturing, in
form and substance satisfactory to Lender;

               (m)  the  other  Financing  Agreements  and all  instruments  and
documents  hereunder and thereunder  shall have been duly executed and delivered
to Lender, in form and substance satisfactory to Lender.

       4.2   Conditions   Precedent   to  All   Loans   and   Letter  of  Credit
Accommodations.  Each of the following is an additional  condition  precedent to
Lender  making  Loans  and/or  providing  Letter  of  Credit  Accommodations  to
Borrowers,  including the initial Loans and Letter of Credit  Accommodations and
any future Loans and Letter of Credit Accommodations:

               (a) all  representations  and warranties  contained herein and in
the  other  Financing  Agreements  shall be true  and  correct  in all  material
respects with the same effect as though such  representations and warranties had
been made on and as of the date of the  making  of each  such Loan or  providing
each such Letter of Credit Accommodation and after giving effect thereto; and

               (b) no Event of Default  and no event or  condition  which,  with
notice or passage of time or both, would  constitute an Event of Default,  shall
exist or have  occurred and be continuing on and as of the date of the making of
such Loan or providing each such Letter of Credit Accommodation and after giving
effect thereto.

SECTION 5.     GRANT OF SECURITY INTEREST

       5.1  Collateral.  To secure payment and  performance of all  Obligations,
each Borrower hereby grants to Lender a continuing  security interest in, a lien
upon, and a right of set off against,  and hereby assigns to Lender as security,
the following  property and interests in property of such Borrower,  whether now
owned or hereafter acquired or existing, and wherever located (collectively, the
"Collateral"):

               (a)    Accounts;

               (b) all present and future contract rights,  general  intangibles
(including  tax  and  duty  refunds,   registered  and   unregistered   patents,
trademarks,  service  marks,  copyrights,  trade  names,  applications  for  the
foregoing, trade secrets, goodwill, processes,  drawings,  blueprints,  customer
lists,  licenses,  whether as licensor or  licensee,  choses in action and other
claims and existing and future leasehold interests in equipment, real estate and
fixtures),  chattel paper, documents,  instruments,  letters of credit, bankers'
acceptances and guaranties;

               (c) all present and future monies,  securities,  credit balances,
deposits,  deposit accounts and other property of such Borrower now or hereafter
held or received by or in transit to

                                             -21-


<PAGE>



Lender or its affiliates or at any other depository or other institution from or
for the account of such  Borrower,  whether for  safekeeping,  pledge,  custody,
transmission,  collection  or  otherwise,  and all  present  and  future  liens,
security interests,  rights,  remedies, title and interest in, to and in respect
of Accounts and other  Collateral,  including  (i) rights and remedies  under or
relating to guaranties,  contracts of  suretyship,  letters of credit and credit
and other  insurance  related to the  Collateral,  (ii)  rights of  stoppage  in
transit, replevin, repossession, reclamation and other rights and remedies of an
unpaid  vendor,  lienor or secured  party,  (iii) goods  described  in invoices,
documents,  contracts or instruments with respect to, or otherwise  representing
or evidencing, Accounts or other Collateral, including returned, repossessed and
reclaimed  goods,  and (iv) deposits by and property of account debtors or other
persons securing the obligations of account debtors;

               (d)    Inventory;

               (e)    Equipment;

               (f) Real Property;  provided,  that, in the case of Real Property
acquired  after  the date  hereof,  the  security  interest  in and lien  hereby
intended  to  be  granted  by  Borrowers  shall  be  further   evidenced  and/or
effectuated by a mortgage,  deed of trust or deed to secure debt satisfactory to
Lender,  contemporaneously  with the acquisition of such hereafter acquired Real
Property;

               (g) without limiting the Collateral  described in Section 5.1(c),
all existing and future cash, cash equivalents and other investments  (including
the Cash Equivalents), and all right, title and interest of such Borrower in and
to existing and future  investment  accounts  and  custodial  accounts  wherever
located,  together with the cash,  cash  equivalents  and other  investments and
other property now or hereafter held in or credited to such investment  accounts
and custodial accounts;

               (h)    Records; and

               (i) all  products  and  proceeds of the  foregoing,  in any form,
including  insurance  proceeds and all claims  against third parties for loss or
damage to or destruction of any or all of the foregoing.

       5.2 Senior Real  Property  Lien. If HMG  Manufacturing  grants a mortgage
lien  upon  the  Real  Property  located  at  234  South  8th  Street,  Reading,
Pennsylvania  to a person  other than  Lender as  permitted  by Section  9.8(f),
securing  only  indebtedness  for borrowed  money  incurred in  compliance  with
Section 9.9(f) hereof, Lender shall subordinate its mortgage lien upon such Real
Property  in favor of the  mortgage  lien of such  other  person  upon such Real
Property in an amount not to exceed the original  principal  amount of $600,000,
less repayments thereof,  pursuant to a subordination  agreement with such other
person in form and substance  satisfactory to Lender, as determined by Lender in
a commercially reasonable manner.

                                             -22-


<PAGE>




SECTION 6.     COLLECTION AND ADMINISTRATION

       6.1  Borrowers'  Loan  Accounts.  Lender shall  maintain one or more loan
account(s)  on its books in which  shall be  recorded  (a) all Loans,  Letter of
Credit Accommodations and other Obligations and the Collateral, (b) all payments
made by or on  behalf of  Borrowers  and (c) all other  appropriate  debits  and
credits as provided in this Agreement,  including fees, charges, costs, expenses
and  interest.  All entries in the loan  account(s)  shall be made in accordance
with Lender's customary practices as in effect from time to time.

       6.2  Statements.  Lender shall render to HMG Worldwide (for itself and on
behalf of the other Borrowers) each month a statement  setting forth the balance
in the loan  account(s)  maintained  by Lender  for  Borrowers  pursuant  to the
provisions of this Agreement,  including  principal,  interest,  fees, costs and
expenses.  Each such  statement  shall be subject to  subsequent  adjustment  by
Lender but shall, absent manifest errors or omissions, be considered correct and
deemed  accepted by Borrowers  and  conclusively  binding  upon  Borrowers as an
account  stated except to the extent that Lender  receives a written notice from
any Borrower of any specific  exceptions of such Borrower  thereto within thirty
(30) days after the date such  statement  has been mailed by Lender.  Until such
time as Lender  shall have  rendered  to HMG  Worldwide a written  statement  as
provided above,  the balance in Borrowers' loan account(s)  shall be presumptive
evidence of the amounts due and owing to Lender by Borrowers.

       6.3     Collection of Accounts.

               (a) Borrowers  shall  establish and maintain,  at their  expense,
blocked  accounts or  lockboxes  and related  blocked  accounts (in either case,
"Blocked Accounts"), as Lender may specify, with such banks as are acceptable to
Lender into which  Borrowers  shall  promptly  deposit and direct their  account
debtors to directly remit all payments on Accounts and all payments constituting
proceeds of Inventory or other  Collateral in the  identical  form in which such
payments are made,  whether by cash,  check or other manner.  The banks at which
the Blocked Accounts are established shall enter into an agreement,  in form and
substance satisfactory to Lender, providing that all items received or deposited
in the Blocked Accounts are the property of Lender, that the depository bank has
no lien  upon,  or right to setoff  against,  the  Blocked  Accounts,  the items
received for deposit therein,  or the funds from time to time on deposit therein
and that the depository  bank will wire, or otherwise  transfer,  in immediately
available  funds,  on a daily basis,  all funds  received or deposited  into the
Blocked  Accounts to such bank account of Lender as Lender may from time to time
designate  for  such  purpose  ("Payment  Account").  Borrowers  agree  that all
payments made to such Blocked  Accounts or other funds received and collected by
Lender,  whether on the Accounts or as proceeds of Inventory or other Collateral
or otherwise shall be the property of Lender.

               (b)    For purposes of calculating interest on the
Obligations, such payments or other funds received will be applied

                                             -23-


<PAGE>



(conditional  upon final  collection) to the  Obligations  one (1) business days
following the date of receipt of  immediately  available  funds by Lender in the
Payment  Account.  For purposes of calculating the amount of the Revolving Loans
available to Borrowers  such  payments will be applied  (conditional  upon final
collection)  to the  Obligations on the business day of receipt by Lender in the
Payment  Account,  if such  payments are  received  within  sufficient  time (in
accordance with Lender's usual and customary practices as in effect from time to
time) to credit  Borrowers' loan account(s) on such day, and if not, then on the
next business day.

               (c)  Borrowers  and  all  of  their   affiliates,   subsidiaries,
shareholders,  directors,  employees  or agents  shall,  acting as  trustee  for
Lender, receive, as the property of Lender, any monies, checks, notes, drafts or
any other payment  relating to and/or  proceeds of Accounts or other  Collateral
which come into their  possession  or under their control and  immediately  upon
receipt thereof,  shall deposit or cause the same to be deposited in the Blocked
Accounts,  or remit  the same or cause  the  same to be  remitted,  in kind,  to
Lender.  In no event shall the same be commingled with any Borrower's own funds.
Borrowers  agree to  reimburse  Lender on demand for any amounts owed or paid to
any bank at which a Blocked  Account is  established or any other bank or person
involved in the transfer of funds to or from the Blocked Accounts arising out of
Lender's payments to or  indemnification  of such bank or person. The obligation
of Borrowers to reimburse  Lender for such amounts  pursuant to this Section 6.3
shall survive the termination or non-renewal of this Agreement.

               (d) Until  separate  Blocked  Accounts are  established  for each
Borrower as required  pursuant to Section  6.3(a)  hereof,  Lender may apply any
proceeds of Accounts or other  Collateral  to the  Obligations  of HMG In-Store,
subject to weekly  reallocation  of collections and adjustments by Lender to the
Revolving Loan  Obligations and Revolving Loan  availability  calculations as to
each Borrower, based on collection reconciliation reports delivered by Borrowers
to Lender not less  frequently  than once each week that shall  allocate  to the
applicable  Borrower  and its  Accounts  any  proceeds  that are received in the
Blocked Account since the period covered by the most recent such  reconciliation
report delivered to Lender.

       6.4 Payments.  All Obligations shall be payable to the Payment Account as
provided in Section 6.3 or such other place as Lender may designate from time to
time.  Lender may apply payments received or collected from Borrowers or for the
account of Borrowers  (including  the  monetary  proceeds of  collections  or of
realization upon any Collateral) to such of the Obligations, whether or not then
due,  in such order and manner as Lender  determines.  At Lender's  option,  all
principal,  interest,  fees,  costs,  expenses and other charges provided for in
this Agreement or the other Financing  Agreements may be charged directly to the
loan account(s) of Borrowers. Borrowers shall make all payments to Lender on the
Obligations  free and clear of, and without  deduction or withholding  for or on
account of, any setoff,  counterclaim,  defense, duties, taxes, levies, imposts,
fees, deductions, withholding,  restrictions or conditions of any kind. If after
receipt of any payment of, or proceeds of Collateral applied to the

                                             -24-


<PAGE>



payment of, any of the  Obligations,  Lender is required to  surrender or return
such  payment or  proceeds to any Person for any  reason,  then the  Obligations
intended to be  satisfied by such payment or proceeds  shall be  reinstated  and
continue and this  Agreement  shall continue in full force and effect as if such
payment or proceeds had not been received by Lender.  Borrowers  shall be liable
to pay to Lender,  and each  Borrower  does  hereby  indemnify  and hold  Lender
harmless  for the amount of any  payments or proceeds  surrendered  or returned.
This  Section 6.4 shall remain  effective  notwithstanding  any contrary  action
which may be taken by Lender in reliance  upon such  payment or  proceeds.  This
Section 6.4 shall survive the payment of the  Obligations and the termination or
non-renewal of this Agreement.

       6.5  Authorization to Make Loans.  Lender is authorized to make the Loans
and provide the Letter of Credit  Accommodations  based upon telephonic or other
instructions  received  from  anyone  purporting  to be an officer of a Borrower
(including HMG Worldwide for itself and/or on behalf of the other  Borrowers) or
other  authorized  person or, at the  discretion  of  Lender,  if such Loans are
necessary to satisfy any Obligations. All requests for Loans or Letter of Credit
Accommodations  hereunder shall specify the date on which the requested  advance
is to be made or Letter of Credit Accommodations established (which day shall be
a business day) and the amount of the requested  Loan.  Requests  received after
11:00 a.m. New York City time on any day shall be deemed to have been made as of
the opening of business on the immediately following business day. All Loans and
Letter of Credit  Accommodations  under  this  Agreement  shall be  conclusively
presumed  to have been made to, and at the  request of and for the  benefit  of,
Borrowers when  deposited to the credit of a Borrower or otherwise  disbursed or
established in accordance  with the  instructions  of a Borrower  (including HMG
Worldwide for itself  and/or on behalf of the other  Borrowers) or in accordance
with the terms and conditions of this Agreement.

       6.6 Use of  Proceeds.  Borrowers  shall use the  initial  proceeds of the
Loans  provided by Lender to Borrowers  hereunder only for: (a) payments to each
of the  persons  listed  in  the  disbursement  direction  letter  furnished  by
Borrowers to Lender on or about the date hereof and (b) costs, expenses and fees
in connection with the preparation,  negotiation, execution and delivery of this
Agreement and the other Financing Agreements.  All other Loans made or Letter of
Credit Accommodations provided by Lender to Borrowers pursuant to the provisions
hereof shall be used by Borrowers only for general  operating,  working  capital
and other proper corporate purposes of Borrowers not otherwise prohibited by the
terms hereof. None of the proceeds will be used, directly or indirectly, for the
purpose of  purchasing  or carrying  any margin  security or for the purposes of
reducing or retiring any indebtedness which was originally  incurred to purchase
or carry any margin  security or for any other  purpose which might cause any of
the Loans to be considered a "purpose credit" within the meaning of Regulation G
of the Board of Governors of the Federal Reserve System, as amended.

