exv4w1



Table of Contents








Exhibit 4.1











CREDIT AGREEMENT



dated as of

July 23, 2003



among



ZALE DELAWARE, INC.,

ZALE CORPORATION,

DDCC, INC., and

TXDC, L.P., as

Borrowers



The LENDERS Party Hereto,



FLEET NATIONAL BANK

as Administrative Agent and Issuing Bank



FLEET RETAIL FINANCE, INC.

as Collateral Agent



and



FLEET SECURITIES INC.

as Arranger



and



BANK ONE, NA

CONGRESS FINANCIAL CORPORATION (SOUTHWEST)

as Co-Syndication Agents



and



JPMORGAN CHASE BANK

BANK OF AMERICA, N.A.

as Co-Documentation Agents



















 







TABLE OF CONTENTS




									
	ARTICLE I DEFINITIONS
		SECTION 1.1. Defined Terms
		SECTION 1.2. Terms Generally
		SECTION 1.3. Accounting Terms; GAAP
	ARTICLE II AMOUNT AND TERMS OF CREDIT
		SECTION 2.1. Commitment of the Lenders
		SECTION 2.2. Reserves; Changes to Reserves
		SECTION 2.3. Making of Loans
		SECTION 2.4. Overadvances
		SECTION 2.5. Swingline Loans
		SECTION 2.6. Letters of Credit
		SECTION 2.7. Settlements Amongst Lenders
		SECTION 2.8. Notes; Repayment of Loans
		SECTION 2.9. Interest on Loans
		SECTION 2.10. Default Interest
		SECTION 2.11. Certain Fees
		SECTION 2.12. Unused Commitment Fee
		SECTION 2.13. Letter of Credit Fees
		SECTION 2.14. Nature of Fees
		SECTION 2.15. Termination or Reduction of Commitments
		SECTION 2.16. Alternate Rate of Interest
		SECTION 2.17. Conversion and Continuation of Loans
		SECTION 2.18. Mandatory Prepayment; Cash Collateral
		SECTION 2.19. Optional Prepayment of Loans; Reimbursement of Lenders
		SECTION 2.20. Maintenance of Loan Account; Statements of Account
		SECTION 2.21. Cash Receipts
		SECTION 2.22. Application of Payments
		SECTION 2.23. Increased Costs
		SECTION 2.24. Change in Legality
		SECTION 2.25. Payments; Sharing of Setoff
		SECTION 2.26. Taxes
		SECTION 2.27. Security Interests in Collateral
		SECTION 2.28. Mitigation Obligations; Replacement of Lenders
	ARTICLE III REPRESENTATIONS AND WARRANTIES
		SECTION 3.1. Organization; Powers
		SECTION 3.2. Authorization; Enforceability
		SECTION 3.3. Governmental Approvals; No Conflicts
		SECTION 3.4. Financial Condition
		SECTION 3.5. Properties
		SECTION 3.6. Litigation and Environmental Matters
		SECTION 3.7. Compliance with Laws and Agreements
		SECTION 3.8. Investment and Holding Company Status
		SECTION 3.9. Taxes
		SECTION 3.10. ERISA
		SECTION 3.11. Disclosure
		SECTION 3.12. Subsidiaries
		SECTION 3.13. Insurance
		SECTION 3.14. Accounts; Credit Cards
		SECTION 3.15. Labor Matters
		SECTION 3.16. Security Documents
		SECTION 3.17. Federal Reserve Regulations
		SECTION 3.18. Solvency
		SECTION 3.19. Foreign Assets Control Regulations, Etc
	ARTICLE IV CONDITIONS
		SECTION 4.1. Closing Date
		SECTION 4.2. Conditions Precedent to Each Loan and Each Letter of Credit
	ARTICLE V AFFIRMATIVE COVENANTS
		SECTION 5.1. Financial Statements and Other Information
		SECTION 5.2. Notices of Material Events
		SECTION 5.3. Information Regarding Collateral
		SECTION 5.4. Existence; Conduct of Business
		SECTION 5.5. Payment of Obligations
		SECTION 5.6. Maintenance of Properties
		SECTION 5.7. Insurance
		SECTION 5.8. Casualty and Condemnation
		SECTION 5.9. Books and Records; Inspection and Audit Rights; Appraisals
		SECTION 5.10. Compliance with Laws
		SECTION 5.11. Employee Benefit Plans
		SECTION 5.12. Use of Proceeds and Letters of Credit
		SECTION 5.13. New Subsidiaries
		SECTION 5.14. Further Assurances
	ARTICLE VI NEGATIVE COVENANTS
		SECTION 6.1. Indebtedness and Other Obligations
		SECTION 6.2. Liens
		SECTION 6.3. Fundamental Changes
		SECTION 6.4. Investments, Loans, Advances, Guarantees and Acquisitions
		SECTION 6.5. Asset Sales
		SECTION 6.6. Restricted Payments; Certain Payments of Indebtedness
		SECTION 6.7. Transactions with Affiliates
		SECTION 6.8. Fixed Charge Coverage Ratio
		SECTION 6.9. Hedging Agreements
	ARTICLE VII EVENTS OF DEFAULT
		SECTION 7.1. Events of Default
		SECTION 7.2. When Continuing
		SECTION 7.3. Remedies on Default
		SECTION 7.4. Application of Proceeds
	ARTICLE VIII THE AGENTS
		SECTION 8.1. Administration by the Agents
		SECTION 8.2. The Collateral Agent
		SECTION 8.3. Sharing of Excess Payments
		SECTION 8.4. Agreement of Required Lenders
		SECTION 8.5. Liability of Agents
		SECTION 8.6. Reimbursement and Indemnification
		SECTION 8.7. Rights of Agents
		SECTION 8.8. Independent Lenders and Issuing Bank
		SECTION 8.9. Notice of Transfer
		SECTION 8.10. Successor Agent
		SECTION 8.11. Reports and Financial Statements
		SECTION 8.12. Syndication Agent, Documentation Agent, and Arranger
	ARTICLE IX MISCELLANEOUS
		SECTION 9.1. Notices
		SECTION 9.2. Waivers; Amendments
		SECTION 9.3. Expenses; Indemnity; Damage Waiver
		SECTION 9.4. Successors and Assigns
		SECTION 9.5. Accession
		SECTION 9.6. Survival
		SECTION 9.7. Counterparts; Integration; Effectiveness
		SECTION 9.8. Severability
		SECTION 9.9. Right of Setoff
		SECTION 9.10. Governing Law; Jurisdiction; Consent to Service of Process
		SECTION 9.11. Waiver of Jury Trial
		SECTION 9.12. Headings
		SECTION 9.13. Interest Rate Limitation
		SECTION 9.14. Confidentiality
		SECTION 9.15. Additional Waivers
	EX-4.1 Revolving Credit Agreement
	EX-4.2 Security Agreement of Revolving Credit Agmt
	EX-10.4 2003 Stock Option Plan
	EX-10.12 Employment Agreement - Mark R. Lenz
	EX-10.13 Employment Agreement - Pamela J. Romano
	EX-10.14 Executive Bonus Plan
	EX-14 Code of Ethics
	EX-21 Subsidiaries
	EX-23.1 Consent of KPMG LLP
	EX-31.1 Rule 13a-14(a) Certification of CEO
	EX-31.2 Rule 13a-14(a) Certification of CFO
	EX-32.1 Section 1350 Certification of CEO
	EX-32.2 Section 1350 Certification of CFO
	EX-99.1 Audit Committee Charter
	EX-99.2 Compensation Committee Charter
	EX-99.3 Nominating/Corporate Governance Charter








Table of Contents














TABLE OF CONTENTS




	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	Page
	 	 	 	 	 	 	

	ARTICLE I DEFINITIONS	 	 	1	 
	 	 	
SECTION 1.1.
	 	Defined Terms
	 	 	1	 
	 	 	
SECTION 1.2.
	 	Terms Generally
	 	 	23	 
	 	 	
SECTION 1.3.
	 	Accounting Terms; GAAP
	 	 	24	 
	ARTICLE II AMOUNT AND TERMS OF CREDIT	 	 	24	 
	 	 	
SECTION 2.1.
	 	Commitment of the Lenders
	 	 	24	 
	 	 	
SECTION 2.2.
	 	Reserves; Changes to Reserves
	 	 	25	 
	 	 	
SECTION 2.3.
	 	Making of Loans
	 	 	25	 
	 	 	
SECTION 2.4.
	 	Overadvances
	 	 	26	 
	 	 	
SECTION 2.5.
	 	Swingline Loans
	 	 	26	 
	 	 	
SECTION 2.6.
	 	Letters of Credit
	 	 	27	 
	 	 	
SECTION 2.7.
	 	Settlements Amongst Lenders
	 	 	31	 
	 	 	
SECTION 2.8.
	 	Notes; Repayment of Loans
	 	 	32	 
	 	 	
SECTION 2.9.
	 	Interest on Loans
	 	 	32	 
	 	 	
SECTION 2.10.
	 	Default Interest
	 	 	32	 
	 	 	
SECTION 2.11.
	 	Certain Fees
	 	 	33	 
	 	 	
SECTION 2.12.
	 	Unused Commitment Fee
	 	 	33	 
	 	 	
SECTION 2.13.
	 	Letter of Credit Fees
	 	 	33	 
	 	 	
SECTION 2.14.
	 	Nature of Fees
	 	 	34	 
	 	 	
SECTION 2.15.
	 	Termination or Reduction of Commitments
	 	 	34	 
	 	 	
SECTION 2.16.
	 	Alternate Rate of Interest
	 	 	34	 
	 	 	
SECTION 2.17.
	 	Conversion and Continuation of Loans
	 	 	35	 
	 	 	
SECTION 2.18.
	 	Mandatory Prepayment; Cash Collateral
	 	 	36	 
	 	 	
SECTION 2.19.
	 	Optional Prepayment of Loans; Reimbursement of Lenders
	 	 	36	 
	 	 	
SECTION 2.20.
	 	Maintenance of Loan Account; Statements of Account
	 	 	38	 
	 	 	
SECTION 2.21.
	 	Cash Receipts
	 	 	38	 
	 	 	
SECTION 2.22.
	 	Application of Payments
	 	 	40	 
	 	 	
SECTION 2.23.
	 	Increased Costs
	 	 	41	 
	 	 	
SECTION 2.24.
	 	Change in Legality
	 	 	42	 
	 	 	
SECTION 2.25.
	 	Payments; Sharing of Setoff
	 	 	43	 
	 	 	
SECTION 2.26.
	 	Taxes
	 	 	44	 
	 	 	
SECTION 2.27.
	 	Security Interests in Collateral
	 	 	45	 
	 	 	
SECTION 2.28.
	 	Mitigation Obligations; Replacement of Lenders
	 	 	46	 
	ARTICLE III REPRESENTATIONS AND WARRANTIES	 	 	47	 
	 	 	
SECTION 3.1.
	 	Organization; Powers
	 	 	47	 
	 	 	
SECTION 3.2.
	 	Authorization; Enforceability
	 	 	47	 
	 	 	
SECTION 3.3.
	 	Governmental Approvals; No Conflicts
	 	 	47	 
	 	 	
SECTION 3.4.
	 	Financial Condition
	 	 	47	 
	 	 	
SECTION 3.5.
	 	Properties
	 	 	48	 



 






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TABLE OF CONTENTS
(Continued)





	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	Page
	 	 	 	 	 	 	

	 	 	
SECTION 3.6.
	 	Litigation and Environmental Matters
	 	 	48	 
	 	 	
SECTION 3.7.
	 	Compliance with Laws and Agreements
	 	 	49	 
	 	 	
SECTION 3.8.
	 	Investment and Holding Company Status
	 	 	49	 
	 	 	
SECTION 3.9.
	 	Taxes
	 	 	49	 
	 	 	
SECTION 3.10.
	 	ERISA
	 	 	49	 
	 	 	
SECTION 3.11.
	 	Disclosure
	 	 	50	 
	 	 	
SECTION 3.12.
	 	Subsidiaries
	 	 	50	 
	 	 	
SECTION 3.13.
	 	Insurance
	 	 	51	 
	 	 	
SECTION 3.14.
	 	Accounts; Credit Cards
	 	 	51	 
	 	 	
SECTION 3.15.
	 	Labor Matters
	 	 	51	 
	 	 	
SECTION 3.16.
	 	Security Documents
	 	 	51	 
	 	 	
SECTION 3.17.
	 	Federal Reserve Regulations
	 	 	51	 
	 	 	
SECTION 3.18.
	 	Solvency
	 	 	51	 
	 	 	
SECTION 3.19.
	 	Foreign Assets Control Regulations, Etc.
	 	 	52	 
	ARTICLE IV CONDITIONS	 	 	52	 
	 	 	
SECTION 4.1.
	 	Closing Date
	 	 	52	 
	 	 	
SECTION 4.2.
	 	Conditions Precedent to Each Loan and Each Letter of Credit
	 	 	55	 
	ARTICLE V AFFIRMATIVE COVENANTS	 	 	55	 
	 	 	
SECTION 5.1.
	 	Financial Statements and Other Information
	 	 	55	 
	 	 	
SECTION 5.2.
	 	Notices of Material Events
	 	 	57	 
	 	 	
SECTION 5.3.
	 	Information Regarding Collateral
	 	 	58	 
	 	 	
SECTION 5.4.
	 	Existence; Conduct of Business
	 	 	58	 
	 	 	
SECTION 5.5.
	 	Payment of Obligations
	 	 	58	 
	 	 	
SECTION 5.6.
	 	Maintenance of Properties
	 	 	59	 
	 	 	
SECTION 5.7.
	 	Insurance
	 	 	59	 
	 	 	
SECTION 5.8.
	 	Casualty and Condemnation
	 	 	60	 
	 	 	
SECTION 5.9.
	 	Books and Records; Inspection and Audit Rights; Appraisals
	 	 	60	 
	 	 	
SECTION 5.10.
	 	Compliance with Laws
	 	 	60	 
	 	 	
SECTION 5.11.
	 	Employee Benefit Plans
	 	 	60	 
	 	 	
SECTION 5.12.
	 	Use of Proceeds and Letters of Credit
	 	 	61	 
	 	 	
SECTION 5.13.
	 	New Subsidiaries
	 	 	61	 
	 	 	
SECTION 5.14.
	 	Further Assurances
	 	 	61	 
	ARTICLE VI NEGATIVE COVENANTS	 	 	61	 
	 	 	
SECTION 6.1.
	 	Indebtedness and Other Obligations
	 	 	62	 
	 	 	
SECTION 6.2.
	 	Liens
	 	 	62	 
	 	 	
SECTION 6.3.
	 	Fundamental Changes
	 	 	64	 
	 	 	
SECTION 6.4.
	 	Investments, Loans, Advances, Guarantees and Acquisitions
	 	 	64	 
	 	 	
SECTION 6.5.
	 	Asset Sales
	 	 	65	 



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(Continued)





	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	Page
	 	 	 	 	 	 	

	 	 	
SECTION 6.6.
	 	Restricted Payments; Certain Payments of Indebtedness
	 	 	66	 
	 	 	
SECTION 6.7.
	 	Transactions with Affiliates
	 	 	67	 
	 	 	
SECTION 6.8.
	 	Fixed Charge Coverage Ratio
	 	 	67	 
	 	 	
SECTION 6.9.
	 	Hedging Agreements
	 	 	67	 
	ARTICLE VII EVENTS OF DEFAULT	 	 	68	 
	 	 	
SECTION 7.1.
	 	Events of Default
	 	 	68	 
	 	 	
SECTION 7.2.
	 	When Continuing
	 	 	71	 
	 	 	
SECTION 7.3.
	 	Remedies on Default
	 	 	71	 
	 	 	
SECTION 7.4.
	 	Application of Proceeds
	 	 	71	 
	ARTICLE VIII THE AGENTS	 	 	72	 
	 	 	
SECTION 8.1.
	 	Administration by the Agents
	 	 	72	 
	 	 	
SECTION 8.2.
	 	The Collateral Agent
	 	 	72	 
	 	 	
SECTION 8.3.
	 	Sharing of Excess Payments
	 	 	72	 
	 	 	
SECTION 8.4.
	 	Agreement of Required Lenders
	 	 	73	 
	 	 	
SECTION 8.5.
	 	Liability of Agents
	 	 	73	 
	 	 	
SECTION 8.6.
	 	Reimbursement and Indemnification
	 	 	74	 
	 	 	
SECTION 8.7.
	 	Rights of Agents
	 	 	74	 
	 	 	
SECTION 8.8.
	 	Independent Lenders and Issuing Bank
	 	 	75	 
	 	 	
SECTION 8.9.
	 	Notice of Transfer
	 	 	75	 
	 	 	
SECTION 8.10.
	 	Successor Agent
	 	 	75	 
	 	 	
SECTION 8.11.
	 	Reports and Financial Statements
	 	 	75	 
	 	 	
SECTION 8.12.
	 	Syndication Agent, Documentation Agent, and Arranger
	 	 	75	 
	ARTICLE IX MISCELLANEOUS	 	 	76	 
	 	 	
SECTION 9.1.
	 	Notices
	 	 	76	 
	 	 	
SECTION 9.2.
	 	Waivers; Amendments
	 	 	76	 
	 	 	
SECTION 9.3.
	 	Expenses; Indemnity; Damage Waiver
	 	 	78	 
	 	 	
SECTION 9.4.
	 	Successors and Assigns
	 	 	80	 
	 	 	
SECTION 9.5.
	 	Accession
	 	 	82	 
	 	 	
SECTION 9.6.
	 	Survival
	 	 	82	 
	 	 	
SECTION 9.7.
	 	Counterparts; Integration; Effectiveness
	 	 	83	 
	 	 	
SECTION 9.8.
	 	Severability
	 	 	83	 
	 	 	
SECTION 9.9.
	 	Right of Setoff
	 	 	83	 
	 	 	
SECTION 9.10.
	 	Governing Law; Jurisdiction; Consent to Service of Process
	 	 	83	 
	 	 	
SECTION 9.11.
	 	Waiver of Jury Trial
	 	 	84	 
	 	 	
SECTION 9.12.
	 	Headings
	 	 	84	 
	 	 	
SECTION 9.13.
	 	Interest Rate Limitation
	 	 	84	 
	 	 	
SECTION 9.14.
	 	Confidentiality
	 	 	85	 
	 	 	
SECTION 9.15.
	 	Additional Waivers
	 	 	86	 



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(Continued)




	 	 	 
	EXHIBITS	 	 
	
	 	 
	A.	 	
Assignment and Acceptance
	B-1.	 	
Revolving Note
	B-2.	 	
Swingline Note
	C.	 	
Security Agreement
	D.	 	
Opinion of Troutman Sanders LLP
	E.	 	
Borrowing Base Certificate
	F.	 	
Instrument of Accession
	 	 	 
	SCHEDULES	 	 
	
	 	 
	1.1	 	
Lenders and Commitments
	1.1(a)	 	
Existing Letters of Credit
	2.21(a)(i)	 	
DDAs and Concentration Accounts
	2.21(a)(ii)	 	
Credit Card Arrangements
	3.6	 	
Litigation and Environmental Matters
	3.12	 	
Subsidiaries
	3.13	 	
Insurance
	5.1(i)	 	
Financial Reporting Requirements
	6.1	 	
Indebtedness
	6.2	 	
Liens
	6.4	 	
Investments
	6.7	 	
Transactions with Affiliates




-iv-









Table of Contents



CREDIT AGREEMENT dated as of July 23, 2003 (this “Agreement”) among



	 	 	ZALE DELAWARE, INC., a corporation organized under the laws of the State
of Delaware having a place of business at 901 W. Walnut Hill Lane,
Irving, Texas 75038-1003 (“Zale Delaware”),
	 
	 	 	ZALE CORPORATION, a corporation organized under the laws of the State of
Delaware having a place of business at 901 W. Walnut Hill Lane, Irving,
Texas 75038-1003 (“Zale”),
	 
	 	 	DDCC, INC., a corporation organized under the laws of the State of
Delaware having a place of business at 101 Convention Center Drive, Suite
850 Las Vegas, Nevada 89109 (“DDCC”), and
	 
	 	 	TXDC, L.P., a limited partnership organized under the laws of the State
of Texas, having a place of business at 901 W. Walnut Hill Lane, Irving,
Texas 75038-1003 (“TXDC”), as BORROWERS; and
	 
	 	 	the LENDERS party hereto; and
	 
	 	 	FLEET NATIONAL BANK, as Administrative Agent and Issuing Bank, a national
banking association having a place of business at 40 Broad Street,
Boston, Massachusetts 02109; and
	 
	 	 	FLEET RETAIL FINANCE, INC., as Collateral Agent for the Lenders, a
Delaware corporation, having a place of business at 40 Broad Street,
Boston, Massachusetts 02109; and
	 
	 	 	BANK ONE, NA and CONGRESS FINANCIAL CORPORATION (SOUTHWEST) as
Co-Syndication Agents; and
	 
	 	 	JP MORGAN CHASE BANK and BANK OF AMERICA, N.A. as Co-Documentation Agents



in consideration of the mutual covenants herein contained and benefits to be
derived herefrom.





ARTICLE I

DEFINITIONS






     SECTION 1.1. Defined Terms. As used in this Agreement, the following terms
have the meanings specified below:


     “Account” means any right to payment for goods sold or leased or for
services rendered, whether or not earned by performance, or any right to
payment for credit extended for goods sold or leased or services rendered.


     “ACH” means automated clearing house transfers.


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Table of Contents


     “Activation Notice” has the meaning set forth in Section 2.21(b).


     “Adjusted LIBO Rate” means, with respect to any LIBOR Borrowing for any
Interest Period, an interest rate per annum (rounded upwards, if necessary, to
the next 1/16 of 1%) equal to (a) the LIBO Rate for such Interest Period
multiplied by (b) the Statutory Reserve Rate.


     “Administrative Agent” means Fleet, in its capacity as administrative
agent for the Lenders hereunder.


     “Affiliate” means, with respect to a specified Person, another Person that
directly, or indirectly through one or more intermediaries, Controls or is
Controlled by or is under common Control with the Person specified.


     “Agents” means collectively, the Administrative Agent and the Collateral
Agent.


     “Agreement” has the meaning set forth in the preamble.


     “Alternate Base Rate” means, for any day, the higher of (a) the annual
rate of interest then most recently announced by Fleet at its head office in
Boston, Massachusetts as its “Base Rate” and (b) the Federal Funds Effective
Rate in effect on such day plus 1⁄2 of 1% (0.50%) per annum. If for any
reason the Administrative Agent shall have determined (which determination
shall be conclusive absent manifest error) that it is unable to ascertain the
Federal Funds Effective Rate for any reason, including the inability of the
Administrative Agent to obtain sufficient quotations thereof in accordance with
the terms hereof, the Alternate Base Rate shall be determined without regard to
clause (b) of the first sentence of this definition, until the circumstances
giving rise to such inability no longer exist. Any change in the Alternate
Base Rate due to a change in Fleet’s Base Rate or the Federal Funds Effective
Rate shall be effective on the effective date of such change in Fleet’s Base
Rate or the Federal Funds Effective Rate, respectively.


     “Applicable Lending Office” means with respect to each Lender, its
domestic lending office in the case of a Loan that is a Base Rate Loan and its
LIBOR lending office in the case of a LIBOR Loan.


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     “Applicable Margin” means the rates for Base Rate Loans and LIBOR Loans
set forth below:



	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	Base Rate	 	 	 	 
	Level	 	Performance Criteria	 	Loans	 	LIBOR Loans
	
	 	
	 	
	 	

	I	 	
Excess Availability greater

     than $325,000,000
	 	 	0	%	 	 	1.50	%
	II	 	
Excess Availability greater
than $100,000,000

     but less
than or equal to $325,000,000
	 	 	0	%	 	 	1.75	%
	III	 	
Excess Availability less than
or

     equal to $100,000,000
	 	 	0	%	 	 	2.00	%



Initially, the Applicable Margin shall be at Level II (notwithstanding that the
Excess Availability requirements for another Level may have been satisfied).
The Applicable Margin shall be adjusted quarterly as of the first day of each
fiscal quarter of the Borrowers, commencing February 1, 2004, based upon the
average Excess Availability for the immediately preceding fiscal quarter.


     “Appraised Inventory Liquidation Value” means the product of (a) the Cost
of Eligible Inventory, minus the Shrink Reserve multiplied by (b) that
percentage determined from the then most recent appraisal of the Borrowers’
Inventory undertaken at the request of the Administrative Agent, to reflect the
appraiser’s estimate of the net recovery on the Borrowers’ Inventory in the
event of an in-store net orderly liquidation of that Inventory.


     “Arranger” means FSI.


     “Assignment and Acceptance” means an assignment and acceptance entered
into by a Lender and an assignee (with the consent of each party whose consent
is required by Section 9.4), and accepted by the Administrative Agent, in the
form of Exhibit A or any other form approved by the Administrative Agent.


     “Base Rate Loan” means any Loan to the Borrowers bearing interest at a
rate determined by reference to the Alternate Base Rate in accordance with the
provisions of Article II.


     “Blocked Account Agreements” has the meaning set forth in Section 2.21(b).


     “Board” means the Board of Governors of the Federal Reserve System of the
United States of America.


     “Borrowers” means Zale, Zale Delaware, DDCC, TXDC and any other Subsidiary
of Zale which becomes party to this Agreement by signing a joinder agreement to
this Agreement and the Loan Documents, as applicable, with the other parties
hereto and thereto, in form and substance satisfactory to the Administrative
Agent.


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Table of Contents


     “Borrowing” means (a) the incurrence of Loans of a single Type, on a
single date and having, in the case of LIBOR Loans, a single Interest Period,
or (b) a Swingline Loan.


     “Borrowing Base” means at any time of calculation, an amount equal to


     (a)  the lesser of



		
	 	     (i) the Inventory Advance Rate multiplied by the difference between
the Cost of Eligible Inventory and the Shrink Reserve



     or



		
	 	     (ii) eighty-five percent (85%) of the Appraised Inventory Liquidation Value



     plus


     (b)  eighty-five percent (85%) of the Borrowers’ Eligible Credit Card
Receivables


     minus


     (c)  the Reserves (other than the Shrink Reserve).


     “Borrowing Base Certificate” has the meaning set forth in Section 5.1(f).


     “Breakage Costs” has the meaning set forth in Section 2.19(b).


     “Business Day” means any day that is not a Saturday, Sunday or other day
on which commercial banks in Boston, Massachusetts, New York, New York or
Dallas, Texas are authorized or required by law to remain closed, provided,
that, when used in connection with a LIBOR Loan, the term “Business Day” shall
also exclude any day on which banks are not open for dealings in dollar
deposits in the London interbank market.


     “Capital Expenditures” means, for any period, (a) the additions to
property, plant and equipment and other capital expenditures of the Borrowers
that are (or would be) set forth in a consolidated statement of cash flows of
the Borrowers for such period prepared in accordance with GAAP and (b) Capital
Lease Obligations incurred by the Borrowers during such period.


     “Capital Lease Obligations” means of any Person, the obligations of such
Person to pay rent or other amounts under any lease of (or other arrangement
conveying the right to use) real or personal property, or a combination
thereof, which obligations are required to be classified and accounted for as
capital leases on a balance sheet of such Person under GAAP, and the amount of
such obligations shall be the capitalized amount thereof determined in
accordance with GAAP.


     “Cash Collateral Account” means an interest-bearing account established by
the Borrowers with the Collateral Agent at Fleet under the sole and exclusive
dominion and control of the Collateral Agent designated as the “Zale Cash
Collateral Account”.


