Document:

EX-4.1

                                 FORM OF OPTION

THIS  OPTION  MAY NOT BE  OFFERED  FOR SALE,  SOLD,  HYPOTHECATED,  ASSIGNED  OR
OTHERWISE  TRANSFERRED,   EXCEPT  (I)  BY  WILL  OR  THE  LAWS  OF  DESCENT  AND
DISTRIBUTION,  (II) UNDER A DOMESTIC  RELATIONS  ORDER IN  SETTLEMENT OF MARITAL
PROPERTY  RIGHTS,  OR (III) TO A  CUSTODIAN,  TRUSTEE  (INCLUDING A TRUSTEE OF A
VOTING TRUST),  EXECUTOR,  OR OTHER FIDUCIARY IN A CUSTODIAL  ACCOUNT,  TRUST OR
OTHER ARRANGEMENT BY WHICH THE HOLDER RETAINS THE ENTIRE BENEFICIAL  INTEREST IN
THE OPTION.

Option No. Op-________                            Date of Issuance: ____________

                          LIGHTPATH TECHNOLOGIES, INC.

                     OPTION TO PURCHASE CLASS A COMMON STOCK

                          VOID AFTER: DECEMBER 10, 2003

     This certifies  that, for value received,  ____________________________  or
any subsequent permitted holder hereof ("Holder"),  is entitled,  subject to the
terms set forth below, to purchase from LIGHTPATH TECHNOLOGIES, INC., a Delaware
corporation (the  "Company"),  _____________ ( ) shares (the "Option Shares") of
Class A Common  Stock,  $0.01 par value per share,  of the Company  (the "Common
Stock"),  as  constituted  on the date  hereof (the  "Issue  Date"),  subject to
compliance  with relevant  federal and state  securities and blue sky laws, upon
surrender hereof, at the principal office of the Company referred to below, with
the  Notice of  Exercise  form  attached  hereto as Annex A duly  executed,  and
simultaneous  payment  therefor  in  lawful  money of the  United  States at the
Exercise  Price as set  forth in  Section 2 below.  The  number,  character  and
Exercise  Price of such  shares of Common  Stock are  subject to  adjustment  as
provided  below.  The term "Option" as used herein shall include this Option and
any options delivered in substitution or exchange therefor as provided herein.

     1. TERM OF OPTION; VESTING.

          (a)  TERM.  Subject  to the  terms and  conditions  set  forth  herein
(including, without limitation, the vesting conditions set forth in Section 1(b)
below), this Option shall be exercisable during the term (the "Term") commencing
on the effective date of a registration  statement filed by the Company with the
Securities and Exchange  Commission with respect to the  registration  under the
Securities  Act of 1933,  as amended,  of the issuance of the Option Shares upon
exercise hereof (the "Option Effective Date"),  and ending at 5:00 p.m., central
time, on December 10, 2003, and shall be void thereafter.(1)

          (b) No Exercise Prior to Option  Effective Date. This Option shall not
be exercisable as to the Option Shares at any time prior to the Option Effective
Date.

---------
(1)  This  Option is  issued  pursuant  to that  certain  "ORDER  AND FINAL
     JUDGMENT,"  entered on November 9, 2001, in  "LIGHTPATH  TECHNOLOGIES,
     INC., V. LEEBURG,  ET AL.," C.A. No. 18021,  commenced on May 2, 2000,
     in the Delaware Court of Chancery,  New Castle  County,  modifying and
     approving that certain  "STIPULATION OF SETTLEMENT," filed on November
     17, 2000.

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     2. EXERCISE PRICE. This Option will have an exercise price of three dollars
and seventy-three cents ($3.73) per share of Class A Common Stock of the Company
(the "Exercise  Price").  This Option must be exercised for the entire number of
Option  Shares  covered by it; no partial  exercise of this Option is permitted.
The Company  will not be required to honor  attempts to exercise  this Option in
part. The Exercise Price is subject to adjustment only as provided in Section 10
hereof.

     3. EXERCISE OF OPTION.

          (a) EXERCISE MECHANICS. The purchase rights represented by this Option
are  exercisable  by the  Holder  for no less than the  entire  number of Option
Shares  covered by this Option (with such number of Option  Shares being subject
to adjustment  only as provided in Section 10 below),  at any time, or from time
to time,  during  the term  hereof  as  described  in  Section  1 above,  by the
surrender  of this  Option  and the  Notice  of  Exercise  annexed  hereto  duly
completed  and  executed  on behalf of the  Holder,  at the  offices of both the
Option Agent and the Company, as set forth in Section 6(b) herein (or such other
office or agency of the Company as it may  designate by notice in writing to the
Holder at the address of the Holder appearing on the books of the Company), upon
payment in full of the Exercise Price for the Option Shares  acquired,  in cash,
certified or bank funds or wire transfer of immediately available funds.

          (b) DATE OF  EXERCISE.  This  Option  shall  be  deemed  to have  been
exercised  immediately  prior  to the  close  of  business  on the  date  of its
surrender for exercise and payment of the Exercise Price as provided above,  and
the person  entitled to receive the shares of Common  Stock  issuable  upon such
exercise  shall be  treated  for all  purposes  as the  holder of record of such
shares as of the close of business on such date. As promptly as  practicable  on
or after such date, the Company, at its expense,  shall issue and deliver to the
person or persons entitled to receive the same a certificate or certificates for
the number of shares  issuable upon such exercise.  Any provision  herein to the
contrary  notwithstanding,  no Option Shares shall be delivered  hereunder until
the registration  statement filed with the Securities and Exchange Commission to
register the issuance of the Option Shares hereunder shall have become effective
and  remain  effective  under the  Securities  Act of 1933,  as  amended,  and a
prospectus relating thereto shall have been delivered to the Holder.

