UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    FORM 10-K

(Mark One)
         [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
              EXCHANGE ACT OF 1934

For the fiscal year ended  September 27, 1997
                          -----------------------------------------------------
                                       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        0-11360
--------------------------------------------------------------------------------

                              ILC TECHNOLOGY, INC.
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

         California                              94-1655721
--------------------------------------------------------------------------------
(State or other jurisdiction of        (IRS Employer Identification No.)
  incorporation or organization)

                   399 Java Drive, Sunnyvale, California 94089
--------------------------------------------------------------------------------
               (Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code      (408) 745-7900
--------------------------------------------------------------------------------

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

         Title of each class                Name of each exchange on
                                             which registered
               None
--------------------------------------------------------------------------------
Securities registered pursuant to Section 12(g) of the Act:

                                  Common Stock
--------------------------------------------------------------------------------
                                (Title of Class)

     Indicate  by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes 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  amendments  to
this Form 10-K. [X]

     The aggregate  market value of the voting stock held by  non-affiliates  of
the registrant,  based upon the closing price of the Common Stock on November 3,
1997, was approximately $38,281,494. Shares of Common Stock held by each officer
and  director and by each person who owns 5% or more of the  outstanding  Common
Stock have been  excluded in that such  persons may be deemed to be  affiliates.
This   determination  of  affiliate  status  is  not  necessarily  a  conclusive
determination  for  other  purposes.  The  number of  outstanding  shares of the
registrant's Common Stock on November 3, 1997 was 4,879,890.



<PAGE>






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

<TABLE>


Item     Description                                                   Page
----     -----------                                                   ----- 
<S>      <C>                                                           <C>
         
         PART I
         ------

1        Business...................................................  1  - 6

2        Properties ................................................     6

3        Legal Proceedings..........................................     6

4        Submission of Matters to a Vote of Security Holders........     6

         Executive Officers of the Registrant.......................   7 - 8

         PART II
         -------

5        Market for the Registrant's Common Equity and
          Related Stockholder Matters...............................    9

6        Selected Financial Data.....................................  10

7        Management's Discussion and Analysis of Financial
          Condition and Results of Operations........................11 - 15

7A       Quantitative and Qualitative Disclosures About Market Risk....15

8        Financial Statements and Supplementary Data.................16 - 38

9        Changes in and Disagreements with Accountants on
          Accounting and Financial Disclosure......................... 39


         PART III
         --------

10       Directors and Executive Officers of the Registrant...........  39

11       Executive Compensation.......................................40 - 42

12       Security Ownership of Certain Beneficial Owners
          and Management..............................................43 - 44

13       Certain Relationships and Related Transactions...............  45


         PART IV
         -------

14       Exhibits, Financial Statement Schedule, and Reports
         on Form 8-K..................................................  46

         Signatures...................................................  47

</TABLE>



<PAGE>



                                     PART I

Item 1.  Business

General
-------

     ILC  Technology,   Inc.  ("ILC"  or  the  "Company")   designs,   develops,
manufactures  and markets high  intensity  lamps and  lighting  products for the
medical,   industrial,   aerospace,   scientific,   entertainment  and  military
industries.   ILC  was   incorporated  in  California  in  1967.  Its  principal
manufacturing and executive facilities are located at 399 Java Drive, Sunnyvale,
California 94089, and its telephone number is (408) 745-7900. ILC's wholly-owned
subsidiary,  Q-Arc. Ltd., an arc lamp manufacturing  company based in Cambridge,
England, was acquired by ILC in 1991.

     In September 1996, the Board of Directors of ILC (the "ILC Board") voted to
proceed with the divestiture of ILC's Precision  Lamp, Inc.  ("PLI")  subsidiary
and therefore  PLI is reported as  discontinued  operations in the  accompanying
consolidated   financial   statements.   PLI  is  a  manufacturer  of  miniature
incandescent  surface mount lamps as well as liquid  crystal  display  backlight
panels that incorporate the technology of the surface mount lamps.

     In May 1997, ILC completed the sale of its Converter  Power,  Inc.  ("CPI")
subsidiary to Applied Science and Technology,  Inc.  ("ASTeX").  The gain on the
sale was reported in the results of  operations  for the third quarter of fiscal
1997. CPI is a producer of high efficiency,  small form lamp power sources built
to fit compactly into a variety of systems.

     On October 30, 1997,  ILC entered into a definitive  Agreement  and Plan of
Merger by and among ILC,  BEC Group,  Inc.  ("BEC") and BILC  Acquisition  Corp.
("Acquisition  Corp."),  a wholly owned subsidiary of BEC, pursuant to which ILC
will merge (the "Merger") with and into Acquisition  Corp. Upon  consummation of
the Merger,  each  outstanding  share of ILC will be converted into the right to
receive 2.18 shares  (reflecting the completion of BEC's  contemplated  one-for-
two reverse  stock  split) of BEC's common  stock.  The Merger is subject to the
approval  of both  ILC's  shareholders  and BEC's  stockholders,  and to certain
regulatory  approvals and other  customary  closing  conditions.  The respective
chairmen of ILC and BEC have executed voting agreements in favor of the Merger.


Business Strategy
-----------------

     ILC  uses a market  focused  business  strategy.  The key  element  of this
strategy is to select growth markets that most closely match ILC's technological
expertise and  manufacturing  strengths.  With a strong emphasis on research and
development,  ILC achieves and  maintains a leadership  position in these market
segments  through  advanced   technology,   engineering  design  capability  and
attentive customer support.

Products

     Flashlamps.  ILC manufactures  pulsed and direct current arc lamps that are
designed  to  satisfy  a wide  variety  of  laser  and  industrial  applications
requiring rigorous,  high-performance standards. The primary source of sales, of
which approximately 80% are for the replacement market,  derives from industrial
uses such as materials  aging (solar  simulation)  and laser cutting,  drilling,
scribing  and marking.  In  addition,  ILC derives  sales of  flashlamps  in the
medical market, where lasers are utilized in cataract surgery and other exacting
procedures.  Production of flashlamps is highly  labor-intensive  and requires a
lengthy training period to achieve a quality  product.  ILC anticipates that the
market for  flashlamps in low-energy  laser pumping  applications  will erode as
alternative  technologies  such as  laser  diode pumps become increasingly cost-

                                        1

<PAGE>



Products (continued)

effective.  In  high-powered  laser  applications,  however,  ILC believes  that
flashlamps will continue to be utilized.

     ILC believes that growth in its flashlamp business is highly dependent upon
its ability to develop new, non-laser applications for flashlamp technology. ILC
continues  to  develop  high  growth  arc  lamp  markets  outside  of the  laser
applications.   Some  of  these  include  material  aging  (solar   simulation),
ultraviolet    ("UV")    sterilization   and   curing,    machine   vision   and
spectrofluoroscopy. During fiscal 1997, sales of flashlamps to non-laser markets
were approximately 12% of ILC's total flashlamp sales.

     Cermax(R) and Equipment. ILC manufactures Cermax lamps, which are short arc
xenon  lamps that are  optically  pre-aligned,  encased in a safe  ceramic  body
bonded to a metallized sapphire window, and are capable of transmitting the full
spectrum  from  infrared  to  UV  wavelengths.  In  addition,  ILC  manufactures
fully-encased and open frame power supplies, lamp holders and other equipment to
support its Cermax  product  line.  Products also include  complete  fiber optic
lightsources that are private labelled for  manufacturers of medical  equipment.
ILC sells Cermax lamps primarily to original equipment manufacturers ("OEMs").

     The  primary   market  for  ILC's  Cermax   product  line  is  fiber  optic
illumination  for medical  procedures  such as endoscopy.  The market for Cermax
lightsources  and  related  equipment  used  in  endoscopy  is  composed  of two
segments:   a  high-intensity   or  critical  segment  and  a  low-intensity  or
non-critical  segment.  Critical endoscopy  applications require  high-intensity
Cermax lightsources with specialized power supplies. High intensity lightsources
are required because physicians seek good color rendition on video displays and,
in some cases, also because of the small size of the fiber optic lightguide. The
low-intensity  market is dominated  by  manufacturers  of halogen  lightsources.
Ancillary  industrial uses for Cermax  lightsources  include  illuminating areas
that are difficult to inspect,  such as nuclear reactors or jet engines. ILC has
also targeted new non-medical Cermax lightsource markets that include analytical
instruments and spot UV curing lightsources.

     During fiscal 1995, ILC announced the release of new  high-intensity  lamps
for  video  projection   utilizing  ILC's   proprietary   Daymax(R)  and  Cermax
technologies.  During  fiscal  1996 and 1997,  several  of ILC's  products  were
incorporated into  high-end/professional and mid-range/business video projection
systems of several OEMs,  including  Hughes-JVC  Technology  Corporation,  Ampro
Corporation,  Electrohome  Limited and Digital Projection Ltd. Sony Electronics,
Inc. and Mitsubishi  Electric  Corporation  have also  demonstrated  preliminary
versions of ILC's video  projection  lamps.  ILC's  video  projection  lamps are
compatible with the key imaging devices,  including light valves, liquid crystal
displays ("LCDs") or Texas Instruments Inc.'s DMD (Digital Micromirror Devices).
In   conjunction   with  several  OEMs,   ILC  is   developing   lamps  for  the
low-end/commercial  business segment. ILC's future growth will depend to a large
extent on the successful  introduction,  marketing and  commercial  viability of
video projection systems that use ILC's products.

     The factors that may  adversely  affect ILC's Cermax  business  include the
entry of  competitors  into the market.  ILC's primary patent on the Cermax lamp
expired in 1991. ORC Technologies,  Inc., Ushio and EG&G, Inc. are manufacturing
and  marketing  sealed beam xenon  illuminators  that  compete with ILC's Cermax
lamps, and other  established and emerging  companies may compete in the future.
Increased  competition  could  result in price  reductions,  which in turn could
generate lower net sales on stable unit volume. Increased competition could also
result in fewer customer orders, reduced gross margins and loss of market share.




                                        2

<PAGE>



Products (continued)

     Stepper  Lamps.  In fiscal 1995, ILC began  commercial  shipment of mercury
xenon short arc lamps,  which are used to expose patterns during the fabrication
of  semiconductor  products.  ILC is shipping a complete line of 1,000 and 2,000
watt stepper lamps.  Each lamp,  fully  utilized,  lasts for  approximately  1-2
months.  Accordingly,  ILC expects that the product will  generate a high repeat
business.

     The market for stepper  lamps is currently  dominated by Ushio,  a Japanese
competitor  of ILC.  ILC has  invested  heavily in  ensuring  the quality of its
stepper lamps since  semiconductor  manufacturers  perceive  substantial risk in
switching  suppliers.  In  addition,  ILC's  stepper  lamp does not  require the
semiconductor  manufacturer to modify any of its maintenance procedures. ILC has
worked extensively for more than four years with semiconductor  manufacturers in
the  United  States  to  qualify  its  stepper  lamps  at  major   semiconductor
fabrication  facilities.  During fiscal 1995, ILC established itself as the only
qualified  United  States  supplier  of  mercury  xenon  short arc lamps used in
semiconductor  manufacturing  equipment.  In 1996 and 1997,  ILC's stepper lamps
were  qualified  by  a  number  of  semiconductor  manufacturers  including  IBM
Corporation,  Intel  Corporation and Integrated  Solutions,  Inc. The failure of
ILC's stepper lamp to sustain market  acceptance  would have a material  adverse
effect on ILC's results of operations.

     In  October   1994,   ILC   purchased  a  20,000  square  foot  office  and
manufacturing  facility  in Santa  Clara,  California  for  ILC's  stepper  lamp
operations.  The move to the new facility was completed in the second quarter of
fiscal 1997. The success of ILC's stepper lamp business depends in large part on
the ability of ILC to manufacture  stepper lamps  efficiently  and reliably over
time.  There  can be no  assurance  that ILC will not  experience  manufacturing
problems in the future that would result in product  delivery  delays or quality
problems.

     Other  Products.  ILC's other products  include  mercury  capillary  lamps,
Daymax metal halide lamps and products for the aerospace and military markets.

     ILC  manufacturers  mercury  capillary lamps using technology and processes
that are similar to those developed for stepper lamps. The primary  applications
for mercury  capillary  lamps include the  photolithography  of grid patterns on
color television screens and printed circuit boards for computers.

     Daymax lamps simulate stable daylight conditions.  Originally developed for
use in  the  space  program,  these  products  are  now  used  primarily  in the
entertainment  business.  Applications include:  indoor and outdoor lighting for
motion  picture  and  television  productions,  high speed and  special  effects
lighting, concert and stadium lighting and theatrical lighting. Daymax lamps are
also used for solar  simulation  in  certain  scientific  applications.  ILC has
developed DTI, a series of integral  low-power metal halide lamps (less than 500
watts) for commercial  projection,  stage and medical  applications.  DTI lamps,
using  a  rugged  ceramic  reflector,  have  been  qualified  for  use in  video
projection systems and architectural lighting.

     In the  Aerospace  market,  ILC offers  standard,  modified,  and  customer
systems  covering  the  visible,  infrared,  and UV  spectrum to meet each space
lighting requirement.  ILC's lighting systems are installed in the Space Shuttle
interior  and  exterior,  on the Manned  Maneuvering  Unit,  on Spacelab  and in
several experiments  carried aboard the shuttle orbiters.  Other ILC systems are
being designed for use on  International  Space Station Alpha, in future shuttle
experiments  and payload  packages and space robotic  vehicles.  ILC is the only
domestic  manufacturer  of space  lighting  qualified  to serve  NASA and  other
government  agencies in Japan and Europe. ILC aerospace lighting systems feature
efficiency, reliability,  ruggedness, light weight and full space qualification.
New systems  designed to meet unique  requirements  can often be developed  from
ILC's large  selection  of space-qualified designs and components, substantially
                                         
                                       3

<PAGE>



Products (continued)

reducing development costs and lead times.

     ILC's products for the military  market include  infrared lamps used by the
military on tanks and aircraft to deflect  offensive heat seeking  missiles.  In
addition,  ILC  developed for Hughes  Aircraft  Company a  multi-faceted  Cermax
high-intensity  discharge lamp which is used in the infrared  guidance system of
the TOW (Tube Launched  Optically Guided Wire Controlled)  missile,  and shipped
approximately $1.6 million of this product in fiscal 1997.

Marketing and Sales

     ILC markets and sells its products to OEMs through a direct sales force and
to  end  users  through  sales  representatives  and  distributors.   The  sales
organization  includes regional sales managers and a team of market  development
managers with global responsibilities aligned along specific markets such as the
semiconductor,  video projection and medical markets. In addition, ILC maintains
customer  service groups at its facilities in California and Cambridge,  England
to provide sales and customer  service  support to its customer base and network
of domestic and foreign sales representatives and distributors.

     ILC's European  sales office,  which is located at the facilities of Q-Arc,
Ltd. in  Cambridge,  England,  markets and sells the  complete  line of lamp and
equipment  products and provides local customer support for European  customers.
In the fiscal year ended  September 27, 1997,  international  sales  represented
approximately 34.0% of ILC's net sales. Information regarding ILC's export sales
and major  customers is  incorporated  herein by reference to Note 3 of Notes to
Consolidated Financial Statements.


Backlog

     As  of  September  27,  1997,   ILC's   backlog  of  unfilled   orders  was
approximately  $23.4  million,   compared  to  approximately  $28.0  million  at
September  28,  1996.  Subsequent  to  fiscal  1997,  ILC  received  an order of
approximately  $6.5  million.  A  comparable  order from the same  customer  was
received  prior to the end of  fiscal  1996 and is  included  in  backlog  as of
September  28,  1996.  Had this order been  received  prior to the end of fiscal
1997,  ILC's backlog at September 27, 1997 would have been  approximately  $29.9
million.  ILC  includes  in its backlog  orders  that have been  released by the
customer  for  shipment  within the next 12 months.  Due to the  possibility  of
customer changes in delivery schedules or cancellations of orders, backlog as of
any particular  date is not necessarily  representative  of actual sales for any
succeeding period.


Manufacturing

     ILC's lamp groups have built substantial expertise in the fields of sealing
technology  (ceramic-to-metal,  quartz-to-metal,  vacuum  sealing),  materials
research, plasma physics, electrical engineering, optoelectronics, and electrode
technology. The manufacturing of most of ILC's lamp and power supply products is
labor and capital intensive, and accordingly,  the labor force is highly skilled
and experienced.  The combination of ILC's technical and manufacturing expertise
enables ILC to dominate its selected market niches for specialty lighting.

     ILC designs,  develops,  and manufactures a majority of its products in two
facilities totaling 97,000 square feet in Sunnyvale, California. These adjoining
 
                                         4

<PAGE>



Manufacturing (continued)

buildings  include  lamp  development   laboratories,   separate   manufacturing
facilities  for xenon and krypton arc lamps,  Cermax lamps,  Daymax metal halide
lamps,  mercury  capillary lamps,  Cermax equipment and aerospace  products.  In
October  1994,  ILC  purchased a facility in Santa Clara,  California  totalling
approximately  20,000  square feet to  accommodate  stepper lamp  manufacturing.
Q-Arc, Ltd. purchased a new facility of approximately 36,000 square feet in June
1994 and  occupied  the new  facility  in early  fiscal  1995.  Q-Arc  currently
occupies  approximately  25,000  square feet of this  facility and has available
11,000 square feet for future expansion.

     Q-Arc  received  ISO9002  certification  in fiscal  1995 and ILC  Sunnyvale
became certified in fiscal 1996. ISO  certification  ensures  customers that ILC
has a quality system that will result in continuous product quality improvement.
It is a  recognition  of a  commitment  to quality  through all  sections of the
organization.


Patents and Trademarks

     ILC holds approximately 25 United States and foreign patents related to the
key  features of several of its  products  and has several  patent  applications
pending  in the  United  States.  While  these  patents  tend to  enhance  ILC's
competitive position, ILC believes that ILC's success depends primarily upon its
proprietary technological,  engineering, production and marketing skills and the
high quality of its  products.  The names of two of ILC's  products,  Cermax and
Daymax,  are  registered as trademarks in the United States Patent and Trademark
Office and in many other countries in which ILC's products are sold.

     ILC's patents  expire at various dates between 1998 and 2013.  There can be
no  assurance  that  any  patents  held  by  ILC  will  not  be  challenged  and
invalidated,   that  patents  will  issue  from  any  of  ILC's  pending  patent
applications  or that any claim allowed from existing or pending patents will be
of  sufficient  scope  or  strength  to  provide  meaningful  protection  or any
commercial advantage to ILC.
Competitors of ILC also may be able to design around ILC's patents.


Competition

     ILC competes on the basis of product performance, applications engineering,
customer  service,  reputation and price.  ILC competes in many markets in which
technology  develops  and  improves  rapidly,  stimulating  ILC to  enhance  the
capability of its products and technologies.  Competitors  consist of both large
and small companies located in the United States, Japan and Europe. They include
EG&G, Inc., Osram GmbH, Philips Electronics N.V., Ushio, ORC Technologies, Inc.,
Koto and Wolfram  Electric Inc. In many market  segments,  the  competition  has
established  the  benchmark for product  acceptance at a very high level,  which
requires ILC to improve  continuously  all phases of its  processes for customer
satisfaction.  ILC believes that by exploiting  segmented  market areas in which
ILC has technological,  manufacturing and marketing  strengths,  ILC can compete
effectively.  At  the  same  time,  by  focusing  its  product  development  and
acquisition  activities  in these  areas,  ILC  believes  that it can defend its
strengths and maintain its leadership in selected markets.


Engineering and Research

     ILC's  engineering  and research and  development  efforts consist of three
main activities. The first area of activity is extensive application engineering
in  response  to  customer  requirements.  These  activities  result in customer
specific products and modifications to existing products  to satisfy  the  needs

                                        5

<PAGE>



Engineering and Research (continued)

of ILC's  customers.  The second area is joint  engineering and development work
made in connection with customer production  contracts.  The third area includes
those projects funded by ILC to develop new products and technologies. ILC spent
$4,253,000,   $4,320,000  and   $4,279,000  in  fiscal  1997,   1996  and  1995,
respectively, for ILC funded research and development.

Employees

     As of September 27, 1997, ILC had 439 full-time employees,  comprised of 31
in research and engineering, 24 in marketing and sales, 361 in manufacturing and
23 in general and administrative positions. ILC believes that its future success
depends  upon its  continued  ability  to  recruit  and  retain  highly  skilled
employees in all disciplines.  Although  competition for qualified  personnel is
intense,  ILC has been successful in attracting and retaining skilled employees.
None of ILC's  employees is represented by a labor union.  ILC believes that its
relations with its employees are good.


Item 2.  Properties

     ILC owns facilities with an aggregate of approximately  153,000 square feet
of office and  manufacturing  space in four separate  buildings in Sunnyvale and
Santa Clara,  California  and  Cambridge,  England.  In Sunnyvale,  ILC owns two
adjacent  buildings  with an  aggregate  of 97,000  square  feet of  office  and
manufacturing  space.  These buildings were constructed by ILC in 1977 and 1979,
sold and leased  back from the new  owners in 1982,  and  re-purchased  from the
landlord in August  1993.  ILC leases to one tenant  approximately  9,000 square
feet of its space in  Sunnyvale  under a lease that  expires in March  1998.  In
October 1994, ILC purchased 20,000 square feet of office and manufacturing space
in Santa Clara,  California.  In June 1994, ILC purchased  36,000 square feet of
office and manufacturing space in Cambridge,  England.  Q-Arc currently occupies
approximately 25,000 square feet with approximately 11,000 square feet available
for future expansion.


Item 3.  Legal Proceedings

     None


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

     There were no matters  submitted to a vote of the security  holders  during
the fourth quarter of fiscal 1997.


                                        6

<PAGE>





Executive Officers of the Registrant
    ILC's  executive  officers and their ages as of December  26, 1997,  are as
follows:

<TABLE>

NAME                        AGE                                 POSITION
<S>                         <C>                                  <C>

Henry C. Baumgartner .......65 .................Chairman of the Board and Chief
                                                 Executive Officer

Richard D. Capra .......... 65 .................President and Chief Operating
                                                 Officer

John A. Lucero ............ 48 .................Senior Vice President, Marketing
                                                 and Sales

Ronald E. Fredianelli ..... 48 .................Chief Financial Officer and
                                                 Secretary

Felix J. Schuda ........... 49 .................Vice President - Chief Technical
                                                 Officer

Dennis M. Toohey .......... 50 .................Vice President, Logistics and
                                                 Quality

Arthur O. Whipple ......... 49 .................Vice President, Engineering

</TABLE>

     Henry C.  Baumgartner  is a co-founder of ILC. He has served ILC in various
management  positions  since  1967  and has been a  member  of the ILC  Board of
Directors since 1967. Mr. Baumgartner was appointed Chairman of the ILC Board of
Directors in July 1996 and Chief  Executive  Officer of ILC in April 1990.  From
April 1990 to July 1996,  he served as the  President of ILC.  Prior to 1990, he
served as Chief Executive Officer and Chairman of the Board of ILC from November
1986.

