SECOND MODIFICATION AGREEMENT

         BY THIS  SECOND  MODIFICATION  AGREEMENT  (the  "Agreement"),  made and
entered  into as of the 22nd day of December,  1995,  FIRST  INTERSTATE  BANK OF
ARIZONA,  N.A.,  whose  address  is Post  Office  Box  29742,  Phoenix,  Arizona
85038-9742,  Corporate  Banking  Division  (hereinafter  called  "Lender"),  and
THREE-FIVE SYSTEMS,  INC., a Delaware  corporation,  whose address is 1600 North
Desert Drive, Tempe,  Arizona 85281-1212  (hereinafter  called  "Borrower"),  in
consideration  of the  mutual  covenants  herein  contained  and other  good and
valuable  consideration,   the  receipt  and  sufficiency  of  which  is  hereby
acknowledged, hereby confirm and agree as follows:

         1.        RECITALS.

                  1.1 Borrower and Lender  entered into a Loan  Agreement  dated
July 11, 1994 (the "Loan  Agreement"),  which  provided for a revolving  line of
credit by Lender to  Borrower  in the amount of  $5,000,000.00  (the  "Revolving
Commitment  Amount")  upon the  terms  and  conditions  contained  therein  (the
"Revolving Credit Loan").

                  1.2 The Loan was  evidenced  by a  Revolving  Promissory  Note
dated July 11, 1994,  executed by Borrower,  payable to the order of Lender,  in
the principal amount of $5,000,000.00 (the "Revolving  Note").  (Hereinafter the
Loan Agreement and the Revolving Note are referred to as the "Loan Documents.")

                  1.3 Lender and Borrower have executed and delivered previously
a Modification Agreement dated June 28, 1995 (the "Modification")  modifying the
terms of the Loan Documents. Hereinafter, "Revolving Note," and "Loan Agreement"
shall mean such documents as modified in the Modification.

                  1.4 Borrower and Lender desire to modify the Loan Documents as
set forth herein.

                  1.5 All undefined capitalized terms used herein shall have the
meaning given them in the Loan Agreement.

         2.        REVOLVING NOTE.

         As of the  date  hereof,  prior  to  the  effect  of the  modifications
contained  herein,  the outstanding  principal  balance of the Revolving Note is
$-0-.

         3.        LOAN AGREEMENT.

                  3.1 The Loan Agreement is hereby amended as follows:

                           (a) The following  definitions  is Section 2.1 of the
                  Loan Agreement are amended to read as follows:

                           "RLC Commitment Amount" means $15,000,000.00.
                           "RLC  Note"  means  that  Revolving  Promissory  Note
                  executed  and  delivered  concurrently  herewith  in the  face
                  amount  equal to the RLC  Commitment  Amount  made by Borrower
                  payable  to the  order of  Lender,  evidencing  the  RLC,  and
                  extensions, modifications and renewals thereof.

                           (b) Section 7.12 of the Loan  Agreement is to read as
                  follows:

                           Section 7.12 Permit the ratios of Borrower's  Current
                  Liabilities at the end of any fiscal quarter of Borrower to be
                  less than 1.1 to 1. In the ratio, Current Assets is defined as
                  cash  plus its  accounts  receivable.  In the  ratio,  Current
                  Liabilities is defined as current liabilities.

                  3.2  The  Revolving  Note  is to  be  executed  and  delivered
concurrently herewith.

         4.        OTHER MODIFICATIONS, RATIFICATIONS AND AGREEMENTS.

                  4.1 All references to the Loan Agreement in the Revolving Note
are hereby amended to refer to the Loan Agreement as hereby amended.

                  4.2 Borrower  acknowledges that the indebtedness  evidenced by
the  Revolving  Note is just and owing,  that the balance  thereof is  correctly
shown in the records of Lender as of the date hereof, and Borrower agrees to pay
the indebtedness evidenced by the Revolving Note according to the terms thereof,
as herein modified.

                  4.3   Borrower   hereby   reaffirms  to  Lender  each  of  the
representations,  warranties,  covenants and agreements of Borrower set forth in
the Revolving Note and the Loan Agreement,  with the same force and effect as if
each were separately stated herein and made as of the date hereof.

