Exhibit 10.74.1

$19,000,000.00 Revolving Credit Loan
$12,000,000.00 Term Loan

LOAN AND SECURITY AGREEMENT

by and between

CORRECTIONAL SERVICES CORPORATION
CSC MANAGEMENT DE PUERTO RICO INC.
YOUTH SERVICES INTERNATIONAL HOLDINGS, INC.
YOUTH SERVICES INTERNATIONAL REAL PROPERTY PARTNERSHIP, LLP
YOUTH SERVICES INTERNATIONAL, INC.
YOUTH SERVICES INTERNATIONAL OF NORTHERN IOWA, INC.
YOUTH SERVICES INTERNATIONAL OF SOUTH DAKOTA, INC.
YOUTH SERVICES INTERNATIONAL OF MISSOURI, INC.
YOUTH SERVICES INTERNATIONAL OF TEXAS, INC.
YOUTH SERVICES INTERNATIONAL OF ILLINOIS, INC.
YOUTH SERVICES INTERNATIONAL OF MICHIGAN, INC.

(collectivel, “Borrower”)

and

GENERAL ELECTRIC CAPITAL CORPORATION

(“Lender”)

October 30, 2002

 

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LOAN AND SECURITY AGREEMENT

         THIS LOAN AND SECURITY AGREEMENT (the “Agreement”) is made as of
October 30, 2002, by and among CORRECTIONAL SERVICES CORPORATION, a Delaware
corporation, CSC MANAGEMENT DE PUERTO RICO INC., a Puerto Rico corporation,
YOUTH SERVICES INTERNATIONAL HOLDINGS, INC., a Delaware corporation, YOUTH
SERVICES INTERNATIONAL REAL PROPERTY PARTNERSHIP,LLP, a Maryland limited
liability partnership, YOUTH SERVICES INTERNATIONAL, INC., a Maryland
corporation, YOUTH SERVICES INTERNATIONAL OF NORTHERN IOWA, INC., an Iowa
corporation, YOUTH SERVICES INTERNATIONAL OF SOUTH DAKOTA, INC., a South Dakota
corporation, YOUTH SERVICES INTERNATIONAL OF MISSOURI, INC., a Missouri
corporation, YOUTH SERVICES INTERNATIONAL OF TEXAS, INC., a Texas corporation,
YOUTH SERVICES INTERNATIONAL OF ILLINOIS, INC., a Maryland corporation, and
YOUTH SERVICES INTERNATIONAL OF MICHIGAN, INC., a Michigan corporation
(collectively, “Borrower”), and GENERAL ELECTRIC CAPITAL CORPORATION, a Delaware
corporation (“Lender”).

RECITALS

         A.         Borrower desires to establish certain financing arrangements
with and borrow funds from Lender, and Lender is willing to establish such
arrangements for and make loans and extensions of credit to Borrower, on the
terms and conditions set forth below.

         B.         The parties desire to define the terms and conditions of
their relationship and to reduce their agreements to writing.

         NOW, THEREFORE, in consideration of the promises and covenants
contained in this Agreement, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties covenant
and agree as follows:

ARTICLE I

DEFINITIONS

         As used in this Agreement, unless otherwise specified, all references
to “Sections” shall be deemed to refer to Sections of this Agreement, and the
following terms shall have the meanings set forth below:

         Section 1.1.         Account.“Account” means any right to payment of a
monetary obligation, whether or not earned by performance, including, but not
limited to, the right to payment of management fees. Without limiting the
generality of the foregoing, the term “Account” shall further include any
“account” (as that term is defined in the Uniform Commercial Code now or
hereafter in effect), any accounts receivable, (as that term is defined in the
Uniform Commercial Code now or hereafter in effect), any “payment intangibles”
(as that

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term is defined in the Uniform Commercial Code now or hereafter in effect) and
all other rights to payment of every kind and description, whether or not earned
by performance.

         Section 1.2.         Account Debtor.“Account Debtor” means the federal
government or a state or local government (including Puerto Rico), or any
department or division of any of the foregoing, or any foreign government
acceptable to Lender in its sole discretion, which governmental entity is
obligated on any Account of Borrower, whether payable directly to Borrower or
indirectly to Borrower by or through a trustee receiving payments with respect
to a particular Facility.

         Section 1.3.         Affiliate.“Affiliate” means, with respect to a
specified Person, any Person directly or indirectly controlling, controlled by,
or under common control with the specified Person, including without limitation
their stockholders and any Affiliates thereof. A Person shall be deemed to
control a corporation or other entity if the Person possesses, directly or
indirectly, the power to direct or cause the direction of the management and
business of the corporation or other entity, whether through the ownership of
voting securities, by contract, or otherwise. All subsidiaries of each entity
comprising Borrower shall be deemed an Affiliate of each entity comprising
Borrower regardless of whether it meets the foregoing definition of Affiliate.

         Section 1.4.         Affiliated Loan Documents.“Affiliated Loan
Documents” shall mean any and all documents evidencing, securing and/or
governing any financing provided by Lender or Lender’s Affiliates to Borrower,
any Guarantor or any Affiliate of Borrower or any Guarantor, as the same may be
amended, modified, increased, renewed or restated from time to time.

         Section 1.5.         Agreement.“Agreement” means this Loan and Security
Agreement, as it may be amended or supplemented from time to time, together with
all attachments, exhibits, schedules, riders and addenda, all of which are
incorporated herein by this reference and made a part hereof.

         Section 1.6.         Beneficiary; Beneficiaries.“Beneficiaries” means
the insurance carriers of Borrower and/or other Persons named as a beneficiary
under a Letter of Credit. “Beneficiaries” means any given insurance carrier of
Borrower and/or other Person named as a beneficiary under a Letter of Credit.

         Section 1.7.         Borrowed Money.“Borrowed Money” means, with
respect to any Person, without duplication (a) all indebtedness for borrowed
money, (b) all obligations of such Person evidenced by bonds, debentures, notes
or similar instruments, or upon which interest payments are customarily made,
(c) that portion of obligations with respect to capital leases that is properly
classified as a liability on a balance sheet in conformity with GAAP, (d) any
obligations of such Person issued or assumed as the deferred purchase price of
property or services purchased by such Person (other than trade debt incurred in
the ordinary course of business and due within six (6) months of the incurrence
thereof or evidenced by a note or other instrument), (e) all Borrowed Money of
others secured by (or for which the holder of such Borrowed Money has an
existing right, contingent or otherwise, to be secured by) any Lien on, or
payable out of the proceeds of production from, any property or asset owned,
held or acquired

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by such Person regardless of whether the indebtedness secured thereby shall have
been assumed by that Person, (f) all guaranty obligations of such Person in
respect of any Borrowed Money of any other person, (g) the maximum amount of all
standby letters of credit issued or bankers’ acceptances facilities created for
the account of such Person and, without duplication, all drafts drawn thereunder
(to the extent unreimbursed), (h) the principal balance outstanding under any
synthetic lease, tax retention operating lease, off-balance sheet loan or
similar off-balance sheet financing product plus any accrued interest thereon,
and (i) the Borrowed Money of any partnership or unincorporated joint venture in
which such Person is a general partner or joint venturer.

         Section 1.8.         Borrower.“Borrower” has the meaning set forth in
the Preamble.

         Section 1.9.         Borrowing Base.“Borrowing Base” has the meaning
set forth in Section 2.1A(d).

         Section 1.10.         Business Day.“Business Day” means any day on
which financial institutions are open for business in the State of Maryland,
excluding Saturdays and Sundays.

         Section 1.11.         Cash Flow.“Cash Flow” means consolidated net
income of Borrower, determined in accordance with GAAP, plus depreciation and
amortization expense deducted in the determination of consolidated net income,
less capital expenditures.

         Section 1.12.         Closing; Closing Date.“Closing” and “Closing
Date” have the meanings set forth in Section 5.3.

         Section 1.13.         Collateral. “Collateral” means, collectively, the
Personal Property and the Real Property.

         Section 1.14.         Commitment Fee.“Commitment Fee” has the meaning
set forth in Section 2.4(a).

         Section 1.15.         Concentration Account.“Concentration Account” has
the meaning set forth in Section 2.3(a).

         Section 1.16.         Controlled Group.“Controlled Group” means all
businesses that would be treated as a single employer under Section 401(b) of
ERISA.

         Section 1.17.         Default Rate.         “Default Rate” means a rate
per annum equal to two percent (2%) per annum above the then applicable rate at
which interest accrues in respect of the applicable Obligations under this
Agreement prior to the occurrence of an Event of Default.

         Section 1.17a.         EBITDA.“EBITDA” means consolidated net income of
Borrower, determined in accordance with GAAP, plus (a) depreciation and
amortization expense deducted in the determination of consolidated net income,
(b) all interest in respect of Borrowed Money (which shall not include
non-recourse debt), including the interest component of any capitalized leases,
deducted in the determination of consolidated net income, (c) federal and state
income

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taxes deducted in the determination of consolidated net income, (d) the amount
of any extraordinary losses reflected in the determination of consolidated net
income, (e) any other non-cash compensation expense recognized by Borrower and
included in the determination of consolidated net income, (f) startup expenses
incurred during the period beginning 90 days prior to the opening of a new
Facility and ending 90 days after the opening of such new Facility, not to
exceed $100,000 per month in the aggregate, (g) any non-cash, non-recurring
charges related to the discontinuation of operations at a Facility to the extent
reflected as an expense in determining consolidated net income, (h) any
non-cash, non-recurring write-downs or write-offs of assets, including non-cash
losses on the sale of assets outside the ordinary course of business, minus (x)
the amount of any extraordinary gains or income reflected in the determination
of consolidated net income and (y) any cash expenditure which is charged to a
reserve account, the establishment of which reserve account was reflected in the
determination of consolidated net income but added back in the calculation of
EBITDA pursuant to clause (g) above.

         Section 1.18.         ERISA.“ERISA” has the meaning set forth in
Section 4.12.

         Section 1.19.         Event of Default.“Event of Default” and “Events
of Default” have the meanings set forth in Section 8.1.

         Section 1.19a.         Face Amount.“Face Amount” means the aggregate
face amount of all Letters of Credit issued and outstanding pursuant to this
Agreement.

         Section 1.20.         Facility; Facilities.“Facilities” means all
prisons, correctional facilities or rehabilitative facilities leased, managed,
owned and/or operated by Borrower. “Facility” means any given facility leased,
managed, owned and/or operated by Borrower.

         Section 1.20a.         Federal Funds Rate.“Federal Funds Rate” means
for any day, a floating rate equal to the weighted average of the rates on
overnight federal funds transactions among members of the Federal Reserve
System, as determined by Lender in its sole discretion, which determination
shall be presumptively correct (absent manifest error).

         Section 1.21.         GAAP.“GAAP” means generally accepted accounting
principles applied in a consistent manner.

         Section 1.22.         Governmental Authority.“Governmental Authority”
means and includes any federal, state, District of Columbia, county, municipal,
or other government and any department, commission, board, bureau, agency or
instrumentality thereof, whether domestic or foreign.

         Section 1.23.         Guaranty.“Guaranty” means any guaranty of the
obligations of Borrower under the Loan Documents from time to time outstanding,
as the same may be amended, modified, or supplemented from time to time.

         Section 1.24.         Hazardous Material.“Hazardous Material” means any
substances defined or designated as hazardous or toxic waste, hazardous or toxic
material, hazardous or

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toxic substance, or similar term, by any environmental statute, rule or
regulation or any Governmental Authority applicable to Borrower or its business,
operations or assets.

         Section 1.25.         Highest Lawful Rate.“Highest Lawful Rate” means
the maximum lawful rate of interest referred to in Section 2.7 that may accrue
pursuant to this Agreement.

         Section 1.25a.         Issuing Party.“Issuing Party” means a banking
institution designated by Lender to issue Letters of Credit provided for in this
Agreement.

         Section 1.26.         LC Draft.“LC Draft” means any sight draft,
receipt, acceptance, cable or other written demand for payment upon a Letter of
Credit.

         Section 1.27.         Leases.“Leases” means all leases, licenses and
other agreements affecting the use, enjoyment or occupancy of the Real Property.

         Section 1.28.         Lender.“Lender” has the meaning set forth in the
Preamble.

         Section 1.28a.         Letter of Credit; Letters of Credit.“Letters of
Credit” means all standby letters of credit (including any amendments or
extensions thereto or reissuances thereof) issued pursuant to this Agreement.
“Letter of Credit” means any given standby letter of credit issued pursuant to
this Agreement (including any amendment or extension thereto or reissuance
thereof).

         Section 1.29.         Letter of Credit Obligations.“Letter of Credit
Obligations” means any and all obligations and liabilities of or incurred by
Lender (or of or incurred by Issuing Party to the extent Issuing Party is an
Affiliate of Lender and/or Lender has reimbursed or will be required to
reimburse Issuing Party for the same), whether contingent or otherwise, due or
not yet due, in connection with the issuance, negotiation, acceptance,
amendment, transfer, payment and/or guarantee of any Letter of Credit, including
but not limited to (a) any and all potential liability of Lender to any Issuing
Party for reimbursement of LC Drafts under any Letter of Credit issued and
outstanding hereunder, (b) the Letter of Credit Fee (as defined in Section
2.4(e)) and any and all other amounts required to be paid or reimbursed by
Borrower pursuant to Section 2.4(e), (c) any and all other fees, charges and
costs incurred by Lender (including but not limited to reasonable attorneys’
fees) in connection with the enforcement of the provisions of this Agreement
with respect to any Letter of Credit, including but not limited to the costs of
collection of the Letter of Credit Obligations and (d) interest payable on any
Letter of Credit Obligations.

         Section 1.29a.         LIBOR Rate.“LIBOR Rate” means a rate of interest
determined by Lender equal to:

           (a)      the offered rate for deposits in United States Dollars for
the applicable period that appears on Telerate Page 3750 as of 11:00 a.m.
(London time), on the second full Business Day next preceding the first day of
such period (unless such date is not a Business Day, in which event the next
succeeding Business Day will be used); divided by

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            (b)    a number equal to 1.0 minus the aggregate (but without
duplication) of the rates (expressed as a decimal fraction) of reserve
requirements in effect on the day that is two (2) Business Days prior to the
beginning of such period (including basic, supplemental, marginal and emergency
reserves under any regulations of the Federal Reserve Board or other
Governmental Authority having jurisdiction with respect thereto, as now and from
time to time in effect) for Eurocurrency funding (currently referred to as
“Eurocurrency Liabilities” in Regulation D of the Federal Reserve Board) that
are required to be maintained by a member bank of the Federal Reserve System.

If such interest rates shall cease to be available from Telerate News Service,
the LIBOR shall be determined from such financial reporting service or other
information as shall be mutually acceptable to Lender and Borrower.

         Section 1.30.         Lien.“Lien” shall mean any mortgage, pledge,
hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or
otherwise), charge or other security interest or any preference, priority or
other security agreement or preferential arrangement of any kind or nature
whatsoever (including, without limitation, any conditional sale or other title
retention agreement and any capital lease having substantially the same
practical effect as any of the foregoing).

         Section 1.31.         Loans.“Loans” shall mean the Revolving Loan and
the Term Loan.

         Section 1.32.         Loan Documents.“Loan Documents” means and
includes this Agreement, the Notes, the Mortgages, the Certificate of Validity,
any Guaranty and each and every other document now or hereafter delivered by
Borrower or any Guarantor in connection with this Agreement, as any of them may
be amended, modified, increased, renewed or restated from time to time.

         Section 1.33.         Loan Management Fee.“Loan Management Fee” has the
meaning set forth in Section 2.4(c).

         Section 1.34.         Lockbox.“Lockbox” has the meaning set forth in
Section 2.3.

         Section 1.35.         Lockbox Account.“Lockbox Account” means an
account or accounts maintained at the Lockbox Bank into which collections of
Accounts are paid directly.

         Section 1.36.         Lockbox Bank.“Lockbox Bank” has the meaning set
forth in Section 2.3.

         Section 1.37.         Maturity Date.“Maturity Date” has the meaning set
forth in Section 2.8(a).

         Section 1.38.         Maximum Revolving Loan Amount.“Maximum Revolving
Loan Amount” has the meaning set forth in Section 2.1A(a).

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         Section 1.39.         Maximum Term Loan Amount.“Maximum Term Loan
Amount” has the meaning set forth in Section 2.1B(a).

         Section 1.40.         Minimum Net Worth.“Minimum Net Worth” shall mean
Tangible Net Worth (defined below) equal to (i) Tangible Net Worth as of June
30, 2002, which amount is $48,814,000, plus (ii) 75% of cumulative net income,
on a consolidated basis, from July 1, 2002 through the measurement date.
“Tangible Net Worth” means assets (excluding intangible assets) less
liabilities, determined on a consolidated basis in accordance with GAAP.
Contingent liabilities reported in footnotes to the balance sheet shall not be
included for purposes of the determination of Tangible Net Worth. “Intangible
assets” means all intangible assets (determined in conformity with GAAP)
including, without limitation, goodwill, intellectual property, licenses,
organizational costs, deferred amounts, covenants not to compete, unearned
income and restricted funds. For purposes of this definition, “restricted funds”
shall not include cash or cash-equivalent deposits that secure letters of credit
issued for the purpose of securing obligations of Borrower.

         Section 1.41.         Mortgages.“Mortgages” shall mean the mortgages,
deeds of trust and deeds to secure debt, granted by Borrower to or for the
benefit of Lender, listed on Schedule 1.41.

         Section 1.42.         Notes.“Notes” shall mean any promissory note or
notes or other writing from time to time evidencing Borrower’s obligation to pay
the Obligations, including, but not limited to, the Term Note and the Revolving
Note, as any of them may be amended, modified, increased, renewed or restated
from time to time.

         Section 1.43.         Obligations.“Obligations” means (a) the principal
of, and interest on, the Notes and all other sums, fees, charges and expenses
due or payable under this Agreement or the other Loan Documents, (b) all
agreements and covenants with and obligations to Lender arising under, out of,
or as a result of or in connection with the Loan Documents, (c) all amounts
advanced by Lender to preserve, protect, defend, and enforce its rights under
this Agreement and the other Loan Documents or in the Collateral, and all
expenses incurred by Lender in connection therewith, (d) the Letter of Credit
Obligations and (e) any and all other present and future indebtedness,
liabilities and obligations of every kind and nature whatsoever of Borrower to
Lender, howsoever created, arising or evidenced, whether direct or indirect,
absolute or contingent, joint or several, both now and hereafter existing, or
due or to become due, whether as borrower, guarantor, surety, indemnitor,
assignor, pledgor or otherwise.

         Section 1.44.         Owned Facility; Owned Facilities.“Owned
Facilities” means all Facilities owned Borrower. “Owned Facility” means any
given Facility owned by Borrower. All Owned Facilities shall be designated as
such on Schedule 4.15.

         Section 1.45.         Permitted Liens.“Permitted Liens” means: (a)
deposits or pledges of Personal Property to secure obligations under workmen’s
compensation, social security or similar laws, or under unemployment insurance;
(b) deposits or pledges of Personal Property to secure bids, tenders, contracts
(other than contracts for the payment of money), leases, statutory obligations,
surety and appeal bonds and other obligations of like nature arising in the
ordinary

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course of business; (c) mechanic’s, workmen’s, materialmen’s or other like Liens
arising in the ordinary course of business with respect to obligations which are
not due, or which are being contested in full compliance with Section 6.6 of
this Agreement; (d) Liens and encumbrances in favor of Lender; (e) Liens on
equipment securing capital leases and other equipment financings, the
indebtedness under which does not exceed $500,000 in the aggregate at any given
time; (f) Liens set forth on Schedule 1.45; and (g) liens for taxes not yet due
and payable.

         Section 1.46.         Person.“Person” means an individual, partnership,
corporation, trust, joint venture, joint stock company, limited liability
company, association, unincorporated organization, Governmental Authority, or
any other entity.

         Section 1.46b.         Personal Property.“Personal Property” has the
meaning set forth in Section 3.1.

         Section 1.47.         Plan.“Plan” has the meaning set forth in Section
4.12.

         Section 1.48.         Premises.“Premises” has the meaning set forth in
Section 4.14.

         Section 1.49.         Prime Rate.“Prime Rate” means that rate of
interest designated as such by Citibank, N.A., or any successor thereto, as the
same may from time to time fluctuate.

         Section 1.50.         Prohibited Transaction.“Prohibited Transaction”
means a “prohibited transaction” within the meaning of Section 406 of ERISA or
Section 4975(c)(1) of the Internal Revenue Code that is not exempt under Section
407 or Section 408 of ERISA or Section 4975(c)(2) or (d) of the Internal Revenue
Code or under a class exemption granted by the U.S. Department of Labor.

         Section 1.51.         Qualified Account.“Qualified Account” means an
Account of Borrower generated in the ordinary course of Borrower’s business from
the sale of goods or rendition of Services which Lender, in its sole credit
judgment, deems to be a Qualified Account. Without limiting the generality of
the foregoing, no Account shall be a Qualified Account if: (a) the Account or
any portion of the Account is payable (whether directly or indirectly) by an
individual and not by an Account Debtor or other Person acceptable to Lender in
its sole discretion; (b) the Account remains unpaid more than one hundred twenty
(120) days past the claim or invoice date (but in no event more than one hundred
fifty (150) days after the applicable Services have been rendered); (c ) the
Account is subject to any defense, set-off, counterclaim, deduction, discount,
credit, chargeback, freight claim, allowance, right of recoupment, or adjustment
of any kind (provided that any Account deemed not a Qualified Account pursuant
to this clause (c) shall only be disqualified to the extent of such defense,
set-off, counterclaim, deduction, discount, credit, chargeback, freight claim,
allowance, right of recoupment or other adjustment); (d) any part of any goods
the sale of which has given rise to the Account has been returned, rejected,
lost, or damaged; (e) if the Account arises from the sale of goods by Borrower,
the sale was not an absolute sale, or the sale was made on consignment or on
approval or on a sale-or-return basis, or the sale was made subject to any other
repurchase or return agreement, or the goods have not been shipped to the
Account Debtor or its designee; (f) if the Account arises from the performance
of Services, the Services have not actually been performed

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or the Services were undertaken in violation of any law; (g) the Account is
subject to a Lien other than a Permitted Lien; (h) Borrower knows or should have
known of the bankruptcy, receivership, reorganization, or insolvency of the
Account Debtor; (i) the Account is evidenced by chattel paper or an instrument
of any kind, or has been reduced to judgment; (j) the Account is an Account of
an Account Debtor having its principal place of business or executive office
outside the United States or Puerto Rico unless such place of business or
executive office is otherwise acceptable to Lender in its sole discretion; (k)
the Account Debtor is an Affiliate or subsidiary of Borrower; (l) more than
twenty percent (20%) of the aggregate balance of all Accounts owing from the
Account Debtor obligated on the Account are outstanding more than one hundred
fifty (150) days past their invoice date; (m) fifty percent (50%) or more of the
aggregate unpaid Accounts from the Account Debtor obligated on the Account are
not deemed Qualified Accounts under this Agreement; (n) the total unpaid
Accounts of the Account Debtor (other than the United States government) exceed
twenty percent (20%) of the net amount of all Qualified Accounts; (o) any
covenant, representation or warranty contained in the Loan Documents with
respect to such Account has been breached; (p) the contract giving rise to the
Account is the subject of a performance, surety or other type of bond or is
subject to a requirement for such a bond; (q) the Account fails to meet such
other specifications and requirements which may from time to time be established
by Lender; or (r) the Account Debtor is a Governmental Authority (other than a
Medicaid/Medicare Account Debtor) and Lender has received evidence that the
Governmental Authority has acknowledged the claim of another creditor to such
Accounts or Borrower has otherwise failed to comply with its obligations under
Section 6.36. In the course of determining whether a particul ar Account
constitutes a “Qualified Account”, Lender shall exercise its credit judgment in
a manner consistent with its standard underwriting practices and not
inconsistent with the credit judgment employed by Lender for the same purpose in
connection with its administration of other loans, giving due regard for the
nature of Borrower’s business.

         Section 1.51b.         Real Property.“Real Property” means all real
property encumbered by the Mortgages and/or any of the Loan Documents or
otherwise serving as Collateral for the Loans.

         Section 1.52.         Reportable Event.“Reportable Event” means a
“reportable event” as defined in Section 4043(c) of ERISA for which the notice
requirements of Section 4043(a) of ERISA are not waived.

         Section 1.53.         Revolver Base Rate.“Revolver Base Rate” means a
rate of interest equal to, at Borrower’s option to be exercised prior to the
beginning of any calendar month, either (i) one-month, two-month or three-month
LIBOR plus four percent (4.0%) per annum; or (ii) two percent (2%) per annum
over the higher of (A) the Prime Rate or (B) the Federal Funds Rate plus
one-half of one percent (0.5%). Any election pursuant to clause (i) shall remain
in effect for one, two or three calendar months, as elected. Any election
pursuant to clause (ii) shall remain in effect for one calendar month.