     Richard D. Capra has  served as a member of the Board of  Directors  of ILC
since 1995. Since July 1996, he has also served as President and Chief Operating
Officer of ILC. From January 1991 to July 1996, Mr. Capra served as a management
consultant  and as director of several  companies  in the  electric and lighting
business. He was President and Chief Financial Officer of Philips Lighting Inc.,
U.S., from 1983 to 1991.

     John A. Lucero has served as Senior Vice  President of Marketing  and Sales
of ILC since  February  1997.  From  September 1996 to February 1997 he was Vice
President  of Marketing  and Sales.  He joined ILC in August 1994 as Director of
Sales.  From June 1991 to August 1994,  he was  employed by Crystal  Technology,
Inc.,  an  electro-optics  company,  in  management  positions in marketing  and
operations.



                                        7

<PAGE>



Executive Officers of the Registrant (continued)


     Ronald E.  Fredianelli has served as Chief  Financial  Officer of ILC since
April 1990 and as Secretary since 1987. Except for the period from November 1985
to August 1986 and until he was elected  Chief  Financial  Officer in 1990,  Mr.
Fredianelli  was the Controller of ILC since August 1979.  From November 1985 to
August 1986, he was Controller of Synergy Computer Graphics.

     Felix  J.  Schuda  has  served  as Chief  Technical  Officer  of ILC  since
September  1996 and as Vice President of ILC since 1981. He has been employed by
ILC in various engineering and engineering management positions since June 1976.

     Dennis M. Toohey has served as Vice  President of Logistics  and Quality of
ILC since October 1996.  From May 1995 to September 1996, he was General Manager
of Coils, Inc., an electronic parts manufacturer.  From May 1993 to May 1995, he
was employed by LeMans Corporation, an auto parts distributor, as Vice President
of  Operations.  From  February  1992 to  April  1993,  he was  Vice  President,
Logistics at  Harley-Davidson  and from April 1990 to February  1992 he was Vice
President, Logistics at General Tire/Continental A.G.

     Arthur O. Whipple has served as Vice  President of Engineering of ILC since
March 1997. From April 1994 to February 1997, he was employed by ILC's Precision
Lamp,  Inc.  subsidiary,  initially as Vice President and as President after May
1996. From January 1990 to March 1994, Mr. Whipple was President of Aqua Design,
Inc., a privately held manufacturer and operator of water treatment systems.


                                        8

<PAGE>



                                    PART II

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


     ILC's common stock is traded in the Nasdaq  National  Market (symbol ILCT).
The high  and low  closing  sales  prices  for the  common  stock on the  Nasdaq
National Market, are set forth below for the quarters as indicated:

<TABLE>

     FISCAL 1997                    HIGH             LOW
     <S>                            <C>              <C>

     1st Quarter....................14 3/16......... 10 3/8
     2nd Quarter....................14 3/4 ......... 10
     3rd Quarter....................12 1/8 .........  9 1/8
     4th Quarter....................12 3/16......... 10 1/2


     FISCAL 1996                    HIGH             LOW

     1st Quarter....................11 1/2 .........  8 3/4
     2nd Quarter....................11 7/8 .........  8 7/8
     3rd Quarter....................14     ......... 10 11/16
     4th Quarter....................13 1/2 ......... 10 7/8

</TABLE>



     There were approximately 2,000 institutional and individual stockholders as
of September 27, 1997.  The closing sales price of the common stock on September
27, 1997 as reported  by Nasdaq was  $11.75.  ILC has not  declared or paid cash
dividends.  ILC intends to retain  earnings for use in its business and does not
expect to pay cash dividends in the foreseeable  future.  ILC's credit agreement
with Union Bank of  California  provides  that ILC shall not  declare or pay any
dividend or other distribution on its Common Stock (other than a stock dividend)
or  purchase  or redeem any Common  Stock,  without  the  bank's  prior  written
consent.


                                       9

<PAGE>



Item 6.  Selected Financial Data

     The following selected  consolidated  financial data of ILC, which has been
reclassified  to reflect the continuing  operations of ILC and the  discontinued
operations of PLI, should be read in conjunction with the Consolidated Financial
Statements  and notes  thereto  and  Management's  Discussion  and  Analysis  of
Financial Condition and Results of Operations included elsewhere herein.


                                     Fiscal Year Ended
                             (in thousands except per share data)

                              1997      1996      1995      1994     1993
                              ----      ----      ----      ----     ----

Net sales.....................$55,518  $54,206   $49,496   $44,331  $42,250

Income from continuing
 operations...................  4,839    4,546     4,637     3,727    4,509

Income (loss) from
 discontinued operations......     --   (4,239)      (99)   (3,536)     250

Net income....................  4,839      307     4,538       191    4,759

Earnings (loss) per share (a):                                  
 Continuing operations........    .96      .92       .97       .77      .91
 Discontinued operations......     --     (.86)     (.02)     (.73)     .05
                                 ----     -----     -----     -----    ----
     Net income per share.....  $ .96    $ .06     $ .95     $ .04    $ .96
                                                  


Weighted average shares
 outstanding..................  5,048     4,923    4,765     4,825    4,980


Working capital...............$13,337   $15,155  $14,618   $11,366  $17,543

Total assets.................. 49,548    47,844   46,726    41,312   39,703

Total long-term debt..........  3,196     7,576    6,592     6,421    5,805

Total stockholders' equity....$34,994   $29,791  $28,802   $23,624  $24,565





(a)  See Note 2 of Notes to Consolidated Financial Statements for an explanation
     of the  determination  of the number of shares used in computing net income
     per share.  In February  1997,  the Financial  Accounting  Standards  Board
     issued Statement of Financial  Accounting  Standards No. 128, "Earnings Per
     Share" ("SFAS No. 128"),  which  requires  disclosure of basic earnings per
     share and diluted  earnings per share and is effective  for periods  ending
     subsequent to December 15, 1997. See "Management's  Discussion and Analysis
     of  Financial  Condition  and Results of  Operations  -- Recent  Accounting
     Pronouncement."



                                       10

<PAGE>



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

     This  Management's  Discussion  and  Analysis of  Financial  Condition  and
Results of  Operations  includes a number of  forward-looking  statements  which
reflect  ILC's  current  views  with  respect  to future  events  and  financial
performance.  These forward-looking  statements are subject to certain risks and
uncertainties  that  could  cause  actual  results  to  differ  materially  from
historical  results or those  anticipated.  In addition to the factors discussed
below,  among the factors that could cause actual  results to differ  materially
are the  following:  ILC's  ability  to  manufacture  products  efficiently  and
reliably;  the ability of ILC to deliver new products on time; market acceptance
of ILC's  products;  the  introduction,  marketing and  commercial  viability of
products and systems that use ILC's products;  competition;  changes in pricing;
the timing of, or delay in, large customer  orders;  quality control of products
sold; and the factors  contained from time to time in the reports that ILC files
with  the  Securities  and  Exchange  Commission.  In  this  report,  the  words
"anticipates",  "believes",  "future",  "may  have",  "will  take  place",  "are
expected" and similar expressions identify forward-looking  statements.  Readers
are cautioned not to place undue reliance on these  forward-looking  statements,
which speak only as of the date hereof.


General

     In  September  1996,  ILC's Board of  Directors  voted to proceed  with the
divestiture of ILC's  Precision Lamp Inc.,  subsidiary  ("PLI") based in Cotati,
California.  The accompanying  consolidated financial statements for fiscal 1996
and 1995 have been  restated to reflect the  discontinued  operations of the PLI
business.  In May 1997, ILC completed the sale of Converter Power,  Inc. ("CPI")
and the results of operations for this subsidiary  through the date of sale have
been  included in  continuing  operations.  Refer to Notes 12 and 13 of Notes to
Consolidated  Financial  Statements  for a further  discussion  of  discontinued
operations  and the  sale of CPI.  Accordingly,  the  following  discussion  and
analysis  of  financial   condition  and  results  of  operations  reflects  the
activities of ILC Technology, Inc., CPI and Q-Arc, Ltd. ("Q-Arc").

     During fiscal 1997, 1996 and 1995, ILC derived  approximately  31%, 39% and
40%, respectively, of its net sales from the medical market. During fiscal 1997,
1996 and 1995,  ILC's sales in the industrial  market accounted for 43%, 46% and
47%,  respectively,  of net sales.  In fiscal years 1997,  1996 and 1995,  ILC's
sales in the aerospace market accounted for 14%, 8% and 8%, respectively, of net
sales.  Products sold in the medical market are incorporated  into products sold
into the health-care and health-care related  industries.  These industries have
recently been subject to significant  fluctuations  in demand which in turn have
affected the demand for components used in these products.  ILC expects sales to
the medical  market to continue to decrease as a percentage of net sales for the
foreseeable  future.  Aerospace  sales have increased in fiscal 1997 over fiscal
1996 and 1995 due to shipments of multi-faceted Cermax high-intensity  discharge
lamps used in the infrared  guidance system of the TOW (Tube Launched  Optically
Guided  Wire  Controlled)  missile  and due to  additional  contracts  for space
lighting  requirements.  Because of the  on-going  uncertainty  in military  and
defense  spending,  ILC does not expect aerospace sales to grow from fiscal 1997
levels.


Continuing Operations

Fiscal 1997 Compared to Fiscal 1996

     Net sales for fiscal  1997 were  $55,518,000  compared  to  $54,206,000  in
fiscal 1996. Although net sales at ILC's California operations ("ILC Sunnyvale")
and Q-Arc  increased  by 16.1%  between the two fiscal  years,  net sales at CPI
decreased 55.1% between the two fiscal years. In  the  fourth  quarter of fiscal

                                       11

<PAGE>

Fiscal 1997 Compared to Fiscal 1996 (continued)

1996,  CPI  experienced a significant  reduction in orders from a major customer
that provides  equipment to the  semiconductor  equipment  industry.  This order
reduction  continued  into the first and second  quarters of fiscal 1997. In May
1997,  CPI was sold and  therefore  net sales for fiscal 1997 reflect only seven
months of CPI sales  activity as opposed to a full year in fiscal 1996.  The net
sales  increases at both ILC  Sunnyvale and at Q-Arc were the result of a higher
volume of products sold in all areas except Equipment products, which were lower
than the previous year due to the timing of the shipment of orders.

     Cost of sales as a  percentage  of net  sales was  70.6%  for  fiscal  1997
compared to 66.7% for fiscal 1996.  The  percentage  increase was due in part to
the sales  decline  from CPI's major  customer  discussed  above.  In  addition,
unfavorable yields in Cermax and infrared lamp products,  coupled with increases
in the  provision for inventory  reserves and revenue  recognition  on Aerospace
contracts  with low or minimal gross  margins,  contributed to the cost of sales
percentage increase between the two fiscal years. The ratio of inventory reserve
to year end inventory in fiscal 1997, 1996 and 1995 was 16.0%,  18.6% and 20.0%,
respectively.

     Research  and  development  expenses,  7.7% of net  sales  in  fiscal  1997
compared to 8.0% of net sales in fiscal 1996, remained constant at approximately
$4.3 million.  Spending  declines occurred in Flashlamp and Quartz lamp products
while  spending  increases  took place in Cermax and Equipment  products for the
display and projection markets. Additionally,  research and development spending
declined at CPI due to the sale of the subsidiary in May 1997.

     Sales and marketing  expenses for fiscal 1997 were  $3,059,000,  or 5.5% of
net sales  compared  to  $2,646,000,  or 4.9% of net sales in fiscal  1996.  The
$413,000  increase  between  the two fiscal  years was the  result of  personnel
additions,   increased  travel  and  trade  show  participation  and  additional
commission expense.

     General  and  administrative  expenses,  7.8% of net sales in  fiscal  1997
compared to 8.1% of net sales in fiscal 1996,  decreased $88,000 between the two
fiscal  years.  The primary  reason for the decrease was due to the inclusion of
only  seven  months  of  expense  for CPI in fiscal  1997  versus a full year of
expense in fiscal 1996. If the general and  administrative  expenses  related to
CPI were excluded from both fiscal years,  the increase  between the two periods
was approximately  $555,000.  Profit sharing accruals at ILC Sunnyvale in fiscal
1997 and  personnel  additions  at Q-Arc during  fiscal 1997 caused  general and
administrative expenses to increase in fiscal 1997 over fiscal 1996.

     Amortization  of intangibles of $120,000 in fiscal 1997 and 1996 represents
the amortization of the covenant-not-to-compete  arising from the acquisition of
Q-Arc in 1991.

     Interest  income was $147,000 in fiscal 1997  compared to $80,000 in fiscal
1996. Interest expense associated with continuing operations, $641,000 in fiscal
1997  compared to $542,000 in fiscal  1996,  increased  $99,000  between the two
fiscal years. The increase in interest expense is due to higher borrowings under
a line of credit for working  capital needs and an equipment  line of credit for
capital equipment acquisitions.

     ILC reported income from continuing  operations before provision for income
taxes and before gain on sale of CPI of  $4,069,000  in fiscal 1997  compared to
income  from  continuing   operations  before  provision  for  income  taxes  of
$6,061,000  in fiscal 1996.  As  discussed  in Note 13 of Notes to  Consolidated
Financial  statements,  the CPI subsidiary was sold in May 1997. The transaction


                                       12

<PAGE>



Fiscal 1997 Compared to Fiscal 1996 (continued)

resulted in a pre-tax  gain,  net of  expenses,  of  $2,379,000.  The results of
operations  for CPI  through  April  1997 are  included  in  ILC's  Consolidated
Statement of Operations. Including the gain on the sale of CPI in the results of
operations  for fiscal  1997  increases  the income from  continuing  operations
before  provision  for income taxes to  $6,447,000.  The  effective tax rate for
fiscal 1997 and 1996 was 25%.

     As  previously  discussed,   the  ILC  Board  voted  to  proceed  with  the
divestiture of PLI located in Cotati,  California.  The operating  losses of PLI
for the six months ended March 29, 1997 were offset against accruals made in the
fourth  quarter  of  fiscal  1996  for  anticipated   losses  during  the  final
disposition of the subsidiary.  In January 1997, ILC signed an agreement to sell
PLI to PLI  Acquisition  Corp.  for  approximately  $3.3 million  subject to due
diligence and the purchaser's ability to obtain adequate financing.  The closing
was set to occur no later than March 31,  1997.  The  purchaser  was not able to
obtain the  required  financing,  but ILC agreed to sell the stock of PLI to PLI
Acquisition  Corp., as discussed in Note 12 of Notes to  Consolidated  Financial
Statements. ILC received a $4 million promissory note that bears interest at the
rate of 8% per year on any unpaid principal  amount.  Payments began in May 1997
and will be completed in April 2000.  The activities of PLI for fiscal 1996 have
been restated to reflect a loss from discontinued operations.


Fiscal 1996 Compared to Fiscal 1995

     Net sales for fiscal 1996 were $54,206,000, an increase of 9.5% over fiscal
1995  net  sales  of   $49,496,000.   The  $4,710,000   increase  was  primarily
attributable  to a $3.4 million sales  increase in Cermax and related  equipment
sales,  a $1.7 million  sales  increase in Quartz  lamps and a $1 million  sales
increase in  Flashlamps.  These sales gains were offset by a $1.4 million  sales
decrease in  Aerospace  and at CPI. In the fourth  quarter of fiscal  1996,  CPI
experienced  a  significant  reduction  in  orders  from a major  customer  that
provides equipment to the semiconductor equipment industry.

     Cost of sales as a  percentage  of net  sales was  66.7%  for  fiscal  1996
compared to 64.2% for fiscal 1995. The percentage  increase was due primarily to
the sales decline from CPI's major  customer  discussed  above coupled with cost
revisions for a fixed price contract in Aerospace.  In addition,  although there
was some improvement in the gross margin associated with Quartz lamp products in
fiscal 1996 over fiscal 1995,  the gross  margin in both fiscal  years  remained
negative.  The ratio of inventory  reserve to year end inventory in fiscal 1996,
1995 and 1994 was 18.6%, 20.0% and 26.3%, respectively.

     Research and development expense, 8.0% of net sales in fiscal 1996 compared
to 8.6% of net sales in fiscal 1995,  remained  unchanged at approximately  $4.3
million.  In  both  fiscal  years,  the  majority  of the  spending  was for the
development  of Quartz  Stepper lamps used in the  processing  of  semiconductor
materials, in Cermax for lamps for video projection and at CPI for the design of
new power supplies to compliment the lamps for video projection.

     Sales and  marketing  expenses,  4.9% of net sales in both  fiscal 1996 and
1995,  increased  $241,000  between the two fiscal  years.  The increase was the
result of personnel additions and more travel and trade show attendance.

     As a percentage of net sales, general and administrative expenses were 8.1%
in fiscal 1996 and 9.0% in fiscal  1995.  In absolute  dollars,  the general and
administrative spending level remained constant at approximately $4.4 million.


                                       13

<PAGE>



Fiscal 1996 Compared to Fiscal 1995 (continued)

     Amortization  of intangibles of $120,000 in fiscal 1996 and 1995 represents
the amortization of the covenant-not-to-compete  arising from the acquisition of
Q-Arc in 1991.

     Interest income was $80,000 in fiscal 1996,  compared to interest income of
$265,000  in fiscal  1995,  which  amount  included  approximately  $235,000  of
interest  income from an income tax refund in the third  quarter of fiscal 1995.
Interest expense associated with continuing operations,  $542,000 in fiscal 1996
as compared to $589,000 in fiscal 1995, decreased  approximately $47,000 between
the two fiscal years due to a slightly lower interest rate.  Interest expense is
associated with a term loan obtained to purchase ILC's two operating  facilities
in  Sunnyvale,  California,  a line of credit for working  capital  needs and an
equipment line of credit for capital equipment acquisitions.

     ILC reported income from continuing  operations before provision for income
taxes of $6,061,000 in fiscal 1996 compared to income from continuing operations
before  provision for income taxes of $6,109,000 in fiscal 1995. The fiscal 1996
effective  tax rate was 25% compared  with a fiscal 1995  effective  tax rate of
28%,  exclusive of a $238,000 income tax refund received in the third quarter of
fiscal 1995.

     As  previously  discussed,   the  ILC  Board  voted  to  proceed  with  the
divestiture  of  PLI.  The net  operating  results  of PLI  were  reported  as a
$4,239,000  loss from  discontinued  operations  in  fiscal  1996.  This  amount
included  the  $840,000  operating  loss of PLI for fiscal 1996 and an estimated
loss for the disposal of  discontinued  operations of $3,399,000.  The estimated
loss for the disposal  included  asset write downs of $3.3  million,  a $500,000
charge for anticipated  losses during the final disposition of PLI and the write
off  of  the  unamortized   balance  of  the  PLI   covenant-not-to-compete   of
approximately $470,000. The combined loss from discontinued operations is net of
a $1,413,000 income tax benefit. See Note 12 of Notes to Consolidated  Financial
Statements.

     ILC believes that inflation and changing  prices had no significant  impact
on sales or costs during fiscal 1997, 1996 and 1995.


Liquidity and Capital Resources

     Cash and cash equivalents decreased to $1,114,000 at the end of fiscal 1997
from $1,829,000 at the end of fiscal 1996. Cash provided by operating activities
from continuing  operations amounted to $1,070,000 in fiscal 1997, a decrease of
$695,000 from $1,765,000 in fiscal 1996.  Cash used in  discontinued  operations
amounted to $1,518,000  in fiscal 1997, an increase of $1,350,000  from $168,000
in fiscal 1996.  During  fiscal 1997,  ILC made capital  equipment  purchases of
$3,102,000.  In fiscal 1997, ILC decreased its net borrowings  under its line of
credit by $2,500,000,  decreased its net  borrowings  under an equipment line by
$276,000 and paid down a term loan by $1,451,000.  In addition,  in fiscal 1997,
ILC also repurchased,  on the open market, 37,000 shares of its common stock for
$425,000. In fiscal 1996, ILC made capital equipment acquisitions of $3,187,000.
During fiscal 1996, ILC increased its net borrowings under its line of credit by
$3,000,000, increased its net borrowings under an equipment line by $180,000 and
paid down a term loan by $1,584,000. In fiscal 1995, ILC used cash of $1,745,000
to purchase land and a new manufacturing facility in Santa Clara, California and
made capital  equipment  acquisitions  of  $2,518,000.  During fiscal 1995,  ILC
increased its net borrowing  under its line of credit by  $2,000,000,  increased
its net borrowings under an equipment line by $670,000 and paid down a term loan
by $1,578,000.

     ILC had working  capital of $13,337,000  and a current ratio of 2.17 to 1.0
at September 27, 1997.  This compares with working  capital of $15,155,000 and a
current  ratio of 2.45 to 1.0 at September  28, 1996.  As of September 27, 1997,
ILC had $3,500,000 unused on a $6,000,000 bank line of credit with interest at

                                       14

<PAGE>



Liquidity and Capital Resources (continued)

2% above the LIBOR rate (London  Interbank  Offer Rate) (7.66% at September  27,
1997). ILC also has available an unused $2,000,000  equipment credit facility at
the above  interest rate.  This credit  facility can be increased to accommodate
the capital  equipment  needs of ILC. In fiscal  1998,  ILC  anticipates  making
capital  expenditures of approximately  $2.5 million.  As of September 27, 1997,
ILC did not have any outstanding material commitments for capital  expenditures.
ILC's  current  financial  resources,   together  with  anticipated   additional
resources to be provided from continuing operations, are expected to be adequate
to meet ILC's working capital needs,  capital  equipment  requirements  and debt
service obligations at least through fiscal 1998.


Recent Accounting Pronouncement

     In February 1997, the Financial  Accounting Standards Board issued SFAS No.
128, which requires  disclosure of basic earnings per share and diluted earnings
per share and is effective  for periods  ending  subsequent to December 15, 1997
and restatement  will be required for all prior period EPS data  presented.  The
pro forma effect of adoption of SFAS No. 128 is included in the table below.


