Document:

MERGER AGREEMENT

                                      among

                          LIGHTPATH TECHNOLOGIES, INC.,

                             HORIZON PHOTONICS, INC.

                                       and

                             LPI MERGER CORPORATION

                              Dated April 14, 2000
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                                 TABLE CONTENTS

                                                                            Page
                                                                            ----
ARTICLE 1....................................................................  5
  1.1   The Merger...........................................................  5
  1.2   Effect of the Merger.................................................  5
  1.3   Consummation of the Merger...........................................  6
  1.4   Articles of Incorporation and Bylaws; Directors and Officers.........  6
  1.5   Conversion of Securities.............................................  6
  1.6   Closing of Company Transfer Books....................................  9
  1.7   Exchange of Certificates............................................. 10
  1.8   Dissenting Shares.................................................... 11
  1.9   Tax Consequences..................................................... 11
  1.10  Taking of Necessary Action; Further Action........................... 11
  1.11  Stock Options........................................................ 12
  1.12  Indemnification; Payment of Note..................................... 13

ARTICLE  2................................................................... 13
  2.1    Organization and Qualification...................................... 13
  2.2   Authority Relative to This Agreement................................. 13
  2.3   Capital Structure.................................................... 14
  2.4   SEC Filings; Financial Statements.................................... 14
  2.5   Valid Issuance....................................................... 15
  2.6   Accuracy of Information.............................................. 15
  2.7   Title to Properties.................................................. 15
  2.8   Accounts Receivable.................................................. 16
  2.9   Employment Matters................................................... 16
  2.10  Affiliate Transactions............................................... 16
  2.11  Compliance with Laws; Permits; Certain Operations.................... 16
  2.12  Non-Contravention; Consents.......................................... 17
  2.13  Brokerage............................................................ 17
  2.14  No Material Adverse Changes.......................................... 17
  2.15  Legal Proceedings.................................................... 18

ARTICLE 3.................................................................... 18
  3.1   Organization and Qualification....................................... 18
  3.2   Authority Relative to this Agreement................................. 18
  3.3   Capitalization....................................................... 19
  3.4   Financial Statements................................................. 20
  3.5   No Subsidiaries...................................................... 20
  3.6   Absence of Undisclosed Liabilities................................... 20
  3.7   No Material Adverse Changes.......................................... 21
  3.8   Absence of Certain Developments...................................... 21
  3.9   Title to Properties.................................................. 23
  3.10  Accounts Receivable.................................................. 24
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  3.11  Inventories.......................................................... 24
  3.12  Tax Matters.......................................................... 24
  3.13  Contracts and Commitments............................................ 27
  3.14  Proprietary Rights................................................... 29
  3.15  Litigation........................................................... 29
  3.16  Brokerage............................................................ 30
  3.17  Employment Matters................................................... 30
  3.18  Employee Benefit Plans............................................... 30
  3.19  Insurance............................................................ 32
  3.20  Affiliate Transactions............................................... 32
  3.21  Suppliers............................................................ 32
  3.22  Officers and Directors; Bank Accounts................................ 33
  3.23  Compliance with Laws; Permits; Certain Operations.................... 33
  3.24  Disclosure........................................................... 33
  3.25  Non-Contravention; Consents.......................................... 33
  3.26  Stockholder Vote Required............................................ 34

ARTICLE 4.................................................................... 34
  4.1      Conduct of Business Pending the Merger............................ 34
  4.2      Notification; Updates to Disclosure Schedule...................... 37

ARTICLE 5.................................................................... 38
  5.1   Shareholders Meeting................................................. 38
  5.2   Expenses............................................................. 38
  5.3   Additional Agreements................................................ 38
  5.4   No Negotiations, etc................................................. 38
  5.5   Notification of Certain Matters...................................... 39
  5.6   Access to Information; Confidentiality............................... 39
  5.7   Shareholder Claims................................................... 39
  5.8   Consents............................................................. 39
  5.9   State Securities Law Compliance...................................... 39
  5.10  Notification; Updates to Parent Disclosure Letter.................... 40
  5.11  Commercially Reasonable Efforts...................................... 40
  5.12  Tax Matters.......................................................... 40
  5.13  Indemnification...................................................... 41
  5.14  Nasdaq SmallCap Market Listing....................................... 42
  5.15  Employees............................................................ 42
  5.16  Future Employment Incentives......................................... 42
  5.17  Funding Commitment................................................... 43

ARTICLE 6.................................................................... 43
  6.1   Conditions to Obligations of Each Party To Effect the Merger......... 43
  6.2   Additional Conditions to Obligation of the Company................... 45
  6.3   Additional Conditions to Obligations of Parent and the Merger Sub.... 47

ARTICLE 7.................................................................... 50
  7.1   Termination.......................................................... 50

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  7.2   Termination Procedures............................................... 51
  7.3   Effect of Termination................................................ 52

ARTICLE 8.................................................................... 52
  8.1   Amendment............................................................ 52
  8.2   Waiver............................................................... 52
  8.3   Public Statements.................................................... 52
  8.4   Notices.............................................................. 52
  8.5   Interpretation....................................................... 53
  8.6   Severability......................................................... 53
  8.7   Miscellaneous........................................................ 54
  8.8   Non-survival of Representations and Warranties....................... 54
  8.9   Entire Agreement; No Third Party Beneficiaries; Rights of Ownership.. 54
  8.10  Fax Signatures....................................................... 54

SCHEDULES

  Schedule 1.4      Officers and Directors of Surviving Corporation

  Schedule 1.5(a)   Shareholder Ownership

  Schedule 1.12     Indemnification; Payment of Note

COMPANY DISCLOSURE SCHEDULES

  Schedule 3.2      Authority Relative to this Agreement

  Schedule 3.3(b)   Company Options

  Schedule 3.3(f)   Registration of Securities

  Schedule 3.6      Undisclosed Liabilities

  Schedule 3.8      Certain Developments

  Schedule 3.9(a)   Liens

  Schedule 3.9(b)   Real Estate

  Schedule 3.9(c)   Leases

  Schedule 3.11     Inventory

  Schedule 3.12(d)  Tax Returns

  Schedule 3.13(a)  Contracts

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  Schedule 3.13(b)  Breach of Contract

  Schedule 3.14     Proprietary Rights

  Schedule 3.18     Employee Benefit Plans

  Schedule 3.19     Insurance

  Schedule 3.20     Affiliate Transactions

  Schedule 3.21     Suppliers

  Schedule 3.22     Officers and Directors; Bank Accounts

  Schedule 3.23     Compliance with Laws; Permits; Certain Operations

  Schedule 3.25     Non-Contravention; Consents

  Schedule 5.16     Future Employment Incentives

  Schedule 5.17     Funding Commitment

EXHIBITS

  Exhibit A         Form of Employment Agreement

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     MERGER  AGREEMENT  This  MERGER  AGREEMENT  is dated  April 14,  2000 (this
"Agreement"), by and among LightPath Technologies,  Inc., a Delaware corporation
("Parent"), LPI Merger Corporation, a Delaware corporation wholly owned directly
by Parent  (the  "Merger  Sub"),  and  Horizon  Photonics,  Inc.,  a  California
corporation (the "Company").

                                    RECITALS

     I. Parent and the Company are parties to a letter of intent dated  February
29, 2000 (the "Letter of Intent"),  which  contemplates  the merger described in
Article 1 (the "Merger").

     II. The  respective  boards of  directors of the Merger Sub and the Company
have  determined  that it is advisable to consummate the Merger,  as a result of
which all of the  outstanding  common stock,  $.0001 par value per share, of the
Company  ("Company  Common  Stock") will be converted into shares of the Class A
Common  Stock,  $.01 par value per  share,  of  Parent  ("Parent  Class A Common
Stock")  and the Company  will be wholly  owned  directly by Parent;  all on the
terms and subject to the conditions set forth in this Agreement.

     NOW, THEREFORE, the parties agree as follows: ARTICLE 1

                                   THE MERGER

     The  respective  boards of  directors  of  Parent,  the  Merger Sub and the
Company have, by resolutions duly adopted,  approved the following provisions of
this  Article  1 as the plan of  merger  required  by the laws of the  states of
California and Delaware in connection with the Merger:

     1.1 The  Merger.  At the  Effective  Time (as defined in Section  1.3),  in
accordance  with this  Agreement  and  applicable  law,  the Merger Sub shall be
merged  with and into the  Company,  the  separate  existence  of the Merger Sub
(except as may be continued  by  operation of law) shall cease,  and the Company
shall continue as the surviving  corporation under the name "Horizon  Photonics,
Inc." as  provided  in the  Amended  Articles  of  Incorporation  of the Company
pursuant to Section 1.4 of this Agreement.  The Company,  in its capacity as the
corporation  surviving  the  Merger,  sometimes  is  referred  to  herein as the
"Surviving Corporation."

     1.2 Effect of the Merger.  The Surviving  Corporation shall possess all the
rights,  privileges,  immunities  and  franchises,  of a public  as well as of a
private  nature,  of each of the Merger Sub and the Company  (collectively,  the
"Constituent  Corporations");  and all property,  real, personal, and mixed, and
all debts due on whatever account,  including  subscriptions to shares,  and all
other choses in action,  and all and every other  interest of or belonging to or
due to each of the  Constituent  Corporations,  shall be taken and  deemed to be
transferred to and vested in the Surviving  Corporation  without  further act or

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deed;  and the Surviving  Corporation  shall be  responsible  and liable for all
liabilities and obligations of each of the Constituent Corporations.

     1.3  Consummation  of the  Merger.  The  consummation  of the  transactions
contemplated by this Agreement (the  "Closing")  shall take place at the offices
of Squire,  Sanders & Dempsey  L.L.P.,  40 North  Central  Avenue,  Suite  2700,
Phoenix,  Arizona  85004 at 10:00 a.m. on a date to be  mutually  agreed upon by
Parent and the Company, which date shall be no later than the third business day
following  the  satisfaction  or  waiver of the of the  conditions  set forth in
Article 6 of this Agreement (the "Scheduled Closing Time") and no later than the
Final Date (as defined in Section 7.1).  The date on which the Closing  actually
takes place is  referred  to in this  Agreement  as the  "Closing  Date." On the
Closing Date, the parties  hereto will cause articles of merger  relating to the
Merger to be delivered to the  Secretaries  of State of the states of California
and Delaware in such form as required by, and executed in accordance  with,  the
relevant  provisions  of  applicable  law. The Merger shall be effective at such
time as such  articles  of  merger  are  duly  filed  with and  accepted  by the
Secretaries of State of the states of California and Delaware in accordance with
applicable law (the "Effective Time").

     1.4 Articles of  Incorporation  and Bylaws;  Directors  and  Officers.  The
Articles of Incorporation  and Bylaws of the Company,  as in effect  immediately
prior to the Effective Time, shall be the Articles of  Incorporation  and Bylaws
of the Surviving  Corporation  immediately  after the  Effective  Time and shall
thereafter continue to be its Articles of Incorporation and Bylaws until amended
as provided  therein and under the applicable law. The directors and officers of
the Surviving Corporation  immediately following the Effective Time shall be the
persons identified on Schedule 1.4 attached hereto.

     1.5  Conversion  of  Securities;  Cash  Consideration.  Subject to Sections
1.7(b) and 1.8, at the  Effective  Time,  the  following  events  shall occur by
virtue of the Merger and without  any action on the part of the Merger Sub,  the
Company or the holder of any of the following securities:

          (a)  Each  share  of  Company  Common  Stock  issued  and  outstanding
     immediately  prior to the Effective  Time (other than shares to be canceled
     pursuant to Section  1.5(b))  shall,  without any action on the part of the
     holders  thereof,  automatically be canceled and extinguished and the total
     number of  outstanding  shares of Company  Common  Stock shall be converted
     into and become a right to receive (A) the total sum of  $1,000,000,  to be
     paid by check or wire  transfer of  immediately  available  funds to one or
     more bank  accounts  designated by the  shareholders  of Company (the "Cash
     Consideration"),  plus (B) an aggregate  number of shares of Parent Class A
     Common Stock determined as set forth in the following  sentence (the "Share
     Consideration"),   payable  to  the   shareholders   of  the  Company  (the
     "Shareholders")  on a PRO RATA basis in the manner  reflected  on  Schedule
     1.5(a) attached  hereto.  The actual  aggregate  number of shares of Parent
     Class A Common Stock constituting the Share Consideration issued by Parent,
     subject to subsequent  adjustment as  contemplated by Section 1.5(f) below,
     will be a number of shares equal to the quotient of $35,200,000  DIVIDED BY
     the average of the last  reported  sale price of the Parent  Class A Common
     Stock for the five (5)  consecutive  trading days ending on the trading day
     prior to the  Closing  Date (the  "Closing  Price").  For  purposes of this

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     Agreement,  "last  reported  sale price" shall be the closing sale price as
     reported by the Nasdaq  SmallCap  Market or such other  primary  securities
     market or  exchange on which the Parent  Class A Common  Stock is listed or
     traded on the date of determination.

          (b)  Each  share  of  Company  Common  Stock  issued  and  outstanding
     immediately  prior to the  Effective  Time and held in the  treasury of the
     Company shall  automatically  be canceled and  extinguished  and no payment
     shall be made with respect thereto.

          (c) Each share of Merger Sub Common Stock,  par value $.001 per share,
     issued  and  outstanding  immediately  prior to the  Effective  Time  shall
     automatically  be converted into and become one validly issued,  fully paid
     and nonassessable  share of common stock, par value $.001 per share, of the
     Surviving Corporation.

          (d) If any  shares of Company  Common  Stock  outstanding  immediately
     prior to the  Effective  Time are  unvested or are subject to a  repurchase
     option,  risk  of  forfeiture  or  other  condition  under  any  applicable
     restricted  stock purchase  agreement or other  agreement with the Company,
     then the shares of Parent  Class A Common Stock issued in exchange for such
     shares of Company  Common  Stock will also be  unvested  and subject to the
     same  repurchase  option,  risk of forfeiture or other  condition,  and the
     certificates  representing  such shares of Parent  Class A Common Stock may
     accordingly be marked with appropriate legends.

          (e) Parent will use its best efforts to cause the Share  Consideration
     issued pursuant to this Agreement to be registered under the Securities Act
     of 1933, as amended (the  "Securities  Act"), on Form S-3 or if the Company
     is ineligible therefore, Form S-2 or S-1, or any successor form of any such
     registration  to such form,  promulgated  by the  Securities  and  Exchange
     Commission  (the  "SEC")  and to be  registered  or  qualified  (or to have
     established  that an exemption from such  registration or  qualification is
     available)  under the "blue  sky" laws of all states  which the  holders of
     such shares reasonably  request, as soon as practicable after the Effective
     Time,  subject to receipt by the Parent of any required  audited  financial
     statements  of the Company or other  information  pertaining to the Company
     and its  business,  and Parent  shall use its best  efforts to maintain the
     effectiveness of such registration statement or registration statements for
     so long as the Share Consideration remains outstanding.

          (f)  The  Share  Consideration  given  to the  Shareholders  shall  be
     adjusted,  as set forth  below,  on the date that is the earlier of (i) the
     date the  registration  statement  referred to in Section  1.5(e)  above is
     declared   effective   or  (ii)  45  days  after  the  Closing   Date  (the
     "Recalculation Date"):

               (i) Should the  average  of the last  reported  sale price of the
          Parent Class A Common Stock for the five (5) consecutive  trading days
          ending  on the  trading  day  prior  to the  Recalculation  Date  (the
          "Recalculation  Price")  be less than the  Closing  Price,  the actual

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          aggregate number of shares of Parent Class A Common Stock constituting
          the Share  Consideration  will be  increased  to the number of shares,
          rounded  to  the  nearest  whole  share,  equal  to  the  quotient  of
          $35,200,000  divided by the Recalculation  Price;  provided,  however,
          that if,  on the  Recalculation  Date,  the  Recalculation  Price  has
          dropped by an amount  greater than forty  percent (40%) as compared to
          the  Closing  Price,  then the  actual  aggregate  number of shares of
          Parent Class A Common Stock constituting the Share  Consideration will
          be  increased  only by 804,776  shares of Parent  Class A Common Stock
          (the "Downside Collar").  For example, if the Closing Price is $40 per
          share,  the total number of shares issued to the  Shareholders  on the
          Closing  Date  would  be  880,000  ($35,200,000  /  $40).  If  on  the
          Recalculation Date the Recalculation  Price is $24 (which would be 40%
          less  than  the $40  Closing  Price),  then  Parent  would  issue  the
          Shareholders an additional  586,667 shares so that the total number of
          shares issued to the  Shareholders  would be 1,466,667  ($35,200,000 /
          $24).  If on the  Recalculation  Date the  Recalculation  Price is $20
          (which  would be greater than 40% less than the Closing  Price),  then
          Parent,  as a result of the  Downside  Collar,  would  only  issue the
          Shareholders an additional  586,667 shares so that the total number of
          shares issued to the  Shareholders  would be 1,466,667  ($35,200,000 /
          $24).

               (ii) Should the  Recalculation  Price  remain  unchanged  or have
          increased by any amount less than or equal to fifty  percent  (50%) as
          compared to the Closing  Price,  then the actual  aggregate  number of
          shares  of  Parent  Class  A  Common  Stock   constituting  the  Share
          Consideration  will remain  unchanged,  with such number determined as
          set forth in Section 1.5(a) above.

               (iii) Should the Recalculation  Price have increased by more than
          fifty percent (50%) as compared to the Closing Price,  then the actual
          aggregate number of shares of Parent Class A Common Stock constituting
          the Share  Consideration  will be  decreased  to the number of shares,
          rounded to the nearest whole share,  that, based on the  Recalculation
          Price,  create value in excess of 50% more than the Closing Price (the
          "Upside Collar");  provided however, that in no event shall the number
          of shares  constituting  the Share  Consideration be decreased by more
          than 50% of the number of shares  constituting the Share Consideration
          as of the Closing  Date  pursuant to Section  1.5(a),  prior to giving
          effect to any adjustment  under this Section 1.5(f).  For example,  if
          the Closing Price is $40 per share,  the total number of shares issued
          to the Shareholders on the Closing Date would be 880,000  ($35,200,000
          / $40). If on the Recalculation  Date the Recalculation  Price is $60,
          then the  total  number of shares  issued  to the  Shareholders  would
          remain  at  880,000  because  $60 would be a 50%  increase  of the $40
          Closing Price. At a $60  Recalculation  Price,  the maximum  aggregate
          value of the Share Consideration would be $52,800,000  (880,000 x $60)
          (the  "Maximum  Upside  Value").  If on  the  Recalculation  Date  the
          Recalculation  Price is $65,  then, as a result of the Upside  Collar,

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          the total number of shares issued to the Shareholders would be reduced
          by the  number  of  shares  that is equal to the  amount  by which the
          aggregate value of the Share Consideration  exceeds the Maximum Upside
          Value. In this case such aggregate value would be $57,200,000 (880,000
          x $65) which  would  result in  $4,400,000  of excess  value above the
          Maximum  Upside Value  ($57,200,000  -  $52,800,000).  Therefore,  the
          Shareholders  would return to Parent 67,692 shares ($4,400,000 / $65),
          thereby reducing the Share  Consideration to 812,307 shares (880,000 -
          67,692)  which would not exceed the Maximum  Upside  Value.  If on the
          Recalculation Date the Recalculation  Price is $140, then, as a result
          of the Upside Collar and the  limitations  set forth above,  the total
          number of shares  issued to the  Shareholders  would be reduced by the
          lesser  of (i) the  number of  shares  that is equal to the  amount by
          which the  aggregate  value of the  Share  Consideration  exceeds  the
          Maximum  Upside  Value,  or (ii) fifty  percent (50%) of the number of
          shares constituting the Share Consideration as of the Closing Date. In
          this  example,  the amount  determined  pursuant  to clause (i) of the
          previous  sentence  would  be  502,857  shares  (((880,000  x  140)  -
          52,800,000) / 140), and the amount determined  pursuant to clause (ii)
          of the  previous  sentence  would be 440,000  shares  (880,000 x 50%).
          Therefore,  the  Shareholders  would return to Parent 440,000  shares,
          thereby reducing the Share  Consideration to 440,000 shares (880,000 -
          440,000).