          (c)  COMPLIANCE  WITH  SECURITIES  LAWS.  The Option  Shares  shall be
stamped or  imprinted  with a legend in  substantially  the  following  form (in
addition to any legend required by state securities laws):

          THE  SECURITIES  REPRESENTED  HEREBY MAY NOT BE OFFERED FOR SALE,
          SOLD,  HYPOTHECATED,  ASSIGNED OR OTHERWISE  TRANSFERRED,  EXCEPT
          PURSUANT  TO  AN  EFFECTIVE   REGISTRATION  STATEMENT  UNDER  THE
          SECURITIES  ACT OF 1933,  AS AMENDED,  AND ANY  APPLICABLE  STATE
          SECURITIES  LAWS,  OR AN EXEMPTION  THEREFROM  UNDER SAID ACT AND
          APPLICABLE LAWS.

     4. REPLACEMENT OF OPTION. On receipt of evidence reasonably satisfactory to
the Company of the loss,  theft,  destruction or mutilation of this Option,  the
Company shall execute and deliver,  in lieu of this Option, a new option of like
tenor and amount.  At the request of the Company,  the Holder shall  provide the
Company  with an executed  Lost Option  Affidavit  substantially  in the form of
Annex B attached  hereto,  each at the cost of the  Holder,  in order to provide
reasonable protection to the Company concerning the replacement of this Option.

     5. RIGHTS OF STOCKHOLDERS. Subject to Sections 8 and 10 of this Option, the
Holder  shall not be  entitled  to vote or  receive  dividends  or be deemed the
holder of Common  Stock or any other  securities  of the Company that may at any

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<PAGE>
time be issuable on the  exercise  hereof for any  purpose,  nor shall  anything
contained  herein be  construed to confer upon the Holder,  as such,  any of the
rights of a stockholder  of the Company or any right to vote for the election of
directors or upon any matter  submitted to stockholders at any meeting  thereof,
or to give or  withhold  consent  to any  corporate  action  (whether  upon  any
recapitalization,  issuance of stock,  reclassification  of stock, change of par
value, or change of stock to no par value, consolidation, merger, conveyance, or
otherwise)  or to  receive  notice  of  meetings,  or to  receive  dividends  or
subscription  rights or otherwise  until the Option shall have been exercised as
provided herein.

     6. LIMITATIONS ON TRANSFER OF OPTION.

          (a) OPTION REGISTER. The Company will maintain a register (the "Option
Register")  containing  the names and  addresses  of the Holder or Holders.  Any
Holder of this Option or any portion  thereof may change his, her or its address
as shown on the Option Register by written notice to the Company requesting such
change. Any notice or written communication required or permitted to be given to
the  Holder  may be  delivered  or given by mail to such  Holder as shown on the
Option  Register  as the  absolute  owner  of  this  Option  for  all  purposes,
notwithstanding  any notice to the contrary.  The initial  Holder of this Option
hereby  consents to the use of the following  address for purposes of the Option
Register:

                                [HOLDER NAME]
                                [HOLDER ADDRESS]
                                [HOLDER ADDRESS]
                                Telephone: (  ) ___-____
                                Facsimile: (  ) ___-____

          (b) OPTION AGENT.  Continental Stock Transfer and Trust Company is the
Company's agent for the purpose of maintaining  the Option Register  referred to
in Section 6(a) above,  issuing the Option  Shares,  exchanging  this Option and
replacing  this  Option.  Any  such   registration,   issuance,   exchange,   or
replacement,  as the case may be,  shall be made at the  office of such agent as
follows:

                                Continental Stock Transfer and Trust Company
                                2 Broadway, 19th Floor
                                New York, NY  10004
                                Phone: (212) 509-4000
                                Fax: (212) 509-5152

                                with copy to:

                                Donna Bogue
                                Chief Financial Officer
                                LightPath Technologies, Inc.
                                3819 Osuna, N.E.
                                Albuquerque, NM  87109

          (c)  NON-TRANSFERABILITY OF OPTION. This Option may not be offered for
sale, sold, hypothecated,  assigned or otherwise transferred, except (i) by will
or the laws of descent and distribution,  (ii) under a domestic  relations order
in  settlement  of marital  property  rights,  or (iii) to a custodian,  trustee

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<PAGE>
(including  a trustee of a voting  trust),  executor,  or other  fiduciary  in a
custodial  account,  trust or other  arrangement by which the Holder retains the
entire beneficial interest in the Option.

     7.  RESERVATION OF STOCK.  The Company  covenants that during the Term this
Option is exercisable, the Company will reserve from its authorized and unissued
Common Stock a sufficient number of shares to provide for the issuance of Common
Stock upon the exercise of this Option, provided,  however, the Company shall at
all times  reserve  the right to issue  treasury  shares to the Holder  upon the
exercise  hereof.  The Company  further  covenants that all Option Shares,  upon
exercise of the rights  represented  by this Option and payment of the  Exercise
Price, all as set forth herein,  will be free from all taxes,  liens and charges
in respect of the issue  thereof  (other  than taxes in respect of any  transfer
occurring  contemporaneously  or otherwise  specified  herein or liens resulting
from the Holder's actions), will be duly authorized,  validly issued, fully paid
and  nonassessable  and will not be issued in violation of any preemptive rights
(whether  statutory,  contractual  or  otherwise).  The Company  agrees that its
issuance of this Option shall  constitute full authority to its officers who are
charged with the duty of executing  stock  certificates to execute and issue the
necessary  certificates  for shares of Common  Stock upon the  exercise  of this
Option.