                                      1997           1996         1995
                                      ----           ----         ----
                                           (shares in thousands)

As reported:
  Earnings (loss) per share:
  Continuing operations.............$ 0.96          $0.92        $0.97
  Discontinued operations...........    --          (0.86)       (0.02)
                                     -----         ------       ------
   Net income per share.............$ 0.96          $0.06        $0.95

Pro forma for SFAS No. 128:
  Basic earnings (loss) per share:
  Continuing operations............. $1.00          $0.96        $1.01
  Discontinued operations...........    --          (0.90)       (0.02)
                                     -----         ------       ------
   Basic net income per share....... $1.00          $0.06        $0.99
  Weighted average number of
   common shares outstanding........ 4,848          4,725        4,604

  Diluted earnings (loss) per share:
  Continuing operations............. $0.96          $0.92        $0.97
  Discontinued operations...........    --          (0.86)       (0.02)
                                     -----         ------       ------
   Diluted net income per share      $0.96          $0.06        $0.95
  Weighted average number of
   common shares outstanding........ 5,048          4,923        4,765







Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

     Not applicable.




                                       15

<PAGE>



Item 8.  Financial Statements and Supplementary Data




Table of Contents                                                    Page
-----------------                                                    ----


Consolidated Balance Sheets - September 27,
  1997 and September 28, 1996.......................................17 - 18

Consolidated Statements of Operations for the Three
  Fiscal Years Ended September 27, 1997.............................   19

Consolidated Statements of Stockholders' Equity
  for the Three Fiscal Years Ended September 27, 1997...............   20

Consolidated Statements of Cash Flows for the Three
  Fiscal Years Ended September 27, 1997.............................21 - 22

Notes to Consolidated Financial Statements..........................23 - 35

Form 10-K Schedule..................................................   36

Report of Independent Public Accountants............................   37

Quarterly Results of Operations (Unaudited).........................   38


                                       16

<PAGE>





                              ILC TECHNOLOGY, INC.
                          CONSOLIDATED BALANCE SHEETS
                   SEPTEMBER 27, 1997 AND SEPTEMBER 28, 1996




                                     ASSETS





                                                1997              1996
                                                ----              ----

Current assets:

 Cash and cash equivalents...................$1,113,992        $ 1,828,807

 Accounts receivable, less allowance for
  doubtful accounts of $337,958 and $312,358,
  respectively............................... 9,485,397          9,494,246

 Receivable from long-term contracts........  1,049,122            861,427

 Inventories, net........................... 10,716,680          8,901,528

 Deferred tax asset.........................    835,803          2,158,000

 Prepaid expenses...........................    344,393            208,320

 Current portion of note receivable from 
  sale of PLI ..............................  1,150,000                 --

 Net assets from discontinued operations....         --          2,178,383
                                            -----------          ---------

    Total current assets.................... 24,695,387         25,630,711
                                             ----------         ----------



 Property and equipment, net................ 21,652,695         21,176,431

 Note receivable from sale of PLI, net
  of current portion........................  2,196,871                 --

 Covenants-not-to-compete, net of 
  accumulated amortization and writedown of
  $3,314,404 and $3,195,524, respectively...    237,761            356,641

 Other assets...............................    765,309            680,013
                                                -------            -------

                                            $49,548,023        $47,843,796
                                            ===========        ===========











  The accompanying notes are an integral part of these financial statements.

                                       17

<PAGE>

                              ILC TECHNOLOGY, INC.
                          CONSOLIDATED BALANCE SHEETS
                   SEPTEMBER 27, 1997 AND SEPTEMBER 28, 1996



                      LIABILITIES AND STOCKHOLDERS' EQUITY






                                         1997                       1996
                                         ----                       ----

Current liabilities:

   Accounts payable................   $4,361,816                  $3,643,496
   Accrued payroll and related
    items...........................   1,701,209                   1,263,741
   Other accrued liabilities........   1,517,606                   1,146,822
   Current portion of non-compete
    obligation......................          --                     390,000
   Current portion of long-term
    debt............................   2,534,500                   2,545,600
   Accrued income taxes payable.....   1,243,451                   1,486,518
                                       ----------                 -----------

         Total current liabilities..  11,358,582                  10,476,177
                                      ----------                  ----------

Long-term liabilities, net of 
 current portion:

   Long-term debt...................   3,117,396                   7,370,164
   Other accruals...................      78,328                     206,235
                                     -----------                 -----------

          Total long-term liabilities..3,195,724                   7,576,399
                                     -----------                 -----------

Commitments and contingencies (Note 8)

Stockholders' equity:

   Common stock, no par value;
    10,000,000 shares authorized; 
    4,874,040 shares and 4,782,508
    shares outstanding, respectively...7,178,231                   6,815,109

   Retained earnings...................7,815,486                  22,976,111
                                       ---------                ------------

         Total stockholders' equity...34,993,717                  29,791,220
                                      ----------                ------------

                                     $49,548,023                 $47,843,796
                                     ===========                 ===========









  The accompanying notes are an integral part of these financial statements.


                                       18

<PAGE>
                              ILC TECHNOLOGY, INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS
              FOR THE THREE FISCAL YEARS ENDED SEPTEMBER 27, 1997

                                     1997             1996           1995
                                     ----             ----           ----

Net sales........................$55,517,905      $54,206,424     $49,496,029

Costs and expenses:
  Cost of sales.................. 39,194,377       36,180,448      31,799,916
  Research and development.......  4,252,694        4,319,650       4,278,697
  Sales and marketing............  3,059,158        2,645,952       2,404,856
  General and administrative.....  4,329,067        4,417,446       4,459,726
  Amortization of intangibles....    120,000          120,000         120,000
                                 -----------      -----------     -----------
                                  50,955,296       47,683,496      43,063,195

Income from continuing 
 operations before provision for
 income taxes, interest expense
 and gain on sale of CPI.........  4,562,609        6,522,928       6,432,834


Interest expense, net............    493,917          461,898         323,757
                                 -----------       ----------      ----------

Income from continuing 
 operations before provision for
 income taxes and before gain
 on sale of CPI..................  4,068,692        6,061,030       6,109,077

Gain on sale of CPI..............  2,378,683               --              --
                                   ---------      -----------      ----------

Income from continuing
 operations before provision for
 income taxes....................  6,447,375        6,061,030       6,109,077

Provision for income taxes on
 continuing operations...........  1,608,000        1,515,000       1,472,000
                                   ---------       ----------      ----------

Income from continuing operations..4,839,375        4,546,030       4,637,077

Discontinued operations:
  Operating loss, net of tax 
  benefit of $280,000 and 
  $32,000 in 1996 and
   1995, respectively..............       --         (840,217)        (99,143)

  Estimated loss on disposal, 
   including $500,000 for operating
   losses during the phase out, 
   net of tax benefit of
   $1,132,996......................       --       (3,398,987)              --
                                  ----------       ----------       ----------

  Loss from discontinued operations       --       (4,239,204)         (99,143)
                                  ----------       ----------       ----------

Net income........................$4,839,375       $  306,826       $4,537,934
                                  ==========       ==========       ==========
Earnings (loss) per share:
 Earnings from continuing 
  operations......................    $ 0.96             0.92           $ 0.97
 Loss from discontinued operations        --            (0.86)           (0.02)
                                      ------           ------           ------

Net income per share..............    $ 0.96           $ 0.06           $ 0.95
                                      ======           ======           ======

Weighted average shares 
 outstanding used to compute 
 net income (loss) per share...... 5,047,658        4,923,132        4,764,989
                                   =========        =========        =========

 The accompanying notes are an integral part of these financial statements.

                                       19

<PAGE>



                              ILC TECHNOLOGY, INC.
                           CONSOLIDATED STATEMENTS OF
                              STOCKHOLDERS' EQUITY
              FOR THE THREE FISCAL YEARS ENDED SEPTEMBER 27, 1997






                                           Common
                               Common      Stock      Retained
                               Shares      Amount     Earnings        Total
                               ------      ------     --------        -----
Balance at October 1, 1994...4,522,951   $5,492,338  $18,131,351    $23,623,689

  Net income.................       --           --    4,537,934      4,537,934

  Issuance of common 
   stock under stock
   purchase plan..............  37,973      266,575           --        266,575

  Exercise of stock options... 132,250      450,751           --        450,751

  Repurchase of common stock.. (10,000)     (76,750)          --        (76,750)


Balance at September 30,
 1995........................4,683,174    6,132,914   22,669,285     28,802,199

  Net income..................      --           --      306,826        306,826

  Issuance of common
   stock under stock 
   purchase plan............... 34,209      279,068           --        279,068

  Exercise of stock options.... 65,125      403,127           --        403,127
                              ---------    --------    ---------     ----------


Balance at September 28,
 1996.........................4,782,508   6,815,109   22,976,111     29,791,220

  Net income..................       --          --    4,839,375      4,839,375

  Issuance of common
   stock under stock 
   purchase plan..............   28,555     266,588           --        266,588

  Exercise of stock options...   99,977     521,992           --        521,992

  Repurchase of common stock..  (37,000)   (425,458)          --       (425,458)
                              ----------  ----------     --------    ----------


Balance at September 27, 
 1997......................... 4,874,040  $7,178,231  $27,815,486   $34,993,717
                               =========  ==========  ===========   ===========















 The accompanying notes are an integral part of these financial statements.

                                       20

<PAGE>
                              ILC TECHNOLOGY, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE THREE FISCAL YEARS ENDED SEPTEMBER 27, 1997

                                         1997          1996          1995
                                         ----          ----          ----
Cash flows from operating
 activities:
  Net Income.........................$4,839,375     $306,826      $4,537,934

  Adjustment to reconcile net 
   income to net cash provided by
   continuing operations:

  Discontinued operations............        --    4,239,204          99,143

  Depreciation and amortization...... 2,002,845    1,689,689       1,569,478

  Provision for doubtful accounts....    68,694       38,804         102,861

  Provision for inventory obsolescence..696,089      520,006         169,034

  Net loss on property and equipment
   sold or retired...................... 14,144           --          26,367

  Equity in income of joint venture....(106,000)     (20,000)        (89,000)

  Gain on sale of CPI................(2,378,683)          --              --

  Changes in assets and liabilities,
   net of effects of businesses sold:

  Decrease in marketable securities..        --           --         998,129

  Increase in accounts receivable....(1,494,632)  (1,333,378)     (2,467,329)

  Increase in inventories............(4,267,013)  (1,888,444)     (1,685,743)

  (Increase) decrease in deferred 
   tax asset......................... 1,322,197     (704,000)        951,000

  (Increase) decrease in prepaid 
   expenses..........................  (136,073)     (86,076)        406,556

  (Increase) decrease in other 
    assets...........................    20,704       79,823          (9,397)

  Increase (decrease) in accounts
   payable...........................   718,320     (120,502)        300,709

  Decrease in accrued liabilities....  (230,124)    (956,660)       (637,731)
                                       --------     --------        --------
    Net cash provided by operating
     activities from continuing
     operations...................... 1,069,843    1,765,292       4,272,011

    Net cash used in discontinued 
     operations......................(1,518,488)    (168,186)     (1,722,659)
                                     ----------     --------      ----------

  Cash flows from investing activities:

  Proceeds from sale of CPI.......... 6,350,000           --              --

  Payments received on note for 
   sale of PLI.......................   350,000           --              --

  Purchase of land and real estate           --           --      (3,045,412)

  Decrease in deposit on land and
   building purchase.................        --           --       1,300,000

  Investment in joint venture........        --           --        (450,000)

  Capital expenditures...............(3,102,092)  (3,186,557)     (2,517,541)
                                     -----------   ----------     -----------
    Net cash provided by (used in)
     investing activities............ 3,597,908   (3,186,557)     (4,712,953)
                                      ---------   ----------      -----------

   The accompanying notes are an integral part of these financial statements.

                                       21

<PAGE>



                              ILC TECHNOLOGY, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
               FOR THE THREE FISCAL YEARS ENDED SEPTEMBER 27, 1997

                                   (continued)




                                              1997         1996       1995
                                              ----         ----       ----

Cash flows from financing activities:

 Principal borrowings under line
  of credit.............................  $10,963,000   $9,500,000  $8,450,000

 Principal repayments under line
  of credit.............................  (13,463,000)  (6,500,000) (6,450,000)

 New borrowings under equipment line....    1,045,000    1,555,000   1,720,089

 Principal repayments under 
  equipment line........................   (1,321,200)  (1,374,800) (1,049,958)

 Principal repayments under term loan...   (1,451,000)  (1,584,000) (1,578,000)

 Payments under non-compete agreement...           --     (390,000)   (520,000)

 Proceeds from issuance of common stock.      788,580      682,195     717,326

 Repurchase of common stock.............     (425,458)          --     (76,750)
                                          ------------   ---------  ----------

    Net cash provided by (used in) 
     financing activities...............   (3,864,078)   1,888,395   1,212,707
                                          -----------    ---------   ---------

    Net increase (decrease) in cash
     and cash equivalents...............     (714,815)     298,944    (950,894)

Cash and cash equivalents at beginning
 of year................................    1,828,807    1,529,863   2,480,757
                                            ---------    ---------  ----------
Cash and cash equivalents at end 
 of year................................   $1,113,992   $1,828,807  $1,529,863
                                           ==========   ==========  ==========






                                              1997         1996        1995
                                              ----         ----        ----

Supplemental disclosures of cash
 flow information:


Cash paid during the year for:
 Interest - continuing operations......   $  641,127     $542,061  $  589,200
 Interest - discontinued operations....           --       77,714     106,341
 Income taxes..........................      282,898    1,055,000     909,000


Supplemental disclosure of non-cash activities:

ILC sold the  stock of PLI for a note.  The  purchase  price,  net of  expenses,
approximated the net assets of PLI (Note 12).






  The  accompanying  notes are an integral part of these financial statements.

                                       22

<PAGE>



                              ILC TECHNOLOGY, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 27, 1997



1. The Company
--------------
         ILC Technology,  Inc.  ("ILC") was  incorporated on September 15, 1967.
ILC  designs,  develops,  manufactures  and  markets  high  intensity  lamps and
lighting   products  for  the  medical,   industrial,   aerospace,   scientific,
entertainment  and  military  industries.  ILC  develops  and  manufactures  the
majority of its products at its  headquarter  facilities in  California  and the
remainder at its subsidiary  facility in the United  Kingdom.  (See Notes 12, 13
and 16).

2.  Summary of Significant Accounting Policies
----------------------------------------------
Basis of Presentation

         The consolidated  financial  statements include the accounts of ILC and
its  wholly  owned  subsidiaries.  All  significant  intercompany  balances  and
transactions have been eliminated.

         Fiscal year 1995 was restated to reflect ILC's  decision to discontinue
the operations of Precision Lamp, Inc.  ("PLI") (see Note 12). This  restatement
had no impact on net income.

         ILC's fiscal year end is the Saturday closest to September 30.

Use of Estimates in Preparation of Financial Statements
-------------------------------------------------------

         The  preparation of financial  statements in conformity  with generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that  affect the  reported  amounts of assets and  liabilities  and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting period. Actual results could differ from those estimates.  Items which
require  management  to make  estimates  include  the  realization  of  accounts
receivable and inventory balances,  warranty, and other reserves.  Additionally,
ILC is currently in  negotiation  with PLI Acquistion  Corp. to restructure  the
terms of that note receivable, as discussed in Note 12.

Cash and Cash Equivalents
-------------------------

         For the purpose of the  statement  of cash  flows,  ILC  considers  all
highly liquid  investments with an original  maturity of three months or less at
the time of issue to be cash equivalents.


Inventories
-----------

         Inventories  are stated at the lower of cost  (first-in,  first-out) or
market, and include material,  labor and manufacturing overhead.  Inventories at
September  27,  1997 and  September  28,  1996,  net of  inventory  reserves  of
$2,043,420 and $2,034,258, respectively, consisted of:





                                       23

<PAGE>

2.  Summary of Significant Accounting Policies (continued)
--  ------------------------------------------------------

Inventories (continued)
-----------------------


                                   1997                       1996
                                   ----                       ----

Raw materials                   $5,459,159                 $ 4,802,839
Work-in-process                  3,974,496                   2,549,805
Finished goods                   1,283,025                   1,548,884
                                ----------                 -----------
Total inventories              $10,716,680                 $ 8,901,528
                               ===========                 ===========



Developmental and Manufacturing Contracts
-----------------------------------------

      ILC  contracts  with the  U.S.  Government  and  other  customers  for the
development and manufacturing of various products under both cost-plus-fixed-fee
and fixed-price  contracts.  Revenues are recognized under these contracts using
the  percentage  of  completion  method,  whereby  revenues  are reported in the
proportion  that  costs  incurred  bear to the  total  estimated  costs for each
contract.  Periodic  reviews of estimated  total costs during the performance of
such  contracts  may result in  revisions of contract  estimates  in  subsequent
periods. Any loss contracts are reserved at the time such losses are determined.
Revenues from these  contracts  were less than 10% of net revenues  during 1997,
1996 and 1995.


Depreciation and Amortization
-----------------------------

      Depreciation  and amortization on property and equipment are provided on a
straight-line  basis over estimated useful lives of 3 to 31.5 years,  except for
leasehold improvements which are amortized over the terms of the leases.


Net Income (Loss) Per Share
---------------------------

      Net income (loss) per share is computed using the weighted  average number
of common  shares and common  equivalent  shares (when such  equivalents  have a
dilutive effect)  outstanding during the period using the treasury stock method.
Fully diluted net income (loss) per share is not  significantly  different  from
net income (loss) per share as reported.

      In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, which requires  disclosure of basic earnings per share and diluted earnings
per share and is effective  for periods  ending  subsequent to December 15, 1997
and restatement  will be required for all prior period EPS data  presented.  The
pro forma effect of adoption of SFAS No. 128 is included in the table below.











                                       24

<PAGE>

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
    ------------------------------------------------------

Net Income (Loss) Per Share (continued)
---------------------------------------


                                        1997         1996          1995
                                        ----         ----          ----
                                              (shares in thousands)

As reported:
  Earnings (loss) per share:
  Continuing operations.................$ 0.96       $0.92          $0.97
  Discontinued operations...............    --       (0.86)         (0.02)
                                         -----      ------         ------
   Net income per share.................$ 0.96       $0.06          $0.95

Pro forma for SFAS No. 128:
  Basic earnings (loss) per share:
  Continuing operations.................$1.00        $0.96          $1.01
  Discontinued operations...............   --        (0.90)         (0.02)
                                        -----       ------         ------
  Basic net income per share............$1.00        $0.06          $0.99
  Weighted average number of
   common shares outstanding............4,848        4,725          4,604

  Diluted earnings (loss) per share:
  Continuing operations.................$0.96        $0.92          $0.97
  Discontinued operations...............   --        (0.86)         (0.02)
                                        -----       ------         ------
  Diluted net income per share..........$0.96        $0.06          $0.95
  Weighted average number of
   common shares outstanding............5,048        4,923          4,765




Covenants-Not-To-Compete
------------------------

      The  covenant-not-to-compete  relates to the Q-Arc  acquisition  that took
place in 1991. This is being amortized over the period of the covenant.

      In March 1995, the Financial  Accounting  Standards Board issued Statement
of Financial  Accounting  Standards No. 121,  "Accounting  for the Impairment of
Long-Lived Assets and for Long- Lived Assets to be Disposed Of." ILC adopted the
provisions  of this  statement  in fiscal  1996.  The  effect  on its  financial
position and results of operations was not significant.  ILC quarterly evaluates
whether later events and circumstances have occurred that indicate the remaining
estimated  useful lives of these  intangibles  may warrant  revision or that the
remaining balances of intangibles may not be recoverable.  When factors indicate
that  intangibles  should be  evaluated  for  possible  impairment,  ILC uses an
estimate of the related  subsidiary's  undiscounted cash flow over the remaining
life of the intangibles in measuring whether the intangibles are recoverable. As
part of ILC's  decision to discontinue  the  operations of PLI, the  unamortized
balance of the covenant-not-to-compete  ($470,000) was written off in the fourth
quarter of fiscal 1996.


Investment in Joint Venture
---------------------------

     In February 1995, ILC invested $450,000 in a lamp  manufacturer  located in
Japan. ILC's investment represents a 49% ownership interest in the equity of the
investee,  consequently  ILC accounts for its investment using the equity method
of accounting.  ILC's investment is included in Other Assets in the accompanying
consolidated balance sheets and its proportionate interest in the income of the

                                       25

<PAGE>

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
    ------------------------------------------------------

Investment in Joint Venture (continued)
---------------------------------------

investee  of  $106,000,  $20,000  and  $89,000  in fiscal  1997,  1996 and 1995,
respectively,  is  included  in  the  accompanying  consolidated  statements  of
operations.


New Accounting Pronouncements
-----------------------------

     SFAS No. 130, "Reporting Comprehensive Income",  establishes guidelines for
all items that are to be recognized under accounting  standards as components of
comprehensive income to be reported in the financial  statements.  The statement
is effective for all periods ending after December 15, 1997 and reclassification
of  financial  statements  for earlier  periods  presented  will be required for
comparative purposes.

      SFAS No. 131,  "Disclosures  about  Segments of an Enterprise  and Related
Information",   establishes   standards  for  reporting  of  operating   segment
information in annual financial  statements and requires that those  enterprises
report  selected  information  about  operating  segments  in interim  financial
statements  issued to  shareholders.  The statement is effective for all periods
ending after December 15, 1997.


3.  Revenues
--  --------

      ILC recognizes  revenue on all product sales upon shipment of the product.
ILC accrues for estimated  warranty  obligations  at the time of the sale of the
related  product based upon its past history of claims  experience  and costs to
discharge its obligations.

      ILC operates in a single  industry  segment,  the  designing,  developing,
manufacturing and marketing of high performance light source products.  Revenues
from  continuing  operations  are  geographically   summarized  as  follows  (in
thousands):

                                  1997              1996               1995
                                  ----              ----               ----

United States....................$36,639          $34,088             $32,533
Europe...........................  6,671            6,920               5,964
Asia............................. 11,986           12,700              10,951
Other international..............    222              498                  48
                                 -------          -------             -------
                                 $55,518          $54,206             $49,496
                                 =======          =======             =======



Customers  comprising more than 10% of net sales from continuing  operations are
as follows:

                                   1997              1996              1995
                                   ----              ----              ----

Customer A.........................13.5%             15.0%             12.2%
Customer B.........................  *               11.5%             12.0%


*less than 10% of net sales

                                       26

<PAGE>

3.  Revenues (continued)
--  --------------------

      ILC  provides  credit  in the form of  trade  accounts  receivable  to its
customers.  ILC  does not  generally  require  collateral  to  support  customer
receivables.  ILC performs  ongoing  credit  evaluations  of its  customers  and
maintains allowances which management believes are adequate for potential credit
losses.