          (g)  Notwithstanding  the foregoing,  the Board of Directors of Parent
     may, in its sole and absolute  discretion  and without any liability of any
     kind for failure to do so, waive the  application  of the  adjustments  set
     forth in Section  1.5(f)(i)  or (iii) above to allow for a number of shares
     to be issued to the Shareholders in excess of the Downside  Collar,  or for
     the  Shareholders  to be allowed to retain a number of shares that  exceeds
     the  Upside  Collar;  provided  however,  in no event,  shall the number of
     additional shares of Parent Class A Common Stock issued pursuant to Section
     1.5(f)(i) exceed 1,207,158 shares.  In making the determination  whether to
     waive any such  adjustments,  in the manner  provided  above,  the Board of
     Directors  of Parent may  consider  (without  limitation)  factors  such as
     current market conditions as of the Recalculation Date,  potential business
     opportunities   and  strategic   relationships,   management  and  employee
     retention,  product development and marketing  opportunities and such other
     factors as it may deem relevant. The parties acknowledge and agree that the
     Board of Directors of Parent shall have no  obligation  to advise any party
     of the basis for its decision whether to waive such adjustments.

     1.6  Closing  of  Company  Transfer  Books.  At  the  Effective  Time,  the
Shareholders  shall  cease to have any  further  rights as  shareholders  of the
Company,  and the stock  transfer  books of the  Company  shall be closed and no
transfer of shares of Company  Common Stock issued and  outstanding  immediately
prior to the Effective  Time shall  thereafter be made.  If, after the Effective
Time, valid  certificates  previously  representing such shares are presented to
the Surviving  Corporation or the Disbursing  Agent (as defined in Section 1.7),
they shall be exchanged as provided in Section 1.7.

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     1.7 Exchange of Certificates.

          (a) At the Closing,  the Shareholders and the Company shall deliver to
     the Parent stock certificates evidencing all the Company Common Stock, each
     in form  suitable for transfer,  endorsed in blank or with  executed  blank
     stock transfer powers, along with stock book, stock transfer ledger, minute
     book and any corporate seal of the Company. Upon the surrender and exchange
     of a certificate  theretofore  representing shares of Company Common Stock,
     each Shareholder  shall be issued a certificate  representing the number of
     shares of Parent  Class A Common  Stock to which  such  person is  entitled
     pursuant to Section 1.5(a),  and each such certificate  shall bear a legend
     stating  that the shares  represented  by such  certificate  are subject to
     recalculation pursuant to this Agreement,  and the certificate  theretofore
     representing  shares of Company  Common Stock shall  forthwith be canceled.
     Until  so  surrendered   and  exchanged,   each   certificate   theretofore
     representing  shares of Company  Common  Stock shall  represent  solely the
     right to receive the Parent  Class A Common  Stock into which the shares it
     theretofore  represented shall have been converted and the pro-rata portion
     of the $1,000,000 to be paid pursuant to Section 1.5(a),  and the Surviving
     Corporation shall not be required to pay the Shareholder thereof the Parent
     Class A Common Stock to which such Shareholder otherwise would be entitled;
     provided  that  procedures  allowing for payment  against lost or destroyed
     certificates  against receipt of customary and  appropriate  certifications
     and indemnities  shall be provided.  Each  Shareholder  shall be issued new
     Parent Class A Common  Stock  certificates  within five (5)  business  days
     following the Recalculation Date,  evidencing the adjustment,  if any, made
     pursuant to Section 1.5(f) and such  certificates  will not bear the legend
     regarding  recalculation.  All  certificates of Parent Class A Common Stock
     issued  pursuant  hereto,  issued prior to their  registration  pursuant to
     Section 1.5(e) above, shall bear the following legend:

          "The securities evidenced by this certificate have not been registered
          under the Securities Act of 1933, as amended,  and have been taken for
          investment  purposes  only  and not  with a view  to the  distribution
          thereof,  and, except as stated in an agreement  between the holder of
          this  certificate,  or its  predecessor  in  interest,  and the issuer
          corporation,  such  securities may not be sold or  transferred  unless
          there is an effective  registration  statement under said Act covering
          such   securities  or  such  sale  or  transfer  is  exempt  from  the
          registration and prospectus delivery requirements of said Act."

          (b) No  fractional  shares of  Parent  Class A Common  Stock  shall be
     issued in  connection  with the Merger,  including  but not limited to, any
     shares  issued as a result of a  post-closing  adjustment  as  provided  in
     Section 1.5(f), and no certificates for any such fractional shares shall be
     issued. In lieu of such fractional shares, any fractional share interest in
     Parent  Class A Common  Stock which a holder of Company  Common Stock would
     otherwise  be  entitled  to receive in the Merger  (after  aggregating  all
     fractional  shares of Parent Class A Common  Stock that would  otherwise be
     issuable to such holder)  shall be rounded up to the nearest whole share if

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     such  fraction is 0.5 or greater  and shall be rounded  down to the nearest
     whole share if such fraction is less than 0.5.

     1.8 Dissenting Shares.

          (a)  Notwithstanding  anything  to  the  contrary  contained  in  this
     Agreement,  any shares of Company  Common Stock that,  as of the  Effective
     Time, are or may become  "dissenting  shares" within the meaning of Section
     1300(b) of the California  Corporations  Code (the "California  Law") shall
     not be  converted  into or  represent  the right to receive  Parent Class A
     Common Stock in  accordance  with Section 1.5, and the holder or holders of
     such shares shall be entitled only to such rights as may be granted to such
     holder or holders under applicable California Law; provided,  however, that
     if the  status  of any such  shares  as  "dissenting  shares"  shall not be
     perfected,  or if any such shares  shall lose their  status as  "dissenting
     shares,"  then,  as of the later of the  Effective  Time or the time of the
     failure to perfect  such  status or the loss of such  status,  such  shares
     shall automatically be converted into and shall represent only the right to
     receive (upon the surrender of the certificate or certificates representing
     such shares) Parent Class A Common Stock in accordance with Section 1.5.

          (b) The  Company  shall give  Parent (i) prompt  notice of any written
     demand  received by the Company prior to the Effective  Time to require the
     Company to  purchase  shares of capital  stock of the  Company  pursuant to
     California Law and of any other demand,  notice or instrument  delivered to
     the Company prior to the Effective Time pursuant to the California Law, and
     (ii) the  opportunity to participate in all  negotiations  and  proceedings
     with respect to any such demand,  notice or  instrument.  The Company shall
     not make any payment or settlement  offer prior to the Effective  Time with
     respect to any such demand unless Parent shall have consented in writing to
     such payment or settlement offer.

     1.9 Tax  Consequences.  For  federal  income  tax  purposes,  the Merger is
intended to constitute a reorganization within the meaning of Section 368 of the
Internal Revenue Code of 1986, as amended (the "Code"),  and the parties to this
Agreement agree to report the Merger and all related  transactions  consistently
therewith.  The  parties  also agree to take such  actions as may be  reasonably
required to cause the Merger to be treated as a qualifying reorganization and to
take no action  which would  disqualify  the Merger from  reorganization  status
under Section 368 of the Code. The parties to this  Agreement  hereby adopt this
Agreement  as  a  "plan  of  reorganization"  within  the  meaning  of  Sections
1.368-2(g) and 1.368-3(a) of the United States Treasury Regulations.

     1.10 Taking of Necessary Action; Further Action. Parent and the Merger Sub,
on the one hand,  and the Company,  on the other hand,  shall use all reasonable
efforts to take all such action (including,  without limitation, action to cause
the  satisfaction of the conditions of the other to effect the Merger) as may be
necessary  or  appropriate  in order to  effectuate  the Merger as  promptly  as
possible.  If, at any time  after the  Effective  Time,  any  further  action is
necessary or desirable to carry out the purposes of this  Agreement  and to vest
the  Surviving  Corporation  and Parent with full  possession of all the rights,
privileges,  immunities  and  franchises of the  Constituent  Corporations,  the
officers  and  directors  of the  Surviving  Corporation  and  Parent  are fully
authorized in the name of the Constituent Corporations or otherwise to take, and
shall take, all such action.

                                       11
<PAGE>
     1.11 Stock Options.

          (a) At the Effective Time, each option,  whether vested or unvested (a
     "Company  Option"),  that is then  outstanding  under any of the  Company's
     Stock Option Plans (collectively, the "Stock Plan") shall automatically and
     without  further  action by the  holder of a Company  Option  become  fully
     vested and shall be assumed by Parent in  accordance  with the terms (as in
     effect  on the  date  hereof)  of the  Stock  Plan  and  the  stock  option
     agreement,  if any, by which such Company  Option is evidenced.  All rights
     with respect to Company  Common  Stock under  outstanding  Company  Options
     shall thereupon be converted, subject to the provisions hereof, into rights
     with respect to Parent Class A Common  Stock.  From and after the Effective
     Time, (i) each Company Option assumed by Parent (collectively, the "Assumed
     Options")  may be  exercised  solely  for  shares of Parent  Class A Common
     Stock,  (ii) the number of shares of Parent Class A Common Stock subject to
     each such  Assumed  Option shall be equal to the number of shares of Parent
     Class A Common  Stock which the holder of such  Assumed  Option  would have
     received pursuant to Section 1.5, without giving effect to any post closing
     adjustment  to the Share  Consideration  pursuant  to  Section  1.5(f),  in
     exchange  for the shares of Company  Common  Stock  subject to such Assumed
     Option if such Assumed Option had been exercised  immediately  prior to the
     Effective  Time,  (iii) the per share exercise price for the Parent Class A
     Common Stock  issuable upon  exercise of each such Assumed  Option shall be
     determined by dividing the exercise price per share of Company Common Stock
     subject  to such  Assumed  Option,  as in effect  immediately  prior to the
     Effective  Time,  by a  fraction  the  numerator  of which is the number of
     shares  of Parent  Class A Common  Stock  subject  to such  Assumed  Option
     immediately  after the Effective  Time, and the denominator of which is the
     number of shares of Company  Common Stock  subject to such  Assumed  Option
     immediately  prior  to the  Effective  Time,  and  rounding  the  resulting
     exercise price up to the nearest whole cent, and (iv) all  restrictions  on
     the exercise of each such Assumed  Option shall  continue in full force and
     effect and the term, exercisability, status as an incentive or nonqualified
     option,  and other  provisions of such Company  Option,  except the vesting
     schedule,  shall otherwise remain unchanged;  provided,  however, that each
     such Assumed  Option  shall,  in accordance  with its terms,  be subject to
     further adjustment as appropriate to reflect any stock split, reverse stock
     split,  stock  dividend,  recapitalization  or  other  similar  transaction
     effected by Parent after the  Effective  Time but without  giving effect to
     any post closing adjustment to the Share Consideration  pursuant to Section
     1.5(f).  The Company and Parent shall take all action that may be necessary
     (under the Stock Plan and  otherwise) to effectuate  the provisions of this
     Section 1.11 and deliver  documentation  evidencing the Assumed  Options to
     the  former  holders  of  Company  Options  at the  Closing  or as  soon as
     practicable  thereafter  (but in no event more than 10 business  days after
     the Closing Date).

                                       12
<PAGE>
          (b) Parent has shares of Parent  Class A Common  Stock  registered  on
     Form S-8  promulgated  by the SEC, and Parent shall use its best efforts to
     maintain the effectiveness of such  registration  statement or registration
     statements  for so long as such Assumed  Options remain  outstanding.  With
     respect to any Company  employee or director who  subsequent  to the Merger
     will be subject to the  reporting  requirements  under Section 16(a) of the
     Securities  Exchange Act of 1934,  as amended (the  "Exchange  Act"),  with
     respect to the  securities  of Parent  beneficially  owned by such  person,
     Parent shall  administer the Assumed Options in a manner that complies with
     the disinterested  administration requirements of Rule 16b-3 promulgated by
     the SEC under the Exchange Act.

     1.12  Indemnification;  Payment of Note.  After the Effective Time,  Parent
shall  indemnify  Robert  R.  Cullen  and his  spouse  and  Richard  J.  Sweeney
(collectively,  the  "Guarantors")  for all  obligations  owed by the Guarantors
under the personal  guaranties  executed by  Guarantors  to secure those certain
building and  equipment  leases for the Company as  disclosed  on Schedule  1.12
attached hereto.  At the Closing,  as additional  consideration  for the Merger,
Parent shall, by check or wire transfer of immediately  available  funds, pay in
full to Robert R.  Cullen,  the  principal  amount of $250,000  plus all accrued
interest, to discharge that certain note owed by the Company to Robert R. Cullen
as disclosed on Schedule 1.12.

                                    ARTICLE 2

           REPRESENTATIONS AND WARRANTIES OF PARENT AND THE MERGER SUB

     Parent and the Merger Sub hereby represent and warrant to the Company that,
except as  otherwise  disclosed in Parent's  Annual  Report on Form 10-K for the
fiscal  year  ended  June 30,  1999 (the  "Parent's  Latest  10-K") or  Parent's
Quarterly  Report on Form 10-Q for the fiscal  quarter  ended  December 31, 1999
(the "Parent's Latest 10-Q"), each of the following:

     2.1 Organization and Qualification.  Each of Parent and the Merger Sub is a
corporation duly organized, validly existing and in good standing under the laws
of its  jurisdiction of incorporation  and has the requisite  corporate power to
carry on its business as now conducted.

     2.2 Authority Relative to This Agreement. Each of Parent and the Merger Sub
has the requisite corporate power and authority to enter into this Agreement and
to carry out its  obligations  hereunder.  The  execution  and  delivery of this
Agreement  by Parent and the Merger Sub and the  consummation  by Parent and the
Merger Sub of the transactions  contemplated hereby have been duly authorized by
Parent and by the Board of Directors and sole shareholder of the Merger Sub, and
no other  corporate  proceedings  on the part of  Parent or the  Merger  Sub are
necessary to authorize this Agreement and such transactions.  This Agreement has
been duly executed and delivered by Parent and the Merger Sub and  constitutes a
valid and binding obligation of each,  enforceable in accordance with its terms.
Neither  Parent  nor the  Merger  Sub is subject  to, or  obligated  under,  any
provision of (a) their respective  Certificates of Incorporation or Bylaws,  (b)
any  agreement,  arrangement  or  understanding,  (c) any license,  franchise or
permit or (d) subject to  compliance  with the statutes  referred to in the next
sentence,  any law,  regulation,  order,  judgment  or  decree,  which  would be
breached,  or  violated,  or in  respect  of  which a right  of  termination  or
acceleration or any encumbrance on any of its or any of its subsidiaries' assets
would be created,  by its execution,  delivery and performance of this Agreement

                                       13
<PAGE>
and the consummation by it of the transactions  contemplated  hereby, other than
any  such  breaches  or  violations  which  will  not,  individually  or in  the
aggregate,  have a  material  adverse  effect  on the  business,  operations  or
financial condition of Parent and its subsidiaries, taken as a whole. Other than
authorizations,  consents and approvals of or filings or registrations  with the
Delaware General  Corporation Law ("Delaware Law"), the SEC and other applicable
federal  and  state  governmental  authorities,  no  authorization,  consent  or
approval of, or filing with, any public body, court or authority is necessary on
the part of Parent or the  Merger  Sub for the  consummation  by Parent  and the
Merger Sub of the transactions  contemplated by this Agreement,  except for such
authorizations,  consents,  approvals  and  filings  as to which the  failure to
obtain or make  would not,  individually  or in the  aggregate,  have a material
adverse effect on the business,  operations or financial condition of Parent and
its subsidiaries, taken as a whole.

     2.3 Capital  Structure.  The authorized capital stock of Parent consists of
(i) 40,000,000  shares of common stock,  $.01 par value per share,  of which (A)
34,500,000  shares  have been  designated  as Class A Common  Stock,  13,753,365
shares  of  which  were  issued  and  outstanding  as of  March  31,  2000  (the
"Capitalization  Date"),  (B) 2,000,000 shares have been designated as Class E-1
Common Stock,  1,508,267  shares of which were issued and  outstanding as of the
Capitalization  Date,  (C)  2,000,000  shares have been  designated as Class E-2
Common Stock,  1,508,267  shares of which were issued and  outstanding as of the
Capitalization  Date, and (D) 1,500,000 shares have been designated as Class E-3
Common Stock,  1,005,503  shares of which were issued and  outstanding as of the
Capitalization Date and (ii) 5,000,000 shares of preferred stock, $.01 par value
per share,  of which (A) 250 shares have been  designated  as Series A Preferred
Stock, of which no shares were  outstanding as of the  Capitalization  Date, (B)
300 shares have been designated as Series B Preferred  Stock, of which no shares
were  outstanding  as of the  Capitalization  Date,  (C) 500  shares  have  been
designated as Series C Preferred  Stock, of which no shares were  outstanding as
of the Capitalization  Date, (D) 100,000 shares have been designated as Series D
Preferred  Stock, of which no shares were  outstanding as of the  Capitalization
Date, and (E) 500 shares have been designated as Series F Preferred  Stock,  153
shares of which were issued and outstanding as of the  Capitalization  Date. All
outstanding shares of capital stock of Parent are validly issued, fully paid and
nonassessable and not subject to preemptive rights contained in Parent's charter
documents  or in any  contract  or  agreement  to which  Parent is a party.  All
outstanding  shares of the capital  stock of each of Parent's  subsidiaries  are
validly issued,  fully paid and  nonassessable and are owned by Parent or one of
its  subsidiaries  free and clear of any  liens,  security  interests,  pledges,
agreements, claims, charges or encumbrances.

     2.4 SEC Filings; Financial Statements.

          (a) Parent has delivered to the Company  accurate and complete  copies
     (excluding copies of exhibits) of each report, registration statement (on a
     form other than Form S-8) and definitive  proxy  statement  filed by Parent
     with the SEC  between  July 1,  1998 and the  date of this  Agreement  (the
     "Parent SEC  Documents").  As of the time it was filed with the SEC (or, if
     amended or superseded by a filing prior to the date of this Agreement, then
     on the date of such filing):  (i) each of the Parent SEC Documents complied
     in all material respects with the applicable requirements of the Securities
     Act or the  Exchange  Act  (as the  case  may  be);  and  (ii) as of  their
     respective dates, or as of the date of any amendment  thereto,  none of the
     Parent SEC Documents  contained any untrue  statement of a material fact or

                                       14
<PAGE>
     omitted to state a material fact required to be stated therein or necessary
     in order to make the statements  therein, in the light of the circumstances
     under which they were made, not misleading.

          (b) The audited  financial  statements and unaudited interim financial
     statements of Parent included (or  incorporated by reference) in the Parent
     SEC  Documents  have been prepared in accordance  with  generally  accepted
     accounting  principles  applied on a  consistent  basis  during the periods
     involved  (except as may be indicated in the notes  thereto),  are accurate
     and complete in all material  respects and fairly present the  consolidated
     financial  position of Parent as of the dates thereof and the  consolidated
     results of Parent's  operations  and the  changes in Parent's  consolidated
     financial position for the periods then ended, in the case of the unaudited
     interim  financial  statements  subject to year-end audit adjustments which
     will not, individually or in the aggregate, be material in magnitude.  Such
     unaudited interim financial statements reflect all adjustments necessary to
     present a fair statement of the results for the interim periods presented.

     2.5 Valid Issuance.  Subject to Section  1.5(d),  the Parent Class A Common
Stock to be issued in the Merger  will be, when  issued in  accordance  with the
provisions of this Agreement, validly issued, fully paid and nonassessable.