     8. NOTICES.

          (a)  CERTIFICATE  OF CHIEF  FINANCIAL  OFFICER.  Whenever the Exercise
Price or number of shares  purchasable  hereunder shall be adjusted  pursuant to
Section 10 hereof, the Company shall,  within thirty (30) days of the occurrence
of the event which triggered such adjustment,  issue a certificate signed by its
Chief Financial Officer setting forth, in reasonable detail, the event requiring
the  adjustment,  the  amount  of the  adjustment,  the  method  by  which  such
adjustment  was  calculated,  and  the  Exercise  Price  and  number  of  shares
purchasable hereunder after giving effect to such adjustment,  and shall cause a
copy of such certificate to be mailed (by first-class mail,  postage prepaid) to
the Holder of this Option.  The Company shall, upon the written request,  at any
time, of any such Holder, furnish or cause to be furnished to such Holder a like
certificate  setting forth:  (i) such  adjustments and  readjustments;  (ii) the
Exercise  Price at the time in  effect;  and (iii) the  number of shares and the
amount,  if any, of other  property  that at the time would be received upon the
exercise of the Option.

          (b) NOTICE OF CERTAIN FUNDAMENTAL TRANSACTIONS. In case of:

               (i) any  Extraordinary  Transaction,  as that term is  defined in
Section 10(a) hereof;

               (ii) any reclassification of the capital stock of the Company, or

               (iii) any voluntary dissolution, liquidation or winding-up of the
Company,

then, and in each such case, the Company shall promptly send to the Option Agent
and the Option Agent shall  promptly  send the Holders a notice (in such form as
shall be furnished to the Option Agent by the Company) of such  proposed  action
or offer,  such notice to be mailed by the Option  Agent to the Holders at their
addresses as they appear in the Option  Register,  which shall  specify the date
such issuance or event is to take place and the date of participation therein by
the Holders of Common Stock, if any such date is to be fixed,  and shall briefly
indicate  the effect of such  action on the  Common  Stock and on the number and
kind of any other shares of stock and on other property,  if any, and the number
of shares of Common Stock and other property,  if any, purchasable upon exercise
of each Option and the Exercise Price after giving effect to any adjustment,  if
any, which will be required as a result of such action. Any such notice shall be

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<PAGE>
given by the  Company  at least 20 days  prior to the date of the taking of such
proposed  action or the date of  participation  therein by the Holders of Common
Stock, whichever shall be the earlier.

          (c) DEEMED RECEIPT. All such notices, advices and communications shall
be  deemed to have  been  received  by the  Holder  (i) in the case of  personal
delivery,  on the date of such delivery and (ii) in the case of mailing,  on the
fifth business day following the date of such mailing.

     9. AMENDMENTS. This Option may be amended by the parties hereto without the
consent  of any Holder for the  purpose of curing any  ambiguity,  or of curing,
correcting or supplementing any defective  provision  contained herein or making
any other  provisions  with respect to matters or questions  arising  under this
Option as the  Company and the Option  Agent may deem  necessary  or  desirable;
provided, however, that the Company determines, and the Option Agent may rely on
such  determination,  that such action shall not affect  adversely the rights of
the  Holders.  Any  amendment or  supplement  to this Option that has an adverse
effect on the interests of the Holders shall require the written  consent of the
Holders of a  majority  of the then  outstanding  Options.  The  consent of each
Holder  affected  shall be  required  for any  amendment  pursuant  to which the
Exercise  Price would be  increased or the number of Option  Shares  purchasable
upon  exercise  of  Options  would be  decreased  (other  than  pursuant  to the
adjustments provided in Section 10 hereof).

          (a) NO WAIVER. No waivers of, or exceptions to, any term, condition or
provision of this Option,  in any one or more instances,  shall be deemed to be,
or construed as, a further or continuing  waiver of any such term,  condition or
provision.

     10.  ADJUSTMENTS.  The Exercise Price and the number of shares  purchasable
hereunder are subject to adjustment from time to time as follows:

          (a) MERGER,  SALE OF ASSETS,  ETC. If at any time while this Option is
outstanding  and  unexpired  there shall be (i) a  reorganization  (other than a
combination,  reclassification,  exchange  or  subdivision  of shares  otherwise
provided for herein), (ii) a merger or consolidation of the Company with or into
another  corporation  in which the  Company is not the  surviving  entity,  or a
reverse  triangular  merger in which the Company is the surviving entity but the
shares of the  Company's  capital  stock  outstanding  immediately  prior to the
merger are converted by virtue of the merger into other property, whether in the
form of  securities,  cash,  or  otherwise,  or (iii) a sale or  transfer of the
Company's  properties  and assets as, or  substantially  as, an  entirety to any
other person,  then, as a part of such  reorganization,  merger,  consolidation,
sale or  transfer,  (each an  "Extraordinary  Transaction"),  the Options  shall
terminate  on the  effective  date of  such  Extraordinary  Transaction,  unless
provision  is made in such  transaction  in the sole  discretion  of the parties
thereto for the assumption of the Options or the substitution for the Options of
new options of the successor person or entity or a parent or subsidiary thereof,
with  such  adjustment  as the  number  and  kinds of  shares  and the per share
exercise  price as shall be  necessary  to provide  Holders of the options  upon
exercise  thereof with the kind and amount of  securities,  cash or other assets
that such Holder (net of Exercise Price) would have owned  immediately after the
Extraordinary  Transaction  if such Holder had exercised the Option  immediately
before the effective date of the Extraordinary Transaction.  In the event of any
transaction which will result in such termination, the Company shall give to the
Option  Agent  written  notice  thereof.  Until  the  earlier  to  occur of such
effective  date or record date,  the Holders of Options may exercise the Options
in accordance with their terms, but after such effective date or record date, as
the case may be, Holders of Options may not exercise the Options unless they are
assumed or substituted by the successor as provided above.