      Approximately  31%,  39% and 40% of ILC's sales in fiscal  1997,  1996 and
1995, respectively, were to customers in the medical industry. This industry has
experienced  significant  fluctuations  in demand and ILC  expects  sales to the
medical  market to  decrease  as a  percentage  of net sales in the  foreseeable
future.  Customer  B,  referred  to  above,  is in the  semiconductor  equipment
industry  and was a major  customer  of ILC's  subsidiary,  CPI.  In the  fourth
quarter of fiscal 1996, CPI  experienced a significant  reduction in orders from
this customer. In May 1997, CPI was sold (see Note 13).

4.  Property and Equipment
--  ----------------------

      Property  and  equipment  at  September  27, 1997 and  September  28, 1996
consisted of:

                                           1997                1996
                                           ----                ----

Property and equipment, at cost:
   Machinery and equipment............ $17,130,338          $15,047,138
   Land and buildings.................  15,498,058           14,955,738
   Furniture and fixtures.............     518,283              601,822
   Equipment under capital lease......     174,268              174,268
   Leasehold improvements.............          --              598,814
   Construction-in-progress...........     577,449            1,011,601
                                      ------------        -------------
                                        33,898,396           32,389,891
Less accumulated depreciation and
   amortization ...................... (12,245,701)         (11,212,950)
                                       -----------          -----------

Property and equipment, net........... $21,652,695          $21,176,431
                                       ===========          ===========


5.  Bank Borrowings

         As of September 27, 1997 and September 28, 1996, borrowings outstanding
   under ILC's credit facilities consisted of:

                                           1997                 1996
                                           ----                 ----

Line of credit.........................$2,500,000            $5,000,000
Term loan.............................. 1,187,000             2,638,000
Equipment line of credit............... 1,915,000             2,191,200
Other capital lease....................    49,896                86,564
                                       ----------            ----------
                                        5,651,896             9,915,764

Less: current portion..................(2,534,500)           (2,545,600)
                                       -----------           -----------

Long-term debt.........................$3,117,396           $ 7,370,164
                                       ==========           ===========





     Aggregate  maturities  for  long-term  debt  during the next five years are
approximately:  1998 - $2,534,500, 1999 - $3,117,396, and none in 2000, 2001 and
2002.

                                       27

<PAGE>



5.  Bank Borrowings (continued)
    ---------------------------

         All of the above credit  facilities  are secured by all of the property
of ILC.

         ILC has a $6 million line of credit available with a bank which expires
in March 1999. Borrowings under this line are at 2% above the LIBOR rate (London
Interbank Offer Rate) (7.66% at September 27, 1997).  Under the covenants of the
loan  agreement,  unless  written  approval  from the bank is  obtained,  ILC is
restricted from entering into certain  transactions  and is required to maintain
certain specified  financial  covenants and  profitability.  As of September 27,
1997, ILC was in compliance  with all financial  covenants.  The average balance
outstanding  (based on month-end  balances) under the line of credit in 1997 was
$4,021,000. The maximum borrowings were $6,000,000 and the average interest rate
during 1997 was 7.6%. As of September  27, 1997,  $3.5 million was available for
future borrowings under this line of credit.

         In  addition,   in  connection  with  the  purchase  of  its  Sunnyvale
manufacturing  facilities,  ILC  entered  into a  term  loan  with  a  bank  for
$5,000,000 in 1993, which was subsequently  increased to $6,333,333 in 1994. The
note matures in August 1998. The term loan requires monthly  principal  payments
equal to  one-forty-eighth of the principal amount plus interest at 2% above the
LIBOR rate (London Interbank Offer Rate) (7.66% at September 27, 1997). The term
loan  is a  reducing  revolving  credit  facility  which  allows  for  principal
pre-payments  and the flexibility for re-borrowing up to the maximum amount that
would be outstanding  under the term loan given normal  amortization to the date
of re-borrowing.  The average balance  outstanding (based on month-end balances)
under the term loan in 1997 was $1,913,000, and the average interest rate during
1997 was 7.6%.

         ILC has  available  equipment  lines of credit for 100% of the purchase
cost of new equipment. At the end of fiscal 1997, ILC had borrowings under these
lines of $1,915,000,  of which  $1,348,000 is due in fiscal 1998 and $567,000 is
due in fiscal 1999.  These  borrowings  bear interest at 2% above the LIBOR rate
(7.66% at  September  27,  1997).  ILC also has  available  an unused $2 million
equipment  line of credit which  expires in August 1998.  Borrowings  under this
line bear interest at the same rate as discussed above, with principal  balances
amortized over a 2 year period.


6.  Income Taxes
    ------------

     ILC accounts for income  taxes under SFAS No. 109,  "Accounting  for Income
Taxes." SFAS No. 109 requires an asset and liability  approach to accounting for
income taxes.

         Income from  continuing  operations  before  provision for income taxes
consists of the following for fiscal 1997, 1996 and 1995, respectively:



                                      1997         1996          1995
                                      ----         ----          ----

U.S................................$4,738,375   $4,897,389     $5,588,040
Foreign............................ 1,709,000    1,163,641        521,037
                                   ----------    ----------    ----------
                                   $6,447,375    $6,061,030    $6,109,077
                                   ==========    ==========    ==========



      The components of the provision for income taxes on continuing  operations
are as follows:







                                       28

<PAGE>



6.  Income Taxes (continued)
    ------------------------

                                       1997          1996           1995
                                       ----          ----            ----

Federal -
      Current...................... $671,000      $1,559,000       $833,000
      Deferred ....................   80,000        (600,000)       581,500
                                    --------      ----------       --------
                                     751,000         959,000      1,414,500
                                    --------      ----------      ---------
Foreign -
      Current......................  540,000         384,000             --

State -
      Current......................  241,000         276,000        199,000
      Deferred.....................   76,000        (104,000)        96,500
                                    --------       ---------      ---------
                                     317,000         172,000        295,500
                                    --------       ---------      ---------

Federal refund received............       --              --       (238,000)
                                    --------       ---------       --------

Total provision for income taxes
 on continuing operations.........$1,608,000      $1,515,000     $1,472,000
                                  ==========      ==========     ==========



     The major  components of the deferred tax asset account, as computed under
SFAS No. 109, are as follows:


                                       1997                        1996
                                       ----                        ----

Reserve for loss on disposal of
 discontinued operations, not 
 currently deductible for tax
 purposes...........................$      --                    $1,133,000
Inventory reserve...................  795,000                       877,000
Bad debt reserve....................  132,000                        92,000
Warranty reserve....................  103,000                       128,000
Accruals not currently deductible
 for tax purposes...................  545,000                       381,000
Amortization of covenant-not-
 to-compete.........................       --                       202,000
Excess of tax over book 
 depreciation......................(1,112,000)                     (988,000)
Other items, individually 
 insignificant.....................   372,803                       333,000
                                  -----------                   -----------
                                  $   835,803                    $2,158,000
                                  ===========                   ==========



      The provision for income taxes on continuing  operations  differs from the
amounts which would result by applying the applicable  statutory  Federal income
tax rate to income from continuing operations before taxes as follows:

                                         1997          1996          1995
                                         ----          ----          ----

Computed expected provision.........  $2,192,000    $2,121,000    $2,138,000
State tax...........................     317,000       364,000       367,000
FSC commission......................     (43,000)     (181,000)     (216,000)
General business credits............    (277,000)     (218,000)     (203,000)
Refund received.....................          --            --      (238,000)
Other items, individually
 insignificant......................    (581,000)     (571,000)     (376,000)
                                       ---------      ---------     ---------
                                      $1,608,000    $1,515,000    $1,472,000
                                      ==========    ==========    ==========



                                       29

<PAGE>



6.  Income Taxes (continued)
    ------------------------

     During the second quarter of fiscal 1995, ILC received a refund of $238,000
from the Internal Revenue Service (IRS) related to tax returns filed in previous
years,  which were  examined by the IRS. This amount was recorded as a reduction
of the fiscal  1995 tax  provision  upon  receipt of the refund.  An  additional
$235,000 of interest  related to the refund amount was received and was included
in interest income in fiscal 1995.


7.  Employee Retirement Plan
    ------------------------

     On  January 1,  1984,  ILC  adopted a thrift  incentive  savings  plan (the
"Retirement Plan"). The Retirement Plan is qualified under section 401(k) of the
Internal  Revenue Code and is available to all full-time  employees  with one or
more  years of  employment  with ILC.  Under the terms of the  Retirement  Plan,
participating  employees  must  contribute  at least 2% of their  salary  to the
Retirement Plan, and ILC contributes (as a matching  contribution)  100% of this
amount.  Employees may also  contribute an additional  amount up to 13% of their
salary to the  Retirement  Plan,  with no further  contributions  by ILC.  ILC's
contributions  vest  at a  rate  of  20%  per  year,  commencing  on  the  first
anniversary  of  employment.  Total employer  matching  contributions  under the
Retirement  Plan were  $187,000,  $226,000,  and $212,000 for fiscal years 1997,
1996  and  1995,  respectively.  The  components  of such  expense  relating  to
continuing operations was $187,000, $188,000 and $171,000 for fiscal years 1997,
1996 and 1995, respectively.


8.  Commitments and Contingencies
    -----------------------------

     At  September  27, 1997,  all of ILC's  facilities  in Sunnyvale  and Santa
Clara,  California  and  Cambridge,  England  are owned.  All lease  obligations
associated  with the facilities of PLI and CPI were assumed by the buyers at the
time of sale.

     For fiscal  years 1997,  1996 and 1995,  rental  expense was  approximately
$178,000,  $442,000 and $277,000,  respectively.  Rental  expense for continuing
operations  was $121,000,  $226,000 and $61,000 for fiscal years 1997,  1996 and
1995, respectively.

     As  discussed  in Note 13, the number of shares held in escrow  relating to
the  sale of CPI  are  subject  to  adjustment  related  to  warranties  and the
valuation of the acquiror's common stock.

9.  Stock Option and Purchase Plans
    -------------------------------

     Under  the 1992  Stock  Option  Plan  ("Plan"),  ILC may grant  options  to
employees and directors.  ILC has reserved 575,000 shares for issuance under the
Plan.  The exercise  price per share for stock  options  cannot be less than the
fair market value on the date of grant.  Options granted are for a ten-year term
and generally vest ratably over a period of four years commencing one year after
the date of grant.  The Plan provides for the automatic  grant of a nonstatutory
stock  option  to  purchase  shares  of Common  Stock to each  outside  Director
annually  during ILC's third fiscal  quarter.  During fiscal 1997,  each outside
Director was granted an automatic  option to purchase a total of 5,000 shares of
ILC's Common Stock.  ILC's 1983 Stock Option Plan expired in 1993 and no further
options have been granted under such plan since then.

     In accordance  with the disclosure  requirements  of Statement of Financial
Accounting Standards No. 123 " Accounting for Stock-Based  Compensation," if ILC
had elected to  recognize  compensation  cost based on fair value of the options
granted  at grant  dates  prescribed,  income  from  continuing  operations  and


                                       30

<PAGE>



9.  Stock Option and Purchase Plans (continued)
    -------------------------------------------

earnings per share would have been reduced to the pro forma amounts indicated in
the table below.  The pro forma effect on net income for fiscal 1997 and 1996 is
not representative of the pro forma effect on net income in future years because
it does not take into  consideration pro forma  compensation  expense related to
grants made prior to fiscal 1996.

                                          1997                    1996
                                          ----                    ----

Income from continuing operations-
 as reported..........................$4,839,375                $4,546,030
Income from continuing operations-
 pro forma............................$4,328,487                $4,344,547


Earnings per share from continuing
 operations as reported...............   $0.96                     $0.92
Earnings per share from continuing
 operations-pro forma.................   $0.89                     $0.89




     The fair value of each option grant is estimated on the date of grant using
the   Black-Scholes   option  pricing  model   utilizing   expected   volatility
calculations  based on historical  data (62.10%) and  risk-free  interest  rates
based on U.S. government bonds on the date of grant with maturities equal to the
expected option term (5.82%-6.69%).  No dividends are assumed,  and the expected
option term is 5.93 years. The  weighted-average  fair values of options granted
in fiscal 1997 and 1996 are $6.49 and $6.27, respectively.


                                       31

<PAGE>



9.  Stock Option and Purchase Plans (continued)
    -------------------------------------------

     A summary of ILC's stock option activity for the past three fiscal years is
as follows:


                                                                    Weighted
                                Options                 Exercise    Average
                                Available    Number     Price       Exercise
                                for Grant    of Shares  Per Share   Price
                                ---------    ---------  ---------   ----------
                                                   Options Outstanding
                                             ---------------------------------

Balance at October 1, 1994..... 103,624      720,027    $1.09-11.50   $6.27

 Granted....................... (28,000)      28,000          $9.50   $9.50
 Canceled......................  34,000      (34,000)   $8.75-11.50   $9.85
 Exercised.....................      --     (132,250)   $2.13 -8.75   $3.48
                                -------     --------    -----------   -----

Balance at September 30, 1995.. 109,624      581,777    $1.09-11.50   $6.87

 Additional shares approved.... 200,000           --             --      --
 Granted.......................(205,000)     205,000    $9.00-11.25   $9.94
 Canceled......................  92,125      (92,125)   $8.75-11.50  $10.27
 Exercised.....................      --      (65,125)  $1.09 -11.50  $ 6.10
                                -------      --------  ------------  ------

Balance at September 28, 1996.. 196,749      629,527   $1.09 -11.50   $7.44

 Additional shares approved.... 175,000           --             --      --
 Granted.......................(406,000)     406,000    $9.00-11.19   $10.29
 Canceled......................  89,550      (89,550)   $9.00-11.50   $10.57
 Exercised.....................      --      (99,977)   $1.09-11.50   $ 5.22
                                -------      -------    -----------   -------

Balance at September 27, 1997..  55,299      846,000    $2.25-11.25   $ 8.74
                                =======      =======    ===========   ======




     At the end of fiscal  1997,  1996 and 1995,  options  to  purchase  351,063
shares,  416,965 shares and 439,715 shares,  respectively,  were  exercisable at
weighted average prices of $6.70, $6.11 and $5.94.

     The following table summarizes  information about stock options outstanding
at September 27, 1997:


                                       Weighted Avg.             Weighted Avg.
Number of   Exercise   Weighted Avg.   Remaining     Number of   Exercise Price
Shares      Price      Exercise        Contractual   Shares        of Options
Outstanding Range       Price           Life        Exercisable   Exercisable
----------- --------   -------------   -----------  -----------   ------------- 
162,000   $ 2.25-3.75     $ 3.54       2.19 years     162,000       $  3.54
390,000     7.38-9.50       9.13       7.93 years     136,563          8.70
294,000   10.63-11.50      11.08       8.64 years      52,500         11.30





                                       32

<PAGE>



9.  Stock Option and Purchase Plans (continued)
    -------------------------------------------

     Under ILC's  Employee  Stock Purchase Plan, ILC has 83,033 shares of common
stock  available at September 27, 1997 for issuance to  participating  employees
who have met certain  eligibility  requirements.  The number of shares available
for  purchase by each  participant  is based upon annual base  earnings and at a
purchase price equal to 85% of the fair market value at the beginning or the end
of the quarter of purchase, whichever is lower.


10.  Interest Expense, Net
     ---------------------

Interest expense, net consists of the following:

                                         1997          1996            1995
                                         ----          ----            ----


Interest income...................    $(147,210)     $(80,163)      $(265,443)
Interest expense..................      641,127       542,061         589,200
                                       --------      --------        --------

Net interest expense related to
 continuing operations............     $493,917      $461,898        $323,757
                                       ========      ========        ========



11.  Acquisitions
     ------------

     In August 1991,  ILC acquired  all the  outstanding  stock of Q-Arc Ltd. of
Cambridge,  England  for  $1,400,000  in cash  and  the  assumption  of  certain
liabilities.  Q-Arc is a manufacturer of specialty lamps for laser and non-laser
applications.  This transaction was accounted for as a purchase and accordingly,
all assets were revalued to their respective fair values.  The acquisition price
was equal to the fair  value of net  assets  acquired.  Net  assets  included  a
covenant-not-to-compete   of  approximately  $951,000.  The  covenant  is  being
amortized  over an eight year period.  At September  27, 1997,  the  unamortized
balance of the Q-Arc covenant-not-to-compete is approximately $238,000.


12.  Discontinued Operations
     -----------------------

     In  September  1996,  ILC's Board of  Directors  voted to proceed  with the
divestiture  of PLI which is a  subsidiary  based in  Cotati,  California.  As a
result of ILC's plan, an estimated loss on disposal of $3,399,000,  net of a tax
benefit of $1,133,000,  was recorded in the fourth quarter of fiscal 1996.  This
loss  on  disposal  included  estimated   operating  losses  through  the  final
disposition of the subsidiary  and the write off of the  unamortized  balance of
the PLI covenant-not-to-compete of approximately $470,000.

     In January 1997, ILC signed an agreement to sell PLI. The original  selling
price was  approximately  $3.3 million but was subject to due  diligence and the
ability of PLI Acquisition Corp., the purchaser, to obtain adequate financing no
later  than  March 31,  1997.  The  purchaser  was not able to  obtain  adequate
financing,  but through further  discussions  with the purchaser,  ILC agreed to
sell the stock of PLI to PLI Acquisition Corp. for a promissory note with a face
value of $4 million bearing 8% interest per year on any unpaid principal amount.
Payments on the promissory note began in May 1997 and will be completed in April
2000.  This  transaction  was recorded in the third quarter of fiscal 1997.  The
purchase price,  net of expenses and reserves,  approximated  the book value and
therefore, no gain or loss was recorded.

                                       33

<PAGE>



12.  Discontinued Operations (continued)
     -----------------------------------

     After  conferring with ILC management,  PLI Acquisition  Corp. did not make
the scheduled October and November 1997 payments on the note payable to ILC. ILC
and PLI  Acquisition  Corp.  are  currently  evaluating a  restructuring  of the
payment terms of the note payable to ILC. ILC's  management  believes that there
has been no impairment of the value of the note as recorded by ILC.

     Continuing  operations,  as  reclassified  for fiscal  years 1996 and 1995,
consist  of  the  activities  of  ILC  Technology,   Inc.  based  in  Sunnyvale,
California,  CPI based in Beverly,  Massachusetts  and Q-Arc based in Cambridge,
England.  The  Consolidated  Statements of Operations have been  reclassified to
report  separately the activities of PLI as  discontinued  operations.  Revenues
from PLI were $7,772,000 and $8,933,000 for fiscal 1996 and 1995,  respectively.
The net loss after tax from the discontinued  operations of PLI was $840,000 and
$99,000  for  fiscal  1996 and 1995,  respectively.  A portion  of net  interest
expense  of  approximately  $66,000  and  $58,000  for  fiscal  1996  and  1995,
respectively, was allocated to the discontinued operations. Net interest expense
was allocated to discontinued operations based on the ratio of the net assets to
be discontinued to the consolidated net assets plus consolidated debt other than
debt which is directly attributable to continuing operations. For the six months
ended March 29, 1997,  revenues from PLI were  $1,489,000.  Net interest expense
allocated to the discontinued  operations of PLI was approximately  $18,000.  As
discussed  above,  the resultant  loss from  discontinued  operations was offset
against accruals made in the fourth quarter of fiscal 1996.

     The net assets of PLI of  $2,178,383  as of September 28, 1996 are shown in
the accompanying balance sheet as net assets from discontinued operations. These
assets were written down to a value that represented  management's best estimate
of the amount that could be realized upon disposition.


13.  Converter Power, Inc.
     ---------------------

     In  May  1997,  ILC  completed  the  sale  of CPI to  Applied  Science  and
Technology,  Inc.  (ASTeX) for $6.35  million in cash and 45,000 shares of ASTeX
common stock.  The total sale price was $7.35  million,  subject to  adjustments
related to warranties.  ILC has estimated that $500,000 of potential  warranties
could be paid and has  reduced  the gain on sale  accordingly.  In August  1997,
ASTeX removed approximately 4,900 shares from escrow based on post-closing audit
adjustments.  The remaining shares will be held in escrow subject to any further
post-closing adjustments,  with a final settlement in May 1998. The sale, net of
expenses,  resulted in a gain of  $2,378,683  and was reported in the results of
operations  for the third quarter  ended June 28, 1997.  The net amount due from
ASTeX of $500,000  (to be  satisfied  by the release to ILC of the ASTeX  shares
held in escrow) is reflected in accounts receivable in the accompanying  balance
sheet as of September 27, 1997.


14.  Rights Agreement and Other Matters
     ----------------------------------

     On September 19, 1989, ILC's Board of Directors  declared a dividend of one
common share purchase right for each  outstanding  share of common stock, no par
value,  of ILC. The dividend was payable on October 2, 1989 to the  shareholders
of record on that date.  Each right entitles the  registered  holder to purchase
from ILC one share of common stock of ILC at a price of $15.00 per common share.
The rights will not be  exercisable  until a party  either  acquires  beneficial
ownership  of 20% of ILC's common stock or makes a tender offer for at least 30%
of its common stock. In the event the rights become exercisable and thereafter a
person  or  group  acquires  30% or  more  of  ILC's  stock,  a 20%  shareholder


                                       34

<PAGE>



14.  Rights Agreement and Other Matters (continued)
     ----------------------------------------------


("Acquiring Person") engages in any specified self-dealing transaction, or, as a
result  of  a  recapitalization   or   reorganization,   an  Acquiring  Person's
shareholdings  are increased by more than 3%, each right will entitle the holder
to purchase from ILC, for the exercise price, common stock having a market value
of twice  the  exercise  price of the  right.  In the event  the  rights  become
exercisable  and  thereafter  ILC is  acquired  in a merger  or  other  business
combination,  each right will enable the holder to purchase  from the  surviving
corporation, for the exercise price, common stock having a market value of twice
the exercise price of the right.  At ILC's option,  the rights are redeemable in
their entirety, prior to becoming exercisable, at $.01 per right. The rights are
subject to  adjustment  to prevent  dilution and expire  September  29, 1999. On
February 25, 1997, the Rights Agreement was amended. The amended terms generally
provide  that the  exercise  of the  various  rights may occur  whenever a party
acquires a beneficial  ownership of 15% or more of ILC outstanding common shares
and that  registered  holders of ILC are entitled to purchase from ILC one share
of  common  stock at a price of  $55.00  per  common  share.  Additionally,  the
expiration date of the Rights Agreement was extended to December 31, 2006.

     In  November  1996,  the  Board of  Directors  authorized  eight  severance
agreements for six executive officers and two managers,  providing for severance
benefits  upon  termination  during the  two-year  period  following a change in
control in ILC, as defined therein.