                  4.4 Borrower hereby  ratifies,  reaffirms,  acknowledges,  and
agrees  that  the  Revolving  Note  and the  Loan  Agreement,  represent  valid,
enforceable  and  collectible  obligations  of  Borrower,  and that there are no
existing claims, defenses, personal or otherwise, or rights of setoff whatsoever
with respect to any of these  documents or  instruments.  In addition,  Borrower
hereby expressly waives,  releases and absolutely and forever  discharges Lender
and its present and former  shareholders,  directors,  officers,  employees  and
agents,  and their  separate and  respective  heirs,  personal  representatives,
successors and assigns, from any and all liabilities,  claims, demands, damages,
action and causes of action,  whether known or unknown and whether contingent or
matured,  that  Borrower may now have,  or has had prior to the date hereof,  or
that may  hereafter  arise with respect to acts,  omissions or events  occurring
prior to the date hereof and,  without limiting the generality of the foregoing,
from any and all liabilities,  claims, demands,  damages,  actions and causes of
action, known or unknown,  contingent or matured,  arising out of, or in any way
connected with, the RLC.  Borrower  further  acknowledges and represents that no
event has occurred and no condition  exists that, after notice or lapse of time,
or both, would constitute a default under this Agreement,  the Revolving Note or
the Loan Agreement.

                  4.5 All terms, conditions and provisions of the Revolving Note
and the Loan  Agreement  are continued in full force and effect and shall remain
unaffected and unchanged  except as specifically  amended hereby.  The Revolving
Note  and the Loan  Agreement,  as  amended  hereby,  are  hereby  ratified  and
reaffirmed by Borrower, and Borrower specifically  acknowledges the validity and
enforceability thereof.

         5.        GENERAL.

                  5.1  This   Agreement   in  no  way  acts  as  a  release   or
relinquishment  of those  rights  securing  payment of the RLC.  Such rights are
hereby ratified, confirmed, renewed and extended by Borrower in all respects.

                  5.2 The  modifications  contained  herein shall not be binding
upon Lender until Lender shall have received all of the following:

                           (a) An original of this  Agreement  fully executed by
                  the Borrower.

                           (b) Such resolutions or authorizations and such other
                  documents as Lender may require  relating to the existence and
                  good  standing of the Borrower and the authority of any person
                  executing this  Agreement or other  documents on behalf of the
                  Borrower.

                  5.3  Borrower  shall  execute  and  deliver  such   additional
documents  and do such  other  acts as Lender  may  reasonably  require to fully
implement the intent of this Agreement.

                  5.4 Borrower shall pay all costs and expenses,  including, but
not limited to,  reasonable  attorneys'  fees  incurred by Lender in  connection
herewith,  whether or not all of the conditions described in Paragraph 5.2 above
are satisfied.  Lender, at its option,  but without any obligation to do so, may
advance funds to pay any such costs and expenses that are the  obligation of the
Borrower,  and all such funds  advanced  shall bear interest at the highest rate
provided in the Revolving Note and shall be due and payable upon demand.

                  5.5 Notwithstanding  anything to the contrary contained herein
or in any other  instrument  executed  by  Borrower  or Lender,  or in any other
action or conduct undertaken by Borrower or Lender on or before the date hereof,
the agreements,  covenants and provisions  contained herein shall constitute the
only  evidence of  Lender's  consent to modify the terms and  provisions  of the
Revolving Note or the Loan Agreement. Accordingly, no express or implied consent
to any  further  modifications  involving  any of the  matters set forth in this
Agreement  or  otherwise  shall be inferred or implied by Lender's  execution of
this  Agreement.  Further,  Lender's  execution  of  this  Agreement  shall  not
constitute  a waiver  (either  express or implied) of the  requirement  that any
further  modification of the RLC or of the Revolving Note or the Loan Agreement,
shall require the express written  approval of Lender;  no such approval (either
express or implied) has been given as of the date hereof.

                  5.6 Time is hereby declared to be of the essence hereof of the
RLC, of the Revolving Note and of the Loan Agreement,  and Lender requires,  and
Borrower agrees to, strict  performance of each and every  covenant,  condition,
provision and agreement hereof, of the Revolving Note and the Loan Agreement.

                  5.7 This  Agreement  shall be binding upon, and shall inure to
the benefit of, the parties  hereto and their heirs,  personal  representatives,
successors and assigns.

                  5.8 This Agreement is made for the sole protection and benefit
of the parties  hereto,  and no other  person or entity  shall have any right of
action hereon.

                  5.9  This  Agreement   shall  be  governed  by  and  construed
according to the laws of the State of Arizona.

         IN  WITNESS  WHEREOF,  these  presents  are  executed  as of  the  date
indicated above.

                                        FIRST INTERSTATE BANK OF ARIZONA, N.A.