          (b)  RECLASSIFICATION,  ETC.  If the  Company,  at any time while this
Option remains  outstanding and unexpired,  by reclassification of securities or
otherwise,  shall change any of the securities as to which purchase rights under
this Option exist into the same or a different number of securities of any other

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<PAGE>
class or classes,  this Option shall  thereafter  represent the right to acquire
such number and kind of  securities as would have been issuable as the result of
such change with  respect to the  securities  that were  subject to the purchase
rights under this Option  immediately  prior to such  reclassification  or other
change and the Exercise  Price  therefor shall be  appropriately  adjusted,  all
subject  to further  adjustment  as  provided  in this  Section 10 and  subject,
further,  to the requirement  that no such adjustment  shall reduce the Exercise
Price to an amount less than the per-share par value of the Option Shares.

          (c) SPLIT, SUBDIVISION OR COMBINATION OF SHARES. If the Company at any
time while this Option remains outstanding and unexpired shall split,  subdivide
or combine the securities as to which  purchase  rights under this Option exist,
into a different  number of securities of the same class, the Exercise Price for
such  securities  shall be  proportionately  decreased in the case of a split or
subdivision or proportionately increased in the case of a combination; provided,
however, that no such decrease shall reduce the Exercise Price to an amount less
than the per-share par value of the Option Shares.

          (d)  ADJUSTMENTS  FOR  DIVIDENDS  IN  STOCK  OR  OTHER  SECURITIES  OR
PROPERTY.  If while this Option, or any portion hereof,  remains outstanding and
unexpired the holders of the securities as to which  purchase  rights under this
Option  exist at the time shall have  received,  or, on or after the record date
fixed for the determination of eligible stockholders, shall have become entitled
to  receive,  without  payment  therefor,  other  or  additional  stock or other
securities or property (other than cash) of the Company by way of dividend, then
and in each case, this Option shall represent the right to acquire,  in addition
to the number of shares of the security receivable upon exercise of this Option,
and without payment of any additional consideration therefor, the amount of such
other or additional  stock or other  securities or property (other than cash) of
the Company that such holder would hold on the date of such exercise had it been
the holder of record of the security  receivable upon exercise of this Option on
the date  hereof and had  thereafter,  during the period from the date hereof to
and including the date of such  exercise,  retained such shares and/or all other
additional stock available by it as aforesaid during such period,  giving effect
to all  adjustments  called for during  such  period by the  provisions  of this
Section 10.

          (e) NO  IMPAIRMENT.  The Company  will not, by any  voluntary  action,
avoid or seek to avoid the  observance or  performance of any of the terms to be
observed or performed  hereunder  by the Company,  but will at all times in good
faith assist in the carrying out of all the provisions of this Section 10 and in
the taking of all such action as may be  necessary  or  appropriate  in order to
protect the rights of the Holders of this Option against impairment. The Company
hereby  agrees  that in order to  effectuate  the  purposes  and  intent of this
Agreement,  it will not  increase the par value of the Common Stock prior to the
Termination Date without the prior written consent of the Holder.

     11. MISCELLANEOUS.

          (a) NOTICES.  All notices and other communications from the Company to
the Holder shall be mailed by first class registered or certified mail,  postage
prepaid (unless  specified  otherwise  herein),  at the address contained in the
Option Register.

          (b)  GOVERNING  LAW.  This Option shall be  construed  and enforced in
accordance  with and  governed by the  internal  laws of the State of  Delaware,
other than conflicts of laws principles thereof.

          (c)  HEADINGS.  The  headings  in  this  Option  are for  purposes  of
reference only, and shall not limit or otherwise affect any of the terms hereof.

          (d) SEVERABILITY AND CONFLICTS.  The invalidity or unenforceability of
any provision  hereof shall in no way affect the validity or  enforceability  of
any other provision.

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<PAGE>
     IN WITNESS WHEREOF, LightPath Technologies,  Inc. has caused this Option to
be executed by its officer thereunto duly authorized.

Dated:  ________________________

LIGHTPATH TECHNOLOGIES, INC.