15.  Repurchase of Common Stock
     --------------------------

     In November 1996, the Board of Directors authorized ILC to repurchase up to
1,000,000 shares of ILC's issued and outstanding common stock.  During the third
quarter of fiscal 1997,  and since  inception  of the  repurchase  program,  ILC
repurchased  37,000 shares of common stock for an aggregate  amount of $425,458.
Purchases  were made on the open market and can be made for up to two years from
the date of authorization.


16.  Subsequent Event
     ----------------

     On October 30, 1997,  ILC entered into a definitive  Agreement  and Plan of
Merger by and among ILC,  BEC Group,  Inc.  ("BEC") and BILC  Acquisition  Corp.
("Acquisition  Corp."),  a wholly owned subsidiary of BEC, pursuant to which ILC
will merge (the "Merger") with and into Acquisition  Corp. Upon  consummation of
the Merger,  each  outstanding  share of ILC will be converted into the right to
receive 2.18 shares (reflecting the completion of BEC's contemplated one-for-two
reverse  stock  split) of BEC's  common  stock.  The  Merger is  subject  to the
approval  of both  ILC's  shareholders  and BEC's  stockholders,  and to certain
regulatory  approvals and other  customary  closing  conditions.  The respective
chairmen  of ILC and BEC have executed voting agreements in favor of the Merger.


                                       35

<PAGE>



                                                              SCHEDULE VIII

                              ILC TECHNOLOGY, INC.
                 VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
                      FOR FISCAL YEARS 1997, 1996 AND 1995





                      Balance at  Charged to  Deductions Deductions   Balance at
                      Beginning   Cost and      and        from        end of
                      of Period   Expenses    Write Offs Dispositions  Period
                      ---------   --------    ---------- ------------  ------- 

Allowance for
  Doubtful Accounts:


Year ended
  September 30, 1995..... $332,672   $102,861   $ 26,093   $-------    $409,440


Year ended
  September 28, 1996..... $409,440   $ 38,804   $135,886    -------    $312,358


Year ended
  September 27, 1997..... $312,358   $68,694     $22,062   $ 21,032    $337,958



Reserve for Inventory
  Obsolescence:


Year ended
  September 30, 1995....$2,141,992  $169,034    $430,000   $-------  $1,881,026


Year ended
  September 28, 1996....$1,881,026  $520,006    $366,774    -------  $2,034,258


Year ended
  September 27, 1997....$2,034,258  $696,089    $635,927    $51,000  $2,043,420






                                       36

<PAGE>





                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To ILC Technology, Inc.


     We  have  audited  the  accompanying  consolidated  balance  sheets  of ILC
Technology, Inc. (a California Corporation) and subsidiaries as of September 27,
1997  and  September  28,  1996,  and the  related  consolidated  statements  of
operations,  stockholders'  equity and cash flows for each of the three years in
the period ended September 27, 1997. These financial statements and the schedule
referred to below are the responsibility of ILC's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.

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

     In our opinion,  the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of ILC Technology,
Inc. and  subsidiaries  as of September  27, 1997 and September 28, 1996 and the
results of their  operations and their cash flows for each of the three years in
the period  ended  September  27, 1997 in  conformity  with  generally  accepted
accounting principles.

     Our audit was made for the  purpose  of  forming  an  opinion  on the basic
financial  statements  taken as a whole.  The  schedule  presented on page 36 is
presented  for  purposes  of  complying   with  the   Securities   and  Exchange
Commission's  rules  and is not  part of the  basic  financial  statements.  The
schedule has been subjected to the auditing  procedures  applied in the audit of
the  basic  financial  statements  and,  in our  opinion,  fairly  states in all
material  respects  the  financial  data  required  to be set forth  therein  in
relation to the basic financial statements taken as a whole.





                                              ARTHUR ANDERSEN LLP



San Jose,  California
December 1, 1997



                                       37

<PAGE>



                  QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
                     (in thousands, except per share data)


                                     Year Ended September 27, 1997
                          -----------------------------------------------------
                          First           Second          Third        Fourth
                          Quarter         Quarter         Quarter      Quarter
                          -------         -------         -------      -------

Revenues................. $12,121         $14,775         $13,911      $14,711

Gross profit.............   3,380           4,211           4,105        4,627

Net income from
 continuing operations...     307             689           2,671        1,172

Net income per share
 from continuing
 operations.............. $  0.06         $  0.14         $  0.53       $ 0.23




                                       Year Ended September 28, 1996
                                (First, second and third quarters restated
                                        for discontinued operations)
                          -----------------------------------------------------
                          First            Second         Third        Fourth
                          Quarter          Quarter        Quarter      Quarter
                          -------          -------        -------      --------
Revenues................. $12,211          $13,943        $14,860      $13,192

Gross profit.............   4,199            4,869          4,995        3,963

Net income from
 continuing operations...     848            1,124          1,626          948

Net income (loss)
 from discontinued
 operations..............      30              (13)          (122)      (4,134)

Net income per share
 from continuing
 operations..............  $ 0.17           $ 0.23         $ 0.33       $ 0.19

Net income (loss) per
 share from discontinued
 operations..............  $ 0.01          $ (0.01)       $ (0.03)     $ (0.83)




                                       38

<PAGE>



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

            None

                                    PART III


Item 10.  Directors and Executive Officers of the Registrant

     The names of the directors and certain information about them are set forth
below.

     Henry C. Baumgartner,  age 65, is a co-founder of ILC. He has served ILC in
various  management  positions since 1967 and has been a member of the ILC Board
of Directors since 1967. Mr. Baumgartner was appointed Chairman of the ILC Board
of Directors in July 1996 and Chief Executive Officer of ILC in April 1990. From
April 1990 to July 1996,  he served as the  President of ILC.  Prior to 1990, he
served as Chief Executive Officer and Chairman of the Board of ILC from November
1986.

     Richard D. Capra,  age 65, has served as a member of the Board of Directors
of ILC since 1995.  Since July 1996,  he has also served as President  and Chief
Operating  Officer of ILC. From January 1991 to July 1996, Mr. Capra served as a
management  consultant and as director of several  companies in the electric and
lighting  business.  He was  President  and Chief  Financial  Officer of Philips
Lighting, Inc., U.S., from 1983 to 1991.

     Arthur L.  Schawlow,  age 76, has served as a director  of ILC from 1969 to
1971 and since 1984. He was a Professor of Physics at Stanford  University  from
1961 until his retirement in 1991.  Dr. Schawlow won the Noble Prize in 1981 for
contributions toward the development of laser spectroscopy.

     Harrison H. Augur, age 56, has served as a member of the Board of Directors
of ILC since 1989. He has been General Partner of Capital Asset Management since
June 1987. From April 1981 to August 1991, he served as Executive Vice President
and Director of Worms & Co., Inc.

     George  B.  Clairmont,  age 48,  has  served  as a member  of the  Board of
Directors  of  ILC  since  July  1997.  He  has  been   President  of  Clairvest
Corporation,  a New York-based  registered  investment adviser,  since 1983. Mr.
Clairmont also serves as a director of Thomson-Leeds Corporation, a designer and
manufacturer of point of sales displays.

     The  information   regarding  executive  officers  required  by  this  item
appearing  in  Part  I  hereof  under  the  heading   "Executive   Officers"  is
incorporated herein by reference.


Section 16(a) Beneficial Ownership Reporting Compliance

     Based  solely on its  review of the  copies of forms  furnished  to ILC and
written representations from its executive officers and directors,  ILC believes
that all Section 16(a) filing requirements were met during fiscal 1997.



                                       39

<PAGE>





Item 11.  Executive Compensation

Summary Compensation Table

     The following table shows certain  information  concerning the compensation
of each of ILC's executive  officers for services  rendered in all capacities to
ILC for the fiscal years ended 1997, 1996 and 1995.

                                  Annual Compensation
                         -------------------------------------
                                                  Other Annual    All Other
Name and Principal       Fiscal    Salary   Bonus  Compensation    Compensation
------------------       ----     -------  -----  ------------   -------------

Henry C. Baumgartner.... 1997    $183,654  $45,000   $6,000          $3,000
 Chief Executive         1996     175,000   15,000       --           2,558
 Officer                 1995     175,000   26,392       --           3,021

Richard D. Capra (5).... 1997     197,115   45,000    6,000             615
 President and           1996      25,385       --       --              --
 Chief Operation         1995      10,000       --       --              --
 Operator

Ronald E. Fredianelli... 1997     132,885   25,000    3,000            2,338
 Chief Financial         1996     120,000   10,000       --            2,215
 Officer and             1995     113,423   19,074       --            2,262
 Secretary

John A. Lucero.......... 1997     126,923   30,000    3,000            2,435
 Senior Vice             1996      96,442   10,000       --            1,919
 President, Sales        1995      91,642   12,459       --            1,823
 and Marketing

Felix J. Schuda..........1997     115,000   20,000    3,000            2,212
 Vice President-         1996     115,000    8,000       --            2,100
 Chief Technical         1995     105,000   15,893       --            2,100
 Officer

Dennis M. Toohey (6).....1997     115,385   25,000    3,000               --
 Vice President, Logistics
 and Quality
        
Arthur O. Whipple (7)....1997     115,000    20,000   3,000            2,096
 Vice President,         1996     110,000        --      --            2,200
 Engineering             1995     110,000        --      --            1,100

___________________________

(1)  No  compensation  is  paid to  officers  of ILC for  services  rendered  as
     directors.

(2)  Includes  cash bonuses  paid during the year and cash  bonuses  accrued for
     services rendered during the year.

(3)  Represents car allowance.

(4)  Represents ILC matching  contributions under ILC's Thrift Incentive Savings
     Plan.

(5)  Mr. Capra joined ILC in July 1996. Amounts for 1995 represent  compensation
     for services as a director.

(6)  Mr. Toohey joined ILC in October 1996.

(7)  Mr. Whipple  joined ILC in March 1997.  Amounts for 1996 and 1995 represent
     compensation for services as an officer of Precision Lamp, Inc.

                                       40

<PAGE>

Item 11.  Executive Compensation (continued)

Option Grants in Fiscal 1997

     The following table sets forth  information  regarding option grants to the
executive  officers  in  fiscal  1997.  In  accordance  with  the  rules  of the
Securities and Exchange Commission,  the table sets forth the hypothetical gains
or  "option  spreads"  that  would  exist  for the  options  at the end of their
ten-year term.  These gains are based on assumed rates of annual  compound stock
price  appreciated  of 5% and 10% from the date the options  were granted to the
end of the option terms.

                                 Option Grants in Fiscal 1997

                                       Individual Grants
                       ---------------------------------------------------------
                       Number of    Percent of                                  
                       Underlying   Granted to         Exercise                 
                        Options     Employees in       Price Per     Expiration
Name                   Granted (1)  Fiscal 1997         Share          Date     
----                   -----------  -----------         -----          ----     
Henry C. Baumgartner...   20,000         5%             $11.00        11/21/06  
Henry C. Baumgartner...   50,000        12%               9.50        05/13/07  
Richard D. Capra.......   40,000        10%              11.00        11/21/06  
Richard D. Capra.......   40,000        10%               9.50        05/13/07  
Ronald E. Fredianelli..   10,000         2%              11.00        11/21/06  
Ronald E. Fredianelli..   20,000         5%               9.50        05/13/07  
Felix J. Schuda........   10,000         2%               9.50        05/13/07  
John A. Lucero.........   20,000         5%              11.00        11/21/06  
John A. Lucero.........   20,000         5%               9.50        05/13/07  
Dennis M. Toohey.......   25,000         6%              11.00        11/21/06  
Arthur O. Whipple......   25,000         6%               9.50        05/13/07  

                                   Option Grants in Fiscal 1997

                                          Individual Grants
                                   -----------------------------
                                   Potential Realizable Value at
                                   Assumed Annual Rates of Stock
                                   Price Appreciation for Option
                                            Term (2)
                                   -----------------------------
Name                                  5%                  10%
----                               -----------------------------

Henry C. Baumgartner..............  $138,357           $350,623
Henry C. Baumgartner..............   298,725            757,028
Richard D. Capra..................   276,714            701,247
Richard D. Capra..................   238,980            605,622
Ronald E. Fredianelli.............    69,178            175,312
Ronald E. Fredianelli.............   119,490            302,811
Felix J. Schuda...................    59,745            151,406
John A. Lucero....................   138,357            350,623
John A. Lucero....................   119,490            302,811
Dennis M. Toohey..................   172,946            438,279
Arthur O. Whipple.................   149,362            378,514

(1)      The options  shown in the table were  granted at fair market  value and
         become  exercisable  in cumulative  increments of 25% of the shares per
         year,  commencing on the first  anniversary  of the date of grant.  The
         options  shown in the table  will  expire  ten  years  from the date of
         grant, subject to earlier termination upon termination of employment.

(2)      The  assumed  annual  compound  rates of stock price  appreciation  are
         mandated by the rules of the Securities and Exchange  Commission and do
         not represent ILC's estimate or projection of future stock prices.

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

   The  following  table shows the number of shares of Common Stock  acquired by
the executive  officers  upon the exercise of stock options  during fiscal 1997,
the net value  realized  at  exercise,  the  number  of  shares of Common  Stock
represented  by outstanding  stock options held by each executive  officer as of
September  27, 1997 and the value of such options  based on the closing price of
ILC's Common Stock on September 27, 1997, which was $11.75.



                                       41

<PAGE>

Item 11.  Executive Compensation (continued)

Aggregated  Option Exercises in Last Fiscal Year and Fiscal Year-End Option
  Values (continued)

                                                                  Number of
                                                                 Unexercised    
                                                                 Options at     
                                                                FY-End (#) (1)  
                                                                --------------- 
                          Shares Acquired      Value Realized    Exercisable/   
Name                      on Exercise (#)        ($) (3)         Unexercisable  
----                      ---------------      --------------    -------------  

Henry C. Baumgartner........   40,000             $375,000       81,250/88/750  
Richard D. Capra............       --                  --       16,250/123,750  
Ronald E. Fredianelli.......   10,000               93,750       45,000/45,000  
Felix J. Schuda.............       --                  __        41,250/13,750  
John A. Lucero..............       --                  __         8,750/46,250  
Dennis M. Toohey............       --                  __             0/25,000  
Arthur O. Whipple...........       --                  __         3,750/28,750  


                                        Value of Unexercised
                                        In-the-Money Options
                                          at FY-End ($) (2)
                                        --------------------
                                             Exercisable/
Name                                        Unexercisable
----                                    --------------------

Henry C. Baumgartner..........             $558,688/179,063
Richard D. Capra..............               12,813/147,188
Ronald E. Fredianelli.........               293,750/93,750
Felix J. Schuda...............               280,438/32,813
John A. Lucero................                36,250/81,250
Dennis M. Toohey..............                     0/18,750
Arthur O. Whipple.............                16,406/72,656

__________________

(1)  Represents the total number of shares subject to stock options held by each
     executive  officer.  These  options  were  granted on various  dates during
     fiscal  years  1988  through  1997 and are  exercisable  on  various  dates
     beginning in 1989 and expiring in 2007.

(2)  Represents the difference  between the exercise price and $11.75,  which is
     the September 27, 1997 closing price.  Stock option  exercise  prices range
     from $2.25 to $11.25.

(3)  Aggregate  market value of the shares  covered by the option at the date of
     exercise, less the aggregate exercise price.


Compensation  Committee  Interlocks and Insider  Participation  in  Compensation
 Decisions

     The  Compensation and Stock Option Committee of the Board of Directors (the
"Committee") is composed of George B. Clairmont, Chairman, Harrison H. Augur and
Arthur L. Schawlow. All are independent outside directors.


Director Compensation

     Members  of the  Board  who are  not  also  officers  or  employees  of ILC
("Outside  Directors")  are  paid an  annual  fee of  $10,000  for  services  as
director.  Such fees are paid  quarterly  and prorated  when a director does not
serve  for a  full  year.  Directors  receive  no  additional  compensation  for
committee participation or attendance at committee meetings.

     During the third  quarter of 1997,  each  Outside  Director  was granted an
automatic option to purchase a total of 5,000 shares of ILC's Common Stock at an
exercise price of $9.50 per share. In addition,  in February 1997, Mr. Augur and
Dr. Schawlow each was granted an option to purchase 5,000 shares of ILC's Common
Stock at an exercise price $11.19 per share.  As of September 27, 1997,  options
to purchase shares were outstanding to the following Outside  Directors,  at the
weighted average exercise price per share indicated:  Mr. Augur-50,000 shares at
$7.59 per share; and Dr. Schawlow-30,000 shares at $10.16 per share.



                                       42

<PAGE>



Item 12.  Security Ownership of Certain Beneficial Owners and Management

     The following table sets forth  information  with respect to the beneficial
ownership of ILC Common Stock as of September  27, 1997 by (i) each  shareholder
known by ILC to be the  beneficial  owner of more than 5% of ILC  Common  Stock;
(ii) each  director of ILC;  (iii) each  executive  office of ILC;  and (iv) all
directors and executive officers of ILC as a group.


                                                 Beneficial Ownership
                                             as of September 27, 1997 (1)
                                             ----------------------------
Name                                         Number               Percent
----                                         ------               -------
Westport Asset Management, Inc. (2)......    700,550              14.4%
Royce & Associates, Inc. (3).............    519,920              10.7%
Investment Counselors of Maryland, Inc.(4)   326,000               6.7%
Marvin C. Schwartz (5)...................    302,700               6.2%
Henry C. Baumgartner (6).................    191,238               3.9%
Felix J. Schuda (7)......................     96,184               2.0%
Ronald E. Fredianelli (8)................     79,751               1.6%
Richard D. Capra (9).....................     27,338                *
John A. Lucero (10)......................     16,906                *
Dennis M. Toohey (11)....................      6,250                *
Arthur O. Whipple (12)...................      3,950                *
Arthur L. Schawlow (13)..................     25,750                *
Harrison H. Augur (14)...................     45,750               1.0%
George B. Clairmont (15).................    177,900               3.6%
All Executive Officers and Directors
 as a Group..............................    671,017              13.0%
 (10 persons) (16)

______________________
*Less than 1%

(1)  Based upon a total of 4,874,040  shares of ILC Common Stock  outstanding as
     of September 27, 1997.  Unless  otherwise  indicated below, the persons and
     entities named in the table have sole voting and sole investment power with
     respect to all shares  beneficially  owned,  subject to community  property
     laws where  applicable.  Shares of ILC Common Stock subject to options that
     are currently  exercisable or  exercisable  within 60 days of September 27,
     1997 are  deemed  to be  outstanding  and to be  beneficially  owned by the
     person  holding such options for the purpose of  computing  the  percentage
     ownership of such person but are not treated as outstanding for the purpose
     of computing the percentage ownership of any other person.

(2)  The share ownership is as reported on Schedule 13G dated February 13, 1997.
     Of these shares,  691,650 shares are held in discretionary managed accounts
     and 8,900 shares are  beneficially  owned by officers and  stockholders  of
     Westport Asset  Management,  Inc. The address of Westport Asset Management,
     Inc. is 253 Riverside Avenue, Westport, Connecticut 06880.

(3)  The share  ownership is as reported on  Amendment  Number 3 to Schedule 13G
     dated June 6, 1997,  on behalf of a group  consisting  of Charles M. Royce,
     Royce & Associates, Inc. ("Royce") and Royce Management Company ("RMC"). Of
     these shares,  461,620  shares are  beneficially  owned by Royce and 58,300
     shares  are  beneficially  owned by RMC.  Mr.  Royce  disclaims  beneficial
     ownership of all of such shares. The address of Mr. Royce, Royce and RMC is
     1414 Avenue of the Americas, New York, New York 10019.



                                       43

<PAGE>





Item 12.  Security Ownership of Certain Beneficial Owners and 
           Management (continued)


(4)  The share ownership is as reported on Schedule 13G dated February 14, 1997.
     All of such  shares are owned by  various  investment  advisory  clients of
     Investment  Counselors of Maryland,  Inc., which reported sole voting power
     as to 286,000 shares and sole dispositive  power as to 326,000 shares.  The
     address of Investment Counselors of Maryland, Inc. is 803 Cathedral Street,
     Baltimore, Maryland 21201-5297.

(5)  The share  ownership  is as reported on Schedule 13D dated August 13, 1996.
     Mr. Schwartz  reported  ownership of 55,500 shares,  sole dispositive power
     and voting power with respect to 20,000 shares and discretionary and shared
     dispositive  power  with  respect  to 227,200  shares.  The  address of Mr.
     Schwartz is 605 Third Avenue, New York, New York 10158-3698.

(6)  Includes 92,500 shares subject to outstanding  options that are exercisable
     within 60 days after September 27, 1997. Mr. Baumgartner is the Chairman of
     the Board, Chief Executive Officer and a Director of ILC.

(7)  Includes 42,500 shares subject to outstanding  options that are exercisable
     within 60 days after  September 27, 1997.  Mr. Schuda is the Vice President
     and Chief Technical Officer of ILC.

(8)  Includes 52,500 shares subject to outstanding  options that are exercisable
     within 60 days after  September  27,  1997.  Mr.  Fredianelli  is the Chief
     Financial Officer and Secretary of ILC.

(9)  Includes 26,250 shares subject to outstanding  options that are exercisable
     within 60 days after September 27, 1997. Mr. Capra is the President,  Chief
     Operating Officer and a Director of ILC.

(10) Includes 15,000 shares subject to outstanding  options that are exercisable
     within 60 days after  September  27,  1997.  Mr.  Lucero is the Senior Vice
     President, Sales and Marketing of ILC.

(11) Represents  shares  subject to  outstanding  options  that are  exercisable
     within 60 days after  September 27, 1997. Mr. Toohey is the Vice President,
     Logistics and Quality of ILC.

(12) Includes 3,750 shares subject to outstanding  options that are  exercisable
     within 60 days after September 27, 1997. Mr. Whipple is the Vice President,
     Engineering of ILC.

(13) Includes 13,750 shares subject to outstanding  options that are exercisable
     within 60 days after -----  September 27, 1997. Dr.  Schawlow is a Director
     of ILC.

(14) Includes 33,750 shares subject to outstanding  options that are exercisable
     within 60 days after -----  September 27, 1997.  Mr. Augur is a Director of
     ILC.

(15) Includes  68,900 shares owned by persons whose  accounts are managed by Mr.
     Clairmont,  as to which Mr. Clairmont disclaims beneficial  ownership.  Mr.
     Clairmont is a Director of ILC.

(16) Includes 286,250 shares subject to outstanding  options  exercisable within
     60 days after September 27, 1997, as described in Notes (6) through (14).