         Section 1.53a.         Revolving Credit Advance.“Revolving Credit
Advance” has the meaning set forth in Section 2.1A(b).

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         Section 1.53b.         Revolving Loan.“Revolving Loan” or “Revolver”
has the meaning set forth in Section 2.1A.

         Section 1.53c.         Revolving Note.“Revolving Note” means the
Revolving Note referred to in Section 2.1A, as it may be amended, modified,
increased, renewed or restated from time to time.

         Section 1.54.         Services.“Services” means services provided by
Borrower which are consistent with the ownership, management and operation of
correctional, educational, developmental and rehabilitative facilities and
programs, including but not limited to, the provision of personnel, security,
transportation, treatment, education, development, rehabilitation, discharge,
transitional living, aftercare services, food, medical care, dental care, mental
health services and related services, maintenance of facilities and related
services, and provision of such equipment as Borrower may find necessary or
specifically requested to serve a valid and proper purpose.

         Section 1.55.         Term Base Rate. “Term Base Rate” means, subject
to Section 2.9(e), a rate of interest equal to, at Borrower’s option, either (i)
one-month, two-month or three-month LIBOR plus five percent (5.0%) per annum; or
(ii) three percent (3%) per annum over the higher of (A) the Prime Rate or (B)
one-half of one percent (0.5%) over the Federal Funds Rate. Any election
pursuant to clause (i) shall remain in effect for one, two or three calendar
months, as elected. Any election pursuant to clause (ii) shall remain in effect
for one calendar month.

         Section 1.55a.         Term Loan.“Term Loan” has the meaning set forth
in Section 2.1B.

         Section 1.55b.         Term Note.“Term Note” means the Term Note
referred to in Section 2.1B, as it may be amended, modified, increased, renewed
or restated from time to time.

         Section 1.56.         Termination Fee.“Termination Fee” shall mean an
amount, payable as yield maintenance for the loss of bargain and not as a
penalty, equal to either (a) if the date of notice of a termination is on or
before the first anniversary of the Closing Date, one percent (1%) of the
Maximum Revolving Loan Amount or (b) if the date of a notice of termination is
after the first anniversary of the Closing Date and on or before the second
anniversary of the Closing Date, one-half of one percent (0.5%) of the Maximum
Revolving Loan Amount. No Termination Fee shall apply if the date of notice of
termination is after the second anniversary of the Closing Date.

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ARTICLE II

AMOUNT AND TERMS OF CREDIT

         Section 2.1A.         Revolving Loan.

                  (a)         Lender hereby agrees and commits to make revolving
credit advances to Borrower, pursuant to the terms and conditions of this
Agreement and the other Loan Documents (collectively, the “Revolving Loan”), in
a maximum aggregate principal amount that may be outstanding at any one time of
Nineteen Million and No/100 Dollars ($19,000,000.00) (the “Maximum Revolving
Loan Amount”).

                  (b)         The Revolving Loan shall be in the nature of a
revolving line of credit, and shall include sums advanced and other credit
extended by Lender to or for the benefit of Borrower from time to time under
this Section 2.1A (each a “Revolving Credit Advance”) up to the Maximum
Revolving Loan Amount depending upon the availability in the Borrowing Base, the
requests of Borrower pursuant to the terms and conditions of Section 2.2. The
outstanding principal balance of the Revolving Loan may fluctuate from time to
time, to be reduced by repayments made by Borrower (which may be made without
penalty or premium), and to be increased by future Revolving Credit Advances,
advances and other extensions of credit to or for the benefit of Borrower. For
purposes of this Agreement, any determination as to whether there is
availability within the Borrowing Base for advances or extensions of credit
shall be made by Lender in its sole discretion in a manner consistent with its
standard underwriting practices and not inconsistent with the same
determinations made by Lender in connection with its administration of other
loans.

                  (c)         At Closing, Borrower shall execute and deliver to
Lender a promissory note evidencing Borrower’s unconditional obligation to repay
Lender for Revolving Credit Advances, advances, and other extensions of credit
made under the Revolving Loan, in the form of Exhibit A-1 to this Agreement (as
amended, modified, increased, restated or replaced from time to time, the
“Revolving Note”), dated the date of this Agreement, payable to the order of
Lender in accordance with the terms thereof. The Revolving Note shall bear
interest on the outstanding principal balance of the Revolving Note from the
date of the Revolving Note until repaid at a rate per annum (on the basis of the
actual number of days elapsed over a year of 360 days ) equal to the Revolver
Base Rate, provided that after the occurrence and during the continuance of an
Event of Default such rate shall be equal to the Default Rate. Each Revolving
Credit Advance, advance and other extension of credit in respect of the
Revolving Loan shall be deemed evidenced by the Revolving Note, which is deemed
incorporated into and made a part of this Agreement by this reference.

                  (d)         Subject to the terms and conditions of this
Agreement, advances under the Revolving Loan shall be made and Letters of Credit
shall be issued against a borrowing base equal to eighty-five percent (85%) of
Qualified Accounts due and owing from any Account Debtor (the “Borrowing Base”).
Lender, in its sole credit judgment, may further adjust the Borrowing Base by
applying percentages (known as “liquidity factors”) to Qualified Accounts by
payor based upon Borrower’s actual recent collection history for each such payor
in a manner

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consistent with Lender’s underwriting practices and procedures. Such liquidity
factors may be adjusted by Lender from time to time as warranted by Lender’s
standard underwriting practices and procedures and using its sole credit
judgment in a manner not inconsistent with the credit judgment employed by
Lender for the same purpose in connection with its administration of other
loans. Additionally, notwithstanding the foregoing, Lender will withhold from
the Borrowing Base (after application of the liquidity factors) an amount equal
to one-sixth (16.7%) of the outstanding balance of the Term Loan.

         Section 2.1B.         Term Loan.

                  (a)         Lender hereby agrees and commits to make a term
loan to Borrower, pursuant to the terms and conditions of this Agreement and the
other Loan Documents (the “Term Loan”), in a maximum principal amount of Twelve
Million and No/100 Dollars ($12,000,000.00) (the “Maximum Term Loan Amount”).

                  (b)         The Term Loan shall not be in the nature of a
revolving line of credit, but shall include sums advanced and other credit
extended by Lender to or for the benefit of Borrower from time to time under
this Section 2.1B up to the Maximum Term Loan Amount. To the extent any Term
Loan proceeds are repaid for any reason, whether voluntarily or involuntarily
(including repayments from insurance or condemnation proceeds), Lender shall
have no obligation to re-advance such sums to Borrower.

                  (c)         At Closing, Borrower shall execute and deliver to
Lender a promissory note evidencing Borrower’s unconditional obligation to repay
Lender for the Term Loan and all advances and other extensions of credit made
under the Term Loan, in the form of Exhibit A-2 to this Agreement (as amended,
modified, increased, restated or replaced from time to time, the “Term Note”),
dated the date of this Agreement, payable to the order of Lender in accordance
with the terms thereof. The Term Note shall bear interest on the outstanding
principal balance of the Term Note from the date of the Term Note until repaid
at a rate per annum (on the basis of the actual number of days elapsed over a
year of 360 days) equal to the Term Base Rate, provided that after the
occurrence and during the continuance of an Event of Default such rate shall be
equal to the Default Rate. The Term Loan and all advances and other extension of
credit in respect of the Term Loan shall be deemed evidenced by the Term Note,
which is deemed incorporated into and made a part of this Agreement by this
reference.

         Section 2.1C.         Letter of Credit Facility.

                  (a)         Borrower has requested that Lender issue or cause
to be issued, and Lender has agreed to issue or cause to be issued by Issuing
Party for Borrower’s account and guaranteed by Lender, one or more Letters of
Credit in a maximum Face Amount of $7,000,000 for the benefit of one or more
Beneficiaries. Each Letter of Credit shall expire no later than one (1) year
from the date it is issued, and, if requested by Borrower, subject to the terms
and conditions of this Agreement at Lender’s sole discretion, may be renewed or
extended thereafter for additional periods of up to one (1) year each, provided
that the term of such Letter of Credit (including any extended term) shall not
expire on a date that is later than thirty (30) days prior to the schedule
Maturity Date.

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                   (b)         To the extent that Lender makes or is obligated
to make any payment in connection with an LC Draft honored by Issuing Party,
such payment, together with all other Letter of Credit Obligations then paid or
incurred by Lender and unreimbursed by Borrower, shall constitute Revolving
Credit Advances under this Agreement made by Lender as of the date the same are
paid or incurred by Lender or due from Borrower, as the case may be, regardless
of whether a default or Event of Default has occurred and is continuing and
notwithstanding Borrower’s failure to have met any of the conditions precedent
set forth in Section 5.2. All such Letter of Credit Obligations shall bear
interest until paid at the rate then applicable to Revolving Credit Advances
under this Agreement. The Letter of Credit Obligations shall be evidenced by the
Revolving Note and secured by this Agreement and the other Loan Documents.
Except as otherwise expressly provided herein, all other terms, conditions and
provisions of this Agreement, including, but not limited to, the terms set forth
on Exhibit F attached hereto and incorporated herein by reference, shall apply
to the Letters of Credit and/or the Letter of Credit Obligations, as applicable.

                  (c)         All payments which Lender makes or is obligated to
make in connection with an LC Draft honored by Issuing Party, shall be due and
payable, in full, to Lender by Borrower immediately upon demand by Lender.
Borrower’s failure to repay all or any portion of the Letter of Credit
Obligations as and when due in accordance with the applicable provisions of this
Agreement shall constitute an event of Default under Section 8.1(a) of this
Agreement. Borrower acknowledges and agrees that Lender shall have the right,
but not the obligation, to apply collections of Accounts towards repayment of
amounts outstanding under this Section 2.1C(c).

                  (d)         If Issuing Party honors any LC Draft under a
Letter of Credit and Borrower fails to reimburse Lender in accordance with the
terms of this Agreement, Lender may assert its right of subrogation under
applicable law, whether Issuing Party’s honoring of such LC Draft satisfies all
or only part of the underlying obligation. Borrower shall, on reasonable notice,
cooperate with Lender and Issuing Party in the assertion of (i) Borrower’s
rights against the particular Beneficiary presenting such LC Draft, (ii) such
Beneficiary’s rights against Borrower and (iii) any other rights that Lender or
Issuing Party may have by subrogation, assignment or otherwise. Such cooperation
shall include, without limitation, the prompt return of all drafts, documents,
instruments and statements in Borrower’s possession that were presented by or on
behalf of such Beneficiary in connection with any LC Draft.

                  (e)         During any period in which a Letter of Credit is
outstanding, if the Borrowing Base is ever less than the sum of (x) the Face
Amount plus (y) the balance of the Revolving Loan plus (z) $200,000, then
Borrower agrees to make upon demand such cash deposits with Lender as Lender may
from time to time require, which cash deposit shall be applied at Lender’s
option either to reduce the balance of the Revolving Loan or to secure further
the Letter of Credit Obligations.

         Section 2.2.         Loan Administration. Borrowings under the Loans
shall be as follows:

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                   (a)         A request for a Revolving Credit Advance shall be
made, or shall be deemed to be made, in the following manner: (i) Borrower may
give Lender notice of its intention to borrow, in which notice Borrower shall
specify the amount of the proposed borrowing and the proposed borrowing date,
not later than 2:00 p.m. Eastern time one (1) Business Day before the proposed
borrowing date; provided,however, that no such request may be made at a time
when there exists an Event of Default; and (ii) the becoming due of any amount
required to be paid under this Agreement, whether as interest or for any other
Obligation, shall be deemed irrevocably to be a request for a Revolving Credit
Advance on the day following the due date in the amount required to pay such
interest or other Obligation if such was not paid by Borrower on the due date.

                  (b)         Borrower hereby irrevocably authorizes Lender to
disburse the proceeds of each Revolving Credit Advance or advance from the Term
Loan requested, or deemed to be requested, as follows: (i) the proceeds of each
Revolving Credit Advance requested under subsection 2.2(a)(i) or any Term Loan
advance shall be disbursed by Lender by wire transfer to such bank account as
may be agreed upon by Borrower and Lender from time to time or elsewhere if
pursuant to written direction from Borrower; and (ii) the proceeds of each
Revolving Credit Advance deemed to be requested under subsection 2.2(a)(ii)
shall be disbursed by Lender by way of direct payment of the relevant interest
or other Obligation.

                  (c)         All Loans, advances and other extensions of credit
to or for the benefit of Borrower shall constitute one general Obligation of
Borrower, and shall be secured by Lender’s Lien upon all of the Collateral.

                  (d)         Lender shall enter all Loans as debits to a loan
account or accounts in the name of Borrower and shall also record in said loan
account(s) all payments made by Borrower on any Obligations and all proceeds of
Collateral which are indefeasibly paid to Lender, and may record therein, in
accordance with customary accounting practice, other debits and credits,
including interest and all charges and expenses properly chargeable to Borrower.
Prior to the earlier to occur of an Event of Default or the Maturity Date, all
collections into the Concentration Account pursuant to Section 2.3 shall be
applied first to fees, costs and expenses due and owing under the Loan
Documents, then to interest due and owing in respect of the Revolving Credit
Advances, and then to principal outstanding with respect to Revolving Credit
Advances. During the continuance of any Event of Default hereunder, or following
the Maturity Date, all collections into the Concentration Account pursuant to
Section 2.3 shall be applied to the Obligations in such order as Lender shall
elect in its sole and absolute discretion.

                  (e)         Lender will account to Borrower monthly with a
statement of the Loans, charges and payments made pursuant to this Agreement,
and such accounting rendered by Lender shall be deemed final, binding and
conclusive upon Borrower, absent manifest error, unless Lender is notified by
Borrower in writing to the contrary within thirty (30) days of the date each
accounting is mailed to Borrower. Such notice shall be deemed an objection only
to those items specifically objected to in the notice.

         Section 2.3.         Collections, Disbursements, Borrowing
Availability, and Lockbox Account.

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                   (a)         Borrower shall maintain a lockbox (the “Lockbox”)
with SunTrust Bank or other bank acceptable to Lender (the “Lockbox Bank”),
subject to the provisions of this Agreement, and shall execute with the Lockbox
Bank a lockbox agreement in the form attached as Exhibit B, and such other
agreements related to such lockbox agreement as Lender may require. Borrower
shall use its best, good faith efforts to ensure that all collections of
Accounts are paid directly from Account Debtors into the Lockbox for deposit
into the Lockbox Account, and that all funds deposited into the Lockbox Account
are immediately transferred into a depository account maintained by Lender at
Bank One, N.A., or such other financial institution as determined by Lender in
its sole discretion, by written notice to Borrower and the Lockbox Bank (the
“Concentration Account”). The parties agree that Borrower’s obligation to cause
all collections of Accounts to be paid directly into the Lockbox shall consist
of its good faith efforts and that Borrower shall not be in breach of the
requirements of this Section 2.3(a) by virtue of an absolute refusal of an
Account Debtor to send its remittances directly to the Lockbox.

                  (b)         Notwithstanding anything in any lockbox agreement
to the contrary, Borrower agrees that it shall be liable for any fees and
charges in effect from time to time and charged by the Lockbox Bank in
connection with the Lockbox and the Lockbox Account, and that Lender shall have
no liability therefor. Borrower further acknowledges and agrees that, to the
extent such fees and charges are not paid by Borrower directly but are satisfied
using collections in the Lockbox Account, such fees and charges shall be deemed
to be Revolving Credit Advances made by Lender hereunder and, to the extent that
the payment of such fees or charges by Borrower as provided herein results in
any overadvance under this Agreement, Borrower agrees to immediately (upon
notice) repay to Lender the amount of such overadvance. Borrower agrees to
indemnify and hold Lender harmless from any and all liabilities, claims, losses
and demands whatsoever, including reasonable attorneys’ fees and expenses,
arising from or relating to actions of Lender or the Lockbox Bank pursuant to
this Section 2.3 or any lockbox agreement.

                  (c)         Lender shall apply, on a daily basis, all funds
transferred into the Concentration Account pursuant to this Section 2.3 to
reduce the outstanding indebtedness under the Loans and this Agreement (in
accordance with Section 2.2(d)). To the extent that any collections of Accounts
or proceeds of other Collateral are not sent directly to the Lockbox as required
by this Section 2.3 but are received by Borrower, such collections shall be held
in trust for the benefit of Lender and immediately remitted, in the form
received, to the Lockbox Bank for transfer to the Concentration Account
immediately upon receipt by Borrower.

                  (d)         Borrower acknowledges and agrees that its
compliance with the terms of this Section 2.3 is essential, and that Lender will
suffer immediate and irreparable injury and have no adequate remedy at law, if
Borrower, through its acts or omissions, causes or permits Account Debtors to
send payments other than to the Lockbox, or if Borrower fails to immediately
deposit collections of Accounts or proceeds of other Collateral in the Lockbox
Account as herein required. Upon Borrower’s failure to comply with the terms of
this Section 2.3, Lender will be entitled, in addition to exercising any other
rights and remedies available to it, but in lieu of imposing the Default Rate,
to assess a non-compliance fee which shall operate to increase the Revolver Base
Rate and the Term Base Rate by two percent (2%) per annum during

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any period of non-compliance. Lender shall be entitled to assess such
non-compliance fee whether or not an Event of Default is declared or otherwise
occurs (but not during any period in which the Default Rate is in effect).

                  (e)         All funds transferred from the Concentration
Account for application to Borrower’s indebtedness to Lender shall be applied as
provided in Section 2.2(d), but for purposes of calculating interest shall be
subject to a five (5) Business Day clearance period. If as the result of
collections of Accounts pursuant to the terms and conditions of this Section 2.3
a credit balance exists with respect to the Concentration Account, such credit
balance shall not accrue interest in favor of Borrower, but shall be available
to Borrower at any time or times for so long as no Event of Default, and no
fact, event or circumstance that, with notice or the passage of time (or both),
would constitute an Event of Default, exists.

         Section 2.4.         Fees.

                  (a)         By executing this Agreement, Borrower agrees
unconditionally to pay to Lender, on the Closing Date, subject to the funding of
the Loans by Lender, a commitment fee equal to one and three-quarters percent
(1¾%) of the sum of Maximum Revolving Loan Amount and the Maximum Term Loan
Amount (such amount, the “Commitment Fee”) less the initial payment of
$200,000.00 previously paid to Lender by Borrower upon its acceptance of the
funding commitment set forth in the commitment letter dated July 24, 2002.

                  (b)         For so long as the Revolving Loan is available to
Borrower, Borrower unconditionally shall pay to Lender a monthly usage fee (the
“Usage Fee”) equal to one-half of one percent (0.5%) of the average amount by
which the Maximum Revolving Loan Amount, less the amount withheld from the
Borrowing Base pursuant to the last sentence of Section 2.1A(d), exceeds the
average amount of the outstanding principal balance of the Revolving Credit
Advances during the preceding month. The Usage Fee shall be payable monthly in
arrears on the first Business Day of each successive calendar month.

                  (c)         For so long as either of the Loans is available to
Borrower, Borrower unconditionally shall pay to Lender a loan management fee
(the “Loan Management Fee”) equal to Seventy-Five Thousand and No/100 Dollars
($75,000.00) per annum, payable annually in advance on the Closing Date and on
each anniversary thereof.

                  (d)         In consideration for Lender’s agreement to cause
any and all Letters of Credit to be issued for Borrower’s account, Borrower
hereby agrees to pay to Lender, with respect to each Letter of Credit issued,
for each three (3) month period or portion thereof (each, a “Period”) during
which such Letter of Credit may be outstanding, a fee (the “Letter of Credit
Fee”) equal to four percent (4.0%) of the Face Amount, on an annualized basis.
The Letter of Credit Fee shall not be prorated for any Period shorter than three
(3) months. The Letter of Credit Fee for each Period shall be deemed accrued and
fully earned upon the commencement of each Period (the first such Period to
commence on the date of issuance of the Letter of Credit, and each Period
thereafter to commence on each annual anniversary thereof), shall be payable in
full on the first date of each such Period, and shall be non-refundable when
paid. In addition to the Letter of Credit Fee, Borrower hereby agrees to pay to
or reimburse Lender for, on demand,

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any and all commissions and charges of, and any and all fees (including any per
annum fees), costs and expenses incurred by Lender (or of Issuing Party to the
extent Lender is obligated to reimburse Issuing Party therefor), in connection
with the issuance, negotiation, acceptance, amendment, transfer and payment of
the Letter of Credit or otherwise payable pursuant to the application and
related documentation under which such Letter of Credit is issued. Borrower
hereby agrees that each Letter of Credit Fee and any and all other amounts
required to be paid or reimbursed by Borrower under this subsection 2.4(e) may
be paid by adding such amounts to the balance of Revolving Credit Advances
hereunder.

                  (e)         Borrower shall pay to Lender all reasonable fees
and expenses in connection with audits and appraisals of Borrower’s books and
records and such other matters as Lender shall deem appropriate, which shall be
due and payable on the first Business Day of the month following the date of
issuance by Lender of a request for payment thereof to Borrower.

                  (f)         Borrower shall pay to Lender, on demand, any and
all fees, costs or expenses which Lender or any participant pays to a bank or
other similar institution (including, without limitation, any fees paid by
Lender to any participant) arising out of or in connection with (i) the
forwarding to Borrower or any other Person on behalf of Borrower, by Lender, of
proceeds of Revolving Credit Advances made by Lender to Borrower pursuant to
this Agreement, and (ii) the depositing for collection, by Lender or any
participant, of any check or item of payment received or delivered to Lender or
any participant on account of Obligations.

                  (g)         Lender shall have the right to charge
administrative fees as Lender may determine, in its sole reasonable discretion,
in connection with any servicing requests made by Borrower requiring Lender’s
evaluation, preparation and processing of any such requests.

         Section 2.5.         Payments.

                  (a)         Principal payable on account of Revolving Credit
Advances shall be payable by Borrower to Lender immediately upon the earliest of
(a) the receipt by Borrower or Lender of any payments on or proceeds from any of
the Personal Property, to the extent of such proceeds, (b) the occurrence of an
Event of Default if any of the Loans and the maturity of the payment of any of
the Obligations are accelerated, or (c) the termination of this Agreement
pursuant to Section 2.8 of this Agreement; provided,however, that if the
outstanding principal balance of the Revolving Credit Advances is at any time in
excess of the Borrowing Base, Borrower shall, immediately upon demand, repay
such excess. Interest accrued on the Revolving Credit Advances shall be due on
the earliest of (x) the first day of each month (for the immediately preceding
month), computed on the last calendar day of the preceding month, (y) during the
continuance of an Event of Default, the day such interest accrues, or (z) the
Maturity Date.

                  (b)         Principal payable on account of the Term Loan
shall be payable by Borrower to Lender immediately upon the earliest of (a) the
date(s) set forth in the amortization schedule attached as or described in
Exhibit E hereto, or (b) the Maturity Date. Interest accrued on the Term Loan
shall be due on the earliest of (x) the first day of each month (for the
immediately preceding month), commencing on October 1, 2002, computed on the
last calendar

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day of the preceding month, or (y) during the continuance of an Event of
Default, the day such interest accrues.

                  (c)         Except to the extent otherwise set forth in this
Agreement, all payments of principal and of interest on the Loans, all other
charges and any other obligations of Borrower under this Agreement, shall be
made to Lender to the Concentration Account, in immediately available funds. All
payments shall be made without deduction for any set-off, recoupment,
counterclaim or defense that Borrower now has or may have in the future.

                  (d)         In the event that any payment required hereunder
is not actually received by Lender within five (5) calendar days of the date
such payment is due, Borrower agrees to pay a late charge equal to four percent
(4%) of the total amount of any delinquent payment as liquidated damages in
order to defray the increased cost of collection occasioned by such late payment
and the lost investment opportunity. Such charges shall be imposed
automatically, without any notice to Borrower or any other person, but not more
often than once a month.

         Section 2.6.         Use of Proceeds. The proceeds of Lender’s advances
under the Loans shall be used solely to defease Borrower’s existing indebtedness
owed to Fleet Bank, for working capital, for acquisition or refinancing of the
Real Property, and for other costs of Borrower arising in the ordinary course of
Borrower’s business. On the date of Closing, Lender, on Borrower’s behalf, will
forward a portion of the proceeds of the Loans to Chicago Title Insurance
Company for the purpose of purchasing all rights in an existing mortgage note
secured by Borrower’s Salinas, Puerto Rico facility. Lender will hold such note
and all rights thereto, in escrow for Borrower.