By: ___________________________________
Name:  Donna Bogue
Title: Chief Financial Officer

Address:

LightPath Technologies, Inc.
3819 Osuna, N.E.
Albuquerque, NM  87109

Annexes
---------------------------------------

Annex A - Notice of Exercise
Annex B - Affidavit of Loss
<PAGE>
                                     ANNEX A

                               NOTICE OF EXERCISE

To:  LIGHTPATH TECHNOLOGIES, INC.
     3819 Osuna, N.E.
     Albuquerque, NM  87109

     (1) The undersigned  hereby elects to purchase  _________  shares of Common
Stock of  LIGHTPATH  TECHNOLOGIES,  INC.,  pursuant to the terms of the attached
Option,  and tenders  herewith  payment of the purchase price for such shares in
full as follows:

                   _________________________________________
                   _________________________________________
                   _________________________________________

     (2)  In  exercising  this  Option,  the  undersigned  hereby  confirms  and
acknowledges  that the  shares of  Common  Stock to be  issued  upon  conversion
thereof are being acquired  solely for the account of the undersigned and not as
a nominee for any other party, and that the undersigned will not offer,  sell or
otherwise dispose of any such shares of Common Stock, except under circumstances
that will not result in a violation of the  Securities  Act of 1933, as amended,
or any state securities laws.

     (3) Please issue a certificate or certificates  representing said shares of
Common  Stock  in the  name  of the  undersigned  or in  such  other  name as is
specified below:

                                       _________________________________________
                                       (Name)

                                       _________________________________________
                                       (Name)
<PAGE>
                                    ANNEX B

                            FORM OF AFFIDAVIT OF LOSS

STATE OF           )
                   ) ss:
COUNTY OF          )

     The undersigned  (hereinafter  "Deponent"),  being duly sworn,  deposes and
says that:

          1. Deponent is an adult whose mailing address is:

________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________

          2.  Deponent  is  the  recipient  of an  Option  (the  "Option")  from
LightPath  Technologies,  Inc. (the "Company"),  dated ____________ __, 2001 for
the  purchase of up to  __________  shares of Common  Stock,  par value $.01 per
share,  of the  Company,  at an exercise  price of $________  per share.

          3. The Option has been lost, stolen, destroyed or misplaced, under the
following circumstances:

          4. The Option was not endorsed.

          5.  Deponent has made a diligent  search for the Option,  and has been
unable to find or recover same, and Deponent was the unconditional  owner of the
Option at the time of loss, and is entitled to the full and exclusive possession
thereof;  that neither the Option nor the rights of Deponent  therein  have,  in
whole or in part, been assigned, transferred, hypothecated, pledged or otherwise
disposed of, in any manner whatsoever,  and that no person,  firm or corporation
other than the Deponent has any right,  title, claim, equity or interest in, to,
or respecting the Option.

          6. Deponent  makes this  Affidavit  for the purpose of requesting  and
inducing  the Company and its agents to issue a new option in  substitution  for
the Option.

          7. If the Option should ever come into the hands,  custody or power of
the Deponent or the Deponent's representatives,  agents or assigns, the Deponent
will immediately and without consideration  surrender the Option to the Company,
its  representatives,  agents or assigns,  its transfer  agents or  subscription
agents for cancellation.
<PAGE>
          8. The Deponent hereby indemnifies and holds harmless the Company from
any claim or demand  for  payment  or  reimbursement  of any  party  arising  in
connection with the subject matter of this Affidavit.

Signed, sealed and dated:  _________________________

                                       _________________________________________
                                       Deponent

Sworn to and subscribed before me this

____ day of _________________, _________

________________________________________
Notary PublicEXHIBIT 10.17

                             MEMORANDUM OF AGREEMENT

     THIS MEMORANDUM OF AGREEMENT (this "Agreement") is made as of July 6, 2001,
by and among  Kahala  Corp.,  a Florida  corporation  ("Kahala"),  and Ranch * 1
Acquisition,  L.L.C., an Arizona limited  liability company ("Ranch")  (jointly,
"Borrower"),  on the one hand,  and Robert E. Petersen and Margaret M. Petersen,
Trustees of the RE&M Petersen Trust ("Lender"),  on the other hand, with respect
to the following facts:

     A. Ranch and Lender have been in negotiation  for Lender,  or its designee,
to make a loan to Ranch in the principal amount of up to $2,500,000 (the "Loan")
for the purpose of permitting Ranch to provide debtor-in possession financing to
Ranch  *1,  Inc.,  a  Delaware  corporation,   and  certain  of  its  affiliates
(collectively,  "Debtor"),  pursuant to the terms and conditions of that certain
Debtor-In-Possession  Loan and Security Agreement entered into between Ranch and
Debtor (the  "Debtor  Loan  Agreement"),  a copy of which is attached  hereto as
Exhibit A and incorporated herein by this reference.

     B. Debtor are the debtors and the debtors-in-possession  under that certain
Chapter 11 bankruptcy proceeding filed in the United States Bankruptcy Court for
the Southern District of New York,  Bankruptcy Case Nos.: 01-41853 (AJG) through
01-41881 (AJG) (the "Bankruptcy Case.")

     C. Kahala is the sole Member of Ranch.

     D.  Lender is  willing  to make the Loan to Ranch and Ranch is  willing  to
accept the Loan from Lender, all on the following terms and conditions:

     NOW, THEREFORE, for and in consideration of the foregoing premises, and the
mutual undertakings set forth below, the parties hereto hereby agree as follows:

     1.  AGREEMENT  TO MAKE LOAN.  Lender  hereby  agrees  that  Lender,  or its
designee,  will make a loan to Ranch of the principal amount of up to $2,500,000
(the  "Maximum  Loan  Amount"),  on the terms and  conditions  contained in this
Agreement and in accordance with the terms and conditions for advances, interest
payments,  late  charges,  standby  and  early  termination  fees and  principal
payments as set forth in the Debtor  Loan  Agreement.  The parties  specifically
acknowledge and agree that the Loan shall not be a revolving loan.