     2.6 Accuracy of Information. No representation or warranty by Parent or the
Merger Sub in this Agreement, and no exhibit, document,  statement,  certificate
or schedule  furnished or to be furnished to the Company pursuant hereto,  or in
connection with the transactions  contemplated hereby,  contains or will contain
any  untrue  statement  of a  material  fact,  or omits or will  omit to state a
material  fact  necessary to make the  statements or facts  contained  herein or
therein  not  misleading  or  necessary  to provide the  Company  with  adequate
information as to Parent and the Merger Sub and their affairs.  There is no fact
which has not been disclosed to the Company that materially affects adversely or
could  reasonably  be  anticipated  to materially  affect  adversely the assets,
financial  condition  or  operating  results,  customer,  employee  or  supplier
relations,  business condition or prospects, or financing arrangements of Parent
or the Merger Sub.

     2.7 Title to Properties.

          (a) Parent or one of Parent's  subsidiaries  owns good and  marketable
     title to each of the tangible  properties and tangible assets  reflected on
     the balance sheet  included in Parent's  Latest 10-Q or acquired  since the
     date thereof, free and clear of all material liens and encumbrances, except
     for (A)  liens for  current  taxes  not yet due and  payable,  (B) liens or
     mortgages  described in Parent's Latest 10-Q, (C) the properties subject to
     the  leases   described  in  Parent's   Latest  10-Q,  (D)  liens  securing
     indebtedness  described in Parent's  Latest 10-Q and (E) assets disposed of
     since the date of the balance sheet included in Parent's Latest 10-Q in the
     ordinary course of business.

          (b) All of the  buildings,  machinery,  equipment  and other  tangible
     assets  necessary  for  the  conduct  of  Parent's  and  its  subsidiaries'
     businesses are in good condition and repair (except where the failure to be

                                       15
<PAGE>
     in such  condition and repair,  either  individually  or in the  aggregate,
     would not have a material  adverse  effect on Parent or any  subsidiary  of
     Parent  and  except  for  ordinary  wear and  tear),  and are usable in the
     ordinary  course of  business.  Parent and its  subsidiaries  own, or lease
     under valid leases which afford peaceful and undisturbed  possession of the
     subject matter of the lease, all buildings,  machinery, equipment and other
     tangible assets necessary for the conduct of their businesses.

     2.8 Accounts Receivable.  Parent's and its subsidiaries' notes and accounts
receivable  recorded on the balance sheet  included in Parent's  Latest 10-Q and
those  arising  since the date  thereof  are  valid  receivables  (subject  to a
reasonable allowance for doubtful accounts as set forth in Parent's Latest 10-Q)
arising  from bona fide  transactions  entered  into in the  ordinary  course of
business and are current and collectible in full in accordance with their terms,
subject to no valid counterclaims or setoffs.

     2.9 Employment  Matters.  To the knowledge of Parent,  (i) no key executive
employee of Parent or any subsidiary of Parent,  and no group of Parent's or any
subsidiary's employees,  has any plans to terminate his or its employment,  (ii)
Parent  and the  subsidiaries  have  complied  with  all  laws  relating  to the
employment of labor,  including  provisions  thereof  relating to wages,  hours,
equal opportunity,  collective bargaining and the payment of social security and
other  taxes,  and (iii)  Parent and its  subsidiaries  have no  material  labor
relations problems pending and their labor relations are satisfactory.

     2.10  Affiliate  Transactions.  Except  as set  forth  or  incorporated  by
reference  in  Parent's  Latest  10-K or  Parent's  Latest  10-Q,  no officer or
director of Parent or any  subsidiary  of Parent or any member of the  immediate
family  of any such  officer  or  director,  or any  entity in which any of such
persons owns any beneficial  interest  (other than a  publicly-held  corporation
whose   stock  is  traded  on  a  national   securities   exchange   or  in  the
over-the-counter market and less than five percent (5%) of the stock of which is
beneficially owned by any of such persons)  (collectively  "Insiders"),  (a) has
any  material  agreement  with Parent or any  subsidiary  of Parent  (other than
normal employment  arrangements) or any material interest in any property, real,
personal or mixed, tangible or intangible, used in or pertaining to the business
of Parent or any  subsidiary  of Parent,  or (b) has been  indebted to Parent in
amounts  in excess of  $60,000  in the  aggregate  at any time  (other  than for
purchases subject to usual trade terms, for ordinary travel and expense payments
and for other transactions in the ordinary course of business).  For purposes of
the preceding  sentence,  the members of the  immediate  family of an officer or
director shall consist of the spouse, parents, children,  siblings, mothers- and
fathers-in-law, sons- and daughters-in-law,  and brothers- and sisters-in-law of
such officer or director.

     2.11 Compliance with Laws;  Permits;  Certain  Operations.  Parent, each of
Parent's  subsidiaries  and their  respective  officers,  directors,  agents and
employees  have  complied  in  all  material  respects,  and  currently  are  in
compliance in all material respects, with all applicable laws and regulations of
foreign,  federal,  state and local  governments and all agencies  thereof which
affect  the  businesses  or any owned or  leased  properties  of Parent  and its
subsidiaries and to which Parent or any of its subsidiaries may be subject,  and
no claims have been filed against Parent or any of its  subsidiaries  alleging a
material  violation of any such law or regulation.  Parent and its  subsidiaries
hold all material permits,  licenses,  certificates and other  authorizations of
foreign, federal, state and local governmental agencies required for the conduct

                                       16
<PAGE>
of their businesses.  Parent has not received any notice or other  communication
from any governmental  authority  regarding any actual or possible violation of,
or failure to comply with, any legal requirement, except where failure to comply
with such legal  requirement has not had and could not reasonably be expected to
have a material adverse effect on Parent.

     2.12  Non-Contravention;  Consents.  Neither  the  execution,  delivery  or
performance of this Agreement or any of the other agreements referred to in this
Agreement,  nor the consummation of the Merger or any of the other  transactions
contemplated  by this  Agreement,  will directly or indirectly  (with or without
notice or lapse of time):

          (a)  contravene,  conflict with or result in a violation of (i) any of
     the provisions of Parent's or Merger Sub's  certificate of incorporation or
     bylaws,  or (ii)  any  resolution  adopted  by  Parent's  or  Merger  Sub's
     stockholders or board of directors or committee of such board of directors;

          (b) contravene, conflict with or result in a violation of the terms or
     requirements  of, or give any  governmental  authority the right to revoke,
     withdraw,  suspend,  cancel, terminate or modify, any material governmental
     authorization  that is held  by  Parent  or  Merger  Sub or that  otherwise
     relates  to  Parent's  business  or to any of the  assets  owned or used by
     Parent;

          (c)  contravene,  conflict with or result in a violation or breach of,
     or result in a default  under,  any  provision of any material  contract of
     Parent or Merger Sub, or give any Person the right to (i) declare a default
     or exercise any remedy under any such material  contract,  (ii)  accelerate
     the maturity or performance of any such material contract, or (iii) cancel,
     terminate or modify any such material contract; or

          (d)  result  in the  imposition  or  creation  of any  lien  or  other
     encumbrance  upon or with  respect to any asset  owned or used by Parent or
     Merger Sub (except for minor liens and  encumbrances  that will not, in any
     case or in the aggregate,  materially  detract from the value of the assets
     subject  thereto or  materially  impair the  operations of Parent or Merger
     Sub).

     2.13 Brokerage.  There are no claims for investment banking fees, brokerage
commissions,  finders'  fees or  similar  compensation  in  connection  with the
transactions  contemplated  by  this  Agreement  based  on  any  arrangement  or
agreement made by or on behalf of Parent,  Merger Sub or any other subsidiary of
Parent for which the Company will be responsible.

     2.14 No Material  Adverse  Changes.  Since June 30, 1999, there has been no
material  adverse  change,  and no event has  occurred  that will or that  would
reasonably  be  expected  to  result  in  a  material  adverse  change,  in  the
consolidated assets, financial condition, operating results, customer, employee,
supplier or franchise relations,  business condition or prospects,  or financing
arrangements of Parent.

                                       17
<PAGE>
     2.15 Legal  Proceedings.  Except as  disclosed  in Parent's  Latest 10-K or
Parent's Latest 10-Q, there are no actions, suits, claims,  proceedings,  orders
or other investigations  pending or threatened against Parent that challenges or
may have the  effect  or  preventing,  delaying,  making  illegal  or  otherwise
interfering  with the  Merger or any  other  transactions  contemplated  by this
Agreement or that could reasonably be expected to have a material adverse effect
on the  business,  properties,  assets,  condition  (financial  or otherwise) or
business prospects of Parent.

                                    ARTICLE 3

                  REPRESENTATIONS AND WARRANTIES OF THE COMPANY

     The Company  hereby  represents  and  warrants to Parent and the Merger Sub
that as of the date  hereof,  and again at the  Effective  Time  (subject to any
changes permitted or contemplated hereby),  except as otherwise disclosed in the
Company's disclosure schedules that have been delivered to Parent and the Merger
Sub simultaneously with the execution and delivery of this Agreement and as will
be updated as  necessary  and  redelivered  on the  Closing  Date (the  "Company
Disclosure Schedules"), each of the following:

     3.1  Organization  and  Qualification.  The Company is a  corporation  duly
organized,  validly existing and in good standing under the laws of the state of
California,  and has the  requisite  corporate  and other  power  and  authority
(including  all  licenses,  permits and  authorizations)  to own and operate its
properties and to carry on its business as now conducted and presently  proposed
to be conducted and to perform its obligations under all contracts, instruments,
notes or other  binding  commitments  to which it is or may become a party or by
which it or its  assets is or may  become  bound.  The  copies of the  Company's
Articles of Incorporation and Bylaws which have been furnished by the Company to
Parent prior to the date of this Agreement  reflect all amendments  made thereto
through the date hereof and are correct and  complete.  The Company is qualified
to do  business  and is in good  standing  as a  foreign  corporation  in  every
jurisdiction  in which the nature of its  business or its  ownership of property
requires it to be qualified. The Company has not conducted any business under or
otherwise  used, for any purpose or in any  jurisdiction,  any fictitious  name,
assumed name, trade name or other name.

     3.2  Authority  Relative to this  Agreement.  The Company has the requisite
corporate and other power and authority to enter into and perform this Agreement
and to  carry  out its  obligations  hereunder  (it  being  understood  that the
Company's  obligations hereunder to effect the Merger is subject to the approval
of its shareholders as set forth in Section 3.26). The execution and delivery of
this  Agreement  by the  Company  and the  consummation  by the  Company  of the
transactions  contemplated  hereby  have  been duly  authorized  by the Board of
Directors of the Company and, except for the approval of its shareholders as set
forth in Section 3.26, no other corporate proceedings on the part of the Company
are necessary to authorize this Agreement and such transactions.  This Agreement
has been duly executed and delivered by the Company and  constitutes a valid and
binding  obligation of the Company,  enforceable  in accordance  with its terms.
Except as  disclosed on Schedule 3.2 of the Company  Disclosure  Schedules,  the
Company (as defined in Section  3.5(b)) is not subject to, or  obligated  under,
any provision of (a) its Articles of Incorporation or Bylaws, (b) any agreement,
arrangement  or  understanding,  (c) any  license,  franchise  or  permit or (d)
subject to compliance with any of the statutes referred to in the next sentence,
any law,  regulation,  order,  judgment  or decree,  which  would be breached or

                                       18
<PAGE>
violated,  or in respect of which a right of termination or  acceleration or any
encumbrance on any of its assets would be created,  by its  execution,  delivery
and performance of this Agreement and the consummation by it of the transactions
contemplated  hereby,  and  the  Company  has  not  taken  any  action  that  is
inconsistent  in  any  material  respect  with  any  resolution  adopted  by the
Company's shareholders,  its board of directors or any committee of its board of
directors.  The books of account, stock records,  minute books and other records
of the Company are accurate,  up-to-date  and complete in all material  respects
and have been maintained in accordance with prudent  business  practices.  Other
than in connection  with or in compliance  with the provisions of the California
Law and the SEC, no  authorization,  consent or approval of, or filing with, any
public body,  court or authority is necessary on the part of the Company for the
consummation by the Company of the transactions contemplated by this Agreement.

     3.3 Capitalization.

          (a) The  authorized  capital stock of the Company  consists of 915,405
     shares of  Company  Common  Stock,  510,000  shares of which are issued and
     outstanding  as of the date  hereof,  and  235,405  shares  of  convertible
     preferred  stock,  235,405 shares of which are issued and outstanding as of
     the date hereof.  All of the issued and outstanding shares of capital stock
     of the Company are validly  issued,  fully paid and  nonassessable  and not
     subject to preemptive  rights contained in the Company's  charter documents
     or in any contract or agreement to which the Company is a party.

          (b) The Company has reserved  160,000  shares of Company  Common Stock
     for issuance under the Stock Plan, of which vested and unvested  options to
     purchase  119,000 shares are  outstanding as of the date of this Agreement.
     Schedule  3.3(b) of the  Company  Disclosure  Schedules,  under the caption
     "Company  Options,"  accurately  sets forth,  with  respect to each Company
     Option that is outstanding as of the date of this  Agreement:  (i) the name
     of the holder of such  Company  Option;  (ii) the total number of shares of
     Company Common Stock that are subject to such Company Option and the number
     of shares of Company Common Stock with respect to which such Company Option
     is immediately exercisable; (iii) the date on which such Company Option was
     granted and the term of such Company Option;  (iv) the vesting schedule for
     such Company  Option;  (v) the exercise  price per share of Company  Common
     Stock purchasable under such Company Option;  and (vi) whether such Company
     Option  has been  designated  an  "incentive  stock  option"  as defined in
     Section  422 of the  Code.  The  Company  has no  outstanding  warrants  to
     purchase any capital stock of the Company.

          (c) Except as  specifically  referred  to in  Sections  3.3(a) and (b)
     above, there is no: (i) outstanding subscription,  option, call, warrant or
     right (whether or not currently  exercisable)  to acquire any shares of the
     capital  stock  or  other  securities  of  the  Company;  (ii)  outstanding
     security,  instrument or obligation that is or may become  convertible into
     or exchangeable  for any shares of the capital stock or other securities of
     the Company;  (iii) contract or agreement under which the Company is or may

                                       19
<PAGE>
     become obligated to sell or otherwise issue any shares or its capital stock
     or any other  securities;  or (iv) condition or circumstance  that may give
     rise to or  provide a basis for the  assertion  of a claim by any person or
     entity to the effect  that such  person or entity is entitled to acquire or
     receive any shares of capital stock or other securities of the Company.

          (d) All  outstanding  shares of capital  stock of the  Company and all
     outstanding Company Options have been issued and granted in compliance with
     (i)  all  applicable   securities  laws  and  other   applicable  laws  and
     regulations,  and (ii) all requirements  set forth in applicable  contracts
     and agreements.

          (e)  The  Company  has  never   repurchased,   redeemed  or  otherwise
     reacquired shares of capital stock or other securities of the Company.

          (f) Except as disclosed on Schedule  3.3(f),  the Company is not under
     any  obligation to register  under the  Securities Act any of its presently
     outstanding  securities or any securities that may be subsequently  issued,
     and no person or entity holds any right to  participate in new issuances of
     securities by the Company.

          (g) The Company is not a party to or  obligated  under any  agreement,
     arrangement or  understanding,  contingent or otherwise,  (i) involving the
     repurchase  or  redemption  of any amount of  Company  Common  Stock,  (ii)
     requiring  the Company to issue any amount of Company  Common  Stock to any
     person at any time,  or (iii)  contemplating  the  issuance  at any time of
     shares of Company  Common Stock or other  consideration  to any person as a
     guarantee  by the  Company of a minimum  market  price for  Company  Common
     Stock.

     3.4 Financial  Statements.  The audited financial statements of the Company
for the nine-month  period  beginning April 1, 1999 and ending December 31, 1999
were  prepared in  accordance  with  generally  accepted  accounting  principles
applied on a  consistent  basis  during the periods  involved  (except as may be
indicated in the notes thereto) (the "Company's Interim Financial  Statements"),
and the unaudited  financial  statements  of the Company for the interim  period
ended March 31, 2000,  have been  delivered to Parent and the Merger Sub and are
accurate and complete in all material respects and present fairly and accurately
the consolidated  financial  position of the Company as of the dates thereof and
the  consolidated  results of its operations and the changes in its consolidated
financial  position  for the periods  then ended,  in the case of the  unaudited
interim  financial  statements  subject to year-end audit adjustments which will
not, individually or in the aggregate, be material in magnitude.  Such unaudited
interim financial statements reflect all adjustments necessary to present a fair
statement of the results for the interim periods presented.

     3.5 No  Subsidiaries.  The  Company  does  not  currently  own or  control,
directly or indirectly, any interest in any other corporation,  association,  or
other business entity.

     3.6  Absence of  Undisclosed  Liabilities.  The  Company  does not have any
obligations or liabilities (whether accrued, absolute, contingent,  unliquidated
or  otherwise,  whether due or to become due and  regardless  of when  asserted)
arising out of transactions  heretofore entered into, or any action or inaction,

                                       20
<PAGE>
or any state of facts  existing,  including  taxes with respect to or based upon
transactions  or events  heretofore  occurring,  except  (a)  obligations  under
contracts or  commitments  described  in Schedule 3.6 of the Company  Disclosure
Schedules,  or under  contracts  and  commitments  which are not  required to be
disclosed thereunder (but not liabilities for breaches thereof), (b) liabilities
reflected  on the balance  sheet  included in the  Company's  Interim  Financial
Statements,  (c)  liabilities  which have  arisen  after the date of the balance
sheet  included in the Company's  Interim  Financial  Statements in the ordinary
course of business (none of which is a material  uninsured  liability for breach
of contract, breach of warranty, tort, infringement,  claim or lawsuit), and (d)
liabilities otherwise disclosed in the Company Disclosure Schedules.

     3.7 No Material Adverse Changes. There has been no material adverse change,
and no event has  occurred  that will or that would  reasonably  be  expected to
result in a material  adverse  change,  in the  consolidated  assets,  financial
condition,   operating  results,  customer,   employee,  supplier  or  franchise
relations,  business  condition or prospects,  or financing  arrangements of the
Company, taken as a whole.