         Section 2.7.         Interest Rate Limitation. The parties intend to
conform strictly to the applicable usury laws in effect from time to time during
the term of the Loans. Accordingly, if any transaction contemplated by this
Agreement would be usurious under such laws, then notwithstanding any other
provision of this Agreement: (a) the aggregate of all interest that is
contracted for, charged, or received under this Agreement or under any other
Loan Document shall not exceed the maximum amount of interest allowed by
applicable law (the “Highest Lawful Rate”), and any excess shall be promptly
credited to Borrower by Lender (or, to the extent that such consideration shall
have been paid, such excess shall be promptly refunded to Borrower by Lender);
(b) neither Borrower nor any other Person now or hereafter liable under this
Agreement shall be obligated to pay the amount of such interest to the extent
that it is in excess of the Highest Lawful Rate; and (c) the effective rate of
interest for the portion of the Loans that would otherwise be usurious under
applicable laws shall be reduced to the Highest Lawful Rate. All sums paid, or
agreed to be paid, to Lender for the use, forbearance, and detention of the debt
of Borrower to Lender shall, to the extent permitted by applicable law, be
allocated throughout the full term of the applicable Note until payment is made
in full so that the actual rate of interest does not exceed the Highest Lawful
Rate in effect at any particular time during the full term thereof. If at any
time the rate of interest under the applicable portion of the Loans exceeds the
Highest Lawful Rate, the rate of interest to accrue pursuant to this Agreement
under such portion of the Loans shall be limited, notwithstanding anything to
the contrary in this Agreement, to the Highest La wful Rate, but any subsequent
reductions in the applicable interest accrual rate shall not reduce the interest
to accrue pursuant to this Agreement below the Highest

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Lawful Rate until the total amount of interest accrued equals the amount of
interest that would have accrued if the Term Base Rate or Revolver Base Rate, as
applicable, had at all times been in effect. If the total amount of interest
paid or accrued pursuant to this Agreement under the foregoing provisions is
less than the total amount of interest that would have accrued if the Term Base
Rate or Revolver Base Rate, as applicable, had at all times been in effect, then
Borrower agrees to pay to Lender an amount equal to the difference between (x)
the lesser of (A) the amount of interest that would have accrued if the Highest
Lawful Rate had at all times been in effect, or (B) the amount of interest that
would have accrued if the Term Base Rate or Revolver Base Rate, as applicable,
had at all times been in effect, and (y) the amount of interest accrued in
accordance with the other provisions of this Agreement.

         Section 2.8.         Maturity Date; Termination of Revolving Loan;
Termination Fee.

                  (a)         The Revolving Note, all interest accrued thereon,
all fees, expenses and other charges accrued hereunder, and all other
Obligations, if not earlier paid or required to be paid, shall become due and
payable in full upon the “Maturity Date” (as defined below). The “Maturity Date”
shall be the earliest to occur of (i) September 25, 2005 and (ii) the date on
which the Obligations otherwise become due as a result of acceleration of the
Obligations as provided for under this Agreement or any other Loan Document, or
(iii) the effective date of any earlier termination of this Agreement.

                  (b)         Subject to the provisions of subsection (c) below,
upon at least thirty (30) days prior written notice to Lender (the “Termination
Notice Period”), Borrower may terminate this Agreement by specifying an
effective termination date (the “Requested Termination Date”) in a notice of
termination sent to Lender; provided that, notwithstanding anything in
Borrower’s termination notice to the contrary, the Requested Termination Date
shall be effective no earlier than the first Business Day of the month following
the expiration of the Termination Notice Period. Unless earlier terminated
pursuant to this Agreement, all funding obligations of Lender under this
Agreement shall terminate no later than the expiration of the Termination Notice
Period.

                  (c)         All undertakings, agreements, covenants,
warranties and representations of Borrower contained in the Loan Documents shall
survive any termination of this Agreement or Lender’s funding obligations under
this Agreement and Lender shall retain its Liens in the Collateral and all of
its rights and remedies under the Loan Documents notwithstanding such
termination until Borrower has paid the Obligations to Lender, in full, in
immediately available funds. All indemnities of Borrower in this Agreement or
any other Loan Documents shall survive termination of this Agreement.

                  (d)         At the effective date of any termination of
Lender’s funding obligations under this Agreement (whether by voluntary
termination by Borrower or by termination by Lender following the occurrence of
an Event of Default), Borrower shall pay to Lender (in addition to the then
outstanding principal, accrued interest and other Obligations owing under the
terms of this Agreement and any other Loan Documents) as yield maintenance for
the loss of bargain and not as a penalty, an amount equal to the applicable
Termination Fee. Consistent

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with the foregoing, Borrower must repay the Term Note in full in connection with
any termination of this Agreement and repayment in full of the Revolving Note.

                  (e)         Upon the expiration or termination of this
Agreement for any reason, including without limitation any termination by Lender
following the occurrence of any Event of Default or any early termination of
this Agreement by Borrower pursuant to this Section 2.8 (any such occurrence, a
“Deemed Draw Event”) at any time during which a Letter of Credit remains
outstanding, the entire Face Amount shall be deemed to have been drawn under the
Letter of Credit and shall automatically become a Revolving Credit Advance under
this Agreement. All amounts paid to or collected by Lender in connection with a
Letter of Credit following a Deemed Draw Event in excess of the amounts actually
drawn on the Letters of Credit by Beneficiary thereof shall be held in an
account in the name and under the control of Lender. All such sums so held by
Lender shall be deemed part of the Collateral and shall be subject to all
security interests and liens granted to Lender in this Agreement with respect to
the Collateral. Lender shall have the right to withdraw funds from such account
to repay any outstanding Letter of Credit Obligations or other Obligations
hereunder. Upon termination or expiration of any Letter of Credit, following
repayment of any Letter of Credit Obligations or other Obligations, any funds in
such account which exceed the aggregate of the amounts not actually drawn on the
Letters of Credit which remain outstanding shall be remitted to Borrower. Any
funds remaining after the expiration of all Letters of Credit, payment in full
of all Letter of Credit Obligations and all other Obligations of Borrower shall
be remitted to Borrower.

         Section 2.9.         Maturity of Term Note; Prepayment of Term Note;
Release of Real Property; Sale of Owned Facility.

                  (a)         The Term Note, all interest accrued thereon, all
fees, expenses and other charges accrued hereunder, and all other Obligations,
if not earlier paid or required to be paid, shall become due and payable, in
accordance with the amortization schedule set forth on Exhibit E, with a final
maturity of September 25, 2004.

                  (b)         Borrower may prepay all or any portion of the Term
Note outstanding, together with all interest accrued on the Term Note and all
other Obligations accrued hereunder in respect of the Term Loan, on any date.
Borrower may prepay the Term Note without prepaying the Revolving Note.

                  (c)         As part of any prepayment in full of the Term
Note, Lender shall release each of the Mortgages and release the Real Property
as part of the Collateral, but only upon strict compliance by Borrower with all
of the following conditions:

                 (1)      Borrower shall have prepaid the Term Note in full,
together with all interest accrued on the Term Note, all other Obligations
accrued hereunder in respect of the Term Loan and all other sums or fees which
are payable hereunder in connection with the prepayment of the Term Note;

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                 (2)      as of the date of such prepayment, there shall exist
no Event of Default or any fact, event or circumstance that, with the passage of
time, or the giving of notice, or both, could constitute an Event of Default;
and

                 (3)      Borrower shall have paid to Lender all costs and
expenses that Lender has incurred or that Lender estimates it will incur in
connection with preparing and filing such release, including, but not limited
to, all filing fees and legal fees and expenses (including fees and expenses of
Lender’s in-house counsel).

                  (d)         Borrower shall apply all net proceeds of any sale
of the Real Property to the prepayment, partial or in full, of the Term Note. In
connection with any such sale, Lender shall release its Mortgage upon the
particular parcel of Real Property being sold and release such parcel of Real
Property as part of the Collateral, but only upon strict compliance by Borrower
with all of the following conditions:

                 (1)      Borrower shall provide evidence that all net proceeds
of such sale shall be forwarded to Lender to be applied to the payment of
interest, all other sums and fees payable in respect of, and principal of the
Term Note, together with all interest accrued on the Term Note, all other
Obligations accrued hereunder in respect of the Term Loan and all other sums or
fees which are payable hereunder in connection with the prepayment of the Term
Note;

                 (2)      as of the date of such prepayment, there shall exist
no Event of Default or any fact, event or circumstance that, with the passage of
time, or the giving of notice, or both, could constitute an Event of Default;
and

                 (3)      Borrower shall have paid to Lender all costs and
expenses that Lender has incurred or that Lender estimates it will incur in
connection with preparing and filing such release, including, but not limited
to, all filing fees and legal fees and expenses (including fees and expenses of
Lender’s in-house counsel).

                  (e)         In the event that the Term Note is not repaid in
full on or prior to the six (6) month anniversary of the Closing Date, the Term
Base Rate shall be increased, as of the date of such six (6) month anniversary,
by one-quarter of one percent (¼%) per annum and by an additional one-quarter of
one percent (¼%) per annum on the first day of each calendar quarter thereafter
(i.e. April 1, July 1, etc.); provided that if such six-month anniversary falls
on the 30th day of the final month of a calendar quarter, then the Term Base
Rate shall not be increased on both such anniversary and the first day of the
immediately following calendar quarter.

         Section 2.10.         Joint and Several Liability; Binding
Obligations.Each entity constituting Borrower shall be jointly and severally
liable for all of the obligations of Borrower under the Notes and this
Agreement. Each Borrower, individually, expressly understands, agrees and
acknowledges, that the Loans would not be made available on the terms herein in
the absence of the collective credit of all of the Borrowers, the joint and
several liability of all Borrowers, and the cross-collateralization of the
Collateral of all Borrowers. Accordingly, each Borrower, individually
acknowledges that the benefit to each of Borrowers under the Loans as a

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whole constitutes reasonably equivalent value, regardless of the amount of the
Loans actually borrowed by, advanced to, or the amount of Collateral provided
by, any individual Borrower. In addition, each entity comprising Borrower hereby
acknowledges and agrees that all of the representations, warranties, covenants,
obligations, conditions, agreements and other terms contained in this Agreement
shall be applicable to and shall be binding upon each entity comprising
Borrower, and shall be binding upon all such entities when taken together.

ARTICLE III

COLLATERAL

         Section 3.1.         Generally.As security for the Obligations, and as
further security for the payment and performance by Borrower, any Guarantor and
their respective Affiliates of their respective obligations under the Affiliated
Loan Documents, Borrower hereby assigns and grants to Lender a continuing first
priority Lien on and security interest in, upon, and to the following property
whether now owned or hereafter acquired or arising (the “Personal Property”;
unless otherwise defined in this Agreement, all terms used in the following
subparagraphs shall have the meanings given them in the Uniform Commercial Code
as now or hereafter in effect), to the extent that Borrower may legally grant a
Lien on or security interest in such property:

                  (a)         All of Borrower’s Accounts, and all of Borrower’s
money, contract rights, chattel paper, documents, deposit accounts, securities,
investment property and instruments with respect thereto, and all of Borrower’s
rights, remedies, security, Liens and supporting obligations, in, to and in
respect of the foregoing, including, without limitation, rights of stoppage in
transit, replevin, repossession and reclamation and other rights and remedies of
an unpaid vendor, lienor or secured party, guaranties or other contracts of
suretyship with respect to the Accounts, deposits or other security for the
obligation of any Account Debtor, and credit and other insurance;

                  (b)         To the extent not listed above, all of Borrower’s
money, securities, investment property, deposit accounts, instruments and other
property and the proceeds thereof that are now or hereafter held or received by,
in transit to, in possession of, or under the control of Lender or a bailee or
Affiliate of Lender, whether for safekeeping, pledge, custody, transmission,
collection or otherwise;

                  (c)         To the extent not listed above, all of Borrower’s
now owned or hereafter acquired deposit accounts into which Accounts or the
proceeds of Accounts are deposited, including the Lockbox Account;

                  (d)         All of Borrower’s right, title and interest in, to
and in respect of all goods relating to, or which by sale have resulted in,
Accounts, including, without limitation, all goods described in invoices or
other documents or instruments with respect to, or otherwise representing or
evidencing, any Account, and all returned, reclaimed or repossessed goods;

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                   (e)         All of Borrower’s general intangibles (including,
but not limited to, payment intangibles) and other property of every kind and
description with respect to, evidencing or relating to its Accounts, including,
but not limited to, all existing and future customer lists, choses in action,
claims, books, records, ledger cards, contracts, licenses, formulae, tax and
other types of refunds, returned and unearned insurance premiums, rights and
claims under insurance policies, and computer programs, information, software,
records, and data, as the same relates to the Accounts;

                  (f)         All of Borrower’s other money, securities,
investment property, deposit accounts, instruments, documents, supporting
obligations and chattel paper;

                  (g)         All of Borrower’s letter-of-credit rights and
commercial tort claims;

                  (h)         All of Borrower’s other general intangibles
(including, without limitation, any proceeds from insurance policies after
payment of prior interests), patents, unpatented inventions, trade secrets,
copyrights, contract rights, goodwill, literary rights, rights to performance,
rights under licenses, choses-in-action, claims, information contained in
computer media (such as data bases, source and object codes, and information
therein), things in action, trademarks and trademarks applied for (together with
the goodwill associated therewith) and derivatives thereof, trade names,
including the right to make, use, and vend goods utilizing any of the foregoing,
and permits, licenses, certifications, authorizations and approvals, and the
rights of Borrower thereunder, issued by any governmental, regulatory, or
private authority, agency, or entity whether now owned or hereafter acquired,
together with all cash and non-cash proceeds and products thereof;

                  (i)         All of Borrower’s now owned or hereafter acquired
inventory of every description which is held by Borrower for sale or lease or is
furnished by Borrower under any contract of service or is held by Borrower as
raw materials, work in process or materials used or consumed in a business,
wherever located, and as the same may now and hereafter from time to time be
constituted, together with all cash and non-cash proceeds and products thereof;

                  (j)         All of Borrower’s now owned or hereafter acquired
machinery, equipment, computer equipment, tools, tooling, furniture, fixtures,
goods, supplies, materials, work in process, whether now owned or hereafter
acquired, together with all additions, parts, fittings, accessories, special
tools, attachments, and accessions now and hereafter affixed thereto and/or used
in connection therewith, all replacements thereof and substitutions therefor,
and all cash and non-cash proceeds and products thereof;

                  (k)         To the extent not listed above as original
collateral, the proceeds (including, without limitation, insurance proceeds) and
products of all of the foregoing.

         Notwithstanding the foregoing, Lender and Borrower agree that Lender’s
Lien on and security interest in money and funds of Borrower, to the extent
reported as “restricted cash” or “restricted funds” on Borrower’s balance
sheets, shall be subordinate to the Liens and security interests giving rise to
such designation as “restricted cash” or “restricted funds”.

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         Section 3.2.         Lien Documents.At Closing and thereafter as Lender
deems necessary in its sole discretion, Borrower shall execute and deliver to
Lender, or have executed and delivered (all in form and substance satisfactory
to Lender in its sole discretion) any agreements, documents, instruments, and
writings deemed necessary by Lender or as Lender may otherwise request from time
to time in its sole discretion to evidence, perfect, or protect Lender’s Lien
and security interest in the Collateral required under this Agreement. Borrower
hereby authorizes Lender to file one or more financing statements and amendments
thereto describing the Collateral and describing any agricultural liens or other
statutory liens held by Lender.

         Section 3.3.         Personal Property Collateral Administration.

                  (a)         All Personal Property (except deposit accounts)
shall at all times be kept by Borrower at its offices and locations set forth on
Schedule 4.15 (or other place of business hereafter established by Borrower) and
shall not be moved from such offices and locations without (i) providing prior
written notice to Lender in accordance with Section 6.15, and (ii) obtaining the
prior written consent of Lender, which consent shall not be unreasonably
withheld.

                  (b)         Borrower shall keep accurate and complete records
of its Accounts and all payments and collections thereon and shall submit to
Lender on such periodic basis as Lender shall reasonably request a sales and
collections report for the preceding period, in form satisfactory to Lender. In
addition, if Accounts in an aggregate face amount in excess of $250,000.00 that
were included in the most recent Borrowing Base certification become ineligible
because, subsequent to the date of such Borrowing Base certification, such
Accounts fall within one of the specified categories of ineligibility set forth
in the definition of Qualified Accounts (but other than pursuant to clause (b)
of such definition), Borrower shall notify Lender of such occurrence on the
first Business Day following such occurrence and the Borrowing Base shall
thereupon be adjusted to reflect such occurrence. If requested by Lender,
Borrower shall execute and deliver to Lender formal written assignments of all
of its Accounts weekly or daily, which shall include all Accounts that have been
created since the date of the last assignment, together with copies of claims,
invoices or other information related thereto.

                  (c)         Whether or not an Event of Default has occurred,
any of Lender’s officers, employees or agents shall have the right, at any time
or times hereafter, in the name of Lender or any designee of Lender or Borrower,
to verify the validity, amount or any other matter relating to any Accounts by
mail, telephone, telegraph or otherwise. Borrower shall cooperate fully with
Lender in an effort to facilitate and promptly conclude such verification
process.

                  (d)         To expedite collection, Borrower shall endeavor in
the first instance to make collection of its Accounts. Lender shall have the
right at any time to notify Account Debtors (subject to applicable law) that
Accounts have been assigned to Lender.

                  (e)         Borrower shall bear the risk of loss on all
Personal Property, regardless of whether such Personal Property is in the
possession or control of Borrower, Lender, a bailee or any other Person.

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         Section 3.4.         Other Actions.In addition to the foregoing,
Borrower:

                  (a)         shall provide prompt written notice to each Person
who either is currently an Account Debtor or becomes an Account Debtor at any
time following the date of this Agreement that Lender has been granted a first
priority Lien and security interest in, upon and to all Accounts applicable to
such Person and directs each Account Debtor to make payments into the Lockbox,
and hereby authorizes Lender, upon Borrower’s failure to send such notices
within ten (10) days after the date of this Agreement (or ten (10) days after
the Person becomes an Account Debtor), to send any and all similar notices to
such Persons;

                  (b)         shall do and hereby authorizes Lender to do
anything further that may be lawfully required by Lender to secure Lender and
effectuate the intentions and objects of this Agreement, including but not
limited to the execution and delivery of lockbox agreements, continuation
statements, amendments to financing statements, and any other documents required
under this Agreement;

                  (c)         at Lender’s request, shall immediately deliver to
Lender all items of Collateral for which Lender must receive possession to
obtain a perfected security interest;

                  (d)         shall, on Lender’s demand, deliver to Lender all
notes, certificates, and documents of title, chattel paper, warehouse receipts,
instruments, and any other similar instruments constituting Personal Property;

                  (e)         shall, where Personal Property is in the
possession of a third party, join with Lender in notifying the third party of
Lender’s security interests and obtaining an acknowledgement from the third
party that it is holding the Personal Property for the benefit of Lender;

                  (f)         shall cooperate with Lender in obtaining control
with respect to Personal Property consisting of deposit accounts, investment
property, letter of credit rights, electronic chattel paper and any other
portion of the Personal Property for which control is required in order to
perfect a security interest; and

                  (g)         shall not create any chattel paper without placing
a legend on the chattel paper acceptable to Lender indicating that Lender has a
security interest in the chattel paper.

         Section 3.5.         Searches.Before Closing, and thereafter (as and
when determined by Lender in its sole discretion), Lender will perform the
searches described in clauses (a), (b) and (c) below against Borrower (the
results of which are to be consistent with Borrower’s representations and
warranties under this Agreement), all at Borrower’s expense:

                  (a)         Uniform Commercial Code searches with the
Secretary of State and local filing offices of each jurisdiction where Borrower
maintains its executive offices, a place of business, or assets and the
jurisdiction in which Borrower is organized;

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                   (b)          Judgment, federal tax lien and corporate and
partnership tax lien searches, in each jurisdiction searched under clause (a)
above; and

                  (c)         Searches of applicable corporate, limited
liability company, partnership and related records to confirm the continued
existence, organization and good standing of Borrower and the exact legal name
under which Borrower is organized.

         Section 3.6.         Power of Attorney.Each of the officers of Lender
designated on Schedule 3.6 is hereby irrevocably made, constituted and appointed
the true and lawful attorney for Borrower (without requiring any of them to act
as such) with full power of substitution to do the following: (a) endorse the
name of Borrower upon any and all checks, drafts, money orders, and other
instruments for the payment of money that are payable to Borrower and constitute
collections on Borrower’s Accounts; (b) execute and/or caused to be filed in the
name of Borrower any financing statements, schedules, assignments, instruments,
documents, and statements that Borrower is obligated to give Lender under this
Agreement; (c) take any action Borrower is required to take under Section 3.4
above; (d) do such other and further acts and deeds in the name of Borrower that
Lender may deem necessary or desirable to perfect Lender’s security interest or
Lien in any Collateral; and (e) following an Event of Default, do such other and
further acts and deeds in the name of Borrower that Lender may deem necessary or
desirable to enforce any Account or other Personal Property. In addition, if
Borrower breaches its obligation to direct payments of the proceeds of the
Personal Property to the Lockbox Account, Lender, as the irrevocably made,
constituted and appointed true and lawful attorney for Borrower pursuant to this
paragraph, may, by the signature or other act of any of Lender’s officers
(without requiring any of them to do so), direct any federal, state or private
payor or fiscal intermediary to pay proceeds of the Personal Property to
Borrower by directing payment to the Lockbox Account.

         Section 3.7.         Newport News, Virginia Real Property.With respect
to the parcel of Real Property located in Newport News, Virginia, Lender agrees
to take all steps reasonably necessary to effect the transfer of a certain
portion of such parcel to Holy Tabernacle Housing and Economic Development
Corporation (“HTHEDC”), in accordance with the terms of an agreement between
Borrower and HTHEDC.

ARTICLE IV

REPRESENTATIONS AND WARRANTIES

         Each entity comprising Borrower represents and warrants to Lender, as
of the date hereof, to each of the matters set forth in this Article IV.
Additionally, each request for a Revolving Credit Advance and each request for
the issuance, amendment or extension of a Letter of Credit shall be deemed to
constitute a representation and warranty by Borrower to Lender, as of the date
of each such request, to each of the matters set forth in this Article IV.

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         Section 4.1.         Subsidiaries.Except as set forth in Schedule 4.1,
Borrower has no subsidiaries.

         Section 4.2.         Organization and Good Standing. Borrower is a
corporation, limited liability company or limited liability partnership, as the
case may be, duly organized, validly existing, and in good standing under the
laws of its state of formation, is in good standing as a foreign corporation,
limited liability company or limited liability partnership, as the case may be,
in each jurisdiction in which the character of the properties owned or leased by
it therein or the nature of its business makes such qualification necessary, has
the corporate, limited liability company or limited liability partnership (as
the case may be) power and authority to own its assets and transact the business
in which it is engaged, and has obtained all certificates, licenses and
qualifications required under all laws, regulations, ordinances, or orders of
public authorities necessary for the ownership and operation of all of its
properties and transaction of all of its business. The state of organization of
each entity comprising Borrower is listed on Schedule 4.2, and the exact legal
name of each entity comprising Borrower is as set forth in the first paragraph
of this Agreement.

         Section 4.3.         Authority. Borrower has full corporate, limited
liability company or limited liabilitypartnership (as the case may be) power and
authority to enter into, execute, and deliver this Agreement and to perform its
obligations under this Agreement, to borrow the Loans, to execute and deliver
the Notes, and to incur and perform the obligations provided for in the Loan
Documents, all of which have been duly authorized by all necessary corporate,
limited liability company or limited liability partnership (as the case may be)
action. No consent or approval of shareholders, members or partners of, or
lenders to, Borrower and no consent, approval, filing or registration with any
Governmental Authority is required as a condition to the validity of the Loan
Documents or the performance by Borrower of its obligations under the Loan
Documents, unless such consent, approval, filing or registration has already
been duly received or made.

         Section 4.4.         Binding Agreement.This Agreement and all other
Loan Documents constitute, and the Notes, when issued and delivered pursuant to
this Agreement for value received, will constitute, the valid and legally
binding obligations of Borrower, enforceable against Borrower in accordance with
their respective terms, except to the extent that such enforceability may be
limited by principles of equity, the applications of judicial discretion and
applicable bankruptcy, moratorium, reorganization, fraudulent conveyance,
insolvency and other similar laws of general application affecting or limiteing
the enforcement of creditors’ rights.

         Section 4.5.         Litigation. Except as disclosed in Schedule 4.5,
there are no actions, suits, proceedings or investigations pending or threatened
against Borrower before any court or arbitrator or before or by any Governmental
Authority which, in any one case or in the aggregate, if determined adversely to
the interests of Borrower, could have a material adverse effect on the business,
properties, condition (financial or otherwise) or operations, current or
prospective, of Borrower taken as a whole, or upon its ability to perform its
obligations under the Loan Documents. Borrower is not in default with respect to
any order of any court, arbitrator, or Governmental Authority applicable to
Borrower or its properties.