     2. LOAN  DISBURSEMENT.  The proceeds of the Loan will be disbursed to Ranch
according the following schedule.

          2.1 Lender shall  disburse to Ranch during the first 30 days following
the filing of the Bankruptcy  Case, an aggregate  amount not to exceed  $500,000
(collectively,  the  "Initial  Disbursement").  The amount of each  disbursement

                                       1
<PAGE>
comprising the Initial  Disbursement  shall be the same as the amount ordered by
the Court in the  Bankruptcy  Case. The date of the first such  disbursement  is
hereinafter referred to as the "Initial Disbursement Date."

          2.2   Commencing  no  sooner  than  30  days   following  the  Initial
Disbursement  Date and no more  frequently  than every 30 days  thereafter  (the
"Requested Disbursement Date"), Lender shall make disbursements to Ranch in such
amounts as Ranch, in accordance with the terms and provisions of the Debtor Loan
Agreement,  may request,  by a written notice from Ranch delivered to Lender not
later  than 3  business  days prior to the  Requested  Disbursement  Date of the
requested amount, not to exceed $250,000 per month, until the full amount of the
Loan has been disbursed by Lender to Ranch.

     3. INTEREST AND OTHER COMPENSATION TO LENDER.

          3.1  INTEREST  AND LATE  CHARGES.  Interest  on the  unpaid  principal
balance  of the Loan  from  time to time  shall  accrue at the rate per year set
forth in the Debtor Loan Agreement (and, if applicable, at the rate set forth in
any approved plan of  reorganization  in the  Bankruptcy  Case)  (including  any
default rate in either such case), commencing upon the Initial Disbursement Date
and continuing until the entire principal of the Loan has been repaid.  Interest
shall be payable  monthly,  in  arrears,  commencing  one month from the Initial
Disbursement  Date and on the same day of each  succeeding  month until the full
amount of the principal  balance of the Loan and all accrued but unpaid interest
thereon is paid. Any late charges paid by Debtor to Ranch shall be paid entirely
to Lender within 10 days of the receipt thereof by Ranch.

          3.2 LOAN ORIGINATION FEE. Ranch shall pay to Lender a Loan Origination
Fee in the amount of $12,500.  The Loan Origination Fee shall be due and payable
to Lender at the time of disbursement of the Initial  Disbursement.  Lender,  at
its  option,  may add the amount of this  $12,500  Loan  Origination  Fee to the
Initial  Disbursement  in which case, such amount shall be considered as part of
the Loan balance.

          3.3  STANDBY  FEE.  For so long as the  Debtor  Loan  Agreement  is in
effect,  Ranch  shall pay to Lender a monthly  Standby Fee equal to 0.25% of the
average  daily  undisbursed  portion of the  Maximum  Loan  Amount.  The monthly
Standby  Fee shall be due and payable  within 3 business  days of its receipt by
Ranch from Debtor.

          3.4 EARLY TERMINATION FEE. Ranch shall pay to Lender 60% of any "Early
Termination  Fee" (as such term is defined in the Debtor Loan Agreement) paid to
Ranch by Debtor pursuant to the Debtor Loan Agreement, which amount shall be due
and payable to Lender within 10 days following  receipt of the Early Termination
Fee by Ranch.

          3.5  ADDITIONAL  PAYMENT.  As additional  consideration  for the Loan,
Ranch shall pay to Lender the sum of $1,000,000 (the "Additional Payment").  The
Additional  Payment shall be paid to Lender in accordance with the provisions of
Paragraph 5 hereof.

                                       2
<PAGE>
Payments  received by Lender  from Ranch  shall be applied  first to unpaid loan
fees, then to interest then due and unpaid, and then to principal.

     4. PRINCIPAL  REPAYMENT.  The principal balance of the Loan shall be repaid
from sales of corporate stores,  "Initial  Franchise Fees" and "Area Development
Fees" (as such  terms are  defined in  Debtor's  standard  franchise  agreement)
generated by Debtor or by any  successor to Debtor with respect to franchises of
the type being marketed by Debtor and due to and received by Ranch,  as follows.
Prior to the date of  confirmation  of Debtor's  Plan of  Reorganization  in the
Bankruptcy  Case,  Ranch shall pay to Lender 100% of the net proceeds from sales
of corporate stores ("Store  Sales").  Ranch shall also pay to Lender the amount
of the Initial  Franchise Fees ("IFF's") and Area Development Fees ("ADF's") due
to and received by Ranch. All such items shall be paid by Ranch to Lender within
10 days of receipt of same by Ranch.  From and after the date of confirmation of
Debtor's  Plan  of  Reorganization  in  the  Bankruptcy  Case,  if  there  is an
outstanding  principal balance of the Loan remaining unpaid,  Ranch shall pay to
Lender all Store Sales, IFF's and ADF's due to and received by Ranch,  within 10
days of receipt of same by Ranch,  until the full amount of the principal of the
Loan is repaid; provided, however, that if Ranch receives more than 60% of IFF's
or ADF's, Lender's share of IFF's or ADF's,  whichever applies, shall be limited
to 60% of the entire amount received by Debtor.  Ranch  acknowledges  and agrees
that no part of the  principal of the Loan repaid to Lender will be re-loaned by
Lender to Ranch.