     3.8 Absence of Certain Developments. Except as disclosed in Schedule 3.8 of
the Company Disclosure Schedules, since December 31, 1999, the Company has not:

          (a) redeemed or purchased,  directly or indirectly,  any shares of its
     capital  stock,  or declared,  accrued,  set aside or paid any dividends or
     distributions with respect to any shares of its capital stock;

          (b) other than upon the exercise of  outstanding  warrants or options,
     issued or sold any of its equity securities, securities convertible into or
     exchangeable for its equity securities,  warrants,  options or other rights
     to acquire its equity securities, or its bonds or other securities;

          (c) borrowed any amount or incurred,  guaranteed or become  subject to
     any material liability, except current liabilities incurred in the ordinary
     course of business;

          (d)  discharged or satisfied any material lien or  encumbrance or paid
     any material liability, other than current liabilities paid in the ordinary
     course of business;

          (e)  mortgaged,  pledged or subjected  to, or  otherwise  permitted to
     become subject to, any lien, charge or other encumbrance, any of the assets
     of the Company with a fair market value in excess of $10,000,  except liens
     for current property taxes not yet due and payable;

          (f)  sold,  assigned  or  transferred  (including  without  limitation
     transfers to any employees,  shareholders or affiliates of the Company) any
     tangible assets,  except for fair value in the ordinary course of business,
     or canceled any debts or claims;

          (g)  sold,  assigned  or  transferred  (including  without  limitation
     transfers to any employees,  shareholders or affiliates of the Company) any
     patents,  trademarks,  trade  names,  copyrights,  trade  secrets  or other

                                       21
<PAGE>
     intangible  assets,  except  for  fair  value  in the  ordinary  course  of
     business,  or disclosed any  proprietary  confidential  information  to any
     person other than Parent or the Merger Sub;

          (h) suffered any  extraordinary  loss or waived any rights of material
     value, whether or not in the ordinary course of business or consistent with
     past practice;

          (i) taken any other action or entered into any other transaction other
     than in the ordinary  course of business and in accordance with past custom
     and practice,  or entered into any transaction with any Insider (as defined
     in Section 3.20);

          (j) suffered any material theft, damage, destruction or loss of or to,
     or any  material  interruption  in the use of, any  property or  properties
     owned or used by it, whether or not covered by insurance;

          (k) made or  granted  any  bonus or any wage,  salary or  compensation
     increase,  or made or granted any increase in any employee  benefit plan or
     arrangement, or amended or terminated any existing employee benefit plan or
     arrangement or adopted any new employee  benefit plan or arrangement,  with
     respect to any director, officer or consultant of the Company or, except in
     the  ordinary  course of the  Company's  business and  consistent  with the
     Company's historical compensation practices, any other employee or group of
     employees;

          (l)  amended or waived  any of its  rights  under,  or  permitted  the
     acceleration of vesting under,  (i) any provision of its Stock Plan or (ii)
     any provision of any agreement evidencing any outstanding Company Option;

          (m) made any capital  expenditures or commitments therefor (other than
     any  such  expenditures  or  commitments  made in the  ordinary  course  of
     business for leasehold  improvements at, or the furnishing or equipping of,
     the  facilities  operated by the Company as of the date of this  Agreement)
     that aggregate in excess of $10,000;

          (n) made any loans or advances to, or  guarantees  for the benefit of,
     any persons that aggregate in excess of $10,000;

          (o)  effected  or  been  a  party  to  any  acquisition   transaction,
     recapitalization,  reclassification of shares,  stock split,  reverse stock
     split or similar transaction;

          (p) formed any  subsidiary  or acquired  any equity  interest or other
     interest in any other entity;

          (q) written off as  uncollectible,  or  established  any reserve  with
     respect to, any account  receivable  or other  indebtedness  in excess of a
     total of $10,000;

                                       22
<PAGE>
          (r) changed any of its methods of accounting  or accounting  practices
     in any material respect;

          (s) made any tax election;

          (t) commenced or settled any legal proceeding;

          (u) waived or agreed to waive any applicable statute of limitations or
     any similar statutory or judicial doctrine benefiting the Company;

          (v) entered into any material  transaction or taken any other material
     action  outside the ordinary  course of business or  inconsistent  with its
     past practices; or

          (w) made  charitable  contributions  or pledges which in the aggregate
     exceed $10,000.

     3.9 Title to Properties.

          (a) The Company  owns good and  marketable  title to each the tangible
     properties and tangible  assets  reflected on the balance sheet included in
     the  Company's  Interim  Financial  Statements  or acquired  since the date
     thereof, free and clear of all liens and encumbrances, except for (A) liens
     for current taxes not yet due and payable,  (B) liens disclosed in Schedule
     3.9(a) of the Company Disclosure  Schedules,  (C) the properties subject to
     the  leases  disclosed  in  Schedule  3.10(c)  of  the  Company  Disclosure
     Schedules  and (D) assets  disposed of since the date of the balance  sheet
     included in the  Company's  Interim  Financial  Statements  in the ordinary
     course of business consistent with past practices.

          (b) (i) the real estate  described  in Schedule  3.9(b) of the Company
     Disclosure Schedules and the demised leases described in Schedule 3.9(c) of
     the Company Disclosure Schedules constitutes all of the real estate used or
     occupied by the Company  (the "Real  Estate")  and (ii) the Real Estate has
     access,  sufficient  for  the  conduct  of the  Company's  business  as now
     conducted or as presently proposed to be conducted,  to public roads and to
     all utilities,  including  electricity,  sanitary and storm sewer,  potable
     water,  natural  gas and other  utilities,  used in the  operations  of the
     Company.

          (c) The leases described in Schedule 3.9(c) of the Company  Disclosure
     Schedules  are in full force and effect,  and the Company,  as the case may
     be, has a valid and existing  leasehold  interest under each such lease for
     the term set forth  therein.  The Company has delivered to Parent  complete
     and accurate copies of each of the leases  described under such caption and
     none of such leases has been modified in any respect,  except to the extent
     that such  modifications  are disclosed by the copies  delivered to Parent.
     The  Company is not in  default,  and no  circumstances  exist  which could

                                       23
<PAGE>
     result  in  such  default,  under  any of such  leases;  nor,  to the  best
     knowledge  of the  Company,  is any  other  party to any of such  leases in
     default.

                  (d)  All of the  buildings,  machinery,  equipment  and  other
         tangible assets necessary for the conduct of the Company's business are
         in good  condition  and repair  (except where the failure to be in such
         condition and repair,  either  individually or in the aggregate,  would
         not have a  material  adverse  effect on the  Company  and  except  for
         ordinary  wear and  tear),  and are  usable in the  ordinary  course of
         business.  The Company  owns, or leases under valid leases which afford
         peaceful and undisturbed possession of the subject matter of the lease,
         all buildings, machinery, equipment and other tangible assets necessary
         for the conduct of its business.

                  (e) The Company is not in violation of any  applicable  zoning
         ordinance  or other law,  regulation  or  requirement  relating  to the
         operation of any  properties  used in the  operation  of its  business,
         including without limitation  applicable  environmental  protection and
         occupational  health and safety laws and  regulations,  and the Company
         has not received any notice of any such violation,  or of the existence
         of any condemnation  proceeding with respect to any properties owned or
         leased by the Company.

         3.10 Accounts  Receivable.  The Company's notes and accounts receivable
recorded  on the  balance  sheet  included in the  Company's  Interim  Financial
Statements  and those  arising  since  the date  thereof  are valid  receivables
(subject to a reasonable  allowance  for  doubtful  accounts as set forth in the
Company's  Interim  Financial  Statements)  arising from bona fide  transactions
entered into in the ordinary  course of business and are current and collectible
in full in accordance  with their terms,  subject to no valid  counterclaims  or
setoffs.

         3.11  Inventories.  Except as disclosed in Schedule 3.11 of the Company
Disclosure  Schedules,  the  inventories of the Company  recorded on the balance
sheet included in the Company's Interim Financial Statements,  and the inventory
created or purchased since the date thereof,  consists of a quantity and quality
usable and salable in the ordinary  course of business,  is not  slow-moving  as
determined  in  accordance  with  past  practices,   obsolete  or  damaged,   is
merchantable and fit for its particular use, and is not defective.

     3.12 Tax Matters.

          (a) The Company has (i) filed all Tax Returns  required to be filed by
     any  jurisdiction  to which it is  subject,  (ii)  paid in full on a timely
     basis all Taxes due and claimed to be due by each such jurisdiction,  (iii)
     duly  collected  or  withheld  and  timely  paid all Taxes  required  to be
     collected  from others or deducted  and  withheld  from any amounts paid to
     employees or others,  and (iv)  properly  completed and filed all sales tax
     exemption  certificates  for  sales  where  Tax was not  charged.  Such Tax
     Returns  accurately  and  completely  set  forth  all  relevant  items  and
     accurately  reflect the Tax Liabilities  for such periods.  No material Tax
     deficiency  or penalty has been asserted or, to Company's  best  knowledge,
     threatened by any such jurisdiction  against the Company.  "Tax" or "Taxes"
     means any  federal,  state,  local,  or  foreign  income,  gross  receipts,

                                       24
<PAGE>
     license,  payroll,   employment,   excise,  severance,  stamp,  occupation,
     premium,  windfall  profits,  environmental  (including  taxes  under  Code
     Section  59A),   customs  duties,   capital  stock,   franchise,   profits,
     withholding, social security (or similar),  unemployment,  disability, real
     property,  personal  property,  sales, use, transfer,  registration,  value
     added,  alternative or add-on minimum,  estimated, or other tax of any kind
     whatsoever,  including any interest,  penalty, or addition thereto, whether
     disputed  or  not.  "Tax  Return"  or  "Tax  Returns"   means  any  return,
     declaration,  report,  claim for refund, or information return or statement
     relating to Taxes,  including  any  schedule  or  attachment  thereto,  and
     including any amendment thereof.

          (b) There is no audit of any Tax Return of the  Company  in  progress.
     The Company has no notice nor any knowledge of any threatened action, suit,
     proceeding,  investigation, audit, or claim for or relating to Taxes, there
     are no matters under  discussion  with any  governmental  authorities  with
     respect to Taxes that could result in an additional amount of Taxes, and no
     governmental  authority  has  indicated  that it  intends  to audit any Tax
     Return of the Company.

          (c) The  Company has not (i) waived any  statute of  limitations  with
     respect to Tax  obligations or agreed to any extension of time with respect
     to a Tax  assessment  or  deficiency,  (ii)  has  been a  party  to any Tax
     allocation or sharing  agreement,  (iii) has been a member of an affiliated
     group (other than the  affiliated  group of which the Company is the common
     parent)  filing a  consolidated  federal  income tax return,  nor taken any
     other  action that could  result in  Liability  for Taxes of an  affiliated
     group (other than the  affiliated  group of which the Company is the common
     parent) under Treas.  Reg.  Section  1.1502-6 (or any similar  provision of
     state, local, or foreign law),  including as a transferee or successor,  by
     contract,  or  otherwise,  or  (iv) is  currently  the  beneficiary  of any
     extensions of time within which to file any Tax Return.  "Liability"  means
     any liability  (whether known or unknown,  whether  asserted or unasserted,
     whether  absolute or  contingent,  whether  accrued or  unaccrued,  whether
     liquidated or  unliquidated,  and whether due or to become due),  including
     any liability  for Taxes.  No claim has ever been made by an authority in a
     jurisdiction  where the Company does not file Tax Returns that it is or may
     be subject to taxation by that jurisdiction,  nor, to the best knowledge of
     the  Company,  is there any  material  factual or legal  basis for any such
     claim.

          (d) Schedule  3.12(d) of the Company  Disclosure  Schedules  lists all
     federal, state, local, and foreign income Tax Returns filed with respect to
     the Company since January 1, 1998,  and indicates  those income Tax Returns
     that have been  audited  and those  that are  currently  the  subject of an
     audit.  The Company has  delivered  to the  Purchaser  correct and complete
     copies of all state,  federal,  and foreign income tax returns with respect
     to all taxable  periods for which the statute of limitations is still open,
     and copies of all examination  reports and statements of deficiencies  that
     have been assessed  against or agreed to by the Company and that may have a
     material  effect on the tax  liability  of the  Company  for any present or
     future  taxable period or for any past taxable period for which the statute
     of limitations is still open.

                                       25
<PAGE>
          (e) The Company has not been a United  States  real  property  holding
     corporation  within  the  meaning  of Code  Section  897(c)(2)  during  the
     applicable period specified in Code Section 897(c)(1)(A)(ii).

          (f) The  Company  has not (i)  agreed or  consented  at any time under
     Section 341(f) of the Code to have the  provisions of Section  341(f)(2) of
     the Code apply to any  disposition  of any assets,  (ii) agreed,  nor is it
     required, to make any adjustment under Section 481(a) of the Code by reason
     of a change  in  accounting  method  or  otherwise  that  will  affect  the
     liability  of the  Company  for Taxes,  (iii) made an  election,  nor is it
     required,  to treat any asset as owned by another  person  pursuant  to the
     provisions  of Section  168(f) of the Code or as  tax-exempt  bond financed
     property or  tax-exempt  use property  within the meaning of Section 168 of
     the Code,  (iv) made any of the  foregoing  elections nor is it required to
     apply any of the foregoing  rules under any  comparable  state or local tax
     provision.  The Company does not own any material assets that were financed
     directly or indirectly  with, or that directly or indirectly  secure,  debt
     the interest on which is tax-exempt under Section 103(a) of the Code.

          (g) The Company is not a party to any "Gain Recognition Agreements" as
     such term is used in the Treasury Regulations promulgated under Section 367
     of the Code.

          (h) The Company has not made or become obligated to make, nor will the
     Parent, Merger Sub, or the Company, as a result of any event connected with
     any  transaction  contemplated  herein and/or any termination of employment
     related to such transaction,  make or become obligated to make, any "excess
     parachute  payment," as defined in Section 280G of the Code (without regard
     to subsection (b)(4) thereof).

          (i) There are no liens for Taxes  (other than for  current  Taxes that
     are not yet due and payable or are being  contested in good faith) upon the
     assets of the Company.

          (j)  There  are no joint  ventures,  partnerships,  limited  liability
     companies,  or other  arrangements  or  contracts to which the Company is a
     party and that could be treated as a  partnership  for  federal  income tax
     purposes.

          (k)  The  Company  does  not  have  outstanding  any  "deferred  gain"
     resulting from any "deferred intercompany  transaction," as both such terms
     were used in Section  1.1502-13 of the Treasury  Regulations as such was in
     effect for taxable years beginning before July 12, 1995.

                                       26
<PAGE>
          (l) The Company does not have outstanding any "intercompany  items" or
     any  "corresponding  items" from any  "intercompany  transactions," as such
     terms are used in Section 1.1503-13 of the Treasury  Regulations as such is
     in effect for taxable years  beginning on or after July 12, 1995, that have
     not previously been taken into account under the terms of such regulation.

          (m)  The  Company  does  not  currently  have or in the  past  had any
     "permanent  establishment" in any foreign country,  as such term is defined
     in any  applicable  Tax treaty or convention  between the United States and
     such foreign  country or has otherwise  taken steps that have  exposed,  or
     will expose, it to the taxing jurisdiction of a foreign country.

          (n) The unpaid Taxes of the Company (A) did not, as of the most recent
     fiscal  month end prior to the date  hereof,  exceed  the  reserve  for Tax
     Liability  (not  including any reserve for deferred  Taxes  established  to
     reflect  timing  differences  between book and Tax income) set forth on the
     face of the most recent  balance  sheet  (other than in any notes  thereto)
     that has been made  available to the  Purchaser and (B) will not, as of the
     Closing Date, exceed such reserve in the Closing Balance Sheet.

     3.13 Contracts and Commitments.

          (a) Except as disclosed in Schedule 3.13(a) of the Company  Disclosure
     Schedules,  the  Company  is not a party or  bound to any of the  following
     contracts or agreements (collectively, the "Material Contracts"):

              (i)    collective  bargaining agreement or contract with any labor
                     union;

              (ii)   bonus, pension, profit sharing,  retirement,  or other form
                     of deferred compensation plan;

              (iii)  hospitalization  insurance  or  similar  plan or  practice,
                     whether formal or informal;

              (iv)   contract  for the  employment  of any  officer,  individual
                     employee,  or other  person on a  full-time  or  consulting
                     basis or relative to severance pay for any such person;

              (v)    agreement or indenture  relating to the  borrowing of money
                     in  excess  of  $10,000  or  to  mortgaging,   pledging  or
                     otherwise  placing  a lien  on any  of  the  assets  of the
                     Company;

              (vi)   guaranty of any obligation for borrowed money or otherwise,
                     other than endorsements made for collection;

                                       27
<PAGE>
              (vii)  lease or agreement  under which it is lessor of, or permits
                     any third party to hold or operate,  any property,  real or
                     personal, for an annual rental in excess of $10,000;

              (viii) contract or group of related  contracts with the same party
                     for the purchase of products or  services,  under which the
                     undelivered  balance of such  products  and  services has a
                     purchase price in excess of $10,000;

              (ix)   contract or group of related  contracts with the same party
                     for the  sale of  products  or  services  under  which  the
                     undelivered  balance of such  products  or  services  has a
                     sales price in excess of $10,000;

              (x)    other contract or group of related  contracts with the same
                     party continuing over a period of more than six months from
                     the date or dates  thereof,  either not terminable by it on
                     30 days' or less notice  without  penalty or involving more
                     than $10,000;

              (xi)   contract which  prohibits the Company from freely  engaging
                     in business anywhere in the world;

              (xii)  contract  relating  to the  distribution  of the  Company's
                     products;

              (xiii) franchise agreement;

              (xiv)  contract,  agreement or understanding  with any shareholder
                     who  beneficially  owns  five  percent  (5%) or more of the
                     Company  Common  Stock or with  any  officer,  director  or
                     employee (other than for employment on customary terms);

              (xv)   license agreement or agreement providing for the payment or
                     receipt of royalties or other  compensation  by the Company
                     in connection with the  proprietary  rights as disclosed on
                     Schedule 3.14 of the Company Disclosure Schedules; or

              (xvi)  other agreement  material to the Company's  business or not
                     entered into in the ordinary course of business.

          (b)  Except as  specifically  disclosed  on  Schedule  3.13(b)  of the
     Company Disclosure Schedules,  (i) no contract or commitment required to be
     disclosed  under such  caption  has been  breached or canceled by the other
     party;  (ii) since the date of the balance sheet  included in the Company's
     Interim Financial Statements, no customer or supplier has indicated that it

                                       28
<PAGE>
     will stop or decrease the rate of business  done with the  Company,  except
     for changes in the ordinary course of the Company's  businesses;  (iii) the
     Company has  performed  all  obligations  required to be performed by it in
     connection with the contracts or commitments required to be disclosed under
     such  caption  and is not in  receipt  of any  claim of  default  under any
     contract or commitment  required to be disclosed  under such caption;  (iv)
     the Company does not have any present expectation or intention of not fully
     performing  any  obligation  pursuant  to any  contract  or  commitment  or
     commitment set forth under such caption;  and (v) the Company does not have
     any knowledge of any breach or anticipated breach by any other party to any
     contract or commitment set forth under such caption.

          (c) Prior to the date of this Agreement, Parent has been supplied with
     a true and  correct  copy of each  written  contract or  commitment,  and a
     written  description  of each oral  contract or  commitment,  disclosed  on
     Schedule  3.13 of the  Company  Disclosure  Schedules,  together  with  all
     amendments, waivers or other changes thereto.

     3.14  Proprietary  Rights.  Except as  disclosed  on  Schedule  3.14 of the
Company  Disclosure  Schedules,  there  are  no  patents,  patent  applications,
trademarks,  service marks,  trade names,  corporate  names,  copyrights,  trade
secrets or other  proprietary  rights  owned by the Company or  necessary to the
conduct  of the  Company's  business  as now  conducted.  The  Company  owns and
possesses all rights,  titles and interest,  or a valid  license,  in and to the
proprietary  rights  set  forth  under  such  caption.  The  Company  Disclosure
Schedules  describes under such caption all  proprietary  rights which have been
licensed to third  parties and all  proprietary  rights which are licensed  from
third  parties by the Company.  The Company has taken all action deemed by it to
be reasonably  necessary to protect the proprietary  rights set forth under such
caption in the United States and all foreign countries reasonably related to the
Company's  markets and  business  objectives.  The Company has not  received any
notice of, nor is it aware of any facts  which  indicate  a  likelihood  of, any
infringement, misappropriation, or conflict from any third party with respect to
the proprietary rights which are listed under such caption;  the Company, to its
best knowledge, has not infringed,  misappropriated or otherwise conflicted with
any  proprietary  rights  of  any  third  parties,   nor  is  it  aware  of  any
infringement,  misappropriation  or conflict  which will occur in the  continued
operation  of the  Company;  and no  claim by any  third  party  contesting  the
validity of any  proprietary  rights listed under such caption has been made, is
currently outstanding, or to the best knowledge of the Company is threatened.

     3.15 Litigation.  There are no actions, suits, claims, proceedings,  orders
or  investigations  pending  or, to the  Company's  best  knowledge,  threatened
against the Company or otherwise  affecting any of its properties or assets,  or
that challenges or may have the effect of preventing,  delaying,  making illegal
or otherwise interfering with the Merger or any other transactions  contemplated
by this  Agreement,  at law or in equity,  or before or by any  federal,  state,
municipal or other governmental department, commission, board, bureau, agency or
instrumentality,  domestic or foreign,  or that could  reasonably be expected to
have a material adverse effect on the business,  properties,  assets,  condition
(financial or  otherwise)  or business  prospects of the Company and there is no
basis known to the Company for any of the  foregoing.  There is no order,  writ,
injunction, judgment or decree:

                                       29
<PAGE>
          (a) to which the  Company  or any of the  assets  owned or used by the
     Company is subject, or

          (b) to which any officer or  employee  of the Company is subject  that
     prohibits  such  officer or employee  from  engaging in or  continuing  any
     conduct, activity or practice relating to the Company's business. Except as
     set forth under such  caption,  the Company has not received any opinion or
     legal  advice  to the  effect  that the  Company  is  exposed  from a legal
     standpoint to any liability or disadvantage  which may be material to it or
     its prospects.