       6.7     Appointment of HMG Worldwide as Agent for Borrowers.  The
Borrowers, other than HMG Worldwide, hereby irrevocably appoint HMG

                                             -25-


<PAGE>



Worldwide,  and each officer  thereof,  as their agent and  attorney-in-fact  to
request Loans and Letter of Credit  Accommodations  on their behalf, at Lender's
option, to receive  disbursements of Loans on their behalf (which may be made to
the  same  account  of HMG  Worldwide  to  which  disbursements  of Loans to HMG
Worldwide are made),  to receive  notices and statements of account from Lender,
to take such other actions on their behalf as is provided hereunder or under any
of the other  Financing  Agreements  and  generally to deal with Lender on their
behalf,  for all matters  pertaining  to the financing  arrangements  under this
Agreement.

SECTION 7.     COLLATERAL REPORTING AND COVENANTS

       7.1  Collateral  Reporting.  Each Borrower  shall provide Lender with the
following  documents in a form satisfactory to Lender: (a) on a regular basis as
required by Lender,  a schedule of Accounts,  credits  issued and cash received;
(b) on a weekly basis or more frequently as Lender may request,  (i) a statement
issued by the Custodian Bank itemizing all Cash  Equivalents  and other property
held in or credited to the Custodial Account and the Market Values thereof as of
the statement date and (ii) a special report of Inventory purchased under Letter
of Credit  Accommodations  during each week during the period  commencing on the
date  hereof and  ending on January  31,  1997;  (c) on a monthly  basis or more
frequently  as  Lender  may  request,  (i)  perpetual  inventory  reports,  (ii)
inventory  reports by category  and (iii) agings of accounts  payable,  (d) upon
Lender's request, (i) copies of customer statements and credit memos, remittance
advices  and  reports,  and copies of deposit  slips and bank  statements,  (ii)
copies of shipping and delivery documents,  and (iii) copies of purchase orders,
invoices  and  delivery  documents  for  Inventory  and  Equipment  acquired  by
Borrowers;  (e)  agings  of  accounts  receivable  on a  monthly  basis  or more
frequently  as  Lender  may  request;  and  (f)  such  other  reports  as to the
Collateral  as Lender  shall  request  from time to time.  If any of  Borrowers'
records or reports of the Collateral are prepared or maintained by an accounting
service,  contractor,  shipper  or other  agent,  Borrowers  hereby  irrevocably
authorize  such service,  contractor,  shipper or agent to deliver such records,
reports,  and related  documents to Lender and to follow  Lender's  instructions
with respect to further  services at any time that an Event of Default exists or
has occurred and is continuing.

       7.2     Accounts Covenants.

               (a) Borrowers  shall notify Lender  promptly of: (i) any material
delay in any  Borrower's  performance  of any of its  obligations to any account
debtor or the assertion of any claims, offsets, defenses or counterclaims by any
account debtor, or any disputes with account debtors,  in each case involving an
amount  in  excess of  $25,000,  or any  settlement,  adjustment  or  compromise
thereof,  (ii)  all  material  adverse  information  relating  to the  financial
condition of any account debtor and (iii) any event or  circumstance  which,  to
any  Borrower's  knowledge  would  cause  Lender to consider  any then  existing
Accounts  as no longer  constituting  Eligible  Accounts.  No credit,  discount,
allowance or extension or agreement for any of the foregoing shall be granted by
a Borrower

                                             -26-


<PAGE>



to any account debtor without Lender's consent, except in the ordinary course of
such Borrower's  business in accordance  with practices and policies  previously
disclosed  in writing to  Lender.  So long as no Event of Default  exists or has
occurred and is  continuing,  Borrowers  shall settle,  adjust or compromise any
claim, offset, counterclaim or dispute with any account debtor. At any time that
an Event of Default exists or has occurred and is continuing,  Lender shall,  at
its option, have the exclusive right to settle,  adjust or compromise any claim,
offset,  counterclaim  or dispute  with  account  debtors or grant any  credits,
discounts or allowances.

               (b) In addition to the reporting requirements elsewhere set forth
herein,  each Borrower shall separately  notify Lender promptly of any return of
Inventory  by any one account  debtor if the  inventory so returned in such case
has a value in  excess  of  $20,000.  At any time that  Inventory  is  returned,
reclaimed or repossessed,  the Account (or portion thereof) which arose from the
sale of such returned, reclaimed or repossessed Inventory shall not be deemed an
Eligible  Account.  In the event any account  debtor  returns  Inventory when an
Event of  Default  exists or has  occurred  and is  continuing,  the  applicable
Borrower  receiving such Inventory shall,  upon Lender's  request,  (i) hold the
returned  Inventory in trust for Lender,  (ii) segregate all returned  Inventory
from all of its other property,  (iii) dispose of the returned  Inventory solely
according to Lender's instructions, and (iv) not issue any credits, discounts or
allowances with respect thereto without Lender's prior written consent.

               (c) With respect to each  Account:  (i) the amounts  shown on any
invoice  delivered  to Lender or schedule  thereof  delivered to Lender shall be
true and  complete,  (ii) no  payments  shall be made  thereon  except  payments
immediately  delivered to Lender pursuant to the terms of this Agreement,  (iii)
no  credit,  discount,  allowance  or  extension  or  agreement  for  any of the
foregoing  shall be  granted  by a  Borrower  to any  account  debtor  except as
reported to Lender in  accordance  with this  Agreement  and except for credits,
discounts, allowances or extensions made or given in the ordinary course of such
Borrower's  business  in  accordance  with  practices  and  policies  previously
disclosed  to  Lender,  (iv) there  shall be no  setoffs,  deductions,  contras,
defenses,  counterclaims  or disputes  existing or asserted with respect thereto
except as reported to Lender in accordance with the terms of this Agreement, (v)
none of the  transactions  giving rise thereto will violate any applicable State
or Federal  laws or  regulations,  all  documentation  relating  thereto will be
legally  sufficient  under such laws and regulations and all such  documentation
will be legally enforceable in accordance with its terms.

               (d) Lender shall have the right at any time or times, in Lender's
name or in the name of a nominee of Lender,  to verify the  validity,  amount or
any  other  matter  relating  to any  Account  or  other  Collateral,  by  mail,
telephone, facsimile transmission or otherwise.

               (e) Each  Borrower  shall  deliver  or cause to be  delivered  to
Lender, with appropriate endorsement and assignment,  with full recourse to such
Borrower, all chattel paper and instruments which

                                             -27-


<PAGE>



such  Borrower  now  owns  or may at any  time  acquire  immediately  upon  such
Borrower's receipt thereof, except as Lender may otherwise agree.

               (f)  Lender  may,  at any time or times  that an Event of Default
exists or has occurred and is continuing,  (i) notify any or all account debtors
that the  Accounts  have been  assigned to Lender and that Lender has a security
interest  therein  and Lender may  direct  any or all  accounts  debtors to make
payment of  Accounts  directly  to Lender,  (ii)  extend the time of payment of,
compromise,  settle  or adjust  for  cash,  credit,  return  of  merchandise  or
otherwise,  and upon any  terms or  conditions,  any and all  Accounts  or other
obligations  included in the  Collateral  and thereby  discharge  or release the
account  debtor or any other  party or parties  in any way  liable  for  payment
thereof  without  affecting any of the  Obligations,  (iii)  demand,  collect or
enforce payment of any Accounts or such other obligations,  but without any duty
to do so, and Lender  shall not be liable for its  failure to collect or enforce
the  payment  thereof nor for the  negligence  of its agents or  attorneys  with
respect thereto and (iv) take whatever other action Lender may deem necessary or
desirable  for the  protection  of its  interests.  At any time that an Event of
Default  exists or has  occurred and is  continuing,  at Lender's  request,  all
invoices and statements sent to any account debtor shall state that the Accounts
and such other obligations have been assigned to Lender and are payable directly
and only to Lender and  Borrowers  shall  deliver to Lender  such  originals  of
documents  evidencing  the sale and  delivery  of  goods or the  performance  of
services giving rise to any Accounts as Lender may require.

       7.3 Inventory Covenants. With respect to the Inventory: (a) each Borrower
shall at all times maintain inventory records reasonably satisfactory to Lender,
keeping correct and accurate  records  itemizing and describing the kind,  type,
quality and  quantity of  Inventory,  such  Borrower's  cost  therefor and daily
withdrawals  therefrom and additions thereto;  (b) each Borrower shall conduct a
physical  count of the  Inventory  at least once each  year,  but at any time or
times as  Lender  may  request  on or after an Event of  Default,  and  promptly
following such physical  inventory shall supply Lender with a report in the form
and with such specificity as may be reasonably satisfactory to Lender concerning
such  physical  count;  (c) no  Borrower  shall  remove any  Inventory  from the
locations set forth or permitted  herein,  without the prior written  consent of
Lender,  except for sales of Inventory  by a Borrower in the ordinary  course of
such Borrower's business and except to move Inventory directly from one location
set forth or  permitted  herein to  another  such  location;  (d) upon  Lender's
request,  Borrowers  shall, at Lender's expense prior to an Event of Default and
at Borrowers'  expense any time thereafter,  deliver or cause to be delivered to
Lender  written  reports or appraisals  as to the  Inventory in form,  scope and
methodology  acceptable  to Lender  and by an  appraiser  acceptable  to Lender,
addressed  to Lender or upon which Lender is  expressly  permitted to rely;  (e)
each Borrower  shall produce,  use,  store and maintain the Inventory,  with all
reasonable care and caution and in accordance  with applicable  standards of any
insurance and in conformity with applicable laws (including the  requirements of
the  Federal  Fair  Labor  Standards  Act of 1938,  as  amended  and all  rules,
regulations and orders related

                                             -28-


<PAGE>



thereto);  (f) each Borrower assumes all  responsibility  and liability  arising
from or  relating  to the  production,  use,  sale or other  disposition  of its
Inventory;  (g) no Borrower shall sell Inventory to any customer on approval, or
any other basis which entitles the customer to return or may obligate a Borrower
to repurchase such Inventory; (h) each Borrower shall keep its Inventory in good
and  marketable  condition;  and (i) no Borrower  shall,  without  prior written
notice to Lender, acquire or accept any Inventory on consignment or approval.

       7.4 Equipment Covenants. With respect to the Equipment: (a) upon Lender's
request, each Borrower shall, at its expense, at any time or times as Lender may
request on or after an Event of  Default,  deliver or cause to be  delivered  to
Lender  written  reports or appraisals  as to the  Equipment in form,  scope and
methodology  acceptable to Lender and by an appraiser  acceptable to Lender; (b)
each  Borrower  shall keep its  Equipment  in good  order,  repair,  running and
marketable  condition (ordinary wear and tear and obsolete Equipment  excepted);
(c) each Borrower shall use its Equipment  with all reasonable  care and caution
and in accordance with  applicable  standards of any insurance and in conformity
in all material  respects with all  applicable  laws;  (d) the Equipment of each
Borrower is and shall be used in such Borrower's  business and not for personal,
family,  household or farming use;  (e) no Borrower  shall remove any  Equipment
from the locations set forth or permitted herein, except to the extent necessary
to have any  Equipment  repaired or  maintained  in the  ordinary  course of the
business of such  Borrower or to move  Equipment  directly from one location set
forth or permitted  herein to another such  location and except for the movement
of motor  vehicles  used by or for the benefit of such  Borrower in the ordinary
course of such  Borrower's  business;  (f) the Equipment is now and shall remain
personal  property and no Borrower  shall  permit any of the  Equipment to be or
become a part of or permanently affixed to real property;  and (g) each Borrower
assumes all responsibility and liability arising from the use of its Equipment.

       7.5 Power of Attorney.  Each Borrower hereby  irrevocably  designates and
appoints  Lender (and all persons  designated by Lender) as such Borrower's true
and lawful  attorney-in-fact,  and  authorizes  Lender,  in such  Borrower's  or
Lender's  name,  to:  (a) at any time an Event of  Default  or event  which with
notice or passage of time or both would constitute an Event of Default exists or
has occurred and is continuing  (i) demand payment on Accounts or other proceeds
of Inventory  or other  Collateral,  (ii)  enforce  payment of Accounts by legal
proceedings  or  otherwise,  (iii)  exercise all of such  Borrower's  rights and
remedies  to collect any  Account or other  Collateral,  (iv) sell or assign any
Account upon such terms, for such amount and at such time or times as the Lender
deems advisable,  (v) settle,  adjust,  compromise,  extend or renew an Account,
(vi)  discharge  and  release any  Account,  (vii)  prepare,  file and sign such
Borrower's  name on any proof of claim in bankruptcy  or other similar  document
against an account debtor,  (viii) notify the post office  authorities to change
the address for delivery of such  Borrower's  mail to an address  designated  by
Lender, and open and dispose of all mail addressed to such Borrower, and (ix) do
all acts and things which are necessary, in Lender's  determination,  to fulfill
such Borrower's Obligations

                                             -29-


<PAGE>



under this Agreement and the other  Financing  Agreements and (b) at any time to
(i) take control in any manner of any item of payment or proceeds thereof,  (ii)
have  access to any  lockbox or postal box into  which such  Borrower's  mail is
deposited,  (iii)  endorse  such  Borrower's  name upon any items of  payment or
proceeds thereof and deposit the same in the Lender's account for application to
the  Obligations,  (iv) endorse  such  Borrower's  name upon any chattel  paper,
document, instrument,  invoice, or similar document or agreement relating to any
Account or any goods pertaining  thereto or any other Collateral,  (v) sign such
Borrower's  name on any  verification of Accounts and notices thereof to account
debtors  and (vi)  execute in such  Borrower's  name and file any UCC  financing
statements or amendments  thereto.  Each Borrower hereby releases Lender and its
officers,  employees and designees from any liabilities  arising from any act or
acts  under  this  power of  attorney  and in  furtherance  thereof,  whether of
omission or commission,  except as a result of Lender's own gross  negligence or
wilful misconduct as determined pursuant to a final non-appealable judgment of a
court of competent jurisdiction.