     5. PAYMENT OF ADDITIONAL PAYMENT.  Following Ranch's repayment to Lender of
the full amount of the principal of the Loan together with all interest  accrued
thereon,  Ranch  shall  continue to pay to Lender its  receipts of Store  Sales,
IFF's and ADF's due to and received by Ranch,  within 10 days of receipt of same
by Ranch,  until Lender has received the full amount of the Additional  Payment.
No interest shall accrue or be payable with respect to the Additional Payment.

     6.  RIGHTS OF  INSPECTION.  Ranch  agrees to  furnish  to Lender  copies of
Ranch's monthly bank statements within 30 days following Ranch's receipt of such
statements,  and  quarterly  financial  statements  for  Ranch  within  30  days
following the end of each quarterly  financial  period of Ranch.  Lender and its
representatives  shall  have the  right to audit  and  copy  Ranch's  books  and
records,  from time to time, to verify receipts of Store Sales,  IFF's and ADF's
generated by Debtor and received by Company.

     7.  MANAGEMENT  OF  RANCH.  For so long as there  remains  any sum owing to
Lender hereunder,  including,  without limitation, the Additional Payment, Ranch
and Kahala covenant and agree that Ranch shall be managed by 2 Managers.  Lender
shall be  entitled  to  designate  one of the 2  Managers  and  Kahala  shall be
entitled  to  designate  the other of the 2  Managers.  Ranch shall not make any
modifications  to any  provision  of  the  Debtor  Loan  Agreement,  rescind  or
terminate  such  agreement,  waive any claim  under  such  agreement,  or extend
Debtor's time for performance  under such agreement  without  Lender's  consent,
which consent shall be given or denied in Lender's sole and absolute discretion.

                                       3
<PAGE>
     8. DEFAULT BY BORROWER. In the event of any default under this Agreement by
either  Ranch or Kahala  (and  provided  that  Lender  has given  notice of such
alleged default to Ranch and Kahala, setting forth the details thereof, and such
default is not cured within 10 days of such notice), or in the event of Debtor's
default under the Debtor Loan Agreement, Lender shall have no obligation to make
any further  disbursements  under the Loan and Kahala  agrees that Lender  shall
have the  option,  exercisable  in Lender's  sole and  absolute  discretion,  to
acquire the entire membership  interest in Ranch, for no  consideration,  and to
remove any manager of Ranch appointed by Kahala.

     9. REPRESENTATIONS AND WARRANTIES.  Ranch and Kahala each hereby represents
and warrants to Lender as follows:

          9.1  Ranch  is a  limited  liability  company  organized  and in  good
standing under the laws of the State of Arizona.

          9.2 Kahala is a corporation formed and in good standing under the laws
of the State of Florida.

          9.3 Kahala is the sole member of Ranch.

          9.4  Kahala  has  delivered  to  Lender,  Resolutions  of the Board of
Directors  of  Kahala,  acting in its  capacity  as sole  Member of Ranch and on
behalf of Ranch,  authorizing  and  approving the execution and delivery of this
Agreement.

          9.5  Attached  hereto  as  Exhibit B and  incorporated  herein by this
reference is a true and complete copy of that certain Debtor's  Emergency Motion
for Order Authorizing The Debtor To Obtain  Post-Petition  Secured Financing And
Approving Joint Franchise Marketing Arrangement, filed in the Bankruptcy Case on
July 5, 2001 (the "Motion.")

          9.6  Attached  hereto  as  Exhibit C and  incorporated  herein by this
reference is a true and  complete  copy of that certain  Order  Authorizing  The
Debtor To Obtain  Post-Petition  Secured Financing And Approving Joint Franchise
Marketing  Arrangement,  filed in the Bankruptcy Case on July 5, 2001, approving
the Motion.

          9.7 Ranch and Kahala  acknowledge and agree that the  representations,
warranties  and covenants of Ranch and Kahala  contained in this Agreement are a
material  inducement  to Lender in entering  into this  Agreement  and Lender is
relying on such  representations,  warranties and covenants  notwithstanding its
own investigations.

                                       4
<PAGE>
          9.8 Ranch  and  Kahala  acknowledge  and  agree  that the  transaction
described in this Agreement is not usurious.

     10. MISCELLANEOUS. The following miscellaneous provisions are also included
in this Agreement:

          10.1  NOTICES.  Any  notice,  request,  demand,  instruction  or other
communication  given  hereunder  by any  party  must be in  writing  and will be
validly and timely given or made to another party if (i) served personally, (ii)
deposited in the United States mail,  certified or registered,  postage prepaid,
return receipt requested,  (iii) delivered by overnight courier, or (iv) sent by
telecopier, to each of the parties as set forth below:

          If to Ranch:       Kahala Corp.
                             Attn: David Guarino
                             7730 E. Greenway Road, Suite 104
                             Scottsdale, AZ  85260
                             Telephone:  (480) 443-0200, Ext. 17
                             Fax:  (480) 443-1972

          If to Kahala:      Kahala Corp.
                             Attn: Kevin Blackwell
                             7730 E. Greenway Road, Suite 104
                             Scottsdale, AZ  85260
                             Telephone:  (480) 443-0200, Ext. 15
                             Fax:  (480) 443-1972

          With a copy to:    Michael Reagan, Esq.
                             Kahala Corp.
                             7730 E. Greenway Road, Suite 104
                             Scottsdale, AZ  85260
                             Telephone:  (480) 443-0200, Ext. 18
                             Fax:  (480) 443-1972