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     “Cash Control Event” means that Excess Availability is less than
$50,000,000 for five (5) consecutive days. For purposes of Section 2.21(f),
the occurrence of a Cash Control Event shall be deemed continuing,
notwithstanding that Excess Availability may after the Cash Control Event
exceed $50,000,000, unless and until Excess Availability exceeds $50,000,000
for five (5) consecutive days, in which case a Cash Control Event shall no
longer be deemed to be continuing for purposes of Section 2.21(f).


     “Cash Receipts” has the meaning set forth in Section 2.21(b).


     “CERCLA” means the Comprehensive Environmental Response, Compensation, and
Liability Act, 42 U.S.C. § 9601 et seq.


     “Change in Control” means, at any time, (a) occupation of a majority of
the seats (other than vacant seats) on the board of directors of Zale by
Persons who were neither (i) nominated by the board of directors of Zale or
(ii) appointed by directors so nominated; or (b) the acquisition of fifty
percent (50%) or more of the capital stock of Zale by any Person or group of
Persons, or (c) the failure of Zale or another Borrower to own directly 100%
of the capital stock or other ownership interest of Zale Delaware, DDCC, and
TXDC.


     “Change in Law” means (a) the adoption of any law, rule or regulation
after the date of this Agreement, (b) any change in any law, rule or regulation
or in the interpretation or application thereof by any Governmental Authority
after the date of this Agreement or (c) compliance by any Lender or the Issuing
Bank (or, for purposes of Section 2.23(b), by any lending office of such Lender
or by such Lender’s or the Issuing Bank’s holding company, if any) with any
request, guideline or directive (whether or not having the force of law) of any
Governmental Authority made or issued after the date of this Agreement.


     “Charges” has the meaning set forth in Section 9.13.


     “Closing Date” means the date on which the conditions specified in Section
4.1 are satisfied (or waived by the Agents).


     “Code” means the Internal Revenue Code of 1986, as amended from time to
time.


     “Collateral” means any and all “Collateral” as defined in any applicable
Security Document.


     “Collateral Agent” means FRF, in its capacity as collateral agent under
the Security Documents.


     “Commercial Letter of Credit” means any Letter of Credit issued for the
purpose of providing the primary payment mechanism in connection with the
purchase of any materials, goods or services by a Borrower in the ordinary
course of business of such Borrower.


     “Commitments” means, with respect to each Lender, the commitment of such
Lender hereunder in the amount set forth opposite its name on Schedule 1.1 or
as may subsequently


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be set forth in the Register from time to time, as the same may be reduced
from time to time pursuant to Section 2.15.


     “Commitment Percentage” means, with respect to each Lender, the percentage
of the Commitments of all Lenders hereunder in the amount set forth opposite
its name on Schedule 1.1 or as may subsequently be set forth in the Register
from time to time, as the same may be reduced pursuant to Section 2.15.


     “Commitment Fee” has the meaning set forth in Section 2.12.


     “Concentration Accounts” has the meaning set forth in Section 2.21(a).


     “Consignment A/R Reserve” means an amount equal to six percent (6%) of the
Borrowers’ Eligible Credit Card Receivables.


     “Consolidated EBITDA” means Consolidated Net Income for any period plus
(a) without duplication, the sum of the following expenses of Zale and its
Subsidiaries for such period, in each case to the extent included in
determining said Consolidated Net Income: (i) depreciation expense, (ii)
amortization expense, (iii) interest expense, (iv) total U.S. and foreign
federal, state, provincial and local income tax expense, (v) charges relating
to the valuation of inventory by application of the LIFO (last in/first out)
method of inventory valuation, (vi) non-cash compensation expense arising out
of the grant or exercise of stock options or other equity based compensation,
(vii) expense arising from the write-off of excess goodwill and (viii) all
other non-cash charges less (b) without duplication, the sum of (i) income
earned during such period relating to the valuation of inventory by the
application of the LIFO method of inventory valuation, (ii) interest income for
such period, (iii) non-cash gains for such period and (iv) total U.S. and
foreign federal, state, provincial and local income tax benefits provided
during such period.


     “Consolidated Net Income” means the consolidated net income (or loss) of
Zale and its Subsidiaries, determined in accordance with GAAP, after
eliminating therefrom all extraordinary items of income or loss.


     “Consolidated Tangible Net Worth” means the difference between
Consolidated Total Assets and Consolidated Total Liabilities, and less the sum
of: (a) the total book value of all assets of Zale and its Subsidiaries
properly classified as intangible assets under GAAP, including such items as
goodwill, the purchase price of acquired assets in excess of the fair market
value thereof, trademarks, trade names, service marks, brand names, copyrights,
patents and licenses, and rights with respect to the foregoing; plus (b) all
amounts representing any write-up in the book value of any assets of Zale or
its Subsidiaries resulting from a revaluation thereof subsequent to April 30,
2003.


     “Consolidated Total Assets” means all assets of Zale and its Subsidiaries
determined on a consolidated basis in accordance with GAAP.


     “Consolidated Total Interest Expense” means for any period, the aggregate
amount of interest required to be paid or accrued by Zale and its Subsidiaries
during such period on all Indebtedness of Zale and its Subsidiaries outstanding
during all or any part of such


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period in accordance with GAAP (including payments consisting of interest
in respect of Capital Lease Obligations or Synthetic Leases).


     “Consolidated Total Liabilities” means all liabilities of Zale and its
Subsidiaries determined on a consolidated basis in accordance with GAAP.


     “Control” means the possession, directly or indirectly, of the power to
direct or cause the direction of the management or policies of a Person,
whether through the ability to exercise voting power, by contract or otherwise.
The terms “Controlling” and “Controlled” have meanings correlative thereto.


     “Cost” means the cost of Inventory as reported on the Borrowers’ financial
stock ledger using the retail method of accounting based on practices which are
in effect on the date of this Agreement.


     “Credit Card Notifications” has the meaning set forth in Section
2.21(b)(ii).


     “Credit Extensions” means as of any day, the sum of (a) the principal
balance of all Loans then outstanding, and (b) the then amount of the Letter of
Credit Outstandings.


     “Customer Credit Reserve” means 50% of the aggregate face value at such
time of (a) outstanding gift certificates and gift cards of the Borrowers
entitling the holder thereof to use all or a portion of the certificate to pay
all or a portion of the purchase price for any Inventory, and (b) outstanding
merchandise credits of the Borrowers.


     “DDCC” has the meaning set forth in the preamble.


     “DDAs” means any checking or other demand deposit account maintained by
the Borrowers.


     “Default” means any event or condition that constitutes an Event of
Default or that upon notice, lapse of time or both would, unless cured or
waived, become an Event of Default.


     “Distribution Minimum Excess Availability Amount” means Excess
Availability of $75,000,000 or more.


     “Documentation Agents” means JPMorgan Chase Bank and Bank of America, N.A.


     “Dollars” or “$” means lawful money of the United States of America.


     “Dutch Auction Tender Offer” means the offer by Zale to purchase up to
6,400,000 shares of its common stock, or such lesser number of shares as are to
be tendered, at a price per share not greater than $48 nor less than $42 as
such offer may be amended, modified, supplemented or extended from time to time
(including, but not limited to, any increase in size thereof permitted by Rule
13e-4(f)(1)(ii)) pursuant to the Dutch Auction Tender Offer Documents.


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     “Dutch Auction Tender Offer Documents” means, collectively, the Tender
Offer Statement on Schedule TO, dated July 1, 2003, and the exhibits thereto,
as the same may be amended, modified, supplemented or extended from time to
time in a manner acceptable to the Administrative Agent.


     “Eligible Credit Card Receivables” means (a) Accounts of the Borrowers due
in four (4) Business Days or less on a non-recourse basis from major credit
card processors and (b) Eligible Private Label Credit Card Receivables, in each
case to the extent that it constitutes Collateral.


     “Eligible Inventory” means, as of the date of determination thereof, items
of Inventory of the Borrowers that are finished goods (including, but not
limited to, unmounted gemstones and shanks or mounts for which no stone has
been mounted to the extent such goods are listed in the stock ledger or
inventory systems), merchantable and readily saleable to the public in the
ordinary course deemed by the Administrative Agent in accordance with its
customary credit and collateral considerations and policies to be eligible for
inclusion in the calculation of the Borrowing Base. Without limiting the
foregoing, unless otherwise approved in writing by the Administrative Agent,
none of the following shall be deemed to be Eligible Inventory:



		
	 	     (a) Inventory that is not owned solely by the Borrowers, or is
leased or on consignment or such Borrowers do not have good and valid
title thereto;
	 
	 	     (b) Inventory that is not located at a warehouse facility or store
that is owned or leased by a Borrower unless it is in-transit between
warehouse facilities and stores leased or owned by a Borrower;
	 
	 	     (c) Inventory that represents (i) goods damaged, defective or
otherwise unmerchantable, except in the case of each of the foregoing to
the extent that the Administrative Agent has determined a recoverable
value and (ii) goods that do not conform in all material respects to the
representations and warranties contained in this Agreement or any of the
Security Documents;
	 
	 	     (d) Inventory that is not located in the United States of America
(excluding, except as otherwise specifically provided, territories and
possessions thereof), Puerto Rico or the Dominion of Canada;
	 
	 	     (e) Inventory that is not subject to a perfected first-priority
security interest in favor of the Collateral Agent for the benefit of the
Secured Parties;
	 
	 	     (f) Inventory which consists of samples, labels, bags, packaging,
and other similar non-merchandise categories;
	 
	 	     (g) Inventory as to which insurance in compliance with the
provisions of Section 5.7 hereof is not in effect;
	 
	 	     (h) Inventory, other than layaway inventory, which has been sold but
not yet delivered or as to which any Borrower has accepted a deposit;



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	 	     (i) Inventory acquired in permitted acquisitions in compliance with
the provisions of Section 6.4, unless and until the Administrative Agent
shall have received (i) the results of appraisals of the Inventory
acquired in such acquisition and (ii) such other due diligence related to
such acquisition by the Administrative Agent that the Administrative
Agent may require, all of the results of the foregoing to be reasonably
satisfactory to the Administrative Agent;
	 
	 	     (j) Inventory of a Subsidiary that becomes a Borrower hereunder in
compliance with the provisions of Section 2.1(c), unless and until the
Administrative Agent shall have received (i) the results of appraisals of
the Inventory of such Subsidiary and (ii) such other due diligence
related to such Subsidiary by the Administrative Agent that the
Administrative Agent may require, all of the result of the foregoing to
be reasonably satisfactory to the Administrative Agent.



     “Eligible Private Label Credit Card Receivables” means Accounts of the
Borrowers due in four (4) Business Days or less on (a) private label credit
cards issued by Citibank USA, N.A. on substantially the terms as in effect on
the Closing Date or as otherwise modified in a manner reasonably acceptable to
the Administrative Agent and (b) other private label credit cards issued by
other Persons reasonably acceptable to the Administrative Agent.


     “Environmental Laws” means all laws, rules, regulations, codes,
ordinances, orders, decrees, judgments, injunctions, notices or binding
agreements issued, promulgated or entered into by or with any Governmental
Authority, relating in any way to the environment, preservation or reclamation
of natural resources, handling, treatment, storage, disposal, Release or
threatened Release of any Hazardous Material or to health and safety matters.


     “Environmental Liability” means any liability, contingent or otherwise
(including any liability for damages, natural resource damage, costs of
environmental remediation, administrative oversight costs, fines, penalties or
indemnities), of any Borrower directly or indirectly resulting from or based
upon (a) violation of any Environmental Law, (b) the generation, use, handling,
transportation, storage, treatment or disposal of any Hazardous Materials, (c)
exposure to any Hazardous Materials, (d) the release or threatened release of
any Hazardous Materials into the environment or (e) any contract, agreement or
other consensual arrangement pursuant to which liability is assumed or imposed
with respect to any of the foregoing.


     “ERISA” means the Employee Retirement Income Security Act of 1974, as
amended from time to time.


     “ERISA Affiliate” means any trade or business (whether or not
incorporated) that, together with the Borrowers, is treated as a single
employer under Section 414(b) or (c) of the Code or, solely for purposes of
Section 302 of ERISA and Section 412 of the Code, is treated as a single
employer under Section 414 of the Code.


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     “ERISA Event” means (a) any “reportable event”, as defined in Section 4043
of ERISA or the regulations issued thereunder with respect to a Plan (other
than an event for which the 30-day notice period is waived); (b) the existence
with respect to any Plan of an “accumulated funding deficiency” (as defined in
Section 412 of the Code or Section 302 of ERISA), whether or not waived; (c)
the filing pursuant to Section 412(d) of the Code or Section 303(d) of ERISA of
an application for a waiver of the minimum funding standard with respect to any
Plan; (d) the incurrence by the Borrowers or any of its ERISA Affiliates of any
liability under Title IV of ERISA with respect to the termination of any Plan;
(e) the receipt by the Borrowers or any ERISA Affiliate from the PBGC or a plan
administrator of any notice relating to an intention to terminate any Plan or
Plans or to appoint a trustee to administer any Plan; (f) the incurrence by the
Borrowers or any of its ERISA Affiliates of any liability with respect to the
withdrawal or partial withdrawal from any Plan or Multiemployer Plan; or (g)
the receipt by the Borrowers or any ERISA Affiliate of any notice, or the
receipt by any Multiemployer Plan from the Borrowers or any ERISA Affiliate of
any notice, concerning the imposition of Withdrawal Liability or a
determination that a Multiemployer Plan is, or is expected to be, insolvent or
in reorganization, within the meaning of Title IV of ERISA.


     “Event of Default” has the meaning set forth in Section 7.1.


     “Excess Availability” means, as of any date of determination, the excess,
if any, of (a) the lesser of the Borrowing Base or the Total Commitment, minus
(b) the outstanding Credit Extensions.


     “Excluded Subsidiaries” means Zale Puerto Rico, Inc. and Zale Canada Co.


     “Excluded Taxes” means, with respect to the Agents, any Lender, the
Issuing Bank or any other recipient of any payment to be made by or on account
of any obligation of the Borrowers hereunder, (a) income or franchise taxes
imposed on (or measured by) its gross or net income by the United States of
America, or by the jurisdiction under the laws of which such recipient is
organized or in which its principal office is located or, in the case of any
Lender, in which its Applicable Lending Office is located, (b) any branch
profits taxes imposed by the United States of America or any similar tax
imposed by any other jurisdiction in which any Borrower is located and (c) in
the case of a Foreign Lender (other than an assignee pursuant to a request by a
Borrower under Section 2.28(b)), any withholding tax that is imposed on amounts
payable to such Foreign Lender at the time such Foreign Lender becomes a party
to this Agreement (or designates a new lending office) or is attributable to
such Foreign Lender’s failure to comply with Section 2.26(e), except to the
extent that such Foreign Lender (or its assignor, if any) was entitled, at the
time of designation of a new lending office (or assignment), to receive
additional amounts from the Borrowers with respect to such withholding tax
pursuant to Section 2.26(a).


     “Existing Lenders” means Fleet National Bank, as Agent, and the other
lending institutions party to that certain Amended and Restated Revolving
Credit Agreement, dated as of March 30, 2000.


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     “Existing Letters of Credit” means those letters of credit issued and
outstanding under the Prior Loan Agreement which are identified on Schedule
1.1(a).


     “Federal Funds Effective Rate” means, for any day, the weighted average
(rounded upwards, if necessary, to the next 1/100 of 1%) of the rates on
overnight Federal funds transactions with members of the Federal Reserve System
arranged by Federal funds brokers, as published on the next succeeding Business
Day by the Federal Reserve Bank of New York, or, if such rate is not so
published for any day that is a Business Day, the average (rounded upwards, if
necessary, to the next 1/100 of 1%) of the quotations for such day for such
transactions received by Fleet from three Federal funds brokers of recognized
standing selected by it.


     “Fee Letter” means the letter entitled “Fee Letter” among the Borrowers,
the Administrative Agent and the Arranger dated as of July 1, 2003, as such
letter may from time to time be amended.


     “Financial Officer” means, with respect to any Borrower, the chief
financial officer, controller or treasurer of such Borrower.


     “Fixed Charge Coverage Ratio” means for any Reference Period the ratio of
(a)(i) Consolidated EBITDA for such period less (ii) the sum of (A) Capital
Expenditures for such period and (B) federal income tax paid in cash during
such period to (b) the sum of (i) Consolidated Total Interest Expense for such
period, (ii) the sum of all scheduled payments of principal on Indebtedness of
Zale and its Subsidiaries (including without limitation, the principal
component of amounts paid on account of Capitalized Lease Obligations) made or
required to be made during such period, and (iii) Restricted Payments
consisting of dividends made during such period.


     “Fleet” means Fleet National Bank, a national banking association.


     “Fleet Concentration Account” has the meaning set forth in Section
2.21(b).


     “Foreign Lender” means any Lender that is organized under the laws of a
jurisdiction other than the United States of America or any State thereof or
the District of Columbia.


     “FRF” means Fleet Retail Finance, Inc., a Delaware corporation.


     “FSI” means Fleet Securities, Inc., a Massachusetts corporation.


     “GAAP” means generally accepted accounting principles in the United States
of America.


     “Governmental Authority” means the government of the United States of
America, any other nation or any political subdivision thereof, whether state
or local, and any agency, authority, instrumentality, regulatory body, court,
central bank or other entity exercising executive, legislative, judicial,
taxing, regulatory or administrative powers or functions of or pertaining to
government.


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     “Guarantee” means, of or by any Person (the “guarantor”), any obligation,
contingent or otherwise, of the guarantor guaranteeing or having the economic
effect of guaranteeing any Indebtedness of any other Person (the “primary
obligor”) in any manner, whether directly or indirectly, and including any
obligation of the guarantor, direct or indirect, (a) to purchase or pay (or
advance or supply funds for the purchase or payment of) such Indebtedness or to
purchase (or to advance or supply funds for the purchase of) any security for
the payment thereof, (b) to purchase or lease property, securities or services
for the purpose of assuring the owner of such Indebtedness or of the payment
thereof, (c) to maintain working capital, equity capital or any other financial
statement condition or liquidity of the primary obligor so as to enable the
primary obligor to pay such Indebtedness or (d) as an account party in respect
of any letter of credit or letter of guaranty issued to support such
Indebtedness, provided, that the term “Guarantee” shall not include
endorsements for collection or deposit in the ordinary course of business.


     “Guaranteed Pension Plan” means any employee pension benefit plan within
the meaning of §3(2) of ERISA maintained or contributed to by any of the
Borrowers or any ERISA Affiliate the benefits of which are guaranteed on
termination in full or in part by the PBGC pursuant to Title IV of ERISA.


     “Hazardous Materials” means all explosive or radioactive substances or
wastes and all hazardous or toxic substances, wastes or other pollutants,
including petroleum or petroleum distillates, asbestos or asbestos containing
materials, polychlorinated biphenyls, radon gas, infectious or medical wastes
and all other substances or wastes of any nature regulated pursuant to any
Environmental Law, including any material listed as a hazardous substance under
Section 101(14) of CERCLA.


     “Hedging Agreement” means any interest rate protection agreement, foreign
currency exchange agreement, commodity price protection agreement, or other
interest or currency exchange rate or commodity price hedging arrangement.


     “Indebtedness” means, of any Person, without duplication, (a) all
obligations of such Person for borrowed money, (b) all obligations of such
Person evidenced by bonds, debentures, notes or similar instruments, (c) all
obligations of such Person upon which interest charges are customarily paid,
(d) all obligations of such Person under conditional sale or other title
retention agreements relating to property acquired by such Person, (e) all
obligations of such Person in respect of the deferred purchase price of
property or services (excluding current accounts payable incurred in the
ordinary course of business), (f) all Indebtedness of others secured by (or for
which the holder of such Indebtedness has an existing right, contingent or
otherwise, to be secured by) any Lien on property owned or acquired by such
Person, whether or not the Indebtedness secured thereby has been assumed, (g)
all Guarantees by such Person of Indebtedness of others (including, without
limitation, under any Synthetic Leases), (h) all Capital Lease Obligations of
such Person, (i) all obligations, contingent or otherwise, of such Person as an
account party in respect of letters of credit and letters of guaranty and (j)
all obligations, contingent or otherwise, of such Person in respect of bankers’
acceptances. The Indebtedness of any Person shall include the Indebtedness of
any other entity (including any partnership in which such Person is a general
partner) to the extent such Person is liable therefor as a result of such
Person’s


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ownership interest in or other relationship with such entity, except to
the extent the terms of such Indebtedness provide that such Person is not
liable therefor.


     “Indemnified Taxes” means Taxes other than Excluded Taxes.


     “Indemnitee” has the meaning set forth in Section 9.3(b).


     “Interest Payment Date” means (a) with respect to any Base Rate Loan
(including a Swingline Loan), the last day of each calendar quarter, and (b)
with respect to any LIBOR Loan, the last day of each Interest Period and, in
the case of any Interest Period longer than three months, on each successive
date three months after the first day of such Interest Period.


     “Interest Period” means, with respect to any LIBOR Borrowing, the period
commencing on the date of such Borrowing and ending on the numerically
corresponding day in the calendar month that is one, two, three or six months
thereafter, as any Borrower may elect, provided, that (a) if any Interest
Period would end on a day other than a Business Day, such Interest Period shall
be extended to the next succeeding Business Day unless such next succeeding
Business Day would fall in the next calendar month, in which case such Interest
Period shall end on the next preceding Business Day, and (b) any Interest
Period that commences on the last Business Day of a calendar month (or on a day
for which there is no numerically corresponding day in the last calendar month
of such Interest Period) shall end on the last Business Day of the last
calendar month of such Interest Period, and (c) any Interest Period which would
otherwise end after the Maturity Date shall end on the Maturity Date. For
purposes hereof, the date of a Borrowing initially shall be the date on which
such Borrowing is made and thereafter shall be the effective date of the most
recent conversion or continuation of such Borrowing.


     “Inventory” has the meaning set forth in the Security Agreement.


     “Inventory Advance Rate” means (i) 65.5% for the months of January through
September and (ii) 69% for the months of October through December.


     “Issuing Bank” means Fleet, in its capacity as the issuer of Letters of
Credit hereunder, and any successor to Fleet in such capacity (which may only
be a Lender selected by the Administrative Agent in its reasonable discretion).
The Issuing Bank may, in its reasonable discretion, arrange for one or more
Letters of Credit to be issued by Affiliates of the Issuing Bank, in which case
the term “Issuing Bank” shall include any such Affiliate with respect to
Letters of Credit issued by such Affiliate. Each Issuing Bank shall act
commercially reasonably and otherwise in accordance with the standard of care
set forth in Section 2.6(i).


     “Landlord Lien Reserve” means one month’s base rent for each of the
Borrowers’ facilities located in the States of Washington, Pennsylvania and
Virginia at which inventory is stored, calculated quarterly.


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     “Layaway Reserve” means 100% of the aggregate amount deposited by
customers with the Borrowers including, without limitation, amounts deposited
on account of layaway or similar programs.


     “L/C Disbursement” means a payment made by the Issuing Bank pursuant to a
Letter of Credit.


     “Lenders” means the Persons identified on Schedule 1.1 and each assignee
that becomes a party to this Agreement as set forth in Section 9.4.


     “Letter of Credit” means a letter of credit that is (i) issued pursuant to
this Agreement for the account of any Borrower, (ii) a Standby Letter of Credit
or Commercial Letter of Credit, (iii) issued in connection with the purchase of
Inventory by any Borrower or for any other purpose that is reasonably
acceptable to the Administrative Agent, and (iv) in form and substance
reasonably satisfactory to the Issuing Bank.


     “Letter of Credit Fees” means the fees payable in respect of Letters of
Credit pursuant to Section 2.13.


     “Letter of Credit Outstandings” means, at any time, the sum of (a) with
respect to Letters of Credit outstanding at such time, the aggregate maximum
amount that then is or at any time thereafter may become available for drawing
or payment thereunder plus (b) all amounts theretofore drawn or paid under
Letters of Credit for which the Issuing Bank has not then been reimbursed.


     “LIBOR Borrowing” means a Borrowing comprised of LIBOR Loans.


     “LIBOR Loan” means any Loan bearing interest at a rate determined by
reference to the Adjusted LIBO Rate in accordance with the provisions of
Article II.


     “LIBOR Rate” means, with respect to any LIBOR Borrowing for any Interest
Period, the rate of interest (rounded upwards, if necessary to the next 1/16 of
1%) determined by the Administrative Agent to be the prevailing rate per annum
at which deposits in dollars are offered by banks in the London interbank
market based on information presented on Reuters Screen FRBD or Telerate at
11:00 a.m. (London time) not less than two Business Days before the first day
of the Interest Period for the subject LIBOR Borrowing, for a deposit
approximately in the amount of the subject Borrowing and for a period of time
approximately equal to such Interest Period.


     “Lien” means, with respect to any asset, (a) any mortgage, deed of trust,
lien, pledge, hypothecation, encumbrance, charge or security interest in, on or
of such asset, (b) the interest of a vendor or a lessor under any conditional
sale agreement, capital lease or title retention agreement (or any financing
lease having substantially the same economic effect as any of the foregoing)
relating to such asset and (c) in the case of securities, any purchase option,
call or similar right of a third party with respect to such securities.


     “Line Fee” means a fee equal to 0.375% per annum (on the basis of actual
days elapsed in a year of 360 days) of the average daily balance of the
difference between


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(x)  such Lender’s Commitment and (y) the sum of (i) such Lender’s
Commitment Percentage of the principal amount of Loans then outstanding, and
(ii) such Lender’s Commitment Percentage of the then Letter of Credit
Outstandings for each day commencing on the date hereof and ending on but
excluding the Termination Date.


     “Loan Account” has the meaning set forth in Section 2.20(a).


     “Loan Agreement Obligations” means (a) the payment by the Borrowers of (i)
the principal of, and interest on the Loans, when and as due, whether at
maturity, by acceleration, upon one or more dates set for prepayment or
otherwise, (ii) each payment required to be made by the Borrowers under this
Agreement in respect of any Letter of Credit, when and as due, including
payments in respect of reimbursement of disbursements, interest thereon and
obligations to provide cash collateral and (iii) all other monetary
obligations, including fees, costs, expenses and indemnities, whether primary,
secondary, direct, contingent, fixed or otherwise (excluding obligations under
clauses (b) and (c) of the definition of “Obligations”), of the Borrowers to
the Secured Parties under this Agreement and the other Loan Documents and (b)
the payment and performance of all the covenants, agreements, obligations and
liabilities of each Borrower under or pursuant to this Agreement, and the other
Loan Documents,


     “Loan Documents” means this Agreement, the Notes, the Letters of Credit,
the Fee Letter, all Borrowing Base Certificates, the Blocked Account
Agreements, the Credit Card Notifications, the Security Documents, and any
other instrument or agreement executed and delivered in connection herewith or
therewith.


     “Loans” means all loans (including, without limitation, Revolving Loans
and Swingline Loans) at any time made to the Borrowers or for account of the
Borrowers pursuant to this Agreement.


     “Margin Stock” has the meaning set forth in Regulation U.


     “Material Adverse Effect” means a material adverse effect on (a) the
business, operations, property, assets, or financial condition of the Borrowers
and their Subsidiaries taken as a whole, or (b) the validity or enforceability
of this Agreement or any of the other Loan Documents or any of the material
rights or remedies of the Administrative Agent, the Collateral Agent or the
Lenders hereunder or thereunder; provided, however, that no Material Adverse
Effect shall be deemed to exist with respect to the Borrowers solely as a
result of (i) the loss by any Borrower of its investment in an Unrestricted
Subsidiary; (ii) the loss of that portion of Consolidated EBITDA generated by
any Unrestricted Subsidiary; or (iii) any liability of an Unrestricted
Subsidiary that is not, on an unconsolidated basis, a liability of a Borrower.


     “Material Indebtedness” means Indebtedness (other than the Loans and
Letters of Credit) of any one or more of the Borrowers in an aggregate
principal amount exceeding $25,000,000.