       7.6 Right to Cure.  Lender may, at its option,  (a) cure any default by a
Borrower  under  any  material  agreement  with a third  party or pay or bond on
appeal any judgment  entered  against a Borrower,  (b) discharge  taxes,  liens,
security  interests or other encumbrances at any time levied on or existing with
respect to the Collateral  and (c) pay any amount,  incur any expense or perform
any act which,  in Lender's  judgment,  is necessary or appropriate to preserve,
protect, insure or maintain the Collateral and the rights of Lender with respect
thereto.  Lender may add any amounts so expended to the  Obligations  and charge
any Borrower's  account  therefor,  such amounts to be repayable by Borrowers on
demand.  Lender  shall be under no  obligation  to effect such cure,  payment or
bonding and shall not, by doing so, be deemed to have assumed any  obligation or
liability  of any  Borrower.  Any payment  made or other  action taken by Lender
under this Section shall be without prejudice to any right to assert an Event of
Default hereunder and to proceed accordingly.

       7.7 Access to Premises.  From time to time as requested by Lender, at the
cost and expense of  Borrowers,  (a) Lender or its designee  shall have complete
access to all of  Borrowers'  premises  during normal  business  hours and after
reasonable  notice to Borrowers,  or at any time and without notice to Borrowers
if an Event  of  Default  exists  or has  occurred  and is  continuing,  for the
purposes  of  inspecting,  verifying  and  auditing  the  Collateral  and all of
Borrowers'  books and records,  including the Records,  and (b) Borrowers  shall
promptly  furnish to Lender  such  copies of such books and  records or extracts
therefrom as Lender may request,  and (c) use during normal  business hours such
of Borrowers' personnel,  equipment,  supplies and premises as may be reasonably
necessary for the  foregoing  and if an Event of Default  exists or has occurred
and is  continuing  for the  collection of Accounts and  realization  upon other
Collateral.

                                             -30-


<PAGE>




SECTION 8.     REPRESENTATIONS AND WARRANTIES

       Borrowers hereby, jointly and severally,  represent and warrant to Lender
the  following   (which  shall  survive  the  execution  and  delivery  of  this
Agreement),  the truth and accuracy of which are a  continuing  condition of the
making of Loans and  providing  Letter  of  Credit  Accommodations  by Lender to
Borrowers:

       8.1 Corporate Existence, Power and Authority; Subsidiaries. Each Borrower
is a corporation duly organized and in good standing under the laws of its state
of  incorporation  and is duly  qualified as a foreign  corporation  and in good
standing in all states or other jurisdictions where the nature and extent of the
business  transacted by it or the  ownership of assets makes such  qualification
necessary,  except for those  jurisdictions  in which the  failure to so qualify
would not have a material adverse effect on such Borrower's financial condition,
results of  operation  or  business  or the rights of Lender in or to any of the
Collateral. The execution, delivery and performance of this Agreement, the other
Financing Agreements and the transactions  contemplated hereunder and thereunder
are all within each Borrower's  corporate powers,  have been duly authorized and
are not in contravention  of law or the terms of each Borrower's  certificate of
incorporation, by-laws, or other organizational documentation, or any indenture,
agreement  or  undertaking  to which  any  Borrower  is a party or by which  any
Borrower or its property or properties  are bound.  This Agreement and the other
Financing  Agreements   constitute  legal,  valid  and  binding  obligations  of
Borrowers  enforceable in accordance with their respective  terms.  Borrowers do
not have any  subsidiaries  except as set forth on the Information  Certificate.
Electronic Voting Systems Inc. has no assets and maintains no operations.

       8.2  Financial  Statements;  No Material  Adverse  Change.  All financial
statements  relating to Borrowers  which have been or may hereafter be delivered
by Borrowers  to Lender have been  prepared in  accordance  with GAAP and fairly
present the financial  condition and the results of operation of Borrowers as at
the dates and for the  periods set forth  therein.  Except as  disclosed  in any
interim financial  statements furnished by Borrowers to Lender prior to the date
of this  Agreement,  there has been no  material  adverse  change in the assets,
liabilities,  properties and condition,  financial or otherwise, of any Borrower
since the date of the most recent  audited  financial  statements  furnished  by
Borrowers to Lender prior to the date of this Agreement.

       8.3 Chief Executive  Office;  Collateral  Locations.  The chief executive
office of each  Borrower  is located at its address  set forth  below,  and each
Borrower's Records are located at its address set forth below and its only other
places of business and the only other  locations of Collateral,  if any, are the
addresses  set forth in the  Information  Certificate,  subject  to the right of
Borrowers to establish new locations in accordance  with Section 9.2 below.  The
Information Certificate correctly identifies any of such locations which are not
owned by Borrowers and sets forth the owners and/or operators thereof.

                                             -31-


<PAGE>



       8.4 Priority of Liens;  Title to Properties.  The security  interests and
liens granted to Lender under this Agreement and the other Financing  Agreements
constitute  valid and perfected  first priority liens and security  interests in
and upon the  Collateral  subject  only to the liens  indicated  on Schedule 8.4
hereto and the other liens permitted under Section 9.8 hereof. Each Borrower has
good and  marketable  title to all of its  properties  and assets  subject to no
liens, mortgages,  pledges,  security interests,  encumbrances or charges of any
kind, except those granted to Lender and such others as are specifically  listed
on Schedule 8.4 hereto or permitted under Section 9.8 hereof.

       8.5 Tax Returns.  Each  Borrower has filed,  or caused to be filed,  in a
timely manner all tax returns, reports and declarations which are required to be
filed by it (without  requests for extension  except as previously  disclosed in
writing  to  Lender).   All  information  in  such  tax  returns,   reports  and
declarations  is complete and accurate in all material  respects.  Each Borrower
has paid or  caused  to be paid all taxes due and  payable  or  claimed  due and
payable in any assessment received by it, except taxes the validity of which are
being contested in good faith by appropriate  proceedings diligently pursued and
available to such Borrower and with respect to which adequate reserves have been
set aside on its books.  Adequate provision has been made for the payment of all
accrued  and unpaid  Federal,  State,  county,  local,  foreign  and other taxes
whether or not yet due and payable and whether or not disputed.

       8.6 Litigation. Except as set forth on the Information Certificate, there
is no present  investigation by any governmental  agency pending, or to the best
of any Borrower's knowledge threatened,  against or affecting any Borrower,  its
assets or  business  and there is no action,  suit,  proceeding  or claim by any
Person pending, or to the best of any Borrower's knowledge  threatened,  against
any Borrower or its assets or goodwill, or against or affecting any transactions
contemplated  by this  Agreement,  which if  adversely  determined  against  any
Borrower would result in any material adverse change in the assets,  business or
prospects  of any  Borrower,  or would  impair the  ability of any  Borrower  to
perform its Obligations hereunder or under any of the other Financing Agreements
to which it is a party or of Lender to enforce any  Obligations  or realize upon
any Collateral.

     8.7 Compliance with Other Agreements and Applicable Laws. No Borrower is in
default in any material  respect under, or in violation in any material  respect
of any of the terms of,  any  agreement,  contract,  instrument,  lease or other
commitment  to which it is a party or by which it or any of its assets are bound
and Borrowers are in  compliance  in all material  respects with all  applicable
provisions of laws, rules, regulations,  licenses, permits, approvals and orders
of any foreign, Federal, State or local governmental authority.

       8.8 Bank Accounts.  All of the deposit accounts,  investment  accounts or
other  accounts in the name of or used by  Borrowers  maintained  at any bank or
other financial institution are set forth on Schedule 8.8 hereto, subject to the
right of Borrower to  establish  new  accounts in  accordance  with Section 9.13
below.

                                             -32-


<PAGE>



       8.9     Environmental Compliance.

               (a) Except as set forth on Schedule  8.9 hereto,  no Borrower or,
to the best of Borrowers'  knowledge,  any other person,  has  generated,  used,
stored, treated, transported, manufactured, handled, produced or disposed of any
Hazardous Materials,  on or off its premises (whether or not owned by it) in any
manner which at any time  violates,  in any  material  respect,  any  applicable
Environmental  Law or any  license,  permit,  certificate,  approval  or similar
authorization  thereunder and the operations of Borrowers comply in all material
respects with all Environmental  Laws and all licenses,  permits,  certificates,
approvals and similar authorizations thereunder.

               (b) Except as set forth on Schedule 8.9 hereto, there has been no
investigation,  proceeding,  complaint,  order,  directive,  claim,  citation or
notice by any  governmental  authority or any other person nor is any pending or
to  the  best  of any  Borrower's  knowledge  threatened,  with  respect  to any
non-compliance with or violation of the requirements of any Environmental Law by
Borrowers or the  release,  spill or  discharge,  threatened  or actual,  of any
Hazardous Material or the generation, use, storage,  treatment,  transportation,
manufacture,  handling, production or disposal of any Hazardous Materials or any
other environmental,  health or safety matter, which affects any Borrower or its
business,  operations  or assets or any  properties  at which any  Borrower  has
transported, stored or disposed of any Hazardous Materials.

               (c) To the best of  Borrowers'  knowledge,  no  Borrower  has any
material liability (contingent or otherwise) in connection with a release, spill
or  discharge,   threatened  or  actual,  of  any  Hazardous  Materials  or  the
generation,  use, storage,  treatment,  transportation,  manufacture,  handling,
production or disposal of any Hazardous Materials.

               (d) To the  best of  Borrowers'  knowledge,  Borrowers  have  all
licenses, permits, certificates, approvals or similar authorizations required to
be obtained or filed in connection  with the  operations of Borrowers  under any
Environmental Law and all of such licenses, permits, certificates,  approvals or
similar authorizations are valid and in full force and effect.

       8.10    Employee Benefits.

               (a) Borrowers  have not engaged in any  transaction in connection
with which Borrowers or any of their ERISA Affiliates could be subject to either
a civil penalty assessed pursuant to Section 502(i) of ERISA or a tax imposed by
Section 4975 of the Code, including any accumulated funding deficiency described
in Section  8.10(c)  hereof and any  deficiency  with respect to vested  accrued
benefits described in Section 8.10(d) hereof.

               (b) Except as set forth on Schedule  8.10,  no  liability  to the
Pension Benefit Guaranty  Corporation has been or is expected by Borrowers to be
incurred with respect to any employee  benefit plan of Borrowers or any of their
ERISA  Affiliates.  There has been no  reportable  event  (within the meaning of
Section  4043(b) of ERISA) or any other event or  condition  with respect to any
employee

                                             -33-


<PAGE>



pension  benefit  plan of  Borrowers  or any of  their  ERISA  Affiliates  which
presents a risk of termination of any such plan by the Pension Benefit  Guaranty
Corporation.

               (c) Except as set forth on Schedule  8.10,  full payment has been
made of all amounts which Borrowers or any of their ERISA Affiliates is required
under  Section  302 of ERISA and  Section 412 of the Code to have paid under the
terms of each employee benefit plan as contributions to such plan as of the last
day of the most recent  fiscal year of such plan ended prior to the date hereof,
and no  accumulated  funding  deficiency (as defined in Section 302 of ERISA and
Section  412 of the Code),  whether or not waived,  exists  with  respect to any
employee benefit plan, including any penalty or tax described in Section 8.10(a)
hereof and any deficiency with respect to vested accrued  benefits  described in
Section 8.10(d) hereof.

               (d) Except as set forth on  Schedule  8.10  hereto,  the  current
value of all vested accrued benefits under all employee benefit plans maintained
by  Borrowers  that are subject to Title IV of ERISA does not exceed the current
value of the assets of such plans  allocable  to such vested  accrued  benefits,
including  any  penalty  or tax  described  in  Section  8.10(a)  hereof and any
accumulated  funding  deficiency  described in Section 8.10(c) hereof. The terms
"current value" and "accrued benefit" have the meanings specified in ERISA.

               (e) Except as set forth on Schedule  8.10, no Borrower nor any of
its  ERISA  Affiliates  is or has  ever  been  obligated  to  contribute  to any
"multiemployer  plan" (as such term is defined in Section  4001(a)(3)  of ERISA)
that is subject to Title IV of ERISA.

       8.11 Accuracy and Completeness of Information.  All information furnished
by or on behalf of any  Borrower  in writing to Lender in  connection  with this
Agreement  or  any  of  the  other  Financing   Agreements  or  any  transaction
contemplated  hereby or thereby,  including all  information on the  Information
Certificate,  is true and correct in all material respects and does not omit any
material fact necessary in order to make such  information  not  misleading.  No
event or circumstance has occurred which has had or could reasonably be expected
to have a material  adverse  affect on the business,  assets or prospects of any
Borrower,  which  has not been  fully  and  accurately  disclosed  to  Lender in
writing.

       8.12  Interrelated  Business.  HMG Worldwide is the direct and beneficial
owner and holder of all the issued and  outstanding  shares of capital  stock of
HMG In-Store and Intermark and Intermark is the direct and beneficial  owner and
holder  of all the  issued  and  outstanding  shares  of  capital  stock  of HMG
Manufacturing.  Borrowers  share an identity  of interest  such that any benefit
received by one  Borrower  benefits  the others.  Each  Borrower  sells goods or
renders  services to or for the benefit of the other  Borrowers.  Each  Borrower
makes loans and advances and provides other financial  accommodations  to or for
the benefit of the other  Borrowers  (including,  inter alia, the payment and/or
guarantees  by one  Borrower  of  indebtedness  of  the  other  Borrowers).  HMG
Worldwide obtains and/or provides administrative,  legal, marketing, payroll and
management services to or for the benefit of the other

                                             -34-


<PAGE>



Borrowers.  Borrowers have  centralized  purchasing,  collection,  distribution,
accounting,  legal and  other  services  and are  engaged  in a common  business
enterprise.