     3.16 Brokerage.  There are no claims for investment banking fees, brokerage
commissions,  finders'  fees or  similar  compensation  in  connection  with the
transactions  contemplated  by  this  Agreement  based  on  any  arrangement  or
agreement  made by or on behalf of the Company for which any other party will be
responsible.

     3.17 Employment Matters.  To the best knowledge of the Company,  (i) no key
executive employee of the Company, and no group of the Company's employees,  has
any plans to terminate his or its employment, (ii) the Company has complied with
all laws  relating to the  employment  of labor,  including  provisions  thereof
relating to wages,  hours,  equal  opportunity,  collective  bargaining  and the
payment  of social  security  and other  taxes,  and  (iii) the  Company  has no
material  labor  relations   problems   pending  and  its  labor  relations  are
satisfactory.

     3.18 Employee Benefit Plans.

     With  respect to the  employee  benefits  provided  to  current  and former
employees, officers and directors of the Company:

          (a) The Company currently  maintains only the employee pension benefit
     plans,  as  defined  in  Section  3(2) of the  Employee  Retirement  Income
     Security  Act of 1974,  as amended  ("ERISA"),  as are  listed on  Schedule
     3.18(a) of the Company Disclosure Schedules (the "Pension Plans").

          (b) The Company currently  maintains only the employee welfare benefit
     plans,  as defined in Section 3(1) of ERISA  (including but not limited to,
     life insurance,  medical,  hospitalization,  holiday, vacation,  disability
     dental and vision  plans) as are listed on Schedule  3.18(b) of the Company
     Disclosure Schedules (the "Welfare Plans").

          (c) The Company  currently  maintains,  or has entered into,  only the
     compensation  programs and/or employment  arrangements,  (including but not
     limited to, incentive  compensation,  bonus, stock option,  stock purchase,
     severance,   sick  pay,   salary   continuation,   deferred   compensation,
     supplemental  executive  compensation  plans, and employment and consulting
     agreements)  as are listed on Schedule  3.18(c) of the  Company  Disclosure
     Schedules (the "Compensation Programs").

                                       30
<PAGE>
          (d) The Company does not contribute,  has not  contributed  within the
     last ten years, to any multiemployer plan, as defined in Sections 3(37) and
     4001 of ERISA,  and have not incurred any withdrawal  liability  within the
     meaning of Section 4201 of ERISA.

          (e) Each  Pension  Plan and  Welfare  Plan is in  compliance  with the
     material  requirements of ERISA;  each Pension Plan which is intended to be
     qualified  under  Section  401(a)  of the Code has been  determined  by the
     Internal  Revenue  Service  to  be  so  qualified  or a  request  for  such
     determination  has been timely filed with the Internal Revenue Service (and
     to Company's  best knowledge  nothing has occurred  between the date of the
     last such  determination and the Closing Date to cause the Internal Revenue
     Service to revoke such determination).

          (f) Any  Pension  Plan or any  Welfare  Plan  designed  to satisfy the
     requirements  of Section 125,  Section 401,  Section  401(k),  Section 409,
     Section 501(c)(9),  Section  4975(e)(7),  and/or Section 4980B of the Code,
     complies  with the material  requirements  of such  section and  applicable
     regulations thereunder.

          (g)  Neither the  Company  nor any other  employer  that is, or at any
     relevant  time  was,  together  with  the  Company,  treated  as a  "single
     employer"  under  Section  414 of the  Code,  has at any  time on or  after
     January 1, 1998  maintained  or  contributed  to a defined  benefit plan as
     defined in Section  3(35) of ERISA,  that is or was  subject to Title IV of
     ERISA;  and no  accumulated  funding  deficiency,  as  defined  in  Section
     302(a)(2)  of ERISA,  exists  (whether or not waived)  with  respect to any
     Pension Plan as of the date hereof.

          (h) All amounts  required to be paid by the  Company  with  respect to
     each Pension Plan,  Welfare Plan and Compensation  Program on or before the
     Closing Date have been paid.

          (i) None of the Pension  Plans or the Company or any party in interest
     or   disqualified   person  has  engaged  in  any  non-exempt   "prohibited
     transactions"  as defined in  Section  406 of ERISA or Section  4975 of the
     Code.

          (j) Except as disclosed on Schedule 3.18(j) of the Company  Disclosure
     Schedules,  no Pension Plan or Welfare Plan  provides  benefits,  including
     without limitation death or medical benefits (whether or not insured), with
     respect to current or former  employees  beyond their  retirement  or other
     termination of service other than (i) coverage  mandated by applicable law,
     (ii) retirement benefits under a Pension Plan, (iii) death benefits under a
     Welfare  Plan,  (iv)  deferred  compensation  accrued  on the  books of the
     Company,  or (v) benefits the full cost of which is borne by the current or
     former employee (or his or her beneficiary).

          (k) No "leased employee," as that term is defined in Section 414(n) of
     the Code, performs or has performed services for the Company.

                                       31
<PAGE>
          (l) No  liability  has been,  or is  expected  by the  Company  to be,
     incurred by the  Company  under Title IV  (including,  without  limitation,
     Section 4062) of ERISA with respect to any Pension Plan.

          (m) No  reportable  event  within the meaning of Title IV of ERISA has
     occurred with respect to any Pension Plan.

          (n) The Company has furnished  Parent with correct and complete copies
     of each Pension Plan, Welfare Plan, and Compensation Program, together with
     any trust agreements,  summary plan  descriptions,  employee  informational
     material, financial statements relating thereto and participant listings.

     3.19 Insurance. Schedule 3.19 of the Company Disclosure Schedules lists and
briefly  describes  (including name of insurer,  agent,  coverage and expiration
date) each insurance policy  maintained by, at the expense of or for the benefit
of the Company  with  respect to its  properties  and assets and  describes  any
material  claims made  thereunder.  All of such  insurance  policies are in full
force  and  effect  and  the  Company  is not in  default  with  respect  to its
obligations  under  any of such  insurance  policies.  Except  as  disclosed  on
Schedule  3.19 of the  Company  Disclosure  Schedules,  the  Company is the sole
beneficiary  of each such  policy.  The  insurance  coverage  of the  Company is
customary  for  corporations  of  similar  size  engaged  in  similar  lines  of
businesses.  The  Company  has not  received  any notice or other  communication
regarding  any  actual or  possible  (a)  cancellation  or  invalidation  of any
insurance  policy,  (b) refusal of any  coverage or rejection of any claim under
any  insurance  policy or (c)  material  adjustment  in the  amount of  premiums
payable with respect to any insurance policy.

     3.20  Affiliate  Transactions.  Except as disclosed on Schedule 3.20 of the
Company  Disclosure  Schedules,  no officer or  director  of the  Company or any
member of the immediate family of any such officer or director, or any entity in
which  any  of  such  persons  owns  any  beneficial   interest  (other  than  a
publicly-held  corporation  whose  stock  is  traded  on a  national  securities
exchange  or in the  over-the-counter  market  and less  than 5% of the stock of
which is beneficially owned by any of such persons)  (collectively  "Insiders"),
(a)  has  any  agreement  with  the  Company   (other  than  normal   employment
arrangements) or any interest in any property, real, personal or mixed, tangible
or  intangible,  used in or pertaining  to the business of the Company,  (b) has
been indebted to the Company in amounts in excess of $10,000 in the aggregate at
any  time,  (c) has at any  time  competed,  directly  or  indirectly,  with the
Company,  or (d) has any claim or right  against the Company  (other than rights
under Company Options and rights to receive  compensation for services performed
as an employee of the  Company).  For purposes of the  preceding  sentence,  the
members of the immediate  family of an officer or director  shall consist of the
spouse,  parents,  children,  siblings,  mothers- and fathers-in-law,  sons- and
daughters-in-law, and brothers- and sisters-in-law of such officer or director.

     3.21 Suppliers. Schedule 3.21 of the Company Disclosure Schedules lists the
five (5) largest  suppliers  of the Company  (on a  consolidated  basis) for the
fiscal year  (transaction  period) ended March 31, 2000, and sets forth opposite
the name of each such supplier the total amount of purchases  from such supplier
by the Company during such period.

                                       32
<PAGE>
     3.22 Officers and Directors;  Bank  Accounts.  Schedule 3.22 of the Company
Disclosure  Schedules lists all officers and directors of the Company and all of
the  Company's  accounts and safe deposit  boxes at any bank or other  financial
institution (designating each authorized signer).

     3.23 Compliance with Laws; Permits; Certain Operations. The Company and its
officers,  directors,  agents  and  employees  have  complied  in  all  material
respects,  and currently are in  compliance in all material  respects,  with all
applicable laws and regulations of foreign, federal, state and local governments
and all  agencies  thereof  which affect the  businesses  or any owned or leased
properties of the Company and to which the Company may be subject, and no claims
have been filed  against  the Company  alleging a  violation  of any such law or
regulation,  except as  disclosed  on Schedule  3.23 of the  Company  Disclosure
Schedules.  The  Company  has not  given or agreed  to give any  money,  gift or
similar benefit (other than incidental gifts of articles of nominal value, gifts
and prizes awarded  pursuant to promotional  programs  approved by the Company's
management and  non-extraordinary  entertainment  expenditures) to any actual or
potential customer,  supplier,  foreign or domestic governmental employee or any
other  person in a position to assist or hinder the Company in  connection  with
any  actual or  proposed  transaction.  The  Company  holds all of the  permits,
licenses,  certificates and other authorizations of foreign,  federal, state and
local  governmental  agencies required for the conduct of its business.  Without
limiting the  generality  of the  foregoing,  the Company has not  violated,  or
received a notice or charge asserting any violation of, the Occupational  Safety
and Health Act of 1970 or any other  state or  federal  acts or laws  (including
rules and regulations  thereunder)  regulating or otherwise  affecting  employee
health and safety or the environment.

     3.24 Disclosure.

          (a) Neither  this  Agreement  nor any other  agreement  or  instrument
     executed in connection with the transactions contemplated hereby nor any of
     the  attachments or exhibits  hereto nor the Company  Disclosure  Schedules
     contains any untrue  statement of a material  fact or omits a material fact
     necessary to make the statements  contained herein or therein,  in light of
     the circumstances in which they were made, not misleading,  and there is no
     fact which has not been disclosed in writing to Parent of which any officer
     or director of the Company is aware which materially  affects  adversely or
     could  reasonably  be  anticipated  to  materially   affect  adversely  the
     business, including operating results, assets, customer relations, employee
     relations and business prospects, of the Company, taken as a whole.

     3.25 Non-Contravention;  Consents.  Except as disclosed on Schedule 3.25 of
the  Company  Disclosure  Schedules,  neither  (1) the  execution,  delivery  or
performance of this Agreement or any of the other agreements referred to in this
Agreement,  nor  (2)  the  consummation  of the  Merger  or  any  of  the  other
transactions  contemplated by this Agreement,  will directly or indirectly (with
or without notice or lapse of time):

          (a)  contravene,  conflict with or result in a violation of (i) any of
     the provisions of the Company's  Articles of  Incorporation  or Bylaws,  or
     (ii) any resolution  adopted by the Company's  shareholders,  the Company's
     board of directors or any committee of such board of directors;

                                       33
<PAGE>
          (b) contravene, conflict with or result in a violation of, or give any
     governmental authority or other person or entity the right to challenge any
     of the  transactions  contemplated  by this  Agreement  or to exercise  any
     remedy or obtain  any relief  under,  any legal  requirement  or any order,
     writ,  injunction,  judgment or decree to which the Company,  or any of the
     assets owned or used by the Company, is subject;

          (c)  contravene,  conflict with or result in a violation of any of the
     terms or requirements of, or give any  governmental  authority the right to
     revoke,  withdraw,  suspend,  cancel, terminate or modify, any governmental
     permit or authorization  that is held by the Company that otherwise relates
     to the  Company's  business  or to any of the  assets  owned or used by the
     Company;

          (d)  contravene,  conflict with or result in a violation or breach of,
     require consent under,  or result in a default under,  any provision of any
     contract or agreement  to which the Company is a party,  or give any person
     or entity the right to (i) declare a default or exercise  any remedy  under
     any such contract or agreement, (ii) accelerate the maturity or performance
     of any such contract or agreement, or (iii) cancel, terminate or modify any
     such contract or agreement; or

          (e)  result  in the  imposition  or  creation  of any  lien  or  other
     encumbrance  upon or with respect to any asset owned or used by the Company
     (except  for minor  liens that will not,  in any case or in the  aggregate,
     materially  detract  from  the  value  of the  assets  subject  thereto  or
     materially impair the operations of the Company).

     Except as disclosed on Schedule 3.25 of the Company  Disclosure  Schedules,
the  Company is not and will not be required to make any filing with or give any
notice to, or to obtain any  consent  from,  any person or entity in  connection
with (x) the execution,  delivery or performance of this Agreement or any of the
other agreements  referred to in this Agreement,  or (y) the consummation of the
Merger or any of the other transactions contemplated by this Agreement.

     3.26 Stockholder  Vote Required.  The affirmative vote of a majority of the
votes entitled to be cast by holders of the outstanding shares of Company Common
Stock (voting as a class) and Company  convertible  preferred stock (voting as a
class) are the only votes of the holders of any class or series of the Company's
capital  stock  necessary  to  approve  this  Agreement  and  the  Merger  under
California Law.

                                    ARTICLE 4

                     CONDUCT OF BUSINESS PENDING THE MERGER

     4.1 Conduct of  Business  Pending the  Merger.  The Company  covenants  and
agrees that, prior to the Effective Time,  unless Parent shall otherwise consent
in writing  (which consent shall not be  unreasonably  withheld) or as otherwise
expressly contemplated or permitted by this Agreement:

                                       34
<PAGE>
          (a) The business of the Company  shall be  conducted  only in, and the
     Company  shall not take any action  except in, the ordinary  course,  on an
     arm's-length  basis and in  accordance  in all material  respects  with all
     applicable  laws,  rules and regulations and past custom and practice;  and
     the Company shall  maintain its facilities in good condition and repair and
     in accordance with the Company's  policies and procedures  relating thereto
     as in effect prior to the execution of this Agreement;

          (b) The Company  shall not,  directly or  indirectly,  do or permit to
     occur any of the following: (i) issue, sell, pledge, dispose of or encumber
     (A)  any  additional  shares  of,  or  any  options,  warrants,  conversion
     privileges  or rights of any kind to  acquire  any  shares  of,  any of its
     capital   stock,   except  for  issuances  upon  the  exercise  of  options
     outstanding on the date hereof,  or (B) any of its assets,  except for fair
     value in the ordinary  course of  business;  (ii) amend or propose to amend
     its Articles of Incorporation or Bylaws; (iii) split, combine or reclassify
     any outstanding  shares of Company Common Stock or other  securities of the
     Company,  or declare,  set aside or pay any dividend or other  distribution
     payable in cash,  stock,  property or  otherwise  with respect to shares of
     Company  Common  Stock or other  securities  of the  Company;  (iv) redeem,
     purchase or acquire or offer to acquire any shares of Company  Common Stock
     or other  securities  of the  Company;  (v) acquire  (by merger,  exchange,
     consolidation,   acquisition   of  stock  or  assets  or   otherwise)   any
     corporation,  partnership,  joint venture or other business organization or
     division  or  material  assets   thereof;   (vi)  incur  or  guarantee  any
     indebtedness  for borrowed  money or issue any debt  securities  except the
     borrowing  of  working  capital  in the  ordinary  course of  business  and
     consistent with past practice or (vii) enter into or propose to enter into,
     or modify or propose to modify, any agreement, arrangement or understanding
     with respect to any of the matters set forth in this Section 4.1(b);

          (c) The Company shall not,  directly or indirectly,  (i) enter into or
     modify any  Material  Contract,  agreement  or  understanding  to which the
     Company is a party; (ii) enter into or modify any employment,  severance or
     similar  agreements  or  arrangements  with,  or grant any bonuses,  salary
     increases,  severance or  termination  pay to, any officers or directors or
     consultants;   (iii)  make  any   capital   expenditures,   including   any
     capitalizable  lease  obligations,  other than  expenditures  necessary  to
     maintain  existing assets in good repair and other capital  expenditures in
     amounts  not  exceeding  $10,000 in the  aggregate;  or (iv) in the case of
     employees who are not officers or directors or  consultants,  grant or take
     any action with respect to the granting of any salary increases,  severance
     or  termination  pay or increases in other  benefits,  other than grants or
     such actions as are in the ordinary  course of the  Company's  business and
     are consistent with the Company's historic compensation practices, or grant
     or take any actions with respect to the granting of any bonuses;

          (d) The Company  shall not adopt or amend any bonus,  profit  sharing,
     compensation,  stock option,  pension,  retirement,  deferred compensation,
     employment or other employee benefit plan, trust, fund or group arrangement
     for the benefit or welfare of any employees or any bonus,  profit  sharing,
     compensation,  stock option,  pension,  retirement,  deferred compensation,

                                       35
<PAGE>
     employment  or other  employee  benefit  plan,  agreement,  trust,  fund or
     arrangements for the benefit or welfare of any director;

          (e) The  Company  shall  use its best  efforts  to cause  its  current
     insurance  (or  reinsurance)  policies not to be canceled or  terminated or
     reduced in  coverage  amount or any of the  coverage  thereunder  to lapse,
     unless  simultaneously  with such termination,  cancellation,  reduction in
     coverage amount or lapse,  replacement policies providing coverage equal to
     or greater than the coverage  under the  canceled,  terminated,  reduced or
     lapsed policies for  substantially  similar  premiums are in full force and
     effect;

          (f) The Company (i) shall use its best efforts to preserve  intact its
     business  organization  and good will,  keep  available the services of its
     officers and employees as a group and maintain  satisfactory  relationships
     with  suppliers,   distributors,   customers  and  others  having  business
     relationships  with it; (ii) shall not take any action which would  render,
     or which  reasonably  may be  expected  to render,  any  representation  or
     warranty  made  by it in  this  Agreement  or in  any  other  agreement  or
     instrument executed in connection with the transactions contemplated hereby
     untrue at, or at any time prior to, the Effective Time;  (iii) shall notify
     Parent  of any  emergency  or other  change  in the  normal  course  of its
     business or in the operation of its properties and of any  governmental  or
     third  party  complaints,  investigations  or hearings  (or  communications
     indicating that the same may be  contemplated)  if such emergency,  change,
     complaint,  investigation or hearing would be material,  individually or in
     the aggregate,  to the business,  operations or financial  condition of the
     Company  or to the  Company's,  Parent's  or the  Merger  Sub's  ability to
     consummate the transactions  contemplated by this Agreement; and (iv) shall
     notify Parent if the Company  shall  discover  that any  representation  or
     warranty made by it in this  Agreement  was when made, or has  subsequently
     become, untrue;

          (g) The Company  shall not change any of its methods of  accounting or
     accounting practices in any material respect;

          (h) The  Company  will not  waive or  agree  to waive  any  applicable
     statute of  limitations  or any  similar  statutory  or  judicial  doctrine
     benefiting the Company;

          (i) The Company shall not commence or settle any material legal action
     or proceeding,  provided,  that the Company may settle any legal actions or
     proceedings  which  were  pending as of the date of the  Company's  Interim
     Financial Statements so long as the consideration paid or agreed to be paid
     by the Company in connection with such  settlements does not exceed $10,000
     in any individual case or $10,000 in the aggregate for all such settlements
     (in the case of cash  settlements) or cause the number of shares of Company
     Common Stock issued and  outstanding,  after taking into account any shares
     issued or canceled in connection with such settlement, to exceed the number
     of shares of Company  Common  Stock issued and  outstanding  on the date of
     this Agreement;

                                       36
<PAGE>
          (j) The Company shall cause its officers to report at Parent's request
     (but in no event less  frequently  than  weekly) to Parent  concerning  the
     status of the Company's business; and

          (k) Subject to the fiduciary  obligations  of its directors as advised
     by counsel,  the  Company  shall not,  except as required by law,  call any
     meeting of its shareholders other than the meeting  contemplated in Section
     5.1.