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         Section 4.6.          No Conflicts.The execution and delivery by
Borrower of this Agreement and the other Loan Documents do not, and the
performance of its obligations under the Loan Documents will not, violate,
conflict with, constitute a default under, or result in the creation of a Lien
or encumbrance upon the property of Borrower (other than for the benefit of
Lender) under: (a) any provision of Borrower’s articles of incorporation or
bylaws, certificate of formation or operating agreement, or certificate of
limited liability partnership or agreement of limited liability partnership, as
the case may be, (b) any provision of any law, rule, or regulation applicable to
Borrower, (c) any indenture or other agreement or instrument to which Borrower
is a party or by which Borrower or its property is bound, or (d) any judgment,
order or decree of any court, arbitration tribunal, or Governmental Authority
having jurisdiction over Borrower which is applicable to Borrower.

         Section 4.7.         Financial Condition.The financial statements of
Borrower which have been delivered to Lender fairly present the consolidated
financial condition of Borrower and the results of its operations and changes in
financial condition as of the dates and for the periods referred to, and have
been prepared in accordance with GAAP. There are no material unrealized or
anticipated liabilities, direct or indirect, fixed or contingent, of Borrower as
of the dates of such financial statements which are not reflected in such
financial statements or in the notes to such financial statements. There has
been no adverse change in the business, properties, condition (financial or
otherwise) or operations (current or prospective) of Borrower since the date of
the last financial statement delivered to Lender. The federal tax identification
number and fiscal year of each entity comprising Borrower is as described on
Schedule 4.7.

         Section 4.8.         No Default.Borrower is not in default under or
with respect to any obligation in any respect which could reasonably be expected
to be materially adverse to its business, operations, property or financial
condition, or which could reasonably be expected to have a material, adverse
effect on the ability of Borrower to perform its obligations under the Loan
Documents. No Event of Default or event that, with the giving of notice or lapse
of time, or both, could become an Event of Default, has occurred and is
continuing.

         Section 4.9.         Title to Properties. Borrower has good, marketable
and indefeasible title to, rights in and the power to transfer its properties
and assets, including the Collateral and the properties and assets reflected in
the financial statements described in Section 4.7, subject to no Lien, mortgage,
pledge, encumbrance or charge of any kind, other than Permitted Liens, except as
described on Schedule 4.9. Except as described on Schedule 4.9, Borrower has not
agreed or consented to cause any of its properties or assets whether owned now
or hereafter acquired to be subject in the future (upon the happening of a
contingency or otherwise) to any Lien, mortgage, pledge, encumbrance or charge
of any kind other than Permitted Liens. All of the Collateral, and all other
property and assets of Borrower that are necessary to the conduct of Borrower’s
business, are owned or leased or otherwise available to Borrower or the rights
to same are held by Borrower in its name, and none of the Collateral, or any
such property or assets are owned or leased or the rights thereto held in the
name of any other entity.

         Section 4.10.         Taxes.Borrower has filed, or has obtained
extensions for the filing of, all federal, state and other tax returns which are
required to be filed, and has paid all taxes shown as due on those returns and
all assessments, fees and other amounts due as of the date of this

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Agreement. All tax liabilities of Borrower are adequately provided for on
Borrower’s books. Except as set forth on Schedule 4.10, no tax liability has
been asserted by the Internal Revenue Service or other taxing authority against
Borrower for taxes in excess of those already paid.

         Section 4.11.         Securities and Banking Laws and Regulations.

                  (a)         The use of the proceeds of the Loans and
Borrower’s issuance of the Notes will not directly or indirectly violate or
result in a violation of the Securities Act of 1933 or the Securities Exchange
Act of 1934, as amended, or any regulations issued pursuant thereto, including
without limitation Regulations U, T or X of the Board of Governors of the
Federal Reserve System. Borrower is not engaged in the business of extending
credit for the purpose of the purchasing or carrying “margin stock” within the
meaning of those regulations. No part of the proceeds of the Loans under this
Agreement will be used to purchase or carry any margin stock or to extend credit
to others for such purpose.

                  (b)         Borrower is not an investment company within the
meaning of the Investment Company Act of 1940, as amended, nor is it, directly
or indirectly, controlled by or acting on behalf of any Person which is an
investment company within the meaning of that Act.

         Section 4.12.         ERISA.No employee benefit plan (a “Plan”) subject
to the Employee Retirement Income Security Act of 1974 (“ERISA”) and regulations
issued pursuant to ERISA that is maintained by Borrower or under which Borrower
could have any material liability under ERISA (i) has failed to meet minimum
funding standards established in Section 302 of ERISA, (ii) has failed to
substantially comply with all applicable requirements of ERISA and of the
Internal Revenue Code, including all applicable rulings and regulations
thereunder, or (iii) has engaged in or been involved in a prohibited transaction
(as defined in ERISA) under ERISA or under the Internal Revenue Code. Neither
Borrower nor any member of a Controlled Group that includes Borrower has
assumed, or received notice of a claim asserted against Borrower or another
member of the Controlled Group for, withdrawal liability (as defined in the
Multi-Employer Pension Plan Amendments Act of 1980, as amended) with respect to
any multi-employer pension plan. Borrower does not participate in any
multi-employer pension plan.

         Section 4.13.         Compliance with Laws.To the best of the knowledge
of Borrower, Borrower is not in material violation of any statute, rule or
regulation of any Governmental Authority (including, without limitation, any
statute, rule or regulation relating to employment practices or to
environmental, occupational and health standards and controls). Borrower has
obtained all licenses, permits, franchises, and other governmental
authorizations necessary for the ownership of its properties and the conduct of
its business. Borrower is current with all reports and documents required to be
filed with any state or federal securities commission or similar Governmental
Authority and is in full compliance with all applicable rules and regulations of
such commissions.

         Section 4.14.         Environmental Matters.No use, exposure, release,
generation, manufacture, storage, treatment, transportation or disposal of
Hazardous Material has occurred or is occurring on or from the Real Property or
any real property on which the Personal Property is located or which is owned,
leased or otherwise occupied by Borrower (all such real property,

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including the Real Property, is herein referred to collectively as the
“Premises”), or off the Premises as a result of any action of Borrower, except
as described in Schedule 4.14 or disclosed in the Environmental Assessment
reports prepared by Linebach & Funkhauser and provided to Lender. All Hazardous
Material used, treated, stored, transported to or from, generated or handled on
the Premises, or off the Premises by Borrower, has been disposed of on or off
the Premises by or on behalf of Borrower in a lawful manner. Except as disclosed
in the Phase I Environmental Assessment reports prepared by Linebach &
Funkhauser and provided to Lender, there are no underground storage tanks
present on or under the Real Property, and no other environmental, public health
or safety hazards exist with respect to the Real Property.

         Section 4.15.         Places of Business; Chief Executive Office.As of
the Closing Date, the only places of business of Borrower, and the places where
it keeps and intends to keep the Personal Property and records concerning the
Personal Property, are at the Facilities set forth in Schedule 4.15. Schedule
4.15 also lists whether each Facility is owned, leased or managed by Borrower
and, for each Facility not owned by Borrower, the owner of record of each such
property. Borrower’s chief executive office is located in the state and at the
address shown in Schedule 4.15.

         Section 4.16.         Intellectual Property.Borrower exclusively owns
or possesses all the patents, patent applications, trademarks, trademark
applications, service marks, trade names, copyrights, franchises, licenses, and
rights with respect to the foregoing necessary for the current and planned
future conduct of its business, without any conflict with the rights of others.
A list of all such intellectual property (indicating the nature of Borrower’s
interest), as well as all outstanding franchises and licenses given by or held
by Borrower, is attached as Schedule 4.16. Borrower is not in default of any
obligation or undertaking with respect to such intellectual property or rights.
Borrower is not infringing on any patents, patent applications, trademarks,
trademark applications, service marks, trade names, copyrights, franchises,
licenses, any rights with respect to the foregoing, or any other intellectual
property rights of others and Borrower is not aware of any infringement by
others of any such rights owned by Borrower.

         Section 4.17.         Capitalization.The authorized equity securities
(whether capital stock, partnership or membership interests or otherwise) of
each entity comprising Borrower are as set forth in Schedule 4.17. Such equity
securities were issued in compliance with all applicable state, federal and
foreign laws concerning the issuance of securities. All issued and outstanding
equity securities of each entity comprising Borrower other than Correctional
Services Corporation (each such entity, a “Subsidiary”) are duly authorized and
validly issued and are fully paid, nonassessable and free and clear of all Liens
or pledges other than those in favor of Lender or for the benefit of Lender. Set
forth on Schedule 4.17 are (i) in the case of Correctional Services Corporation,
the identity of all holders of equity securities known by Borrower to hold in
excess of five percent (5%) of all issued and outstanding equity securities of
Correctional Services Corporation on a fully diluted basis as of the Closing
Date and (ii) in the case of each Subsidiary, the identity of all holders of
equity securities of such Subsidiary and the percentage of each holders’ fully
diluted ownership of such Subsidiary. No shares of the equity securities of any
Subsidiary, other than those shown on Schedule 4.17, are issued and outstanding.
There are no preemptive or other outstanding rights, options, warrants,
conversion rights or similar agreements or understandings for the purchase or
acquisition from Borrower of any equity

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securities of any Subsidiary.

         Section 4.18.         Material Facts.Neither this Agreement nor any
other Loan Document nor any other agreement, document, certificate, or statement
furnished to Lender by or on behalf of Borrower in connection with the
transactions contemplated by this Agreement contains any untrue statement of
material fact or omits to state a material fact necessary to make the statements
contained in this Agreement or other Loan Document not misleading. There is no
fact known to Borrower that adversely affects or in the future may adversely
affect the business, operations, affairs or financial condition of Borrower, or
any of its properties or assets.

         Section 4.19.         Investments, Guarantees, and Certain
Contracts.Borrower does not own or hold any equity or long-term debt investments
in, have any outstanding advances to, have any outstanding guarantees for the
obligations of, or have any outstanding borrowings from, any Person, except as
described on Schedule 4.19. Borrower is not a party to any contract or
agreement, or subject to any corporate restriction, which has a material adverse
effect on its business.

         Section 4.20.         Business Interruptions.Except as described on
Schedule 4.20, within five years before the date of this Agreement, neither the
business, property or assets, or operations of Borrower has been adversely
affected in any way by any casualty, strike, lockout, combination of workers, or
order of the United States of America or other Governmental Authority, directed
against Borrower. There are no pending or overtly threatened labor disputes,
strikes, lockouts, or similar occurrences or grievances against Borrower or its
business.

         Section 4.21.         Names.Within five years before the date of this
Agreement, Borrower has not conducted business under or used any other name
(whether corporate, partnership or assumed) other than as shown on Schedule
4.21. Borrower is the sole owner of all names listed on such Schedule and any
and all business done and invoices issued in such names are Borrower’s sales,
business, and invoices. Each trade name of Borrower represents a division or
trading style of Borrower and not a separate Person or independent Affiliate.

         Section 4.22         Joint Ventures.Borrower is not engaged in any
joint venture or partnership with any other Person, except as set forth on
Schedule 4.22.

         Section 4.23         Accounts.Lender may rely, in determining which
Accounts are Qualified Accounts, on all statements and representations made by
Borrower with respect to any Account or Accounts. Unless otherwise indicated in
writing to Lender, with respect to each Qualified Account, Borrower represents
that:

                  (a)         The Account is genuine and in all respects what it
purports to be, and is not evidenced by a judgment;

                  (b)         The Account arises out of a completed, bona fide
sale and delivery of goods or rendition of Services by Borrower in the ordinary
course of its business and in accordance with the terms and conditions of all
purchase orders, contracts and other documents relating thereto and forming a
part of the contract between Borrower and the Account Debtor;

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                   (c)         The Account is for a liquidated amount maturing
as stated in a duplicate claim or invoice covering such sale or rendition of
Services, a copy of which has been furnished or is available to Lender;

                  (d)         The Account, and Lender’s security interest in
such Account, is not subject to any offset, Lien, deduction, defense, dispute,
counterclaim or any other adverse condition, and each such Account is absolutely
owing to Borrower and is not contingent in any respect or for any reason;

                  (e)         There are no facts, events or occurrences which in
any way impair the validity or enforceability of any Accounts or tend to reduce
the amount payable thereunder from the face amount of the claim or invoice and
statements delivered to Lender with respect thereto;

                  (f)         To the best of Borrower’s knowledge, (i) the
Account Debtor under the Account had the capacity to contract at the time any
contract or other document giving rise to the Account was executed and (ii) such
Account Debtor is solvent;

                  (g)         To the best of Borrower’s knowledge, there are no
proceedings or actions which are threatened or pending against any Account
Debtor under the Account which might result in any material adverse change in
such Account Debtor’s financial condition or the collectibility of such Account;

                  (h)         The Account has been billed and forwarded to the
Account Debtor for payment in accordance with applicable laws and compliance and
conformance with any and requisite procedures, requirements and regulations
governing payment by such Account Debtor with respect to such Account; and

                  (i)         Borrower has obtained and currently has all
certificates of need, licenses, permits and authorizations that are necessary in
the generation of such Accounts.

         Section 4.24.         Solvency.Both before and after giving effect to
the transactions contemplated by the terms and provisions of this Agreement,
Borrower (taken as a whole) (a) owns property whose fair saleable value is
greater than the amount required to pay all of Borrower’s Indebtedness
(including contingent debts), (b) was and is able to pay all of its Indebtedness
as such Indebtedness matures, and (c) had and has capital sufficient to carry on
its business and transactions and all business and transactions in which it
about to engage. For purposes of this Agreement, the term “Indebtedness” means,
without duplication (x) all items which in accordance with GAAP would be
included in determining total liabilities as shown on the liability side of a
balance sheet of such Borrower as of the date on which Indebtedness is to be
determined, (y) all obligations of any other person or entity which such
Borrower has guaranteed, and (z) the Obligations.

         Section 4.25.         [INTENTIONALLY OMITTED]

         Section 4.26.         Reports. Borrower has timely filed or caused to
be timely filed, all cost

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reports and other reports of every kind, as applicable and required by law or by
written or oral contracts or otherwise to have been filed or made with respect
to the Facilities. There are no claims, actions or appeals pending (and Borrower
has not filed any claims or reports which should result in any such claims,
actions or appeals) before any commission, board or agency with respect to any
state or federal cost reports or claims filed by Borrower, or any disallowance
by any commission, board or agency in connection with any audit of such cost
reports. No validation review or program integrity review related to Borrower,
or the consummation of the transactions contemplated herein, or related to the
Facilities or the Collateral, have been conducted by any commission, board or
agency in connection with the any programs, and to the knowledge of Borrower, no
such reviews are scheduled, pending or threatened against or affecting any of
the providers, or any of the Facilities or the Collateral, or the consummation
of the transactions contemplated hereby.

         Section 4.27.         Funds from Restricted Grants.Except as described
on Schedule 4.27, none of the Facilities or other Collateral is subject to, and
Borrower shall indemnify and hold Lender harmless from and against, any
liability in respect of amounts received by Borrower or others for the purchase
or improvement of the Facilities or other Collateral or any part thereof under
restricted or conditioned grants or donations.

         Section 4.28.         [INTENTIONALLY OMITTED]

         Section 4.29.         Assignment of Claims Laws.Except as set forth in
Schedule 4.29, no Borrower is a party to any contract or agreement that is
subject to the Federal Assignment of Claims Act, as amended (31 U.S.C. Section
3727) or any similar state or local law. With respect to its contracts and
agreements, Borrower has not filed any notice pursuant to the Federal Assignment
of Claims Act or any similar state or local law, except for any notice naming
Lender or Fleet Bank as assignee.

         Section 4.30.         Leases.Except as described on Schedule 4.30,
Borrower has not entered into any Leases or licenses of the Collateral nor are
there any unrecorded Leases pertaining to the Facilities.

         Section 4.31.         Condemnation.No condemnation of any portion of
the Real Property has commenced or, to the best of Borrower’s knowledge, is
contemplated by any governmental authority.

         Section 4.32.         Commitment.All factual information set forth in
the commitment letter for the Loans (if any) (the “Commitment”) and its
exhibits, all financial statements, operating statements, leases and rent rolls
previously furnished by or on behalf of Borrower to Lender in connection with
the Loans and all other submissions referred to herein or required by the
Commitment are true, complete and correct in all material respects as of the
date indicated thereon, are not misleading in any material respect and do not
omit any information required to prevent such statements, loan submissions or
materials from being materially misleading under the circumstances.

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         Section 4.33.         Contracts.Since January 1, 2002, there have been
no terminations or non-renewals of any of Borrower’s material contracts for
Services.

         Section 4.34.         Compliance.To Borrower’s knowledge, the
Facilities are structurally sound and the operation of the Facilities complies,
in all material respects, with all applicable zoning, environmental protection
or control codes and fire, electrical and building codes, rules and regulations.
There is no license, approval or permit, necessary for either the lawful
operation of the Facilities or the lawful occupancy thereof, including, without
limitation, utility, building, zoning, subdivision control, land and water use,
environmental protection and flood hazard permits, which has not been obtained.

         Section 4.35.         Unrecorded Contracts.Except as disclosed on
Schedule 4.35, there are no unrecorded contracts to purchase the Facilities or
any interest therein.

         Section 4.36.         Real Estate Taxes.All real estate taxes and
assessments against the Real Property are fully paid for all prior years, except
as described on Schedule 4.10.

         Section 4.37.         Flood Plain.To the best of the knowledge of
Borrower, no part of the Real Property lies in a 100 year flood plain that has
been identified by the Secretary of Housing and Urban Development or any other
governmental authority.

         Section 4.38.         Real Property.The Loan Documents create a valid
first lien on the marketable, fee simple estate in the Real Property. Each of
the Owned Facilities is located on one or more of the parcels that comprise the
Real Property. To Borrower’s knowledge, except with respect to the parcel of
Real Property located in Belle Glade, Florida, the Real Property and all
improvements to the Real Property, if any, including all access roadways,
driveways and any other paving, and any and all site work, fencing, lighting and
other improvements, has been completed in a good and workmanlike manner in
accordance with the plans, specifications and/or site plan previously approved
by the county or city in which the Real Property is situate, is free from filed
or unfiled mechanics ’ and materialmen’s liens, and has not been damaged by fire
or casualty and there are no deficiencies or problems with the design and/or
construction of the improvements on the Real Property. Final certificates of
occupancy or non-residential use permits have been obtained in connection with
each of the Owned Facilities. The parcels of land comprising the Real Property,
other than those on which is located the Forest Ridge Youth Services Facility in
Estherville, Iowa, are contiguous, subdivided parcels and are in full compliance
with applicable subdivision ordinances. No subdivision or resubdivision of such
parcels is required to: (i) convey, transfer, assign or lease such parcels,
either individually or as a whole; or (ii) rebuild after a casualty all or any
portion of the improvements on the Real Property to current size and
configuration.

         Section 4.39.         Insurance. All insurance required by the Loan
Documents is in full force and effect. For all casualty, rent loss, business
interruption and other insurance relating to damage to the Real Property, Lender
is insured as a first mortgagee thereunder, with a non-contributory loss payee
clause, a minimum thirty-day cancellation notice provision, and agreed amount,
replacement cost and inflation guard endorsements.

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         Section 4.40.         Utilities.The Owned Facilities are adequately
served by electric, gas (if applicable), water, public sewer, public storm sewer
and other utilities and municipal services and/or self-contained or managed
water, wastewater and sewer systems required for the use of the Owned Facilities
as Borrower has represented such use to Lender. Utilities entering the Owned
Facilities either do so from a public street or are located in recorded
easements, which Lender’s title insurer has insured as being senior in priority
over the affected land to all other matters of record, and, to Borrower’s
knowledge, do not run under or through any building, structure or improvement
(except paving) or land privately owned by persons or entities other than
Borrower.

         Section 4.41.         Streets.All streets, roads, parking areas and
driveways necessary to serve the Owned Facilities for the use represented by
Borrower have been completed and are serviceable; and all streets and roads to
be dedicated have been dedicated and accepted for public use and maintenance by
the jurisdictions in which the Owned Facilities are located.

         Section 4.42.         Other Liens.Except as disclosed on Schedule 4.42,
there are no deeds of trust, mortgages, conditional sales contracts, chattel
mortgages, leases of personalty, financing statements, title retention
agreements or other liens filed and/or recorded against the Real Property other
than those securing Lender.

         Section 4.43.         Title and Ownership.Title to the Real Property
will be held in the names of one or more of the entities comprising the
“Borrower” under the deeds of trust, deeds to secure debt and/or mortgages
securing the Notes and, except as disclosed on Schedule 4.43, will not be the
subject of any transaction whereby the legal or beneficial title to all or any
part of the Real Property shall be transferred to anyone other than such
entities.

         Section 4.44.         Restricted Use.Borrower has no knowledge or
information that the present or proposed use and occupancy of the Facilities
violates any restrictive covenant, right-of-way, easement, operating agreement,
environmental protection statute or regulation or historical preservation
statute or regulation, and no notice of any violation of any regulation in
respect of the Real Property has been issued or received. There are no pending
proceedings to change or down-zone the existing zoning classification as to any
portion of the Real Property.

         Section 4.45.         Representations and Warranties Relating to Real
Property and Owned Facilities. To the extent that any representation or warranty
contained in this Article IV relates to the Real Property or the Owned
Facilities, such representation or warranty shall cease to apply effective as of
the first date after which the Term Loan has been repaid in full and on which no
default or Event of Default exists hereunder.

         Section 4.46.         Representations or Warranties Based on
“Knowledge”. To the extent any representation or warranty contained in this
Article IV is based upon the “knowledge” of Borrower, “knowledge” shall mean the
actual knowledge of the following officers of Correctional Service Corporation
and their successors: James F. Slattery, Bernard A. Wagner, Thomas C. Rapone,
Robert Matthews, Paul Donnelly and John R. Mentzer, III.

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ARTICLE V

CLOSING AND CONDITIONS OF LENDING

         Section 5.1.         Conditions Precedent to Agreement.The obligation
of Lender to enter into and perform this Agreement, to advance sums in respect
of the Term Loan, to make the initial Revolving Credit Advances and to issue any
Letter of Credit is subject to the following conditions precedent:

                  (a)         Lender shall have received two (2) originals of
this Agreement, the Certificate of Validity, any Guaranty and all other Loan
Documents required to be executed and delivered at or before Closing (other than
the Notes, as to which Lender shall receive only one (1) original of each),
executed by Borrower and any other required Persons, as applicable.

                  (b)         Lender shall have received all searches required
by Section 3.5.

                  (c)         Borrower and any Guarantor shall have complied and
shall then be in compliance with all the terms, covenants and conditions of the
Loan Documents.

                  (d)         There shall have occurred and be continuing no
Event of Default and no event that, with the giving of notice or the lapse of
time, or both, could constitute such an Event of Default.

                  (e)         The representations and warranties contained in
Article IV shall be true and correct in all material respects as of the Closing
Date (except to the extent such representations and warranties expressly relate
to a date other the Closing Date).

                  (f)         Lender shall have received copies of all board of
directors resolutions, consents of members and managers and consents of partners
of each Borrower and any Guarantor, and other action taken by Borrower and any
Guarantor to authorize the execution, delivery and performance of the Loan
Documents and the borrowing of the Loans under the Loan Documents, as well as
the names and signatures of the officers of, members and managers of and
partners of Borrower and any Guarantor authorized to execute documents on its
behalf in connection with the Loans, all as also certified as of the date of
this Agreement by Borrower’s or any Guarantor’s, as applicable, chief financial
officer or other officer, and such other papers as Lender may require.

                  (g)         Lender shall have received (i) copies, certified
as true, correct and complete by the applicable state of organization of each
Borrower, of the certificate of incorporation, certificate of formation or
certificate of limited liability partnership of each Borrower, with any
amendments to any of the foregoing, (ii) copies, certified as true, correct and
complete by an authorized officer, member or partner of each Borrower, of all
other documents necessary for performance of the obligations of Borrower under
this Agreement and the other Loan Documents, and (iii) certificates of good
standing for each Borrower issued by the state of

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organization of each Borrower and by each state in which each Borrower is doing
and currently intends to do business for which qualification is required.

                  (h)         Lender shall have received a written opinion of
counsel for Borrower, dated the date of this Agreement, substantially in the
form of Exhibit C.

                  (i)         Lender shall have received such financial
statements, reports, certifications, and other operational information required
to be delivered under this Agreement, including without limitation internal
financial statements for the six months ended June 30, 2002 (showing results
satisfactory to Lender) and an initial borrowing base certificate calculating
the Borrowing Base.

                  (j)         Lender shall have received the Commitment Fee.

                  (k)         The Lockbox, Lockbox Account and the Concentration
Account shall have been established.