       8.13  Survival  of  Warranties;   Cumulative.   All  representations  and
warranties  contained in this Agreement or any of the other Financing Agreements
shall survive the  execution and delivery of this  Agreement and shall be deemed
to have been made again to Lender on the date of each  additional  borrowing  or
other credit accommodation  hereunder and shall be conclusively presumed to have
been relied on by Lender  regardless of any  investigation  made or  information
possessed by Lender. The  representations  and warranties set forth herein shall
be cumulative and in addition to any other  representations  or warranties which
any Borrower shall now or hereafter give, or cause to be given, to Lender.

SECTION 9.     AFFIRMATIVE AND NEGATIVE COVENANTS

       9.1 Maintenance of Existence.  Each Borrower shall at all times preserve,
renew and keep in full, force and effect its corporate  existence and rights and
franchises  with  respect  thereto  and  maintain  in full  force and effect all
permits, licenses, trademarks, tradenames, approvals, authorizations, leases and
contracts  necessary  to carry on the  business as  presently  or proposed to be
conducted. Each Borrower shall give Lender thirty (30) days prior written notice
of any proposed change in its corporate  name,  which notice shall set forth the
new name and such  Borrower  shall  deliver to Lender a copy of the amendment to
the Certificate of Incorporation of such Borrower  providing for the name change
certified by the Secretary of State of the jurisdiction of incorporation of such
Borrower  as soon  as it is  available.  HMG  Worldwide  shall  not  permit  its
subsidiaries,  Electronic Voting Systems Inc. and HMG Europe, B.V., to engage in
any active  business  operations,  other than to the extent  required in winding
down the business  operations  of HMG Europe,  B.V.,  or acquire any  additional
assets other than cash to pay liabilities.

       9.2 New Collateral Locations. A Borrower may open any new location within
the  continental  United  States  provided such Borrower (a) gives Lender thirty
(30) days prior written notice of the intended opening of any such new location,
except  in  the  case  of  new  locations  consisting  of a  subcontractor's  or
processor's premises at which Inventory having a value of up to $25,000 is to be
kept,  in which case only ten (10) days prior  written  notice shall be required
(b) executes and  delivers,  or causes to be executed and  delivered,  to Lender
such  agreements,  documents,  and  instruments  as Lender  may deem  reasonably
necessary  or  desirable  to protect its  interests  in the  Collateral  at such
location, including UCC financing statements.

       9.3     Compliance with Laws, Regulations, Etc.

               (a) Each  Borrower  shall,  at all times,  comply in all material
respects with all laws, rules,  regulations,  licenses,  permits,  approvals and
orders applicable to it and duly observe all requirements of any Federal,  State
or local governmental authority,  including the Employee Retirement Security Act
of 1974, as amended,

                                             -35-


<PAGE>



the  Occupational  Safety  and Hazard Act of 1970,  as  amended,  the Fair Labor
Standards Act of 1938, as amended, and all statutes, rules, regulations, orders,
permits and stipulations relating to environmental pollution and employee health
and safety, including all of the Environmental Laws.

               (b) Each Borrower shall establish and maintain, at its expense, a
system to assure and monitor its  continued  compliance  with all  Environmental
Laws in all of its operations, which system shall include annual reviews of such
compliance  by  employees or agents of such  Borrower who are familiar  with the
requirements of the Environmental  Laws.  Copies of all  environmental  surveys,
audits, assessments,  feasibility studies and results of remedial investigations
shall be promptly furnished,  or caused to be furnished, by Borrowers to Lender.
Borrowers  shall  take  prompt  and   appropriate   action  to  respond  to  any
non-compliance  with any of the Environmental Laws and shall regularly report to
Lender on such response.

               (c) Each  Borrower  shall  give both oral and  written  notice to
Lender  immediately  upon such  Borrower's  receipt  of any  notice  of, or such
Borrower's  otherwise  obtaining  knowledge of, (i) the  occurrence of any event
involving  the  release,  spill  or  discharge,  threatened  or  actual,  of any
Hazardous  Material or (ii) any  investigation,  proceeding,  complaint,  order,
directive,  claims,  citation or notice with respect to: (A) any  non-compliance
with or violation of any  Environmental  Law by any Borrower or (B) the release,
spill or discharge,  threatened or actual, of any Hazardous  Material or (C) the
generation,  use, storage,  treatment,  transportation,  manufacture,  handling,
production   or  disposal  of  any   Hazardous   Materials   or  (D)  any  other
environmental,  health or safety matter, which adversely affects any Borrower or
its  business,  operations  or assets or any  properties  at which any  Borrower
transported, stored or disposed of any Hazardous Materials.

               (d) Without  limiting the generality of the  foregoing,  whenever
Lender  reasonably  determines  that there is  non-compliance,  or any condition
which  requires  any action by or on behalf of a Borrower  in order to avoid any
material  non-compliance,  with  any  Environmental  Law,  Borrowers  shall,  at
Lender's request and Borrowers' expense: (i) cause an independent  environmental
engineer  acceptable  to Lender to  conduct  such  tests of the site  where such
Borrower's non-compliance or alleged non-compliance with such Environmental Laws
has  occurred  as to such  non-compliance  and  prepare  and deliver to Lender a
report as to such  non-compliance  setting  forth the results of such  tests,  a
proposed plan for responding to any environmental  problems  described  therein,
and an estimate of the costs  thereof and (ii) provide to Lender a  supplemental
report  of such  engineer  whenever  the scope of such  non-compliance,  or such
Borrower's response thereto or the estimated costs thereof,  shall change in any
material respect.

               (e)  Borrowers  shall  indemnify and hold  harmless  Lender,  its
directors,  officers,  employees, agents, invitees, representa tives, successors
and assigns, from and against any and all losses, claims, damages,  liabilities,
costs, and expenses  (including  attorneys' fees and legal expenses) directly or
indirectly arising

                                             -36-


<PAGE>



out  of or  attributable  to the  use,  generation,  manufacture,  reproduction,
storage, release, threatened release, spill, discharge,  disposal or presence of
a Hazardous Material,  including,  without limitation, the costs of any required
or necessary repair, cleanup or other remedial work with respect to any property
of Borrowers and the preparation and implementation of any closure,  remedial or
other  required   plans.   All   representations,   warranties,   covenants  and
indemnifications   in  this  Section  9.3  shall  survive  the  payment  of  the
Obligations and the termination or non-renewal of this Agreement.

       9.4  Payment  of Taxes  and  Claims.  Each  Borrower  shall  duly pay and
discharge all taxes, assessments, contributions and governmental charges upon or
against it or its  properties or assets,  except for taxes the validity of which
are being contested in good faith by appropriate  proceedings diligently pursued
and available to such Borrower and with respect to which adequate  reserves have
been set  aside on its  books.  Each  Borrower  shall be  liable  for any tax or
penalties imposed on Lender as a result of the financing  arrangements  provided
for herein and  Borrowers  agree to  indemnify  and hold  Lender  harmless  with
respect to the foregoing,  and to repay to Lender on demand the amount  thereof,
and until paid by  Borrowers  such amount  shall be added and deemed part of the
Loans,  provided,  that,  nothing contained herein shall be construed to require
Borrowers to pay any income or  franchise  taxes  attributable  to the income of
Lender from any  amounts  charged or paid  hereunder  to Lender.  The  foregoing
indemnity  shall survive the payment of the  Obligations  and the termination or
non-renewal of this Agreement.

       9.5  Insurance.   Each  Borrower  shall,  at  all  times,  maintain  with
financially  sound  and  reputable   insurers  insurance  with  respect  to  the
Collateral  against  loss or damage and all other  insurance of the kinds and in
the  amounts   customarily   insured  against  or  carried  by  corporations  of
established  reputation  engaged in the same or similar businesses and similarly
situated. Said policies of insurance shall be satisfactory to Lender as to form,
amount and  insurer.  Each  Borrower  shall  furnish  certificates,  policies or
endorsements to Lender as Lender shall require as proof of such insurance,  and,
if any Borrower  fails to do so,  Lender is  authorized,  but not  required,  to
obtain such  insurance at the expense of Borrowers.  All policies  shall provide
for at least thirty (30) days prior written notice to Lender of any cancellation
or reduction  of coverage  and that Lender may act as attorney for  Borrowers in
obtaining,  and at any time an Event of Default  exists or has  occurred  and is
continuing,  adjusting,  settling,  amending and canceling such insurance.  Each
Borrower  shall  cause  Lender  to be named as a loss  payee  and an  additional
insured  (but  without any  liability  for any  premiums)  under such  insurance
policies and each Borrower shall obtain  non-contributory  lender's loss payable
endorsements  to all insurance  policies in form and substance  satisfactory  to
Lender. Such lender's loss payable  endorsements shall specify that the proceeds
of such  insurance  shall be payable to Lender as its  interests  may appear and
further  specify that Lender shall be paid  regardless of any act or omission by
any  Borrower  or any of its  affiliates.  At its  option,  Lender may apply any
insurance  proceeds  received  by Lender at any time to the cost of  repairs  or
replacement of Collateral

                                             -37-


<PAGE>



and/or to payment of the Obligations,  whether or not then due, in any order and
in such manner as Lender may determine or hold such proceeds as cash  collateral
for the Obligations.

       9.6     Financial Statements and Other Information.

               (a) Each  Borrower  shall keep proper  books and records in which
true and complete entries shall be made of all dealings or transactions of or in
relation  to  the   Collateral  and  the  business  of  such  Borrower  and  its
subsidiaries (if any) in accordance with GAAP and such Borrower shall furnish or
cause to be  furnished to Lender:  (i) within  thirty (30) days after the end of
each fiscal month,  except within sixty (60) days after the end of each December
and  forty-five  (45)  days  after  the end of each  January,  March,  June  and
September, monthly unaudited consolidated and consolidating financial statements
(including  in  each  case  balance  sheets,  statements  of  income  and  loss,
statements  of cash  flow,  and  statements  of  shareholders'  equity),  all in
reasonable  detail,  fairly  presenting  in all material  respects the financial
position  and the  results  of the  operations  of  Borrowers  and each of their
subsidiaries  as of the end of and through  such fiscal  month,  and (ii) within
ninety  (90) days after the end of each  fiscal  year,  unaudited  consolidating
financial statements and audited consolidated financial statements (including in
each case balance sheets, statements of income and loss, statements of cash flow
and statements of shareholders' equity), and the accompanying notes thereto, all
in reasonable  detail,  fairly presenting in all material respects the financial
position and the results of the operations of HMG Worldwide and its subsidiaries
as of the end of and for  such  fiscal  year,  together  with,  as such  audited
financial  statements,  the unqualified  report of independent  certified public
accountants,  which accountants shall be an independent accounting firm selected
by  Borrowers  and  reasonably  acceptable  to Lender (it being agreed by Lender
that, as of the date hereof, Friedman,  Alpren & Green is acceptable to Lender),
that such  consolidated  financial  statements  have been prepared in accordance
with GAAP, and present fairly in all material respects the results of operations
and financial  condition of HMG Worldwide and its  subsidiaries as of the end of
and for the fiscal year then ended.

               (b) Each Borrower shall promptly  notify Lender in writing of the
details of (i) any loss,  damage,  investigation,  action,  suit,  proceeding or
claim relating to the Collateral or any other property which is security for the
Obligations  having a value in excess of  $25,000 or which  would  result in any
material  adverse  change  in  such  Borrower's  business,  properties,  assets,
goodwill or  condition,  financial or otherwise  and (ii) the  occurrence of any
Event of Default or event which, with the passage of time or giving of notice or
both, would constitute an Event of Default.

               (c) HMG  Worldwide  shall  promptly  after the  sending or filing
thereof  furnish or cause to be furnished to Lender  copies of all reports which
HMG Worldwide sends to its stockholders  generally and copies of all reports and
registration  statements  which  any  Borrower  files  with the  Securities  and
Exchange  Commission  (including  all reports on Forms 8-K, 10-K and 10-Q),  any
national securities exchange or the National  Association of Securities Dealers,
Inc.

                                             -38-


<PAGE>



               (d)  Borrowers  shall  furnish or cause to be furnished to Lender
such  budgets,  forecasts,  projections  and other  information  respecting  the
Collateral  and the  business of  Borrowers,  as Lender may,  from time to time,
reasonably  request.  Lender  is  hereby  authorized  to  deliver  a copy of any
financial  statement  or any  other  information  relating  to the  business  of
Borrowers  to any  court or other  government  agency or to any  participant  or
assignee or prospective  participant or assignee.  Borrowers hereby  irrevocably
authorize  and direct  all  accountants  or  auditors  to deliver to Lender,  at
Borrowers'  expense,  copies of the  financial  statements  of Borrowers and any
reports or management letters prepared by such accountants or auditors on behalf
of  Borrowers  and to  disclose  to  Lender  such  information  as they may have
regarding the business of Borrowers. Any documents, schedules, invoices or other
papers  delivered to Lender may be destroyed or otherwise  disposed of by Lender
one (1) year  after  the same are  delivered  to  Lender,  except  as  otherwise
designated by Borrowers to Lender in writing.