     “Maturity Date” means August 11, 2008.


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     “Maximum Rate” has the meaning set forth in Section 9.13.


     “Minority Lenders” has the meaning set forth in Section 9.2(d).


     “Moody’s” means Moody’s Investors Service, Inc.


     “Multiemployer Plan” means a multiemployer plan as defined in Section
4001(a)(3) of ERISA.


     “Noncompliance Notice” has the meaning set forth in Section 2.5(b).


     “Note Indenture” means that certain Indenture dated as of September 20,
1997 for $100,000,000 of 8.50% Senior Notes due 2007 among Zale, as Issuer,
Zale Delaware, as Guarantor and Bank One, NA.


     “Notes” means (i) the promissory notes of the Borrowers substantially in
the form of Exhibit B-1, each payable to the order of a Lender, evidencing the
Revolving Loans, and (ii) the promissory note of the Borrowers substantially in
the form of Exhibit B-2, payable to the Swingline Lender, evidencing the
Swingline Loans.


     “Obligations” means (a) Loan Agreement Obligations, (b) the payment and
performance of any transaction with FRF as Collateral Agent, or Fleet as
Administrative Agent, or any of their respective Affiliates, which arises out
of any cash management, depository, investment, letter of credit, interest rate
protection or other Hedging Agreement, or other banking or financial services
provided by any such Person, in each case, in connection with this Agreement or
the other Loan Documents, as each may be amended from time to time and (c) the
payment and performance of any transaction with any Lender, or any of their
respective Affiliates, which arises out of any interest rate protection or
other Hedging Agreement.


     “Other Taxes” means any and all current or future stamp or documentary
taxes or any other excise or property taxes, charges or similar levies arising
from any payment made under any Loan Document or from the execution, delivery
or enforcement of, or otherwise with respect to, any Loan Document.


     “Overadvance” means, at any time of calculation, a circumstance in which
the Credit Extensions exceed the lesser of (a) the Total Commitment or (b) the
Borrowing Base.


     “PBGC” means the Pension Benefit Guaranty Corporation referred to and
defined in ERISA and any successor entity performing similar functions.


     “Permitted Asset Sales” means sales and dispositions of assets that are
deemed appropriate by the Borrowers for fair market value not to exceed
$100,000,000 in any fiscal year.


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     “Permitted Encumbrances” means:



		
	 	     (a) Liens imposed by law for taxes that are not yet due or are being
contested in compliance with Section 5.5;
	 
	 	     (b) carriers’, warehousemen’s, landlord’s, mechanics’,
materialmen’s, repairmen’s and other like Liens, arising in the ordinary
course of business and securing obligations that are not overdue by more
than ninety (90) days or are being contested in compliance with Section
5.5;
	 
	 	     (c) pledges and deposits made in the ordinary course of business in
compliance with workers’ compensation, unemployment insurance, old-age
pension and other social security laws or regulations;
	 
	 	     (d) deposits to secure the performance of bids, trade contracts,
leases, contracts (other than for the repayment of borrowed money),
statutory obligations, surety and appeal bonds, performance bonds and
other obligations of a like nature, in each case in the ordinary course
of business;
	 
	 	     (e) judgment liens in respect of judgments that do not constitute an
Event of Default under Section 7.1(k); and
	 
	 	     (f) easements, zoning restrictions, rights-of-way and similar
encumbrances (and with respect to leasehold interests, mortgages,
obligations, liens and other encumbrances incurred, created, assumed or
permitted to exist and arising by, through or under or asserted by a
landlord or owner of leased property, with or without the consent of the
lessee) on real property imposed by law or arising in the ordinary course
of business that do not secure any monetary obligations and do not
materially detract from the value of the affected property or interfere
with the ordinary conduct of business of the Borrowers.



provided, that except as provided in any one or more of clauses (a) through (f)
above, the term “Permitted Encumbrances” shall not include any Lien securing
Indebtedness.


     “Permitted Investments” means each of the following:



		
	 	     (a) marketable direct or guaranteed obligations of the United States
of America that mature within two (2) years from the date of purchase by
such Borrower or such Subsidiary;
	 
	 	     (b) demand deposits, certificates of deposit, Eurodollar deposits,
time deposits and bankers acceptances issued by banking institutions
provided, that such banks have a long-term credit rating of at least “AA”
(or its then equivalent) if rated by S&P or any successor service thereto
having a substantially similar rating system or “Aa” (or its then
equivalent) if rated by Moody’s or any successor service thereto having a
substantially similar rating system, or an equivalent rating from either
Dominion Bond Rating Services Limited or CBRS, Inc.; provided, however,
the Borrowers’ investment in any one bank shall not exceed 5% of the
primary capital of such bank;



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	 	     (c) securities commonly known as “commercial paper” issued by the
Administrative Agent, or a corporation or any other financial institution
that at the time of purchase have been rated and the ratings for which
are not less than “P1” (or its then equivalent) if rated by Moody’s or
any successor service thereto having a substantially similar rating
system, or not less than “A1” (or its then equivalent) if rated by S&P or
any successor service thereto having a substantially similar rating
system, or an equivalent rating from either Dominion Bond Rating Services
Limited or CBRS, Inc.; provided, however, the Borrowers may invest up to
20% of their Permitted Investments measured at the time of investment
made pursuant to paragraphs (a)-(i) hereof in commercial paper with a
combined rating of “A-2/P-2” (or its then equivalent);
	 
	 	     (d) demand notes issued by a corporation organized and existing
under the laws of the United States of America or any state thereof that
at that time of purchase have a rating of at least “AA” (or its then
equivalent) if rated by S&P or any successor service thereto having a
substantially similar rating system, or its equivalent by at least two
(2) nationally recognized rating services, or an equivalent rating from
either Dominion Bond Rating Services Limited or CBRS, Inc., and have a
maturity date that does not exceed one (1) year beyond the date of
purchase; provided, however, such investments will be limited to the
greater of $20 million per obligor or 20% of investments made pursuant to
paragraphs (a)-(i) hereof measured at the time of investment;
	 
	 	     (e) repurchase agreements, purchased through the Administrative
Agent, or a corporation organized and existing under the laws of the
United States of America or any state thereof that at the time of
purchase have been rated and the ratings for which are not less than “P1”
(or its then equivalent) if rated by Moody’s or any successor service
thereto having a substantially similar rating system, or not less than
“A1” (or its then equivalent) if rated by S&P or any successor service
thereto having a substantially similar rating system, or an equivalent
rating from either Dominion Bond Rating Services Limited or CBRS, Inc.,
which repurchase agreements are collateralized by securities of the
United States of America or any agency thereof in an amount equal to at
least 102% of the amount of such investment;
	 
	 	     (f) shares of any so-called “money market fund” advised, serviced or
sold by any of the Lenders or by any other financial institution
provided, that such fund is registered under the Investment Company Act
of 1940, has net assets of at least $250,000,000, has an investment
portfolio with an average maturity of 365 days or less and is not
considered to be a “high-yield” fund;
	 
	 	     (g) municipal fixed and variable rate short-term securities that
mature within one (1) year from the date of purchase by any Borrower or
such Subsidiary that at the time of purchase have been rated and the
ratings for which are not less than “MIG-1/VMIG-1” (or its then
equivalent) if rated by Moody’s or any successor service thereto having a
substantially similar rating system or not less than
“SP-1+/A-1”
 (or its
then equivalent) if rated by S&P or any successor service thereto having
a substantially similar rating system, or an equivalent rating from
either Dominion Bond Rating Services Limited or CBRS, Inc.;



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	 	     (h) municipal fixed and variable rate medium-term securities that
mature between one (1) and two (2) years from the date of purchase by
such Borrower or such Subsidiary that at the time of purchase have been
rated and the ratings for which are not less than “Aa” (or its then
equivalent) if rated by Moody’s or any successor service thereto having a
substantially similar rating system or not less than “AA” (or its then
equivalent) if rated by S&P or any successor service thereto having a
substantially similar rating system, or an equivalent rating from either
Dominion Bond Rating Services Limited or CBRS, Inc.;
	 
	 	     (i) other investments not to exceed ten percent (10%) of
Consolidated Tangible Net Worth at the time any such investment is made;
and
	 
	 	     (j) marketable direct obligations of the State of Texas or its
agencies and instrumentalities that at the time of purchase have been
rated and the ratings for which are not less than “P” (or its then
equivalent) if rated by Moody’s or any successor service thereto having a
substantially similar rating system or not less than “A” (or its then
equivalent) if rated by S&P or any successor service thereto having a
substantially similar rating system.



     “Permitted Overadvance” means an Overadvance determined by the
Administrative Agent, in its reasonable discretion, (a) which is made to
maintain, protect or preserve the Collateral and/or the Lenders’ rights under
the Loan Documents, or (b) which is otherwise in the Lenders’ interests;
provided, that Permitted Overadvances shall not (i) exceed five percent (5%) of
the lesser of the then Borrowing Base or the then Total Commitment, in the
aggregate outstanding at any time or (ii) remain outstanding for more than
thirty consecutive Business Days, unless in case of clause (ii), the Required
Supermajority Lenders otherwise agree; and provided, further, that the
foregoing shall not (1) modify or abrogate any of the provisions of Section
2.6(g) regarding the Lenders’ obligations with respect to L/C Disbursements, or
(2) result in any claim or liability against the Administrative Agent
(regardless of the amount of any Overadvance) for “inadvertent Overadvances”
(i.e. where an Overadvance results from changed circumstances beyond the
control of the Administrative Agent (such as a reduction in the collateral
value)), and further provided, that in no event shall the Administrative Agent
make an Overadvance, if after giving effect thereto, the principal amount of
the Credit Extensions would exceed the Total Commitment.


     “Person” means any natural person, corporation, limited liability company,
trust, joint venture, association, company, partnership, Governmental Authority
or other entity.


     “Plan” means any employee pension benefit plan (other than a Multiemployer
Plan) subject to the provisions of Title IV of ERISA or Section 412 of the Code
or Section 302 of ERISA, and in respect of which the Borrowers or any ERISA
Affiliate is (or, if such plan were terminated, would under Section 4069 of
ERISA be deemed to be) an “employer” as defined in Section 3(5) of ERISA.


     “Prior Lenders” means Fleet National Bank, as agent, and the other lenders
party to the Prior Loan Agreement.


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     “Prior Loan Agreement” means that certain Amended and Restated Revolving
Credit Agreement, dated as of March 30, 2000, as amended, among the Zale, Zale
Delaware, TXDC, DDCC and Zale Canada Co., as borrowers, and the Prior Lenders.


     “Rabbi Trust” means any trust established for the satisfaction of
obligations of any of Zale or its Subsidiaries for deferred compensation, the
terms of which trust will not, at any time, result in such obligations being
treated as funded under applicable Department of Labor and Internal Revenue
Service guidelines as of the date hereof.


     “Real Estate” means all land, together with the buildings, structures,
fixtures, parking areas, and other improvements thereon, now or hereafter owned
by any Borrower, including all easements, rights-of-way, and similar rights
relating thereto and all leases, tenancies, and occupancies thereof.


     “Reference Period” means as of any date of determination, the period of
twelve (12) consecutive fiscal months of Zale and its Subsidiaries ending on
such date, or if such date is not a fiscal month end date, the period of twelve
(12) consecutive fiscal months most recently ended (in each case treated as a
single accounting period).


     “Record” means the grid attached to a Note, or the continuation of such
grid, or any other similar record, including computer records, maintained by a
Lender with respect to any Loan, whether referred to in such Note or otherwise.


     “Register” has the meaning set forth in Section 9.4(c).


     “Regulation U” means Regulation U of the Board as from time to time in
effect and all official rulings and interpretations thereunder or thereof.


     “Regulation X” means Regulation X of the Board as from time to time in
effect and all official rulings and interpretations thereunder or thereof.


     “Related Parties” means, with respect to any specified Person, such
Person’s Affiliates and the respective directors, officers, employees, agents
and advisors of such Person and such Person’s Affiliates.


     “Release” has the meaning set forth in Section 101(22) of CERCLA.


     “Required Lenders” means, at any time, Lenders having Commitments equal to
51% of the Total Commitments, or if the Commitments have been terminated,
Lenders whose percentage of the Credit Extensions (after settlement and
repayment of all Swingline Loans by the Lenders) aggregate not less than 51% of
all such Credit Extensions.


     “Required Supermajority Lenders” means, at any time, Lenders having
Commitments equal to 75% of the Total Commitments, or if the Commitments have
been terminated, Lenders whose percentage of the Credit Extensions (after
settlement and repayment of all Swingline Loans by the Lenders) aggregate not
less than 75% of all such Credit Extensions.


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     “Reserves” means the Shrink Reserve, Layaway Reserve, Customer Credit
Reserve, the Landlord Lien Reserve, Consignment A/R Reserve and such other
reserves established from time to time in accordance with Section 2.2(b).


     “Restricted Payment” means any dividend or other distribution (whether in
cash, securities or other property) with respect to any shares of any class of
capital stock of any Borrower other than dividends payable solely in shares of
common stock of such Borrower, or any payment (whether in cash, securities or
other property), including any sinking fund or similar deposit, on account of
the purchase, redemption, retirement, acquisition, cancellation or termination
of any such shares of capital stock of any Borrower or any option, warrant or
other right to acquire any such shares of capital stock of any Borrower, other
than any such payment made solely in share of common stock of such Borrower.


     “Revolving Loans” means all Loans at any time made by a Lender pursuant to
Section 2.1.


     “S&P” means Standard & Poor’s Rating Services, a division of the
McGraw-Hill Companies, Inc.


     “Secured Parties” has the meaning set forth in the Security Agreement.


     “Security Agreement” means the Security Agreement, in the form of Exhibit
C attached hereto and incorporated herein, among the Borrowers and the
Collateral Agent for the benefit of the Secured Parties, as amended and in
effect from time to time.


     “Security Documents” means the Security Agreement and each other security
agreement or other instrument or document executed and delivered pursuant to
Section 5.14 to secure any of the Obligations.


     “Settlement Date” has the meaning set forth in Section 2.7(b).


     “Shrink” means Inventory which has been lost, misplaced, stolen, or is
otherwise unaccounted for.


     “Shrink Reserve” means from time to time the Borrowers’ then current
general ledger reserve for Shrink provided that the determination of such
current general ledger reserve is consistent with the methodologies used in the
Borrowers’ most recent physical Inventory results delivered to the
Administrative Agent on or about June 21, 2003.


     “Solvent” means, with respect to any Person on a particular date, that on
such date (a) at fair valuations, all of the properties and assets of such
Person are greater than the sum of the debts, including contingent liabilities,
of such Person, (b) the present fair saleable value of the properties and
assets of such Person is not less than the amount that would be required to pay
the probable liability of such Person on its debts as they become absolute and
matured, (c) such Person is able to realize upon its properties and assets and
pay its debts and other liabilities, contingent obligations and other
commitments as they mature in the normal course of business, (d) such Person
does not intend to, and does not believe that it will, incur debts beyond such
Person’s ability to pay as such debts mature, and (e) such


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Person is not engaged in a business or a transaction, and is not about to
engage in a business or transaction, for which such Person’s properties and
assets would constitute unreasonably small capital after giving due
consideration to the prevailing practices in the industry in which such Person
is engaged.


     “Standby Letter of Credit” means any Letter of Credit other than a
Commercial Letter of Credit.


     “Statutory Reserve Rate” means a fraction (expressed as a decimal), the
numerator of which is the number one and the denominator of which is the number
one minus the aggregate of the maximum reserve percentages (including any
marginal, special, emergency or supplemental reserves) expressed as a decimal
established by the Board to which the Administrative Agent is subject with
respect to the Adjusted LIBO Rate, for eurocurrency funding (currently referred
to as “Eurocurrency Liabilities” in Regulation D of the Board). Such reserve
percentages shall include those imposed pursuant to such Regulation D. LIBOR
Loans shall be deemed to constitute eurocurrency funding and to be subject to
such reserve requirements without benefit of or credit for pro ration,
exemptions or offsets that may be available from time to time to any Lender
under such Regulation D or any comparable regulation. The Statutory Reserve
Rate shall be adjusted automatically on and as of the effective date of any
change in any reserve percentage.


     “Subsidiary” means, with respect to any Person (the “parent”) at any date,
any corporation, limited liability company, partnership, association or other
entity the accounts of which would be consolidated with those of the parent in
the parent’s consolidated financial statements if such financial statements
were prepared in accordance with GAAP as of such date, as well as any other
corporation, limited liability company, partnership, association or other
entity of which securities or other ownership interests representing more than
50% of the equity or more than 50% of the ordinary voting power or, in the case
of a partnership, more than 50% of the general partnership interests are, as of
such date, owned, controlled or held.


     “Swingline Lender” means Fleet, in its capacity as lender of Swingline
Loans hereunder.


     “Swingline Loan” means a Loan made by the Swingline Lender to the
Borrowers pursuant to Section 2.5.


     “Syndication Agents” means Bank One, NA and Congress Financial Corporation
(Southwest).


     “Synthetic Lease” means any lease or other agreement for the use or
possession of property creating obligations which do not appear as Indebtedness
on the balance sheet of the lessee thereunder but which, upon the insolvency or
bankruptcy of such Person, would be characterized as Indebtedness of such
lessee without regard to the accounting treatment.


     “Taxes” means any and all current or future taxes, levies, imposts,
duties, deductions, charges or withholdings imposed by any Governmental
Authority.


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     “Termination Date” means the earliest to occur of (i) the Maturity Date,
(ii) the date on which the maturity of the Loans is accelerated and the
Commitments are terminated in accordance with Section 7.1, or (iii) the date of
the occurrence of any Event of Default pursuant to Section 7.1(h) or (i).


     “Total Commitment” means, at any time, the sum of the Commitments at such
time as reduced by the Borrowers pursuant to Section 2.15.


     “TXDC” has the meaning set forth in the preamble.


     “Type”, when used in reference to any Loan or Borrowing, refers to whether
the rate of interest on such Loan, or on the Loans comprising such Borrowing,
is determined by reference to the Adjusted LIBO Rate or the Alternate Base
Rate.


     “Uniform Customs” means with respect to any Letter of Credit, the Uniform
Customs and Practice for Documentary Credits (1993 Revision), International
Chamber of Commerce Publication No. 500 or any successor version thereto
adopted by the Administrative Agent in the ordinary course of its business as a
letter of credit issuer and in effect at the time of issuance of such Letter of
Credit.


     “Unrestricted Subsidiaries” means each of the Subsidiaries of the
Borrowers which are not Borrowers under this Agreement.


     “Unused Commitment” means, on any day, (a) the then Total Commitments
minus (b) the sum of (i) the principal amount of Loans then outstanding and
(ii) the then Letter of Credit Outstandings.


     “Withdrawal Liability” means liability to a Multiemployer Plan as a result
of a complete or partial withdrawal from such Multiemployer Plan, as such terms
are defined in Part I of Subtitle E of Title IV of ERISA.


     “Zale” has the meaning set forth in the preamble.


     “Zale Delaware” has the meaning set forth in the preamble.





     SECTION 1.2. Terms Generally. The definitions of terms herein shall apply
equally to the singular and plural forms of the terms defined. Whenever the
context may require, any pronoun shall include the corresponding masculine,
feminine and neuter forms. The words “include”, “includes” and “including”
shall be deemed to be followed by the phrase “without limitation”. The word
“will” shall be construed to have the same meaning and effect as the word
“shall”. Unless the context requires otherwise (a) any definition of or
reference to any agreement, instrument or other document herein shall be
construed as referring to such agreement, instrument or other document as from
time to time amended, supplemented or otherwise modified (subject to any
restrictions on such amendments, supplements or modifications set forth
herein), (b) any reference herein to any Person shall be construed to include
such Person’s successors and assigns, (c) the words “herein”, “hereof” and
“hereunder”, and words of similar import, shall be construed to refer to this
Agreement in its
entirety and not to any particular provision hereof, (d) all references herein
to Articles, Sections, Exhibits and


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Schedules shall be construed to refer to
Articles and Sections of, and Exhibits and Schedules to, this Agreement and (e)
the words “asset” and “property” shall be construed to have the same meaning
and effect and to refer to any and all tangible and intangible assets and
properties, including cash, securities, accounts and contract rights.





     SECTION 1.3. Accounting Terms; GAAP. Except as otherwise expressly provided
herein, all terms of an accounting or financial nature shall be construed in
accordance with GAAP, as in effect from time to time, provided that if any
Borrower notifies the Administrative Agent that the Borrowers request an
amendment to any provision hereof to reflect the effect of any change occurring
after the date hereof in GAAP or in the application thereof on the operation of
such provision (or if the Administrative Agent notifies the Borrowers that the
Required Lenders request an amendment to any provision hereof for such
purpose), regardless of whether any such notice is given before or after such
change in GAAP or in the application thereof, then such provision shall be
interpreted on the basis of GAAP as in effect and applied immediately before
such change shall have become effective until such provision shall have been
amended in accordance herewith.





ARTICLE II

AMOUNT AND TERMS OF CREDIT






     SECTION 2.1. Commitment of the Lenders.


     (a)  Each Lender severally and not jointly with any other Lender, agrees,
upon the terms and subject to the conditions herein set forth, to extend credit
to the Borrowers, or any of them, on a revolving basis, in the form of
Revolving Loans and Letters of Credit and in an amount not to exceed the lesser
of such Lender’s Commitment or such Lender’s Commitment Percentage of the
Borrowing Base, subject to the following limitations:



		
	 	     (i) The aggregate outstanding amount of the Credit Extensions
shall not at any time exceed the lower of (i) the Total Commitment,
or (ii) the then amount of the Borrowing Base.
	 
	 	     (ii) No Lender shall be obligated to issue any Letter of
Credit, and Letters of Credit shall be available from the Issuing
Bank, subject to the ratable participation of all Lenders, as set
forth in Section 2.6. The Borrowers will not at any time permit
the aggregate Letter of Credit Outstandings to exceed $20,000,000.
	 
	 	     (iii) Subject to all of the other provisions of this
Agreement, Revolving Loans that are repaid may be reborrowed prior
to the Termination Date. No new Credit Extension, however, shall
be made to the Borrowers after the Termination Date.



     (b)  Each Borrowing of Revolving Loans shall be made by the Lenders ratably
in accordance with their respective Commitment Percentages. The failure of any
Lender to make


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any Loan shall neither relieve any other Lender of its
obligation to fund its Loan in accordance with the provisions of this Agreement
nor increase the obligation of any such other Lender.


     (c)  Any Excluded Subsidiary may become a Borrower under this Agreement,
provided such Excluded Subsidiary signs a joinder agreement to this Agreement
and the Loan Documents, as applicable, with the other parties hereto and
thereto, in form and substance satisfactory to the Administrative Agent.





     SECTION 2.2. Reserves; Changes to Reserves.


     (a)  The initial Reserves as of the date of this Agreement are the (i)
Shrink Reserve, (ii) Customer Credit Reserve, (iii) Layaway Reserve, (iv)
Landlord Lien Reserve and (v) Consignment A/R Reserve.


     (b)  The Administrative Agent may in consultation with the Borrowers
hereafter establish additional Reserves or change any of the foregoing
Reserves, on five (5) Business Days’ notice to the Borrowers based on
appraisals and/or changes in the value of the Collateral which the
Administrative Agent, based on its customary credit and collateral
considerations and policies, believes may impede its ability to realize on the
Collateral. All appraisals shall be done by Gordon Brothers or its Affiliates
or appraisers reasonably satisfactory to the Administrative Agent and the
Borrowers and shall be done using a consistent methodology.





     SECTION 2.3. Making of Loans.


     (a)  Except as set forth in Section 2.16 and Section 2.24, Loans (other
than Swingline Loans) by the Lenders shall be either Base Rate Loans or LIBOR
Loans as the relevant Borrower may request subject to and in accordance with
this Section 2.3, provided, that all Swingline Loans shall be only Base Rate
Loans. All Loans made pursuant to the same Borrowing shall, unless otherwise
specifically provided herein, be Loans of the same Type. Each Lender may
fulfill its Commitment with respect to any Loan by causing any lending office
of such Lender to make such Loan; but any such use of a lending office shall
not affect the obligation of the Borrowers to repay such Loan in accordance
with the terms of the applicable Note. Subject to the other provisions of this
Section 2.3 and the provisions of Section 2.24, Borrowings of Loans of more
than one Type may be incurred at the same time, but no more than ten (10)
Borrowings of LIBOR Loans may be outstanding at any time.


     (b)  The Borrowers requesting a Borrowing shall give the Administrative
Agent telephonic notice (thereafter confirmed in writing) of each Borrowing of
(i) LIBOR Loans not later than 12:00 p.m., Boston time, on the third Business
Day prior to the date on which such Borrowing is to be made and (ii) Base Rate
Loans not later than 12:00 p.m., Boston time, on the Business Day on which such
Borrowing is to be made. Such notice shall be irrevocable and
binding on each of the Borrowers and shall specify the amount of the
proposed Borrowing (which shall be in an integral multiple of $1,000,000, but
not less than $5,000,000 in the case of LIBOR Loans) and the date thereof
(which shall be a Business Day) and shall contain disbursement instructions.
Such notice shall specify whether the Borrowing then being requested is to be a
Borrowing of Base Rate Loans or LIBOR Loans and, if LIBOR Loans, the Interest
Period with respect thereto. If no election of Interest Period is specified in
any such


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notice for a Borrowing of LIBOR Loans, such notice shall be deemed a
request for an Interest Period of one month. If no election is made as to the
Type of Loan, such notice shall be deemed a request for a Borrowing of Base
Rate Loans. The Administrative Agent shall promptly notify each Lender of its
proportionate share of such Borrowing, the date of such Borrowing, the Type of
Borrowing being requested and the Interest Period or Interest Periods
applicable thereto, as appropriate. On the borrowing date specified in such
notice, each Lender shall make its share of the Borrowing available at the
office of the Administrative Agent at 100 Federal Street, Boston, Massachusetts
02110, not later than 4:00 p.m., Boston time, in immediately available funds.
Unless the Administrative Agent shall have received notice from a Lender prior
to the proposed date of any Borrowing of LIBOR Loans and no less than one (1)
hour prior to the proposed Borrowing of Base Rate Loans that such Lender will
not make available to the Administrative Agent such Lender’s share of such
Borrowing, the Administrative Agent may assume that such Lender has made such
share available on such date in accordance with this Section and may, in
reliance upon such assumption, make available to the Borrowers a corresponding
amount. In such event, if a Lender has not in fact made its share of the
applicable Borrowing available to the Administrative Agent, then the applicable
Lender and the Borrowers severally agree to pay to the Administrative Agent
forthwith on demand such corresponding amount with interest thereon, for each
day from and including the date such amount is made available to the Borrowers
to but excluding the date of payment to the Administrative Agent, at (i) in the
case of such Lender, the greater of the Federal Funds Effective Rate and a rate
determined by the Administrative Agent in accordance with banking industry
rules on interbank compensation or (ii) in the case of the Borrowers, the
interest rate applicable to Base Rate Loans. If such Lender pays such amount
to the Administrative Agent, then such amount shall constitute such Lender’s
Loan included in such Borrowing. Upon receipt of the funds made available by
the Lenders to fund any Borrowing hereunder, the Administrative Agent shall
disburse such funds in the manner specified in the notice of borrowing
delivered by the Borrowers and shall use reasonable efforts to make the funds
so received from the Lenders available to the Borrowers not later than 4:00
p.m., Boston time.