                                       44

<PAGE>



Item 13.  Certain Relationships and Related Transactions


     In November 1996, ILC entered into  Compensation  Agreements with eleven of
its key employees, eight of whom are currently employed by ILC, that provide for
severance benefits upon termination following a change in control of ILC. Six of
the  executive  officers of ILC, plus two  additional  key employees of ILC, are
currently covered by the Compensation  Agreements.  Each agreement provides that
if, during the two-year period  following a change in control of ILC (as defined
in the  Compensation  Agreements),  ILC  terminates the  employee's  employment
without cause (other than for death,  retirement or  disability) or the employee
terminates  the  employee's  employment  for  good  reason  (as  defined  in the
Compensation  Agreements)  the employee will receive from ILC a lump sum payment
as a severance benefit.  The amount of such payment will be equal to three times
the  employee's   annual  full  base  salary  (excluding  bonus)  for  Henry  C.
Baumgartner,  Chairman of the Board and Chief Executive  Officer of ILC, Richard
D.  Capra,  President  and  Chief  Operating  Officer  of  ILC,  and  Ronald  E.
Fredianelli,  ILC's Chief Financial Officer, and two times the employee's annual
full base salary (excluding bonus) for Felix J. Schuda, Vice President and Chief
Technical  Officer of ILC,  John A. Lucero,  Senior Vice  President of Sales and
Marketing of ILC and Arthur O. Whipple, Vice President of Engineering of ILC.


                                       45

<PAGE>



                                    PART IV


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

(a)  The following documents are filed as part of this report:

     1. Financial Statements

     The  Consolidated  Financial  Statements,  notes  thereto,  and Report of
Independent Public  Accountants  thereon are included in Part II, Item 8 of this
report.

                                                                   Page in
      2.  Financial Statement Schedule                             Form  10-K

      Schedule VIII       Valuation and Qualifying
                           Accounts and Reserves                       36

     All other schedules have been omitted since the required information is not
present in amounts sufficient to require submission of the schedule,  or because
the information required is included in the Consolidated Financial Statements or
notes thereto.


       3.  Exhibits

     The exhibits  listed in the Index to Exhibits  following the signature page
are filed as part of this Report.

     A copy of any exhibits  filed with ILC  Technology's  Annual Report on Form
10-K or  incorporated  by reference  herein will be furnished  without charge to
shareholders of record upon written request to Ronald E. Fredianelli, Secretary,
ILC Technology, Inc., 399 Java Drive, Sunnyvale, California 94089.

(b)    Reports on Form 8-K

       No reports on Form 8-K were filed during the last quarter of fiscal 1997.




                                       46

<PAGE>

                                   SIGNATURES

Pursuant to the  requirements of 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.

                              ILC TECHNOLOGY, INC.


                              By: /s/ Henry C. Baumgartner
                                  Henry C. Baumgartner
                                  (Chairman of the Board and
                                  Chief Executive Officer)


Dated: December 8, 1997


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



           Signatures         Title                            Date

/s/ Henry C. Baumgartner      Chairman of the Board and        December 8, 1997
------------------------      Chief Executive Officer 
(Henry C. Baumgartner)        (Principal Executive
                              Officer and Director)

/s/ Richard D. Capra          President, Chief                 December 8, 1997
-------------------------     Operating Officer and     
(Richard D. Capra)            Director



/s/ Ronald E. Fredianelli     Chief Financial Officer          December 8, 1997
-------------------------     and Secretary 
(Ronald E. Fredianelli)       (Principal Financial and
                              Accounting Officer)

/s/ Harrison H. Augur         Director                         December 8, 1997
-------------------------
(Harrison H. Augur)


 /s/ //Arthur L. Schawlow     Director                         December 8, 1997
-------------------------
(Arthur L. Schawlow)


George B. Clairmont           Director                         December 8, 1997
--------------------------
(George B. Clairmont)



                                       47

<PAGE>



                               INDEX TO EXHIBITS

Exhibit
Number            Description
-------           -----------

2.1      (A)      Agreement and Plan of Merger, dated as of October 30, 1997, by
                  and among BEC Group, Inc., BILC Acquisition Corp.
                  and ILC Technology, Inc.

2.2      (B)      Asset Purchase Agreement dated May 8, 1997, by and among 
                  Applied Science and Technology, Inc., ASTeX/CPI Acquisition 
                  Corp., Converter Power, Inc. and ILC Technology, Inc.

3.1      (C)      Restated Articles of Incorporation of ILC Technology, Inc. 
                  as filed in the Office of the California Secretary of State 
                  on March 8, 1991.

3.2      (D)      Amended and Restated Bylaws as of November 21, 1996

10.1     (E)      ILC Technology, Inc. 1983 Employee Incentive and Nonstatutory
                  Stock Option Plan, as amended, together with related form of
                  Stock Option Agreement.*

10.2     (F)      Rights Agreement between ILC Technology, Inc. and Security
                  Pacific National Bank dated as of September 19, 1989.

10.3     (G)      Amendment to Rights Agreement dated as of February 25, 1997
                  between ILC Technology, Inc. and ChaseMellon Shareholder
                  Services L.L.C. as Rights Agent.

10.4              ILC Technology, Inc. 1992 Stock Option Plan, as amended, and
                  related form of Option Agreement. *

10.5     (H)      Form of Officer and Director Indemnification Agreement *

10.6     (D)      Form of Management Compensation Agreement*

10.7              Amended and restated loan agreement by and between ILC 
                  Technology, Inc. and Union Bank of California dated 
                  September 4, 1997.

21.1              Subsidiaries of Registrant

23.1              Consent of Arthur Andersen LLP

27.1              Financial Data Schedule



(A)               Incorporated by reference from Annex A to the Joint Proxy 
                  Statement/Prospectus filed as part of the BEC Group, Inc.
                  Registration Statement on Form S-4 filed November 19,
                  1997 (File No. 333-40519).

(B)               Incorporated  by  reference  from the Exhibit to  Registrant's
                  Current Report on Form 8-K dated May 8, 1997.


<PAGE>





                         INDEX TO EXHIBITS (continued)


(C)               Incorporated  by reference  from the Exhibits to  Registrant's
                  Annual Report on Form 10-K for the fiscal year ended September
                  28, 1991.

(D)               Incorporated  by reference  from the Exhibits to  Registrant's
                  Annual Report on Form 10-K for the fiscal year ended September
                  28, 1996.

(E)               Incorporated  by reference  from the Exhibits to  Registrant's
                  Annual  Report on Form 10-K for the fiscal year ended  October
                  2, 1993.

(F)               Incorporated  by reference  from the Exhibits to  Registrant's
                  Current Report on Form 8-K dated September 19, 1989.

(G)               Incorporated  by reference  from the Exhibits to  Registrant's
                  Current Report on Form 8-K dated February 25, 1997.

(H)               Incorporated  by reference  from the Exhibits to  Registrants'
                  Annual  Report on Form 10-K for the fiscal year ended  October
                  3, 1992.

*                 Management contract or compensatory plan or arrangement.


<PAGE>



                                  EXHIBIT 10.4

                              ILC TECHNOLOGY, INC.

                             1992 STOCK OPTION PLAN

                          As Amended November 21, 1996

                                   ARTICLE 1

                                  DEFINITIONS


As used herein, the following definitions shall apply:

1.1  "Administrator"  means the Board or its  Committee  appointed  pursuant  to
     Article 10 of the Plan. -------------

1.2  "Affiliate"  means a  parent  or  subsidiary  corporation  of the  Company,
     whether now or hereafter existing, as defined in Sections 424(e) and (f) of
     the Code, respectively.

1.3  "Board" means the Board of Directors of the Company.

1.4  A "Change  in  Control"  shall be  deemed  to occur (a)  should a person or
     related group of persons,  other than the Company or a person that directly
     or indirectly  controls,  is controlled by or is under common  control with
     the Company, becomes the beneficial owner (within the meaning of Rule 13d-3
     of the General Rules and Regulations under the Exchange Act) of 25% or more
     of the Company's  outstanding voting stock pursuant to a tender or exchange
     offer  that the  Board  does not  recommend  that the  shareholders  of the
     Company  accept;  or  (b)  on  the  first  date  within  any  period  of 24
     consecutive  months  or less on which  there is  effected  a change  in the
     composition  of the  Board by reason of a  contested  election  such that a
     majority of the Board  members  (rounded up to the next whole number) cease
     to be  comprised  of  individuals  who either (i) have been  members of the
     Board  continuously  since the  beginning  of such period or (ii) have been
     elected or nominated for election as Board members during such period by at
     least a  majority  of the Board  members  described  in clause (i) who were
     still in office at the time such election or nomination was approved by the
     Board.

1.5  "Code" means the Internal Revenue Code of 1986, as amended.

1.6  "Committee" means the Committee  appointed by the Board under Article 10 of
     the Plan. ---------

1.7  "Common Stock" means the Common Stock, no par value, of the Company.

1.8  "Company" means ILC Technology, Inc., a California corporation.

1.9  "Corporate  Transaction"  means  (a) a merger or  acquisition  in which the
     Company is not the surviving entity (except for a transaction the principal
     purpose  of  which  is  to  change  the  State  in  which  the  Company  is
     incorporated),  (b) the  sale,  transfer  or  other  disposition  of all or
     substantially  all of the assets of the Company or (c) any other  corporate
     reorganization or business combination in which the beneficial ownership of
     50% or more of the Company's outstanding voting stock is transferred.



                                       1

<PAGE>



1.10 "Employee" means any person, including officers and directors,  employed by
     the  Company or any  Affiliate.  The term  "Employee"  shall  also  include
     directors  of the  Company;  however,  payment of a  director's  fee by the
     Company shall not be sufficient to constitute "employment" by the Company.

1.11 "Exchange Act" means the Securities Exchange Act of 1934, as amended.

1.12 "Fair Market  Value" means,  as of any date,  the value of the Common Stock
     determined as ----------------- follows:

     (a)  If the Common Stock is listed on a stock  exchange or national  market
          system including without  limitation the National Market System of the
          National  Association of Securities Dealers,  Inc. Automated Quotation
          ("Nasdaq")  System,  its Fair Market Value shall be the closing  sales
          price for such stock (or the closing bid, if no sales were  reported),
          as quoted on such system or exchange  for the last market  trading day
          prior to the time of  determination  as  reported  in the Wall  Street
          Journal or such other source as the Administrator deems reliable;

     (b)  If the  Common  Stock is quoted on the Nasdaq  System  (but not on its
          National Market System) or regularly quoted by a recognized securities
          dealer but selling  prices are not  reported,  its Fair  Market  Value
          shall be the mean between the high and low asked prices for the Common
          Stock or;

     (c)  In the absence of an established market for the Common Stock, its Fair
          Market Value shall be determined in good faith by the Administrator.

1.13 "Incentive  Option"  means an Option  intended  to qualify as an  incentive
     stock option within the meaning of Section 422 of the Code.

1.14 "Nonstatutory  Option"  means an  Option  not  intended  to  qualify  as an
     Incentive Option.

1.15 "Option" means a stock option granted pursuant to the Plan.

1.16 "Option Agreement" means a written agreement,  signed by the Optionee and a
     duly authorized  representative of the Company,  evidencing the grant of an
     Option.

1.17 "Optionee" means an Employee or Outside Director who receives an Option.

1.18 "Outside Director" means each member of the Board who is not an Employee or
     an officer of ---------------- the Company or any Affiliate.

1.19 "Plan" means this 1992 Stock Option Plan.

1.20 "Rule  16b-3"  means  Rule  16b-3  promulgated  under  Section  16  of  the
     Securities Exchange Act ---------- of 1934, as amended.

1.21 "Share" means a share of the Common Stock,  as adjusted in accordance  with
     Article 9 of the ----- Plan.

1.22 "Termination  of Employment"  means the  interruption or termination of the
     employment  relationship  by the  Company or any  Affiliate  for any reason
     including  resignation,  discharge,  death  or  retirement,  but  excluding
     terminations where  there is  a simultaneous reemployment by the Company or

                                       2

<PAGE>



     an Affiliate.  The Committee,  in its absolute discretion,  shall determine
     the  effect  of all  matters  and  questions  relating  to  Termination  of
     Employment.  Employment shall not be considered interrupted in the case of:
     (a) sick leave; (b) military leave; (c) any other leave of absence approved
     by the Board,  provided that such leave is for a period of not more than 90
     days,  unless  reemployment upon the expiration of such leave is guaranteed
     by contract or statute;  or (d) transfers  between locations of the Company
     or between  the  Company,  its  Affiliates  or its  successor.  For Outside
     Directors,  Termination  of Employment  means ceasing to be a member of the
     Board.

                                   ARTICLE 2

                                    PURPOSE


     The  purpose  of the Plan is to advance  the  interests  of the  Company by
giving the Company's Employees and Outside Directors incentive through ownership
of the Company's  stock to continue in the service of the Company and thereby to
help the Company compete  effectively the other  enterprises for the services of
qualified  individuals.  Options granted under the Plan may be Incentive Options
or Nonstatutory Options, as determined by the Administrator at the time of grant
of an option and  subject to the  applicable  provisions  of Section  422 of the
Code, the regulations  promulgated  thereunder and other relevant  provisions of
the Code and regulations.


                                   ARTICLE 3

                           STOCK SUBJECT TO THE PLAN

     Subject to the adjustment as provided in Article 9 of the Plan, the Company
is authorized to issue Options to purchase up to 575,000 Shares. Any unpurchased
Shares that are subject to an Option that  terminates  for any reason other than
exercise shall, unless the Plan has been terminated, become available for future
grant  under the Plan.  The  Company  shall at all times  reserve  for  issuance
pursuant to the Plan a number of its authorized but unissued Shares equal to the
number of Shares  issuable  pursuant to the Plan.  Exercise  of an Option  shall
decrease the number of Shares  available,  both for purposes of the Plan and for
sale  under the  Option,  by the  number  of  Shares  as to which the  Option is
exercised.


                                   ARTICLE 4

                                  TERM OF PLAN

     The Plan shall become  effective upon its adoption by the Board.  Within 12
months  after  the date of such  adoption,  the Plan  shall be  approved  by the
shareholders of the Company in the degree and manner  required under  applicable
state and federal law. No Option shall become  exercisable unless and until such
shareholder approval has been obtained. Unless sooner terminated under Article 9
and 10, the Plan shall  terminate upon the earlier of (i) the tenth  anniversary
of its adoption by the Board or (ii) the date on which all shares  available for
issuance under the Plan have been issued.  Any Option outstanding under the Plan
at the time of its  termination  shall remain in effect in  accordance  with its
terms and conditions and those of the Plan.




                                       3

<PAGE>



                                   ARTICLE 5

                                  ELIGIBILITY

     Nonstatutory  Options may be granted to  Employees  and Outside  Directors,
except that Outside  Directors who serve as Administrator  under Section 10.1 of
the Plan are eligible to receive  Option grants only in accordance  with Article
8.  Incentive  Options may be granted  only to  Employees.  An  Optionee  who is
otherwise  eligible may be granted an additional Option or Options.  The maximum
number of Shares underlying  options granted to any Employee or Outside Director
in any fiscal year of the Company is 100,000 Shares.

                                   ARTICLE 6

                                TERMS OF OPTIONS

6.1  Written  Agreements.  Grants of  Options  shall be  evidenced  by an Option
     Agreement,  which shall contain the  provisions  that the Plan requires and
     may contain additional provisions that do not conflict with the Plan as the
     Administrator deems appropriate.  Option Agreements need not have identical
     terms, but each Option Agreement shall be subject to the Plan.

6.2  Term of Option. The term of each Option shall be no more than 10 years from
     the date of grant.  However,  in the case of an Incentive Option granted to
     an Optionee  who, at the time the Option is granted,  owns, as that term is
     defined in Section 424(d) of the Code, stock  representing more than 10% of
     the voting  power of all classes of stock of the Company or any  Affiliate,
     the  term of the  Option  shall  be no more  than 5 years  from the date of
     grant.

6.3  Exercise  Price.  The per Share  exercise price for the Shares to be issued
     pursuant to exercise of an Option shall be determined by the Administrator,
     but in no event  shall  the per Share  exercise  price of an Option be less
     than the Fair Market  Value per Share on the date of grant.  In the case of
     an Incentive Option granted to an Employee who, at the time of the grant of
     such Incentive  Option,  owns, as that term is defined in Section 424(d) of
     the  Code,  stock  representing  more than 10% of the  voting  power of all
     classes of stock of the Company or any  Affiliate,  the per Share  exercise
     price shall be no less than 110% of the Fair Market  Value per Share on the
     date of grant.

6.4  Termination of Employment. Unless determined otherwise by the Administrator
     pursuant to Section  6.5, to the extent not already  expired or  exercised,
     every Option shall  terminate at the earlier of (i) the expiration  date as
     set forth in the  Option  Agreement  or (ii) 30 days after  Termination  of
     Employment  for reasons other than death or  disability.  If Termination of
     Employment  is due to the  Optionee's  death or  disability  (as defined in
     Section  22(e)  (3)  of  the  Code),  unless  determined  otherwise  by the
     Administrator  pursuant  to  Section  6.5,  the  Option,  to the extent not
     already  expired or  exercised,  shall  terminate at the earlier of (i) the
     expiration  date as set  forth in the  Option  Agreement  or (ii) 12 months
     after the date of the Optionee's  disability or death.  In the event of the
     death of the Optionee,  the Option shall be  exercisable  by the Optionee's
     estate or any  person  who  acquired  the right to  exercise  the Option by
     bequest or  inheritance.  Except as  provided  in an Option  Agreement,  an
     Option shall be exercisable  after  Termination  of Employment  only to the
     extent  exercisable on the date of Termination of Employment.  For purposes
     of this Section,  the limited period of exercisability of Incentive Options
     following  Termination  of  Employment  shall be measured from the date the
     Optionee  ceases to be an Employee.  Upon the  expiration  of the period of
     exercisability  after  Termination  of  Employment or (if earlier) upon the
     expiration of the Option term, the Option shall terminate.

                                       4

<PAGE>



6.5  Extension of Exercise Period.  The Administrator  shall have full power and
     authority  to  extend  the  expiration  date  of an  Option  following  the
     Optionee's  Termination of Employment from the periods specified in Section
     6.4 to  such  greater  period  of  time  as the  Administrator  shall  deem
     appropriate;  provided,  however,  that in no event  shall  any  Option  be
     exercisable after the expiration date set forth in the Option Agreement. In
     the case of an Incentive Option,  however, such determination shall be made
     at the time of grant of the Option and such period of time shall not exceed
     12 months after  Termination of Employment by reason of death or disability
     of the  Optionee or 3 months  after  Termination  of  Employment  for other
     reasons.

6.6  Non-Transferability  of  Options.  The  Option  may not be  sold,  pledged,
     assigned, hypothecated, transferred or disposed of in any manner other than
     by will or by the laws of descent  or  distribution  and may be  exercised,
     during the lifetime of the Optionee, only by the Optionee.

6.7  Type of Option.  Each Option  Agreement  shall clearly state whether or not
     the Option is intended to qualify as an Incentive Option. If only a portion
     of an Option is intended to so qualify,  (i) the Option  Agreement shall so
     state,  and (ii) the Option  Agreement shall not require that the number of
     Incentive  Options  exercised  reduces the size of the Nonstatutory  Option
     portion, or vice-versa.

6.8  Limitation on Incentive  Options.  The  aggregate  Fair Market Value of the
     Shares for which one or more Incentive Options granted to an Optionee under
     the Plan (or any other  incentive  stock  option plan of the Company or any
     Affiliate) may for the first time become  exercisable as Incentive  Options
     under the Code during any one  calendar  year shall not exceed  $100,000 or
     such  other  amount as may be  permitted  under  subsequent  amendments  to
     Section  422 of the  Code.  To the  extent  that any two or more  Incentive
     Options (including any Incentive Options accelerated in connection with any
     Corporate  Transaction or Change in Control under Section 9.3 or 9.4 of the
     Plan),  violate this  limitation,  such excess  Options shall be treated as
     Nonstatutory  Options.  For purposes of this Section 6.8, Incentive Options
     shall be taken into  account in the order in which they were  granted,  and
     the Fair Market Value of the Shares shall be  determined as of the time the
     Option with respect to such Shares was granted.

6.9  Time of Granting  Options.  The date of grant of an Option  shall,  for all
     purposes,  be the date on which the  Administrator  makes the determination
     granting  such  Option,  or  such  other  date  as  is  determined  by  the
     Administrator.  Notice of the determination shall be given to each Employee
     to whom an Option is so granted within a reasonable  time after the date of
     such grant.

6.10 No Employment Agreement. No Option Agreement, nor anything contained in the
     Plan, shall confer upon any Optionee any right with respect to continuation
     of  employment  with the Company or  interfere in any way with the right of
     the Optionee or the Company to terminate such  employment at any time, with
     or without cause.

6.11 Notice of Disqualifying  Disposition of Incentive Options.  Optionees shall
     give the Company  written  notice of any  disposition of any Share acquired
     pursuant to  exercise of an  Incentive  Option if such  disposition  occurs
     before the  second  anniversary  of the date the Option was  granted or the
     first  anniversary  of the  date of  purchase  of the  Share  disposed  of,
     whichever occurs later. A disposition includes any sale, exchange, gift, or
     other  transfer or  attempted  transfer of legal  title.  The notice  shall
     include the Optionee's name, the number of Shares disposed of and the dates
     and prices the Shares were acquired and disposed of.

6.12 Adjustments  to Option  Rights.  Subject to the general  limitations of the
     Plan, the  Administrator  may adjust the exercise price,  term or any other
     provision of an Option (other than Options granted pursuant to Article 8 of

                                       5

<PAGE>



     the  Plan) by  cancelling  and  regranting  the  Option or by  amending  or
     substituting the Option. Options that have been so adjusted may have higher
     or lower  exercise  prices,  have longer or shorter  terms or be subject to
     different rights and restrictions than prior Options. The Administrator may
     also  adjust the number of Options  granted to an  Optionee  by  cancelling
     outstanding Options or granting additional Options.  Except for adjustments
     necessary to ensure compliance with any applicable state or federal law, no
     such  adjustment  shall  impair  an  Optionee's  rights  under  any  Option
     Agreement without the consent of the Optionee.


                                   ARTICLE 7

                              EXERCISE OF OPTIONS

7.1  When Options Become Exercisable. Options shall be exercisable at such times
     and under such  conditions as determined  by the  Administrator,  which may
     include  performance  criteria  with  respect  to the  Company  and/or  the
     Optionee.  Options  granted to officers and  directors of the Company shall
     not be  exercisable  in whole or in part until the expiration of six months
     after the date of grant.  No Option shall be exercisable  until the Company
     and the Optionee sign an Option Agreement acceptable to the Company.