       9.7 Sale of Assets, Consolidation,  Merger, Dissolution, Etc. No Borrower
shall,  directly or indirectly,  (a) merge into or with or consolidate  with any
other  Person or permit any other  Person to merge  into or with or  consolidate
with it, or (b) sell, assign, lease,  transfer,  abandon or otherwise dispose of
any stock or  indebtedness to any other Person or any of its assets to any other
Person  (except for (i) sales of Inventory  in the ordinary  course of business,
(ii)  sales or other  dispositions  of  Inventory  samples  and  other  items of
inventory not saleable in the ordinary course of business,  provided,  that, the
Value of such  Inventory so sold by all  Borrowers on a combined  basis does not
exceed  $150,000 in the aggregate in any one fiscal year,  (iii) the disposition
of worn-out or obsolete Equipment or Equipment no longer used in the business of
such  Borrower so long as (A) all proceeds are paid to Lender and (B) such sales
do not involve  Equipment  having an  aggregate  fair market  value in excess of
$20,000 for all such Equipment disposed of in any fiscal year of Borrowers, (iv)
trade-ins  and other  exchanges  of  telephone  and other  office  equipment  in
exchange  for similar  equipment  having a fair market  value  greater than such
equipment exchanged),  or (c) form or acquire any subsidiaries,  or (d) wind up,
liquidate or dissolve or (e) agree to do any of the foregoing.

       9.8 Encumbrances.  No Borrower shall create,  incur,  assume or suffer to
exist any security interest, mortgage, pledge, lien, charge or other encumbrance
of any nature  whatsoever  on any of its  assets or  properties,  including  the
Collateral,  except:  (a) liens and security  interests in favor of Lender;  (b)
liens  securing the payment of taxes,  either not yet overdue or the validity of
which are being  contested in good faith by appropriate  proceedings  diligently
pursued  and  available  to such  Borrower  and with  respect to which  adequate
reserves  have been set aside on its books and  Availability  Reserves have been
established  if  required by Lender  hereunder  in the amount of such taxes plus
interest and possible  penalties  thereon;  (c)  non-consensual  statutory liens
(other than liens securing the payment of taxes) arising in the ordinary  course
of such Borrower's  business to the extent:  (i) such liens secure  indebtedness
which is not overdue or (ii) such liens secure  indebtedness  relating to claims
or liabilities which are fully

                                             -39-


<PAGE>



insured and being  defended at the sole cost and expense and at the sole risk of
the  insurer  or  being  contested  in good  faith  by  appropriate  proceedings
diligently  pursued and  available to such  Borrower,  in each case prior to the
commencement  of  foreclosure or other similar  proceedings  and with respect to
which  adequate  reserves  have been set aside on its books;  (d) subject to the
provisions of the Mortgages, zoning restrictions, easements, licenses, covenants
and other restrictions affecting the use of Real Property which do not interfere
in any material  respect with the use of such Real Property or ordinary  conduct
of the business of Borrower as presently  conducted thereon or materially impair
the value of the Real Property which may be subject thereto;  (e) purchase money
security interests in Equipment (including capital leases) not to exceed $50,000
in the aggregate at any time  outstanding so long as such security  interests do
not apply to any property of Borrowers other than the Equipment so acquired, and
the  indebtedness  secured  thereby does not exceed the cost of the Equipment so
acquired;  (f) a mortgage lien granted by HMG  Manufacturing  upon only the Real
Property  located at 234 South 8th Street,  Reading,  Pennsylvania in favor of a
financial institution or government agency to secure permitted  indebtedness set
forth in  Section  9.9(f)  hereof,  provided,  that,  Lender  receives a written
agreement,  in form and  substance  satisfactory  to  Lender,  from such  lender
permitting  Lender,  without  charge,  access to and the right to remain on such
Real Property for a period of not less than one hundred  twenty (120) days after
notice from such lender  directing  removal of  Collateral  located on such Real
Property,  which  notice is given  following  acceleration  of the  indebtedness
secured by such mortgage lien;  (g) a mortgage lien,  subordinate in priority to
the  liens of  Lender,  granted  by HMG  Manufacturing  upon  only the  Eligible
Additional Real Property to secure  subordinated  indebtedness  under certain of
the PIDA Loans, to the extent  permitted under Section 9.9(g) hereof;  provided,
that, Lender receives a written subordination and intercreditor  agreement and a
subordination  instrument,  in  recordable  form,  all  in  form  and  substance
satisfactory to Lender, as further  described in Section 9.9(g) hereof;  and (h)
the security interests and liens set forth on Schedule 8.4 hereto.

       9.9 Indebtedness.  No Borrower shall incur, create,  assume, become or be
liable in any manner with  respect to, or permit to exist,  any  obligations  or
indebtedness, except:

               (a) the Obligations;

               (b) trade  obligations and normal accruals in the ordinary course
of business  not yet due and  payable,  or with respect to which any Borrower is
contesting  in  good  faith  the  amount  or  validity  thereof  by  appropriate
proceedings  diligently  pursued and available to such Borrower and with respect
to which adequate reserves have been set aside on its books;

               (c) purchase money indebtedness (including capital leases) to the
extent not incurred or secured by liens (including  capital leases) in violation
of any other provision of this Agreement;

                                             -40-


<PAGE>



               (d)  obligations  or  indebtedness  of one  Borrower  to  another
Borrower  (other  than HMG  Worldwide)  for (i)  inventory  purchases,  overhead
allocations and other trade obligations and related  intercompany  accounts,  in
the ordinary  course of business  consistent  with past practices and subject to
the  provisions of Section 9.12 hereof and in accordance  with the  Requirements
Agreement  referred  to in  Section  9.12  hereof  and (ii) short term loans and
advances in the ordinary  course of business  consistent  with past practices in
the aggregate amount not to exceed, at any time  outstanding,  for all Borrowers
on a combined basis, the amount of $250,000;  provided, that, in each case under
clause (ii), as of the date of such incurrence of debt, no Event of Default,  or
condition  or event  which,  with  notice or  passage  of time,  or both,  would
constitute an Event of Default, shall exist or have occurred and be continuing;

               (e)  unsecured  indebtedness  of  Borrowers  for  borrowed  money
incurred after the date hereof, which indebtedness is subject and subordinate in
right of  payment  to the  right of  Lender to  receive  the prior  indefeasible
payment and  satisfaction in full payment of all of the  Obligations;  provided,
that,  (i)  Lender  shall have  received  not less than  thirty  (30) days prior
written notice of the intention to incur such  indebtedness,  which notice shall
set forth in  reasonable  detail  satisfactory  to  Lender,  the  amount of such
indebtedness,  the person or persons to whom such indebtedness will be owed, the
interest rate, the schedule of repayments and maturity date with respect thereto
and such  other  information  as Lender  may  reasonably  request  with  respect
thereto,  (ii) Lender shall have received true,  correct and complete  copies of
all  agreements,  documents and instruments  evidencing or otherwise  related to
such  indebtedness,  (iii)  after  giving  effect  to  the  incurrence  of  such
indebtedness,  no Event of Default or condition or event which, with the passage
of time,  or both,  would  constitute  an Event of Default,  shall exist or have
occurred  and be  continuing,  (iv)  such  indebtedness  shall  be  incurred  by
Borrowers  at  commercially  reasonable  rates  and  terms  in an  arm's  length
transaction,  and if such  borrowing is from an affiliate of Borrowers,  then at
rates and on terms no less favorable to Borrowers than Borrowers would obtain in
a comparable arm's length transaction with a person who is not an affiliate, (v)
such  indebtedness  shall not at any time include terms and conditions  which in
any manner adversely affect Lender or any rights of Lender as determined in good
faith by Lender,  (vi) the terms of such  indebtedness,  upon which Lender shall
expressly be permitted to rely, shall only require regularly  scheduled payments
of  principal  and  interest  in  respect of such  indebtedness,  and shall only
require such  payments to be made or accepted so long as (A) no Event of Default
or  condition  or event which,  with notice or passage of time,  or both,  would
constitute  an Event of Default  shall exist or have  occurred and be continuing
and (B)  Borrower  shall have Excess  Availability  of at least  $700,000 at all
times  during the thirty (30) day period  immediately  prior to any such payment
and immediately after giving effect thereto, (vii) Borrowers shall not, directly
or indirectly, (A) amend, modify, alter or change the terms of such indebtedness
or any  agreement,  document  or  instrument  related  thereto  in any  material
respect,  or (B) redeem,  retire,  defease,  purchase or otherwise  acquire such
indebtedness, or set aside or otherwise deposit or invest any sums

                                             -41-


<PAGE>



for such  purpose,  except to convert  such  indebtedness  into common  stock of
Borrowers  (subject,   nevertheless,  to  Section  10.1(j)  hereof)  and  (viii)
Borrowers shall furnish to Lender all notices or demands in connection with such
indebtedness either received by a Borrower or on its behalf,  promptly after the
receipt thereof,  or sent by a Borrower or on its behalf,  concurrently with the
sending thereof, as the case may be;

               (f)  indebtedness  of HMG  Manufacturing  incurred after the date
hereof for money borrowed from a financial  institution or government  agency in
an amount not to exceed the  principal  amount of $600,000,  secured only by the
Real  Property  located at 234 South 8th Street,  Reading,  Pennsylvania  to the
extent such mortgage  lien is permitted  pursuant to Section  9.8(f),  provided,
that,  (i)  Lender  shall have  received  not less than  thirty  (30) days prior
written notice of the intention to incur such  indebtedness,  which notice shall
set forth in  reasonable  detail  satisfactory  to  Lender,  the  amount of such
indebtedness,  the person or persons to whom such indebtedness will be owed, the
interest rate, the schedule of repayments and maturity date with respect thereto
and such  other  information  as Lender  may  reasonably  request  with  respect
thereto,  (ii) Lender shall have received true,  correct and complete  copies of
all  agreements,  documents and instruments  evidencing or otherwise  related to
such  indebtedness,  (iii)  after  giving  effect  to  the  incurrence  of  such
indebtedness,  no Event of Default, or condition or event which with the passage
of time or both  would  constitute  an Event  of  Default,  shall  exist or have
occurred  and be  continuing,  (iv) such  indebtedness  shall be incurred by HMG
Manufacturing  at commercially  reasonable  rates and terms of repayment  (which
Lender hereby agrees would  include  rates of three and three  quarters  (3.75%)
percent per annum and monthly  amortization in equal  installments  over fifteen
(15)  years),  (v) such  indebtedness  shall not at any time  include  terms and
conditions  which in any manner  adversely affect Lender or any rights of Lender
as determined in good faith by Lender  (except that such terms shall require the
subordination of Lender's lien upon such Real Property to the extent provided in
Section 5.2 hereof),  (vi)  Borrowers  shall not,  directly or  indirectly,  (A)
amend,  modify, alter or change the terms of such indebtedness or any agreement,
document or instrument  related thereto in any material respect,  or (B) redeem,
retire, defease,  purchase or otherwise acquire such indebtedness,  or set aside
or otherwise deposit or invest any sums for such purpose,  (vii) Borrowers shall
furnish to Lender all notices or demands in  connection  with such  indebtedness
either  received  by a Borrower  or on its  behalf,  promptly  after the receipt
thereof,  or sent by a Borrower or on its behalf,  concurrently with the sending
thereof, as the case may be;

               (g) unsecured  indebtedness of HMG  Manufacturing  under the PIDA
Loans,  other than those PIDA Loans  described in Section 9.9(f)  hereof,  which
indebtedness  is  subordinate  in right of  payment  to the  right of  Lender to
receive full and indefeasible  payment of the Obligations;  provided,  that: (i)
HMG  Manufacturing  shall not,  directly  or  indirectly,  make any  payments in
respect of such indebtedness,  including, but not limited to, any prepayments or
other  non-mandatory  payments,  except that until an Event of Default, or event
which  with  notice or  passage  of time or both  would  constitute  an Event of
Default, shall exist or have occurred

                                             -42-


<PAGE>



and be continuing,  HMG Manufacturing may make regularly  scheduled  payments of
principal and interest at commercially  reasonable rates and terms in accordance
with the  terms of such  agreement  or  instrument  as in  effect on the date of
execution or issuance  thereof,  (ii) HMG  Manufacturing  shall not, directly or
indirectly, (A) amend, modify, alter or change any terms of such indebtedness or
any agreement,  document or instrument related thereto,  or (B) redeem,  retire,
defease,  purchase  or  otherwise  acquire  such  indebtedness,  or set aside or
otherwise  deposit or invest any sums for such purpose,  (iii) HMG Manufacturing
shall furnish to Lender all notices,  demands or other materials concerning such
indebtedness  either received by HMG  Manufacturing  or on its behalf,  promptly
after  receipt  thereof,  or  sent  by  HMG  Manufacturing  or  on  its  behalf,
concurrently with the sending thereof, as the case may be, and (iv) Lender shall
have entered into an  intercreditor  and  subordination  agreement,  in form and
substance  satisfactory to Lender,  with the holder(s) of such  indebtedness and
PIDA providing for among other things (A) the  subordination of the indebtedness
of HMG  Manufacturing  described  in this Section  9.9(g),  (B) the absolute and
unconditional  subordination  in favor of Lender of the  mortgage  lien upon the
Eligible  Additional  Real Property  securing such  indebtedness  under the PIDA
Loans, (C) restrictions on enforcement  actions with respect to such subordinate
indebtedness  and subordinate  mortgage lien, (D) release  provisions  requiring
such  mortgage  lien to be released in the event the  Eligible  Additional  Real
Property  is  to  be  sold  or  otherwise  disposed  of  by  Lender  or  by  HMG
Manufacturing  with the  consent of  Lender,  and (E) other  provisions  for the
protection of the security interests and liens of Lender in the Collateral; and

               (h) the indebtedness set forth on Schedule 9.9 hereto;  provided,
that,  (i) the  applicable  Borrowers  indebted  thereon may only make regularly
scheduled  payments of principal and interest in respect of such indebtedness in
accordance  with the terms of the agreement or  instrument  evidencing or giving
rise to such indebtedness as in effect on the date hereof,  (ii) Borrowers shall
not,  directly or indirectly,  (A) amend,  modify,  alter or change the terms of
such indebtedness or any agreement, document or instrument related thereto as in
effect on the date hereof, or (B) redeem, retire, defease, purchase or otherwise
acquire such indebtedness,  or set aside or otherwise deposit or invest any sums
for such  purpose,  and (iii)  Borrowers  shall furnish to Lender all notices or
demands in connection with such indebtedness either received by a Borrower or on
its behalf,  promptly after the receipt thereof, or sent by a Borrower or on its
behalf, concurrently with the sending thereof, as the case may be.