     SECTION 2.4. Overadvances. The Agents and the Lenders have no obligation to
make any Loan or to provide any Letter of Credit to the extent an Overadvance
would result. The Administrative Agent may, in its discretion, make Permitted
Overadvances without the consent of the Lenders and each Lender shall be bound
thereby. Any Permitted Overadvances may constitute Swingline Loans. The
making of any Permitted Overadvance is for the benefit of the Borrowers; such
Permitted Overadvances constitute Revolving Loans and Obligations. The making
of any such Permitted Overadvances on any one occasion shall not obligate the
Administrative Agent or any Lender to make or permit any Permitted Overadvances
on any other occasion or to permit such Permitted Overadvances to remain
outstanding.





     SECTION 2.5. Swingline Loans.


     (a)  The Swingline Lender is authorized by the Lenders and shall, subject
to the provisions of this Section, make Swingline Loans up to $50,000,000 in
the aggregate outstanding at any time, consisting only of Base Rate Loans plus
the Applicable Margin, upon a notice of Borrowing received by the
Administrative Agent and the Swingline Lender (which notice, at the Swingline
Lender’s discretion, may be submitted prior to 1:00 p.m., Boston time, on the


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Business Day on which such Swingline Loan is requested). Swingline Loans shall
be subject to periodic settlement with the Lenders under Section 2.7 below.


     (b)  Swingline Loans may be made only in the following circumstances: (A)
for administrative convenience, the Swingline Lender shall, at the Borrowers’
request, make Swingline Loans in reliance upon the Borrowers’ actual or deemed
representations under Section 4.2, that the applicable conditions for borrowing
are satisfied or (B) for Permitted Overadvances. If the conditions for
borrowing under Section 4.2 cannot be fulfilled, the Borrowers shall give
immediate notice thereof to the Administrative Agent and the Swingline Lender
(a “Noncompliance Notice”), and the Administrative Agent shall promptly provide
each Lender with a copy of the Noncompliance Notice. If the conditions for
borrowing under Section 4.2 cannot be fulfilled, the Required Lenders may
direct the Swingline Lender to, and the Swingline Lender thereupon shall, cease
making Swingline Loans (other than Permitted Overadvances) until such
conditions can be satisfied or are waived in accordance with Section 9.2.
Unless the Required Lenders so direct the Swingline Lender, the Swingline
Lender may, but is not obligated to, continue to make Swingline Loans beginning
one Business Day after the Noncompliance Notice is furnished to the Lenders.
Notwithstanding the foregoing, no Swingline Loans shall be made pursuant to
this Subsection (b) (other than Permitted Overadvances) if the aggregate
outstanding amount of the Credit Extensions would exceed the lower of (i) the
Total Commitment or any lesser amount to which the Total Commitment has then
been reduced by the Borrowers pursuant to Section 2.15, or (ii) the then amount
of the Borrowing Base.





     SECTION 2.6. Letters of Credit.


     (a)  Upon the terms and subject to the conditions herein set forth, the
Borrowers may request the Issuing Bank, at any time and from time to time after
the date hereof and prior to the Termination Date, to issue, and subject to the
terms and conditions contained herein, the Issuing Bank shall issue, for the
account of the relevant Borrower one or more Letters of Credit; provided, that
no Letter of Credit shall be issued if after giving effect to such issuance (i)
the aggregate Letter of Credit Outstandings shall exceed $20,000,000, or (ii)
the aggregate Credit Extensions would exceed the limitation set forth in
Section 2.1(a)(i); and provided, further, that no Letter of Credit shall be
issued if the Issuing Bank shall have received notice from the Administrative
Agent or the Required Lenders that the conditions to such issuance have not
been met.


     (b)  Each Standby Letter of Credit shall expire at or prior to the close of
business on the earlier of (i) the date one year after the date of the issuance
of such Letter of Credit (or, in the case of any renewal or extension thereof,
one year after such renewal or extension) and (ii) the date that is five
Business Days prior to the Maturity Date, provided, that each Standby Letter of
Credit may, upon the request of the Borrowers, include a provision whereby such
Letter of Credit shall be renewed automatically for additional consecutive
periods of 12 months or less (but not beyond the date that is five Business
Days prior to the Maturity Date) unless the Issuing Bank notifies the
beneficiary thereof at least 30 days prior to the then-applicable expiration
date that such Letter of Credit will not be renewed.


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     (c)  Each Commercial Letter of Credit shall expire at or prior to the close
of business on the earlier of (i) the date one year after the date of the
issuance of such Commercial Letter of Credit and (ii) the date that is five
Business Days prior to the Maturity Date.


     (d)  Drafts drawn under any Letter of Credit shall be reimbursed by the
Borrowers in dollars on the next Business Day of any such payment thereof by
the Issuing Bank by paying to the Administrative Agent an amount equal to such
drawing not later than 3:00 p.m., Boston time, on such date, provided, that the
Borrowers may, subject to the conditions to borrowing set forth herein, request
in accordance with Section 2.3 that such payment be financed with a Revolving
Loan consisting of a Base Rate Loan or Swingline Loan in an equivalent amount
and, to the extent so financed, the Borrowers’ obligation to make such payment
shall be discharged and replaced by the resulting Base Rate Loan or Swingline
Loan. The Issuing Bank shall, promptly following its receipt thereof, examine
all documents purporting to represent a demand for payment under a Letter of
Credit. The Issuing Bank shall promptly notify the Administrative Agent and
the Borrowers by telephone (confirmed by telecopy) of such demand for payment
and whether the Issuing Bank has made or will make payment thereunder (which
payment shall not be made until two (2) Business Days after such notice from
the Issuing Bank to the Borrowers), provided, that any failure to give or delay
in giving such notice shall not relieve the Borrowers of their obligation to
reimburse the Issuing Bank and the Lenders with respect to any such payment.


     (e)  If the Issuing Bank shall make any L/C Disbursement, then, unless the
Borrowers shall reimburse the Issuing Bank in full on the date such payment is
made, the unpaid amount thereof shall bear interest, for each day from and
including the date such payment is made to but excluding the date that the
Borrowers reimburse the Issuing Bank therefor, at the rate per annum then
applicable to Base Rate Loans, provided, that if the Borrowers fail to
reimburse such Issuing Bank when due pursuant to paragraph (d) of this Section,
then Section 2.10 shall apply. Interest accrued pursuant to this paragraph
shall be for the account of the Issuing Bank, except that interest accrued on
and after the date of payment by any Lender pursuant to paragraph (g) of this
Section to reimburse the Issuing Bank shall be for the account of such Lender
to the extent of such payment.


     (f)  Immediately upon the issuance of any Letter of Credit by the Issuing
Bank (or the amendment of a Letter of Credit increasing the amount thereof),
and without any further action on the part of the Issuing Bank, the Issuing
Bank shall be deemed to have sold to each Lender, and each such Lender shall be
deemed unconditionally and irrevocably to have purchased from the Issuing Bank,
without recourse or warranty, an undivided interest and participation, to the
extent of such Lender’s Commitment Percentage, in such Letter of Credit, each
drawing thereunder and the obligations of the Borrowers under this Agreement and
the other Loan Documents with respect thereto. Upon any change in the
Commitments pursuant to Section 9.4 and Section 9.5, it is hereby agreed that
with respect to all Letter of Credit Outstandings, there shall be an automatic
adjustment to the participations hereby created to reflect the new Commitment
Percentages of the assigning and assignee Lenders. Any action taken or omitted
by the Issuing Bank under or in connection with a Letter of Credit, if taken or
omitted in the absence of gross negligence or willful misconduct, shall not
create for the Issuing Bank any resulting liability to any Lender.


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     (g)  In the event that the Issuing Bank makes any L/C Disbursement and the
Borrowers shall not have reimbursed such amount in full to the Issuing Bank
pursuant to Section 2.6(d), the Issuing Bank shall promptly notify the
Administrative Agent, which shall promptly notify each Lender of such failure,
and each Lender shall promptly and unconditionally pay to the Administrative
Agent for the account of the Issuing Bank the amount of such Lender’s
Commitment Percentage of such unreimbursed payment in dollars and in same day
funds. If the Issuing Bank so notifies the Administrative Agent, and the
Administrative Agent so notifies the Lenders prior to 11:00 a.m., Boston time,
on any Business Day, each such Lender shall make available to the Issuing Bank
such Lender’s Commitment Percentage of the amount of such payment on such
Business Day in same day funds. If and to the extent such Lender shall not
have so made its Commitment Percentage of the amount of such payment available
to the Issuing Bank, such Lender agrees to pay to the Issuing Bank, forthwith
on demand such amount, together with interest thereon, for each day from such
date until the date such amount is paid to the Administrative Agent for the
account of the Issuing Bank at the Federal Funds Effective Rate. Each Lender
agrees to fund its Commitment Percentage of such unreimbursed payment
notwithstanding a failure to satisfy any applicable lending conditions or the
provisions of Section 2.1 or Section 2.6, or the occurrence of the Termination
Date. The failure of any Lender to make available to the Issuing Bank its
Commitment Percentage of any payment under any Letter of Credit shall neither
relieve any Lender of its obligation hereunder to make available to the Issuing
Bank its Commitment Percentage of any payment under any Letter of Credit on the
date required, as specified above, nor increase the obligation of such other
Lender. Whenever any Lender has made payments to the Issuing Bank in respect
of any reimbursement obligation for any Letter of Credit, such Lender shall be
entitled to share ratably, based on its Commitment Percentage, in all payments
and collections thereafter received on account of such reimbursement
obligation.


     (h)  Whenever a Borrower desires that the Issuing Bank issue a Letter of
Credit (or the amendment, renewal or extension of an outstanding Letter of
Credit), such Borrower shall give to the Issuing Bank and the Administrative
Agent at least two Business Days’ prior written (including telegraphic, telex,
facsimile or cable communication) notice (or such shorter period as may be
agreed upon in writing by the Issuing Bank and such Borrower) specifying the
date on which the proposed Letter of Credit is to be issued, amended, renewed
or extended (which shall be a Business Day), the stated amount of the Letter of
Credit so requested, the expiration date of such Letter of Credit, the name and
address of the beneficiary thereof, and the provisions thereof. If requested
by the Issuing Bank, the Borrowers shall also submit a letter of credit
application on the Issuing Bank’s standard form in connection with any request
for the issuance, amendment, renewal or extension of a Letter of Credit.


     (i)  The obligations of the Borrowers to reimburse the Issuing Bank for any
L/C Disbursement shall be unconditional and irrevocable and shall be paid
strictly in accordance with the terms of this Agreement under all
circumstances, including, without limitation: (i) any lack of validity or
enforceability of any Letter of Credit; (ii) the existence of any claim,
setoff, defense or other right which the Borrowers may have at any time against
a beneficiary of any Letter of Credit or against any of the Lenders, whether in
connection with this Agreement, the transactions contemplated herein or any
unrelated transaction; (iii) any draft, demand, certificate or other document
presented under any Letter of Credit proving to be forged, fraudulent, invalid
or insufficient in any respect or any statement therein being untrue or
inaccurate in any respect; (iv)


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any other circumstance or happening whatsoever,
whether or not similar to any of the foregoing, that might, but for the
provisions of this Section, constitute a legal or equitable discharge of, or
provide a right of setoff against, the Borrowers’ obligations hereunder; or (v)
the fact that any Event of Default shall have occurred and be continuing. None
of the Administrative Agent, the Lenders, the Issuing Bank or any of their
Affiliates shall have any liability or responsibility by reason of or in
connection with the issuance or transfer of any Letter of Credit or any payment
or failure to make any payment thereunder (irrespective of any of the
circumstances referred to in the preceding sentence), or any error, omission,
interruption, loss or delay in transmission or delivery of any draft, notice or
other communication under or relating to any Letter of Credit (including any
document required to make a drawing thereunder), any error in interpretation of
technical terms or any consequence arising from causes beyond the control of
the Issuing Bank, provided, that the foregoing shall not be construed to excuse
the Issuing Bank from liability to the Borrowers to the extent of any direct
damages (as opposed to consequential damages, claims in respect of which are
hereby waived by the Borrowers to the extent permitted by applicable law)
suffered by the Borrowers that are caused by the Issuing Bank’s failure to
exercise care when determining whether drafts and other documents presented
under a Letter of Credit comply with the terms thereof. The parties hereto
expressly agree that, in the absence of gross negligence or willful misconduct
on the part of the Issuing Bank (as finally determined by a court of competent
jurisdiction), the Issuing Bank shall be deemed to have exercised care in each
such determination. In furtherance of the foregoing and without limiting the
generality thereof, the parties agree that, with respect to documents presented
that appear on their face to be in compliance with the terms of a Letter of
Credit, the Issuing Bank may, in its reasonable discretion, either accept and
make payment upon such documents without responsibility for further
investigation, regardless of any notice or information to the contrary, or
refuse to accept and make payment upon such documents if such documents are not
in strict compliance with the terms of such Letter of Credit.


     (j)  If any Event of Default shall occur and be continuing, on the Business
Day that the Borrowers receive notice from the Administrative Agent or the
Required Lenders demanding the deposit of cash collateral pursuant to this
paragraph, the Borrowers shall deposit in the Cash Collateral Account an amount
in cash equal to 103% of the Letter of Credit Outstandings as of such date plus
any accrued and unpaid interest thereon. Each such deposit shall be held by
the Collateral Agent as collateral for the payment and performance of the
Obligations of the Borrowers under this Agreement. The Collateral Agent shall
have exclusive dominion and control, including the exclusive right of
withdrawal, over such Cash Collateral Account. Other than any interest earned
on the investment of such deposits, which investments shall be made at the
option and sole discretion of the Collateral Agent at the request of the
Borrowers and at the Borrowers’ risk and expense, such deposits shall not bear
interest. Interest or profits, if any, on
such investments shall accumulate in such account. Moneys in such Cash
Collateral Account shall be applied by the Collateral Agent to reimburse the
Issuing Bank for payments on account of drawings under Letters of Credit for
which it has not been reimbursed and, to the extent not so applied, shall be
held for the satisfaction of the reimbursement obligations of the Borrowers for
the Letter of Credit Outstandings at such time or, if the Loans have matured or
the maturity of the Loans has been accelerated, be applied to satisfy other
Obligations of the Borrowers under this Agreement.


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     (k)  All Existing Letters of Credit shall, from and after the Closing Date,
be deemed for all purposes to be Letters of Credit under this Agreement.





     SECTION 2.7. Settlements Amongst Lenders.


     (a)  The Swingline Lender may (but shall not be obligated to), at any time,
on behalf of the Borrowers (which hereby authorize the Swingline Lender to act
in their behalf in that regard) request the Administrative Agent to cause the
Lenders to make a Revolving Loan (which shall be a Base Rate Loan) in an amount
equal to such Lender’s Commitment Percentage of the outstanding amount of
Swingline Loans made in accordance with Section 2.5, which request may be made
regardless of whether the conditions set forth in Article IV have been
satisfied. Upon such request, each Lender shall make available to the
Administrative Agent the proceeds of such Revolving Loan for the account of the
Swingline Lender. If the Swingline Lender requires a Revolving Loan to be made
by the Lenders and the request therefor is received prior to 12:00 Noon, Boston
time, on a Business Day, such transfers shall be made in immediately available
funds not later than 4:00 p.m., Boston time, that day; and, if the request
therefor is received after 12:00 Noon, Boston time, then not later than 4:00
p.m., Boston time, on the next Business Day. The obligation of each Lender to
transfer such funds is irrevocable, unconditional and without recourse to or
warranty by the Administrative Agent or the Swingline Lender. If and to the
extent any Lender shall not have so made its transfer to the Administrative
Agent, such Lender agrees to pay to the Administrative Agent, forthwith on
demand such amount, together with interest thereon, for each day from such date
until the date such amount is paid to the Administrative Agent at the Federal
Funds Effective Rate.


     (b)  The amount of each Lender’s Commitment Percentage of outstanding
Revolving Loans shall be computed weekly (or more frequently in the
Administrative Agent’s discretion) and shall be adjusted upward or downward
based on all Revolving Loans and repayments of Revolving Loans received by the
Administrative Agent as of 4:00 p.m., Boston time, on the first Business Day
following the end of the period specified by the Administrative Agent (such
date, the “Settlement Date”).


     (c)  The Administrative Agent shall deliver to each of the Lenders promptly
after the Settlement Date a summary statement of the amount of outstanding
Revolving Loans for the period and the amount of repayments received for the
period. As reflected on the summary statement: (x) the Administrative Agent
shall transfer to each Lender its applicable Commitment Percentage of
repayments, and (y) each Lender shall transfer to the Administrative Agent (as
provided below), or the Administrative Agent shall transfer to each Lender,
such amounts as are
necessary to insure that, after giving effect to all such transfers, the
amount of Revolving Loans made by each Lender with respect to Revolving Loans
shall be equal to such Lender’s applicable Commitment Percentage of Revolving
Loans outstanding as of such Settlement Date. If the summary statement
requires transfers to be made to the Administrative Agent by the Lenders and is
received prior to 12:00 Noon, Boston time, on a Business Day, such transfers
shall be made in immediately available funds not later than 4:00 p.m., Boston
time, that day; and, if received after 12:00 Noon, Boston time, then not later
than 4:00 p.m., Boston time, on the next Business Day. The obligation of each
Lender to transfer such funds is irrevocable, unconditional and without
recourse to or warranty by the Administrative Agent. If and to the extent any
Lender shall not have so made its transfer to the Administrative Agent, such
Lender agrees to pay to the


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Administrative Agent, forthwith on demand such
amount, together with interest thereon, for each day from such date until the
date such amount is paid to the Administrative Agent at the Federal Funds
Effective Rate.





     SECTION 2.8. Notes; Repayment of Loans.


     (a)  The Loans made by each Lender (and by the Swingline Lender, with
respect to Swingline Loans) shall be evidenced by a Note duly executed by the
Borrowers, dated the Closing Date, in substantially the form attached hereto as
Exhibit B-1 or B-2, as applicable, payable to the order of each such Lender (or
the Swingline Lender, as applicable) in an aggregate principal amount equal to
such Lender’s Commitment (or, in the case of the Note evidencing the Swingline
Loans, $50,000,000).


     (b)  The outstanding principal balance of all Swingline Loans shall be
repaid on the earlier of the Termination Date or, on the date otherwise
requested by the Swingline Lender in accordance with the provisions of Section
2.5(a). The outstanding principal balance of all other Obligations shall be
payable on the Termination Date (subject to earlier repayment as provided
below). Each Note shall bear interest from the date thereof on the outstanding
principal balance thereof as set forth in this Article II. Each Lender is
hereby authorized by the Borrowers to endorse on a schedule attached to each
Note delivered to such Lender (or on a continuation of such schedule attached
to such Note and made a part thereof), or otherwise to record in such Lender’s
internal records, an appropriate notation evidencing the date and amount of
each Loan from such Lender, each payment and prepayment of principal of any
such Loan, each payment of interest on any such Loan and the other information
provided for on such schedule; provided, however, that the failure of any
Lender to make such a notation or any error therein shall not affect the
obligation of the Borrowers to repay the Loans made by such Lender in
accordance with the terms of this Agreement and the applicable Notes.





     SECTION 2.9. Interest on Loans.


     (a)  Subject to Section 2.10, each Base Rate Loan shall bear interest
(computed on the basis of the actual number of days elapsed over a year of 365
or 366 days, as applicable) at a rate
per annum that shall be equal to the then Alternate Base Rate, plus the
Applicable Margin for Base Rate Loans.


     (b)  Subject to Section 2.10, each LIBOR Loan shall bear interest (computed
on the basis of the actual number of days elapsed over a year of 360 days) at a
rate per annum equal, during each Interest Period applicable thereto, to the
Adjusted LIBO Rate for such Interest Period, plus the Applicable Margin for
LIBOR Loans.


     (c)  Accrued interest on all Loans shall be payable in arrears on each
Interest Payment Date applicable thereto, on the Termination Date, after the
Termination Date on demand and (with respect to LIBOR Loans) upon any repayment
or prepayment thereof (on the amount prepaid).





     SECTION 2.10. Default Interest. Effective upon the occurrence of any Event of
Default and at all times thereafter while such Event of Default is continuing,
at the option of the Administrative Agent or upon the direction of the Required
Lenders, interest shall accrue on all


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outstanding Loans (including Swingline
Loans) (after as well as before judgment, as and to the extent permitted by
law) at a rate per annum equal to the rate (including the Applicable Margin for
Loans) in effect from time to time plus 2.00% per annum, and such interest
shall be payable on demand.





     SECTION 2.11. Certain Fees. The Borrowers shall pay to the Administrative
Agent, for the account of the Administrative Agent, the fees set forth in the
Fee Letter as and when payment of such fees is due as therein set forth.





     SECTION 2.12. Unused Commitment Fee. The Administrative Agent shall pay each
Lender the Line Fee at the times and in the manner set forth below. The
Borrowers shall pay to the Administrative Agent for the account of the Lenders,
a commitment fee (the “Commitment Fee”) equal to 0.375% per annum (on the basis
of actual days elapsed in a year of 360 days) of the average daily balance of
the Unused Commitment for each day commencing on and including the Closing Date
and ending on but excluding the Termination Date. The Commitment Fee so
accrued in any fiscal quarter shall be payable on the first Business Day of the
immediately succeeding fiscal quarter, except that all Commitment Fees so
accrued as of the Termination Date shall be payable on the Termination Date.
If the Commitment Fee actually paid by the Borrowers is insufficient to pay the
Line Fee due the Lenders, the deficiency shall be paid to the Lenders by the
Swingline Lender from its own funds (and the Borrowers shall have no liability
with respect thereto). The Administrative Agent shall pay the Line Fee (and
any amounts payable by the Swingline Lender hereunder) to the Lenders based
upon their pro rata share of the aggregate Line Fee due to all Lenders;
provided, that for purposes of calculating the pro rata share of any Person
which is both the Swingline Lender and a Lender, such Person’s share shall be
equal to the difference between (i) the sum of such Person’s Commitment, and
(ii) the sum of (A) such Person’s Commitment Percentage of the principal amount
of Revolving Loans then outstanding (including the principal
amount of Swingline Loans then outstanding), and (B) such Person’s Commitment
Percentage of the then Letter of Credit Outstandings.





     SECTION 2.13. Letter of Credit Fees.


     (a)  The Borrowers shall pay the Administrative Agent, for the account of
the Lenders, on the last day of each calendar quarter, in arrears, a fee (each,
a “Letter of Credit Fee”) equal to the following per annum percentages of the
average face amount of the following categories of Letters of Credit
outstanding during the subject quarter (each computed on the basis of the
actual number of days elapsed over a year of 360 days):



		
	 	     (i) Standby Letters of Credit: At the then Applicable Margin
per annum for LIBOR Loans.
	 
	 	     (ii) Commercial Letters of Credit: At the rate equal to fifty
percent (50%) of then Applicable Margin per annum for LIBOR Loans.
	 
	 	     (iii) After the occurrence and during the continuance of an
Event of Default, at the option of the Administrative Agent or upon
the direction of the Required Lenders, the Letter of Credit Fee set
forth in clauses (i) and (ii) above, shall be increased by an
amount equal to two percent (2%) per annum.



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     (b)  The Borrowers shall pay to the Administrative Agent, for the account
of the Issuing Bank, and in addition to all Letter of Credit Fees otherwise
provided for hereunder, such fees and charges in connection with the issuance,
negotiation, settlement, amendment and processing of each Letter of Credit
issued by the Issuing Bank as are customarily imposed by the Issuing Bank from
time to time in connection with letter of credit transactions and such fronting
fees as are agreed upon by the Borrowers and the Issuing Bank.





     SECTION 2.14. Nature of Fees. All fees shall be paid on the dates due, in
immediately available funds, to the Administrative Agent, for the respective
accounts of the Administrative Agent, the Issuing Bank, and the Lenders, as
provided herein. Once paid, all fees shall be fully earned and shall not be
refundable under any circumstances.





     SECTION 2.15. Termination or Reduction of Commitments. Upon at least five (5)
Business Days’ prior written notice to the Administrative Agent, the Borrowers
may at any time in whole permanently terminate, or from time to time in part
permanently reduce, the Commitments. Each such reduction shall be in the
principal amount of $5,000,000 or any integral multiple of $1,000,000 in excess
thereof. Each such reduction or termination shall (i) except as provided in
Section 2.28(b), be applied ratably to the Commitments of each Lender and (ii)
be irrevocable when given. At the effective time of each such reduction or
termination, the Borrowers shall pay to the Administrative Agent for
application as provided herein (i) all Commitment Fees accrued on the unused
portion of the
Commitments so terminated or reduced through the date thereof, and (ii) any
amount by which the Credit Extensions outstanding on such date exceed the
amount to which the Commitments are to be reduced effective on such date, in
each case pro rata based on the amount prepaid.





     SECTION 2.16. Alternate Rate of Interest. If prior to the commencement of any
Interest Period for a LIBOR Borrowing:


     (a)  the Administrative Agent reasonably determines (which determination
shall be conclusive absent manifest error) that adequate and reasonable means
do not exist for ascertaining the Adjusted LIBO Rate for such Interest Period;
or


     (b)  the Administrative Agent is advised by the Required Supermajority
Lenders that the Adjusted LIBO Rate for such Interest Period will not
adequately and fairly reflect the cost to such Lenders (or Lender) of making or
maintaining their Loans (or its Loan) included in such Borrowing for such
Interest Period;


then the Administrative Agent shall give notice thereof to the Borrowers and
the Lenders by telephone or telecopy as promptly as practicable thereafter (but
in any event, within two (2) Business Days) and, until the Administrative Agent
notifies the Borrowers and the Lenders that the circumstances giving rise to
such notice no longer exist, (i) any Borrowing Request that requests the
conversion of any Borrowing to, or continuation of any Borrowing as, a LIBOR
Borrowing shall be ineffective and (ii) if any Borrowing Request requests a
LIBOR Borrowing, such Borrowing shall be made as a Borrowing of Base Rate
Loans.


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     SECTION 2.17. Conversion and Continuation of Loans. The Borrowers shall have
the right at any time,


     (a)  on three (3) Business Days’ prior irrevocable notice to the
Administrative Agent (which notice, to be effective, must be received by the
Administrative Agent not later than 11:00 a.m., Boston time, on the third
Business Day preceding the date of any conversion), (x) to convert any
outstanding Borrowings of Base Rate Loans (but in no event Swingline Loans) to
Borrowings of LIBOR Loans or (y) to continue an outstanding Borrowing of LIBOR
Loans for an additional Interest Period,


     (b)  on one (1) Business Day’s prior irrevocable notice to the
Administrative Agent (which notice, to be effective, must be received by the
Administrative Agent not later than 11:00 a.m., Boston time, on the first
Business Day preceding the date of any conversion), to convert any outstanding
Borrowings of LIBOR Loans to a Borrowing of Base Rate Loans, subject to the
following:



		
	 	     (i) no Borrowing of Loans may be converted into, or continued
as, LIBOR Loans at any time when an Event of Default has occurred
and is continuing;
	 
	 	     (ii) if less than a full Borrowing of Loans is converted, such
conversion shall be made pro rata among the Lenders, as applicable,
in accordance with the respective principal amounts of the Loans
comprising such Borrowing held by such Lenders immediately prior to
such refinancing;
	 
	 	     (iii) the aggregate principal amount of Loans being converted
into or continued as LIBOR Loans shall be in an integral of
$1,000,000 and at least $5,000,000;
	 
	 	     (iv) the Interest Period with respect to a Borrowing of LIBOR
Loans effected by a conversion or in respect to the Borrowing of
LIBOR Loans being continued as LIBOR Loans shall commence on the
date of conversion or the expiration of the current Interest Period
applicable to such continuing Borrowing, as the case may be;
	 
	 	     (v) a Borrowing of LIBOR Loans may be converted only on the
last day of an Interest Period applicable thereto;
	 
	 	     (vi) each request for a conversion or continuation of a
Borrowing of LIBOR Loans which fails to state an applicable
Interest Period shall be deemed to be a request for an Interest
Period of one month; and
	 
	 	     (vii) no more than ten (10) Borrowings of LIBOR Loans may be
outstanding at any time.