          (1) The Company shall not make or amend any federal,  state,  or local
     Tax  election,  agree to waive or extend  any  statute of  limitations,  or
     resolve or agree to resolve any audit or proceeding relating to Taxes.

     4.2 Notification; Updates to Disclosure Schedule.

          (a) During the period  subsequent to the  execution of this  Agreement
     and prior to the Effective  Time (the  "Pre-Closing  Period"),  the Company
     shall promptly notify Parent in writing of:

              (i)    the discovery by the Company of any event, condition,  fact
                     or circumstance that occurred or existed on or prior to the
                     date of this  Agreement and that caused or  constitutes  an
                     inaccuracy in or breach of any  representation  or warranty
                     made by the Company in this Agreement;

              (ii)   any event,  condition,  fact or  circumstance  that occurs,
                     arises or exists after the date of this  Agreement and that
                     would cause or constitute an inaccuracy in or breach of any
                     representation  or  warranty  made by the  Company  in this
                     Agreement if (A) such  representation  or warranty had been
                     made  as of  the  time  of  the  occurrence,  existence  or
                     discovery of such event,  condition,  fact or circumstance,
                     or (B) such  event,  condition,  fact or  circumstance  had
                     occurred, arisen or existed on or prior to the date of this
                     Agreement;

              (iii)  any breach of any  covenant or  obligation  of the Company;
                     and

              (iv)   any event, condition,  fact or circumstance that would make
                     the timely  satisfaction of any of the conditions set forth
                     in Sections 6.1, 6.2 or 6.3 impossible or unlikely.

          (b) If any event, condition,  fact or circumstance that is required to
     be disclosed  pursuant to Section 4.2(a) requires any change in the Company
     Disclosure Schedules, or if any such event, condition, fact or circumstance
     would require such a change assuming the Company Disclosure  Schedules were
     dated as of the date of the  occurrence,  existence  or  discovery  of such
     event,  condition,  fact or  circumstance,  then the Company shall promptly

                                       37
<PAGE>
     deliver to Parent an update to the Company Disclosure  Schedules specifying
     such  change.  No such update  shall be deemed to  supplement  or amend the
     Company  Disclosure  Schedules  for  the  purpose  of (i)  determining  the
     accuracy of any of the  representations  and warranties made by the Company
     in this Agreement,  or (ii)  determining  whether any of the conditions set
     forth in Sections 6.1, 6.2 or 6.3 has been satisfied.

                                    ARTICLE 5

                              ADDITIONAL AGREEMENTS

     5.1 Shareholders  Meeting. The Company shall call and hold a meeting of its
Shareholders (the "Company Shareholders' Meeting) to submit this Agreement,  the
Merger and related matters for the  consideration  and approval of the Company's
Shareholders or, in the alternative, obtain the unanimous written consent of its
Shareholders.  In the  case of a  Company  Shareholders'  Meeting,  the  Company
Shareholders'  Meeting will be called, held and conducted,  and any proxies will
be solicited, in compliance with applicable law.

     5.2 Expenses.  Each party to this Agreement  shall bear their own costs and
expenses  incurred  in  connection  with  this  Agreement  and the  transactions
contemplated hereby.

     5.3  Additional  Agreements.  Subject  to the terms and  conditions  herein
provided,  each of the parties  hereto agrees to use all  reasonable  efforts to
take,  or cause to be taken,  all  action  and to do,  or cause to be done,  all
things  necessary,  proper or  advisable  to  consummate  and make  effective as
promptly  as  practicable  the  transactions  contemplated  by  this  Agreement,
including using reasonable efforts to obtain all necessary waivers, consents and
approvals and to effect all necessary registrations and filings,  including, but
not  limited  to, any  submissions  of  information  requested  by  governmental
authorities.

     5.4 No  Negotiations,  etc. The Company shall not,  directly or indirectly,
through  any  officer,  director,  agent  or  otherwise,  solicit,  initiate  or
encourage submission of any inquiry, proposal or offer from any person or entity
(including any of its or their officers or employees) other than Parent relating
to any  liquidation,  dissolution,  recapitalization,  merger,  consolidation or
acquisition  or purchase  of all or a material  portion of the assets of, or any
equity  interest  in,  the  Company or other  similar  transaction  or  business
combination  involving the Company,  or, unless the Company's Board of Directors
receives a written opinion from the Company's outside counsel stating that there
would  be a  material  risk  of  liability  on the  part of the  members  of the
Company's Board of Directors to the Company's shareholders for failure to do so,
participate in any  discussions  or  negotiations  regarding,  or furnish to any
other person any information with respect to, or otherwise  cooperate in any way
with,  or assist or  participate  in,  facilitate  or  encourage,  any effort or
attempt by, or consider,  entertain  or accept any  proposal or offer from,  any
other  person or entity to do or seek any of the  foregoing.  The Company  shall
promptly  notify Parent and the Merger Sub if any such proposal or offer, or any
inquiry from or contact with any person with respect thereto,  is made and shall
promptly  provide Parent with such information  regarding such proposal,  offer,
inquiry or contact as Parent may request.

                                       38
<PAGE>
     5.5 Notification of Certain Matters. Each party shall give prompt notice to
each  other  party of (a) the  occurrence  or  failure  to  occur of any  event,
conditions,  fact or circumstance which occurrence or failure would be likely to
cause any  representation or warranty on its part contained in this Agreement to
be untrue or inaccurate at, or at any time prior to, the Effective Time, and (b)
any  material  failure of such party,  or any  officer,  director,  shareholder,
employee or agent thereof, to comply with or satisfy any covenant,  condition or
agreement to be complied with or satisfied by it hereunder.

     5.6  Access to  Information;  Confidentiality.  Parent  and its  attorneys,
accountants,  consultants and  representatives  shall continue to have access to
the books and records of the Company and such other  information  pertaining  to
the business and assets of the Company as Parent shall reasonably  request,  and
the Company and its  attorneys,  accountants,  consultants  and  representatives
shall  continue to have access to the books and records of Parent and such other
information pertaining to the business and assets of Parent as the Company shall
reasonably  request,  and each of Parent and the Company shall provide the other
with reasonable access to its officers and other personnel,  as provided in Part
5,  paragraph (c) of the Letter of Intent.  The terms of [Part 5, paragraph (b)]
of the  Letter of Intent  shall  apply,  in the event of a  termination  of this
Agreement, to information obtained as a result of such access and assistance.

     5.7  Shareholder  Claims.  The Company shall not settle or  compromise  any
claim  brought  by any  present,  former  or  purported  holder  or owner of any
securities  of the  Company  in  connection  with the Merger  without  the prior
written consent of Parent.

     5.8  Consents.  As  promptly as  practicable  after the  execution  of this
Agreement,  each party to this Agreement (a) shall make all filings (if any) and
give  all  notices  (if any)  required  to be made  and  given by such  party in
connection  with the  Merger  and the other  transactions  contemplated  by this
Agreement,  and (b) shall use all commercially  reasonable efforts to obtain all
consents  (if any)  required to be obtained  (pursuant  to any  applicable  law,
regulation,  contract or  agreement,  or  otherwise) by such party in connection
with the  Merger  and the other  transactions  contemplated  by this  Agreement.
Parent shall (upon request)  promptly deliver to the Company a copy of each such
filing made, each such notice given and each such consent  obtained by Parent or
Merger  Sub during the  period  subsequent  to the date  hereof and prior to the
Effective Time; and the Company shall (upon request)  promptly deliver to Parent
a copy of each such filing  made,  each such notice  given and each such consent
obtained  by the  Company  during the period  subsequent  to the date hereof and
prior to the Effective Time.

     5.9  State  Securities  Law  Compliance.   Parent  shall  use  commercially
reasonable efforts to (a) qualify, prior to the Effective Time, the Parent Class
A Common  Stock to be issued  pursuant to the Merger under state "blue sky" laws
of  every  jurisdiction  of the  United  States  in  which  (i)  any  registered
shareholder  of the  Company  has an address on the records of the Company as of
the  date of this  agreement,  and  (ii) an  exemption  from  the  qualification
requirements  under such laws is  unavailable  with  respect to the  issuance of
Parent  Class A  Common  Stock  in the  Merger,  and (b)  qualify,  prior to the
Effective  Time,  the Assumed  Options  under the state "blue sky" laws of every
jurisdiction of the United States in which (i) the records of the Company, as of
the date of this  Agreement,  indicate  that a holder  of such  Assumed  Options
resides,  and (ii) an exemption from the qualification  requirements  under such
laws is unavailable.

                                       39
<PAGE>
     5.10 Notification. (a) During the Pre-Closing Period, Parent shall promptly
notify the Company in writing of:

       (i)    the  discovery  by  Parent  of  any  event,  condition,   fact  or
              circumstance  that  occurred or existed on or prior to the date of
              this  Agreement and that caused or constituted an inaccuracy in or
              breach of any  representation  or warranty  made by Parent in this
              Agreement;

       (ii)   any event, condition,  fact or circumstance that occurs, arises or
              exists  after the date of this  Agreement  and that would cause or
              constitute  an inaccuracy  in or breach of any  representation  or
              warranty   made  by   Parent  in  this   Agreement   if  (A)  such
              representation  or  warranty  had been  made as of the time of the
              occurrence,  existence or discovery of such event, condition, fact
              or   circumstance,   or  (B)  such  event,   condition,   fact  or
              circumstance  had  occurred,  arisen or existed on or prior to the
              date of this Agreement;

       (iii)  any breach of any covenant or obligation of Parent; and

       (iv)   any event,  condition,  fact or  circumstance  that would make the
              timely satisfaction of any of the conditions set forth in Sections
              6.1, 6.2 or 6.3 impossible or unlikely.

     5.11 Commercially  Reasonable  Efforts.  During the Pre-Closing Period, (a)
the  Company  shall  use  all  commercially  reasonable  efforts  to  cause  the
conditions  set forth in Sections 6.1 and 6.3 to be satisfied on a timely basis,
and (b) Parent and Merger Sub shall each use all commercially reasonable efforts
to cause the  conditions  set forth in Sections 6.1 and 6.2 to be satisfied on a
timely basis.

     5.12 Tax Matters. Prior to the Closing:

          (a)  The   Company   shall  give  the   Parent   and  its   authorized
     representatives  full  access to all  properties,  books,  records  and Tax
     Returns of or relating to the  Company,  whether in the  possession  of the
     Company,  or third-party  representatives in order that the Parent may have
     full opportunity to make such  investigations as it shall desire to make of
     the affairs of the Company.  The Company shall ensure that all  third-party
     representatives of the Company,  including without  limitation  accountants
     and attorneys, fully cooperate and be available to the Parent in connection
     with such investigation.

          (b) The Company shall terminate all tax allocation  agreements and tax
     sharing  agreements  with respect to the Company and shall ensure that such
     agreements are of no further force or effect as to the Company on and after
     the Closing and there shall be no further  liability  of the Company  under
     any such agreements.

                                       40
<PAGE>
     5.13 Indemnification.

          (a) From and after the Effective Time, the Surviving Corporation shall
     indemnify,  defend and hold  harmless  the  present  and  former  officers,
     directors  and  employees of the Company  (collectively,  the  "Indemnified
     Parties") against all losses,  expenses,  claims,  damages,  liabilities or
     amounts  that are paid in  settlement  of (with  approval of Parent and the
     Surviving Corporation), or otherwise in connection with, any claim, action,
     suit, proceeding or investigation (a "Claim"), based in whole or in part on
     the fact that such  person is or was such a  director,  officer or employee
     and  arising  out of  actions  or  omissions  occurring  at or prior to the
     Effective  Time,  in each case to the fullest  extent  permitted  under the
     General  Corporation Law of the State of Delaware (the "DGCL"),  (and shall
     pay  expenses  in advance of the final  disposition  of any such  action or
     proceeding to each Indemnified  Party to the fullest extent permitted under
     the DGCL,  upon receipt  from the  Indemnified  Party to whom  expenses are
     advanced of the undertaking to repay such advances  contemplated by Section
     145(e) of the DGCL).

          (b) Any Indemnified Party wishing to claim  indemnification under this
     Section 5.14, upon learning of any such Claim,  shall notify Parent and the
     Surviving  Corporation  (although  the failure so to notify  Parent and the
     Surviving  Corporation shall not relieve the Surviving Corporation from any
     liability  that it may have under this Section  5.14,  except to the extent
     such failure  materially  prejudices such party),  and shall deliver to the
     Surviving Corporation the undertaking contemplated by Section 145(e) of the
     DGCL.  Parent and the Surviving  Corporation shall have the right to assume
     the  defense   thereof  and  the  Surviving   Corporation,   including  its
     affiliates,  shall not be liable to such Indemnified  Parties for any legal
     expenses of other counsel or any other  expenses  subsequently  incurred by
     such  Indemnified  Parties in connection with the defense  thereof,  except
     that if Parent  and the  Surviving  Corporation  elect  not to assume  such
     defense or there is a conflict of interest between,  or different  defenses
     exist for Parent and the Surviving Corporation and the Indemnified Parties,
     the  Indemnified  Parties  may  retain  counsel  satisfactory  to them (and
     reasonably  satisfactory to Parent) and the Surviving Corporation shall pay
     all  reasonable  fees and  expenses  of such  counsel  for the  Indemnified
     Parties promptly as statements  therefor are received;  provided,  however,
     that (i) the Surviving Corporation, including its affiliates, shall not, in
     connection  with  any  one  such  action  or  proceeding  or  separate  but
     substantially  similar  actions  or  proceedings  arising  out of the  same
     general  allegations,  be liable for the fees and expenses of more than one
     separate firm of attorneys at any time for all  Indemnified  Parties except
     to the extent that local  counsel,  in addition  to such  parties'  regular
     counsel,  is necessary or desirable in order to effectively  defend against
     such action or proceeding,  (ii) Parent, the Surviving  Corporation and the
     Indemnified  Parties will cooperate in the defense of any such matter,  and
     (iii) the Surviving  Corporation,  including its  affiliates,  shall not be
     liable for any settlement  effected without Parent's prior written consent,
     which consent will not be unreasonably  withheld or delayed,  and provided,

                                       41
<PAGE>
     further, however, that the Surviving Corporation, including its affiliates,
     shall not have any obligation  hereunder to any Indemnified  Party when and
     if a court of competent  jurisdiction shall ultimately determine,  and such
     determination  shall have become  final and not subject to further  appeal,
     that  the   indemnification   of  such  Indemnified  Party  in  the  manner
     contemplated  hereby is prohibited by applicable law. No Indemnified  Party
     shall consent to entry of judgment or enter into any  settlement  that does
     not include as an unconditional  term thereof the giving by the claimant or
     plaintiff to such  Indemnified  Party of a release,  in form and  substance
     reasonably  satisfactory to such Indemnified  Party,  from all liability in
     respect of such claim or litigation for which such Indemnified  Party would
     be entitled to indemnification hereunder.

          (c) This  Section 5.14 is intended to be for the benefit of, and shall
     be enforceable by, the Indemnified Parties referred to herein,  their heirs
     and personal  representatives and shall be binding on Parent and Merger Sub
     and the Surviving Corporation and their respective successors and assigns.

     5.14  Nasdaq  SmallCap  Market  Listing.  Parent  shall use all  reasonable
efforts to cause the shares of Parent  Class A Common  Stock to be issued in the
Merger and the shares of Parent Class A Common Stock to be reserved for issuance
under the  Assumed  Options to be approved  for  listing on the Nasdaq  SmallCap
Market, subject to official notice of issuance, as soon as practicable after the
Closing Date.

     5.15 Employees; Employment Agreements.

          (a) Following  the Effective  Time,  the Surviving  Corporation  shall
     honor in accordance  with their terms all employee  benefit plans disclosed
     by the Company under the caption  "Employee  Benefit  Plans" in the Company
     Disclosure  Schedules,  and all accrued benefits vested thereunder.  Parent
     agrees  to  provide,  after the  Effective  Time,  or cause  the  Surviving
     Corporation to provide,  employees of the Company, not otherwise covered by
     collective bargaining  agreements,  with employee benefits in the aggregate
     substantially  no less favorable  than those benefits  provided to Parent's
     similarly  situated  employees for a period ending on the first anniversary
     of the Effective Time.

          (b) Parent shall enter into an employment  agreement (the  "Employment
     Agreement"),  the form of which is attached  hereto as Exhibit A, with each
     of Robert R. Cullen and Richard J. Sweeney.

     5.16 Future  Employment  Incentives.  In addition to the  treatment  of the
Company's  Stock Plan under Section  1.11(a) above,  at the Closing the officers
and  employees of the  Surviving  Corporation  (or, in the event of a subsequent
merger, consolidation or other restructuring,  the officers and employees of the
business formerly  conducted by the Company prior to the Effective Time) will be
allocated  stock  options  for not less than  146,000  shares of Parent  Class A
Common  Stock  representing  eight  percent  (8%) of the total  number of shares

                                       42
<PAGE>
reserved under the Amended LightPath  Technologies,  Inc. Omnibus Incentive Plan
dated  November 12, 1997 (the  "Omnibus  Plan") as  disclosed on Schedule  5.16;
provided  that such number of available  option  shares shall be  increased,  as
necessary,  from time to time  following the Merger to provide for an allocation
of eight percent (8%) of any increase in option shares under the Omnibus Plan or
any  successor  thereto.  All such stock  options will be granted and managed in
accordance  with existing  policies of Parent and the Omnibus Plan.  The parties
acknowledge  and agree  that if and to the extent  that  Parent is  required  to
obtain any  shareholder  approval of an amendment  to its existing  stock option
plans in order to implement  the  provisions  of this  Section 5.16  (including,
without limitation,  any amendment increasing the number of shares available for
grant thereunder),  the stock options contemplated hereby may be granted subject
to and contingent upon receipt of such shareholder approval.

     5.17 Funding Commitment;  Facility.  Following the Closing Date, the Parent
shall fund  $5,250,000  to the  Surviving  Corporation  to provide for  facility
expansion,  equipment acquisitions,  recruitment and retention of key personnel,
product  development  and strategic  supply  arrangements in accordance with the
budget  set forth on  Schedule  5.17,  which  budget  has been  approved  by the
Parent's  board of directors and which budget shall be implemented in accordance
with Parent's existing policies and procedures.  Following the Closing Date, the
Parent currently intends to continue operations of the Surviving  Corporation at
the Company's current facility located in Walnut, California for the foreseeable
future.