       9.10 Loans, Investments,  Guarantees, Etc. No Borrower shall, directly or
indirectly, make any loans or advance money or property to any person, or invest
in (by capital  contribution,  dividend or  otherwise) or purchase or repurchase
the stock or indebtedness or all or a substantial part of the assets or property
of any person, or guarantee,  assume,  endorse,  or otherwise become responsible
for (directly or  indirectly)  the  indebtedness,  performance,  obligations  or
dividends  of any Person or agree to do any of the  foregoing,  except:  (a) the
endorsement of instruments  for collection or deposit in the ordinary  course of
business; (b) investments in Cash Equivalents;  provided, that, as to any of the
foregoing, unless

                                             -43-


<PAGE>



waived in  writing by Lender,  Borrowers  shall take such  actions as are deemed
necessary  by  Lender  to  perfect  the  security  interest  of  Lender  in such
investments, including with respect to the Custodial Account as provided herein;
(c)  loans  and  advances  by one  Borrower  to  another  Borrower  constituting
permitted  indebtedness of the recipient  Borrower under Section 9.9 hereof; (d)
investments  by HMG  Worldwide in and advances to HMG Europe,  B.V. in an amount
not to exceed $200,000 to cover costs and expenses incurred by HMG Europe,  B.V.
in connection with winding down its business operations;  (e) investments by HMG
Worldwide in and advances to Creative Displays,  Inc. in an amount not to exceed
$30,000 per month to cover real property lease obligations of Creative Displays,
Inc.  through July 31, 1997; (f) advance  payments  (including  commissions)  to
providers  of goods and  services to a Borrower in the  ordinary  course of such
Borrower's business and subject to the terms and conditions set forth in Section
9.12 hereof;  and (g) the existing  loans,  advances and guarantees set forth on
Schedule 9.10 hereto;  provided, that, as to such loans, advances and guarantees
identified on Schedule  9.10, (i) Borrowers  shall not,  directly or indirectly,
(A)  increase the  principal  amount of such loans from the amounts set forth on
Schedule 9.10, reduce the interest rates applicable to such loans, or forgive or
cancel  any  indebtedness  in respect of such  loans,  or (B) as to matters  not
covered by clause (A), after an Event of Default that is continuing or condition
or event which with notice or passage of time or both would  constitute an Event
of Default,  amend, modify, alter or change the terms of such loans, advances or
guarantees or any agreement,  document or instrument related thereto,  or (C) as
to such guarantees,  redeem, retire, defease,  purchase or otherwise acquire the
obligations  arising pursuant to such guarantees  (other than in accordance with
the terms of such instruments),  or set aside or otherwise deposit or invest any
sums for such purpose,  and (ii) Borrowers  shall furnish to Lender all notices,
demands or other material in connection with such loans,  advances or guarantees
or other  indebtedness  subject to such guarantees either received by a Borrower
or on its behalf,  promptly after the receipt thereof,  or sent by a Borrower or
on its behalf, concurrently with the sending thereof, as the case may be.

       9.11  Dividends  and   Redemptions.   No  Borrower  shall,   directly  or
indirectly,  declare or pay any  dividends  on account of any shares of class of
capital  stock of any  Borrower now or  hereafter  outstanding,  or set aside or
otherwise  deposit  or invest  any sums for such  purpose,  or  redeem,  retire,
defease,  purchase or otherwise acquire any shares of any class of capital stock
(or set aside or otherwise  deposit or invest any sums for such purpose) for any
consideration other than common stock or apply or set apart any sum, or make any
other distribution (by reduction of capital or otherwise) in respect of any such
shares or agree to do any of the foregoing.

       9.12  Transactions  with  Affiliates.  No  Borrower  shall,  directly  or
indirectly,  (a) purchase, acquire or lease any property from, or sell, transfer
or lease any property to, any officer, director, agent or any other affiliate of
such Borrower,  except for sales of finished goods  Inventory to HMG In-Store by
HMG  Manufacturing  or Intermark  in the ordinary  course of and pursuant to the
reasonable  requirements of such Borrower's  business for fair consideration and
upon commercially reasonable terms and in

                                             -44-


<PAGE>



accordance with the Requirements Agreement, dated of even date herewith, between
HMG In-Store and HMG  Manufacturing  (as in effect on the date  hereof),  or (b)
make any payments of  management,  consulting  or other fees for  management  or
similar  services,  or of  any  indebtedness  owing  to any  officer,  employee,
shareholder,  director or other person  affiliated with such Borrower except (i)
repayments of short term loans and advances by one Borrower to another  Borrower
otherwise  permitted  hereunder,   (ii)  reasonable  compensation  to  officers,
employees and directors for services rendered to Borrower in the ordinary course
of  business,  and (iii)  payments of  reasonable  fees and  expenses  for legal
services or financial  advisory  services rendered to Borrowers by an affiliated
law or  financial  advisory  firm (as the case  may be) of any  director  of any
Borrower,  (iv)  payments  by one  Borrower  (other than HMG  Worldwide)  to HMG
Worldwide for corporate  overhead  allocations  of legal,  audit,  insurance and
other like expenses, incurred in the ordinary course of business for the benefit
of the other Borrowers, in the aggregate not to exceed, for all Borrowers, other
than HMG  Worldwide,  the amount of $1,000,000  for all such payments in any one
fiscal year of Borrowers;  provided,  that, as of the date of each such payment,
no Event of Default,  or  condition  or event  which,  with notice or passage of
time,  or  both,  would  constitute  an Event of  Default,  shall  exist or have
occurred and be continuing.

       9.13    Custodial Account; Additional Bank Accounts.

               (a) HMG  Worldwide  shall at all  times  maintain  the  Custodial
Account and Custodial Account Agreement in full force and effect.

               (b) No Borrower shall, directly or indirectly, open, establish or
maintain any deposit account,  investment  account or any other account with any
bank or other  financial  institution,  other than the Blocked  Accounts and the
accounts  set  forth  in  Schedule  8.8  hereto,  except:  (c) as to any  new or
additional  Blocked  Accounts and other such new or  additional  accounts  which
contain any Collateral or proceeds  thereof,  with the prior written  consent of
Lender and subject to such conditions thereto as Lender may establish and (d) as
to any accounts  used by Borrowers to make  payments of payroll,  taxes or other
obligations to third parties, after prior written notice to Lender.

       9.14  Compliance  with ERISA.  Borrowers  shall not,  with respect to any
"employee benefit plans" maintained by Borrower or any of its ERISA Affiliates:

               (a) (i)  terminate  any of such  employee  benefit plans so as to
incur any  liability to the Pension  Benefit  Guaranty  Corporation  established
pursuant  to ERISA,  (ii)  allow or suffer to exist any  prohibited  transaction
involving  any of such employee  benefit  plans or any trust created  thereunder
which would  subject  Borrowers  or such ERISA  Affiliate to a tax or penalty or
other  liability on  prohibited  transactions  imposed under Section 4975 of the
Code  or  ERISA,  (iii)  fail  to pay to any  such  employee  benefit  plan  any
contribution  which it is obligated to pay under  Section 302 of ERISA,  Section
412 of the Code or the terms of such plan,  (iv) except as set forth on Schedule
8.10  hereto,  allow or  suffer  to exist any  accumulated  funding  deficiency,
whether or not waived,

                                             -45-


<PAGE>



with  respect  to any such  employee  benefit  plan,  (v) except as set forth on
Schedule  8.10 hereto,  allow or suffer to exist any  occurrence of a reportable
event  or any  other  event or  condition  which  presents  a  material  risk of
termination  by the Pension  Benefit  Guaranty  Corporation of any such employee
benefit plan that is a single employer plan, which  termination  could result in
any  liability to the Pension  Benefit  Guaranty  Corporation  or (vi) incur any
withdrawal liability with respect to any multiemployer plan.

               (b) As used in this Section  9.14,  the terms  "employee  benefit
plans",  "accumulated  funding deficiency" and "reportable event" shall have the
respective  meanings  assigned  to  them in  ERISA,  and  the  term  "prohibited
transaction"  shall have the meaning  assigned to it in Section 4975 of the Code
and ERISA.

       9.15 Tangible Net Worth.  Borrowers  shall, at all times,  during each of
the respective periods set forth in the table below, maintain Tangible Net Worth
in an amount not less than the dollar amount set forth below for such period:

               Amount                                     Period

               (a)    negative $600,000            from the date hereof to
                                                   and including May 31,
                                                   1997

               (b)    $0                           from June 1, 1997 to and
                                                   including November 30,
                                                   1997

               (c)    $250,000                     from December 1, 1997 and
                                                   at all times thereafter

       9.16  Costs and  Expenses.  Borrowers  shall pay to Lender on demand  all
costs,  expenses,  filing fees and taxes paid or payable in connection  with the
preparation,   negotiation,  execution,  delivery,  recording,   administration,
collection,  liquidation,  enforcement and defense of the Obligations,  Lender's
rights in the Collateral, this Agreement, the other Financing Agreements and all
other documents related hereto or thereto, including any amendments, supplements
or consents  which may  hereafter be  contemplated  (whether or not executed) or
entered  into in  respect  hereof  and  thereof,  including:  (a) all  costs and
expenses of filing or recording  (including  Uniform  Commercial  Code financing
statement  filing  taxes  and fees,  documentary  taxes,  intangibles  taxes and
mortgage  recording taxes and fees, if  applicable);  (b) costs and expenses and
fees  for  title  insurance  (if  applicable)  and  other  insurance   premiums,
environmental audits, surveys, assessments, engineering reports and inspections,
appraisal  fees and  search  fees;  (c) costs and  expenses  of  remitting  loan
proceeds,  collecting  checks and other items of payment,  and  establishing and
maintaining the Blocked Accounts,  together with Lender's  customary charges and
fees with respect thereto; (d) charges,  fees or expenses charged by any bank or
issuer in  connection  with the Letter of Credit  Accommodations;  (e) costs and
expenses of preserving  and protecting  the  Collateral;  (f) costs and expenses
paid or  incurred  in  connection  with  obtaining  payment of the  Obligations,
enforcing the security interests and liens of Lender,

                                             -46-


<PAGE>



selling or otherwise realizing upon the Collateral,  and otherwise enforcing the
provisions of this Agreement and the other Financing Agreements or defending any
claims  made  or  threatened  against  Lender  arising  out of the  transactions
contemplated  hereby and thereby  (including  preparations for and consultations
concerning any such  matters);  (g) all  out-of-pocket  expenses and costs heret
ofore and from time to time  hereafter  incurred by Lender  during the course of
periodic field examinations of the Collateral and Borrowers' operations,  plus a
per diem charge at the rate of $600 per person per day for Lender's examiners in
the field and office;  and (h) the fees and disbursements of counsel  (including
legal assistants) to Lender in connection with any of the foregoing.

       9.17  Further  Assurances.  At the request of Lender at any time and from
time to time, Borrowers shall, at Borrowers' expense,  duly execute and deliver,
or cause to be duly executed and delivered,  such further agreements,  documents
and  instruments,  and do or  cause  to be  done  such  further  acts  as may be
necessary  or proper to  evidence,  perfect,  maintain  and enforce the security
interests and the priority thereof in the Collateral and to otherwise effectuate
the  provisions  or purposes  of this  Agreement  or any of the other  Financing
Agreements.  Lender may at any time and from time to time request a  certificate
from an officer of each Borrower  representing that all conditions  precedent to
the  making of Loans and  providing  Letter of Credit  Accommodations  contained
herein are satisfied. In the event of such request by Lender, Lender may, at its
option,  cease to make any further Loans or provide any further Letter of Credit
Accommodations  until Lender has  received  such  certificate  and, in addition,
Lender has determined  that such  conditions are satisfied.  Where  permitted by
law, each Borrower hereby  authorizes Lender to execute and file one or more UCC
financing statements signed only by Lender.