If any of the Borrowers does not give notice to convert any Borrowing of Base
Rate Loans, or does not give notice to continue, or does not have the right to
continue, any Borrowing as LIBOR Loans, in each case as provided above, such
Borrowing shall automatically be converted


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to, or continued as, as applicable,
a Borrowing of Base Rate Loans at the expiration of the then-current Interest
Period. The Administrative Agent shall, after it receives notice from any
Borrower, promptly give each Lender notice of any conversion, in whole or part,
of any Loan made by such Lender.





     SECTION 2.18. Mandatory Prepayment; Cash Collateral. The outstanding
Obligations shall be subject to mandatory prepayment as follows:


     (a)  If at any time the amount of the Credit Extensions exceeds the lower
of (i) the then amount of the Total Commitment, and (ii) the then amount of the
Borrowing Base, the Borrowers will immediately upon a Financial Officer
becoming aware of such occurrence (A) prepay the Loans in an amount necessary
to eliminate such excess, and (B) if, after giving effect to the prepayment in
full of all outstanding Loans such excess has not been eliminated, deposit cash
into the Cash Collateral Account in an amount equal to such excess.


     (b)  To the extent required pursuant to Section 2.21(b), the Revolving
Loans shall be repaid daily in accordance with the provisions of said Section
2.21(b).


     (c)  Subject to the foregoing, outstanding Base Rate Loans shall be prepaid
before outstanding LIBOR Loans are prepaid. Each partial prepayment of LIBOR
Loans shall be in an integral multiple of $5,000,000. No prepayment of LIBOR
Loans shall be permitted pursuant to
this Section 2.18 other than on the last day of an Interest Period
applicable thereto, unless the Borrowers simultaneously reimburse the Lenders
for all “Breakage Costs” (as defined in Section 2.19, below) associated
therewith. In order to avoid such Breakage Costs, as long as no Event of
Default has occurred and is continuing, at the request of the Borrowers, the
Administrative Agent shall hold all amounts required to be applied to LIBOR
Loans in the Cash Collateral Account and will apply such funds to the
applicable LIBOR Loans at the end of the then pending Interest Period therefor
(provided, that the foregoing shall in no way limit or restrict the Agents’
rights upon the subsequent occurrence of an Event of Default). No partial
prepayment of a Borrowing of LIBOR Loans shall result in the aggregate
principal amount of the LIBOR Loans remaining outstanding pursuant to such
Borrowing being less than $5,000,000 (unless all such outstanding LIBOR Loans
are being prepaid in full). Any prepayment of the Revolving Loans shall not
permanently reduce the Commitments.


     (d)  All amounts required to be applied to all Loans hereunder (other than
Swingline Loans) shall be applied ratably in accordance with each Lender’s
Commitment Percentage.


     (e)  Upon the Termination Date, the Commitments and the credit facility
provided hereunder shall be terminated in full and the Borrowers shall pay, in
full and in cash, all outstanding Loans and all other outstanding Obligations.





     SECTION 2.19. Optional Prepayment of Loans; Reimbursement of Lenders.


     (a)  The Borrowers shall have the right at any time and from time to time
to prepay outstanding Loans in whole or in part, (x) with respect to LIBOR
Loans, upon at least two Business Days’ prior written or facsimile notice to
the Administrative Agent prior to 11:00 a.m., Boston time, and (y) with respect
to Base Rate Loans, on the same Business Day if written, telex


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or facsimile
notice is received by the Administrative Agent prior to 1:00 p.m., Boston time,
subject to the following limitations:



		
	 	     (i) Subject to Section 2.18, all prepayments shall be paid to
the Administrative Agent for application, first, to the prepayment
of outstanding Swingline Loans, second, to the prepayment of other
outstanding Loans ratably in accordance with each Lender’s
Commitment Percentage, and third, to the funding of a cash
collateral deposit in the Cash Collateral Account in an amount
equal to 103% of all Letter of Credit Outstandings.
	 
	 	     (ii) Subject to the foregoing, outstanding Base Rate Loans
shall be prepaid before outstanding LIBOR Loans are prepaid. Each
partial prepayment of LIBOR Loans shall be in an integral multiple
of $5,000,000. No prepayment of LIBOR Loans shall be permitted
pursuant to this Section 2.19 other than on the last day of an
Interest Period applicable thereto, unless the Borrowers
simultaneously reimburse the Lenders for all “Breakage Costs” (as
defined below) associated therewith. No partial prepayment of a
Borrowing of LIBOR Loans shall result in the aggregate principal
amount of the LIBOR Loans remaining
outstanding pursuant to such Borrowing being less than
$5,000,000 (unless all such outstanding LIBOR Loans are being
prepaid in full).
	 
	 	     (iii) Each notice of prepayment shall specify the prepayment
date, the principal amount and Type of the Loans to be prepaid and,
in the case of LIBOR Loans, the Borrowing or Borrowings pursuant to
which such Loans were made. The Administrative Agent shall,
promptly after receiving notice from the Borrowers hereunder,
notify each Lender of the principal amount and Type of the Loans
held by such Lender which are to be prepaid, the prepayment date
and the manner of application of the prepayment.



     (b)  The Borrowers shall reimburse each Lender on demand for any loss
incurred or to be incurred by it in the reemployment of the funds released (i)
resulting from any prepayment (for any reason whatsoever, including, without
limitation, conversion to Base Rate Loans or acceleration by virtue of, and
after, the occurrence of an Event of Default) of any LIBOR Loan required or
permitted under this Agreement, if such Loan is prepaid other than on the last
day of the Interest Period for such Loan or (ii) in the event that after the
Borrowers deliver a notice of borrowing under Section 2.3 in respect of LIBOR
Loans, such Loans are not borrowed on the first day of the Interest Period
specified in such notice of borrowing for any reason. Such loss shall be the
amount as reasonably determined by such Lender as the excess, if any, of (A)
the amount of interest which would have accrued to such Lender on the amount so
paid or not borrowed at a rate of interest equal to the Adjusted LIBO Rate for
such Loan, for the period from the date of such payment or failure to borrow to
the last day (x) in the case of a payment or refinancing of a LIBOR Loan other
than on the last day of the Interest Period for such Loan, of the then current
Interest Period for such Loan or (y) in the case of such failure to borrow, of
the Interest Period for such LIBOR Loan which would have commenced on the date
of such failure to borrow, over (B) the amount of interest which would have
accrued to such Lender on such amount by placing such amount on deposit for a
comparable period with leading banks in the London interbank market
(collectively, “Breakage Costs”). Any Lender demanding


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reimbursement for such
loss shall deliver to the Borrowers simultaneously with such demand one or more
certificates setting forth the amount of such loss as determined by such Lender
and setting forth in reasonable detail the manner in which such amount was
determined.


     (c)  In the event the Borrowers fail to prepay any Loan on the date
specified in any prepayment notice delivered pursuant to Section 2.19(a), the
Borrowers on demand by any Lender shall pay to the Administrative Agent for the
account of such Lender any amounts required to compensate such Lender for any
actual loss incurred by such Lender as a result of such failure to prepay,
including, without limitation, any loss, cost or expenses incurred by reason of
the acquisition of deposits or other funds by such Lender to fulfill deposit
obligations incurred in anticipation of such prepayment. Any Lender demanding
such payment shall deliver to the Borrowers simultaneously with such demand one
or more certificates setting forth the amount of such loss as determined by
such Lender and setting forth in reasonable detail the manner in which such
amount was determined.


     (d)  Whenever any partial prepayment of Loans is to be applied to LIBOR
Loans, such LIBOR Loans shall, unless the Borrowers otherwise direct, be
prepaid in the chronological order of their Interest Payment Dates.





     SECTION 2.20. Maintenance of Loan Account; Statements of Account.


     (a)  The Administrative Agent shall maintain an account on its books in the
name of the Borrowers (the “Loan Account”) which will reflect (i) all Loans
made by the Lenders to the Borrowers or for the Borrowers’ account, (ii) all
L/C Disbursements, fees and interest that have become payable as herein set
forth, and (iii) any and all other monetary Obligations that have become
payable.


     (b)  The Loan Account will be credited with all amounts received by the
Administrative Agent from the Borrowers, including all amounts received in the
Fleet Concentration Account from any Concentration Account, on the date such
amounts are received and the amounts so credited shall be applied as set forth
in Section 2.22(a) and (b). After the end of each month, the Administrative
Agent shall send to the Borrowers a statement accounting for the charges,
loans, advances and other transactions occurring among and between the
Administrative Agent, the Lenders and the Borrowers during that month. The
monthly statements shall, absent manifest error, be an account stated, which is
final, conclusive and binding on the Borrowers.





     SECTION 2.21. Cash Receipts.


     (a)  (i) Annexed hereto as Schedule 2.21(a)(i) is a list of all DDAs and
accounts maintained by the Borrowers into which more than one DDA deposits or
transfers funds (the “Concentration Accounts”) as of the date hereof, which
Schedule includes, with respect to each Concentration Account depository (1)
the name and address of that depository; (2) the account number(s) maintained
with such depository; and (3) to the extent known, a contact person at such
depository.


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	 	     (ii) Annexed hereto as Schedule 2.21(a)(ii) is a list describing all
arrangements to which any Borrower is a party with respect to the payment
to any Borrower of the proceeds of all credit card charges for sales by
any Borrower.



     (b)  (i) On the Closing Date, the Borrowers shall have entered into agency
agreements with the banks maintaining the Concentration Accounts, which
agreements (the “Blocked Account Agreements”) shall be in form and substance
reasonably satisfactory to the Administrative Agent.



		
	 	     (ii) On the Closing Date, the Borrowers shall deliver to the
Administrative Agent notifications (the “Credit Card Notifications”)
executed on behalf of the Borrowers to each of their major credit card
processors instructing such credit card processors to remit all proceeds
of all credit card charges to a Concentration Account.
	 
	 	     (iii) The Blocked Account Agreements shall provide that, after the
occurrence and during the continuance of an Event of Default or Cash
Control Event, the Administrative Agent may, or at the request of the
Required Lenders shall, provide a
notice to each bank (with a copy to the Borrowers) maintaining a
Concentration Account (an “Activation Notice”) requiring the sweep on
each Business Day of all available cash receipts and other proceeds from
the sale of Inventory, including, without limitation, the proceeds of all
credit card charges (all such cash receipts and proceeds, “Cash
Receipts”), to a Concentration Account maintained by the Collateral Agent
at Fleet (the “Fleet Concentration Account”). At such time as such Event
of Default has been cured or waived or such Cash Control Event no longer
exists, the Activation Notice shall cease to be effective and the
Administrative Agent shall give notice thereof to each bank maintaining a
Concentration Account rescinding such Activation Notice previously given
to such bank.



     (c)  The Borrowers may close Concentration Accounts and/or open new
Concentration Accounts, subject to the execution and delivery to the
Administrative Agent of appropriate Blocked Account Agreements consistent with
the provisions of this Section 2.21. The Borrowers may close DDAs and/or open
new DDAs, subject to the Borrowers updating Schedule 2.21(a)(i) and otherwise
complying with the terms of this Agreement. The Borrowers may not enter into
any agreement with any credit card processors unless contemporaneously
therewith, a Credit Card Notification is executed and delivered to the
Administrative Agent. The Borrowers shall each cause each of their credit card
processors to remit all proceeds of all credit card charges to a Concentration
Account.


     (d)  The Fleet Concentration Account is, and shall remain, under the sole
dominion and control of the Collateral Agent. Each Borrower acknowledges and
agrees that (i) such Borrower has no right of withdrawal from the Fleet
Concentration Account, (ii) the funds on deposit in the Fleet Concentration
Account, if any, shall continue to be collateral security for all of the
Obligations and (iii) the funds on deposit in the Fleet Concentration Account
shall be applied as provided in Section 2.22(a).


     (e)  The Borrowers shall cause the ACH or wire transfer to a Concentration
Account, no less frequently then daily, of the then contents of each DDA, each
such transfer to be net of


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any minimum balance, not to exceed $10,000, as may
be required to be maintained in the subject DDA by the bank at which such DDA
is maintained.


     (f)  So long as (i) no Event of Default has occurred and is continuing, and
(ii) no Activation Notice shall have been given and remain in effect, the
Borrowers may direct, and shall have sole control over, the manner of
disposition of the funds in the Concentration Accounts. After the delivery of
an Activation Notice and during the effectiveness thereof, the Borrowers shall
cause the ACH or wire transfer to the Fleet Concentration Account, no less
frequently than daily of the then contents of each Concentration Account, each
such transfer to be net of any minimum balance, not to exceed $10,000, as may
be required to be maintained in the subject Concentration Account by the bank
at which such Concentration Account is maintained, and, in connection with each
such transfer, the Borrowers shall also provide the Administrative Agent with
an accounting of the contents of each Concentration Account.


     In the event that, notwithstanding the provisions of this Section 2.21,
after the delivery of an Activation Notice and during the effectiveness
thereof, the Borrowers receive or otherwise have dominion and control of any
such proceeds or collections, such proceeds and collections
shall be held in trust by the Borrowers for the Administrative Agent and
shall not be commingled with any of the Borrowers’ other funds or deposited in
any account of any Borrower other than as instructed by the Administrative
Agent.


     Effective upon delivery of an Activation Notice to the Borrowers from the
Collateral Agent, after the occurrence and during the continuation of an Event
of Default (including, without limitation, the failure of the Borrowers to
comply with the provisions of this Section 2.21(f)) (which notice may be given
by telephone if promptly confirmed in writing) or a Cash Control Event, (i) the
Administrative Agent may, at any time thereafter, deliver the Credit Card
Notifications to the addressees thereof, and (ii) the Concentration Accounts
will, without any further action on the part of any Borrower or the Collateral
Agent convert into a closed account under the exclusive dominion and control of
the Collateral Agent in which funds are held subject to the rights of the
Collateral Agent hereunder. In such event, all amounts in the Fleet
Concentration Account from time to time may be applied to the Obligations in
such order and manner as provided in Section 2.22 hereof.





     SECTION 2.22. Application of Payments.


     (a)  Subject to the provisions of Section 2.21, as long as no Event of
Default then exists, all amounts received in the Fleet Concentration Account
from any source, including the Concentration Accounts, shall be applied, on the
day of receipt, in the following order: first, to pay interest due and payable
on Credit Extensions and to pay fees and expense reimbursements and
indemnification then due and payable to the Administrative Agent, FSI, the
Issuing Bank, the Collateral Agent, and the Lenders; second, to repay
outstanding Swingline Loans; third, to repay other outstanding Revolving Loans
that are Base Rate Loans and all outstanding reimbursement obligations under
Letters of Credit; fourth, to repay outstanding Revolving Loans that are LIBOR
Loans and all Breakage Costs due in respect of such repayment pursuant to
Section 2.19(b) or, at the Borrowers’ option, to fund a cash collateral deposit
to the Cash Collateral Account sufficient to pay, and with direction to pay,
all such outstanding LIBOR Loans on the last day of the then-pending Interest
Period therefor; fifth, to pay Fleet or an


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Affiliate of Fleet in connection
with cash management and other similar banking or financial services provided
by such Person, sixth, to pay Indebtedness under any Hedging Agreement with a
Lender or an Affiliate of a Lender, seventh, to pay all other Obligations that
are then outstanding and then due and payable (it being understood that undrawn
Letters of Credit shall not be required to be cash collateralized if no Event
of Default has occurred and is continuing). If all amounts set forth in
clauses first through and including seventh above are paid, any excess amounts
shall be deposited in a separate cash collateral account, and shall promptly be
released to the Borrowers upon the request of any Borrower. Any other amounts
received by the Administrative Agent, the Issuing Bank, the Collateral Agent,
or any Lender as contemplated by Section 2.21 shall also be applied in the
order set forth above in this Section 2.22.


     (b)  All credits against the Obligations shall be effective on the day of
receipt thereof, and shall be conditioned upon final payment to the
Administrative Agent of the items giving rise to such credits. If any item
deposited to the Fleet Concentration Account and credited to the Loan Account
is dishonored or returned unpaid for any reason, whether or not such return is
rightful or timely, the Administrative Agent shall have the right to
reverse such credit and charge the amount of such item to the Loan Account and
the Borrowers shall indemnify the Administrative Agent, the Collateral Agent,
the Issuing Bank and the Lenders against all claims and losses resulting from
such dishonor or return.





     SECTION 2.23. Increased Costs.


     (a)  If any Change in Law shall:



		
	 	     (i) impose, modify or deem applicable any reserve, special
deposit or similar requirement against assets of, deposits with or
for the account of, or credit extended by, any Lender or any
holding company of any Lender (except any such reserve requirement
reflected in the Adjusted LIBO Rate) or the Issuing Bank; or
	 
	 	     (ii) impose on any Lender or the Issuing Bank or the London
interbank market any other condition affecting this Agreement or
LIBOR Loans made by such Lender or any Letter of Credit or
participation therein;



and the result of any of the foregoing shall be to increase the cost to such
Lender of making or maintaining any LIBOR Loan (or of maintaining its
obligation to make any such Loan) or to increase the cost to such Lender or the
Issuing Bank of participating in, issuing or maintaining any Letter of Credit
or to reduce the amount of any sum received or receivable by such Lender or the
Issuing Bank hereunder (whether of principal, interest or otherwise) other than
Taxes, which shall be governed by Section 2.26 hereof, then the Borrowers will
pay to such Lender or the Issuing Bank, as the case may be, such additional
amount or amounts as will compensate such Lender or the Issuing Bank, as the
case may be, for such additional costs incurred or reduction suffered.


     (b)  If any Lender or the Issuing Bank determines that any Change in Law
regarding capital requirements has or would have the effect of reducing the
rate of return on such Lender’s or the Issuing Bank’s capital or on the capital
of such Lender’s or the Issuing Bank’s holding company, if any, as a
consequence of this Agreement or the Loans made by, or participations in


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Letters of Credit held by, such Lender, or the Letters of Credit issued by the
Issuing Bank, to a level below that which such Lender or the Issuing Bank or
such Lender’s or the Issuing Bank’s holding company could have achieved but for
such Change in Law (taking into consideration such Lender’s or the Issuing
Bank’s policies and the policies of such Lender’s or the Issuing Bank’s holding
company with respect to capital adequacy), then from time to time the Borrowers
will pay to such Lender or the Issuing Bank, as the case may be, such
additional amount or amounts as will compensate such Lender or the Issuing Bank
or such Lender’s or the Issuing Bank’s holding company for any such reduction
suffered.


     (c)  A certificate of a Lender or the Issuing Bank setting forth the amount
or amounts necessary to compensate such Lender or the Issuing Bank or its
holding company, as the case may be, as specified in paragraph (a) or (b) of
this Section and setting forth in reasonable detail the manner in which such
amount or amounts were determined shall be delivered to the Borrowers and shall
be conclusive absent manifest error. The Borrowers shall pay such Lender
or the Issuing Bank, as the case may be, the amount shown as due on any
such certificate within ten (10) Business Days after receipt thereof.


     (d)  Failure or delay on the part of any Lender or the Issuing Bank to
demand compensation pursuant to this Section within sixty (60) days of the
effective date of the relevant Change in Law shall constitute a waiver of such
Lender’s or the Issuing Bank’s right to demand such compensation.





     SECTION 2.24. Change in Legality.


     (a)  Notwithstanding anything to the contrary contained elsewhere in this
Agreement, if (x) any Change in Law shall make it unlawful for a Lender to make
or maintain a LIBOR Loan or to give effect to its obligations as contemplated
hereby with respect to a LIBOR Loan or (y) at any time any Lender determines
that the making or continuance of any of its LIBOR Loans has become
impracticable as a result of a contingency occurring after the date hereof
which adversely affects the London interbank market or the position of such
Lender in the London interbank market, then, by written notice to the
Borrowers, such Lender may (i) declare that LIBOR Loans will not thereafter be
made by such Lender hereunder, whereupon any request by the Borrowers for a
LIBOR Borrowing shall, as to such Lender only, be deemed a request for a Base
Rate Loan unless such declaration shall be subsequently withdrawn; and (ii)
require that all outstanding LIBOR Loans made by it be converted to Base Rate
Loans, in which event all such LIBOR Loans shall be automatically converted to
Base Rate Loans as of the effective date of such notice as provided in
paragraph (b) below. In the event any Lender shall exercise its rights under
clause (i) or (ii) of this paragraph (a), all payments and prepayments of
principal which would otherwise have been applied to repay the LIBOR Loans that
would have been made by such Lender or the converted LIBOR Loans of such Lender
shall instead be applied to repay the Base Rate Loans made by such Lender in
lieu of, or resulting from the conversion of, such LIBOR Loans.


     (b)  For purposes of this Section 2.24, a notice to the Borrowers by any
Lender pursuant to paragraph (a) above shall be effective, if lawful, and if
any LIBOR Loans shall then be outstanding, on the last day of the then-current
Interest Period; and otherwise such notice shall be effective on the date of
receipt by the Borrowers.


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     SECTION 2.25. Payments; Sharing of Setoff.


     (a)  The Borrowers shall make each payment required to be made by it
hereunder or under any other Loan Document (whether of principal, interest,
fees or reimbursement of drawings under Letters of Credit, or of amounts
payable under Section 2.19(b), Section 2.23 or Section 2.26, or otherwise)
prior to 12:00 noon, Boston time, on the date when due, in immediately
available funds, without setoff or counterclaim. Any amounts received after
such time on any date may, in the discretion of the Administrative Agent, be
deemed to have been received on the next succeeding Business Day for purposes
of calculating interest thereon. All such payments shall be made to the
Administrative Agent at its offices at 100 Federal Street,
Boston, Massachusetts, except payments to be made directly to the Issuing
Bank or Swingline Lender as expressly provided herein and except that payments
pursuant to Section 2.19(b), Section 2.23, Section 2.26 and Section 9.3 shall
be made directly to the Persons entitled thereto and payments pursuant to other
Loan Documents shall be made to the Persons specified therein. The
Administrative Agent shall distribute any such payments received by it for the
account of any other Person to the appropriate recipient promptly following
receipt thereof. If any payment under any Loan Document (other than payments
with respect to LIBOR Borrowings) shall be due on a day that is not a Business
Day, the date for payment shall be extended to the next succeeding Business
Day, and, in the case of any payment accruing interest, interest thereon shall
be payable for the period of such extension. All payments under each Loan
Document shall be made in dollars.


     (b)  If at any time insufficient funds are received by and available to the
Administrative Agent to pay fully all amounts of principal, unreimbursed
drawings under Letters of Credit, interest and fees then due hereunder, such
funds shall be applied (i) first, towards payment of interest and fees then due
hereunder, ratably among the parties entitled thereto in accordance with the
amounts of interest and fees then due to such parties, and (ii) second, towards
payment of principal and unreimbursed drawings under Letters of Credit then due
hereunder, ratably among the parties entitled thereto in accordance with the
amounts of principal and unreimbursed drawings under Letters of Credit then due
to such parties.


     (c)  If any Lender shall, by exercising any right of setoff or counterclaim
or otherwise, obtain payment in respect of any principal of or interest on any
of its Loans or participations in drawings under Letters of Credit or Swingline
Loans resulting in such Lender’s receiving payment of a greater proportion of
the aggregate amount of its Loans and participations in drawings under Letters
of Credit and Swingline Loans and accrued interest thereon than the proportion
received by any other Lender, then the Lender receiving such greater proportion
shall purchase (for cash at face value) participations in the Loans and
participations in drawings under Letters of Credit and Swingline Loans of other
Lenders to the extent necessary so that the benefit of all such payments shall
be shared by the Lenders ratably in accordance with the aggregate amount of
principal of and accrued interest on their respective Loans and participations
in drawings under Letters of Credit and Swingline Loans, provided, that (i) if
any such participations are purchased and all or any portion of the payment
giving rise thereto is recovered, such participations shall be rescinded and
the purchase price restored to the extent of such recovery, without interest,
and (ii) the provisions of this paragraph shall not be construed to apply to
any payment made by the Borrowers pursuant to and in accordance with the
express terms of this Agreement or any payment obtained by a Lender as
consideration for the


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assignment of or sale of a participation in any of its
Loans or participations in drawings under Letters of Credit to any assignee or
participant, other than to the Borrowers or any Affiliate thereof (as to which
the provisions of this paragraph shall apply). The Borrowers consent to the
foregoing and agree, to the extent they may effectively do so under applicable
law, that any Lender acquiring a participation pursuant to the foregoing
arrangements may exercise against the Borrowers rights of setoff and
counterclaim with respect to such participation as fully as if such Lender were
a direct creditor of the Borrowers in the amount of such participation.


     (d)  Unless the Administrative Agent shall have received notice from the
Borrowers prior to the date on which any payment is due to the Administrative
Agent for the account of the
Lenders or the Issuing Bank hereunder that the Borrowers will not make
such payment, the Administrative Agent may assume that the Borrowers have made
such payment on such date in accordance herewith and may, in reliance upon such
assumption, distribute to the Lenders or the Issuing Bank, as the case may be,
the amount due. In such event, if the Borrowers have not in fact made such
payment, then each of the Lenders or the Issuing Bank, as the case may be,
severally agrees to repay to the Administrative Agent forthwith on demand the
amount so distributed to such Lender or Issuing Bank with interest thereon, for
each day from and including the date such amount is distributed to it to but
excluding the date of payment to the Administrative Agent, at the greater of
the Federal Funds Effective Rate and a rate determined by the Administrative
Agent in accordance with banking industry rules on interbank compensation.


     (e)  If any Lender shall fail to make any payment required to be made by it
pursuant to this Agreement, then the Administrative Agent may, in its
discretion (notwithstanding any contrary provision hereof), apply any amounts
thereafter received by the Administrative Agent for the account of such Lender
to satisfy such Lender’s obligations under this Agreement until all such
unsatisfied obligations are fully paid.





     SECTION 2.26. Taxes.


     (a)  Any and all payments by or on account of any obligation of the
Borrowers hereunder or under any other Loan Document shall be made free and
clear of and without deduction for any Indemnified Taxes or Other Taxes,
provided, that if the Borrowers shall be required to deduct any Indemnified
Taxes or Other Taxes from such payments, then (i) the sum payable shall be
increased as necessary so that after making all required deductions the
Administrative Agent, Lender or Issuing Bank (as the case may be) receives an
amount equal to the sum it would have received had no such deductions been
made, (ii) the Borrowers shall make such deductions and (iii) the Borrowers
shall pay the full amount deducted to the relevant Governmental Authority in
accordance with applicable law.


     (b)  In addition, the Borrowers shall pay any Other Taxes to the relevant
Governmental Authority in accordance with applicable law.


     (c)  The Borrowers shall indemnify the Administrative Agent, each Lender
and the Issuing Bank, within 10 Business Days after written demand therefor,
for the full amount of any Indemnified Taxes or Other Taxes paid by the
Administrative Agent, such Lender or the Issuing Bank, as the case may be, on
or with respect to any payment by or on account of any obligation


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of the
Borrowers hereunder or under any other Loan Document (including Indemnified
Taxes or Other Taxes imposed or asserted on or attributable to amounts payable
under this Section) and any penalties, interest and reasonable expenses arising
therefrom or with respect thereto, whether or not such Indemnified Taxes or
Other Taxes were correctly or legally imposed or asserted by the relevant
Governmental Authority. A certificate as to the amount of such payment or
liability delivered to the Borrowers by a Lender or the Issuing Bank, or by the
Administrative Agent on its own behalf or on behalf of a Lender or the Issuing
Bank setting forth in reasonable detail the manner in which such amount was
determined, shall be conclusive absent manifest error.