                  (l)         Lender shall have received an estoppel certificate
substantially in the form of Exhibit D from Borrower’s landlord or sublandlord,
as the case may be, with respect to each of the leased Facilities identified on
Schedule 4.15.

                  (m)         Lender shall have received a certificate of
Borrower’s chief financial officer or other officer, dated the Closing Date,
certifying that all of the conditions specified in this subsections (c), (d),
(e), (f), (g), (i) and (k) of this Section 5.1 have been fulfilled.

                  (n)         The state of title to the Real Property shall be
satisfactory to Lender and Lender’s Mortgages shall, except in the case of the
Real Property located in Texas and Florida, be insured by a mortgagee title
insurance policy (or binding commitment therefor) in form and substance and from
a title insurer acceptable to Lender. Such title insurance policy shall be on an
American Land Title Association (“ALTA”) form designated by Lender, shall
specifically contain no exception as to survey matters (but only with respect to
the Florence, Arizona and Salinas, Puerto Rico properties) or creditors rights,
must contain affirmative coverage against mechanics’, contractors’, suppliers’
and/or materialmen’s liens, filed or unfiled, must affirmatively insure that the
security instrument is a valid first lien against the fee simple, marketable
estate, insuring Lender for a sum not less than an amount acceptable to Lender
at Closing and must contain such endorsements as may be required by Lender
(including, but not limited to, endorsements covering zoning (ALTA 3.1),
variable interest rates, revolving credit, no violations of covenants,
conditions and restrictions, street address, no usury violation, environmental
liens, tie-in, access, contiguity, encroachment, tax parcel, doing business,
mortgage tax, first loss and last dollar) to the extent the same are reasonably
available in the jurisdiction where the particular parcel of Real Property is
located, and, with respect to the Real Property located in Florence, Arizona and
Salinas, Puerto Rico only, shall contain no exceptions for matters which a land
survey may have indentified. Fee simple title to the Real Property and to the
fixtures, equipment, furniture and personal property encumbered by the Loan
Documents shall be marketable, and free and clear of all defects, liens,
encumbrances, security interests, assessments, restrictions and easements which
are not acceptable to and approved in writing by Lender. If access to the Real
Property is by means of easements or leases, said

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easements or leases shall be satisfactory in form and substance to Lender, shall
be insured under the mortgagee’s title insurance policy issued to Lender as part
of the insured estate and shall not be subject to any prior liens, encumbrances,
covenants or restrictions. All streets necessary to serve the Owned Facilities
for the use represented by Borrower shall have been completed and shall be
serviceable and all streets to be dedicated shall have been dedicated and
accepted for public use and maintenance. A search of the state and local public
records shall disclose no conditional sales contracts, chattel mortgages, leases
of personalty, financing statements or title retention agreements filed and/or
recorded against Borrower or the property other than liens which are expressly
permitted or otherwise disclosed under this Agreement.

                  (o)         Lender shall have received the following, all in
form and substance satisfactory to Lender in its sole and absolute discretion,
prior to any disbursement under the Loans:

                        (1)   with respect to each Owned Facility, (i) a Phase I
Environmental Site Assessment and (ii) such other documents and materials as
Lender shall deem reasonably necessary or appropriate.

                        (2)   with respect to Borrower’s Owned Facilities
located in Florence, Arizona and Salinas, Puerto Rico, (i) such property
appraisals, property as-built surveys complying in all respects with the
“Minimum Standard Detail requirements for ALTA/ACSM Land Title Surveys,” jointly
established and adopted in 1999 by ALTA, the American Congress on Surveying and
Mapping and the National Society of Professional Surveyors, and meeting the
accuracy requirements of an urban survey, and including items 1 through 16 of
Table A thereof (except for item 5 relating to contours of the land), physical
and structural inspection reports and other third party reports as Lender shall
deem necessary or appropriate and (ii) evidence that the Real Property and all
improvements thereon comply with applicable codes, regulations and ordinances,
are zoned for their current use, are structurally sound, are adequately served
by necessary utilities or self-contained systems, are free of mechanics and
materialmens liens, are not the subject to any pending or threatened litigation,
are not the subject of any pending or threatened condemnation proceeding and
have not been damaged by fire or other casualty.

                  (p)         The Real Property shall be owned by Borrower and
shall not be the subject of any transaction whereby the legal or beneficial
title to all or any part thereof shall be transferred to anyone other than
Borrower, except as otherwise disclosed in the Schedules to this Agreement.

                  (q)         All real estate taxes and assessments, special or
otherwise, which are due and payable must be paid in full on or before Closing,
unless being contested in accordance with Section 6.6. Borrower shall submit to
Lender prior to Closing copies of all recent real estate tax bills, with proof
of payment, together with evidence that the mortgaged premises is a separately
identifiable tax lot.

                  (r)         Lender shall have received evidence reasonably
satisfactory to Lender that the Real Property located in Florence, Arizona and
Salinas, Puerto Rico is not within a special flood

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hazard area and is not eligible for flood insurance under the U.S. Flood
Disaster Protection Act of 1973, as amended, or that Borrower is adequately
insured against flood damages at such locations.

                  (s)         Borrower shall have received at least
$7,500,000.00 in net proceeds from the sale of its Phoenix, Arizona facility.

                  (t)          Borrower shall have a minimum excess availability
of at least $3,500,000.00 at Closing.

                  (u)         There shall be no material adverse changes
(individually or in the aggregate) in the business or financial conditions or
prospects of Borrower, the Facilities or the Collateral, each from what was
reflected in the financial statements and other information given to Lender as
part of Lender’s underwriting of the Loans.

                  (v)         Lender shall have completed all legal and credit
due diligence with respect to Borrower, as described in the Commitment Letter
relating to the Loans dated as of July 24, 2002 (“Commitment Letter”).

                  (w)         Borrower shall have complied with all terms and
conditions set forth in the Commitment Letter, and all representations and
warranties contained therein shall be true and correct.

         Section 5.2.         Conditions Precedent to Advances.Notwithstanding
any other provision of this Agreement, no Term Loan proceeds, Revolving Credit
Advances, advances or other extensions of credit under the Loans shall be
disbursed or any Letter of Credit issued under this Agreement unless the
following conditions have been satisfied or waived immediately before such
disbursement:

                  (a)         The representations and warranties on the part of
Borrower contained in Article IV of this Agreement shall be true and correct in
all material respects at and as of the date of disbursement or advance, as
though made on and as of such date (except to the extent that such
representations and warranties expressly relate solely to an earlier date, in
which case the same need only be true and correct as of such earlier date, and
except that the references in Section 4.7 to financial statements shall be
deemed to be a reference to the then most recent annual and interim financial
statements of Borrower furnished to Lender pursuant to Section 6.1).

                  (b)         No Event of Default or event that, with the giving
of notice or the lapse of time, or both, could become an Event of Default shall
have occurred and be continuing or would result from the making of the
disbursement or advance.

                  (c)         No material adverse change in the condition
(financial or otherwise), properties, business, or operations of Borrower or any
Guarantor shall have occurred and be continuing with respect to Borrower or any
Guarantor since the date of this Agreement.

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         Notwithstanding anything in this Agreement to the contrary, Lender may
terminate its funding obligations under this Agreement without notice upon or
after the occurrence of an Event of Default.

         Section 5.3.         Closing.Subject to the conditions of this Article
V, the Loans shall be made available on the date as is mutually agreed by the
parties (the “Closing Date”) at such time as may be mutually agreeable to the
parties upon the execution of this Agreement (the “Closing”) at such place as
may be requested by Lender.

         Section 5.4.         Waiver of Rights.By completing the Closing under
this Agreement, or by making advances under the Loans, Lender does not waive a
breach of any representation or warranty of Borrower under this Agreement or
under any other Loan Document, and all of Lender’s claims and rights resulting
from any breach or misrepresentation by Borrower are specifically reserved by
Lender.

ARTICLE VI

AFFIRMATIVE COVENANTS

         Each entity comprising Borrower covenants and agrees that for so long
as Borrower may borrow under this Agreement, until payment in full of the Notes
and performance of all other obligations of Borrower under the Loan Documents,
and for as long as any Letter of Credit is issued and outstanding:

         Section 6.1.         Financial Statements and Collateral
Reports.Borrower will furnish to Lender each of the following, on a consolidated
basis: (a) a sales and collections report and accounts receivable aging schedule
on a form acceptable to Lender within fifteen (15) days after the end of each
calendar month, which shall include, but not be limited to, a report of sales,
credits issued, and collections received; (b) payables aging schedules within
twenty-five (25) days after the end of each calendar month; (c) internally
prepared monthly financial statements for Borrower, certified by the chief
financial officer of Borrower, within twenty-five (25) days of the end of each
calendar month, accompanied by management analysis and actual vs. budget
variance reports for each facility generating Accounts; (d) annual projections,
profit and loss statements, balance sheets, and cash flow reports (prepared on a
monthly basis), approved by Borrower’s board of directors, for the succeeding
fiscal year within thirty (30) days before the end of each of Borrower’s fiscal
years; (e) internally prepared annual financial statements for Borrower within
sixty (60) days after the end of each of Borrower’s fiscal years; (f) annual
audited financial statements for Borrower, with a debt compliance letter,
prepared by a firm of independent public accountants satisfactory to Lender,
within one hundred thirty-five (135) days after the end of each of Borrower’s
fiscal years; (g) promptly upon receipt thereof, copies of any reports submitted
to Borrower by the independent accountants in connection with any interim audit
of the books of Borrower and copies of each management control letter provided
to Borrower by independent accountants; (h) as soon as available, copies of all
financial statements and notices provided by Borrower to all of its
stockholders; (i) on the last business day of every month, evidence satisfactory
to Lender that all federal and state taxes, including, without

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limitation payroll taxes, that are due have been paid in full; and (j) such
additional information, reports or statements as Lender may from time to time
request. Annual financial statements shall set forth in comparative form figures
for the corresponding periods in the prior fiscal year. All financial statements
shall include a balance sheet and statement of earnings and shall be prepared in
accordance with GAAP.

         Section 6.2.         Payments Under this Agreement.Borrower will make
all payments of principal, interest, fees, and all other payments required under
this Agreement and under the Loans, and under any other agreements with Lender
to which Borrower is a party, as and when due. Except as otherwise provided or
limited by the terms of this Agreement, all items required to be furnished under
this Agreement or the other Loan Documents shall be furnished without cost to
Lender. To the extent that any sums are received by Lender from insurance
proceeds, condemnation proceeds, or the fulfillment by Borrower of some other
covenant under any Loan Documents, and such sums are applied by Lender to the
principal balance of the Notes, the amount of the regular monthly payments under
the Notes shall continue to be the amount provided for herein without adjustment
for the principal prepayment, if any.

         Section 6.3.         Existence, Good Standing, and Compliance with
Laws.Borrower will do or cause to be done all things necessary (a) to obtain and
keep in full force and effect all corporate, limited liability company or
limited liability partnership existence, rights, licenses, permits, certificates
of needs, regulatory approvals, privileges, and franchises (collectively,
“Permits”) of Borrower necessary to the ownership of its property or the conduct
of its business, and comply with all applicable current and future laws,
ordinances, rules, regulations, orders and decrees of any Governmental Authority
having or claiming jurisdiction over Borrower; (b) to maintain and protect the
properties used or useful in the conduct of the operations of Borrower, in a
prudent manner, including without limitation the maintenance at all times of
such insurance upon its insurable property and operations as required by law or
by Section 6.7; and (c) to maintain all Permits free from restrictions or known
conflicts which could materially impair their use or operation or cause the
Permits to be provisional, probationary or restricted in any way.

         Section 6.4.         Legality. Borrower shall disclose to Lender any
conditions or circumstances of which it is aware that cause the making of the
Loans or any disbursement or advance under the Loans to be subject to any
penalty or special tax, prohibited by any governmental order or regulation
applicable to Borrower, or in violation of any rule or regulation of any
Governmental Authority, or if any necessary consents, approvals or
authorizations of any Governmental Authority to or of any such disbursement or
advance shall not have been obtained.

         Section 6.5.         [INTENTIONALLY OMITTED]

         Section 6.6.         Taxes and Charges. Borrower will timely file all
tax reports and pay and discharge all taxes, assessments and governmental
charges or levies imposed upon Borrower, or its income or profits or upon its
properties or any part thereof (collectively, “Charges”), before the same shall
be in default and before the date on which penalties attach thereto, as well as
all lawful claims for labor, material, supplies or otherwise (collectively,
“Mechanics Claims”) which, if unpaid, might become a Lien or charge upon the
properties or any part thereof of Borrower. Borrower shall have the right to
contest, in good faith by

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appropriate proceedings, the amount or validity of any such Charges or Mechanics
Claims so long as: (i) Borrower shall have set aside on its books adequate
reserve therefor; (ii) Borrower’s title to, and its right to use, the Collateral
is not adversely affected thereby and Lender’s Lien and priority on the
Collateral are not adversely affected, altered or impaired thereby;
(iii) Borrower has given prior written notice to Lender of Borrower’s intent to
so contest or object to any such Charges or Mechanics Claims; (iv) such contest
stays the enforcement or collection of the Charges and Mechanics Claims or any
Lien created; and (v) in the case of real estate taxes or assessments or
Mechanics Claims, Borrower has obtained an endorsement, in form and substance
satisfactory to Lender, to the loan policy of title insurance issued to Lender
insuring over any Lien created by such Charges or Mechanics Claims, or Borrower
has deposited with Lender a bond or other security satisfactory to Lender in an
amount sufficient to entirely eliminate any Lien for such Charges or Mechanics
Claims as a Lien against the Real Property. Should any stamp tax, intangible
tax, intangible recording tax or other tax (excluding income, franchise, gross
receipts or similar taxes with respect to Lender), now or hereafter become
payable with respect to this Agreement or any of the other Loan Documents,
Borrower will pay the tax before its due date and hold Lender harmless from the
cost of the tax.

         Section 6.7.         Insurance.Borrower shall carry adequate commercial
general liability and professional liability insurance with responsible
companies reasonably satisfactory to Lender in such amounts and against such
risks as is customarily maintained by similar businesses and by owners of
similar property in the same general area. If Real Property constitutes any
portion of the Collateral, then Borrower shall further carry all insurance
described on Schedule 6.7.

         Section 6.8.         Information; Visits and Inspections.Borrower shall
furnish to Lender such information as Lender may, from time to time, reasonably
request with respect to the business or financial affairs of Borrower. Borrower
shall also permit any officer, employee, agent or representative of Lender to
visit and inspect any of the properties of Borrower, to inspect, audit and make
copies of or prepare extracts from Borrower’s minute books, books of account and
other records, including management letters prepared by Borrower’s auditors, of
Borrower, and make copies thereof or extracts therefrom, and to discuss the
business affairs, finances and accounts of Borrower with, and be advised as to
the same by, the officers, employees and independent accountants Borrower, all
at such times and as often as Lender may reasonably require.

         Section 6.9.         Preservation and Maintenance of Facilities and
Real Property.

                  (a)         Borrower will maintain, keep and preserve all of
Owned Facilities in good repair, working order and condition and from time to
time make all necessary repairs, renewals, replacements, betterments and
improvements thereto, so that the business carried on in connection therewith
may be properly conducted at all times.

                  (b)         Borrower (1) shall not commit waste or permit
impairment or deterioration of the Real Property; (2) shall not abandon the Real
Property; (3) shall keep the Owned Facilities in good repair and restore or
repair promptly, in a good and workmanlike manner, all or any part of the Real
Property to the equivalent of its original condition, ordinary wear and tear
excepted, or such other condition as Lender may approve in writing, upon any
damage or loss thereto in

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accordance with the Loan Documents; (4) shall comply with all laws, ordinances,
regulations and requirements of any governmental body applicable to the Real
Property; (5) shall provide for management of the Owned Facilities by Borrower
or by a property manager satisfactory to Lender pursuant to a contract in form
and substance satisfactory to Lender; (6) will do or cause to be done any and
all things or acts, all in a timely and proper manner, which, from the character
and/or use of the Real Property, may be reasonably necessary to protect and
preserve the Real Property; (7) will comply with all terms, covenants and
conditions of all agreements and instruments, recorded and unrecorded, affecting
the Real Property; (8) will not use the Real Property or any part thereof or
allow the same to be used or occupied for any purpose other than fully in
compliance with all zoning ordinances; (9) will pay all costs of operation,
maintenance and ownership of the Real Property as they come due; (10) will not
undertake or permit the execution of any renovation or other construction
program which will cause the land on which are located the Owned Facilities or
any portion thereof to become unoccupied or vacant; (11) will continuously
operate the Owned Facilities and use commercially reasonable efforts to keep the
Owned Facilities fully utilized; and (12) shall give notice in writing to Lender
of and, unless otherwise directed in writing by Lender, appear in and defend any
action or proceeding purporting to affect the Real Property, the security
granted by the Loan Documents or the rights or powers of Lender. Neither
Borrower nor any tenant or other person shall remove, demolish or alter any
improvement or any fixture, equipment, machinery or appliance in or on the Owned
Facilities and owned or leased by Borrower except when incident to the
replacement of fixtures, equipment, machinery and appliances with items of like
kind.

                  (c)         Borrower covenants and agrees: that the
improvements to the Real Property, if any, have been, and all future
improvements will be, constructed strictly in accordance with the requirements
of all regulatory authorities having jurisdiction, all approved site plan(s),
all approved development plan(s) and all restrictive covenants affecting the
Real Property or any part thereof; that the Improvements have been, and all
future improvements will be, constructed and installed entirely within the
bounds of the Real Property and do not and will not encroach upon any easement
or right-of-way or upon the land of others except for such minor encroachments,
above or below ground, onto or upon public space as may be consented to and
permitted by the jurisdiction in which the Real Property is located; and that
the improvements to the Real Property are, and all future improvements will be,
wholly within all building restriction lines however established, and do not and
will not violate use and other restrictions contained in prior conveyances,
zoning ordinances, building codes, health and safety codes, fire protection
agreements, subdivision ordinances or restrictions. Borrower covenants: (1) to
diligently prosecute to completion and to complete within the time period
required under the Loan Documents or otherwise by Lender all improvements to the
Real Property required to be made under the terms of the Loan Documents; and
(2) to diligently prosecute to completion and to complete all improvements for
which construction was commenced by Borrower (regardless of whether such
construction was required under the terms of the Loan Documents).

         Section 6.10.         Notification of Events of Default and Adverse
Developments.Borrower promptly will notify Lender upon the occurrence of: (a)
any Event of Default; (b) any event that, with the giving of notice or lapse of
time, or both, could constitute an Event of Default; (c) any event, development
or circumstance whereby the financial statements previously furnished to Lender
fail in any material respect to present fairly, in accordance with GAAP, the

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financial condition and operational results of Borrower on a consolidated basis;
(d) any judicial, administrative or arbitration proceeding pending against
Borrower, and any judicial or administrative proceeding known by Borrower to be
threatened against it which, if adversely decided, could have a material adverse
effect its condition (financial or otherwise) or operations (current or
prospective) or which may expose Borrower to uninsured liability of $250,000.00
or more; (e) any default claimed by any other creditor for Borrowed Money of
Borrower other than Lender; (f) any Lien arising against the Collateral (other
than a Permitted Lien); (g) any other development in the business or affairs of
Borrower which may be materially adverse; in each case describing the nature of
the event or development. In the case of notification under clauses (a) and (b),
Borrower should set forth the action Borrower proposes to take with respect to
such event.

         Section 6.11.         Employee Benefit Plans.Borrower will (a) comply
with the funding requirements of ERISA with respect to the Plans for its
employees, or will promptly satisfy any accumulated funding deficiency that
arises under Section 302 of ERISA; (b) furnish Lender, promptly after filing the
same, with copies of all reports or other statements filed with the United
States Department of Labor, the Pension Benefit Guaranty Corporation, or the
Internal Revenue Service with respect to all Plans, or which Borrower, or any
member of a Controlled Group, may receive from such Governmental Authority with
respect to any such Plans, and (c) promptly advise Lender of the occurrence of
any Reportable Event or Prohibited Transaction with respect to any such Plan and
the action which Borrower proposes to take with respect thereto. Borrower will
make all contributions when due with respect to any multi-employer pension plan
in which it participates and will promptly advise Lender: (x) upon its receipt
of notice of the assertion against Borrower of a claim for withdrawal liability;
(y) upon the occurrence of any event that could trigger the assertion of a claim
for withdrawal liability against Borrower; and (z) upon the occurrence of any
event that would place Borrower in a Controlled Group as a result of which any
member (including Borrower) thereof may be subject to a claim for withdrawal
liability, whether liquidated or contingent.

         Section 6.12.         Financing Statements. Borrower shall provide to
Lender evidence satisfactory to Lender as to the due recording of termination
statements, releases of collateral, and Forms UCC-3, and shall permit to be
recorded financing statements on Form UCC-1, duly executed by Borrower and
Lender, in all places necessary to release all existing security interests and
other Liens in the Personal Property (other than as expressly permitted by this
Agreement) and to perfect and protect Lender’s first priority Lien and security
interest in the Personal Property, as Lender may request.

         Section 6.13.          Financial Records. Borrower shall keep current
and accurate books of records and accounts in which full and correct entries
will be made of all of its business transactions, and will reflect in its
financial statements adequate accruals and appropriations to reserves, all in
accordance with GAAP.

         Section 6.14.         Collection of Accounts.Borrower shall continue to
collect its Accounts in the ordinary course of business.

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         Section 6.15.         Places of Business. Borrower shall use its best
efforts to give thirty (30) days’ prior written notice to Lender of any change
in the location of any of its places of business, of the places where its
records concerning its Accounts are kept, of the places where the Personal
Property is kept, or of the establishment of any new, or the discontinuance of
any existing, places of business.

         Section 6.16.         Business Conducted.Borrower shall continue in the
business currently conducted by it using its best efforts to maintain its
customers and goodwill. Borrower shall not engage, directly or indirectly, in
any line of business substantially different from the business conducted by it
immediately before the Closing Date, or engage in business or lines of business
which are not reasonably related thereto.

         Section 6.17.         Litigation and Other Proceedings.Borrower shall
give prompt notice to Lender of any litigation, arbitration, or other proceeding
before any Governmental Authority against or affecting Borrower if the amount
claimed would expose Borrower to uninsured liability of $250,000.00 or more.

         Section 6.18.         Bank Accounts.Borrower shall assign to Lender all
of its depository and disbursement accounts into which collections of Accounts
are deposited.

         Section 6.19.         Submission of Personal Property Documents.
Borrower will, on demand of Lender, make available to Lender copies of shipping
and delivery receipts evidencing the shipment of goods that gave rise to an
Account, in-take forms or other proof of the satisfactory performance of
Services that gave rise to an Account, a copy of the claim or invoice for each
Account and copies of any written contract or order from which the Account
arose. Borrower shall promptly notify Lender if an Account becomes evidenced or
secured by an instrument or chattel paper and upon request of Lender, will
promptly deliver any such instrument or chattel paper to Lender.

         Section 6.20.         Licensure; Cost Reports.Borrower will maintain
all certificates of need, and licenses necessary to conduct its business as
currently conducted, and take any steps required to comply with any such new or
additional requirements that may be imposed on providers of Services. If
required by applicable law, all cost reports will be properly filed.

         Section 6.21.         Officer’s Certificates.Together with the monthly
financial statements delivered pursuant to clause (c) of Section 6.1, and
together with the audited annual financial statements delivered pursuant to
clause (f) of that Section, Borrower shall deliver to Lender a certificate of
its chief financial officer, in form and substance satisfactory to Lender:

                  (a)         Setting forth the information (including detailed
calculations) required to establish whether Borrower is in compliance with the
requirements of Sections 6.33 and 6.34 and any other provisions of this
Agreement specified by Lender, as of the end of the period covered by the
financial statements then being furnished; and

                  (b)         Stating that such officer has reviewed the
relevant terms of this Agreement, and has made (or caused to be made under such
officer’s supervision) a review of

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the transactions and conditions of Borrower from the beginning of the accounting
period covered by the income statements being delivered to the date of the
certificate, and that such review has not disclosed the existence during such
period of any fact, event or circumstance that constitutes an Event of Default
or that, with the passage of time or giving of notice or both, could become an
Event of Default, and if any such condition or event existed during such period
or now exists, specifying the nature and period of existence thereof and what
action Borrower has taken or proposes to take with respect thereto.

         Section 6.22.         Recoupments. On each Borrowing Base certificate
given to Lender in connection with a request for a Revolving Credit Advance,
Borrower will disclose to Lender the amount of any recoupments or offset by any
third-party payor being sought, requested or claimed, or, to Borrower’s
knowledge, threatened against Borrower, or any of its Affiliates.