7.2  No  Fractional  Shares.  An Option may not be exercised for a fraction of a
     Share.

7.3  Exercise Procedure.  An Option shall be deemed to be exercised when written
     notice of such  exercise has been given to the Company in  accordance  with
     the terms of the Option by the person  entitled to exercise  the Option and
     full  payment for the Shares with  respect to which the Option is exercised
     has been  received by the Company.  Full payment may, as  authorized by the
     Administrator, consist of any consideration and method of payment allowable
     under  Section 7.4 of the Plan.  Until the  issuance  (as  evidenced by the
     appropriate  entry on the  books  of the  Company  or of a duly  authorized
     transfer agent of the Company) of the stock  certificate  evidencing Shares
     acquired upon exercise of an Option,  no right to vote or receive dividends
     or any other  rights as a  shareholder  shall  exist  with  respect to such
     Shares, notwithstanding the exercise of the Option. The Company shall issue
     (or cause to be issued) such stock  certificate  promptly  upon exercise of
     the Option.

7.4  Payment  for  Shares.  The  consideration  to be paid for the  Shares to be
     issued upon exercise of an Option,  including the method of payment,  shall
     be  determined  by the  Administrator  (and,  in the  case of an  Incentive
     Option,  shall be  determined  at the time of grant) and may consist of (i)
     cash,  (ii) check,  (iii) delivery of a properly  executed  exercise notice
     together with  irrevocable  instructions to a broker to promptly deliver to
     the  Company  the  amount  of  sale or loan  proceeds  required  to pay the
     exercise price or (iv) any combination of the foregoing.

7.5  Withholding  Tax  Obligations.  At the time of exercise  of an Option,  the
     Optionee shall remit to the Company by bank  cashier's  check or other form
     of payment acceptable to the Company,  all applicable (as determined by the
     Company  in  its  sole  discretion)   federal  and  state  withholding  and
     employment taxes.

                                   ARTICLE 8

                     AUTOMATIC GRANTS TO OUTSIDE DIRECTORS

8.1  Option Grant.  Each calendar year,  each Outside  Director in office at the
     date of grant (including any Outside Director who may have already received
     one or more automatic option grants) shall automatically be granted a Non-

                                       6

<PAGE>



     statutory  Option to purchase  5,000  Shares upon the terms and  conditions
     specified  below.  The initial  automatic grant shall occur on November 13,
     1993. Beginning in 1994, such automatic grants shall occur each year on the
     date of the meeting of the Administrator held in the Company's third fiscal
     quarter.

8.2  Terms of  Options.  The  terms  and  conditions  that  apply  to each  such
     automatic grant shall be as follows: (i) the per Share exercise price shall
     be equal to the Fair Market Value per Share on the date of grant;  (ii) the
     term  of  the  Option  shall  be 10  years;  (iii)  the  Options  shall  be
     exercisable  in  cumulative  increments  of 25% per year  commencing on the
     first  anniversary  of the date of  grant;  and (iv) all  other  terms  and
     conditions  of the  Option  shall  be as set  forth in the  Company's  then
     current form of Option Agreement.

8.3  No Other  Grants.  Except for the  automatic  grants  under this Article 8,
     those members of the Board who serve as Administrator under Section 10.1 of
     the Plan shall not be eligible to receive any additional  Options under the
     Plan or any other  stock plan of the  Company or any  Affiliate,  except as
     permitted by Rule 16b-3.


                                   ARTICLE 9

                      ADJUSTMENTS OF AND CHANGES IN STOCK


9.1  Adjustments.  Subject to any  required  action by the  shareholders  of the
     Company,  in the event of any change to the Common Stock issuable under the
     Plan by  reason  of any (i)  Corporate  Transaction  or (ii)  stock  split,
     reverse  stock split,  stock  dividend,  recapitalization,  combination  or
     reclassification of Shares or other change affecting the outstanding Common
     Stock as a class without receipt of consideration,  then unless such change
     results in the  termination of all  outstanding  Options as a result of the
     Corporate  Transaction,  the number of Shares  covered by each  outstanding
     Option and the number of Shares  authorized for issuance under the Plan but
     as to which no Options have yet been granted or that have been  returned to
     the Plan upon  cancellation or expiration of an Option,  as well as the per
     Share exercise price, shall be proportionately  adjusted.  Such adjustments
     shall be made by the  Administrator,  whose  determination  in that respect
     shall be  final,  binding  and  conclusive.  Except as  expressly  provided
     herein,  no  issuance  by the  Company of shares of stock of any class,  or
     securities convertible into shares of stock of any class, shall affect, and
     no adjustment  by reason  thereof shall be made with respect to, the number
     or price of Shares subject to an outstanding Option.

9.2  Dissolution. In the event of the proposed dissolution or liquidation of the
     Company,  the Board shall  notify the  Optionee at least  fifteen (15) days
     prior to such  proposed  action.  To the extent it has not been  previously
     exercised,  the Option will terminate immediately prior to the consummation
     of such proposed action.

9.3  Corporate  Transactions.  In the  event  of a  Corporate  Transaction,  the
     exercisability  of each Option shall be  automatically  accelerated so that
     each Option shall,  immediately before the specified effective date for the
     Corporate  Transaction,  become fully exercisable with respect to the total
     number  of  Shares  and may be  exercised  for all or any  portion  of such
     Shares. However, an Option shall not be so accelerated if and to the extent
     that such Option is, in connection with the Corporate  Transaction,  either
     to be assumed by the successor corporation or parent thereof or be replaced
     with a  comparable  option to purchase  shares of the capital  stock of the
     successor corporation or parent thereof. The determination of comparability
     shall be made by the Administrator,  and its determination  shall be final,
     binding and conclusive.

                                       7

<PAGE>



     Upon the consummation of a Corporate  Transaction,  all outstanding Options
     shall,  to the extent not previously  exercised or assumed by the successor
     corporation or its parent, terminate and cease to be exercisable.

9.4  Change in Control. In the event of a Change in Control,  the exercisability
     of  each  Option  shall  be  automatically  accelerated  effective  15 days
     following the effective date of the Change in Control,  so that each Option
     shall become fully  exercisable  with respect to the total number of Shares
     and may be exercised  for all or any portion of such Shares.  Upon a Change
     in  Control,   all  outstanding  Options  accelerated  shall  remain  fully
     exercisable  until the expiration or sooner  termination of the Option term
     specified in the option agreement.

9.5  Other Changes.  Upon any other relevant change in the capitalization of the
     Company,  the Administrator  may, as it deems  appropriate,  provide for an
     equitable  adjustment  in the number of Shares then subject to the Plan and
     to any  outstanding  Options,  as well as the exercise price of outstanding
     Options.

9.6  No Fractional  Shares. No right to purchase  fractional Shares shall result
     from any adjustment to outstanding  Options pursuant to this Article.  Upon
     any such adjustment, the number of Shares subject to outstanding Options of
     each Optionee shall be rounded down to the nearest whole Share. The Company
     shall give notice of any  adjustment  to each  holder of Options  that have
     been so  adjusted.  Such  adjustment  (whether or not such notice is given)
     shall be effective and binding for all purposes of the Plan.


                                   ARTICLE 10

                             ADMINISTRATION OF PLAN

10.1 Administrator. The Plan shall be administered by (A) the Board if the Board
     may administer the Plan in compliance  with Rule 16b-3,  or (B) a Committee
     of the Board,  which shall be constituted in such a manner as to permit the
     Plan to comply  with Rule  16b-3.  Once  appointed,  such  Committee  shall
     continue to serve in its designated  capacity until  otherwise  directed by
     the  Board.  From  time to time the  Board  may  increase  the size of such
     Committee and appoint additional  members thereof,  remove members (with or
     without  cause) and  appoint  new members in  substitution  therefor,  fill
     vacancies,  however  caused,  and remove all members of the  Committee  and
     thereafter  directly  administer the Plan,  all to the extent  permitted by
     Rule 16b-3.

10.2 Powers of the  Administrator.  Subject to the provisions of the Plan and in
     the case of a Committee, the specific duties delegated by the Board to such
     Committee, the Administrator shall have the authority, in its discretion:

     (a)  to determine the Fair Market Value of the Common Stock,  in accordance
          with Section 1.12 of the Plan;

     (b)  to select the Employees and Outside Directors to whom Options may from
          time to time be granted hereunder;

     (c)  to determine whether and to what extent Options are granted hereunder;

     (d)  to  determine  the number of Shares to be covered by each such  Option
          granted hereunder;

                                       8

<PAGE>



     (e)  to approve forms of Option Agreement;

     (f)  to determine the terms and conditions, not inconsistent with the terms
          of the Plan,  of any  Option  granted  hereunder  (including,  but not
          limited to, the Share price and any  restriction  or limitation on any
          Option and/or the Shares relating thereto,  based in each case on such
          factors as the Administrator shall determine, in its sole discretion);

     (g)  to adopt rules and regulations for implementing the Plan;

     (h)  to interpret the Plan; and

     (i)  to take such other action as is appropriate to the  administration  of
          the Plan.

10.3 Rule  16b-3.  Unless the Board  determines  otherwise  in a specific  case,
     Options  granted to persons  subject to Section  16(b) of the  Exchange Act
     must comply with Rule 16b-3 and shall contain such additional conditions or
     restrictions  as may be  required  thereunder  to qualify  for the  maximum
     exemption  from  Section  16 of the  Exchange  Act  with  respect  to  Plan
     transactions.  In no event  shall  the Board  take any  action  that  would
     violate Section 10.1 of the Plan.

10.4 Effect of  Administrator's  Decision.  All  decisions,  determinations  and
     interpretations  of the  Administrator  shall be final and  binding  on all
     Optionees and any other persons having an interest in any Options.


                                   ARTICLE 11

                     AMENDMENT AND TERMINATION OF THE PLAN

11.1 Amendment  and  Termination.  The Board may at any time  amend,  suspend or
     terminate the Plan. In addition,  to the extent  necessary and desirable to
     comply  with  Rule  16b-3 or with  Section  422 of the  Code (or any  other
     applicable law or regulation,  including the requirements of the NASD or an
     established stock exchange),  the Company shall obtain shareholder approval
     of any Plan amendment in such a manner and to such a degree as required.

11.2 Effect of Amendment or Termination. Except as provided in the Plan or in an
     Option Agreement, no amendment, suspension or termination of the Plan shall
     alter or impair the rights of any Optionee under any Option  outstanding at
     the time, without the written consent of the Optionee.

11.3 Amendments  Required by Code.  Notwithstanding  the  provisions  of Section
     11.2,  the Board hereby  reserves the right to amend or modify the Plan and
     any  Options  outstanding  to the extent  necessary  to qualify  any or all
     Options for such favorable  federal income tax treatment as may be afforded
     employee  stock  options  under  Section  422 of the Code  and  regulations
     subsequently promulgated thereunder.







                                       9

<PAGE>



                                   ARTICLE 12

                       CONDITIONS UPON ISSUANCE OF SHARES

     Implementation of the Plan, the grant of Options and the issuance of Shares
hereunder  shall be subject to the Company  obtaining  all approvals and permits
required  by  regulatory  authorities  having  jurisdiction  over the Plan,  the
Options or the Shares,  including,  without  limitation,  any stock  exchange or
market upon which the Shares may then be listed or traded.  The inability of the
Company to obtain any such approvals or permits shall relieve the Company of any
liability  in respect of the failure to grant such Options or issue or sell such
Shares as to which such  approval or permit shall not have been  obtained.  As a
condition  to the  exercise  of an Option,  the  Company  may require the person
exercising such Option to represent and warrant at the time of any such exercise
that the Shares are being  purchased only for investment and without any present
intention  to sell or  distribute  such Shares if, in the opinion of counsel for
the Company, such a representation is required by applicable law.


                                   ARTICLE 13

                            INFORMATION TO OPTIONEES

     The Company  shall  provide to each  Optionee,  during the period for which
such Optionee has one or more Options outstanding,  copies of all annual reports
and other  information  which are provided to all  shareholders  of the Company.
This  Article 13 shall not be  construed  to require the Company to provide such
information to key employees  whose duties in connection with the Company assure
their access to equivalent information.


                                   ARTICLE 14

                                   TAX STATUS

     The  Company  does not  hereby,  nor by way of any plan,  document,  Option
Agreement  or  otherwise,  represent  or warrant to any  person,  including  the
Optionees, that the grant or exercise of an Option or the subsequent disposition
of Shares  obtained by the  exercise of an Option  pursuant to the Plan,  or any
other aspect of the Plan, will have any particular tax effect.


                                   ARTICLE 15

                                  PLAN GOVERNS

     If there is any inconsistency between the Plan and any documents related to
the Plan,  including  any  Option  Agreement,  the Plan  shall  govern.  Nothing
contained in the Plan shall be construed to  constitute,  or be evidence of, any
right in favor of any person to receive  Options  hereunder or any obligation on
the part of the Company to issue Options with respect to its Common Stock.







                                       10

<PAGE>





                                   ARTICLE 16

                          APPLICABLE LAW; SEVERABILITY

     The Plan shall be governed and construed in all respects in accordance with
the laws of the State of California  excluding its conflict of laws rules to the
extent such rules would apply the law of another jurisdiction. Incentive Options
granted under the Plan shall be interpreted and  administered in accordance with
Section  422 of the  Code.  If any  provision  is  susceptible  of more than one
interpretation,  it shall be  interpreted in a manner  consistent  with the Plan
being an incentive stock option plan. If any provision of the Plan is found by a
court of competent  jurisdiction to be invalid or  unenforceable,  the remaining
provisions shall continue to be fully effective.

                                       11

<PAGE>







                              ILC TECHNOLOGY, INC.

                             STOCK OPTION AGREEMENT

                     PURSUANT TO THE 1992 STOCK OPTION PLAN




Optionee



     This Stock Option Agreement, dated as of the Date of Grant set forth below,
is entered into between ILC Technology,  Inc., a California  corporation and the
Optionee named above pursuant to the ILC Technology, Inc. 1992 Stock Option Plan
(the "Plan"). Capitalized terms not defined in this Agreement are defined in the
Plan.

     Pursuant  to the Plan,  the  Company  grants an option to the  Optionee  to
purchase shares of the Common Stock of the Company as follows:

     Date of Grant                      ___________, 19__

     Exercise Price Per Share           $__________

     Total Number of Shares Granted      __________ Shares

     Total Exercise Price               $_____________

     Type of Option                     Incentive Stock Option

     Nonstatutory Stock Option

     Term                               __ years

     Expiration Date                    ___________, 20__



                                       12

<PAGE>



     Vesting Schedule: Subject to the provisions of this Agreement and the Plan,
the Options become  exercisable in cumulative  installments  as set forth below.
Exercisable Options may be exercised from time to time until the Expiration Date
set forth above or termination of the Options as set forth below.

          ________Shares exercisable beginning on ______________, 19__

          ________Shares exercisable beginning on ______________, 19__

          ________Shares exercisable beginning on ______________, 20__

          ________Shares exercisable beginning on ______________, 20__



     Termination:  Exercisable  Options  expire  30 days  after  Termination  of
Employment  for reasons  other than death or disability of Optionee or 12 months
after Termination of Employment because of death or disability. Options that are
not  exercisable at the time of Termination of Employment  expire on the date of
Termination of Employment. In no case, however, shall the Options be exercisable
after the Expiration Date.

     Nontransferability:  During the  lifetime  of the  Optionee,  the Option is
exercisable  only by the  Optionee.  The Option or this  Agreement  shall not be
sold, pledged, assigned,  transferred or disposed of in any manner other than by
will or by the laws of descent or  distribution.  Any  attempted  sale,  pledge,
assignment,  transfer or other disposition of the Option shall be void and of no
effect.

     Optionee  and the  Company  agree  that this  Option is  granted  under and
governed by the terms and  conditions of the Plan and the  Additional  Terms and
Conditions,  all of which are attached to and made a part of this Agreement.  By
signing  this  Agreement,  Optionee  acknowledges  that  Optionee  has  read and
understood the Plan and agrees to be bound by it and this  Agreement,  including
the Additional Terms and Conditions attached to this Agreement.



OPTIONEE:__________________________  ILC TECHNOLOGY, INC._______________________

                                     BY:________________________________________

                                     Title:_____________________________________
                
                                     Print Name_________________________________


                                       13

<PAGE>



                                  EXHIBIT 10.7



                                 LOAN AGREEMENT


     This Amended And Restated Loan Agreement  ("Agreement") is made and entered
into as of September 4, 1997 by and between ILC  Technology,  Inc., a California
corporation  ("Borrower")  and Union Bank of California,  N.A.,  ("Bank").  This
Agreement  amends and restates in its entirety that certain loan agreement dated
March 25, 1996 between Bank and Borrower.


Section 1. The Loan

Section 1.1.1 The Revolving Loan

     Bank will loan to  Borrower  an amount  not to exceed Six  Million  Dollars
($6,000,000)  outstanding  in the  aggregate  at any one  time  (the  "Revolving
Loan").  Borrower may borrow,  repay and  reborrow all or part of the  Revolving
Loan in accordance  with the terms of the Revolving  Note. All borrowings of the
Revolving  Loan must be made  before  March 31,  1999 at which  time all  unpaid
principal  and  interest of the  Revolving  Loan shall be due and  payable.  The
Revolving Loan shall be evidenced by a promissory note (the "Revolving Note") on
the  standard  form used by Bank for  commercial  loans.  Bank shall  enter each
amount borrowed and repaid in Bank's records and such entries shall be deemed to
be the amount of the Revolving  Loan  outstanding.  Omission of Bank to make any
such entries  shall not  discharge  Borrower of its  obligation to repay in full
with interest all amounts borrowed.

1.1.2  The Non-Revolving-To-Term Loan

     Bank will loan to  Borrower  an amount  not to exceed Two  Million  Dollars
($2,000,000)   outstanding   in   the   aggregate   at   any   one   time   (the
"Non-Revolving-To-Term   Loan").   Borrower  may  borrow  all  or  part  of  the
Non-Revolving-To-Term    Loan   in   accordance    with   the   terms   of   the
Non-Revolving-To-Term  Note. All borrowings of  the  Non-Revolving-To-Term  Loan
must be made before  August 31, 1998, at which time all unpaid  principal  under
the Non-Revolving-To-Term  Loan shall be converted to a fully amortizing loan as
set forth in Subsection  1.1.3.  In the event of a prepayment of principal after
such  conversion and payment of any resulting fees, any prepaid amounts shall be
applied  to the  scheduled  principal  payments  in the  reverse  order of their
maturity. The Non-Revolving-To-Term Loan shall be evidenced by a promissory note
(the  "Non-Revolving-To-Term  Note")  on the  standard  form  used by  Bank  for
commercial  loans.  Bank shall enter each amount  borrowed  and repaid in Bank's
records   and  such   entries   shall  be  deemed  to  be  the   amount  of  the
Non-Revolving-To-Term  Loan  outstanding.  Omission  of Bank to  make  any  such
entries  shall not  discharge  Borrower of its  obligation to repay in full with
interest all amounts borrowed.

1.1.3  The Term Loan

     Solely to repay the Non-Revolving-To-Term  Loan, Bank will loan to Borrower
the sum  outstanding  at the maturity of the  Non-Revolving-To-Term  Loan in one
disbursement  on or before August 31, 1998 (the "Term Loan").  In the event of a
prepayment of principal and payment of any resulting  fees, any prepaid  amounts
shall be applied to the  scheduled  principal  payments in the reverse  order of
their maturity. The Term Loan shall be evidenced by a promissory note (the "Term
Note") on the standard form used by Bank for commercial loans.


                                       1

<PAGE>



1.1.4  Other Loans

     Bank has extended and will continue to extend, subject to the terms of this
Agreement and the terms of the respective Note,  certain  additional  facilities
each evidenced by a Note described as follows:

      A. Obligation # 0027000003  which matures on August 28, 1998.  The current
         outstanding  principal  amount  of the Term Loan is One  Million  Three
         Hundred  Nineteen  Thousand  Dollars  ($1,319,000).  This  Term Loan is
         evidenced by a promissory  note ("Term Note") on the standard form used
         by Bank for commercial loans. In the event of a prepayment of principal
         and any  resulting  fees,  any prepaid  amounts shall be applied to the
         scheduled principal payments in the reverse order of their maturity.

      B. Obligation # 0080000002  which matures on January 30, 1998. The current
         outstanding  principal amount of the Term Loan is Two Hundred Sixty One
         Thousand  Dollars  ($261,000).   This  Term  Loan  is  evidenced  by  a
         promissory  note ("Term  Note") on the  standard  form used by Bank for
         commercial  loans.  In the event of a prepayment  of principal  and any
         resulting  fees, any prepaid  amounts shall be applied to the scheduled
         principal payments in the reverse order of their maturity.

      C. Obligation  #0081000002  which  matures on March 31, 1999.  The current
         outstanding  principal  amount  of the Term Loan is One  Million  Seven
         Hundred  Ninety Six Thousand  Dollars  ($1,796,000).  This Term Loan is
         evidenced by a promissory  note ("Term Note") on the standard form used
         by Bank for commercial loans. In the event of a prepayment of principal
         and any  resulting  fees,  any prepaid  amounts shall be applied to the
         scheduled principal payments in the reverse order of their maturity.


1.2  Terminology

     As used herein the word "Loan"  shall  mean,  collectively,  all the credit
facilities described above.

     As used herein the word "Note" shall mean, collectively, all the promissory
notes described above.

     As used  herein,  the  words  "Loan  Documents"  shall  mean all  documents
executed in connection with this Agreement.


1.3  Purpose of Loan

     The  proceeds  of the  Revolving  Loan  shall be used for  general  working
capital  purposes  and the proceeds of the  Non-Revolving-To-Term  Loan shall be
used for only for Borrower's capital equipment requirements.


1.4  Interest

     The   unpaid   principal   balance   of  the   Revolving   Loan   and   the
Non-Revolving-To-Term  Loan shall bear interest at the rate or rates provided in
the Revolving Note and the Non-Revolving-To-Term  Note and selected by Borrower.
The Revolving Loan and the Non-Revolving-To-Term  Loan may be prepaid in full or
in part  only in  accordance  with  the  terms  of the  Revolving  Note  and the
Non-Revolving-To-Term  Note and any such  prepayment  shall  be  subject  to the
prepayment fee provided for therein.


                                       2

<PAGE>



1.5  Balances

     Borrower shall maintain its major  depository  accounts with Bank until the
Note and all sums payable pursuant to this Agreement have been paid in full.

1.6  Disbursement

     Upon  execution  hereof,  Bank shall  disburse  the proceeds of the Loan as
provided in Bank's standard form Authorization executed by Borrower.