                                    ARTICLE 6

                                   CONDITIONS

     6.1  Conditions  to  Obligations  of Each Party To Effect the  Merger.  The
respective  obligations  of each party to effect the Merger  shall be subject to
the fulfillment at or prior to the Effective Time of the following conditions:

          (a) this Agreement  (including  without  limitation the plan of merger
     contained  herein) and the Merger  shall have been  approved and adopted by
     the requisite vote or unanimous  written consent of the Shareholders as may
     be  required  by law  and by any  applicable  provisions  of the  Company's
     Articles of Incorporation and Bylaws;

          (b)  the   materials   distributed   with   respect  to  the   Company
     Shareholders'  Meeting shall not contain any untrue statement of a material
     fact and shall not omit any statement  required to be contained  therein or
     necessary to make any statement  contained  therein,  in the light in which
     made, not misleading;

          (c)  there  shall  have  been no  law,  statute,  rule or  regulation,
     domestic or foreign,  enacted or promulgated  which would make consummation
     of the Merger illegal;

                                       43
<PAGE>
          (d) no  injunction or other order entered by a United States (state or
     federal) court of competent  jurisdiction shall have been issued and remain
     in effect which would prohibit consummation of the Merger;

          (e) there shall not be threatened, instituted or pending any action or
     proceeding,  before any court or governmental authority or agency, domestic
     or foreign,  (i)  challenging  or seeking to make  illegal,  or to delay or
     otherwise directly or indirectly to restrain or prohibit,  the consummation
     of the Merger, or seeking to obtain material damages in connection with the
     Merger,  (ii) seeking to prohibit direct or indirect ownership or operation
     by Parent of all or a  material  portion of the  business  or assets of the
     Company or of Parent and its  subsidiaries,  or to compel  Parent or any of
     its  subsidiaries or the Company to dispose of or to hold separately all or
     a material portion of the business or assets of Parent and its subsidiaries
     or of the Company,  as a result of the Merger,  (iii)  seeking to impose or
     confirm  limitations  on the  ability  of Parent  effectively  to  exercise
     directly or  indirectly  full rights of  ownership of any shares of Company
     Common  Stock  on  all  matters   properly   presented  to  the   Company's
     shareholders,  (iv) seeking to require  direct or indirect  divestiture  by
     Parent of any shares of Company Common Stock or any shares of the Surviving
     Corporation to be issued in the Merger, (v) seeking or causing any material
     diminution  in the direct or  indirect  benefits  expected to be derived by
     Parent a result of the  transactions  contemplated by this Agreement,  (vi)
     invalidating  or rendering  unenforceable  any  material  provision of this
     Agreement  (including without limitation any of the exhibits or attachments
     hereto) or the Letter of Intent,  (vii) which  otherwise  might  materially
     adversely  affect the  Company or Parent  and its  subsidiaries,  or (viii)
     otherwise relating to the Letter of Intent or the Merger;

          (f) there shall not be any action taken, or any injunction  issued, or
     any order,  statute,  rule or regulation  proposed,  enacted,  promulgated,
     issued or deemed applicable to the Merger by any federal,  state or foreign
     court,  government or governmental authority or agency, which may, directly
     or indirectly, result in any of the consequences referred to in (f) above;

          (g) there shall not have  occurred (i) any general  suspension  of, or
     limitation  on prices for,  trading in  securities  on the Nasdaq  SmallCap
     Market,  (ii) a declaration  of a banking  moratorium or any  suspension of
     payments  in  respect of banks in the United  States or any  limitation  by
     United   States   authorities   on  the  extension  of  credit  by  lending
     institutions,  (iii) a  commencement  of war,  armed  hostilities  or other
     international  or national  calamity  directly or indirectly  involving the
     United States, (iv) any limitation by any governmental authority on, or any
     other  event  which,  in the sole  judgment  of  Parent,  might  affect the
     extension of credit by banks or other  lending  institutions  in the United
     States,  or (v) in the case of any of the  foregoing  existing  at the date
     hereof, a material acceleration or worsening thereof;

          (h)  the  Company  shall  have  obtained  each  consent  and  approval
     necessary in order that the Merger and the transactions contemplated herein
     not  constitute  a  breach  or  violation  of,  or  result  in a  right  of
     termination  or  acceleration  or any  encumbrance  on any of the Company's

                                       44
<PAGE>
     assets  pursuant  to the  provisions  of,  any  agreement,  arrangement  or
     understanding or any license, franchise or permit;

          (i) there shall have been no damage,  destruction or loss of or to any
     property or properties owned or used by the Company, whether or not covered
     by insurance,  which in the aggregate has a material  adverse effect on the
     Company, taken as a whole;

          (j) the  principal  terms of this  Agreement and the Merger shall have
     been approved and adopted by the Company's  shareholders in accordance with
     all  applicable  laws  and  regulations  and  the  Company's   Articles  of
     Incorporation and Bylaws; and

          (k) no party hereto shall have  terminated this Agreement as permitted
     herein;

     6.2 Additional  Conditions to Obligation of the Company.  The obligation of
the Company to effect the Merger is also subject to the following conditions:

          (a) the  representations  and  warranties of Parent and the Merger Sub
     set forth in Article 2 shall be true and correct in all  material  respects
     as of the Effective  Time as if made at and as of the Effective  Time,  and
     each of Parent  and the  Merger  Sub shall in all  material  respects  have
     performed each  obligation and agreement and complied with each covenant to
     be performed and complied with by it hereunder at or prior to the Effective
     Time.  A  representation  or  warranty  that  is  expressly  subject  to  a
     materiality  limitation  shall  not be  subject  to a  further  materiality
     limitation as a result of the use of the phrase "in all material  respects"
     in the preceding sentence;

          (b) Parent shall have  furnished to the Company a certificate in which
     Parent  shall  certify  that  Parent  has no  reason  to  believe  that the
     conditions set forth in Section 6.2(a) have not been fulfilled;

          (c) Parent shall have  furnished to the Company (i) a copy of the text
     of the resolutions by which the corporate  action on the part of Parent and
     the Merger Sub  necessary  to approve  this  Agreement  and the Merger were
     taken, (iii)  certificates  executed on behalf of Parent and the Merger Sub
     by  their  respective  corporate  secretaries  or one of  their  respective
     assistant  corporate  secretaries  certifying to the Company, in each case,
     that such copy is a true, correct and complete copy of such resolutions and
     that  such  resolutions  were duly  adopted  and have not been  amended  or
     rescinded, and (iii) an incumbency certificate executed on behalf of Parent
     and the  Merger Sub by their  respective  corporate  secretaries  or one of
     their respective assistant corporate secretaries certifying,  in each case,
     the signature and office of each officer  executing  this  Agreement or any
     other agreement, certificate or other instrument executed pursuant hereto;

                                       45
<PAGE>
          (d) the Company shall have received a letter  addressed to the Company
     from  Squire,  Sanders & Dempsey  L.L.P.  based on  customary  reliance and
     subject to customary qualifications, to the effect that:

              (i)    Each of Parent and the Merger Sub is a corporation  validly
                     existing  with  the  corporate  authority  to own,  pledge,
                     mortgage   and  operate  its   properties,   to  lease  any
                     properties it operates under lease, to conduct its business
                     as it is presently conducted and in good standing under the
                     laws of the State of Delaware.

              (ii)   Parent  has  the   corporate   power  to   consummate   the
                     transactions  on its part  contemplated  by this Agreement.
                     Parent has duly  taken all  requisite  corporate  action to
                     authorize this Agreement;  and this Agreement has been duly
                     executed and delivered by Parent and  constitutes the valid
                     and binding obligation of Parent.

              (iii)  The Merger Sub has the corporate  power to  consummate  the
                     transactions  on its part  contemplated  by this Agreement.
                     The  Merger  Sub has duly  taken  all  requisite  corporate
                     action to  authorize  this  Agreement  and the  articles of
                     merger  contemplated in Section 1.3; and this Agreement and
                     such  articles  of  merger  have  been  duly  executed  and
                     delivered  by the  Merger  Sub  and  constitute  valid  and
                     binding obligations of the Merger Sub.

              (iv)   No actions  are  required  to be taken in order to make the
                     Merger  effective  which have not been taken on or prior to
                     the  delivery  of such  letter  except the  delivery of the
                     articles  of  merger  contemplated  in  Section  1.3 to the
                     Secretary of State of the States of California and Delaware
                     in  accordance   with  California  Law  and  Delaware  Law,
                     respectively.

              (v)    Neither the  execution and delivery by either Parent or the
                     Merger  Sub of  this  Agreement,  nor the  consummation  by
                     either  Parent  or  the  Merger  Sub  of  the  transactions
                     contemplated  hereby (a) violates or contravenes any of the
                     organizational  documents  of either  Parent or Merger Sub;
                     (b)  violates or  contravenes  any  applicable  law; (c) to
                     counsel's  knowledge,  violates or  contravenes  any order,
                     writ,  injunction  or decree  of any court or  governmental
                     instrumentality;   (d)   results   in  the  breach  of,  or
                     constitutes a default under, or requires any consent under,
                     any  Material  Contract;  (e)  results in the  creation  or
                     imposition of any lien, mortgage, security interest, charge
                     or encumbrance under any Material  Contract;  or (f) except

                                       46
<PAGE>
                     to the extent  already  obtained,  requires  the consent or
                     approval  of,  or any  filing  or  registration  with,  the
                     shareholders  of Parent or Merger  Sub or any  Governmental
                     Authority.

              (vi)   There  are no  judgments,  orders,  injunctions,  or  other
                     restraints  issued or filed  against  either  Parent or the
                     Merger Sub,  nor is there any pending or, to the  counsel's
                     knowledge, threatened litigation, arbitration proceeding or
                     governmental  or  administrative   proceedings  against  or
                     involving either of Parent or the Merger Sub.

              (vii)  Neither Parent or the Merger Sub is an "investment company"
                     registered   or  required  to  be   registered   under  the
                     Investment Company Act of 1940, as amended (the "1940 Act")
                     nor is either of Parent or the Merger Sub  "controlled"  by
                     such a company, within the meaning of the 1940 Act.

              (viii) Neither Parent or the Merger Sub is a "holding  company" or
                     a  "subsidiary  company"  of  a  "holding  company"  or  an
                     "affiliate"  of a "holding  company"  within the meaning of
                     The Public Utility Holding Company Act of 1935, as amended;

          (e) the Company  shall not have  discovered  any fact or  circumstance
     existing  as of the date of this  Agreement  which  has not  been  publicly
     disclosed  by  Parent  as of the  date  of  this  Agreement  regarding  the
     business, assets, properties,  condition (financial or otherwise),  results
     of  operations  or  prospects  of  Parent  and its  subsidiaries  which is,
     individually  or in the aggregate with other such facts and  circumstances,
     materially  adverse to Parent and its subsidiaries  taken as a whole, or to
     the value of the shares of Parent Class A Common Stock.

     6.3 Additional  Conditions to Obligations of Parent and the Merger Sub. The
obligations  of Parent and the Merger Sub to effect the Merger are also  subject
to the following conditions:

          (a) the  representations  and  warranties  of the Company set forth in
     Article  3 of this  Agreement  shall be true and  correct  in all  material
     respects  as of the  Effective  Time as if made at and as of the  Effective
     Time,  and the Company shall in all material  respects have  performed each
     obligation  and  agreement  and complied with each covenant to be performed
     and  complied  with by it hereunder  at or prior to the  Effective  Time. A
     representation  or  warranty  that is  expressly  subject to a  materiality
     limitation  shall not be subject to a further  materiality  limitation as a
     result of the use of the phrase "in all material respects" in the preceding
     sentence;

          (b) the Company shall have furnished to Parent a certificate, executed
     by an appropriate  executive officer,  certifying that the  representations
     and  warranties  made by the Company in this Agreement are true and correct
     as of the Effective  Time and that the Company has complied with all of the
     covenants of the Company set forth in this Agreement;

                                       47
<PAGE>
          (c) the Company shall have  furnished to Parent (i) a copy of the text
     of the resolutions by which the board of Directors and  shareholders of the
     Company approved this Agreement (including, without limitation, the plan of
     merger  contained  herein) and the Merger;  (ii) a certificate  executed on
     behalf of the Company by its corporate secretary  certifying to Parent that
     such copy is a true, correct and complete copy of such resolutions and that
     such  resolutions were duly adopted and have not been amended or rescinded;
     and (iii) an  incumbency  certificate  executed on behalf of the Company by
     its corporate secretary certifying the signature and office of each officer
     executing  this  Agreement  or any other  agreement,  certificate  or other
     instrument executed pursuant hereto;

          (d) Parent shall have  received a letter  addressed to Parent from the
     law firm of Allen  Matkins  Leck Gamble & Mallory  LLP,  based on customary
     reliance and subject to customary qualifications, to the effect that:

              (i)    The  Company is a  corporation  validly  existing  with the
                     corporate  authority to own,  pledge,  mortgage and operate
                     its  properties,  to lease any properties it operates under
                     lease, to conduct its business as it is presently conducted
                     and is in good  standing  under  the  laws of the  State of
                     California.

              (ii)   The authorized capital of the Company consists of shares of
                     capital  stock,  designated  "Common  Stock,"  having a par
                     value of $.0001  per  share,  of which the number of shares
                     indicated in such letter are outstanding, all of which were
                     duly   authorized,   validly   issued,   fully   paid   and
                     non-assessable, with no personal liability attaching to the
                     ownership thereof, and have not been issued in violation of
                     any preemptive  rights under California Law or any Material
                     Contract.

              (iii)  The  Company  has the  corporate  power to  consummate  the
                     transactions  on its part  contemplated  by this Agreement;
                     the Company has duly taken all requisite  corporate  action
                     to authorize this  Agreement and each document  constitutes
                     the legal,  valid and binding  obligation  of the  Company,
                     enforceable  against  the  Company in  accordance  with its
                     terms,  and the articles of merger  contemplated in Section
                     1.3; and this  Agreement  and such  articles of merger have
                     been  duly  executed  and  delivered  by  the  Company  and
                     constitute valid and binding obligations of the Company.

                                       48
<PAGE>
              (iv)   No actions  are  required  to be taken in order to make the
                     Merger  effective  which have not been taken on or prior to
                     the  delivery  of such  letter  except the  delivery of the
                     articles  of  merger  contemplated  in  Section  1.3 to the
                     Secretary of State of the States of California and Delaware
                     in  accordance   with  California  Law  and  Delaware  Law,
                     respectively.

              (v)    Neither the  execution  and delivery by the Company of this
                     Agreement,  nor  the  consummation  by the  Company  of the
                     transactions    contemplated   hereby   (a)   violates   or
                     contravenes any of the Company's organizational  documents;
                     (b)  violates or  contravenes  any  applicable  law; (c) to
                     counsel's  knowledge,  violates or  contravenes  any order,
                     writ,  injunction  or decree  of any court or  governmental
                     instrumentality;   (d)   results   in  the  breach  of,  or
                     constitutes a default under, or requires any consent under,
                     any  Material  Contract;  (e)  results in the  creation  or
                     imposition of any lien, mortgage, security interest, charge
                     or encumbrance under any Material  Contract;  or (f) except
                     to the extent  already  obtained,  requires  the consent or
                     approval  of,  or any  filing  or  registration  with,  the
                     Shareholders or any Governmental Authority.

              (vi)   There  are no  judgments,  orders,  injunctions,  or  other
                     restraints  issued or filed  against  the  Company,  nor is
                     there  any   pending  or,  to  the   counsel's   knowledge,
                     threatened    litigation,    arbitration    proceeding   or
                     governmental  or  administrative   proceedings  against  or
                     involving the Company.

              (vii)  The Company is not an  "investment  company"  registered or
                     required to be registered under the Investment  Company Act
                     of 1940,  as amended  (the "1940  Act") nor is the  Company
                     "controlled"  by such a company,  within the meaning of the
                     1940 Act.

              (viii) The  Company is not a "holding  company"  or a  "subsidiary
                     company"  of a "holding  company"  or an  "affiliate"  of a
                     "holding  company" within the meaning of The Public Utility
                     Holding Company Act of 1935, as amended;

          (e) Parent shall not have discovered any fact or circumstance existing
     as of the date of this Agreement  which has not been publicly  disclosed by
     the  Company  as of the  date of this  Agreement  regarding  the  business,
     assets,  properties,   condition  (financial  or  otherwise),   results  of
     operations  or prospects of the Company  which is,  individually  or in the
     aggregate with other such facts and  circumstances,  materially  adverse to
     the  Company  taken as a whole,  or to the value of the  shares of  Company
     Common Stock;

                                       49
<PAGE>
          (f) Parent shall have entered into an Employment  Agreement  with each
     of Robert R. Cullen and Richard J. Sweeney;

          (g) the Company  shall not have  received  written  objections  to the
     Merger  pursuant to applicable  California Law covering more than 5% of the
     shares  of  Company  Common  Stock  outstanding  immediately  prior  to the
     Effective Time;

          (h) on the Closing  Date,  the Board of Directors of Parent shall have
     received from Carmichael & Company LLC a written  update,  dated as of such
     date, confirming that, from a financial point of view, the consideration to
     be offered to the  Shareholders  of the Company in the Merger  contemplated
     hereby is fair to Parent; and

          (i) the Parent  shall have  received a waiver by Lucent  Technologies,
     Inc. of its right of first refusal relating to the Merger.

                                    ARTICLE 7

                        TERMINATION, AMENDMENT AND WAIVER

     7.1 Termination.  Subject to the provisions  hereof,  this Agreement may be
terminated prior to the Effective Time:

          (a) by Parent,  if there has been a material  breach by the Company or
     any of the  Designated  Persons of any covenant or agreement of the Company
     or any of the  Designated  Persons  set forth in this  Agreement  or in any
     other  agreement or  instrument  delivered to Parent,  which breach has not
     been  cured  within  30 days of the date on which  written  notice  of such
     breach  was first  given to the  Company  or which is not  capable of being
     cured by the Scheduled Closing Time;

          (b) by the Company,  if there has been a material  breach by Parent of
     any covenant or agreement of Parent in this Agreement, which breach has not
     been  cured  within  30 days of the date on which  written  notice  of such
     breach was first  given to Parent or which is not capable of being cured by
     the Scheduled Closing Time;

          (c) by  Parent,  if  Parent  reasonably  determines  that  the  timely
     satisfaction  of any  condition  set  forth  in  Section  6.1 or 6.3 by the
     Scheduled Closing Time has become impossible (other than as a result of any
     failure on the part of Parent or Merger Sub to comply  with or perform  any
     covenant  or  obligation  of  Parent  or  Merger  Sub  set  forth  in  this
     Agreement);

          (d) by the  Company,  if the Company  reasonably  determines  that the
     timely satisfaction of any condition set forth in Section 6.1 or 6.2 by the
     Scheduled Closing Time has become impossible (other than as a result of any

                                       50
<PAGE>
     failure  on the part of the  Company  or any of the  Designated  Persons to
     comply  with or  perform  any  covenant  or  obligation  set  forth in this
     Agreement or in any other agreement or instrument delivered to Parent);

          (e)  by  Parent,  at or  after  the  Scheduled  Closing  Time,  if any
     condition  set forth in Section  6.1 or 6.3 has not been  satisfied  by the
     Scheduled  Closing  Time (other than as a result of any failure on the part
     of  Parent  or  Merger  Sub to  comply  with or  perform  any  covenant  or
     obligation of Parent or Merger Sub set forth in this Agreement);

          (f) by the Company,  at or after the  Scheduled  Closing  Time, if any
     condition  set forth in Section  6.1 or 6.2 has not been  satisfied  by the
     Scheduled  Closing  Time (other than as a result of any failure on the part
     of the Company or any of the  Designated  Persons to comply with or perform
     any  covenant or  obligation  set forth in this  Agreement  or in any other
     agreement or instrument delivered to Parent);

          (g) by Parent,  if the  Closing  has not taken  place on or before the
     Final Date  (other than as a result of any failure on the part of Parent to
     comply with or perform any  covenant or  obligation  of Parent set forth in
     this Agreement);

          (h) by the  Company,  if the  Closing has not taken place on or before
     the Final Date  (other  than as a failure on the part of the Company or any
     of the  Designated  Persons  to comply  with or  perform  any  covenant  or
     obligation  set  forth  in this  Agreement  or in any  other  agreement  or
     instrument delivered to Parent); or

          (i) by the mutual consent of Parent and the Company.

     As used herein,  the Final Date shall be April 14,  2000,  except that if a
temporary,  preliminary or permanent injunction or other order by any Federal or
state court that would prohibit or otherwise restrain consummation of the Merger
shall have been issued and shall  remain in effect on April 14,  2000,  and such
injunction  shall not have become  final and  nonappealable,  either  party,  by
giving  the other  written  notice  thereof on or prior to April 14,  2000,  may
extend the time for  consummation  of the Merger up to and including the earlier
of the date such  injunction  shall  become final and  nonappealable  or May 31,
2000, so long as such party shall,  at its own expense,  use its best efforts to
have such injunction dissolved.