         Section 6.23.         [INTENTIONALLY OMITTED]

         Section 6.24.         Post-Closing Obligations. Borrower shall cause to
be performed and completed, to Lender’s satisfaction, all of the obligations set
forth on Schedule 6.24 hereto within the time periods set forth on Schedule
6.24.

         Section 6.25.         Right of First Refusal. Borrower hereby agrees
that if at any time Borrower or any subsidiary or Affiliate of Borrower (a
“Borrower Entity”) receives from a third party an offer, term sheet or
commitment, or any Borrower Entity makes a proposal substantially acceptable to
or accepted by any person or entity (all of the foregoing being referred to as
an “Offer”), which Offer provides for permanent financing, long term financing,
short term financing, cash flow financing, working capital financing, accounts
receivable financing, real estate financing, inventory or equipment financing,
financing secured in whole or in part by assets (tangible or intangible) or
personal property of any Borrower Entity, or sale/leaseback financing, the
applicable Borrower Entity shall first forward the Offer to Lender which shall
have fifteen (15) days after receipt thereof (the “Option Period”) to agree to
provide similar financing in the place of such person or entity upon the terms
and conditions set forth in the Offer and to notify the applicable Borrower
Entity in writing of Lender’s acceptance of the Offer (the “Acceptance Notice”).
If Borrower has not received an Acceptance Notice within the Option Period,
Borrower shall be free to consummate the transaction described in the Offer with
the third party providing the Offer (the “Transaction”); provided, however, that
the foregoing, and Lender’s failure to respond to issue an Acceptance Notice,
shall not be construed as a waiver of any of the terms, covenants or conditions
of the Loan Documents. In the event that the Transaction is not consummated
under similar terms with such person or entity during the one hundred twenty
(120) day period following the expiration of the Op tion Period, or any material
term is changed in any material way, the applicable Borrower Entity shall not be
permitted to consummate the Transaction without again complying with this
Section. For purposes of this Section, “Lender” shall mean and include either of
General Electric Capital Corporation, GE Capital Healthcare Financial Services,
Inc., or any other parent company, subsidiary or Affiliate of such entities. The
provisions of this Section 6.25 shall not apply to Borrower’s need for financing
in connection with its new facility in Tacoma, Washington or in connection with
the sale of its Florence, Arizona facility.

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         Section 6.26.         Special Notice Covenant. Borrower shall, upon
request of Lender, provide Lender with evidence that it is current in its
payment of (i) rent for its Sarasota, Florida offices and (ii) principal and
interest and other charges owed to the first mortgagee of its Florence, Arizona
facility. Borrower shall provide Lender with prompt notice of any default or
claimed default in connection with either obligation.

         Section 6.27.         Taxes. Any and all payments or reimbursements
made under the Loan Documents shall be made free and clear of and without
deduction for any and all taxes, levies, imposts, deductions, charges or
withholdings, and all liabilities with respect thereto of any nature whatsoever
imposed by any taxing authority, excluding such taxes to the extent imposed on
Lender’s net income by the jurisdiction in which Lender is organized or taxable.
If Borrower shall be required by law to deduct any such amounts from or in
respect of any sum payable hereunder to Lender, then the sum payable hereunder
shall be increased as may be necessary so that, after making all required
deductions, Lender receives an amount equal to the sum it would have received
had no such deductions been made.

         Section 6.28.         Further Documentation; Loss of Notes. In the
event any further documentation or information is (a) reasonably required by
Lender or any prospective transferee in connection with selling, transferring,
delivering, assigning, securitizing or granting a participation in the Loans (or
transferring the servicing of the Loans), or (b) deemed necessary or appropriate
by Lender in the exercise of its rights under the Loan Documents or to correct
patent mistakes in the Loan Documents, materials relating to mortgagee’s land
title insurance or the funding of the Loans, Borrower shall provide, or cause to
be provided to Lender, such documentation or information without charge to
Lender if complying with such request shall not place an undue burden or expense
upon Borrower or its employees; otherwise, Borrower shall provide such
documentation and information at Lender’s expense. Borrower shall execute and
deliver to Lender and/or the prospective transferee or servicer such
documentation, including but not limited to, any amendments, corrections,
deletions or additions to the Loan Documents as is required by Lender and/or the
prospective transferee; provided, however, that Borrower shall not be required
to do anything that has the effect of changing the essential economic terms of
the Loans set forth in the Loan Documents or any material term, condition,
covenant or condition set forth in the Loan Documents. Upon notice from Lender
of the loss, theft, or destruction of any of the Notes and upon receipt of
indemnity reasonably satisfactory to Borrower from Lender, or in the case of
mutilation of any of the Notes, upon surrender of the mutilated Note, Borrower
shall make and deliver a new note of like tenor in lieu of the then to be
superseded Note.

         Section 6.29.         Compliance with Requirements of Prospective
Transferee. Borrower shall do anything reasonably necessary to comply with the
requirements of any prospective transferee or servicer of the Loans, in order to
enable Lender or such transferee to sell, transfer, deliver, assign, securitize
or grant a participation in the Loans without charge to Lender if complying with
such requirements shall not place an undue burden or expense upon Borrower or
its employees; otherwise, Borrower shall provide such documentation and
information at Lender’s expense; provided, however, that Borrower shall not be
required to do anything that has the effect of changing the essential economic
terms of this Agreement or any material term, condition, covenant or condition
set forth in the Loan Documents.

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         Section 6.30.         Termination/Default of Contracts/Recoupments.

                  (a)         Borrower shall provide Lender with written notice
of any (i) material default or event of default under, (ii) termination of, or
(iii) failure of any party to renew, any of Borrower’s contracts (unless the
default or event of default under, termination of or failure to renew such
contract, as the case may be, gives rise to less than 5% of Borrower’s annual
revenues and cannot reasonably be expected to have a material adverse effect on
Borrower, including without limitation, on Borrower’s business, the Collateral
or the Loans hereunder) as soon as reasonably possible (other than with respect
to any notice of default, termination or failure to renew that originates with
Borrower, which notice shall be sent concurrently to Lender). Notwithstanding
anything in this subsection (a) to the contrary, no provision in this subsection
(a) shall modify, reduce or otherwise affect Lender’s rights hereunder or under
any other Loan Document.

                  (b)         Borrower shall provide Lender with notice, in a
timely manner, of any offset or recoupment claimed or asserted in respect of, or
any dispute relating to, any contract with any Account Debtor.

                  (c)         Borrower agrees that compliance with this Section
6.30 is a material inducement to Lender’s advancing credit under this Agreement
and Borrower further agrees that any intentional breach of the terms of this
Section 6.30 shall constitute fraud.

         Section 6.31.         Escrows.During the period that the Term Loan is
outstanding, following and during the continuance of any Event of Default,
Borrower agrees to establish and maintain escrows for payment of taxes and
insurance premiums, if and to the extent reasonably required by Lender. Any sums
so escrowed shall be part of the Collateral and shall stand as additional
security for all of the Obligations. Lender may, at its discretion, from time to
time, apply amounts on hand in the escrows to cure any default. Upon demand of
Lender, Borrower shall replenish the applicable reserve or escrow to restore any
sums so applied by Lender. Upon the maturity of any portion of the Obligations,
escrowed moneys then on deposit with Lender or its agent shall, at Lender’s
option, be applied against the Obligations.

         Section 6.32.         [INTENTIONALLY OMITTED]

         Section 6.33.         Financial Covenants.

                  (a)         Net Worth. Borrower will not at any time allow its
tangible net worth, as computed in accordance with GAAP, as provided in Section
1.40 of this Agreement, to fall below the Minimum Net Worth.

                  (b)         EBITDA; Cash Flow.         (i) Borrower shall
maintain minimum quarterly EBITDA equal to at least the following amounts for
each of the following calendar quarters:

Quarter Ending Minimum EBITDA

--------------------------------------------------------------------------------

        December 31, 2002   $ 2,438,000  

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        March 31, 2003     2,400,000   June 30, 2003     2,550,000   September
30, 2003     2,550,000   December 31, 2003     2,550,000           March 31,
2004     2,741,000   June 30, 2004     2,741,000   September 30, 2004    
2,741,000   December 31, 2004     2,580,000           March 31, 2005    
2,760,000   June 30, 2005     2,760,000  

                           (ii)         Borrower shall maintain a minimum
average monthly Cash Flow of at least $125,000 per month, measured as of the
last day of each calendar month and based upon an average of the three (3) most
recent calendar months.

                  (c)         Fixed Charge Coverage Ratio. During the period in
which the Term Loan is outstanding, Borrower shall maintain, as of the end of
each calendar quarter, a “Fixed Charge Coverage Ratio” (as defined below) of at
least 1.75:1.00. The term “Fixed Charge Coverage Ratio” shall mean, as of a
given date, the ratio of EBITDA less capital expenditures and taxes paid in cash
measured over the most recent twelve (12) months to principal payments plus
interest paid in cash measured over the most recent twelve (12) months (except
that for calculations on or prior to March 31, 2003, Fixed Charge Coverage Ratio
shall be annualized based upon results from July 1, 2002 through such date).

                  (d)         Debt Multiple. During the period in which the Term
Loan is outstanding, Borrower shall maintain a “Debt Multiple” (as defined
below) (i) as of December 31, 2002, of 3.15, (ii) as of March 31, 2003, of 3.00,
and (iii) as of the last day of each calendar quarter thereafter, of 2.50. The
term “Debt Multiple” shall mean, as of a given date, the ratio of total debt
other than non-recourse debt (determined in accordance with GAAP) to EBITDA for
the most recent twelve (12) months (except that for calculations on or prior to
March 31, 2003, EBITDA shall be annualized based upon results from July 1, 2002
through such date).

         Section 6.34.         Collateral Covenants. The following covenants
shall be in effect during the period in which the Term Loan is outstanding:

                  (a)         Loan to Value Ratio. Borrower shall maintain, at
all times, a minimum ratio of the outstanding balance of the Term Loan to
liquidation value of the Facilities of at least seventy-five percent (75%). For
purposes of this Section 6.34(a), said ratio shall be determined only with
respect to the aggregate appraised value of the Florence, Arizona and Salinas,
Puerto Rico Facilities (during the period such Facilities are owned by Borrower)
and any other Facility owned by Borrower for which Lender has been provided all
of the third party reports and other information referred to in Section 5.1(o).

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                   (b)         Days Sales Outstanding. Borrower shall maintain,
as of the end of each calendar month, maximum “Days Sales Outstanding” (as
defined below) of not more than 65 days. The term “Days Sales Outstanding” shall
mean gross Accounts of Borrower divided by the quotient of total cash
collections on Accounts of Borrower for the last three (3) calendar months
divided by 90.

                  (c)         Cash Velocity. Borrower shall maintain, as of the
end of each calendar month, minimum “Cash Velocity” (as defined below) of
0.90/1.00. The term “Cash Velocity” shall mean, of the end of any calendar month
(the “Testing Month”), that percentage obtained by dividing (i) the actual
amount collected on Accounts other than collections of “Miscellaneous
Receivables” (as such term is used in Borrower’s financial statements) for the
three calendar months ending with the last day of Testing Month by (ii) the
amount of Accounts that first became Accounts in the three calendar months
ending with the end of the calendar month that precedes the Testing Month by
three calendar months (less any write-offs of Accounts in the three calendar
months ending with the calendar month immediately preceding the Testing Month).

         Section 6.35.         [INTENTIONALLY OMITTED]

         Section 6.36         Covenants with Respect to Assignment of Claims
Laws. For any contract or agreement between Borrower and any Account Debtor that
is subject to the Federal Assignment of Claims Act, as amended (31 U.S.C.
Section 3727) or any similar state or local law (a “Government Contract”),
Borrower agrees that:

                  (a)         Borrower shall give Lender written notice of
Borrower’s execution of or receipt of an award of a Government Contract (within
ten (10) days after such Government Contract is awarded or executed, whichever
is earlier) and shall add such Government Contract to Schedule 4.29;

                  (b)         if requested by Lender, Borrower shall execute and
deliver to Lender, within ten (10) days of Lender’s request, a separate
assignment of the Government Contract in form acceptable to Lender;

                  (c)         Lender shall have the right to send to the Account
Debtor in respect of such Government Contract such notices, and request such
acknowledgments of the Account Debtor, as Lender deems necessary to cause such
Account Debtor to recognize the assignment of the Accounts to Lender, as the
first and only claim against such Accounts, in accordance with the Federal
Assignment of Claims Act, as amended (31 U.S.C. Section 3727) or any similar
state or local law. Borrower shall cooperate with Lender in sending and
procuring such notices and acknowledgments; provided, however, that failure to
procure an acknowledgment of such notice shall not be a breach of Borrower’s
obligations under this Section; and

                  (d)         Borrower shall not permit to exist any notice or
claim against Accounts under a Government Contract, other than notices and
claims of Lender.

         Section 6.37.         Dissolution of Affiliates. Borrower covenants to
dissolve the following

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entities and provide evidence to Lender of such dissolution, on or prior to
October 31, 2002: Correctional Services Corporation (UK) Limited, YSI of Central
Iowa, Inc., Youth Services International of Iowa, Inc., Youth Services
International Investments, LLC, Youth Services International Management
Services, LLC, Youth Services International of Colorado, Inc., Youth Services
International of Georgia, Inc., Youth Services International of Nevada, Inc.,
Youth Services International of Puerto Rico, Inc., Youth Education Services,
Inc., FF&E, Inc. and any other Affiliate without any ongoing operations or not a
party to this Loan Agreement. Borrower covenants to dissolve each of the
following entities and provide evidence to Lender of such dissolution, on or
prior to the date that is thirty (30) days following the first date that the
existence of each is no longer necessary due to ongoing litigation: Youth
Services International of Illinois, Inc., Esmor, Inc. and Esmor New Jersey, Inc.

ARTICLE VII

NEGATIVE COVENANTS

         Each entity comprising Borrower covenants and agrees that so long as
Borrower may borrow under this Agreement, until payment in full of the Notes and
performance of all other obligations of Borrower under the Loan Documents, and
for as long as any Letter of Credit is issued and outstanding:

         Section 7.1.         Borrowing. Borrower will not create, incur, assume
or suffer to exist any liability for Borrowed Money except: (a) indebtedness to
Lender; (b) accounts payable to trade creditors and current operating expenses
(other than for borrowed money) which are not aged more than one hundred twenty
(120) days from the billing date or more than sixty (60) days from the due date,
in each case incurred in the ordinary course of business and paid within such
time period, unless the same are being contested in good faith and by
appropriate and lawful proceedings, and Borrower shall have set aside such
reserves, if any, with respect thereto as are required by GAAP and deemed
adequate by Borrower and its independent accountants; (c) borrowings incurred in
the ordinary course of its business and not exceeding $500,000.00 in the
aggregate outstanding at any one time; and (d) indebtedness secured by Permitted
Liens. Borrower will not make prepayments on any existing or future indebtedness
for Borrowed Money to any Person (other than Lender, to the extent permitted by
this Agreement or any subsequent agreement between Borrower and Lender).

         Section 7.2.          Joint Ventures.Borrower will not invest directly
or indirectly more than $500,000 in the aggregate outstanding at any given time
in any joint venture for any purpose without the prior written notice to, and
the prior written consent of, Lender, which consent shall not be unreasonably
withheld. Nothing contained in this Section 7.2 shall prohibit Borrower from
providing its services to any joint venture, teaming arrangement or strategic
partnership entered into by Borrower.

         Section 7.3.         No Liens and Encumbrances; No Disposition of the
Personal Property or Real Property. Lender does not authorize, and Borrower
agrees not to: (a) create, incur, assume or suffer to exist any mortgage,
pledge, Lien or other encumbrance of any kind

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(including the charge upon property purchased under a conditional sale or other
title retention agreement) upon, or any security interest in, any of the
Collateral, whether now owned or hereafter acquired, except for Permitted Liens;
(b) make any sale or leases of any Accounts or any material portion of the other
Collateral (other than leases of the Real Property permitted under Section 7.20
or sales of Real Property made in accordance with Section 2.9), except for the
disposition or sale of any obsolete or worn out furniture, fixtures, equipment
or supplies in the ordinary course of its business; or (c) license any of the
Collateral.

         Section 7.4.         No Change in Ownership, Operation or Control.

                  (a)         Except as expressly provided otherwise in this
Agreement, without the prior written consent of Lender (which consent may be
given or withheld in Lender’s sole and absolute discretion), Borrower shall not
execute, participate in, facilitate, consent to or suffer or permit to occur any
“Transfer Event” (as defined below). Except as expressly provided otherwise in
this Agreement, the occurrence of a Transfer Event without Lender’s prior
written consent shall constitute an Event of Default hereunder, regardless of
whether Borrower had the power or capacity to prevent such occurrence.

                  (b)         The term “Transfer Event” shall mean any or all of
the following facts, events or circumstances, whether voluntary or involuntary
and whether occurring as a single transaction or as a series of transactions:
(1) the sale, transfer, grant, conveyance, assignment or other disposition or
alienation of all or any part of the Collateral or any interest therein
(including, but not limited to, any ground lease, any purchase option and any
interest in the profits, losses or cash distributions in any way relating to or
arising out of the Collateral), except as permitted pursuant to Section 7.3 or
any other provisions of this Agreement; (2) the creation of any new ownership
interest in any entity comprising Borrower other than Correctional Services
Corporation (any such entity, a “Subsidiary”); (3) the sale, transfer, grant,
conveyance, assignment or other disposition or alienation of any ownership or
voting interest in any Subsidiary (including, but not limited to, any interest
in the profits, losses or cash distributions in any way relating to or arising
out of any Subsidiary); (4) without limiting the generality of the foregoing,
any circumstance under which Borrower is divested of title to any Accounts, Real
Property or any material portion of any Personal Property or any part thereof or
any legal or beneficial interest therein (except as otherwise permitted herein);
(5) without limiting the generality of the foregoing, any circumstance under
which Borrower shall merge or consolidate with or into any other entity other
than another entity comprising Borrower; (6) the creation, levy or execution of
any judgment or other non-consensual lien, against the Collateral or any part
thereof or interest therein, which is not disposed of within 20 days after atta
chment, or the creation, levy or execution of any judgment or other
non-consensual lien against any ownership interest in any Subsidiary; (7) the
mortgage, pledge, hypothecation, assignment or grant of any security interest in
or lien upon any ownership interest in, voting interest in or interest in the
profits or distributions from any Subsidiary; (8) Correctional Services
Corporation shall liquidate, wind-up or dissolve itself (or suffer any
liquidation or dissolution); (9) the sale, transfer, grant, conveyance,
assignment or other disposition or alienation of any of Borrower’s assets, or
the capital stock of any Subsidiary, whether now owned or hereafter acquired, to
any party other than another entity comprising Borrower; (10) Borrower’s
acquisition by purchase or otherwise of all or any substantial part of the
business or assets of, or stock or other evidence of

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beneficial ownership of, any other person or entity, except as otherwise
permitted pursuant to this Agreement; or (11) the sale, transfer, grant,
conveyance, assignment or other disposition or alienation of any right to
operate or control any of the Facilities, whether by lease, sublease, management
agreement, joint venture agreement or otherwise (except for the sale of any
Owned Facility, the proceeds of which are applied in accordance with Section
2.9(d)); provided that a “Transfer Event” shall not be deemed to have occurred
under this Section 7.4(b)(11) by virtue of the closure or cessation of
operations by Borrower of any Facility which shall not have a material adverse
effect on the financial condition of Borrower. The term “Transfer Event” shall
not include occupancy leases made by Borrower in the ordinary course of business
and otherwise in compliance with any restrictions set forth in this Agreement or
other Loan Documents.

                  (c)         Borrower agrees that compliance with this Section
7.4 is a material inducement to Lender’s advancing credit under this Agreement
and Borrower further agrees that any breach of the terms of this Section 7.4
shall constitute fraud. Borrower further agrees that in addition to all other
remedies available to Lender, Lender shall be entitled to specific enforcement
of the covenants in this Section 7.4, including injunctive relief.

         Section 7.5.         Sale and Leaseback.Except as provided in Schedule
1.45, Borrower will not, directly or indirectly, enter into any arrangement
whereby Borrower sells or transfers all or any part of its assets and thereupon
and within one year thereafter rents or leases the assets so sold or transferred
without prior written notice to and the prior written consent of Lender, which
consent shall not be unreasonably withheld, unless the proceeds of such sale are
applied to the repayment of the Term Loan as provided in this Agreement.

         Section 7.6.         Distributions and Management Fees.Borrower shall
not make any “Distributions” (as defined below) to any of its Affiliates, to any
shareholder, member, partner or other person holding an equity interest in
Borrower or to any other Person related to or affiliated with any of the
foregoing. “Distributions” shall mean management fees, salaries or other fees or
compensation, lease or rental payments, repayments of or debt service on loans
or other indebtedness, cash dividends or other distributions with respect to any
of its stock (other than dividends payable solely in stock), partnership or
membership interests (as the case may be) now or hereafter outstanding, the
purchase, redemption or other acquisition for value of any of its stock,
partnership or membership interests (as the case may be) now or hereafter
outstanding, or the return of any capital of its stockholders, partners or
members; provided, however, that the foregoing shall not be construed to
prohibit (a) Borrower from issuing stock options to employees, officers,
directors and consultants pursuant to stock option plans now existing or
hereafter adopted by its board of directors; (b) the payment or provision by
Borrower of salaries, bonuses and fringe benefits to employees and officers
consistent with past practices of Borrower; (c) the payment of fees and expenses
of directors of Borrower consistent with past practices of Borrower; (d)
dividends or distributions on capital stock from one entity comprising Borrower
to another such entity; or (e) the payment or performance by Borrower of any
obligations incurred in connection with transactions between Borrower and any of
its officers, directors or Affiliates, provid ed such transactions are (i) on
terms no less favorable to Borrower than could be obtained from unaffiliated
third parties, (ii) in connection with bona fide business purposes of Borrower
and (iii) approved by a majority of the disinterested members of the board of
directors of Borrower.

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         Section 7.7.         Loans.Borrower will not make loans or advances to
any Person, other than (a) trade credit extended in the ordinary course of its
business, (b) loans to a joint venture entity which are subject to the limit set
forth in Section 7.2 hereof, (c) advances for business travel and similar
temporary advances made in the ordinary course of business to officers,
stockholders, directors, and employees and (d) loans or advances by Correctional
Services Corporation to its subsidiaries which are “Borrowers” under this
Agreement.

         Section 7.8.         Contingent Liabilities.Borrower will not assume,
guarantee, endorse, contingently agree to purchase or otherwise become liable
upon the obligation of any Person, except by the endorsement of negotiable
instruments for deposit or collection or similar transactions in the ordinary
course of business.

         Section 7.9.         Subsidiaries.Borrower will not form any
subsidiary, or make any investment in or any loan in the nature of an investment
to, any other Person, except for loans permitted pursuant to Section 7.7 hereof.

         Section 7.10.         Compliance with ERISA.Borrower will not permit
with respect to any Plan covered by Title IV of ERISA any Prohibited Transaction
or any Reportable Event.

         Section 7.11.         [INTENTIONALLY OMITTED]

         Section 7.12.         Transactions with Affiliates.Borrower will not
enter into any transactions with any Affiliates, including without limitation
the purchase, sale, or exchange of property, or the loaning or giving of funds
to any Affiliate, except in the ordinary course of business and pursuant to the
reasonable requirements of Borrower’s business and upon terms substantially the
same and no less favorable to Borrower as it would obtain in a comparable arm’s
length transaction with any Person not an Affiliate, and so long as the
transaction is not otherwise prohibited under this Agreement.

         Section 7.13.         Contracts.Nothing contained in this Agreement is
intended to permit or authorize Borrower to make any contract on behalf of
Lender.

         Section 7.14.         Change in Capital Structure.Without Lender’s
prior written consent, there shall occur no change in the number or classes of
or recapitalization or reorganization of the equity interests in any Subsidiary.
For purposes of this section, “equity interests” includes, but is not limited
to, stock, membership interests, partnership interests, voting rights, options,
warrants and subordinated debt instruments.

         Section 7.15.         Contracts and Agreements.Borrower will not become
or be a party to any contract or agreement which would breach this Agreement, or
breach any other instrument, agreement, or document to which Borrower is a party
or by which it is or may be bound.

         Section 7.16.         Margin Stock. Borrower will not carry or purchase
any “margin security” within the meaning of Regulations U, T or X of the Board
of Governors of the Federal Reserve System.

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         Section 7.17.         Truth of Statements and Certificates.Borrower
will not furnish to Lender any certificate or other document that contains any
untrue statement of a material fact or that omits to state a material fact
necessary to make it not misleading in light of the circumstances under which it
was furnished.

         Section 7.18.         [INTENTIONALLY OMITTED]

         Section 7.19.         Certain Fundamental Changes. Borrower will not,
without providing Lender with thirty (30) days’ prior written notice, change the
state of its formation or change its legal name.