SECTION 10.           EVENTS OF DEFAULT AND REMEDIES

       10.1 Events of Default. The occurrence or existence of any one or more of
the  following  events  are  referred  to  herein  individually  as an "Event of
Default", and collectively as "Events of Default":

               (a) any Borrower fails (i) to pay when due any of the Obligations
or fails to  perform  any of the  terms,  covenants,  conditions  or  provisions
contained in this Agreement or any of the other Financing  Agreements or (ii) to
perform any of the terms, covenants,  conditions or provisions contained in this
Agreement or any of the other  Financing  Agreements  other than as described in
Section 10.1(a)(i) and such failure shall continue for ten (10) days;  provided,
that,  such ten (10) day period  shall not apply in the case of: (A) any failure
to observe any such term, covenant,  condition or provision which is not capable
of being  cured at all or within  such ten (10) day period or which has been the
subject of a prior failure  within a six (6) month period or (B) an  intentional
breach by Borrower of any such term,  covenant,  condition or provision,  or (C)
the failure to observe or perform any of the covenants or  provisions  contained
in Sections  6.3,  7.1,  7.2,  7.3, 7.4, 7.7, 9.1, 9.2, 9.4, 9.5, 9.7, 9.8, 9.9,
9.10,  9.11,  9.12,  9.13,  9.14 or 9.15 of this  Agreement or any  covenants or
agreements

                                             -47-


<PAGE>



covering substantially the same matter as such sections in any of
the other Financing Agreements;

               (b) any representation, warranty or statement of fact made by any
Borrower to Lender in this  Agreement,  the other  Financing  Agreements  or any
other agreement, schedule,  confirmatory assignment or otherwise shall when made
or deemed made be false or misleading in any material respect;

               (c) any Obligor  revokes,  terminates  or fails to perform any of
the terms, covenants, conditions or provisions of any guarantee,  endorsement or
other agreement of such party in favor of Lender;

               (d) any judgment for the payment of money is rendered against any
Borrower  or any  Obligor  in excess of  $50,000 in any one case or in excess of
$100,000 in the  aggregate  and shall remain  undischarged  or  unvacated  for a
period in excess of forty-five  (45) days or execution  shall at any time not be
effectively  stayed,  or any  judgment  other than for the payment of money,  or
injunction,  attachment,  garnishment  or  execution  is  rendered  against  any
Borrower or any Obligor or any of their assets;

     (e) any Obligor (being a natural person or a general  partner of an Obligor
which  is a  partnership)  dies  or any  Borrower  or any  Obligor,  which  is a
partnership,  limited  liability  company,  limited  liability  partnership or a
corporation,  dissolves (other than Electronic  Voting Systems Inc. and Creative
Displays, Inc.) or suspends or discontinues doing business;

               (f)  any  Borrower  or any  Obligor  becomes  insolvent  (however
defined or evidenced),  makes an assignment for the benefit of creditors,  makes
or sends  notice of a bulk  transfer  or calls a  meeting  of its  creditors  or
principal creditors;

               (g) a case or proceeding  under the bankruptcy laws of the United
States  of  America  now  or  hereafter  in  effect  or  under  any  insolvency,
reorganization,  receivership,  readjustment of debt, dissolution or liquidation
law or statute of any jurisdiction now or hereafter in effect (whether at law or
in equity) is filed  against  any  Borrower or any Obligor or all or any part of
its properties  and such petition or application is not dismissed  within thirty
(30) days after the date of its filing or any Borrower or any Obligor shall file
any answer admitting or not contesting such petition or application or indicates
its consent to, acquiescence in or approval of, any such action or proceeding or
the relief requested is granted sooner;

               (h) a case or proceeding  under the bankruptcy laws of the United
States  of  America  now  or  hereafter  in  effect  or  under  any  insolvency,
reorganization,  receivership,  readjustment of debt, dissolution or liquidation
law or statute of any  jurisdiction now or hereafter in effect (whether at a law
or equity) is filed by any Borrower or any Obligor or for all or any part of its
property; or

               (i)  any  default  by any  Borrower  or  any  Obligor  under  any
agreement,  document or  instrument  relating to any  indebtedness  for borrowed
money owing to any person other than Lender, or any

                                             -48-


<PAGE>



capitalized lease  obligations,  contingent  indebtedness in connection with any
guarantee, letter of credit, indemnity or similar type of instrument in favor of
any person  other than  Lender,  in any case in an amount in excess of  $50,000,
which default  continues for more than the applicable cure period,  if any, with
respect  thereto,  or any  default  by any  Borrower  or any  Obligor  under any
material contract,  lease,  license or other obligation to any person other than
Lender,  which default  continues for more than the applicable  cure period,  if
any, with respect thereto;

               (j)    any change in the controlling ownership of any
Borrower (other than HMG Worldwide);

               (k) the  indictment or  threatened  indictment of any Borrower or
any  Obligor  under  any  criminal   statute,   or  commencement  or  threatened
commencement  of  criminal  or civil  proceedings  against  any  Borrower or any
Obligor,  pursuant to which  statute or  proceedings  the  penalties or remedies
sought or available  include  forfeiture of any of the property of such Borrower
or such Obligor having a value in excess of $50,000;

               (l) there  shall be a material  adverse  change in the  business,
assets or prospects of HMG Worldwide and its subsidiaries taken as a whole after
the date hereof; or

               (m)    there shall be an event of default under any of the
other Financing Agreements.

       10.2    Remedies.

               (a) At any time an Event of Default exists or has occurred and is
continuing,  Lender  shall  have  all  rights  and  remedies  provided  in  this
Agreement, the other Financing Agreements, the Uniform Commercial Code and other
applicable law, all of which rights and remedies may be exercised without notice
to or consent by any Borrower or any  Obligor,  except as such notice or consent
is expressly  provided for hereunder or required by applicable  law. All rights,
remedies  and  powers  granted  to  Lender  hereunder,  under  any of the  other
Financing  Agreements,  the Uniform Commercial Code or other applicable law, are
cumulative,   not   exclusive   and   enforceable,   in   Lender's   discretion,
alternatively,  successively,  or concurrently on any one or more occasions, and
shall include,  without limitation,  the right to apply to a court of equity for
an injunction to restrain a breach or threatened  breach by any Borrower of this
Agreement or any of the other Financing  Agreements.  Lender may, at any time or
times,  proceed  directly  against  any  Borrower  or any Obligor to collect the
Obligations without prior recourse to the Collateral.

               (b)  Without  limiting  the  foregoing,  at any  time an Event of
Default exists or has occurred and is continuing,  Lender may, in its discretion
and without limitation, (i) accelerate the payment of all Obligations and demand
immediate payment thereof to Lender (provided,  that, upon the occurrence of any
Event of Default  described  in Sections  10.1(g) and 10.1(h),  all  Obligations
shall  automatically  become immediately due and payable),  (ii) with or without
judicial process or the aid or assistance of others,  enter upon any premises on
or in which any of the Collateral may be

                                             -49-


<PAGE>



located  and  take   possession  of  the  Collateral  or  complete   processing,
manufacturing and repair of all or any portion of the Collateral,  (iii) require
Borrowers,  at Borrowers'  expense, to assemble and make available to Lender any
part or all of the Collateral at any place and time  designated by Lender,  (iv)
collect, foreclose,  receive,  appropriate,  setoff and realize upon any and all
Collateral,  (v) remove any or all of the Collateral  from any premises on or in
which the same may be located for the purpose of effecting the sale, foreclosure
or other  disposition  thereof  or for any  other  purpose,  (vi)  sell,  lease,
transfer,  assign,  deliver  or  otherwise  dispose  of any and  all  Collateral
(including entering into contracts with respect thereto, public or private sales
at any exchange,  broker's  board, at any office of Lender or elsewhere) at such
prices or terms as Lender  may deem  reasonable,  for cash,  upon  credit or for
future  delivery,  with the Lender having the right to purchase the whole or any
part of the Collateral at any such public sale, all of the foregoing  being free
from any right or equity of redemption of any Borrower, which right or equity of
redemption is hereby expressly waived and released by each Borrower and/or (vii)
terminate this  Agreement.  If any of the Collateral is sold or leased by Lender
upon credit terms or for future delivery,  the Obligations  shall not be reduced
as a result thereof until payment  therefor is finally  collected by Lender.  If
notice of  disposition  of  Collateral  is required by law,  five (5) days prior
notice by Lender to Borrowers  designating the time and place of any public sale
or the time  after  which any  private  sale or other  intended  disposition  of
Collateral  is to be made,  shall be deemed to be reasonable  notice  thereof to
Borrowers  and each  Borrower  waives  any other  notice.  In the  event  Lender
institutes  an  action  to  recover  any  Collateral  or seeks  recovery  of any
Collateral by way of prejudgment remedy, each Borrower waives the posting of any
bond which might otherwise be required.

               (c) Lender may apply the cash  proceeds  of  Collateral  actually
received by Lender from any sale, lease, foreclosure or other disposition of the
Collateral to payment of the Obligations,  in whole or in part and in such order
as Lender may elect,  whether or not then due. Each Borrower shall remain liable
to Lender for the payment of any  deficiency  with  interest at the highest rate
provided for herein and all costs and  expenses of  collection  or  enforcement,
including attorneys' fees and legal expenses.

               (d) Without  limiting the  foregoing,  upon the  occurrence of an
Event of Default or an event  which with notice or passage of time or both would
constitute an Event of Default,  Lender may, at its option,  without notice, (i)
cease making Loans or arranging  for Letter of Credit  Accommodations  or reduce
the  lending  formulas  or  amounts  of  Revolving  Loans  and  Letter of Credit
Accommodations  available to Borrowers  and/or (ii)  terminate  any provision of
this Agreement providing for any future Loans or Letter of Credit Accommodations
to be made by Lender to Borrowers.

       10.3    CONFESSION OF JUDGMENT AND WAIVERS.

               (a) EACH  BORROWER,  TO THE EXTENT  PERMITTED BY LAW, AND WITHOUT
THE  FURTHER  CONSENT  OF OR NOTICE TO SUCH  BORROWER,  HEREBY  IRREVOCABLY  AND
UNCONDITIONALLY AUTHORIZES THE PROTHONOTARY,  CLERK OF COURT, OR ANY ATTORNEY OF
ANY COURT OF RECORD IN THE

                                             -50-


<PAGE>



COMMONWEALTH OF PENNSYLVANIA,  OR ANY OTHER JURISDICTIONS,  AS ATTORNEY FOR SUCH
BORROWER, TO APPEAR FOR SUCH BORROWER IN SUCH COURT AND CONFESS JUDGMENT AGAINST
SUCH BORROWER IN FAVOR OF LENDER,  AND ITS SUCCESSORS  AND ASSIGNS,  AT ANY TIME
FOLLOWING THE  OCCURRENCE OF AN EVENT OF DEFAULT,  FOR ALL OR ANY PORTION OF THE
UNPAID PRINCIPAL  BALANCE,  UNPAID AND CONTINUING  INTEREST,  COSTS AND EXPENSES
(INCLUDING  WITHOUT  LIMITATION  ATTORNEYS' FEES NOT TO EXCEED 10% OF THE UNPAID
PRINCIPAL BALANCE), AND ALL OTHER OBLIGATIONS UNDER THIS AGREEMENT,  FOR WHICH A
VERIFIED  COPY  HEREOF  SHALL BE  SUFFICIENT  WARRANT.  THE  AUTHORITY  TO ENTER
JUDGMENT  SHALL NOT BE  EXHAUSTED  BY ONE  EXERCISE  HEREOF,  BUT, TO THE EXTENT
PERMITTED  BY LAW,  SHALL  CONTINUE  FROM TIME TO TIME UNTIL FULL PAYMENT OF ALL
OBLIGATIONS  UNDER THIS AGREEMENT AND UNTIL THIS AGREEMENT HAS BEEN  TERMINATED.
THE  FOREGOING  RIGHT AND REMEDY IS IN  ADDITION TO AND NOT IN LIEU OF ANY OTHER
RIGHT OR REMEDY AVAILABLE TO LENDER UNDER THIS AGREEMENT OR OTHERWISE.

               (b) EACH BORROWER, BEING FULLY AWARE OF ITS RIGHT TO NOTICE AND A
HEARING  CONCERNING  THE  VALIDITY  OF ANY AND ALL CLAIMS  THAT MAY BE  ASSERTED
AGAINST SUCH  BORROWER BY LENDER  BEFORE A JUDGMENT CAN BE ENTERED  HEREUNDER OR
BEFORE  EXECUTION MAY BE LEVIED ON SUCH JUDGMENT AGAINST ANY AND ALL PROPERTY OF
SUCH  BORROWER,  HEREBY  WAIVES EACH OF THESE  RIGHTS AND AGREES AND CONSENTS TO
JUDGMENT  BEING ENTERED BY  CONFESSION  IN ACCORDANCE  WITH THE TERMS HEREOF AND
EXECUTION  BEING  LEVIED ON SUCH  JUDGMENT  AGAINST ANY AND ALL PROPERTY OF SUCH
BORROWER,  IN EACH CASE WITHOUT  FIRST GIVING NOTICE AND THE  OPPORTUNITY  TO BE
HEARD ON THE  VALIDITY  OF THE CLAIM OR  CLAIMS  UPON  WHICH  SUCH  JUDGMENT  IS
ENTERED.

SECTION 11.           JURY TRIAL WAIVER; OTHER WAIVERS

                      AND CONSENTS; GOVERNING LAW

       11.1    Governing Law; Choice of Forum; Service of Process; Jury
Trial Waiver.

               (a)  The  validity,   interpretation   and  enforcement  of  this
Agreement and the other Financing  Agreements and any dispute arising out of the
relationship  between the parties hereto,  whether in contract,  tort, equity or
otherwise,  shall be  governed  by the  internal  laws of the  State of New York
(without  giving effect to principles of conflicts of law),  except with respect
to Section 10.3 hereof,  and any other  provision of any of the other  Financing
Agreements  providing for the right and remedy of confession of judgment,  which
shall be governed by the laws of the Commonwealth of Pennsylvania.

               (b) Each Borrower and Lender irrevocably  consents and submits to
the  non-exclusive  jurisdiction  of the Supreme Court of the State of New York,
County  of New  York and the  United  States  District  Court  for the  Southern
District  of New York  and  waive  any  objection  based  on venue or forum  non
conveniens  with respect to any action  instituted  therein  arising  under this
Agreement or any of the other Financing  Agreements or in any way connected with
or related or  incidental  to the  dealings of the parties  hereto in respect of
this  Agreement or any of the other  Financing  Agreements  or the  transactions
related  hereto or  thereto,  in each case  whether now  existing  or  hereafter
arising, and whether in contract, tort,

                                             -51-


<PAGE>



equity or  otherwise,  and  agrees  that any  dispute  with  respect to any such
matters  shall be heard only in the courts  described  above (except that Lender
shall have the right to bring any action or  proceeding  against any Borrower or
its  property  in the  courts  of any  other  jurisdiction  which  Lender  deems
necessary or  appropriate  in order to realize on the Collateral or to otherwise
enforce its rights against such Borrower or its property).