1.7  Security

     Prior to any  disbursement  of the Loan,  Borrower  shall  have  executed a
security agreement, on Bank's standard form, and a financing statement, suitable
for filing in the office of the  Secretary  of State of the State of  California
and any  other  state  designated  by Bank,  granting  to Bank a first  priority
security  interest  in such  of  Borrower's  property  as is  described  in said
security agreement.  Exceptions to Bank's first priority,  if any, are permitted
only as otherwise provided in this Agreement.  At Bank's request,  Borrower will
also obtain executed  landlord's and mortgagee's waivers on Bank's form covering
all of Borrower's property located on leased or encumbered real property.

1.8  Controlling Document

     In the event of any  inconsistency  between the terms of this Agreement and
any Note or any of the  other  Loan  Documents,  the terms of such Note or other
Loan Documents will prevail over the terms of this Agreement.


SECTION 2.  CONDITIONS PRECEDENT

     Bank shall not be  obligated to disburse all or any portion of the proceeds
of the Loan unless at or prior to the time for the making of such  disbursement,
the following conditions have been fulfilled to Bank's satisfaction:

2.1  Compliance

     Borrower  shall have  performed and complied with all terms and  conditions
required by this Agreement to be performed or complied with by it prior to or at
the  date of the  making  of such  disbursement  and  shall  have  executed  and
delivered to Bank the Note and other documents deemed necessary by Bank.

2.2  Guaranties

     Q-ARC  Limited  ("Guarantor")  shall have  executed and delivered to Bank a
continuing  guaranty in form and amount  satisfactory  to Bank.  Borrower  shall
cause each Guarantor to submit to Bank not later than Ninety (90) days after the
end  of  each  fiscal  year  such  Guarantor's   financial   statement  in  form
satisfactory to Bank.







                                       3

<PAGE>



2.3  Borrowing Resolution

     Borrower shall have provided Bank with certified copies of resolutions duly
adopted by the Board of Directors of Borrower,  authorizing  this  Agreement and
the Loan Documents.  Such resolutions  shall also  designate the persons who are
authorized to act on Borrower's  behalf in connection with this Agreement and to
do the things required of Borrower pursuant to this Agreement.


2.4  Continuing Compliance

     At the time any  disbursement  is to be made,  there  shall  not  exist any
event,  condition or act which  constitutes  an event of default under Section 6
hereof or any event,  condition or act which with notice,  lapse of time or both
would  constitute  such event of  default;  nor shall  there be any such  event,
condition, or act immediately after the disbursement were it to be made.


SECTION 3.  REPRESENTATIONS AND WARRANTIES

      Borrower represents and warrants that:


3.1   Business Activity

     The  principal  business  of  Borrower  is  manufacturer  of  light  source
products.


3.2  Affiliates and Subsidiaries

     Borrower's  affiliates and  subsidiaries  (those entities in which Borrower
has either a  controlling  interest or at least a 25%  ownership  interest)  and
their  addresses,  and the names of Borrower's  principal  shareholders,  are as
provided  on a  schedule  delivered  to  Bank  on or  before  the  date  of this
Agreement.


3.3  Authority to Borrow

     The execution, delivery and performance of this Agreement, the Note and all
other  agreements and  instruments  required by Bank in connection with the Loan
are not in  contravention  of any of the terms of any  indenture,  agreement  or
undertaking  to which  Borrower is a party or by which it or any of its property
is bound or affected.


3.4  Financial Statements

     The  financial  statements of Borrower,  including  both a balance sheet at
June 28, 1997, together with supporting  schedules,  and an income statement for
the nine (9) months ended June 28, 1997, have heretofore been furnished to Bank,
and are true and  complete  and fairly  represent  the  financial  condition  of
Borrower during the period covered thereby.  Since June 28, 1997, there has been
no material adverse change in the financial condition or operations of Borrower.




                                       4

<PAGE>



3.5  Title

     Except for assets which may have been disposed of in the ordinary course of
business,  Borrower  has  good  and  marketable  title  to all  of the  property
reflected  in its  financial  statements  delivered  to Bank and to all property
acquired by Borrower since the date of said financial statements, free and clear
of all liens,  encumbrances,  security interests and adverse claims except those
specifically referred to in said financial statements.


3.6  Litigation

     There is no litigation or proceeding pending or threatened against Borrower
or any of its  property  which is  reasonably  likely  to affect  the  financial
condition,  property or business of Borrower in a materially  adverse  manner or
result in liability in excess of Borrower's insurance coverage.


3.7  Default

     Borrower  is not  now in  default  in the  payment  of any of its  material
obligations,  and there exists no event,  condition or act which  constitutes an
event of default  under  Section 6 hereof and no  condition,  event or act which
with notice or lapse of time, or both, would constitute an event of default.


3.8  Organization

     Borrower is duly  organized and existing under the laws of the state of its
organization,  and has the power and authority to carry on the business in which
it is engaged and/or proposes to engage.


3.9  Power

     Borrower has the power and  authority to enter into this  Agreement  and to
execute and deliver the Note and all of the other Loan Documents.


3.10  Authorization

     This  Agreement and all things  required by this  Agreement  have been duly
authorized by all requisite action of Borrower.


3.11  Qualification

     Borrower is duly qualified and in good standing in any  jurisdiction  where
such qualification is required.







                                       5

<PAGE>



3.12  Compliance With Laws

     Borrower is not in violation  with respect to any applicable  laws,  rules,
ordinances or regulations  which  materially  affect the operations or financial
condition of Borrower.


3.13  ERISA

     Any defined  benefit  pension  plans as defined in the Employee  Retirement
Income Security Act of 1974, as amended  ("ERISA"),  of Borrower meet, as of the
date  hereof,  the minimum  funding  standards  of Section 302 of ERISA,  and no
Reportable Event or Prohibited Transaction as defined in ERISA has occurred with
respect to any such plan.


3.14  Regulation U

     No action has been taken or is currently planned by Borrower,  or any agent
acting on its behalf,  which would cause this  Agreement  or the Note to violate
Regulation  U or any other  regulation  of the Board of Governors of the Federal
Reserve  System or to violate the  Securities  and Exchange Act of 1934, in each
case as in effect now or as the same may hereafter be in effect. Borrower is not
engaged in the business of  extending  credit for the purpose of  purchasing  or
carrying  margin  stock  as one of its  important  activities  and  none  of the
proceeds of the Loan will be used directly or indirectly for such purpose.


3.15  Continuing Representations

     These representations shall be considered to have been made again at and as
of the date of each disbursement of the Loan and shall be true and correct as of
such date or dates.


SECTION 4.  AFFIRMATIVE COVENANTS

     Until the Note and all sums payable pursuant to this Agreement or any other
of the Loan Documents have been paid in full,  unless Bank waives  compliance in
writing, Borrower agrees that:


4.1   Use of Proceeds

     Borrower  will use the proceeds of the Loan only as provided in  subsection
1.3 above.


4.2  Payment of Obligations

     Borrower will pay and discharge  promptly all taxes,  assessments and other
governmental  charges and claims levied or imposed upon it or its  property,  or
any part thereof, provided,  however, that Borrower shall have the right in good
faith to contest any such taxes, assessments, charges or claims and, pending the
outcome  of such  contest,  to delay or refuse  payment  thereof  provided  that
adequately  funded  reserves are established by it to pay and discharge any such
taxes, assessments, charges and claims.



                                       6

<PAGE>



4.3  Maintenance of Existence

     Borrower  will  maintain  and  preserve  its  existence  and assets and all
rights,  franchises,  licenses and other authority  necessary for the conduct of
its  business  and will  maintain  and  preserve  its  property,  equipment  and
facilities in good order,  condition and repair.  Bank may, at reasonable times,
visit and inspect any of the properties of Borrower.


4.4  Records

     Borrower will keep and maintain  full and accurate  accounts and records of
its operations  according to generally accepted  accounting  principles and will
permit Bank to have access thereto, to make examination and photocopies thereof,
and to make audits during regular business hours. Costs for such audits shall be
paid by Borrower.


4.5  Information Furnished

      Borrower will furnish to Bank:

     (a)  Within  forty  five(45)  days after the close of each fiscal  quarter,
          except  for the final  quarter  of each  fiscal  year,  its  unaudited
          balance  sheet as of the close of such fiscal  quarter,  its unaudited
          income and expense  statement with supportive  schedules and statement
          of retained  earnings for that fiscal quarter,  prepared in accordance
          with generally accepted accounting principles;

     (b)  Within one  hundred  twenty  (120) days after the close of each fiscal
          year,  a copy of its  statement of  financial  condition  including at
          least its  balance  sheet as of the  close of such  fiscal  year,  its
          income and expense statement and retained earnings  statement for such
          fiscal year,  examined and prepared on an audited basis by independent
          certified  public  accountants  selected  by Borrower  and  reasonably
          satisfactory to Bank, in accordance with generally accepted accounting
          principles  applied on a basis  consistent  with that of the  previous
          year;

     (c)  As soon as  available,  but in any event within ninety (90) days after
          the close of each fiscal year of  Borrower,  projections  for the next
          succeeding  fiscal  year  of  corresponding  cash  flow  statement  by
          Borrower and acceptable to Bank;

     (d)  Such other financial statements and information as Bank may reasonably
          request from time to time;

     (e)  In connection with each fiscal year-end statement required  hereunder,
          any management letter of Borrower's certified public accountants;

     (f)  Prompt  written  notice to Bank of all events of default  under any of
          the terms or provisions of this  Agreement or of any other  agreement,
          contract,  document or instrument  entered, or to be entered into with
          Bank; and of any litigation  which, if decided  adversely to Borrower,
          would  have  a  material   adverse  effect  on  Borrower's   financial
          condition; and of any other matter which has resulted in, or is likely
          to result in, a material adverse change in its financial  condition or
          operations;




                                       7

<PAGE>



     (h)  Prior written notice to Bank of any changes in Borrower's officers and
          other senior  management;  Borrower's name; and location of Borrower's
          assets, principal place of business or chief executive office.


4.6  Current Ratio

     Borrower  will at all times  maintain a ratio of current  assets to current
liabilities of at least 1.5:1.0, as such terms are defined by generally accepted
accounting principles.


4.7  Tangible Net Worth


     Borrower  will at all times  maintain a Tangible Net Worth of not less than
Twenty Seven  Million  Dollars  ($27,000,000)  plus 75% of quarterly net profits
after taxes  (calculated  without  giving  effect to net losses and inclusive of
extraordinary  gains)  beginning with the quarter to end September 30, 1997 plus
the proceeds of all sales by Borrower of its stock.  "Tangible  Net Worth" means
the difference  between (a) the gross book value of the assets of Borrower,  and
(b) the sum of (I) the  amount of all  intangibles  such as  goodwill,  patents,
trademarks, organization expenses, treasury stock, unamortized debt discount and
expense  and  deferred  charges,  (ii) the  amount of  reserves  established  by
Borrower  for  anticipated  losses  and  expenses,  and (iii) the  amount of all
liabilities and indebtedness of Borrower,  including accrued but deferred income
taxes.


4.8  Debt to Tangible Net Worth

     Borrower  will at all  times  maintain  a ratio  of  total  liabilities  to
tangible net worth of not greater than 1.5:1.0.


4.9  Profitability

     Borrower will maintain a net profit,  after  provision for income taxes, of
any positive amount for any two consecutive fiscal quarters,  as reported at the
end of each such fiscal quarter and maintain a net profit,  after  provision for
income taxes for its fiscal year end.


4.10  Cash Flow

     Borrower  will  maintain  a ratio of Cash Flow to Debt  Service of not less
than 1.75:1.0.  Compliance with this subsection  shall be measured as of the end
of  Borrower's  fiscal  year.  "Cash  Flow" shall mean net profit  after  taxes,
exclusive of nonrecurring income, to which depreciation,  amortization and other
noncash expenses and interest (and also including  amounts coming due in respect
of leases) are added for the fiscal year just ended.  "Debt  Service" shall mean
that  portion of  long-term  liabilities  and capital  leases  coming due within
twelve (12) months after the date of calculation plus interest.







                                       8

<PAGE>



4.11  Insurance

     Borrower will keep all of its insurable property,  real, personal or mixed,
insured by companies and in amounts approved by Bank against fire and such other
risks, and in such amounts, as is customarily  obtained by companies  conducting
similar business with respect to like properties.  Borrower will furnish to Bank
statements of its insurance coverage,  will promptly furnish other or additional
insurance  deemed  necessary by and upon request of Bank to the extent that such
insurance  may be  available  and  hereby  assigns  to  Bank,  as  security  for
Borrower's obligations to Bank, the proceeds of any such insurance. Prior to any
disbursement of the Loan, Bank will be named loss payee on all policies insuring
collateral  and such  policies  shall  require at least ten (10)  days'  written
notice to Bank  before any policy may be  altered  or  canceled.  Borrower  will
maintain adequate worker's compensation insurance and adequate insurance against
liability for damage to persons or property.


4.12  Additional Requirements

     Borrower will promptly,  upon demand by Bank,  take such further action and
execute all such  additional  documents and  instruments in connection with this
Agreement as Bank in its reasonable  discretion  deems  necessary,  and promptly
supply  Bank with such  other  information  concerning  its  affairs as Bank may
request from time to time.


4.13  Litigation and Attorneys' Fees

     Borrower will pay promptly to Bank upon demand,  reasonable attorneys' fees
(including but not limited to the reasonable estimate of the allocated costs and
expenses of  in-house  legal  counsel  and legal  staff) and all costs and other
expenses paid or incurred by Bank in collecting,  modifying or compromising  the
Loan or in enforcing or exercising its rights or remedies  created by, connected
with or provided for in this Agreement or any of the Loan Documents,  whether or
not an arbitration,  judicial action or other  proceeding is commenced.  If such
proceeding  is  commenced,  only  the  prevailing  party  shall be  entitled  to
attorneys' fees and court costs.


4.14  Bank Expenses

     Borrower  will pay or  reimburse  Bank  for all  costs,  expenses  and fees
incurred by Bank in preparing and  documenting  this Agreement and the Loan, and
all  amendments  and  modifications  thereof,  including  but not limited to all
filing and recording fees,  costs of appraisals,  insurance and attorneys' fees,
including  the  reasonable  estimate  of the  allocated  costs and  expenses  of
in-house legal counsel and legal staff.


4.15  Reports Under Pension Plans

     Borrower  will furnish to Bank, as soon as possible and in any event within
15 days after  Borrower  knows or has reason to know that any event or condition
with  respect to any defined  benefit  pension  plans of Borrower  described  in
Section 3 above has occurred,  a statement of an authorized  officer of Borrower
describing  such event or  condition  and the  action,  if any,  which  Borrower
proposes to take with respect thereto.




                                       9

<PAGE>



SECTION 5.  NEGATIVE COVENANTS

     Until the Note and all other sums payable pursuant to this Agreement or any
other  of the  Loan  Documents  have  been  paid in  full,  unless  Bank  waives
compliance in writing, Borrower agrees that:


5.1  Encumbrances and Liens

     Borrower will not create,  assume or suffer to exist any mortgage,  pledge,
security interest, encumbrance, or lien (other than for taxes not delinquent and
for taxes and other  items  being  contested  in good  faith) on property of any
kind, whether real, personal or mixed, now owned or hereafter acquired,  or upon
the income or profits thereof,  except to Bank and except for minor encumbrances
and easements on real property which do not affect its market value,  and except
for existing  liens on Borrower's  personal  property and future  purchase money
security interests encumbering only the personal property purchased.


5.2  Borrowings

     Borrower  will  not  sell,  discount  or  otherwise  transfer  any  account
receivable or any note, draft or other evidence of indebtedness,  except to Bank
or except to a financial  institution  at face value for  deposit or  collection
purposes  only and  without  any fee other  than fees  normally  charged  by the
financial  institution  for deposit or  collection  services.  Borrower will not
borrow any money,  become  contingently  liable to borrow  money,  nor enter any
agreement to directly or indirectly  obtain borrowed  money,  except pursuant to
agreements made with Bank.


5.3  Sale of Assets, Liquidation or Merger

     Borrower   will  neither   liquidate   nor  dissolve  nor  enter  into  any
consolidation,  merger, partnership or other combination,  nor convey, nor sell,
nor lease all or the greater  part of its assets or  business,  nor  purchase or
lease all or the greater  part of the assets or  business  of  another,  without
prior written consent from Bank.


5.4  Loans, Advances and Guaranties

     Borrower will not,  except in the ordinary  course of business as currently
conducted,  make any loans or advances, become a guarantor or surety, pledge its
credit or properties in any manner or extend credit.


5.5  Investments

     Borrower  will not purchase the debt or equity of another  person or entity
except for savings  accounts and  certificates  of deposit of Bank,  direct U.S.
Government  obligations and commercial paper issued by corporations with the top
ratings of Moody's or Standard & Poor's, provided all such permitted investments
shall mature within one year of purchase.





                                       10

<PAGE>



5.6  Payment of Dividends

     Borrower  will not  declare  or pay any  dividends,  other  than a dividend
payable in its own common  stock,  or authorize  or make any other  distribution
with respect to any of its stock now or hereafter outstanding.


5.7  Retirement of Stock

     Borrower  may  repurchase  its capital  stock up to Three  Million  Dollars
($3,000,000)  in any 12 month period.  Purchases are not to exceed Seven Hundred
Fifty Thousand Dollars ($750,000) in any single fiscal quarter.


SECTION 6.  EVENTS OF DEFAULT

     The occurrence of any of the following  events  ("Events of Default") shall
terminate  any  obligation  on the part of Bank to make or continue the Loan and
automatically,  unless otherwise provided under the Note, shall make all sums of
interest and principal  and any other  amounts owing under the Loan  immediately
due and payable,  without notice of default,  presentment or demand for payment,
protest or notice of nonpayment or dishonor, or any other notices or demands:

6.1

     Borrower shall default in the due and punctual  payment of the principal of
or the interest on the Note or any of the other Loan Documents; or

6.2

       Any default shall occur under the Note; or

6.3

     Borrower shall default in the due performance or observance of any covenant
or condition of the Loan Documents; or

6.4

     Any guaranty or subordination  agreement  required hereunder is breached or
becomes ineffective,  or any Guarantor or subordinating  creditor dies, disavows
or attempts to revoke or terminate such guaranty or subordination agreement; or

6.5

     There is a change in ownership  or control of ten percent  (10%) or more of
the issued and outstanding  stock of Borrower or any Guarantor,  or (if Borrower
is a  partnership)  there is a change in  ownership  or control  of any  general
partner's interest.


SECTION 7.  MISCELLANEOUS PROVISIONS



                                       11

<PAGE>



7.1  Additional Remedies

     The rights, powers and remedies given to Bank hereunder shall be cumulative
and not alternative and shall be in addition to all rights,  powers and remedies
given to Bank by law against  Borrower or any other  person,  including  but not
limited to Bank's rights of setoff or banker's lien.


7.2  Nonwaiver

     Any forbearance or failure or delay by Bank in exercising any right,  power
or  remedy  hereunder  shall not be deemed a waiver  thereof  and any  single or
partial  exercise of any right,  power or remedy  shall not preclude the further
exercise  thereof.  No waiver  shall be  effective  unless it is in writing  and
signed by an officer of Bank.


7.3  Inurement

     The benefits of this Agreement shall inure to the successors and assigns of
Bank and the permitted successors and assignees of Borrower,  and any assignment
by Borrower without Bank's consent shall be null and void.

7.4  Applicable Law

     This Agreement and all other agreements and instruments required by Bank in
connection therewith shall be governed by and construed according to the laws of
the State of California.


7.5  Severability

     Should any one or more  provisions  of this  Agreement be  determined to be
illegal or unenforceable,  all other provisions nevertheless shall be effective.
In the event of any conflict  between the  provisions of this  Agreement and the
provisions of any note or  reimbursement  agreement  evidencing any indebtedness
hereunder, the provisions of such note or reimbursement agreement shall prevail.


7.6  Integration Clause

     Except for documents and instruments  specifically  referenced herein, this
Agreement  constitutes the entire agreement between Bank and Borrower  regarding
the Loan and all prior  communications  verbal or written  between  Borrower and
Bank shall be of no further effect or evidentiary value.


7.7  Construction

     The section and subsection headings herein are for convenience of reference
only and shall not limit or otherwise affect the meaning hereof.


7.8  Amendments

     This Agreement may be amended only in writing signed by all parties hereto.


                                       12

<PAGE>



7.9  Counterparts

     Borrower and Bank may execute one or more  counterparts  to this Agreement,
each of which shall be deemed an original,  but when  together  shall be one and
the same instrument.


SECTION 8.  SERVICE OF NOTICES


8.1

     Any notices or other communications provided for or allowed hereunder shall
be effective  only when given by one of the  following  methods and addressed to
the respective party at its address given with the signatures at the end of this
Agreement and shall be considered to have been validly given: (a) upon delivery,
if  delivered  personally;  (b) upon  receipt,  if mailed,  first class  postage
prepaid, with the United States Postal Service; (c) on the next business day, if
sent  by  overnight  courier  service  of  recognized  standing;  and  (d)  upon
telephoned confirmation of receipt, if telecopied.


8.2

     The  addresses  to which  notices or demands are to be given may be changed
from time to time by notice delivered as provided above.


     THIS  AGREEMENT  is executed  on behalf of the  parties by duly  authorized
officers as of the date first above written.




UNION BANK OF CALIFORNIA, N.A.     



______________________________
s/s Patricia Lee
Patricia Lee
Vice President


Address: 350 California Street-10th Floor
         San Francisco, CA 94104-1402
Attention: Patricia Lee, VP

Telecopier: (415) 705-7111
Telephone:  (415) 705-7385




ILC TECHNOLOGY, INC.


_______________________________
By:   s/s/ Richard D. Capra
Title      President and Chief Operating Officer


________________________________
By:   s/s  Ronald E. Fredianelli

Title:     Chief Financial Officer

Address: 399 Java Drive
         Sunnyvale, CA 94089
Attention: Ron Fredianelli, CFO

Telecopier: (408) 745-7829
Telephone:  (408) 745-7900







                                       13

<PAGE>







                                  EXHIBIT 21.1
                                  SUBSIDIARIES



Name                                              Jurisdiction of Incorporation
----                                              ------------------------------
ILC Light Source Foreign Sales Corporation                  Barbados

Q-Arc Ltd                                                England and Wales




                            

<PAGE>






                                  EXHIBIT 23.1
                   CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS




As independent public accountants, we hereby consent to the incorporation of our
report dated December 1, 1997,  included in this Form 10-K, into ILC Technology,
Inc.'s previously filed Form S-8 Registration Statements,  File Numbers 2-90841,
2-95899, 33-6917, 33-27001, 33-50404, 33-89470 and 333-1095.




                                                    ARTHUR ANDERSEN LLP




San Jose, California
December 8, 1997