     7.2  Termination  Procedures.  If Parent wishes to terminate this Agreement
pursuant to Section 7.1(a),  Section  7.1(c),  Section 7.1(e) or Section 7.1(g),
Parent  shall  deliver to the Company a written  notice  stating  that Parent is
terminating this Agreement and setting forth a brief description of the basis on
which Parent is terminating  this Agreement.  If the Company wishes to terminate
this Agreement  pursuant to Section 7.1(b),  Section  7.1(d),  Section 7.1(f) or
Section  7.1(h),  the Company shall deliver to Parent a written  notice  stating
that the  Company  is  terminating  this  Agreement  and  setting  forth a brief
description of the basis on which the Company is terminating this Agreement.

                                       51
<PAGE>
     7.3 Effect of  Termination.  If this  Agreement is  terminated  pursuant to
Section 7.1, all further  obligations of the parties under this Agreement  shall
terminate.  If this Agreement is terminated  pursuant to Section 7.1 as a result
of the inaccuracy of any  representation or warranty of Parent or the Merger Sub
set forth in Article 2 or the  inaccuracy of any  representation  or warranty of
the  Company  set  forth  in  Article  3,  the  party  making  such   inaccurate
representation  or warranty shall be subject to liability for the termination of
this  Agreement  as a  result  thereof  only  if  and  to the  extent  that  any
Responsible  Officer (as defined  below) of such party had actual  knowledge  of
such inaccuracy.  For purposes hereof,  "Responsible Officer" of any party shall
mean the chairman of the board of directors,  the chief executive  officer,  the
chief  operating  officer,  the chief  financial  officer,  any  executive  vice
president, the treasurer or the secretary of such party.

                                   ARTICLE 8

                               GENERAL PROVISIONS

     8.1 Amendment. This Agreement may not be amended except by an instrument in
writing  approved by the parties to this  Agreement and signed on behalf of each
of the parties hereto; provided,  however, that, after approval of the Merger by
the  shareholders  of the Company,  no amendment  may be made which  changes the
amount into which each share of Company  Common  Stock will be  converted in the
Merger or effects any change which would  materially  and  adversely  affect the
shareholders of the Company without the further  approval of the shareholders of
the Company.

     8.2 Waiver.  At any time prior to the Effective  Time, any party hereto may
(a) extend the time for the  performance of any of the obligations or other acts
of any other party hereto or (b) waive  compliance  with any of the agreement of
any other party or with any conditions to its own obligations, in each case only
to the extent such  obligations,  agreements and conditions are intended for its
benefit.  No  failure  on the part of any party  hereto to  exercise  any power,
right, privilege or remedy under this Agreement, and no delay on the part of any
party  hereto in  exercising  any power,  right,  privilege or remedy under this
agreement,  shall operate as a waiver of such power, right, privilege or remedy,
and no single or partial exercise of any such power, right,  privilege or remedy
shall  preclude  any other or future  exercise  thereof  or of any other  power,
right,  privilege or remedy.  No party hereto shall be deemed to have waived any
claim arising out of this Agreement,  or any power,  right,  privilege or remedy
under this Agreement,  unless the waiver of such claim, power, right,  privilege
or remedy is  expressly  set forth in a written  instrument  duly  executed  and
delivered on behalf of such party,  and any such waiver shall not be  applicable
or have any effect except in the specific instance in which it was given.

     8.3 Public Statements. Except as required by applicable law, no party shall
make any public  announcement  or  statement  with  respect to the Merger,  this
Agreement or any related  transaction without the approval of the other parties,
which approval will not be unreasonably withheld. Moreover, each party agrees to
consult with the other parties prior to issuing any such public  announcement or
statement.

     8.4 Notices.  All notices and other  communications  hereunder  shall be in
writing and shall be sufficiently  given if made by hand delivery,  by telex, by
telecopier,  or by  registered  or certified  mail  (postage  prepaid and return

                                       52
<PAGE>
receipt  requested) to the parties at the following  addresses (or at such other
address for a party as shall be specified by it by like notice):

         If to Parent or
         the Merger Sub:        LightPath Technologies, Inc.
                                  6820 Academy Parkway East, N.E.
                                  Albuquerque, New Mexico 87109
                                  Attn.: Chief Executive Officer

         With a copy to:        Squire, Sanders & Dempsey L.L.P.
                                  40 N. Central Avenue
                                  Phoenix, Arizona  85004
                                  Telecopy:  (602) 253-8129
                                  Attn.: Joseph M. Crabb, Esq.

         If to the Company:     Horizon Photonics, Inc.
                                  679 Brea Canyon Road
                                  Walnut, California 91789
                                  Telecopy:  (909) 444-0025
                                  Attn.: Chief Executive Officer

         With a copy to:        Allen Matkins Leck Gamble & Mallory LLP
                                  18400 Von Karman, Fourth Floor
                                  Irvine, California 92612
                                  Telecopy:  (949) 553-8354
                                  Attn: Gregory W. Preston, Esq.

     All such notices and other communications shall be deemed to have been duly
given: when delivered by hand, if personally delivered; five business days after
being  deposited  in the mail,  postage  prepaid,  if  delivered  by mail;  when
answered back, if telexed; and when receipt acknowledged, if telecopied.

     8.5  Interpretation.  When  a  reference  is  made  in  this  Agreement  to
subsidiaries  of  Parent,  the  word  "subsidiary"  means  any   "majority-owned
subsidiary"  (as  defined  in Rule  12b-2  under the  Exchange  Act) of  Parent;
provided,  however,  that  the  Company  shall  in no  event  and at no  time be
considered a subsidiary of Parent for purposes of this  Agreement.  The headings
contained in this Agreement are for reference purposes only and shall not affect
in any way the  meaning  or  interpretation  of this  Agreement.  References  to
Sections and Articles  refer to sections and articles of this  Agreement  unless
otherwise stated.  Words such as "herein,"  "hereinafter,"  "hereof,"  "hereto,"
"hereby" and "hereunder," and words of like import,  unless the context requires
otherwise,  refer to this  Agreement  (including  the exhibits  and  attachments
hereto). As used in this Agreement,  the masculine,  feminine and neuter genders
shall be deemed to include the others if the context requires.

     8.6  Severability.  If term,  provision,  covenant or  restriction  of this
Agreement is held by a court of competent  jurisdiction  to be invalid,  void or
unenforceable,   the  remainder  of  the  terms,   provisions,   covenants,  and
restrictions  of this Agreement  shall remain in full force and effect and shall

                                       53
<PAGE>
in no way be affected,  impaired or invalidated  and the parties shall negotiate
in good faith to modify this  Agreement  to preserve  each  party's  anticipated
benefits under this Agreement.

     8.7  Miscellaneous.  This Agreement  (together with all other documents and
instruments  referred to herein):  (a)  constitutes  the entire  agreement,  and
supersedes all other prior agreements and  undertakings,  both written and oral,
among the  parties,  with  respect  to the  subject  matter  hereof;  (b) is not
intended to confer upon any other person any rights or remedies  hereunder;  (c)
shall not be assigned by operation of law or  otherwise,  except that Parent and
the  Merger  Sub may  assign  all or any  portion  of their  rights  under  this
Agreement to any wholly owned  subsidiary,  but no such assignment shall relieve
Parent and the Merger Sub of their obligations  hereunder,  and except that this
Agreement  may be assigned by operation of law to any  corporation  with or into
which Parent may be merged; and (d) shall be governed in all respects, including
validity,  interpretation  and  effect,  by the  internal  laws of the  State of
Delaware,  without giving effect to any principles of conflict of laws or choice
of law; provided,  however, that the Letter of Intent shall remain in full force
and effect  notwithstanding  the  execution  and delivery of this  Agreement and
nothing in this Agreement shall supersede any of the provisions of the Letter of
Intent.  This  Agreement  may be  executed  in two or  more  counterparts  which
together shall constitute a single agreement.

     8.8 Non-survival of Representations and Warranties. The representations and
warranties  of the parties set forth herein shall  terminate as of the Effective
Time.

     8.9 Entire Agreement;  No Third Party  Beneficiaries;  Rights of Ownership.
This Agreement  (including the documents and the instruments referred to herein)
(a) constitutes the entire  agreement among the parties and supercedes all prior
agreements  and  understandings,  both written and oral,  among the parties with
respect to the subject matter hereof,  other than the confidentiality  provision
of the Letter of Intent, which should survive the execution and delivery of this
Agreement  and (b) except as provided in Sections 5.15 and 5.17, is not intended
to confer upon any person  other than the parties  hereto any rights or remedies
hereunder. The parties acknowledge that no party shall have the right to acquire
or shall be deemed to have  acquired  shares of common  stock of the other party
pursuant to the Merger until consummation thereof.

     8.10 Fax  Signatures  This  Agreement and any other  document or instrument
relating hereto may be executed by a party's signature  transmitted by facsimile
("fax"),  and  copies of this  Agreement  and any such  document  or  instrument
executed and  delivered by means of faxed  signatures  shall have the same force
and effect as copies hereof executed and delivered with original signatures. All
parties  hereto  may rely  upon  faxed  signatures  as if such  signatures  were
originals.  Any party  executing  and  delivering  this  Agreement  and any such
document or instrument by fax shall  promptly  thereafter  deliver a counterpart
signature page of this Agreement and the fully executed  original or counterpart
original of any such document or  instrument  containing  said party's  original
signature.  All parties  hereto agree that a faxed  signature  may be introduced
into evidence in any  proceeding  arising out of or related to this Agreement or
any such document or instrument as if it were an original signature.

                [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]

                                       54
<PAGE>
                                MERGER AGREEMENT

                                 SIGNATURE PAGE

     IN WITNESS WHEREOF, Parent, the Merger Sub and the Company have caused this
Agreement  to be executed on the date first  written  above by their  respective
officers thereunder duly authorized.

                                        LIGHTPATH TECHNOLOGIES, INC.

                                        By: /s/ Donald Lawson
                                            ------------------------------------
                                        Name: Donald Lawson
                                        Title: President and CEO

                                        LPI MERGER CORPORATION

                                        By: /s/ Donald Lawson
                                            ------------------------------------
                                        Name: Donald Lawson
                                        Title: President

                                        HORIZON PHOTONICS, INC.

                                        By: /s/ Robert Cullen
                                            ------------------------------------
                                        Name: Robert Cullen
                                        Title: President
<PAGE>
Schedules to the Merger Agreement have been omitted.  The Company  undertakes to
furnish  supplementally  a copy of any omitted  schedule to the  Securities  and
Exchange Commission upon request.

SCHEDULES

Schedule 1.4        Officers and Directors of Surviving  Corporation
Schedule 1.5(a)     Shareholder Ownership
Schedule 1.12       Indemnification; Payment of Note
Schedule 3.2        Authority Relative to this Agreement
Schedule 3.3(b)     Company Options
Schedule 3.3(f)     Registration of Securities
Schedule 3.6        Undisclosed Liabilities
Schedule 3.8        Certain Developments
Schedule 3.9(a)     Liens
Schedule 3.9(b)     Real Estate
Schedule 3.9(c)     Leases
Schedule 3.11       Inventory
Schedule 3.12(d)    Tax Returns
Schedule 3.13(a)    Contracts
Schedule 3.13(b)    Breach of Contract
Schedule 3.14       Proprietary Rights
Schedule 3.18       Employee Benefit Plans
Schedule 3.19       Insurance
Schedule 3.20       Affiliate Transactions
Schedule 3.21       Suppliers
Schedule 3.22       Officers and Directors; Bank Accounts
Schedule 3.23       Compliance with Laws; Permits; Certain Operations
Schedule 3.25       Non-Contravention; Consents
Schedule 5.16       Future Employment Incentives
Schedule 5.17       Funding CommitmentExhibit 4.1

                                      NOTE

                                                    Date of Note:    May 8, 2000

Principal Amount:  $11,616,750

Maturity Date:     April 28, 2001

Interest Rate:     8.5% per  annum to be  computed  on an  actual/365-day  basis
                   (i.e.,  interest  for  each  day  during  which  any  of  the
                   Principal  Amount is  outstanding  shall be  computed  at the
                   Interest Rate divided by 365).

                  FOR VALUE  RECEIVED,  the  undersigned  ("Maker")  does hereby
covenant  and  promise to pay to the order of PROMUS  HOTELS,  INC.,  a Delaware
corporation  or  its  successors  or  assigns  (collectively,  "Payee"),  at 755
Crossover Lane, Memphis,  Tennessee 38117-4900,  or at such other place as Payee
may designate to Maker in writing from time to time,  the Principal  Amount,  on
the Maturity  Date,  together  with  interest at the Interest Rate on the unpaid
portion of the  Principal  Amount on the first day of the first month  following
the Date of Note and on the first day of each month  thereafter  until this Note
is paid in full,  and with a late  payment  premium  of 4% of any  principal  or
interest  payment made more than ten (10) days after the due date thereof  which
shall be due with any such late payment. All payments of principal, interest and
other sums  hereunder  shall be made in lawful money of the United States and in
immediately available funds.

                  Pursuant  to  Section  2(b)  of  the  Purchase  Agreement  (as
hereinafter defined), in addition to the payment of interest as provided herein,
commencing  on the first day of the first month  following the repayment in full
of all sums evidenced by (w) the Note made by Maker to Payee dated September 20,
1999 in the principal amount of $26,625,000, (x) the Note made by Maker to Payee
dated October 5, 1999 in the principal  amount of $7,350,000,  (y) the Note made
by Maker to Payee dated November 29, 1999 in the principal amount of $30,210,000
and (z) the Note made by Maker to Payee dated December 22, 1999 in the principal
amount of $4,384,500 and on the first day of each month thereafter, Maker hereby
covenants and promises to pay a monthly principal  amortization payment equal to
the  Amortization   Amount,   as  hereinafter   defined.   Each  such  principal
amortization  payment shall be applied in reduction of the Principal  Amount. In
connection  with  calculating  the  Amortization   Amount,   on  or  before  the
twenty-second  (22nd)  day of each  month (or if such 22nd day is not a business
day,  the  first  business  day  thereafter)  between  the date  hereof  and the
repayment in full of amounts  evidenced by this Note and secured by the Mortgage
(as  hereinafter  defined),  Maker  shall  notify  Payee (the  "Equity  Proceeds
Notice")  of (1) the  total  proceeds  received  in  connection  with the  "best
efforts" public offering of shares in Maker (the

<PAGE>

"Equity  Proceeds")  and (2) the net sum  available  to Maker  from  the  Equity
Proceeds after deduction of offering expenses,  including,  without  limitation,
accountants' fees, legal fees, printing expenses, registration fees, NASD filing
fees,  stock  exchange/quotation  service  listing fees and  transfer  agent and
escrow charges, selling commissions,  marketing expense allowance,  Property (as
herein  defined)  acquisition  fees and expenses and closing costs and a working
capital  reserve and a reserve for  renovations,  repairs  and  replacements  of
capital  improvements  for each  Property  (the "Net Equity  Proceeds"),  all as
contemplated  in Maker's Form S-11  Registration  Statement,  filed on August 3,
1999. For the purposes of this Note (i) the "Amortization  Amount" shall mean an
amount  equal to the  excess of the Net  Equity  Proceeds  set forth in the most
recent  Equity  Proceeds  Notice  over the sum of (x)  $95,298,500  plus (y) the
aggregate of all previous principal  amortization  payments applied in reduction
of the  Principal  Amount and (ii)  "Property"  shall  mean,  collectively,  the
properties  sold to  Maker  as of the  date  hereof  pursuant  to  that  certain
Agreement of Sale dated  November 22, 1999 between  Hampton Inns,  Inc.,  Promus
Hotels Florida,  Inc. and Promus Hotels,  Inc., as sellers,  and Maker, as buyer
(the "Purchase  Agreement").  Notwithstanding  the foregoing,  nothing  provided
herein shall prevent Payee from paying the  Amortization  Amount more often than
monthly.

                  This Note is secured by, among other things,  mortgages and/or
deeds of trust and/or deeds to secure debt  (individually and collectively,  the
"Mortgage"),  which Mortgage  specifies  various  defaults upon the happening of
which  all  sums  owing  on this  Note  may,  at  Payee's  option,  be  declared
immediately due and payable.

                  Maker agrees that it shall be bound by any agreement extending
the time or modifying the above terms of payment, made by Payee and the owner or
owners of the property affected by the Mortgage,  whether with or without notice
to Maker,  and Maker shall continue liable to pay the amount due hereunder,  but
with  interest at a rate no greater  than the  Interest  Rate,  according to the
terms of any such  agreement  of  extension  or  modification.  This Note may be
prepaid, in whole or in part, without premium or penalty.

                  This Note may not be changed orally,  but only by an agreement
in writing,  signed by the party against whom enforcement of any waiver, change,
modification or discharge is sought.

                  Should the  indebtedness  represented by this Note or any part
thereof be collected at law or in equity, or in bankruptcy,  receivership or any
other court  proceedings  (whether at the trial or appellate  level),  or should
this Note be placed in the hands of attorneys for collection upon default, Maker
agrees to pay, in  addition  to the  principal,  premium  and  interest  due and
payable  hereon,  all costs of  collection  or  attempting to collect this Note,
including reasonable attorneys' fees and expenses.

                  All parties to this Note,  whether Maker,  principal,  surety,
guarantor or endorser,  hereby waive presentment for payment,  demand,  protest,
notice of protest and notice of dishonor.

                                       2
<PAGE>

                  Anything   herein  to  the   contrary   notwithstanding,   the
obligations  of Maker under this Note and the  Mortgage  shall be subject to the
limitation  that  payments of interest  shall not be required to the extent that
receipt of any such  payment by Payee  would be contrary  to  provisions  of law
applicable to Payee limiting the maximum rate of interest that may be charged or
collected by Payee.

                  In case of any loss, theft,  destruction or mutilation of this
Note, Maker shall, upon its receipt of an affidavit of an officer of Payee as to
such loss, theft, destruction or mutilation and an appropriate  indemnification,
execute and deliver a replacement Note to Payee in the same principal amount and
otherwise of like tenor as this Note.

                  MAKER BY EXECUTION  HEREOF,  AND PAYEE BY  ACCEPTANCE  HEREOF,
HEREBY EXPRESSLY AND UNCONDITIONALLY WAIVES, IN CONNECTION WITH ANY SUIT, ACTION
OR PROCEEDING  BROUGHT BY PAYEE ON THIS NOTE, ANY AND EVERY RIGHT IT MAY HAVE TO
A TRIAL BY JURY.

                  This  Note  and the  rights  and  obligations  of the  parties
hereunder  shall in all respects be governed by, and  construed  and enforced in
accordance  with, the laws of the State of Tennessee  (without  giving effect to
Tennessee's principles of conflicts of law). Maker hereby irrevocably submits to
the  non-exclusive  jurisdiction of any Tennessee State or Federal court sitting
in The City of Memphis  over any suit,  action or  proceeding  arising out of or
relating to this Note, and Maker hereby agrees and consents that, in addition to
any methods of service of process provided for under applicable law, all service
of process in any such suit,  action or  proceeding  in any  Tennessee  State or
Federal  court  sitting  in The  City of  Memphis  may be made by  certified  or
registered  mail,  return  receipt  requested,  directed to Maker at the address
indicated below, with a copy to counsel at Jenkens & Gilchrist,  Fountain Place,
1445 Ross Avenue,  Suite 3200, Dallas, Texas 75202, and service so made shall be
complete five (5) days after the same shall have been so mailed.

                  [Remainder of page intentionally left blank.]

                                       3
<PAGE>

                  IN WITNESS WHEREOF, Maker has executed and delivered this Note
on the day and year first above written.

                                               APPLE SUITES, INC.,
                                               a Virginia corporation

                                               By /s/ Glade M. Knight
                                                  ------------------------------
                                               Name:  Glade M. Knight
                                               Title: Chairman of the Board and
                                                      President

                                               Address of Maker:
                                               -----------------

                                               306 East Main Street
                                               Richmond, Virginia 23219
                                               Attention: Glade M. Knight

                  This is to certify  that this Note was executed in my presence
on the date hereof by the party whose  signature  appears  above in the capacity
indicated.

                                               /s/ Jacquelyn B. Owens
                                               ---------------------------------
                                               Notary Public

                                               My commission expires:

                                                   6/30/03
                                               ---------------------------------

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