          If to Lender:      Robert E. Petersen, Trustee
                             6420 Wilshire Boulevard
                             Los Angeles, CA  90048-5515
                             Telephone: (323) 782-2140
                             Fax: (323) 782-2734

                                       5
<PAGE>
          With a copy to:    Warren J. Kessler, Esq.
                             Kessler & Kessler,
                             A Law Corporation
                             2029 Century Park East, Suite 1520
                             Los Angeles, CA  90067
                             Telephone: (310) 552-9800
                             Fax: (310) 552-0442

If such notice is served  personally,  such notice will be deemed to be given at
the time of such personal service. If notice is served by mail, such notice will
be deemed to be given two days after the  deposit  of same in any United  States
mail post office box. If such notice is served by overnight courier, such notice
will be deemed to be given on the next business day following the  acceptance of
such notice for  delivery  by such other  overnight  courier.  If such notice is
served by  telecopier,  such  notice will be deemed to be given at the time such
notice is sent, provided that an additional copy of such notice is sent the same
day by another  acceptable means of giving notice under this Paragraph 10.1. Any
person entitled to receive notice under this agreement may change the address or
telecopier  number to which such notice may be sent,  by giving  notice  thereof
pursuant to this Paragraph 10.1.

          10.2  ATTORNEYS'  FEES.  Should any legal  action be  brought  for the
enforcement of this Agreement or any term hereof, or due to any alleged dispute,
breach,  default or  misrepresentation  in connection with any provisions herein
contained,  the prevailing party shall be entitled to its reasonable  attorneys'
fees and costs and other costs  incurred in any such  action or  proceeding  and
including  any  such  action  to  collect  any  award  or  judgement,  including
representation  in  bankruptcy  court,  which results in an  arbitration  of the
matters herein, in addition to such other relief as may be granted by the courts
or arbitration proceedings.

          10.3  APPLICABLE  LAW.  The  existence,  validity,   construction  and
operational  effect of this Agreement and all matters pertaining hereto shall be
determined in accordance with the laws of the State of Arizona.

          10.4  FURTHER  ASSURANCES.  Each of the  parties  agrees that it will,
without  further  consideration,  execute,  acknowledge  and deliver  such other
documents  and take such other  actions as may be  reasonably  requested  by the
other party in order to  consummate  the  purposes  and subject  matter  hereof,
including Ranch providing security to Lender for the Loan.

          10.5  ASSIGNMENT.  Neither party may assign its rights or delegate its
obligations  under this Agreement without the prior written consent of the other
party, which consent shall not be unreasonably withheld.

          10.6 VALIDITY. Any provision of this Agreement which may be prohibited
by law or otherwise held invalid shall be ineffective only to the extent of such
prohibition  or  invalidity  and  shall  not  invalidate  or  otherwise   render
ineffective the remaining provisions of this Agreement.

                                       6
<PAGE>
          10.7 ENTIRE AGREEMENT.  All understandings  and agreements  heretofore
made by and between the parties hereto,  whether in writing or oral, with regard
to the subject  matter hereof are merged into this  Agreement  which alone fully
and completely  expresses the parties' agreement.  This Agreement may be amended
only by a writing  dated  subsequent  to the date  hereof,  signed by all of the
parties hereto.

          10.8 NO  WAIVER.  The  waiver by one party of the  performance  of any
covenant,  condition or promise shall not invalidate this Agreement nor shall it
be considered a waiver by such party of any other covenant, condition or promise
hereunder.  The waiver by any party of the time for performing any act shall not
constitute a waiver of the time for performing any other act or an identical act
required to be performed  at a later time.  The exercise of any remedy shall not
exclude the exercise of other consistent remedies.

          10.9 HEADINGS. The paragraph headings of the various provisions hereof
are intended  solely for  convenience  of reference  and shall not in any manner
amplify,  limit or modify, or otherwise be used in the interpretation of, any of
said provisions.

          10.10 NEUTRAL  INTERPRETATION.  In any action to construe the terms of
this Agreement, this Agreement shall be considered the product of negotiation by
and among the parties hereto.  No clause or provision shall be interpreted  more
strongly  in favor of one  party or the  other,  based  upon the  source  of the
draftsmanship, but shall be interpreted in a neutral manner.

          10.11   COUNTERPARTS.   This   Agreement  may  be  signed  in  several
counterparts,  each of which  shall be an  original,  but all of which  together
shall constitute one and the same instrument.  Delivery of a signed  counterpart
by telephone facsimile transmission shall be effective as delivery of a manually
signed counterpart of this Agreement.

                                       7
<PAGE>
     IN WITNESS  WHEREOF,  the parties hereto have executed this Agreement as of
the day and year first above written.

                                        "LENDER":

                                        RE&M PETERSEN TRUST

                                        By: /s/ Robert E. Petersen
                                            ------------------------------------
                                        Its: Robert E. Petersen, Trustee
                                             -----------------------------------

                                        "RANCH":

                                        RANCH *1 ACQUISITION, L.L.C.,
                                        an Arizona limited liability company

                                        By: Kahala Corp.,
                                            a Florida corporation
                                        Its: Member

                                        By: /s/ David Guarino
                                            ------------------------------------
                                        ITS: VP-CFO
                                             -----------------------------------

                                        "KAHALA":

                                        KAHALA CORP.,
                                        a Florida corporation

                                        By: /s/ David Guarino
                                            ------------------------------------
                                        ITS: VP-CFO
                                             -----------------------------------

                                       8

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