               (c) Each Borrower hereby waives  personal  service of any and all
process  upon it and  consents  that all such  service of process may be made by
certified mail (return receipt  requested)  directed to its address set forth on
the  signature  pages hereof and service so made shall be deemed to be completed
five (5) days after the same shall have been so deposited in the U.S. mails, or,
at Lender's  option,  by service upon such Borrower in any other manner provided
under the rules of any such courts.  Within thirty (30) days after such service,
such Borrowers  shall appear in answer to such process,  failing which Borrowers
shall be deemed in default and  judgment  may be entered by Lender  against such
Borrower for the amount of the claim and other relief requested.

               (d) EACH  BORROWER AND LENDER HEREBY WAIVES ANY RIGHT TO TRIAL BY
JURY OF ANY  CLAIM,  DEMAND,  ACTION OR CAUSE OF ACTION (i)  ARISING  UNDER THIS
AGREEMENT OR ANY OF THE OTHER FINANCING  AGREEMENTS OR (ii) IN ANY WAY CONNECTED
WITH OR RELATED OR INCIDENTAL  TO THE DEALINGS OF THE PARTIES  HERETO IN RESPECT
OF THIS AGREEMENT OR ANY OF THE OTHER FINANCING  AGREEMENTS OR THE  TRANSACTIONS
RELATED  HERETO OR  THERETO  IN EACH CASE  WHETHER  NOW  EXISTING  OR  HEREAFTER
ARISING, AND WHETHER IN CONTRACT,  TORT, EQUITY OR OTHERWISE.  EACH BORROWER AND
LENDER HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM,  DEMAND,  ACTION OR CAUSE
OF ACTION  SHALL BE DECIDED BY COURT TRIAL  WITHOUT A JURY AND THAT ANY BORROWER
OR LENDER MAY FILE AN ORIGINAL  COUNTERPART OF A COPY OF THIS AGREEMENT WITH ANY
COURT AS WRITTEN  EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF
THEIR RIGHT TO TRIAL BY JURY.

               (e) Lender shall not have any liability to any Borrower  (whether
in tort,  contract,  equity or otherwise) for losses suffered by any Borrower in
connection  with,  arising out of, or in any way related to the  transactions or
relationships  contemplated  by this  Agreement,  or any act,  omission or event
occurring  in  connection  herewith,  unless  it is  determined  by a final  and
non-appealable  judgment  binding on Lender,  that the losses were the result of
Lender's  own  acts  or  omissions  constituting  gross  negligence  or  willful
misconduct.  In any such litigation,  Lender shall be entitled to the benefit of
the rebuttable  presumption that it acted in good faith and with the exercise of
ordinary care in the performance by it of the terms of this Agreement.

       11.2 Waiver of Notices.  Each Borrower  hereby  expressly  waives demand,
presentment,  protest and notice of protest and notice of dishonor  with respect
to any and all instruments and commercial  paper,  included in or evidencing any
of the Obligations or the Collateral,  and any and all other demands and notices
of any kind or nature whatsoever with respect to the Obligations, the Collateral
and this Agreement,  except such as are expressly provided for herein. No notice
to or demand on any Borrower  which  Lender may elect to give shall  entitle any
Borrower to any other or

                                             -52-


<PAGE>



further notice or demand in the same, similar or other circumstances.

       11.3  Amendments  and Waivers.  Neither this  Agreement nor any provision
hereof shall be amended,  modified,  waived or discharged orally or by course of
conduct,  but only by a written  agreement  signed by an  authorized  officer of
Lender.  Lender shall not, by any act, delay, omission or otherwise be deemed to
have  expressly or impliedly  waived any of its rights,  powers and/or  remedies
unless such waiver  shall be in writing and signed by an  authorized  officer of
Lender. Any such waiver shall be enforceable only to the extent specifically set
forth therein.  A waiver by Lender of any right,  power and/or remedy on any one
occasion  shall not be construed as a bar to or waiver of any such right,  power
and/or remedy which Lender would otherwise have on any future occasion,  whether
similar in kind or otherwise.

       11.4  Waiver  of  Counterclaims.  Each  Borrower  waives  all  rights  to
interpose any claims, deductions,  setoffs or counterclaims of any nature (other
then compulsory  counterclaims) in any action or proceeding with respect to this
Agreement,  the Obligations,  the Collateral or any matter arising  therefrom or
relating hereto or thereto.

       11.5 Indemnification.  Borrowers shall indemnify and hold Lender, and its
directors,  agents, employees and counsel, harmless from and against any and all
losses, claims, damages, liabilities,  costs or expenses imposed on, incurred by
or  asserted   against  any  of  them  in   connection   with  any   litigation,
investigation,  claim or  proceeding  commenced  or  threatened  related  to the
negotiation,  preparation,  execution,  delivery,  enforcement,  performance  or
administration  of  this  Agreement,  any  other  Financing  Agreements,  or any
undertaking or proceeding related to any of the transactions contemplated hereby
or any act,  omission,  event  or  transaction  related  or  attendant  thereto,
including amounts paid in settlement,  court costs, and the fees and expenses of
counsel. To the extent that the undertaking to indemnify,  pay and hold harmless
set forth in this  Section may be  unenforceable  because it violates any law or
public policy,  Borrowers shall pay the maximum portion which they are permitted
to pay under  applicable law to Lender in  satisfaction  of indemnified  matters
under this  Section.  The foregoing  indemnity  shall survive the payment of the
Obligations and the termination or non-renewal of this Agreement.

SECTION 12.           TERM OF AGREEMENT; MISCELLANEOUS

       12.1    Term.

               (a) This  Agreement  and the  other  Financing  Agreements  shall
become  effective  as of the date set forth on the first  page  hereof and shall
continue  in full force and effect for a term ending on the date three (3) years
from the date hereof (the  "Renewal  Date"),  and from year to year  thereafter,
unless sooner terminated  pursuant to the terms hereof;  provided,  that, Lender
may, at its option,  extend the Renewal Date to the date four (4) years from the
date hereof by giving HMG Worldwide notice at least sixty (60) days prior to the
third anniversary of this Agreement.

                                             -53-


<PAGE>



Lender or  Borrowers  (subject to Lender's  right to extend the Renewal  Date as
provided above) may terminate this Agreement and the other Financing  Agreements
effective on the Renewal Date or on the  anniversary  of the Renewal Date in any
year by giving to the other party at least sixty (60) days prior written notice;
provided,  that,  this  Agreement  and all other  Financing  Agreements  must be
terminated simultaneously. Upon the effective date of termination or non-renewal
of the  Financing  Agreements,  Borrowers  shall  pay to  Lender,  in full,  all
outstanding  and unpaid  Obligations and shall furnish cash collateral to Lender
in such amounts as Lender  determines in good faith are reasonably  necessary to
secure Lender from loss, cost, damage or expense,  including attorneys' fees and
legal expenses, in connection with any contingent Obligations,  including issued
and  outstanding  Letter of Credit  Accommodations  and checks or other payments
provisionally  credited to the Obligations and/or as to which Lender has not yet
received final and indefeasible payment. Such payments and cash collateral shall
be remitted by wire transfer in Federal funds to such bank account of Lender, as
Lender  may,  in its  discretion,  designate  in writing to  Borrowers  for such
purpose. Interest shall be due until and including the next business day, if the
amounts  so paid by  Borrowers  to the bank  account  designated  by Lender  are
received in such bank account later than 12:00 noon, New York City time.

               (b) No  termination  of this  Agreement  or the  other  Financing
Agreements  shall  relieve or discharge any Borrower of its  respective  duties,
obligations and covenants under this Agreement or the other Financing Agreements
until all  Obligations  have been fully and  finally  discharged  and paid,  and
Lender's  continuing  security  interest  in the  Collateral  and the rights and
remedies  of  Lender  hereunder,   under  the  other  Financing  Agreements  and
applicable  law,  shall  remain in effect until all such  Obligations  have been
fully and finally discharged and paid.

               (c) If for any reason this  Agreement is  terminated by Lender by
reason of an Event of Default or at  Borrowers'  request,  and such  termination
becomes  effective  prior to the end of the then current term or renewal term of
this  Agreement,  in  view  of the  impracticality  and  extreme  difficulty  of
ascertaining  actual  damages  and by mutual  agreement  of the  parties as to a
reasonable  calculation of Lender's lost profits as a result thereof,  Borrowers
agree to pay to Lender,  upon the effective date of such  termination,  an early
termination  fee in the amount set forth below if such  termination is effective
in the period indicated:

                      Amount                                           Period

  (i)  3% of Maximum Credit                 From the date hereof to and
                                            including November 21, 1997.

 (ii)  2% of Maximum Credit                 From November 22, 1997 to and
                                            including November 21, 1998.


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(iii)  .5% of Maximum Credit                From November 22, 1998 to and
                                            including May 21, 1999, unless
                                            this Agreement is renewed or
                                            extended for a fourth year, in
                                            which case, from November 22,
                                            1998 to and including May 21,
                                            2000.

 (iv)  .25% of Maximum Credit               From May 22, 1999 to and
                                            including November 21, 1999,
                                            unless this Agreement is renewed
                                            or extended for a fourth year, in
                                            which case, from May 22, 2000 to
                                            and including November 21, 2000.

Such  early  termination  fee shall be  presumed  to be the  amount  of  damages
sustained by Lender as a result of such early  termination  and Borrowers  agree
that it is reasonable under the circumstances  currently existing.  In addition,
and  without  limiting  the  foregoing,  Lender  shall be entitled to such early
termination  fee upon  the  occurrence  of any  Event of  Default  described  in
Sections 10.1(g) and 10.1(h) hereof,  even if Lender does not exercise its right
to terminate this Agreement,  but elects, at its option, to provide financing to
any  Borrower  or permit  the use of cash  collateral  under the  United  States
Bankruptcy  Code.  The early  termination  fee provided for in this Section 12.1
shall be deemed included in the Obligations.

       12.2 Notices.  All notices,  requests and demands  hereunder  shall be in
writing  and (a) made to  Lender  at its  address  set  forth  below  and to HMG
Worldwide,  on behalf of each Borrower,  at its chief executive office set forth
below to the attention of the Chief Operating Officer,  or to such other address
as either party may designate by written notice to the other in accordance  with
this  provision,  and (b) deemed to have been  given or made:  if  delivered  in
person,   immediately  upon  delivery;   if  by  telex,  telegram  or  facsimile
transmission,  immediately upon sending and upon confirmation of receipt;  if by
nationally recognized overnight courier service with instructions to deliver the
next business day, one (1) business day after sending; and if by certified mail,
return receipt requested, five (5) days after mailing.

       12.3 Partial Invalidity. If any provision of this Agreement is held to be
invalid  or  unenforceable,   such  invalidity  or  unenforceability  shall  not
invalidate  this Agreement as a whole,  but this Agreement shall be construed as
though  it did not  contain  the  particular  provision  held to be  invalid  or
unenforceable  and the rights and  obligations of the parties shall be construed
and enforced only to such extent as shall be permitted by applicable law.

       12.4 Successors.  This Agreement,  the other Financing Agreements and any
other document  referred to herein or therein shall be binding upon and inure to
the benefit of and be  enforceable  by Lender,  Borrowers  and their  respective
successors and assigns,  except that Borrowers may not assign their rights under
this Agreement,  the other Financing  Agreements and any other document referred
to herein or therein without the prior written

                                             -55-


<PAGE>



consent of Lender. Lender may, after notice to Borrowers,  assign its rights and
delegate its obligations under this Agreement and the other Financing Agreements
and further may assign, or sell participations in, all or any part of the Loans,
the  Letter of Credit  Accommodations  or any other  interest  herein to another
financial  institution  or  other  person,  in  which  event,  the  assignee  or
participant shall have, to the extent of such assignment or  participation,  the
same  rights and  benefits  as it would  have if it were the  Lender  hereunder,
except as otherwise provided by the terms of such assignment or participation.

       12.5 Entire Agreement.  This Agreement,  the other Financing  Agreements,
any supplements hereto or thereto, and any instruments or documents delivered or
to be  delivered  in  connection  herewith or  therewith  represents  the entire
agreement and  understanding  concerning  the subject  matter hereof and thereof
between  the  parties  hereto,   and  supersede  all  other  prior   agreements,
understandings,  negotiations  and  discussions,  representations,   warranties,
commitments,  proposals,  offers and  contracts  concerning  the subject  matter
hereof, whether oral or written.

       IN WITNESS WHEREOF, Lender and Borrowers have caused these presents to be
duly executed as of the day and year first above written.

LENDER:                                BORROWERS:

CONGRESS FINANCIAL CORPORATION         HMG WORLDWIDE CORPORATION

By:___________________________       By:__________________________

Title:________________________       Title:_______________________

Address:                             Chief Executive Office:

1133 Avenue of the Americas          475 Tenth Avenue
New York, New York 10036             New York, New York 10018



                            [SIGNATURES CONTINUE ON FOLLOWING PAGE]

                                             -56-


<PAGE>


                           [SIGNATURES CONTINUED FROM PREVIOUS PAGE]

                                                   HMG WORLDWIDE IN-STORE
                                                    MARKETING, INC.

                                                   By:__________________________

                                                   Title:_______________________

                                                   Chief Executive Office:

                                                   475 Tenth Avenue
                                                   New York, New York 10018

                                                   HMG/INTERMARK WORLDWIDE
                                                    MANUFACTURING, INC.

                                                   By:__________________________

                                                   Title:_______________________

                                                   Chief Executive Office:

                                                   234 South Eighth Street
                                                   Reading, Pennsylvania 19603

                                                   INTERMARK CORP.

                                                   By:__________________________

                                                   Title:_______________________

                                                   Chief Executive Office:

                                                   475 Tenth Avenue
                                                   New York, New York 10018

S14\CONGRESS\HMG\LOANAGMT.Y12\cej

                                   -57-
<PAGE>