         Section 7.20.         Expansion Opportunities. Lender agrees that it
will consider waivers of and consents under the provisions of this Article VII
if and when reasonably necessary to permit Borrower to pursue opportunities to
expand its business. The parties agree that non-recourse borrowing by entities
other than Borrower shall not violate Section 7.1.

ARTICLE VIII

EVENTS OF DEFAULT

         Section 8.1.         Events of Default.Each of the following
(individually, an “Event of Default” and collectively, the “Events of Default”)
shall constitute an event of default under this Agreement:

                  (a)         A default in the payment of any principal of, or
interest upon, any of the Notes when due and payable, whether at maturity or
otherwise, or any breach of Section 2.3, which default or breach, as applicable,
shall have continued unremedied for a period of five (5) Business Days after
written notice of the default or breach from Lender to Borrower;

                  (b)         A default in the payment of any other charges,
fees, or other monetary obligations owing to Lender arising out of or incurred
in connection with this Agreement when such payment is due and payable, which
default shall have continued unremedied for a period of five (5) Business Days
after written notice of the default from Lender to Borrower;

                  (c)         A default in the due observance or performance by
Borrower or any guarantor of the Obligations of any other term, covenant or
agreement contained in any of the Loan Documents, which default shall have
continued unremedied for a period of ten (10) days after written notice of the
default from Lender to Borrower; provided, however, that if such default cannot
be cured within such ten (10) day period through the exercise of reasonable
diligence, such default shall not result in an Event of Default if Borrower
promptly commences cure and diligently prosecutes such cure to its completion.

                  (d)         Any representation or warranty made by Borrower in
this Agreement or in any of the other Loan Documents, any financial statement,
or any statement or representation

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made in any other certificate, report or opinion delivered in connection with
this Agreement or the other Loan Documents proves to have been incorrect or
misleading in any material respect when made;

                  (e)         Any obligation of Borrower (other than its
Obligations under this Agreement) for the payment of Borrowed Money is not paid
when due or within any applicable grace period, or such obligation becomes or is
declared to be due and payable before the expressed maturity of the obligation,
or there shall have occurred an event that, with the giving of notice or lapse
of time, or both, would cause any such obligation to become, or allow any such
obligation to be declared to be, due and payable prior to its stated maturity
date;

                  (f)         Borrower makes an assignment for the benefit of
creditors, offers a composition or extension to creditors, or makes or sends
notice of an intended bulk sale of any business or assets now or hereafter
conducted by Borrower;

                  (g)         Borrower or any Guarantor (i) files a petition in
bankruptcy, (ii) is adjudicated insolvent or bankrupt, petitions or applies to
any tribunal for any receiver of or any trustee for itself or any substantial
part of its property, (iii) commences any proceeding relating to itself under
any reorganization, arrangement, readjustment or debt, dissolution or
liquidation law or statute of any jurisdiction, whether now or hereafter in
effect, or any such proceeding is commenced against Borrower or any Guarantor
and such proceeding remains undismissed for a period of sixty (60) days, (iv) by
any act indicates its consent to, approval of, or acquiescence in, any such
proceeding or the appointment of any receiver of or any trustee for a Borrower
or any Guarantor or any substantial part of its property, or suffers any such
receivership or trusteeship to continue undischarged for a period of sixty (60)
days, or (v) admits in writing its inability to pay its debts as they become
due;

                  (h)         One or more (i) final judgments against Borrower
in excess of $250,000 or attachments against its property shall be rendered by a
court, arbitrator, arbitration panel, mediator or any individual(s) or entity
with the authority to issue binding judgments against Borrower or (ii) final
settlements by or on behalf of Borrower of any pending litigation, arbitration
or other claim or otherwise disputed matter, in any event not fully and
unconditionally covered by insurance, shall remain unpaid, unstayed on appeal,
undischarged, unbonded and undismissed for a period of ten (10) days;

                  (i)         A Reportable Event that might constitute grounds
for termination of any Plan covered by Title IV of ERISA or for the appointment
by the appropriate United States District Court of a trustee to administer any
such Plan or for the entry of a Lien or encumbrance to secure any deficiency,
has occurred and is continuing thirty (30) days after its occurrence, or any
such Plan is terminated, or a trustee is appointed by an appropriate United
States District Court to administer any such Plan, or the Pension Benefit
Guaranty Corporation institutes proceedings to terminate any such Plan or to
appoint a trustee to administer any such Plan, or a Lien or encumbrance is
entered to secure any deficiency or claim;

                  (j)         Borrower breaches any of the provisions of
Sections 6.6, 6.7, 7.3, 7.4, 7.6, 7.12 or 7.14 of this Agreement.

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                   (k)         There shall occur any uninsured damage to or
loss, theft or destruction of any portion of the Collateral that exceeds
$500,000 in the aggregate;

                  (l)         Borrower breaches or violates the terms of, or a
default or any fact, event or circumstance that could, whether with notice or
the passage of time, or both, constitute a default, occurs under any other
existing or future agreement (related or unrelated) between Borrower and Lender;

                  (m)         Upon the issuance of any execution or distraint
process against Borrower or any of its property or assets;

                  (n)         Borrower ceases any material portion of its
business operations as currently conducted; provided, however, that not Event of
Default shall occur under this subsection (n) if Borrower closes, ceases
providing services or otherwise discontinues any portion of its operations at
any Facility, if (i) the decisions to do so is made in the exercise of
Borrower’s business judgment, (ii) such closure, cessation or discontinuance
will not have a material adverse effect of the financial condition of Borrower
and (iii) Borrower remains in compliance with the covenants set forth in Section
6.33 and 6.34 of this Agreement.

                  (o)         Any indication or evidence is received by Lender
that Borrower may have directly or indirectly been engaged in any type of
activity which, in Lender’s discretion, may result in the forfeiture of any
property of Borrower to any Governmental Authority (except in accordance with
the terms of any contract with a Governmental Authority), which default shall
have continued unremedied for a period of ten (10) days after written notice
from Lender; provided, however, that if such default cannot be cured within such
ten (10) day period through the exercise of reasonable diligence, such default
shall not result in an Event of Default if Borrower promptly commences cure and
diligently prosecutes such cure to its completion.

                  (p)         Borrower or any Affiliate of Borrower, shall
challenge or contest, in any action, suit or proceeding, the validity or
enforceability of this Agreement, or any of the other Loan Documents, the
legality or the enforceability of any of the Obligations or the perfection or
priority of any Lien granted to Lender;

                  (q)         Borrower shall be criminally indicted or convicted
under any law that could lead to a forfeiture of any Collateral;

                  (r)         There shall occur a material adverse change in the
financial condition or business prospects of Borrower, which default shall have
continued unremedied for a period of ten (10) days after written notice from
Lender; or

                  (s)         A default or event of default occurs under any of
the Affiliated Loan Documents; or

  (t) A default or event of default occurs under any Guaranty.

 

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         Notwithstanding the foregoing, Borrower’s failure to comply with any
same provision of this Agreement two (2) times in any twelve (12) month period
shall effect an immediate Event of Default (without the expiration of any
applicable cure period) with respect to all subsequent failures by Borrower to
comply with such provision of this Agreement, and Lender thereupon may exercise
any remedy set forth in this Article VIII without affording Borrower any
opportunity to cure such Event of Default.

         If any right or privilege of Borrower herein, or any consent of Lender
herein, is conditioned upon the absence of an Event of Default, such right,
privilege or consent shall be construed as being conditioned upon the absence of
an Event of Default as well as the absence of any fact, event or circumstance
that, with the passage of time, or the giving of notice, or both, could
constitute an Event of Default.

         Notwithstanding any provision of this Agreement which makes reference
to the continuance of an Event of Default, nothing in this Agreement shall be
construed to permit Borrower to cure an Event of Default following the lapse of
the applicable cure period, and Borrower shall have no such right in any
instance unless specifically granted in writing by Lender.

         All cure periods provided for in this Section shall run concurrently
with any applicable cure period provided for in any other Loan Document.

         Section 8.2.         Acceleration. Upon the occurrence of any of the
foregoing Events of Default, the Obligations under the Notes shall become and be
immediately due and payable upon declaration to that effect delivered by Lender
to Borrower; provided that, upon the happening of any event specified in Section
8.1(f) or 8.1(g), all Obligations including, without limitation the Termination
Fee, shall be immediately due and payable without declaration or other notice to
Borrower.

         Section 8.3.         Remedies.

                  (a)         Upon the occurrence of and during the continuance
of an Event of Default under this Agreement or the other Loan Documents, Lender,
in addition to all other rights, options, and remedies granted to Lender under
this Agreement or at law or in equity, may take any of the following steps
(which list is given by way of example and is not intended to be an exhaustive
list of all such rights and remedies):

                           (i)         Terminate the Loans, whereupon all
outstanding Obligations (including without limitation the Termination Fee) shall
be immediately due and payable;

                           (ii)         Exercise all other rights granted to it
under this Agreement and all rights under the UCC in effect in the applicable
jurisdiction(s) and under any other applicable law; and

                           (iii)         Exercise all rights and remedies under
all Loan Documents now or hereafter in effect, including but not limited to:

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                                    (A)         The right to take possession of,
send notices regarding, and collect directly the Collateral, with or without
judicial process;

                                    (B)         The right to (by its own means
or with judicial assistance) enter any of Borrower’s premises and take
possession of the Collateral, or render it unusable, or dispose of the
Collateral on such premises in compliance with subsection (C) below, without any
liability for rent, storage, utilities, or other sums, and Borrower shall not
resist or interfere with such action;

                                    (C)         The right to require Borrower at
Borrower’s expense to assemble all or any part of the Personal Property and make
it available to Lender;

                                    (D)         The right to reduce the Maximum
Term Loan Amount or Maximum Revolving Loan Amount or to use the Collateral
and/or funds in the Concentration Account in amounts up to the Maximum Revolving
Loan Amount and Maximum Term Loan Amount for any reason; and

                                    (E)         The right to enforce Borrower’s
rights against Account Debtors and other obligors, including, but not limited
to, the right to collect Accounts directly in Lender’s own name and to charge
the collection costs and expenses, including attorneys’ fees, to Borrower.

                  (b)         Borrower agrees that a notice received by it at
least five (5) days before the time of any intended public sale, or the time
after which any private sale or other disposition of the Personal Property is to
be made, shall be deemed to be reasonable notice of such sale or other
disposition. If permitted by applicable law, any perishable Personal Property
which threatens to speedily decline in value or which is sold on a recognized
market may be sold immediately by Lender without prior notice to Borrower. At
any sale or disposition of Personal Property, Lender may (to the extent
permitted by applicable law) purchase all or any part of the Personal Property,
free from any right of redemption by Borrower, which right is hereby waived and
released. Borrower covenants and agrees not to interfere with or impose any
obstacle to Lender’s exercise of its rights and remedies with respect to the
Collateral. Lender shall have no obligation to clean-up or otherwise prepare the
Collateral for sale. Lender may comply with any applicable state or federal law
requirements in connection with a disposition of the Collateral and compliance
will not be considered to adversely affect the commercial reasonableness of any
sale of the Collateral. Lender may sell the Collateral without giving any
warranties as to the Collateral. Lender may specifically disclaim any warranties
of title or the like. This procedure will not be considered to adversely affect
the commercial reasonableness of any sale of the Collateral. If Lender sells any
of the Collateral upon credit, Borrower will be credited only with payments
actually made by the purchaser, received by Lender and applied to the
indebtedness of the purchaser. In the event the purchaser fails to pay for the
Collateral, Lender may resell the Collateral and Bo rrower shall be credited
with the proceeds of the sale.

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                   (c)         Lender shall have no obligation to marshal any
assets in favor of Borrower, or against or in payment of the Notes, any of the
other Obligations or any other obligation owed to Lender by Borrower or any
other person.

         Section 8.4.         Nature of Remedies.Lender shall have the right to
proceed against all or any portion of the Collateral to satisfy in any order (a)
the liabilities and Obligations of Borrower or any of its subsidiaries or other
Affiliates to Lender or any Affiliate of Lender under this Agreement or any
other loan documents evidencing financings provided to Borrower or (b) the
liabilities and obligations of Borrower, any Guarantor and their respective
Affiliates to Lender under the Affiliated Loan Documents. All rights and
remedies granted Lender under this Agreement and under any agreement referred to
in this Agreement, or otherwise available at law or in equity, shall be deemed
concurrent and cumulative, and not alternative remedies, and Lender may proceed
with any number of remedies at the same time until the Loans, and all other
existing and future liabilities and obligations of Borrower to Lender, are
satisfied in full. The exercise of any one right or remedy shall not be deemed a
waiver or release of any other right or remedy, and Lender, upon the occurrence
of an Event of Default, may proceed against Borrower, and/or the Collateral, at
any time, under any agreement, with any available remedy and in any order. All
sums received from Borrower and/or the Collateral in respect of the Loans may be
applied by Lender to the any other liabilities and obligations of Borrower under
the Loan Documents and the Affiliated Loan Documents in such order of
application and in such amounts as Lender shall deem appropriate in its sole and
absolute discretion. Borrower waives any right it may have to require Lender to
pursue any Person for any of the Obligations.

ARTICLE IX

MISCELLANEOUS

         Section 9.1.          Expenses and Taxes.

                  (a)         Borrower agrees to pay, whether or not the Closing
occurs, all reasonable costs and expenses incurred by Lender in connection with
due diligence and analysis, examination and appraisals, documentation,
negotiation and closing of the Loans, including but not limited to all actual
legal, audit and appraisal fees and all other out-of-pocket charges and expenses
reasonably incurred by Lender in connection with the negotiation, preparation,
legal review and execution of each of the Loan Documents, including but not
limited to UCC and judgment lien searches and UCC filings and fees for
post-Closing UCC and judgment lien searches. In addition, Borrower shall pay all
such fees associated with any amendments, modifications and terminations to the
Loan Documents following Closing. If Lender uses in-house counsel for any of
these purposes, Borrower further agrees that its Obligations under the Loan
Documents include reasonable charges for such work commensurate with the fees
that would otherwise be charged by outside legal counsel selected by Lender for
the work performed.

                  (b)         Borrower also agrees to pay all out-of-pocket
charges and expenses incurred by Lender (including the fees and expenses of
Lender’s counsel) in connection with the enforcement, protection or preservation
of any right or claim of Lender, the termination of this

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Agreement, the termination of any Liens of Lender on the Collateral, or the
collection of any amounts due under the Loan Documents. If Lender uses in-house
counsel for any of these purposes (i.e., for any task in connection with the
enforcement, protection or preservation of any right or claim of Lender and the
collection of any amounts due under its Loan Documents), Borrower further agrees
that its Obligations under the Loan Documents include reasonable charges for
such work commensurate with the fees that would otherwise be charged by outside
legal counsel selected by Lender for the work performed.

                  (c)         Borrower shall pay all taxes (other than taxes
based upon or measured by Lender’s income or revenues or any personal property
tax), if any, in connection with the issuance of the Notes and the recording of
the security documents therefor. The obligations of Borrower under this clause
(c) shall survive the payment of Borrower’s indebtedness under this Agreement
and the termination of this Agreement.

         Section 9.2.         Entire Agreement; Amendments.This Agreement and
the other Loan Documents constitute the full and entire understanding and
agreement among the parties with regard to their subject matter and supersede
all prior written or oral agreements, understandings, representations and
warranties made with respect thereto. No amendment, supplement or modification
of this Agreement nor any waiver of any provision thereof shall be made except
in writing executed by the party against whom enforcement is sought.

         Section 9.3.         No Waiver; Cumulative Rights.No waiver by any
party to this Agreement of any one or more defaults by the other party in the
performance of any of the provisions of this Agreement shall operate or be
construed as a waiver of any future default or defaults, whether of a like or
different nature. No failure or delay on the part of any party in exercising any
right, power or remedy under this Agreement, nor acceptance of partial
performance or partial payment, shall operate as a waiver of such right, power
or remedy nor shall any single or partial exercise of any such right, power or
remedy preclude any other or further exercise of such right, power or remedy or
the exercise of any other right, power or remedy. The remedies provided for in
this Agreement are cumulative and are not exclusive of any remedies that may be
available to any party to this Agreement at law, in equity or otherwise.

         Section 9.4.         Notices.Any notice or other communication required
or permitted under this Agreement shall be in writing and personally delivered,
mailed by registered or certified mail (return receipt requested and postage
prepaid), sent by telecopier (with a confirming copy sent by regular mail), or
sent by prepaid overnight courier service, and addressed to the relevant party
at its address set forth below, or at such other address as such party may, by
written notice, designate as its address for purposes of notice under this
Agreement:

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                   (a)         If to Lender, at:

      GE Capital Healthcare Financial Services, Inc.
    2 Wisconsin Circle, 4th Floor
    Chevy Chase, Maryland 20815
    Attention: Pascale Bissainthe, Chief Counsel
    Telephone: (301) 961-1640
    Telecopier: (301) 664-9866

                  (b)         If to Borrower, at:

      Correctional Services Corporation
    1819 Main Street, Suite 1000
    Sarasota, Florida 34236
    Attention: Bernard A. Wagner, Senior VP and CFO;
                       James F. Slattery, President and Chief Executive Officer;
                       with a copy to its General Counsel
Telephone: (941) 953-9199
Telecopier: (941) 953-9198

If mailed, notice shall be deemed to be given five (5) days after being sent. If
sent by personal delivery or prepaid courier, notice shall be deemed to be given
when delivered. If sent by telecopier prior to the close of regular business
hours of the recipient, when receipt is confirmed, or, otherwise, of the next
succeeding Business Day.

         Section 9.5.         Severability.If any term, covenant or condition of
this Agreement, or the application of such term, covenant or condition to any
party or circumstance shall be found by a court of competent jurisdiction to be,
to any extent, invalid or unenforceable, the remainder of this Agreement and the
application of such term, covenant, or condition to parties or circumstances
other than those as to which it is held invalid or unenforceable, shall not be
affected thereby, and each term, covenant or condition shall be valid and
enforced to the fullest extent permitted by law. Upon determination that any
such term is invalid, illegal or unenforceable, Lender may, but is not obligated
to, advance funds to Borrower under this Agreement until the parties to this
Agreement amend this Agreement so as to effect the original intent of the
parties as closely as possible in a valid and enforceable manner.

         Section 9.6.         Successors and Assigns.This Agreement, the Notes,
and the other Loan Documents shall be binding upon and inure to the benefit of
Borrower and Lender and their respective successors and assigns and shall bind
all Persons who become bound as a debtor to this Agreement. Notwithstanding the
foregoing, Borrower may not assign any of its rights or delegate any of its
obligations under this Agreement without the prior written consent of Lender,
which may be withheld in its sole discretion. Lender may sell, assign, transfer,
or participate any or all of its rights or obligations under this Agreement
without notice to or consent of Borrower.

         Section 9.7.         Counterparts.This Agreement may be executed in any
number of counterparts, each of which shall be deemed an original, but all of
which together shall constitute

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but one instrument.

         Section 9.8.         Interpretation.No provision of this Agreement or
any other Loan Document shall be interpreted or construed against any party
because that party or its legal representative drafted that provision. The
titles of the paragraphs of this Agreement are for convenience of reference only
and are not to be considered in construing this Agreement. Any pronoun used in
this Agreement shall be deemed to include singular and plural and masculine,
feminine and neuter gender as the case may be. The words “herein,” “hereof,” and
“hereunder” shall be deemed to refer to this entire Agreement, except as the
context otherwise requires.

         Section 9.9.         Survival of Terms.All covenants, agreements,
representations and warranties made in this Agreement, any other Loan Document,
and in any certificates and other instruments delivered in connection with this
Agreement shall be considered to have been relied upon by Lender and shall
survive the making by Lender of the Loans contemplated by this Agreement and the
execution and delivery to Lender of the Notes, and shall continue in full force
and effect until all liabilities and obligations of Borrower to Lender are
satisfied in full.

         Section 9.10.         Release of Lender. For and in consideration of
the Loans and each advance or other financial accommodation hereunder, each
Borrower, voluntarily, knowingly, unconditionally, and irrevocably, with
specific and express intent, for and on behalf of itself and its agents,
attorneys, heirs, successors, and assigns (collectively the “Releasing Parties”)
does hereby fully and completely release, acquit and forever discharge Lender,
and its successors, assigns, heirs, affiliates, subsidiaries, parent companies,
principals, directors, officers, employees, shareholders and agents (hereinafter
called the “Lender Parties”), and any other person, firm, business, corporation,
insurer, or association which may be responsible or liable for the acts or
omissions of the Lender Parties, or who may be liable for the injury or damage
resulting therefrom (collectively the “Released Parties”), of and from any and
all actions, causes of action, suits, debts, disputes, damages, claims,
obligations, liabilities, costs, expenses and demands of any kind whatsoever, at
law or in equity, whether matured or unmatured, liquidated or unliquidated,
vested or contingent, choate or inchoate, known or unknown that the Releasing
Parties (or any of them) have or may have, against the Released Parties or any
of them (whether directly or indirectly) based upon any fact, event or
circumstance which existed or occurred on or prior to the date of this
Agreement. Each Borrower acknowledges that the foregoing release is a material
inducement to Lender’s decision to extend to Borrower the financial
accommodations hereunder and has been relied upon by Lender in agreeing to make
the Loans and in making each advance of Loans proceeds hereunder.

         Section 9.11.         Time.Whenever Borrower is required to make any
payment or perform any act on a Saturday, Sunday, or a legal holiday under the
laws of the State of Maryland (or other jurisdiction where Borrower is required
to make the payment or perform the act), the payment may be made or the act
performed on the next Business Day. Time is of the essence in Borrower’s
performance under this Agreement and all other Loan Documents.

         Section 9.12.         Commissions.The transaction contemplated by this
Agreement was brought about by Lender and Borrower acting as principals and
without any brokers, agents, or finders being the effective procuring cause.
Borrower and Lender each represent and warrant to

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the other that it has not committed such other to the payment of any brokerage
fee, commission, or charge in connection with this transaction. If any such
claim is made on Lender by any broker, finder, or agent or other person,
Borrower will indemnify, defend, and hold Lender harmless from and against the
claim and will defend any action to recover on that claim, at Borrower’s cost
and expense, including Lender’s counsel fees. Borrower further agrees that until
any such claim or demand is adjudicated in Lender’s favor, the amount demanded
will be deemed a liability of Borrower under this Agreement, secured by the
Collateral.

         Section 9.13.         Third Parties.No rights are intended to be
created under this Agreement or under any other Loan Document for the benefit of
any third party donee, creditor, or incidental beneficiary of Borrower. Nothing
contained in this Agreement shall be construed as a delegation to Lender of
Borrower’s duty of performance, including without limitation Borrower’s duties
under any account or contract in which Lender has a security interest.

         Section 9.14.         Discharge of Borrower’s Obligations.Lender, in
its sole discretion, shall have the right at any time, and from time to time,
without prior notice to Borrower if Borrower fails to do so, to: (a) obtain
insurance covering any of the Collateral as required under this Agreement; (b)
pay for the performance of any of Borrower’s obligations under this Agreement;
(c) discharge taxes, Liens, security interests, or other encumbrances at any
time levied or placed on any of the Collateral in violation of this Agreement
unless Borrower is in good faith with due diligence by appropriate proceedings
contesting those items; and (d) pay for the maintenance and preservation of any
of the Collateral. Expenses and advances shall be added to the Loans, until
reimbursed to Lender and shall be secured by the Collateral. Any such payments
and advances by Lender shall not be construed as a waiver by Lender of an Event
of Default.

         Section 9.15.         Information to Participants.Lender may divulge to
any participant it may obtain in the Loans, or any portion of the Loans, all
information, and furnish to such participant copies of reports, financial
statements, certificates, and documents obtained under any provision of this
Agreement or any other Loan Document.

         Section 9.16.         Indemnity.Borrower hereby indemnifies and agrees
to defend (with counsel acceptable to Lender) and hold harmless Lender, its
Affiliates and the partners, officers, agents and employees of either
(collectively, “Indemnitee”) from and against any liability, loss, cost, expense
(including reasonable attorneys’ fees and expenses for both in-house and outside
counsel), claim, damage, suit, action or proceeding ever suffered or incurred by
Lender or in which Lender may ever be or become involved (whether as a party,
witness or otherwise) (a) arising from Borrower’s failure to observe, perform or
discharge any of its covenants, obligations, agreements or duties under this
Agreement, (b) arising from the breach of any of the representations or
warranties contained in Article IV of this Agreement, (c) by reason of this
Agreement, the other Loan Documents or the transactions contemplated hereby or
thereby, (d) relating to claims of any Person with respect to the Collateral, or
(e) arising out of the issuance of, any claim relating to, the exercise of any
right of remedy arising out of, or any other act or omission in connection with
(including on the part of a Beneficiary) any Letter of Credit. Notwithstanding
any contrary provision in this Agreement, the obligation of Borrower under this
Section 9.16 shall survive the payment in full of the Obligations and the
termination of this

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Agreement.