                                        By:  /s/  Kevin C. Halloran
                                            -----------------------
                                            Name: Kevin C. Halloran
                                            -----------------------
                                            Its:    Vice President
                                            ----------------------

                                                                          LENDER


                                        THREE-FIVE SYSTEMS, INC., a Delaware
                                        corporation



                                        By:  /s/  Randal L. Buness
                                            --------------------------
                                             Name:    Randal L. Buness
                                             -------------------------
                                             Its:     V.P. Finance & C.F.O.
                                             ------------------------------

                                                                        BORROWER

<PAGE>


                            REVOLVING PROMISSORY NOTE


$15,000,000.00                                                  Phoenix, Arizona

                                                             December 22 , 1995


         FOR  VALUE  RECEIVED,  the  undersigned  THREE-FIVE  SYSTEMS,  INC.,  a
Delaware corporation ("Maker"), promises to pay to the order of FIRST INTERSTATE
BANK OF ARIZONA, N.A. (the "Payee";  Payee and each subsequent transferee and/or
owner of this Note,  whether  taking by  endorsement  or  otherwise,  are herein
successively  called  "Holder"),  at Post  Office  Box 29742,  Phoenix,  Arizona
85038-9742,  or at such other place as Holder may from time to time designate in
writing,   the   principal   sum  of  FIFTEEN   MILLION   AND   NO/100   DOLLARS
($15,000,000.00)  or so much thereof as Holder may advance to or for the benefit
of Maker plus  interest  calculated  on a daily basis (based on a 360-day  year)
from the date hereof on the principal  balance from time to time  outstanding as
hereinafter provided,  principal,  interest and all other sums payable hereunder
to be paid in lawful money of the United States of America as follows:

                  (a) Interest. Interest shall accrue on the unpaid principal of
          each RLC Advance:

                    (i) At the  Prime  Rate if it is a Prime  Rate RLC  Advance.
   
                    (ii) At the applicable  LIBOR Rate if it is a LIBOR Rate RLC
               Advance.

                  (b) Interest  Payment.  All accrued  interest shall be due and
          payable on the RLC Payment Date.

                  (c)  Principal  Payment.  The  entire  outstanding   principal
          balance,  all accrued and unpaid interest and all other sums which may
          have become payable thereunder shall be due and payable in full on the
          RLC Maturity Date.

                  (d) Definitions.  The capitalized terms used and not otherwise
          defined  herein  shall have the same  meanings  as defined in the Loan
          Agreement (defined below).

         The principal balance of this Note represents a revolving credit all or
any part of which may be advanced to Maker,  repaid by Maker,  and readvanced to
Maker from time to time,  subject to the other terms hereof and the  conditions,
if any,  contained in the Loan Agreement and provided that the principal balance
outstanding at any one time shall not exceed the face amount hereof.

         Maker agrees to an effective  rate of interest  that is the rate stated
above plus any additional  rate of interest  resulting from any other charges in
the  nature of  interest  paid or to be paid by or on  behalf  of Maker,  or any
benefit received or to be received by Holder, in connection with this Note.

         If any  payment  required  under this Note is not paid  within five (5)
Business Days when due,  then, at the option of Holder,  Maker shall pay a "late
charge"  equal to three percent (3%) of the amount of that payment to compensate
Holder for administrative  expenses and other costs of delinquent payments. This
late charge may be assessed without notice, shall be immediately due and payable
and shall be in addition to all other rights and remedies available to Holder.

         All payments on this Note shall be applied  first to the payment of any
costs,  fees or other  charges  incurred  in  connection  with the  indebtedness
evidenced  hereby,  next to the  payment  of  accrued  interest  and then to the
reduction of the principal balance.

         This Note is issued  pursuant to that Loan Agreement dated of even date
herewith  between  Maker  and  Payee (as  amended  from time to time,  the "Loan
Agreement").

         Time is of the  essence  of this Note.  At the  option of  Holder,  the
entire unpaid principal  balance,  all accrued and unpaid interest and all other
amounts  payable  hereunder  shall become  immediately  due and payable  without
notice  upon the  failure  to pay any sum due and owing  hereunder  as  provided
herein or upon the  occurrence of any event of default under the Loan  Agreement
or any Security Documents.

         After  maturity,  including  maturity  upon  acceleration,  the  unpaid
principal balance, all accrued and unpaid interest and all other amounts payable
hereunder  shall bear  interest at that rate that is five percent (5%) above the
rate that would otherwise be payable under the terms hereof. Maker shall pay all
costs and  expenses,  including  reasonable  attorneys'  fees and  court  costs,
incurred in the collection or enforcement of all or any part of this Note.  Such
court costs and attorneys' fees shall be set by the court and not by jury, shall
be included in any judgment obtained by Holder.

         Maker shall have the option to prepay this Note, in full or in part, at
any  time.  Maker  shall  pay to  Holder  such  amount  or  amounts  as shall be
sufficient to compensate for any losses (including  without  limitations loss of
anticipated  profit),  costs or expenses  which  Holder may incur as a result of
payment  or  Conversion  of any LIBOR  Rate RLC  Advance  other than on the last
Business Day of the Interest Period for such RLC Advance.