     (d)  As soon as practicable after any payment of Indemnified Taxes or Other
Taxes by the Borrowers to a Governmental Authority, the Borrowers shall deliver
to the Administrative Agent the original or a certified copy of a receipt
issued by such Governmental Authority evidencing such payment, a copy of the
return reporting such payment or other evidence of such payment reasonably
satisfactory to the Administrative Agent.


     (e)  Any Foreign Lender that is entitled to an exemption from or reduction
in withholding tax shall deliver to the Borrowers and the Administrative Agent
two copies of either United States Internal Revenue Service Form W-8BEN or Form
W-8ECI, or, in the case of a Foreign Lender’s claiming exemption from or
reduction in U.S. Federal withholding tax under Section 871(h) or 881(c) of the
Code with respect to payments of “portfolio interest”, a Form W-8BEN, or any
subsequent versions thereof or successors thereto (and, if such Foreign Lender
delivers a Form W-8BEN, a certificate representing that such Foreign Lender is
not a bank for purposes of Section 881(c) of the Code, is not a 10-percent
shareholder (within the meaning of Section 871(h)(3)(B) of the Code) of the
Borrowers and is not a controlled foreign corporation related to the Borrowers
(within the meaning of Section 864(d)(4) of the Code)), properly completed and
duly executed by such Foreign Lender claiming complete exemption from or
reduced rate of, U.S. Federal withholding tax on payments by the Borrowers
under this Agreement and the other Loan Documents. Such forms shall be
delivered by each Foreign Lender on or before the date it becomes a party to
this Agreement (or, in the case of a transferee that is a participation holder,
on or before the date such participation holder becomes a transferee hereunder)
and on or before the date, if any, such Foreign Lender changes its Applicable
Lending Office by designating a different lending office. In addition, each
Foreign Lender shall deliver such forms promptly upon the obsolescence or
invalidity of any form previously delivered by such Foreign Lender.
Notwithstanding any other provision of this Section 2.26(e), a Foreign Lender
shall not be required to deliver any form pursuant to this Section 2.26(e) that
such Foreign Lender is not legally able to deliver.


     (f)  The Borrowers shall not be required to indemnify any Foreign Lender or
to pay any additional amounts to any Foreign Lender in respect of U.S. Federal
withholding tax pursuant to paragraph (a) or (c) above to the extent that the
obligation to pay such additional amounts would not have arisen but for a
failure by such Foreign Lender to comply with the provisions of paragraph (e)
above. Should a Lender become subject to Taxes because of its failure to
deliver a form required hereunder, the Borrowers shall, at such Lender’s
expense, take such steps as such Lender shall reasonably request to assist such
Lender to recover such Taxes.





     SECTION 2.27. Security Interests in Collateral. To secure their Obligations
under this Agreement and the other Loan Documents, the Borrowers shall grant to
the Collateral Agent, for



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its benefit and the ratable benefit of the other
Secured Parties, a first-priority security interest in all of the Collateral
pursuant hereto and to the Security Documents.





     SECTION 2.28. Mitigation Obligations; Replacement of Lenders.


     (a)  If any Lender requests compensation under Section 2.23, or if any
Lender is not required to make LIBOR Loans under Section 2.24 or if the
Borrowers are required to pay any additional amount to any Lender or any
Governmental Authority for the account of any Lender pursuant to Section 2.26,
then such Lender shall use reasonable efforts to designate a different lending
office for funding or booking its Loans hereunder or to assign its rights and
obligations hereunder to another of its offices, branches or affiliates, if, in
the reasonable judgment of such Lender, such designation or assignment (i)
would eliminate or reduce amounts payable pursuant to Section 2.23 or Section
2.26 or would permit such Lender to make LIBOR Loans, as the case may be, in
the future and (ii) would not subject such Lender to any material unreimbursed
cost or expense and would not otherwise be materially disadvantageous to such
Lender. The Borrowers hereby agree to pay all reasonable costs and expenses
incurred by any Lender in connection with any such designation or assignment;
provided, however, that the Borrowers shall not be liable for such costs and
expenses of a Lender requesting compensation if (i) such Lender becomes a party
to this Agreement on a date after the Closing Date and (ii) the relevant Change
in Law occurs on a date prior to the date such Lender becomes a party hereto.


     (b)  If any Lender requests compensation under Section 2.23 or if any
Lender is not required to make LIBOR Loans under Section 2.24, or if the
Borrowers are required to pay any additional amount to any Lender or any
Governmental Authority for the account of any Lender pursuant to Section 2.26,
or if any Lender defaults in its obligation to fund Loans hereunder, then the
Borrowers may upon notice to such Lender and the Administrative Agent either
(i) terminate the Commitment of such Lender or (ii) require such Lender to
assign and delegate, without recourse (in accordance with and subject to the
restrictions contained in Section 9.4), all its interests, rights and
obligations under this Agreement to an assignee that shall assume such
obligations (which assignee may be another Lender, if a Lender accepts such
assignment), provided, that (A) except in the case of an assignment to another
Lender, the Borrowers shall have received the prior written consent of the
Administrative Agent, the Issuing Bank and Swingline Lender, which consent
shall not unreasonably be withheld, (B) such Lender shall have received payment
of an amount equal to the outstanding principal of its Loans and participations
in unreimbursed drawings under Letters of Credit and Swingline Loans, accrued
interest thereon, accrued fees and all other amounts payable to it hereunder,
from the assignee (to the extent of such outstanding principal and accrued
interest and fees) or the Borrowers (in the case of all other amounts) and (C)
in the case of any such assignment resulting from a claim for compensation
under Section 2.23 or payments required to be made pursuant to Section 2.26,
such assignment will result in a reduction in such compensation or payments. A
Lender shall not be required to make any such assignment and delegation if,
prior thereto, as a result of a waiver by such Lender or otherwise, the
circumstances entitling the Borrowers to require such assignment and delegation
cease to apply.


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ARTICLE III

REPRESENTATIONS AND WARRANTIES



     Each Borrower, represents and warrants to the Agents and the Lenders that:





     SECTION 3.1. Organization; Powers. Each Borrower is duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
organization, and each such Person has all requisite power and authority to
carry on its business as now conducted and, except where the failure to do so,
individually or in the aggregate, could not reasonably be expected to result in
a Material Adverse Effect, is qualified to do business in, and is in good
standing in, every jurisdiction where such qualification is required.





     SECTION 3.2. Authorization; Enforceability. The transactions contemplated
hereby and by the other Loan Documents to be entered into by each Borrower are
within such Borrower’s corporate or partnership powers and have been duly
authorized by all necessary corporate or partnership, and, if required,
stockholder action. This Agreement has been duly executed and delivered by
each Borrower that is a party hereto and constitutes, and each other Loan
Document to which any Borrower is a party, when executed and delivered by such
Borrower will constitute, a legal, valid and binding obligation of such
Borrower (as the case may be), enforceable in accordance with its terms,
subject to applicable bankruptcy, insolvency, reorganization, moratorium or
other laws affecting creditors’ rights generally and subject to general
principles of equity, regardless of whether considered in a proceeding in
equity or at law.





     SECTION 3.3. Governmental Approvals; No Conflicts. The transactions to be
entered into contemplated by the Loan Documents (a) do not require any consent
or approval of, registration or filing with, or any other action by, any
Governmental Authority, except (i) for such as have been obtained or made and
are in full force and effect, (ii) for those which could not reasonably be
expected to have a Material Adverse Effect, and (iii) for filings and
recordings necessary to perfect Liens created under the Loan Documents, (b)
will not violate any applicable law or regulation or the charter, by-laws or
other organizational documents of any Borrower or any order of any Governmental
Authority, except for such violation which could not reasonably be expected to
have a Material Adverse Effect, (c) will not violate or result in a default
under any indenture, agreement or other instrument binding upon any Borrower or
any of its Subsidiaries or their respective assets, except for such violation
or default which could not reasonably be expected to have a Material Adverse
Effect, or give rise to a right thereunder to require any payment to be made by
any Borrower, and (d) will not result in the creation or imposition of any Lien
on any asset of any Borrower, except Liens created under the Loan Documents or
otherwise permitted hereby or thereby.





     SECTION 3.4. Financial Condition. (a) There have been furnished to each of
the Lenders (i) consolidated balance sheets of Zale and its Subsidiaries as of
July 31, 2002, and a consolidated statement of operations and
consolidated statement of cash flow of Zale and its Subsidiaries for the
fiscal year then ended, certified by KPMG LLP and (ii) an unaudited
consolidated and consolidating balance sheet of Zale and its Subsidiaries as of
April 30, 2003, and an unaudited consolidated statement of operations and
consolidated statement of cash flow of Zale and its Subsidiaries for the period
of three fiscal quarters then ended. Such balance sheets, statements of
operations and statements of cash flow have been prepared in accordance


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with
GAAP and fairly present in all material respects the financial condition of
Zale and its Subsidiaries as at the close of business on the dates thereof and
the results of operations for the periods then ended, subject, in the case of
such unaudited consolidated balance sheet, unaudited consolidated statement of
operations and unaudited consolidated statement of cash flow, to year-end
adjustments, and except that there are no notes to such financial statements.
Other than the obligations incurred in connection with the Dutch Auction Tender
Offer there are no contingent liabilities that are likely to become fixed
obligations of Zale or any of its Subsidiaries as of such dates involving
material amounts, known to the Financial Officers of the Borrowers, which were
not disclosed in such balance sheets and the notes related thereto.


     (b)  The projected consolidated balance sheets and cash flow statements of
Zale and its Subsidiaries for the 2003 to 2004 fiscal years, copies of which
have been delivered to each Lender, have been prepared in good faith, are based
upon estimates and assumptions which the Borrowers deem reasonable as of the
date hereof, have been prepared on the basis of the assumptions stated therein
and reflect the reasonable estimates of Zale and its Subsidiaries of the
results of operations and other information projected therein.


     (c)  During the period from July 31, 2002 through the date of this
Agreement there has been no event or occurrence which has had a Material
Adverse Effect.





     SECTION 3.5. Properties


     (a)  As of the date hereof, the Borrowers and their Subsidiaries own all of
the material assets reflected in the consolidated balance sheet of Zale and its
Subsidiaries as of April 30, 2003 or acquired since that date (except property
or assets sold or otherwise disposed of in the ordinary course of business and
other property sold as permitted by Section 6.5 hereof since that date),
subject to no Liens except Permitted Encumbrances.


     (b)  Each Borrower owns, or is licensed to use, all trademarks, trade
names, copyrights, patents and other intellectual property material to its
business, and the use thereof by such Person does not infringe upon the rights
of any other Person, except for any such infringements that, individually or in
the aggregate, could not reasonably be expected to result in a Material Adverse
Effect.





     SECTION 3.6. Litigation and Environmental Matters. (a) There are no
actions, suits or proceedings by or before any arbitrator or Governmental
Authority pending against or, to the knowledge of any Borrower or any of its
Subsidiaries, threatened against or affecting any such Person (i) as to which
there is a reasonable possibility of an adverse determination and that, if
adversely determined, could reasonably be
expected, individually or in the aggregate, to result in a Material
Adverse Effect (other than those set forth on Schedule 3.6) or (ii) that
involve any of the Loan Documents.


     (b)  Except for the matters set forth on Schedule 3.6, and except as could
not reasonably be expected to have a Material Adverse Effect, no Borrower (i)
has failed to comply with any Environmental Law or to obtain, maintain or
comply with any permit, license or other approval required under any
Environmental Law, (ii) has become subject to any Environmental


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Liability,
(iii) has received notice of any claim with respect to any Environmental
Liability or (iv) knows of any basis for any Environmental Liability.


     (c)  Since the date of this Agreement, there has been no change in the
status of the matters set forth on Schedule 3.6 that, individually or in the
aggregate, has resulted in, or could reasonably be expected to result in, a
Material Adverse Effect.





     SECTION 3.7. Compliance with Laws and Agreements. Each Borrower is in
compliance with all laws, regulations and orders of any Governmental Authority
applicable to it or its property and all indentures, material agreements and
other instruments binding upon it or its property, except where the failure to
do so, individually or in the aggregate, could not reasonably be expected to
result in a Material Adverse Effect. No Default or Event of Default has
occurred and is continuing.





     SECTION 3.8. Investment and Holding Company Status. None of the Borrowers nor
any of its Subsidiaries is (a) an “investment company” as defined in, or
subject to regulation under, the Investment Company Act of 1940 or (b) a
“holding company” as defined in, or subject to regulation under, the Public
Utility Holding Company Act of 1935.





     SECTION 3.9. Taxes. Each Borrower, and each of its Subsidiaries, has timely
filed or caused to be filed all tax returns and reports required to have been
filed by it and has paid or caused to be paid all Taxes required to have been
paid by it, except (a) Taxes that are being contested in good faith by
appropriate proceedings, for which such Person has set aside on its books
adequate reserves, and as to which no Lien has arisen, or (b) to the extent
that the failure to do so could not reasonably be expected to result in a
Material Adverse Effect.





     SECTION 3.10. ERISA. (a) Each Plan and each Guaranteed Pension Plan has
been maintained and operated in compliance with the provisions of ERISA and, to
the extent applicable, the Code, including but not limited to the provisions
thereunder respecting prohibited transactions and the bonding of fiduciaries
and other persons handling plan funds as required by §412 of ERISA, except
where the failure to so comply would not reasonably be expected to have a
Material Adverse Effect. The Borrowers have heretofore delivered to the
Administrative Agent the most recently completed, prior to the date hereof,
annual report, Form 5500, with all required attachments, and
actuarial statement required to be submitted under §103(d) of ERISA, with
respect to each Guaranteed Pension Plan.


     (b)  Under each Plan which is an employee welfare benefit plan within the
meaning of §3(1) or §3(2)(B) of ERISA, no benefits are due unless the event
giving rise to the benefit entitlement occurs prior to plan termination (except
as required by Title I, Part 6 of ERISA). One of the Borrowers or an ERISA
Affiliate, as appropriate, may terminate each such Plan at any time (or at any
time subsequent to the expiration of any applicable bargaining agreement) in
the discretion of such Borrower or such ERISA Affiliate without liability to
any Person, except for benefit entitlements which have accrued prior to such
termination.


     (c)  Each contribution required to be made to a Guaranteed Pension Plan,
whether required to be made to avoid the incurrence of an accumulated funding
deficiency, the notice or lien provisions of §302(f) of ERISA, or otherwise,
has been timely made. No waiver of an


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accumulated funding deficiency or
extension of amortization periods has been received with respect to any
Guaranteed Pension Plan, and none of the Borrowers nor any ERISA Affiliate is
obligated to or has posted security in connection with an amendment to a
Guaranteed Pension Plan pursuant to §307 of ERISA or §401(a)(29) of the Code.
No liability to the PBGC (other than required insurance premiums, all of which
have been paid) has been incurred by the Borrowers or any ERISA Affiliate with
respect to any Guaranteed Pension Plan and there has not been any ERISA Event
(other than an ERISA Event as to which the requirement of thirty (30) days
notice has been waived), or any other event or condition which presents a
material risk of termination of any Guaranteed Pension Plan by the PBGC. Based
on the latest valuation of each Guaranteed Pension Plan (which in each case
occurred within twelve months of the date of this representation), and on the
actuarial methods and assumptions employed for that valuation, the aggregate
benefit liabilities of all such Guaranteed Pension Plans within the meaning of
§4001 of ERISA did not exceed the aggregate value of the assets of all such
Guaranteed Pension Plans, disregarding for this purpose the benefit liabilities
and assets of any Guaranteed Pension Plan with assets in excess of benefit
liabilities, by more than $1,000,000.


     (d)  None of the Borrowers nor any ERISA Affiliate has incurred any
material liability (including secondary liability) to any Multiemployer Plan as
a result of a complete or partial withdrawal from such Multiemployer Plan under
§4201 of ERISA or as a result of a sale of assets described in §4204 of ERISA.
None of the Borrowers nor any ERISA Affiliate has been notified that any
Multiemployer Plan is in reorganization or insolvent under and within the
meaning of §4241 or §4245 of ERISA or is at risk of entering reorganization or
becoming insolvent, or that any Multiemployer Plan intends to terminate or has
been terminated under §4041A of ERISA.





     SECTION 3.11. Disclosure. The Borrowers have disclosed to the Lenders all
agreements, instruments and corporate or other restrictions to which any
Borrower is subject, and all other matters known to any of them, that,
individually or in the aggregate, in each case, could reasonably be expected to
result in a Material Adverse Effect. None of the reports, financial
statements, certificates or other information furnished by or on behalf of any
Borrower to the Administrative Agent or any Lender in connection with the
negotiation of this Agreement or any other Loan Document or
delivered hereunder or thereunder (other than projections), taken as a whole,
contains any material misstatement of fact or omits to state any material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not materially misleading.





     SECTION 3.12. Subsidiaries. Schedule 3.12 (as the same may be supplemented
from time to time pursuant to the provisions of this Agreement) sets forth the
name of, and the ownership interest of each Borrower in each Subsidiary as of
the Closing Date. No other Subsidiaries of Zale own Inventory generally
consisting of watches, gemstones, jewelry, and giftware other than the Excluded
Subsidiaries and the Subsidiaries which are Borrowers hereunder. Except as set
forth on Schedule 3.12 (as the same may be supplemented from time to time
pursuant to the provisions of this Agreement), the Borrowers are not and each
of their respective Subsidiaries is not party to any joint venture, general or
limited partnership, or limited liability company, agreements or any other
business ventures or entities.


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     SECTION 3.13. Insurance. Schedule 3.13 sets forth a description of all
policies of insurance which covers the Collateral maintained by or on behalf of
the Borrowers as of the Closing Date. As of the Closing Date, all premiums in
respect of such insurance that are due and payable have been paid.





     SECTION 3.14. Accounts; Credit Cards. (a) Schedule 2.21(a)(i) lists all
DDAs and Concentration Accounts maintained by any of the Borrowers as of the
Closing Date, and such Schedule correctly identifies the name and address of
each depository, the account number(s) maintained with such depository, and to
the extent known, a contact person at such depository.


     (b)  Schedule 2.21(a)(ii) lists all arrangements to which any Borrower is a
party with respect to the payment to any Borrower of the proceeds of all credit
card charges for sales by any Borrower, as of the Closing Date.





     SECTION 3.15. Labor Matters. As of the Closing Date, there are no strikes,
lockouts or slowdowns against any Borrower pending or, to the knowledge of the
Borrowers, threatened. The hours worked by and payments made to employees of
the Borrowers have not been in violation of the Fair Labor Standards Act or any
other applicable federal, state, local or foreign law dealing with such matters
to the extent that any such violation could reasonably be expected to have a
Material Adverse Effect. All payments due from any Borrower, or for which any
claim may be made against any such Person, on account of wages and employee
health and welfare insurance and other benefits, have been paid or accrued as a
liability on the books of such member. The consummation of the transactions
contemplated by the Loan Documents will not give rise to any right of
termination or right of renegotiation on the part of any union under any
collective bargaining agreement to which any Borrower is bound.





     SECTION 3.16. Security Documents. The Security Documents create in favor of the Collateral Agent, for the
ratable benefit of the Secured Parties, a legal, valid and enforceable security
interest in the Collateral, and the Security Documents constitute, or will upon
the filing of financing statements and the obtaining of “control”, in each case
with respect to the relevant Collateral as required under the applicable
Uniform Commercial Code, the creation of a fully perfected first priority Lien
on, and security interest in, all right, title and interest of the Borrowers
thereunder in such Collateral, in each case prior and superior in right to any
other Person, except as permitted hereunder or under any other Loan Document or
as provided by applicable law.





     SECTION 3.17. Federal Reserve Regulations. Neither the Borrowers nor any of
their respective Subsidiaries is engaged principally, or as one of its
important activities, in the business of extending credit for the purpose of
buying or carrying Margin Stock. No part of the proceeds of any Loan or any
Letter of Credit will be used, whether directly or indirectly, and whether
immediately, incidentally or ultimately, (i) to buy or carry Margin Stock or to
extend credit to others for the purpose of buying or carrying Margin Stock or
to refund indebtedness originally incurred for such purpose or (ii) for any
purpose that entails a violation of, or that is inconsistent with, the
provisions of the Regulations of the Board, including Regulations U or X.





     SECTION 3.18. Solvency. Each of the Borrowers is Solvent. No transfer of
property is being made by any Borrower and no obligation is being incurred by
any Borrower in


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connection with the transactions contemplated by this Agreement
or the other Loan Documents with the intent to hinder, delay, or defraud either
present or future creditors of any Borrower.





     SECTION 3.19. Foreign Assets Control Regulations, Etc. None of the requesting
or borrowing of the Loans, the requesting or issuance, extension or renewal of
any Letters of Credit or the use of the proceeds of any thereof will violate
the Trading With the Enemy Act (50 U.S.C. § 1 et seq., as amended) (the
“Trading With the Enemy Act”) or any of the foreign assets control regulations
of the United States Treasury Department (31 CFR, Subtitle B, Chapter V, as
amended) (the “Foreign Assets Control Regulations”) or any enabling legislation
or executive order relating thereto (which for the avoidance of doubt shall
include, but shall not be limited to (a) Executive Order 13224 of September 21,
2001 Blocking Property and Prohibiting Transactions With Persons Who Commit,
Threaten to Commit, or Support Terrorism (66 Fed. Reg. 49079 (2001)) (the
“Executive Order”) and (b) the Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001
(Public Law 107-56)). Furthermore, none of the Borrowers nor any of their
respective Subsidiaries or other Affiliates (a) is or will become a “blocked
person” as described in the Executive Order, the Trading With the Enemy Act or
the Foreign Assets Control Regulations or (b) engages or will engage in any
dealings or transactions, or be otherwise associated, with any such “blocked
person”.





ARTICLE IV

CONDITIONS






     SECTION 4.1. Closing Date. The obligation of the Lenders to make the initial
Loans and of the Issuing Bank to issue the initial Letters of Credit is subject
to the following conditions precedent:


     (a)  The Agents (or their counsel) shall have received from each party
hereto other than the Lenders either (i) a counterpart of this Agreement and
all other Loan Documents signed on behalf of such party or (ii) written
evidence satisfactory to the Agents (which may include telecopy transmission of
a signed signature page of this Agreement) that such party has signed a
counterpart of this Agreement and all other Loan Documents.


     (b)  The Agents shall have received a favorable written opinion (addressed
to each Agent and the Lenders on the Closing Date and dated the Closing Date)
of Troutman Sanders LLP, counsel for the Borrowers, in the form attached hereto
as Exhibit D. The Borrowers hereby request such counsel to deliver such
opinion.


     (c) The Agents shall have received such documents and certificates as the
Agents or their counsel may reasonably request relating to the organization,
existence and good standing of each Borrower, the authorization of the
transactions contemplated by the Loan Documents and any other legal matters
relating to the Borrowers, the Loan Documents or the transactions contemplated
thereby, all in form and substance reasonably satisfactory to the Agents and
their counsel.


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     (d)  After giving effect to the first funding under the Loans; any charges
to the Loan Account made in connection with the establishment of the credit
facility contemplated hereby; and all Letters of Credit to be issued at, or
immediately subsequent to, such establishment; Excess Availability shall be not
less than $75,000,000. The Agents shall have received a Borrowing Base
Certificate dated the Closing Date, relating to the month ended on June 30,
2003, and executed by a Financial Officer of Zale.


     (e)  The Agents shall have received a certificate from a Financial Officer
of Zale, reasonably satisfactory in form and substance to the Agents, with
respect to the solvency of (i) Zale and its Subsidiaries on a consolidated
basis, and (ii) each Borrower, individually, as of the Closing Date.


     (f)  All necessary consents and approvals to the transactions contemplated
hereby shall have been obtained and shall be reasonably satisfactory to the
Agents.


     (g)  The Agents shall be reasonably satisfied that any financial statements
delivered to them fairly present the business and financial condition of Zale
and its Subsidiaries, and that there has been no material adverse change in the
assets, business, financial condition, or income of Zale and its Subsidiaries
since the date of the most recent financial information delivered to the
Agents.


     (h)  The Administrative Agent shall have received and be satisfied with (i)
the audited financial statements for Zale and its Subsidiaries for the fiscal
year ending July 31, 2002, and (ii) monthly detailed one-year financial
projections and business assumptions for Zale and its Subsidiaries for their
fiscal year ending July, 2004.


     (i)  There shall not be pending any litigation or other proceeding, the
result of which could reasonably be expected to have a Material Adverse Effect.


     (j)  No event shall exist which is, or solely with the passage of time, the
giving of notice or both, would be a default under any material agreement of
any Borrower.


     (k)  The Collateral Agent shall have received results of searches or other
evidence reasonably satisfactory to the Collateral Agent (in each case dated as
of a date reasonably satisfactory to the Collateral Agent) indicating the
absence of Liens on the Borrowers’ Inventory and proceeds thereof, including
without limitation, receivables from credit card processors, except for Liens
for which termination statements and releases reasonably satisfactory to the
Collateral Agent are being tendered concurrently with such extension of credit.


     (l)  The Collateral Agent shall have received all documents and
instruments, including Uniform Commercial Code financing statements and Blocked
Account Agreements with respect to the Concentration Accounts required by law
or reasonably requested by the Collateral Agent to be filed, registered or
recorded to create or perfect the first priority Liens intended to be created
under the Loan Documents and all such financing statements shall have been so
filed, registered or recorded to the satisfaction of the Collateral Agent.


     (m)  All fees due at or immediately after the Closing Date and all
reasonable costs and expenses incurred by the Agents in connection with the
establishment of the credit facility

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contemplated hereby (including the
reasonable fees and expenses of counsel to the Agents) shall have been paid in
full.


     (n)  The consummation of the transactions contemplated hereby shall not (a)
violate any applicable law, statute, rule or regulation, or (b) conflict with,
or result in a default or event of default under, any material agreement of any
Borrower (and the Agents and the Lenders shall receive a satisfactory opinion
of Borrowers’ counsel to that effect).


     (o)  No material changes in governmental regulations or policies affecting
the Borrowers, the Agents, the Arranger or any Lender involved in this
transaction shall have occurred prior to the Closing Date which could,
individually or in the aggregate, materially adversely affect the transaction
contemplated by this Agreement.


     (p)  The Agents shall have received a certificate of Zale stating that the
representations and warranties made by the Borrowers to the Agents and the
Lenders in the Loan Documents are true and correct in all material respects as
of the date of such Certificate, and that no event has occurred which is or
which, solely with the giving of notice or passage of time (or both) would be
an Event of Default.


     (q)  There shall be no Default or Event of Default on the Closing Date.


     (r)  The Agents shall have received a payoff letter or evidence otherwise
reasonably satisfactory in form and substance to the Agents from the Existing
Lenders confirming the termination of such credit facility upon receipt of
payment of the amounts due, if any, thereunder. All obligations to the
Existing Lenders, if any, shall be repaid with the proceeds of the initial
Loans hereunder.


     (s)  The Administrative Agent shall have received a landlord’s agreement
from the lessor of the distribution center located in Irving, Texas, which
agreement shall contain a waiver or subordination of all Liens or claims that
the landlord may assert against the Collateral at that location, and shall
otherwise be reasonably satisfactory in form and substance to the
Administrative Agent.


     (t)  The Administrative Agent shall have received evidence, in form and
substance satisfactory to the Administrative Agent, that either (i) all
Indebtedness under the notes issued pursuant to the Note Indenture has been
paid in full or (ii) such notes have been irrevocably called for redemption and
sufficient funds to pay the redemption price for such notes have been
irrevocably deposited with the trustee under the Note Indenture.


     (u)  There shall have been delivered to the Administrative Agent such
additional instruments and documents as the Administrative Agent or counsel to
the Administrative Agent may reasonably require or request including, without
limitation, the Dutch Auction Tender Offer Documents.