         Section 9.17.         Appointment of Agent under this Agreement.

                  (a)         Each of the entities comprising Borrower (other
than Correctional Services Corporation) hereby irrevocably appoints and
constitutes Correctional Services Corporation as agent to request and receive
advances in respect of the Loans (and to otherwise act on behalf of each such
entity pursuant to this Agreement and the other Loan Documents) from Lender in
the name or on behalf of each such entity. Lender may disburse proceeds of the
Loans to the bank account of any one or more of such entities without notice to
any of the other entities comprising Borrower or any other Person at any time
obligated on or in respect of the Obligations.

                  (b)         Each of the entities comprising Borrower (other
than Correctional Services Corporation) hereby irrevocably appoints and
constitutes Correctional Services Corporation as agent to receive statements of
account and all other notices from Lender with respect to the Obligations or
otherwise under or in connection with this Agreement and the other Loan
Documents.

                  (c)         No purported termination of the appointment of
Correctional Services Corporation as agent shall be effective without the prior
written consent of Lender.

         Section 9.18.         Lender Approvals.Unless expressly provided herein
to the contrary, any approval, consent, waiver or satisfaction of Lender with
respect to any matter that is the subject of this Agreement, the other Loan
Documents may be granted or withheld by Lender in its sole and absolute
discretion.

         Section 9.18a.         Further Assurances.Borrower hereby agrees that
at any time and from time to time, at the expense of Borrower, Borrower will
promptly execute and deliver all further instruments and documents, and take all
further action, that may be necessary or that Lender may reasonably request, in
order to perfect and protect any security interest granted or purported to be
granted hereby, or to enable Lender or any of its agents to exercise and enforce
its rights and remedies under this Agreement with respect to any portion of such
collateral.

         Section 9.19.         Choice of Law; Consent to Jurisdiction. EXCEPT TO
THE EXTENT THAT THE UCC PROVIDES FOR THE APPLICATION OF THE LAW OF BORROWER’S
STATE OF ORGANIZATION, THIS AGREEMENT AND THE NOTE SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF MARYLAND, WITHOUT REGARD
TO ANY OTHERWISE APPLICABLE PRINCIPLES OF CONFLICTS OF LAWS. IF ANY ACTION
ARISING OUT OF THIS AGREEMENT OR THE NOTE IS COMMENCED BY LENDER IN THE STATE
COURTS OF THE STATE OF MARYLAND OR IN THE U.S. DISTRICT COURT FOR THE DISTRICT
OF MARYLAND, BORROWER HEREBY CONSENTS TO THE JURISDICTION OF ANY SUCH COURT IN
ANY SUCH ACTION AND TO THE LAYING OF VENUE IN THE STATE OF MARYLAND. ANY PROCESS
IN ANY SUCH ACTION SHALL BE DULY SERVED IF MAILED BY REGISTERED MAIL,

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POSTAGE PREPAID, TO BORROWER AT ITS ADDRESS DESCRIBED IN SECTION 9.4. OR IF
SERVED BY ANY OTHER MEANS PERMITTED BY APPLICABLE LAW.

         Section 9.20.         Cooperation in Discovery and Litigation. In any
litigation, trial, arbitration or other dispute resolution proceeding relating
to this Agreement or any of the other Loan Documents, all then-current
directors, officers and employees of Borrower or of its Affiliates shall be
deemed to be employees or managing agents of Borrower for purposes of all
applicable law or court rules regarding the production of witnesses by notice
for testimony (whether in a deposition, at trial or otherwise). Borrower agrees
that Lender’s counsel in any such dispute resolution proceeding may examine any
of these individuals as if under cross-examination and that any discovery
deposition of any of them may be used in that proceeding as if it were an
evidence deposition. Borrower in any event will use all commercially reasonable
efforts to produce in any such dispute resolution proceeding, at the time and in
the manner requested by Lender, in accordance with the rules of discovery of the
court in which such proceeding is being conducted, all Persons, documents
(whether in tangible, electronic or other form) or other things under its
control and relating to the dispute in any jurisdiction that recognizes that (or
any similar) distinction.

         Section 9.21.         Waiver of Trial by Jury. BORROWER HEREBY (A)
COVENANTS AND AGREES NOT TO ELECT A TRIAL BY JURY OF ANY ISSUE TRIABLE OF RIGHT
BY A JURY, AND (B) WAIVES ANY RIGHT TO TRIAL BY JURY FULLY TO THE EXTENT THAT
ANY SUCH RIGHT SHALL NOW OR HEREAFTER EXIST. THIS WAIVER OF RIGHT TO TRIAL BY
JURY IS SEPARATELY GIVEN, KNOWINGLY AND VOLUNTARILY, BY BORROWER, AND THIS
WAIVER IS INTENDED TO ENCOMPASS INDIVIDUALLY EACH INSTANCE AND EACH ISSUE AS TO
WHICH THE RIGHT TO A JURY TRIAL WOULD OTHERWISE ACCRUE. LENDER IS HEREBY
AUTHORIZED AND REQUESTED TO SUBMIT THIS AGREEMENT TO ANY COURT HAVING
JURISDICTION OVER THE SUBJECT MATTER AND THE PARTIES TO THIS AGREEMENT, SO AS TO
SERVE AS CONCLUSIVE EVIDENCE OF BORROWER’S WAIVER OF THE RIGHT TO JURY TRIAL.
FURTHER, BORROWER HEREBY CERTIFIES THAT NO REPRESENTATIVE OR AGENT OF LENDER
(INCLUDING LENDER’S COUNSEL) HAS REPRESENTED, EXPRESSLY OR OTHERWISE, TO
BORROWER THAT LENDER WILL NOT SEEK TO ENFORCE THIS WAIVER OF RIGHT TO JURY TRIAL
PROVISION.

         Section 9.22.         Confession of Judgment. UPON THE OCCURRENCE OF AN
EVENT OF DEFAULT HEREUNDER, BORROWER AUTHORIZES ANY ATTORNEY ADMITTED TO
PRACTICE BEFORE ANY COURT OF RECORD IN THE UNITED STATES OR THE CLERK OF SUCH
COURT TO APPEAR ON BEHALF OF BORROWER IN ANY COURT IN ONE OR MORE PROCEEDINGS,
OR BEFORE ANY CLERK THEREOF OR PROTHONOTARY OR OTHER COURT OFFICIAL, AND TO
CONFESS JUDGMENT AGAINST BORROWER IN FAVOR OF LENDER IN THE FULL AMOUNT DUE ON
THIS AGREEMENT (INCLUDING PRINCIPAL, ACCRUED INTEREST AND ANY AND ALL CHARGES,
FEES AND COSTS) PLUS

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REASONABLE ATTORNEYS’ FEES, PLUS COURT COSTS, ALL WITHOUT PRIOR NOTICE OR
OPPORTUNITY OF BORROWER FOR PRIOR HEARING. BORROWER AGREES AND CONSENTS THAT
VENUE AND JURISDICTION SHALL BE PROPER IN THE CIRCUIT COURT OF ANY COUNTY OF THE
STATE OF MARYLAND OR OF BALTIMORE CITY, MARYLAND, OR IN THE UNITED STATES
DISTRICT COURT FOR THE DISTRICT OF MARYLAND. BORROWER WAIVES THE BENEFIT OF ANY
AND EVERY STATUTE, ORDINANCE, OR RULE OF COURT WHICH MAY BE LAWFULLY WAIVED
CONFERRING UPON BORROWER ANY RIGHT OR PRIVILEGE OF EXEMPTION, HOMESTEAD RIGHTS,
STAY OF EXECUTION, OR SUPPLEMENTARY PROCEEDINGS, OR OTHER RELIEF FROM THE
ENFORCEMENT OR IMMEDIATE ENFORCEMENT OF A JUDGMENT OR RELATED PROCEEDINGS ON A
JUDGMENT. THE AUTHORITY AND POWER TO APPEAR FOR AND ENTER JUDGMENT AGAINST
BORROWER SHALL NOT BE EXHAUSTED BY ONE OR MORE EXERCISES THEREOF, OR BY ANY
IMPERFECT EXERCISE THEREOF, AND SHALL NOT BE EXTINGUISHED BY ANY JUDGMENT
ENTERED PURSUANT THERETO; SUCH AUTHORITY AND POWER MAY BE EXERCISED ON ONE OR
MORE OCCASIONS FROM TIME TO TIME, IN THE SAME OR DIFFERENT JURISDICTIONS, AS
OFTEN AS LENDER SHALL DEEM NECESSARY, CONVENIENT, OR PROPER.

[SIGNATURES FOLLOW]

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         IN WITNESS WHEREOF, intending to be legally bound, and intending that
this Agreement constitutes an instrument executed under seal, the parties have
caused this Agreement to be executed under seal as of the date first written
above.

    LENDER:

GENERAL ELECTRIC CAPITAL CORPORATION
a Delaware corporation
        By: 
(SEAL)

--------------------------------------------------------------------------------

        Duly Authorized Signatory           Name:
Title:  

    BORROWER:

CORRECTIONAL SERVICES CORPORATION
a Delaware corporation
        By: 
(SEAL)

--------------------------------------------------------------------------------

      Name:            Title:     

    CSC MANAGEMENT DE PUERTO RICO INC.
a Puerto Rico corporation
        By: 
(SEAL)

--------------------------------------------------------------------------------

      Name:            Title:     

    YOUTH SERVICES INTERNATIONAL HOLDINGS,
   INC.
a Delaware corporation
        By: 
(SEAL)

--------------------------------------------------------------------------------

      Name:            Title:     

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    YOUTH SERVICES INTERNATIONAL REAL
   PROPERTY PARTNERSHIP, LLP
          a Maryland limited liability partnership
        By:  Youth Services International, Inc.
a Maryland corporation
its Managing Partner  

            By: 
(SEAL)

--------------------------------------------------------------------------------

      Name:            Title:     

    YOUTH SERVICES INTERNATIONAL INC.
a Maryland corporation
        By: 
(SEAL)

--------------------------------------------------------------------------------

      Name:            Title:     

    YOUTH SERVICES INTERNATIONAL OF
   NORTHERN IOWA, INC.
an Iowa corporation
        By: 
(SEAL)

--------------------------------------------------------------------------------

      Name:            Title:     

    YOUTH SERVICES INTERNATIONAL OF SOUTH
   DAKOTA, INC.
a South Dakota corporation
        By: 
(SEAL)

--------------------------------------------------------------------------------

      Name:            Title:     

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    YOUTH SERVICES INTERNATIONAL OF
   MISSOURI, INC.
a Missouri corporation
        By: 
(SEAL)

--------------------------------------------------------------------------------

      Name:            Title:     

    YOUTH SERVICES INTERNATIONAL OF TEXAS,
   INC.
a Texas corporation
        By: 
(SEAL)

--------------------------------------------------------------------------------

      Name:            Title:     

    YOUTH SERVICES INTERNATIONAL OF
   ILLINOIS, INC.
a Maryland corporation
        By: 
(SEAL)

--------------------------------------------------------------------------------

      Name:            Title:     

    YOUTH SERVICES INTERNATIONAL OF
   MICHIGAN, INC.
a Michigan corporation
        By: 
(SEAL)

--------------------------------------------------------------------------------

      Name:            Title:     

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LIST OF EXHIBITS

Exhibit A-1 - Form of Revolving Note

Exhibit A-2 – Form of Term Note

Exhibit B - Form of Lockbox Agreement

Exhibit C - Form of Legal Opinion

Exhibit D - Form of Estoppel Certificate

Exhibit E – Amortization Schedule for Term Note

Exhibit F – Additional Letter of Credit Provisions

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LIST OF SCHEDULES

Schedule 1.41 –   Mortgages             Schedule 1.45 –   Permitted Liens      
      Schedule 3.6 –   Officers with Power of Attorney             Schedule 4.1
–   Subsidiaries             Schedule 4.2 –   State of Organization            
Schedule 4.5 –   Litigation             Schedule 4.7 –   Tax Identification
Numbers; Fiscal Years             Schedule 4.9 –   Exceptions to Ownership      
      Schedule 4.10 –   Tax Liability             Schedule 4.14 –  
Environmental Matters             Schedule 4.15 –   Places of Business; Record
Owner; Chief Executive Office             Schedule 4.16 –   Intellectual
Property             Schedule 4.17 –   Capitalization; Ownership            
Schedule 4.19 –   Borrowings and Guarantees             Schedule 4.20 –  
Business Interruptions             Schedule 4.21 –   Trade Names            
Schedule 4.22 –   Joint Ventures             Schedule 4.27 –   Funds from
Restricted Grants             Schedule 4.29 –   Assignment of Claims Laws      
      Schedule 4.30 –   Leases             Schedule 4.35 –   Contracts to
Purchase Facilities  

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Schedule 4.36 –   Tax Lots             Schedule 4.43 –   Title and Ownership    
                  Schedule 4.42 –   Other Liens             Schedule 6.7 –  
Insurance             Schedule 6.24 –   Post-Closing Obligations  

 

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EXHIBIT F

Additional Letter of Credit Provisions

         (a)      Borrower will promptly examine a copy of each Letter of Credit
(and any proposed amendments thereto) sent to Borrower, as well as all other
instruments and documents delivered to Borrower from time to time in connection
with any Letter of Credit, and, in the event Borrower has any claim of
non-compliance with the instructions or of any discrepancy or other irregularity
or any objection to any action taken or proposed to be taken by Lender or
Issuing Party with respect to any Letter of Credit, Borrower will notify Lender
thereof in writing within three (3) Business Days after its receipt of a copy of
such Letter of Credit, any amendments, renewals or extensions thereto, or such
instruments or documents or notice of any such proposed action, and Borrower
will conclusively be deemed to have waived any such claim against the
Indemnitees, unless such notice is given as aforesaid. This section is intended
to substitute three (3) Business Days for the “not unreasonable time period” set
forth in Rule 5.09 of ISP 98 (as defined below).

         (b)      The obligation of Borrower to pay the Letter of Credit
Obligations shall be unconditional and irrevocable and shall be paid under all
circumstances strictly in accordance with the terms of this Amendment and the
Loan Agreement notwithstanding any fact, event or circumstance described in this
subparagraph. Neither Lender nor any other Indemnified Party shall be
responsible for, and neither Lender’s powers and rights hereunder nor Borrower’s
obligations shall be affected by:

  (i)   any act or omission pursuant to Borrower’s instructions;         (ii)  
any other act or omission of any Indemnified Party or Issuing Party other than
any those arising from its or their gross negligence or willful misconduct;    
    (iii)   the validity, accuracy or genuineness of LC Drafts, documents or
required statements, even if such LC Drafts, documents or statements should in
fact prove to be in any or all respects invalid, inaccurate, fraudulent or
forged (and notwithstanding that Borrower shall have notified Lender or Issuing
Party thereof);         (iv)   failure of any LC Draft to bear any reference or
adequate reference to the Letter of Credit;         (v)   errors, omissions,
interruptions or delays in transmission of delivery of any messages however sent
and whether or not in code or otherwise;         (vi)   any act, default,
omission, insolvency or failure in business of any other person (including any
agent, subcontractor or employee) or any consequences arising from causes beyond
Lender’s control;         (vii)   any acts or omissions of any Beneficiary of a
Letter of Credit or transferee of any Letter of Credit, if transferable;        
(viii)   any act or omission of Lender or Issuing Party required or permitted
under any (1) law or practice to which any Letter of Credit is subject
(including ISP 98), (2) applicable order, ruling or decree of any court,
arbitrator or

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  governmental agency, or (3) published statement or interpretation on a matter
of law or practice (including ISP 98);

  (ix)   honor or other recognition of a presentation or demand that includes
forged or fraudulent documents or that is otherwise affected by the fraudulent,
bad faith, or illegal conduct of a Beneficiary or other person (excluding
Lender’s employees), including payment to a person who forges the signature of a
Beneficiary or the signature of an assignee of a Letter of Credit’s proceeds;  
      (x)   honor of a presentation without regard to any nondocumentary
condition(s) in a Letter of Credit, regardless of whether Rule 4.11 of ISP 98
applies;         (xi)   dishonor of any presentation that does not strictly
comply with the terms of the applicable Letter of Credit or that is fraudulent,
forged or otherwise not entitled to be honored;         (xii)   the lack of
validity or enforceability of any Letter of Credit;         (xiii)   any
amendment to waiver of or any consent or departure from all or any of the
provisions of the Letter of Credit or any Loan Document;         (xiv)   the
existence of any claim, set-off, defense or other right which Borrower, its
Affiliates or any other Person may at any time have against any Beneficiary of a
Letter of Credit, Lender, Issuing Party or any other Person, whether in
connection with this Agreement, any other Loan Document or any other related or
unrelated agreements or transactions; or         (xv)   any other act or
omission to act or delay of any kind of Lender, Issuing Party or any other
Person or any other event or circumstance whatsoever that might, but for the
provisions of this paragraph, constitute a legal or equitable discharge of
Borrower’s obligations under this Agreement or any other Loan Document.

         Without limiting the generality of the foregoing, Lender and Issuing
Party may (x) act in reliance on any oral, telephone, telegraphic, electronic,
facsimile or written request, notice or instruction believed in good faith to be
from or have been authorized by Borrower, (y) receive, accept or pay as
complying with the terms of a Letter of Credit any LC Draft or other document,
otherwise in order, which is signed by or issued to any person or entity acting
as the representative of, or in the place of, the party in whose name such
Letter of Credit provides that any LC Draft or other document should be drawn or
issued and (z) waive any stipulation that Issuing Party shall accept or pay any
LC Draft, and Lender may then accept presentation of an LC Draft or other
document for payment directly. It is understood and agreed by Borrower that
Lender and Issuing Party may accept documents that appear on their face to be in
order, without responsibility for further investigation, regardless of any
notice or information to the contrary. As between Borrower and any Indemnified
Party, Borrower assumes all risks of the acts and omissions of, or misuse of any
Letter of Credit by, Beneficiary thereof. Borrower agrees that in any action now
or hereafter arising from an alleged breach, under this Agreement or otherwise,
with respect to any Letter of Credit by any Indemnified Party, the only damages
that may be sought are those which are direct and reasonably foreseeable as the
probable result of any breach thereof. Borrower hereby waives any right it may
have to indirect, consequential, exemplary, special or punitive damages or lost
anticipated profits (whether against Lender or any other

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Indemnified Party) in respect of any present or future breach by Lender or such
Indemnified Party, under the Agreement or otherwise, with respect to any Letter
of Credit, even if Lender or Issuing Party have been advised of the possibility
of such damages. Borrower must in all instances mitigate damages claimed against
any Indemnified Party with respect to any Letter of Credit. If Lender or Issuing
Party honors an LC Draft or presentation under the Letter of Credit for which
Borrower claims it is not obligated to reimburse Lender, Borrower shall
nonetheless pay to Lender the amount paid by Lender to or by Issuing Party,
without prejudice to Borrower’s claims against Lender (except to the extent
waived or limited hereby) to recover fees and costs paid by Borrower with
respect to the honored presentation plus any direct damages resulting therefrom
which Borrower is unable to avoid or reduce and which are permitted to be
recovered under this paragraph. Borrower ’s prevailing in an action based on
forgery or fraud of Beneficiary or other presenter does not relieve Borrower
from its obligation to pay Lender’s and Issuing Party’s costs and expenses in
contesting the entry or maintenance of injunctive relief.

         (c)      Unless Lender or Issuing Party is enjoined by a court of
competent jurisdiction, Lender and Issuing Party may assume that any Beneficiary
or other presenter acts in good faith and that any presentation or other demand
is nonfraudulent.

         (d)      Unless a Letter of Credit specifically permits and Lender
specifically agrees, Lender and Issuing Party need not check the authenticity or
authority of any purported Beneficiary’s signature, even if in other
transactions Beneficiary is a customer or its signature is otherwise known to
Lender or Issuing Party.

         (g)      Unless specifically committed to do so in a writing signed by
Lender, Lender and Issuing Party need not consent to any amendment of a Letter
of Credit. Lender or Issuing Party may, without authorization from or notice to
Borrower, send a notice of non-extension to Beneficiary under a Letter of Credit
if it provides for automatic extension. Any notice of dishonor given by Lender
or Issuing Party within six (6) Business Days after presentation of documents to
Issuing Party shall not be deemed to be unreasonable. This section is intended
to substitute six (6) Business Days for the three (3) Business Days set forth in
Rule 5.01a of ISP 98.

         (g)      Notwithstanding any waiver by Borrower of a discrepancy in an
LC Draft, document or required statement, each of Lender and Issuing Party, each
acting alone, has the right in its sole judgement, to decline to approve any
such discrepancy and to refuse payment on that basis under the applicable Letter
of Credit.

         (h)      Lender may assign its rights and delegate its duties hereunder
to any subsidiary of Lender, in each case without prior notice to Borrower;
provided that such assignment and delegation does not diminish Borrower’s rights
or increase Borrower’s duties hereunder.

         (i)      No Letter of Credit shall be issued hereunder providing for
the acceptance of time LC Drafts or the incurrence of deferred payment
undertakings.

         (j)      Notwithstanding any provision herein contained to the
contrary, if Borrower approves the issuance of a Letter of Credit requiring
payment of a LC Draft on the same day on which such LC Draft is presented,
Issuing Party shall be entitled to honor such LC Draft without

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review or examination by Borrower and Borrower waives all defenses to
reimbursement thereof based on irregularities that may have been revealed by
Borrower’s review or examination.

         (k)      Borrower is responsible for preparing or approving the text of
any Letter of Credit as issued by Issuing Party and as received by Beneficiary.
Lender’s or Issuing Party’s recommendation or drafting of text or Lender’s or
Issuing Party’s use or non-use or refusal to use text submitted by Borrower
shall not affect Borrower’s ultimate responsibility for the final text and its
receipt by Beneficiary. Borrower is responsible for the effect, or lack of
effect under ISP 98, Rule 4.11 or applicable law, of a provision in any Letter
of Credit that requires Lender or Issuing Party to verify facts rather than
examine documents or that fails to identify the documents to which the provision
applies. Borrower is responsible for including suitable provisions in the
underlying agreement that permit Borrower to review the text of any Letter of
Credit as received by Beneficiary and that describe the circumstances under
which a drawing under a Letter of Credit may be made, Letter of Credit proceeds
may be applied to the underlying agreement, and part or all of those proceeds
may be returned. Borrower accepts the risk that the text of any Letter of Credit
is consistent with the underlying obligation, suitable for Borrower’s purposes,
and received by the designated Beneficiary in time to permit such Beneficiary
and Borrower to review such Letter of Credit and to request any desired
amendments.

         (l)      If Lender or Issuing Party is now or hereafter becomes subject
to any reserve, special deposit or similar requirement against assets of,
deposits with, or for the account of, or credit extended by, Lender or Issuing
Party, or any other condition is imposed upon Lender or Issuing Party which
imposes a cost upon Lender or Issuing Party, and the result, in the
determination of Lender or Issuing Party is to increase the cost to Lender or
Issuing Party of maintaining such Letter of Credit or paying or funding the
payment of any LC Draft thereunder, or to reduce the amount of any sum received
or receivable, directly or indirectly, by Lender hereunder or by Issuing Party
under the Letter of Credit, Borrower will pay to Lender upon demand such amounts
required to compensate Lender and Issuer for such increased cost or reduction.
In making the determinations contemplated hereunder, Lender and Issuing Party
may make such estimates, assumptions, allocations and the like which Lender or
Issuing Party in good faith determines to be appropriate, but Lender’s or
Issuing Party’s selection thereof, and Lender’s or Issuing Party’s
determinations based thereon, shall be final and binding and conclusive upon
Borrower.

         (m)     Notwithstanding any provision to the contrary herein, Lender
and Issuing Party reserve the right to decline any instruction provided by
Borrower if, in its discretion, Lender or Issuing Party determines that the
carrying out of such instruction contravenes Lender’s or Issuing Party’s
customary procedures or policy, ISP 98 or any applicable law, rule or
regulation.

         (n)      Each Letter of Credit and, to the extent applicable and not
otherwise inconsistent with this Agreement, this Agreement, shall be subject to
the International Standby Practices, International Chamber of Commerce
Publication No. 590 (“ISP 98”), and the same are incorporated herein by
reference. Borrower is responsible for knowing applicable letter of credit law
and practice, including ISP 98. Solely for purposes of interpreting the ISP 98’s
application to this Amendment and the Letter of Credit issued hereunder, Lender
and Issuing Party shall be deemed to be a “bank” as such term is used in ISP 98.
To the extent permitted by applicable law,

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this Agreement shall prevail in case of a conflict with applicable law or ISP
98, and ISP 98 shall prevail in case of a conflict with applicable law.

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