         Failure of Holder to exercise any option hereunder shall not constitute
a waiver  of the  right to  exercise  the  same in the  event of any  subsequent
default or in the event of continuance of any existing  default after demand for
strict performance hereof.

         Maker and all sureties,  guarantors  and/or endorsers hereof (or of any
obligation   hereunder)  and   accommodation   parties  hereon  (severally  each
hereinafter  called a "Surety")  each:  (a) agree that the liability  under this
Note of all parties hereto is joint and several; (b) severally waive any and all
formalities  in connection  with this Note to the maximum extent allowed by law,
including  (but not limited  to) demand,  diligence,  presentment  for  payment,
protest and  demand,  and notice of  extension,  dishonor,  protest,  demand and
nonpayment  of this Note;  and (c)  consent  that  Holder may extend the time of
payment or otherwise modify the terms of payment of any part or the whole of the
debt  evidenced by this Note, at the request of any other person liable  hereon,
and such  consent  shall not alter nor  diminish  the  liability  of any  person
hereon.

         In addition, each Surety waives and agrees not to assert: (a) any right
to  require  Holder to proceed  against  Maker or any other  Surety,  to proceed
against  or  exhaust  any  security  for the Note,  to pursue  any other  remedy
available to Holder,  or to pursue any remedy in any particular order or manner;
(b) the benefit of any statute of limitations  affecting its liability hereunder
or the enforcement  hereof;  (c) the benefits of any legal or equitable doctrine
or principle of marshalling; (d) notice of the existence,  creation or incurring
of new or additional  indebtedness  of Maker to Holder;  (e) the benefits of any
statutory  provision  limiting  the  liability  of a surety,  including  without
limitation the provisions of Sections  12-1641,  et seq., of the Arizona Revised
Statutes;  and (f) any  defense  arising  by reason of any  disability  or other
defense of Maker or by reason of the cessation from any cause whatsoever  (other
than payment in full) of the  liability of Maker for payment of the Note.  Until
payment in full of the Note, no Surety shall have any right of  subrogation  and
each hereby  waives any right to enforce any remedy which Holder now has, or may
hereafter  have,  against Maker or any other Surety,  and waives any benefit of,
and any right to participate in, any security now or hereafter held by Holder.

         Maker  agrees that to the extent  Maker or any Surety makes any payment
to Holder in connection with the indebtedness evidenced by this Note, and all or
any part of such payment is subsequently invalidated,  declared to be fraudulent
or preferential,  set aside or required to be repaid by Holder or paid over to a
trustee,  receiver or any other  entity,  whether  under any  bankruptcy  act or
otherwise  (any such  payment  is  hereinafter  referred  to as a  "Preferential
Payment"),  then the  indebtedness  of Maker  under this Note shall  continue or
shall be  reinstated,  as the case may be, and, to the extent of such payment or
repayment  by Holder,  the  indebtedness  evidenced by this Note or part thereof
intended  to be  satisfied  by such  Preferential  Payment  shall be revived and
continued in full force and effect as if said Preferential  Payment had not been
made.

         Without  limiting the right of Holder to bring any action or proceeding
against  Maker or any Surety or against any  property of Maker or any Surety (an
"Action") arising out of or relating to this Note or any indebtedness  evidenced
hereby  in the  courts of other  jurisdictions,  Maker  and each  Surety  hereby
irrevocably  submit to the jurisdiction,  process and venue of any Arizona State
or Federal court sitting in Phoenix,  Arizona, and hereby irrevocably agree that
any Action may be heard and  determined  in such Arizona  State court or in such
Federal court.  Maker and all Sureties each hereby  irrevocably  waives,  to the
fullest extent it may  effectively  do so, the defenses of lack of  jurisdiction
over any person, inconvenient forum or improper venue, to the maintenance of any
Action in any jurisdiction.

         This Note shall be binding  upon Maker and its  successors  and assigns
and shall  inure to the  benefit of Payee,  and any  subsequent  holders of this
Note, and their successors and assigns.

         All notices required or permitted in connection with this Note shall be
given at the place and in the  manner  provided  in the Loan  Agreement  for the
giving of notices.

         This  Note  shall be  construed  according  to the laws of the State of
Arizona.

         IN WITNESS WHEREOF, this Revolving Promissory Note has been executed as
of the date first written above.

                                        THREE-FIVE SYSTEMS, INC., a Delaware
                                        corporation



                                        By  /s/  Randal L. Buness
                                            ---------------------
                                                 Randal L. Buness
                                            ---------------------
                                            Its  V.P. Finance & C.F.O.
                                            --------------------------


                                                                 MAKER