The Administrative Agent shall notify the Borrowers and the Lenders of the
Closing Date, and such notice shall be conclusive and binding. Notwithstanding
the foregoing, the obligations of the Lenders to make Loans and of the Issuing
Bank to issue Letters of Credit hereunder shall not become effective unless
each of the foregoing conditions is satisfied (or waived pursuant to


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Section
9.2) at or prior to 5:00 p.m., Boston time, on September 15, 2003, (and, in the
event such conditions are not so satisfied or waived, this Agreement shall
terminate at such time).





     SECTION 4.2. Conditions Precedent to Each Loan and Each Letter of Credit. In
addition to those conditions described in Section 4.1, the obligation of the
Lenders to make any Loan, including the initial Loan and of the Issuing Bank to
issue each Letter of Credit, is subject to the following conditions precedent:


     (a)  Notice. The Administrative Agent shall have received a notice with
respect to such Borrowing or issuance, as the case may be, as required by
Article II.


     (b)  Representations and Warranties. All representations and warranties
contained in this Agreement and the other Loan Documents or otherwise made in
writing in connection herewith or therewith shall be true and correct in all
material respects on and as of the date of each Borrowing or the issuance of a
Letter of Credit hereunder with the same effect as if made on and as of such
date, other than representations and warranties that relate solely to an
earlier date and except for changes thereto which are not prohibited by the
other terms of this Agreement or the other Loan Documents.


     (c)  No Default. On the date of each Borrowing hereunder and the issuance
of each Letter of Credit, no Default or Event of Default shall have occurred
and be continuing.


     (d)  Borrowing Base Certificate. The Administrative Agent shall have
received the most recently required Borrowing Base Certificate.


The request by the Borrowers for, and the acceptance by the Borrowers of, each
extension of credit hereunder shall be deemed to be a representation and
warranty by the Borrowers that the conditions specified in this Section 4.2
have been satisfied at that time and that after giving effect to such extension
of credit the aggregate of all Credit Extensions shall not exceed the amounts
set forth in Section 2.1(a) hereof. The conditions set forth in this Section
4.2 are for the sole benefit of the Administrative Agent and each Lender and
may be waived by the Administrative Agent in whole or in part without prejudice
to the Administrative Agent or any Lender.





ARTICLE V

AFFIRMATIVE COVENANTS



     Until the Commitments have expired or been terminated and the principal of
and interest on each Loan and all fees payable hereunder shall have been paid
in full and all Letters of Credit shall have expired or terminated and all L/C
Disbursements shall have been reimbursed, each Borrower covenants and agrees
with the Agents and the Lenders that:





     SECTION 5.1. Financial Statements and Other Information. The Borrowers will
furnish to the Agents:


     (a)  as soon as practicable, but in any event not later than ninety-five
(95) days after the end of each fiscal year of Zale, (i) the consolidated
balance sheet of Zale and its Subsidiaries


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as at the end of such year, and the
related consolidated statements of operations, stockholders’ equity and cash
flows for such year, setting forth in each case in comparative form the figures
for the previous fiscal year, all audited and reported on by KPMG LLP or by
another independent public accountants of recognized national standing (without
a “going concern” or like qualification or exception and without a
qualification or exception as to the scope of such audit) to the effect that
such consolidated financial statements present fairly in all material respects
the financial condition and results of operations of Zale and its consolidated
Subsidiaries on a consolidated basis in accordance with GAAP consistently
applied, and (ii) the annual 10-K reports of Zale filed with the Securities and
Exchange Commission;


     (b)  as soon as practicable, but in any event not later than fifty (50)
days after the end of each of the first three fiscal quarters of each fiscal
year of Zale, (i) copies of the unaudited consolidated balance sheet of Zale
and its Subsidiaries as at the end of such quarter, and the related
consolidated statement of operations for such quarter and for the portion of
Zale’s fiscal year then elapsed, and the related consolidated statement of cash
flow for the portion of Zale’s fiscal year then elapsed, all in reasonable
detail and prepared in accordance with GAAP (subject to year-end adjustments
and except for the absence of notes), and (ii) the quarterly 10-Q reports of
Zale filed with the Securities and Exchange Commission;


     (c)  as soon as practicable, but in any event not later than thirty (30)
days after the end of each month (which is not a fiscal quarter end) when a
Cash Control Event is in effect, copies of the unaudited consolidated balance
sheet of Zale and its Subsidiaries as at the end of such month, and the related
consolidated statement of operations for such month and for the Reference
Period then ended, and the related consolidated statement of cash flow for the
Reference Period then ended, all in reasonable detail and prepared in
accordance with GAAP (subject to year-end adjustments and except for the
absence of notes);


     (d)  (i) concurrently with any delivery of financial statements under
clause (a) or (b) above a certificate of a Financial Officer of Zale (A)
certifying as to whether a Default or Event of Default has occurred and, if a
Default has occurred, specifying the details thereof and any action taken or
proposed to be taken with respect thereto, (B) stating whether any change in
GAAP or in the application thereof has occurred since the date of Zale’s
audited financial statements referred to in Section 3.4 and, if any such change
has occurred, specifying the effect of such change on the financial statements
accompanying such certificate and (C) when a Cash Control Event is in effect, a
compliance certificate, certified by a Financial Officer of Zale, setting forth
in reasonable detail the computation evidencing compliance with Section 6.8,
(ii) concurrently with any delivery of financial statements under clause (c)
above, a compliance certificate, certified by a Financial Officer of Zale,
setting forth in reasonable detail the computation evidencing compliance with
Section 6.8 and (iii) within three (3) Business Days after the occurrence of a
Cash Control Event, a compliance certificate, certified by a Financial Officer
of Zale, setting forth in reasonable detail the computation evidencing
compliance with Section 6.8 based upon the most recent quarterly financial
statements delivered in accordance with clause (b) above.


     (e)  within sixty (60) days following the commencement of each fiscal year
of Zale, (i) a detailed consolidated budget by quarter for such fiscal year
(including a projected consolidated balance sheet and related statements of
projected operations and cash flow as of the


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end of and for such fiscal year)
and (ii) a monthly detail of projected Inventory levels and Credit Extensions
for such fiscal year; and, promptly when available, any significant revisions
to the budget and the projections;


     (f)  within fifteen (15) days after the end of each month, a certificate in
the form of Exhibit E (a “Borrowing Base Certificate”) showing the Borrowing
Base as of the close of business on the last day of the immediately preceding
month, each such Certificate to be certified as complete and correct on behalf
of the Borrowers by a Financial Officer of Zale, provided, however, (i) if the
Borrowing Base minus the Credit Extensions is less than $50,000,000 or (ii) an
Event of Default exists, such Borrowing Base Certificate (showing the Borrowing
Base as of the close of business on the last day of the immediately preceding
week) shall be furnished weekly on Wednesday of each week;


     (g)  within seven (7) Business Days after the end of the month of December
of each calendar year, a modified Borrowing Base Certificate evidencing a
roll-forward of Inventory from the preceding month’s end;


     (h)  promptly after the same become publicly available, copies of all
periodic and other reports, proxy statements and other materials filed by Zale
or any of its Subsidiaries with
the Securities and Exchange Commission, or any Governmental Authority
succeeding to any or all of the functions of said Commission, or with any
national securities exchange, as the case may be;


     (i)  promptly upon receipt thereof, copies of all reports submitted to Zale
by independent certified public accountants in connection with each annual,
interim or special audit of the books of Zale and its Subsidiaries made by such
accountants, including any management letter commenting on the Borrowers’
internal controls submitted by such accountants to management in connection
with their annual audit;


     (j)  the financial and collateral reports described on Schedule 5.1(i), at
the times set forth in such Schedule; and


     (k)  promptly following any request therefor, such other information
regarding the operations, business affairs and financial condition of any
Borrower, or compliance with the terms of any Loan Document, as the Agents or
any Lender may reasonably request.





     SECTION 5.2. Notices of Material Events. The Borrowers will furnish to the
Administrative Agent, the Issuing Bank, the Collateral Agent, and each Lender
prompt written notice of the following:


     (a)  the occurrence of any Default or Event of Default;


     (b)  the filing or commencement of any action, suit or proceeding by or
before any arbitrator or Governmental Authority against or affecting any
Borrower thereof that, if adversely determined, could reasonably be expected to
result in a Material Adverse Effect;


     (c)  the occurrence of any material violation of any applicable
Environmental Law that any of the Borrowers reports in writing or is reportable
by such Person in writing (or for


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which any written report supplemental to any
oral report is made) to any U.S. and any foreign federal, state or local
environmental agency which violation could reasonably be expected to result in
a Material Adverse Effect;


     (d)  the occurrence of any ERISA Event that, alone or together with any
other ERISA Events that have occurred, could reasonably be expected to result
in a Material Adverse Effect;


     (e)  any other development that results in, or could reasonably be expected
to result in, a Material Adverse Effect; and


     (f)  the discharge by any Borrower of its present independent accountants
or any withdrawal or resignation by such independent accountants.


Each notice delivered under this Section shall be accompanied by a statement of
a Financial Officer or other executive officer of Zale setting forth the
details of the event or development requiring such notice and, if applicable,
any action taken or proposed to be taken with respect thereto.





     SECTION 5.3. Information Regarding Collateral. The Borrowers will furnish to
the Agents (a) prompt written notice of any change in (i) any Borrower’s trade
name used to identify it in the conduct of its business or in the ownership of
its properties or (ii) any office in which it maintains books or records
relating to Collateral owned by it and having a value in excess of $10,000,000
or any office or facility at which Collateral owned by it and having a value in
excess of $10,000,000 is located (including the establishment of any such new
office or facility) and (b) prior written notice of any change in (i) any
Borrower’s corporate name or the location of any Borrower’s chief executive
office or its principal place of business, (ii) any Borrower’s identity or
corporate structure or (iii) any Borrower’s jurisdiction of incorporation,
Federal Taxpayer Identification Number or state organizational number. Zale
also agrees promptly to notify the Agents if any material portion of the
Collateral is damaged, destroyed, or lost, stolen or otherwise unaccounted for.





     SECTION 5.4. Existence; Conduct of Business. Except as otherwise permitted by
this Agreement, each Borrower will do or cause to be done all things necessary
to comply with its respective charter, certificate of incorporation, articles
of organization, and/or other organizational documents, as applicable; and
by-laws and/or other instruments which deal with corporate governance, and to
preserve, renew and keep in full force and effect its legal existence and the
rights, licenses, permits, privileges, franchises, patents, copyrights,
trademarks and trade names material to the conduct of its business.





     SECTION 5.5. Payment of Obligations.Each Borrower will pay its Material
Indebtedness, obligations in connection with Hedging Agreements, and Tax
liabilities, before the same shall become delinquent or in default, except
where (a) the validity or amount thereof is being contested in good faith by
appropriate proceedings, (b) such Borrower has set aside on its books adequate
reserves with respect thereto in accordance with GAAP, (c) such contest
effectively suspends collection of the contested obligation, (d) no Lien
secures such obligation and (e) the failure to make payment pending such
contest could not reasonably be expected to result in a Material Adverse
Effect; provided that any payment made by a Borrower in good faith


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with respect
to any of its Tax liabilities which is subsequently determined by a
Governmental Authority to be less than the payment deemed to be owed by such
Governmental Authority shall not constitute a breach of this Section 5.5,
provided such Governmental Authority has not levied any Lien to secure such
obligation. The Borrowers will cause each of their respective Subsidiaries to
pay its Tax liabilities, except to the extent that the failure to do so could
not reasonably be expected to result in a Material Adverse Effect.





     SECTION 5.6. Maintenance of Properties.Each Borrower will keep and maintain all
property material to the conduct of its business in good working order and
condition, ordinary wear and tear excepted and with the exception of asset
dispositions permitted hereunder.





     SECTION 5.7. Insurance.


          Each Borrower will maintain the following insurance under this Agreement
(or, to the extent consistent with prudent business practice, a program of self
insurance): (i) worker’s compensation and employer’s liability insurance
affording (A) protection under the workers’ compensation laws of the state(s)
in which the service is to be provided and (B) employers’ liability protection
subject to a limit of not less than $500,000; (ii) comprehensive automobile
liability insurance providing limits of not less than $2,000,000 each
occurrence for bodily injury and property damage combined; (iii) commercial
general liability insurance providing not less than $2,000,000 each occurrence
for bodily injury and property damage combined; and (iv) umbrella liability
insurance in amounts not less than $3 million in excess of primary liability
coverage. All such insurance policies required to be maintained under this
Agreement shall be procured from insurance companies rated at least A-VIII or
better by the then current edition of Best’s Insurance Reports published by
A.M. Best Co. The Borrowers shall provide Administrative Agent with
certificates of insurance evidencing the required coverage concurrently with
the execution of this Agreement and upon each renewal of such policies
thereafter, including a clause that obligates the Borrowers to give at least
thirty (30) days prior written notice of any material change or cancellation of
such policies. Each of the Borrowers will maintain with financially sound and
reputable insurers insurance with respect to the Collateral and its other
properties against such casualties as shall be consistent with past practices
and in accordance with the general practices of businesses engaged in similar
activities in similar geographic areas and in amounts, containing such terms,
in such forms and for such periods as may be reasonable and prudent.


     (b)  Fire and extended coverage policies maintained with respect to any
Collateral shall be endorsed or otherwise amended to include (i) a provision to
the effect that none of the Borrowers, the Administrative Agent, the Collateral
Agent, or any other party shall be a coinsurer and (ii) such other provisions
as the Collateral Agent may reasonably require from time to time to protect the
interests of the Lenders. Each such policy referred to in this paragraph also
shall provide that it shall not be canceled, modified or not renewed (i) by
reason of nonpayment of premium except upon not less than ten (10) days’ prior
written notice thereof by the insurer to the Collateral Agent (giving the
Collateral Agent the right to cure defaults in the payment of premiums) or (ii)
for any other reason except upon not less than thirty (30) days’ prior written
notice thereof by the insurer to the Collateral Agent. The Borrowers shall
deliver to the Collateral Agent, prior to the cancellation, modification or
nonrenewal of any such policy of insurance, a copy of a renewal or replacement
policy (or other evidence of renewal of a policy


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previously delivered to the
Collateral Agent) together with evidence satisfactory to the Collateral Agent
of payment of the premium therefor.





     SECTION 5.8. Casualty and Condemnation. Each Borrower will furnish to the
Agents and the Lenders prompt written notice of any casualty or other insured
damage to any material portion of the Collateral having a value in excess of
$10,000,000 or the commencement of any action or proceeding for the taking of
any material portion of the Collateral having a value in excess of $10,000,000
under power of eminent domain or by condemnation or similar proceeding.





     SECTION 5.9. Books and Records; Inspection and Audit Rights; Appraisals.


     (a)  Each Borrower will keep proper books of record and account in which
full, true and correct entries are made of all dealings and transactions in
relation to its business and activities. Each Borrower will permit any
representatives designated by any Agent, upon reasonable prior notice, to visit
and inspect its properties, to examine and make extracts from its books and
records, and to discuss its affairs, finances and condition with its officers
and independent accountants, all at such reasonable times and as often as
reasonably requested.


(b)  Each Borrower will from time to time upon the reasonable request of the
Collateral Agent or the Required Lenders through the Administrative Agent,
permit any Agent or professionals (including investment bankers, consultants,
accountants, lawyers and appraisers) retained by the Agents to conduct
appraisals, commercial finance examinations and other evaluations, including,
without limitation, of (i) the Borrowers’ practices in the computation of the
Borrowing Base and (ii) the assets included in the Borrowing Base and related
financial information such as, but not limited to, sales, gross margins,
payables, accruals and reserves, and pay the reasonable fees and expenses of
the Agents or such professionals with respect to such evaluations and
appraisals; provided, however, so long as there exists no Event of Default and
no Cash Control Event, the Borrowers shall not be required to pay for more than
one (1) Inventory appraisal and one (1) commercial finance examination during
any period of twelve (12) consecutive fiscal months. No more frequently than
once during any period of twelve (12) consecutive fiscal months, or more
frequently as determined by the Collateral Agent if an Event of Default or Cash
Control Event shall have occurred and be continuing, the Collateral Agent shall
conduct at least one (1) commercial finance examination and one (1) Inventory
appraisal, provided, the Collateral Agent shall have discretion to do
commercial finance exams and Inventory appraisals less frequently than once
each consecutive twelve (12) month period should average Credit Extensions for
the prior twelve (12) fiscal month period be less than $75,000,000.





     SECTION 5.10. Compliance with Laws. Each of the Borrowers will, comply with
all laws, rules, regulations, and orders of any Governmental Authority
applicable to it or its property except where the failure to do so,
individually or in the aggregate, could not reasonably be expected to result in
a Material Adverse Effect.





     SECTION 5.11. Employee Benefit Plans. The Borrowers will (a) promptly upon any
request of the Administrative Agent therefor, furnish to the Administrative
Agent a copy of the most recent actuarial statement required to be submitted
under §103(d) of ERISA and Annual Report, Form 5500, with all required
attachments, in respect of each Guaranteed Pension Plan, 

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(b)  within ten (10)
days of receipt or dispatch, furnish to the Administrative Agent any notice,
report or demand sent or received in respect of a Guaranteed Pension Plan under
Sections 302, 4041, 4042, 4043, 4063, 4065, 4066 and 4068 of ERISA, or in
respect of a Multiemployer Plan under Sections 4041A, 4202, 4219, 4242 or 4245
of ERISA.





     SECTION 5.12. Use of Proceeds and Letters of Credit. The proceeds of Loans made hereunder and Letters of Credit issued hereunder
will be used only (a) to refinance Indebtedness due to the Existing Lenders,
(b) to finance the acquisition of working capital assets of the Borrowers and
their respective Subsidiaries, including the purchase of inventory and
equipment, in each case in the ordinary course of business, (c) to finance
Capital Expenditures of the Borrowers and their respective Subsidiaries, and
(d) for general corporate purposes, including to effectuate redemption of the
Senior Notes under the Note Indenture and of the capital stock of Zale pursuant
to the Dutch Auction Tender Offer, all to the extent permitted herein. No part
of the proceeds of any Loan will be used, whether directly or indirectly, for
any purpose that entails a violation of the Regulations of the Board, including
Regulations U and X.





     SECTION 5.13. New Subsidiaries. The Borrowers shall each cause any Subsidiary
of the Borrowers, other than Excluded Subsidiaries, which owns Inventory
generally consisting of watches, gemstones, jewelry and giftware to immediately
become a Borrower hereunder by signing a joinder agreement to this Agreement
and the Loan Documents, as applicable, with the other parties hereto and
thereto, in form and substance satisfactory to the Administrative Agent. None
of the Excluded Subsidiaries shall have or engage in any business in the United
States of America, other than in Puerto Rico.





     SECTION 5.14. Further Assurances. Each Borrower will execute any and all
further documents, agreements and instruments, and take all such further
actions (including the filing and recording of financing statements and other
documents), that may be required under any applicable law, or which any Agent
or the Required Lenders may reasonably request, to effectuate the transactions
contemplated by the Loan Documents or to grant, preserve, protect or perfect
the Liens created or intended to be created by the Security Documents or the
validity or priority of any such Lien, all at the expense of the Borrowers. The
Borrowers also agree to provide to the Agents, from time to time upon request,
evidence reasonably satisfactory to the Agents as to the perfection and
priority of the Liens created or intended to be created by the Security
Documents.





ARTICLE VI

NEGATIVE COVENANTS



     Until the Commitments have expired or terminated and the principal of and
interest on each Loan and all fees payable hereunder have been paid in full and
all Letters of Credit have expired or terminated and all L/C Disbursements
shall have been reimbursed, each Borrower covenants and agrees with the Agents
and the Lenders that:


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     SECTION 6.1. Indebtedness and Other Obligations. The Borrowers will not
create, incur, assume or permit to exist any Indebtedness, except:


     (a)  Indebtedness created under the Loan Documents;


     (b)  Indebtedness set forth in Schedule 6.1 and extensions, renewals and
replacements of any such Indebtedness that do not increase the outstanding
principal amount thereof or result in an earlier maturity date or decreased
weighted average life thereof;


     (c)  Indebtedness of any Borrower to any other Borrower otherwise permitted
hereunder,


     (d)  Indebtedness of any of the Borrowers to any Subsidiary in an aggregate
amount of all such Indebtedness not to exceed $50,000,000;


     (e)  Guaranties of Indebtedness of Zale Canada Co. in an aggregate amount
not to exceed $12,000,000;


     (f)  Indebtedness of any Borrower to finance the acquisition of any fixed
or capital assets, including Capital Lease Obligations and any Indebtedness
assumed in connection with the acquisition of any such assets or secured by a
Lien on any such assets prior to the acquisition thereof, and extensions,
renewals and replacements of any such Indebtedness that do not increase the
outstanding principal amount thereof or result in an earlier maturity date or
decreased weighted average life thereof, provided, that the aggregate principal
amount of Indebtedness permitted by this clause (f) shall not exceed
$50,000,000 at any time outstanding;


     (g)  Indebtedness consisting of Capital Lease Obligations and guaranties
thereof by the Borrowers, or any of them;


     (h)  Indebtedness incurred to purchase or refinance any Real Estate owned
or being acquired by any Borrower; and


     (i)  other unsecured Indebtedness in an aggregate principal amount not
exceeding $150,000,000 at any time outstanding, provided, that the terms of
such Indebtedness do not contain any covenants or events of default which may
be interpreted to be or are deemed to be in, the reasonable discretion of the
Administrative Agent, more restrictive than the covenants and Events of Default
contained in this Agreement.





     SECTION 6.2. Liens. The Borrowers will not create, incur, assume or permit to
exist any Lien on any property or asset now owned or hereafter acquired by it,
or assign or sell any income or revenues (including accounts receivable) or
rights in respect of any thereof, except:


     (a)  Liens created under the Loan Documents;


     (b)  Permitted Encumbrances;

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     (c)  any Lien on any property or asset of any Borrower set forth in
Schedule 6.2, provided, that (i) such Lien shall not apply to any other
property or asset of any Borrower and (ii) such Lien shall secure only those
obligations that it secures as of the Closing Date, and extensions, renewals
and replacements thereof that do not increase the outstanding principal amount
thereof;


     (d)  Liens on fixed or capital assets acquired by any Borrower, provided,
that (i) such Liens secure Indebtedness permitted by clause (f) of Section 6.1,
(ii) such Liens and the Indebtedness secured thereby are incurred prior to or
within one hundred eighty (180) days after such acquisition or the completion
of such construction or improvement, (iii) the Indebtedness secured thereby
does not exceed 100% of the cost of acquiring such fixed or capital assets and
(iv) such Liens shall not apply to any other property or assets of the
Borrowers;


     (e)  Liens to secure Indebtedness permitted by clause (h) of Section 6.1
provided, that such Liens shall not apply to any property or assets of the
Borrowers other than the Real Estate so refinanced or which is the subject of a
sale-leaseback transaction;


     (f)  Liens on Inventory and proceeds thereof (up to the Cost to such
Borrower of such Inventory) held on consignment from trade vendors securing
obligations to return or pay the purchase price of such Inventory;


     (g)  Voluntary options in favor of any of the Borrowers and their
respective Subsidiaries to purchase real property subject to operating leases;


     (h)  transfers to any Rabbi Trust, or other similar trust or similar
arrangement or to any account established for the benefit of the employees of
any of Zale and its Subsidiaries in an aggregate amount not to exceed
$10,000,000 at any time outstanding;


     (i)  Sales, assignments or transfers of assets to the extent permitted by
Section 6.5 hereof; and


     (j)  Other Liens on assets of the Borrowers (other than Inventory or
accounts receivable) to the extent not otherwise included in paragraphs (a)
through (i) of this Section securing Indebtedness and other liabilities in an
aggregate amount not to exceed $10,000,000 at any time outstanding.


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     SECTION 6.3. Fundamental Changes


     (a)  The Borrowers will not merge into or consolidate with any other
Person, or permit any other Person to merge into or consolidate with it, or
liquidate or dissolve, except that, if at the time thereof and immediately
after giving effect thereto, no Default or Event of Default shall have occurred
and be continuing, (i) any Subsidiary may merge into a Borrower in a
transaction in which the Borrower is the surviving corporation, (ii) any
Borrower may merge with any other Person as long as such Borrower is the
surviving corporation, and (iii) any Subsidiary that is not a Borrower may
merge into any other Subsidiary that is not a Borrower, provided, that any such
merger involving a Person that is not a wholly owned Subsidiary immediately
prior to such merger shall not be permitted unless also permitted by Section
6.4.


     (b)  The Borrowers will not engage to any material extent in any business
other than businesses of the type conducted by the Borrowers on the date of
execution of this Agreement and businesses reasonably related thereto.





     SECTION 6.4. Investments, Loans, Advances, Guarantees and Acquisitions. The Borrowers will not purchase, hold or acquire (including pursuant to any
merger with any Person that was not a wholly owned Subsidiary prior to such
merger) any capital stock, evidences of indebtedness or other securities
(including any option, warrant or other right to acquire any of the foregoing)
of, make or permit to exist any loans or advances to, guarantee any obligations
of, or make or permit to exist any investment or any other interest in, any
other Person, or purchase or otherwise acquire (in one transaction or a series
of transactions) any assets of any other Person constituting a business unit,
except for:


     (a)  Permitted Investments;


     (b)  investments existing on the Closing Date, and set forth on Schedule
6.4, to the extent such investments would not be permitted under any other
clause of this Section;


     (c)  loans or advances by any Borrower to any other Borrower;


     (d)  loans or advances by any of the Borrowers to any of its respective
Subsidiaries in an amount not to exceed $50,000,000 in the aggregate for all
such loans or advances;


     (e)  loans to or other investments in an Unrestricted Subsidiary provided
that such loan or investment is either repaid in full by such Unrestricted
Subsidiary or purchased by another Unrestricted Subsidiary within five (5)
Business Days of the date such loan or other investment is made;


     (f)  investments consisting of transfers of stock or other ownership
interest in a Unrestricted Subsidiary to any other Unrestricted Subsidiary,
together with any note or other securities issued by such other Unrestricted
Subsidiary in consideration of such transfer;


     (g)  investments in registered investment companies which invest solely in
investments otherwise permitted by this Section 6.4;

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     (h)  investments consisting of promissory notes received as proceeds of
asset dispositions permitted by Section 6.5;


     (i)  investments in an amount up to the amount of funds under any Rabbi
Trust or similar trust arrangements established for the satisfaction of any of
Zale and its Subsidiaries for deferred compensation, but in no event in excess
of $10,000,000 in the aggregate;


     (j)  investments in Zale stock, whether or not permitted under Section 6.6
in connection with the satisfaction of the Borrowers’ or a Subsidiary’s
obligations under a 401(k) plan and/or the Zale Omnibus Stock Incentive Plan or
similar employee benefit plans maintained by the Borrowers and their respective
Subsidiaries, or any of them;


     (k)  investments consisting of (i) Indebtedness permitted by Sections
6.1(c), (d), (e) and (j), and (ii) guaranties of Indebtedness permitted by
Sections 6.1(f) and (g);


     (l)  investments received in connection with the bankruptcy or
reorganization of, or settlement of delinquent accounts and disputes with,
customers and suppliers, in each case in the ordinary course of business;


     (m)  loans or advances to employees for the purpose of travel,
entertainment or relocation in the ordinary course of business not to exceed
$2,000,000 in the aggregate at any time outstanding;


     (n)  acquisitions of assets or stock (other than the stock of the
Borrowers) so long as (i) such assets or stock acquired are related to the
business of one of the Borrowers or their Subsidiaries, (ii) Excess
Availability exceeds the Distribution Minimum Excess Availability Amount after
completing such acquisition and the Borrowers deliver projections to the
Administrative Agent demonstrating the maintenance of the Distribution Minimum
Excess Availability Amount for the six (6) month period immediately following
such transaction, (iii) at the time of such acquisition, and after giving
effect thereto, there exists no Default or Event of Default, and (iv) with
respect to any such acquisitions of stock, simultaneously with the occurrence
of such acquisition, the entity so acquired shall if it owns Inventory (A) be
merged or consolidated with and into one of the Borrowers, (B) transfer all of
its assets (other than those required to satisfy liabilities) to the Borrowers,
or (C) become a Borrower under this Agreement in accordance with Section 5.13
hereof; provided, further, that with respect to acquisitions of assets or stock
which in the aggregate do not exceed $5,000,000, the Borrowers shall not be
required to comply with clause (ii) above so long as prior to such acquisition
no Cash Control Event has occurred and no Cash Control Event shall occur after
giving effect to such acquisition;


     (o)  acquisitions of Zale stock permitted by Section 6.4(j) or repurchases
of Zale stock otherwise permitted by Section 6.6; and


     (p)  Guarantees of the foreign currency and hedging obligations of Zale
Canada Co. to meet the operating needs of the business consistent with past
practices.





     SECTION 6.5. Asset Sales. The Borrowers will not sell, transfer, lease or
otherwise dispose of any asset, including any capital stock, nor will the
Borrowers issue any additional shares of its capital stock or other ownership
interest in such Borrower, except:


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	 	     (i) (A) sales of Inventory in the ordinary course of business
(including in connection with the closure of stores), or (B) used
or surplus equipment, or (C) Permitted Investments and investments
permitted pursuant to Sections 6.4(g), (h), (i), and (j), in each
case in the ordinary course of business;




		
	 	     (ii) sales, transfers and dispositions among the Borrowers and
their respective Subsidiaries (excluding, however, any sales,
transfers and dispositions of Inventory or proceeds thereof, from
any Borrower except to another Borrower), provided, that any such
sales, transfers or dispositions involving a Subsidiary that is not
a Borrower shall be made in compliance with Section 6.7;
	 
	 	     (iii) sale of the Pennsylvania distribution facilities;




		
	 	     (iv) sale of the 407.48 carat diamond known as the
“Incomparable Diamond” and related diamonds;
	 
	 	     (v) issuances of shares of capital stock of any Borrower to
any other Borrower or the issuance by Zale of shares of its capital
stock;




		
	 	     (vi) the natural expiration of intellectual property licenses
in accordance with the terms thereof;




		
	 	     (vii) transfers of assets permitted as investments under
Section 6.4, including, but not limited to, the transfer of any
loan or investment sold to an Unrestricted Subsidiary as
contemplated by Section 6.4(e); and




		
	 	     
(viii)  Permitted Asset Sales provided that no Event of Default
or Cash Control Event has occurred and is continuing or would occur
as a result thereof;




provided, that all sales, transfers, leases and other dispositions permitted
hereby (other than sales, transfers and other disposition permitted under
clause (ii)) shall be made at arm’s length and for fair value (other than
sales, transfers and other dispositions permitted under clause (ii)); and
further provided, that the authority granted hereunder may be terminated in
whole or in part by the Agents upon the occurrence and during the continuance
of any Event of Default.


     (b)  The Borrowers will not sell, transfer, lease or otherwise dispose of
receipts from credit card processors of the Borrowers.





     SECTION 6.6. Restricted Payments; Certain Payments of Indebtedness.


            The Borrowers will not declare or make, or agree to pay or make, directly
or indirectly, any Restricted Payment, except so long as no Default or Event of
Default occurs and is continuing or would arise therefrom, the Borrowers may
make Restricted Payments so long as Excess Availability exceeds the
Distribution Minimum Excess Availability Amount after giving effect to the
amount of any such distribution or repurchase and the Borrowers deliver
projections to the Administrative Agent demonstrating the maintenance of the
Distribution Minimum Excess Availability Amount for the six (6) month period
immediately following such distribution or repurchase; provided, however, the
Borrowers may make additional Restricted Payments, in an



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aggregate amount not
to exceed $5,000,000 in any fiscal quarter, so long as no Cash Control Event
has occurred and no Cash Control Event shall occur after giving effect to such
payment.


     (b)  Any Borrower may make a Restricted Payment to any other Borrower.


     (c)  The Borrowers shall be permitted to effectuate the Dutch Auction
Tender Offer so long as immediately following the closing of the Dutch Auction
Tender Offer, no Event of Default exists and Excess Availability shall not be
less than $50,000,000 and the Borrowers shall have delivered projections to the
Administrative Agent demonstrating the maintenance of Excess Availability of
$50,000,000 for the twelve (12) month period immediately following such
transactions.


     (d)  After the occurrence and during the continuation an Event of Default
under Section 7.1(h) or Section 7.1(i) hereof, the Borrowers will not at any
time, make or agree to pay
or make, directly or indirectly any payment or other distribution (whether
in cash securities or other property) of or in respect of principal of or
interest on any Indebtedness, or any payment or other distribution (whether in
cash, securities or other property), including any sinking fund or similar
deposit, on account of the purchase, redemption, retirement, acquisition,
cancellation or termination of any Indebtedness, except payment of regularly
scheduled principal and interest payments in respect of any permitted
Indebtedness and refinancings of permitted Indebtedness.





     SECTION 6.7. Transactions with Affiliates. Except as set forth on Schedule 6.7
hereto, the Borrowers will not at any time sell, lease or otherwise transfer
any property or assets to, or purchase, lease or otherwise acquire any property
or assets from, or otherwise engage in any other transactions with, any of
their respective Affiliates, except (a) transactions in the ordinary course of
business that are at prices and on terms and conditions not less favorable to
the Borrowers than could be obtained on an arm’s-length basis from unrelated
third parties, (b) transactions among the Borrowers and (c) transactions in the
ordinary course of business, consistent with past practices, between or among
the Borrowers and/or their respective Subsidiaries not involving any other
Affiliate, which would not otherwise violate the provisions of the Loan
Documents.





     SECTION 6.8. Fixed Charge Coverage Ratio. At all times when a Cash Control
Event is in effect, the Borrowers will not permit the Fixed Charge Coverage
Ratio to be less than 1.1:1.0 for the most recent Reference Period then ended
for which a compliance certificate required by Section 5.1(d) has been
delivered.





     SECTION 6.9. Hedging Agreements. No Borrower shall enter into any Hedging
Agreement except for Hedging Agreements used solely as a part of its normal
business operations as a risk management strategy and/or hedge against changes
resulting from market operations in accordance with its customary policies and
not as a means to speculate for investment purposes on trends and shifts in
financial or commodities markets.


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ARTICLE VII

EVENTS OF DEFAULT






     SECTION 7.1. Events of Default. If any of the following events (“Events of
Default”) shall occur:


     (a)  the Borrowers shall fail to pay any principal of any Loan or any
reimbursement obligation in respect of any L/C Disbursement when and as the
same shall become due and payable, whether at the due date thereof or at a date
fixed for prepayment thereof or otherwise;


     (b)  the Borrowers shall fail to pay any interest on any Loan or any fee or
any other amount (other than an amount referred to in clause (a) of this
Article) payable under this
Agreement or any other Loan Document, within five (5) Business Days of the
date when the same shall become due and payable;


     (c)  any representation or warranty made or deemed made by or on behalf of
any Borrower in or in connection with any Loan Document or any amendment or
modification thereof or waiver thereunder, or in any report, certificate,
financial statement or other document furnished pursuant to or in connection
with any Loan Document or any amendment or modification thereof or waiver
thereunder, shall prove to have been incorrect in any material respect when
made or deemed made;


     (d)  the Borrowers shall fail to observe or perform any covenant, condition
or agreement contained:



		
	 	     (i) in Section 2.21, Section 5.7, Section 5.9 or Section 5.12,
or in Article VI; and




		
	 	     (ii) in Section 5.1(f), and such failure shall continue
unremedied for a period of 5 Business Days after notice thereof
from the Administrative Agent to the Borrowers;



     (e)  any Borrower shall fail to observe or perform any covenant, condition
or agreement contained in any Loan Document (other than those specified in
clause (a), (b), (c), or (d) of this Article), and such failure shall continue
unremedied for a period of thirty (30) days after notice thereof from the
Administrative Agent to Zale (which notice will be given at the request of any
Lender);


     (f)  any Borrower shall fail to make any payment (whether of principal or
interest and regardless of amount) in respect of any Material Indebtedness when
and as the same shall become due and payable (after giving effect to the
expiration of any grace or cure period set forth therein);


     (g)  any event or condition occurs that results in any Material
Indebtedness becoming due prior to its scheduled maturity or that enables or
permits (with or without the giving of notice, the lapse of time or both) the
holder or holders of any such Material Indebtedness or any trustee or agent on
its or their behalf to cause any such Material Indebtedness to become due, or


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to require the prepayment, repurchase, redemption or defeasance thereof, prior
to its scheduled maturity;


     (h)  an involuntary proceeding shall be commenced or an involuntary
petition shall be filed seeking (i) liquidation, reorganization or other relief
in respect of any Borrower or its debts, or of a substantial part of its
assets, under any federal or state bankruptcy, insolvency, receivership or
similar law now or hereafter in effect or (ii) the appointment of a receiver,
trustee, custodian, sequestrator, conservator or similar official for any
Borrower or for a substantial part of its assets, and, in any such case, such
proceeding or petition shall continue undismissed for 60 days or an order or
decree approving or ordering any of the foregoing shall be entered and continue
unstayed and in effect for 30 days;


     (i)  any Borrower shall (i) voluntarily commence any proceeding or file any
petition seeking liquidation, reorganization or other relief under any federal
or state bankruptcy, insolvency, receivership or similar law now or hereafter
in effect, (ii) consent to the institution of, or fail to contest in a timely
and appropriate manner, any proceeding or petition described in clause (h) of
this Article, (iii) apply for or consent to the appointment of a receiver,
trustee, custodian, sequestrator, conservator or similar official for any
Borrower or for a substantial part of its assets, (iv) file an answer admitting
the material allegations of a petition filed against it in any such proceeding,
(v) make a general assignment for the benefit of creditors or (vi) take any
action for the purpose of effecting any of the foregoing;


     (j)  any Borrower shall become unable, admit in writing its inability or
fail generally to pay its debts as they become due;


     (k)  one or more uninsured judgments for the payment of money in an
aggregate amount in excess of $10,000,000 shall be rendered against any
Borrower or any combination thereof and the same shall remain undischarged for
a period of 30 consecutive days during which execution shall not be effectively
stayed, or any action shall be legally taken by a judgment creditor to attach
or levy upon any material assets of any Borrower to enforce any such judgment;


     (l)  (i) any challenge by or on behalf of any Borrower to the validity of
any Loan Document or the applicability or enforceability of any Loan Document
strictly in accordance with the subject Loan Document’s terms or which seeks to
void, avoid, limit, or otherwise adversely affect any security interest created
by or in any Loan Document or any payment made pursuant thereto.



		
	 	     (ii) any challenge by or on behalf of any other Person to the
validity of any Loan Document or the applicability or enforceability of
any Loan Document strictly in accordance with the subject Loan Document’s
terms or which seeks to void, avoid, limit, or otherwise adversely affect
any security interest created by or in any Loan Document or any payment
made pursuant thereto, in each case, as to which an order or judgment has
been entered adverse to the Agents and the Lenders.
	 
	 	     (iii) any Lien purported to be created under any Security Document
shall cease to be, or shall be asserted by any Borrower not to be, a
valid and perfected Lien on any



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	 	Collateral, with the priority required by
the applicable Security Document, except as a result of the sale or other
disposition of the applicable Collateral in a transaction permitted under
the Loan Documents;



     (m)  a Change in Control shall occur;


     (n)  the occurrence of any uninsured loss to the Collateral in an amount
equal to $10,000,000 or greater;


     (o)  the indictment of, or institution of any legal process or proceeding
against, any Borrower, under any federal, state, municipal, and other civil or
criminal statute, rule, regulation, order, or other requirement having the
force of law where the relief, penalties, or remedies sought or available
include the forfeiture of any material property of any Borrower and/or the
imposition of any stay or other order, the effect of which could reasonably be
to restrain in any material way the conduct by the Borrowers, taken as a whole,
of their business in the ordinary course;


     (p)  the closure of any of the Borrowers’ store locations which in the
aggregate results in the Borrowers operating an aggregate number of store
locations which is less than eighty-five percent (85%) of the aggregate number
of store locations operated by the Borrowers as of the Closing Date;


     (q)  except as otherwise permitted hereunder, the determination by any
Borrower, whether by vote of such Borrower’s board of directors or otherwise
to: generally suspend the operation of such Borrower’s business in the ordinary
course, liquidate all or a material portion of such Borrower’s assets or store
locations, or employ an agent or other third party to conduct any so-called
store closing, store liquidation or “Going-Out-Of-Business” sales for such
Borrower’s stores generally; or


     (r)  any event shall occur with regard to the Unrestricted Subsidiaries
which has a Material Adverse Effect on the Borrowers, taken as a whole;


then, and in every such event (other than an event with respect to any Borrower
described in clause (h) or (i) of this Article), and at any time thereafter
during the continuance of such event, the Administrative Agent may, and at the
request of the Required Lenders shall, by notice to the Borrowers, take either
or both of the following actions, at the same or different times: (i) terminate
the Commitments, and thereupon the Commitments shall terminate immediately, and
(ii) declare the Loans then outstanding to be due and payable in whole (or in
part, in which case any principal not so declared to be due and payable may
thereafter be declared to be due and payable), and thereupon the principal of
the Loans so declared to be due and payable, together with accrued interest
thereon and all fees and other obligations of the
Borrowers accrued hereunder,
shall become due and payable immediately, without presentment, demand, protest
or other notice of any kind, all of which are hereby waived by the Borrowers;
and (iii) require the Borrowers to furnish cash collateral in an amount equal
to 103% of the Letter of Credit Outstandings, and in case of any event with
respect to any Borrower described in clause (h) or (i) of this Article, the
Commitments shall automatically terminate and the principal of the Loans then
outstanding, together with accrued interest thereon and all fees and other
obligations of the

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Borrowers accrued hereunder, shall automatically become due
and payable, without presentment, demand, protest or other notice of any kind,
all of which are hereby waived by the Borrowers.





     SECTION 7.2. When Continuing. For all purposes under this Agreement, each
Default and Event of Default that has occurred shall be deemed to be continuing
at all times thereafter unless it either (a) is cured or corrected or (b) is
waived in writing by the Lenders in accordance with Section 9.2.





     SECTION 7.3. Remedies on Default. In case any one or more of the Events of
Default shall have occurred and be continuing, and whether or not the maturity
of the Loans shall have been accelerated pursuant hereto, the Administrative
Agent may proceed to protect and enforce its rights and remedies under this
Agreement, the Notes or any of the other Loan Documents by suit in equity,
action at law or other appropriate proceeding, whether for the specific
performance of any covenant or agreement contained in this Agreement and the
other Loan Documents or any instrument pursuant to which the Obligations are
evidenced, and, if such amount shall have become due, by declaration or
otherwise, proceed to enforce the payment thereof or any other legal or
equitable right of the Agents or the Lenders. No remedy herein is intended to
be exclusive of any other remedy and each and every remedy shall be cumulative
and shall be in addition to every other remedy given hereunder or now or
hereafter existing at law or in equity or by statute or any other provision of
law.





     SECTION 7.4. Application of Proceeds. In the event that an Event of
Default exists and the Administrative Agent, Collateral Agent or any Lender, as
the case may be, receives any monies in connection with the enforcement of this
Agreement or any of the Security Documents, or otherwise with respect to the
realization upon, or disposition of, any of the Collateral, such monies shall
be distributed for application as follows:


     (a)  First, to the payment of, or (as the case may be) the reimbursement of
the Administrative Agent and the Collateral Agent for or in respect of all
reasonable costs, expenses, disbursements and losses which shall have been
incurred or sustained by the Administrative Agent or Collateral Agent in
connection with the collection of such monies by the Administrative Agent or
Collateral Agent, for the exercise, protection or enforcement by the
Administrative Agent or the Collateral Agent of all or any of the rights,
remedies, powers and privileges of the Administrative Agent or Collateral Agent
under this Agreement or any of the other Loan Documents or in respect of the
Collateral or in support of any provision of adequate indemnity to the
Administrative Agent or Collateral Agent against any taxes or liens which by
law shall have, or may have, priority over the rights of the Administrative
Agent or the Collateral Agent to such monies;


     (b)  Second, to all Loan Agreement Obligations owing to the Lenders and the
Administrative Agent and Collateral Agent (including the allowance to take into
account for any Loan Agreement Obligations not then due and payable (i.e., to
cash collateralize up to 103% of Letter of Credit Outstandings)), in such order
or preference as the Required Lenders may determine; provided, however, that
(i) distributions shall be made (A) pari passu among Loan Agreement Obligations
with respect to fees owed to the Administrative Agent and Collateral Agent and
all other Loan Agreement Obligations owed to the Lenders and (B) with respect
to each type of Loan Agreement Obligation owing to the Lenders, such

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as
interest, principal, reasonable fees and expenses, among the Lenders pro rata,
and (ii) the Administrative Agent and the Collateral Agent may in its
reasonable discretion make proper allowance to take into account any Loan
Agreement Obligations not then due and payable;


     (c)  Third, to all other Obligations owing to the Lenders pro rata; and


     (d)  Fourth, upon payment and satisfaction in full or other provisions for
payment in full satisfactory to the Lenders and the Administrative Agent and
the Collateral Agent of
all of the Obligations, to the payment of any obligations required to be
paid pursuant to §9-608(a)(1)(C) or 9-615(a)(3) of the Uniform Commercial Code
of the State of New York; and


     (e)  Fifth, the excess, if any, shall be returned to the Borrowers or to
such other Persons as are entitled thereto.





ARTICLE VIII

THE AGENTS






     SECTION 8.1. Administration by the Agents. The general administration of the
Loan Documents shall be by the Administrative Agent. The Lenders, the
Collateral Agent and the Issuing Bank each hereby irrevocably authorizes the
Administrative Agent (i) to enter into the Loan Documents to which it is a
party and (ii) at its discretion, to take or refrain from taking such actions
as agent on its behalf and to exercise or refrain from exercising such powers
under the Loan Documents and the Notes as are delegated by the terms hereof or
thereof, as appropriate, together with all powers reasonably incidental
thereto. The Administrative Agent shall have no duties or responsibilities
except as set forth in this Agreement and the remaining Loan Documents.





     SECTION 8.2. The Collateral Agent. Each Lender, the Administrative Agent and
the Issuing Bank hereby irrevocably (a) designate FRF as Collateral Agent under
this Agreement and the other Loan Documents, (b) authorize the Collateral Agent
to enter into the other Loan Documents to which it is a party and to perform
its duties and obligations thereunder and (c) agree and consent to all of the
provisions of the Security Documents. All Collateral shall be held or
administered by the Collateral Agent (or its duly-appointed agent) for its
benefit and for the ratable benefit of the other Secured Parties. Any proceeds
received by the Collateral Agent from the foreclosure, sale, lease or other
disposition of any of the Collateral and any other proceeds received pursuant
to the terms of the Security Documents or the other Loan Documents shall be
paid over to the Administrative Agent for application as provided in Section
2.18, Section 2.22, or Section 7.4, as applicable.





     SECTION 8.3. Sharing of Excess Payments. Each of the Lenders, the Agents and
the Issuing Bank agrees that if it shall, through the exercise of a right of
banker’s lien, setoff or counterclaim against the Borrowers, including, but not
limited to, a secured claim under Section 506 of the Bankruptcy Code or other
security or interest arising from, or in lieu of, such secured claim and
received by such Lender, any Agent or the Issuing Bank under any applicable
bankruptcy, insolvency or other similar law, or otherwise, obtain payment in
respect of the Obligations owed it (an “excess payment”) as a result of which
such Lender, such Agent or the

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Issuing Bank has received payment of any Loans
or other Obligations outstanding to it in excess of the amount that it would
have received if all payments at any time applied to the Loans and other
Obligations had been applied in the order of priority set forth in Section
2.22, then such Lender, Agent or the Issuing Bank shall promptly purchase at
par (and shall be deemed to have thereupon purchased) from the other Lenders,
such Agent and the Issuing Bank, as applicable, a participation in the Loans
and Obligations outstanding to such
other Persons, in an amount determined by the Administrative Agent in good
faith as the amount necessary to ensure that the economic benefit of such
excess payment is reallocated in such manner as to cause such excess payment
and all other payments at any time applied to the Loans and other Obligations
to be effectively applied in the order of priority set forth in Section 2.22
pro rata in proportion to its Commitment; provided, that if any such excess
payment is thereafter recovered or otherwise set aside such purchase of
participations shall be correspondingly rescinded (without interest). The
Borrowers expressly consent to the foregoing arrangements and agree that any
Lender, any Agent or the Issuing Bank holding (or deemed to be holding) a
participation in any Loan or other Obligation may exercise any and all rights
of banker’s lien, setoff or counterclaim with respect to any and all moneys
owing by such Borrower to such Lender, such Agent or the Issuing Bank as fully
as if such Lender, Agent or the Issuing Bank held a Note and was the original
obligee thereon, in the amount of such participation.





     SECTION 8.4. Agreement of Required Lenders.


     (a)  Upon any occasion requiring or permitting an approval, consent,
waiver, election or other action on the part of only the Required Lenders,
action shall be taken by the Agents for and on behalf or for the benefit of all
Lenders upon the direction of the Required Lenders, and any such action shall
be binding on all Lenders. No amendment, modification, consent, or waiver
shall be effective except in accordance with the provisions of Section 9.2.


     (b)  Upon the occurrence of an Event of Default, the Agents shall (subject
to the provisions of Section 9.2) take such action with respect thereto as may
be reasonably directed by the Required Lenders; provided, that unless and until
the Agents shall have received such directions, the Agents may (but shall not
be obligated to) take such action as they shall deem advisable in the best
interests of the Lenders. In no event shall the Agents be required to comply
with any such directions to the extent that the Agents believe that the Agents’
compliance with such directions would be unlawful.





     SECTION 8.5. Liability of Agents.


     (a)  Each of the Agents, when acting on behalf of the Lenders and the
Issuing Bank, may execute any of its respective duties under this Agreement by
or through any of its respective officers, agents and employees, and none of
the Agents nor their respective directors, officers, agents or employees shall
be liable to the Lenders or the Issuing Bank or any of them for any action
taken or omitted to be taken in good faith, or be responsible to the Lenders or
the Issuing Bank or to any of them for the consequences of any oversight or
error of judgment, or for any loss, except to the extent of any liability
imposed by law by reason of such Agent’s own gross negligence or willful
misconduct. The Agents and their respective directors, officers, agents and
employees shall in no event be liable to the Lenders or the Issuing Bank or to
any of them for any action taken or omitted to be taken by them pursuant to
instructions received by them from


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the Required Lenders, or in reliance upon
the advice of counsel selected by it. Without limiting the foregoing, none of
the Agents, nor any of their respective directors, officers, employees, or
agents shall be responsible to any Lender or the Issuing Bank for the due
execution, validity, genuineness, effectiveness, sufficiency, or enforceability
of, or for any statement, warranty or representation in, this Agreement, any
Loan Document or any related agreement, document or order, or shall be required
to ascertain or to make any inquiry concerning the performance or observance by
any Borrower of any of the terms, conditions, covenants, or agreements of this
Agreement or any of the Loan Documents.


     (b)  None of the Agents nor any of their respective directors, officers,
employees, or agents shall have any responsibility to the Borrowers on account
of the failure or delay in performance or breach by any Lender (other than by
the Agent in its capacity as a Lender) or the Issuing Bank of any of their
respective obligations under this Agreement or the Notes or any of the Loan
Documents or in connection herewith or therewith.


     (c)  The Administrative Agent and the Collateral Agent, in such capacities
hereunder, shall be entitled to rely on any communication, instrument, or
document reasonably believed by such Person to be genuine or correct and to
have been signed or sent by a person or persons believed by such Person to be
the proper Person or Persons, and, such Person shall be entitled to rely on
advice of legal counsel, independent public accountants, and other professional
advisers and experts selected by such Person.





     SECTION 8.6. Reimbursement and Indemnification. Each Lender agrees (a) to
reimburse (x) each Agent for such Lender’s Commitment Percentage of any
expenses and fees incurred by such Agent for the benefit of the Lenders or the
Issuing Bank under this Agreement, the Notes and any of the Loan Documents,
including, without limitation, counsel fees and compensation of agents and
employees paid for services rendered on behalf of the Lenders or the Issuing
Bank, and any other expense incurred in connection with the operations or
enforcement thereof in each case not reimbursed by the Borrowers and (y) each
Agent for such Lender’s Commitment Percentage of any expenses of such Agent
incurred for the benefit of the Lenders or the Issuing Bank that the Borrowers
have agreed to reimburse pursuant to Section 9.3 and have failed to so
reimburse and (b) to indemnify and hold harmless the Agents and any of their
directors, officers, employees, or agents, on demand, in the amount of such
Lender’s Commitment Percentage, from and against any and all liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses, or disbursements of any kind or nature whatsoever which may be
imposed on, incurred by, or asserted against it or any of them in any way
relating to or arising out of this Agreement, the Notes or any of the Loan
Documents or any action taken or omitted by it or any of them under this
Agreement, the Notes or any of the Loan Documents to the extent not reimbursed
by the Borrowers (except such as shall result from their respective gross
negligence or willful misconduct).





     SECTION 8.7. Rights of Agents. It is understood and agreed that Fleet and FRF
shall have the same rights and powers hereunder (including the right to give
such instructions) as the other Lenders and may exercise such rights and
powers, as well as its rights and powers under other agreements and instruments
to which it is or may be party, and engage in other transactions with the
Borrowers, as though it were not the Administrative Agent or the Collateral
Agent, respectively, of the Lenders under this Agreement.



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     SECTION 8.8. Independent Lenders and Issuing Bank. The Lenders and the Issuing
Bank each acknowledge that they have decided to enter into this Agreement and
to make the Loans or issue the Letters of Credit hereunder based on their own
analysis of the transactions contemplated hereby and of the creditworthiness of
the Borrowers and agrees that the Agents shall bear no responsibility therefor.





     SECTION 8.9. Notice of Transfer. The Agents may deem and treat a Lender party
to this Agreement as the owner of such Lender’s portion of the Loans for all
purposes, unless and until, and except to the extent, an Assignment and
Acceptance shall have become effective as set forth in Section 9.4(b).





     SECTION 8.10. Successor Agent. Any Agent may resign at any time by giving five
(5) Business Days’ written notice thereof to the Lenders, the Issuing Bank, the
other Agents and the Borrowers. Upon any such resignation of any Agent, the
Required Lenders shall have the right to appoint a successor Agent, which so
long as there is no Event of Default shall be reasonably satisfactory to the
Borrowers (whose consent shall not be unreasonably withheld or delayed). If no
successor Agent shall have been so appointed by the Required Lenders and shall
have accepted such appointment, within 30 days after the retiring Agent’s
giving of notice of resignation, the retiring Agent may, on behalf of the
Lenders, the other Agents and the Issuing Bank, appoint a successor Agent which
shall be (a) a financial institution having a rating of not less than A or its
equivalent by S&P or, (b) a Lender capable of complying with all of the duties
of such Agent (and the Issuing Bank), hereunder (in the opinion of the retiring
Agent and as certified to the Lenders in writing by such successor Agent)
which, in the case of (a) and (b) above, so long as there is no Event of
Default shall be reasonably satisfactory to the Borrowers (whose consent shall
not be unreasonably withheld or delayed). Upon the acceptance of any
appointment as Agent by a successor Agent, such successor Agent shall thereupon
succeed to and become vested with all the rights, powers, privileges and duties
of the retiring Agent and the retiring Agent shall be discharged from its
duties and obligations under this Agreement. After any retiring Agent’s
resignation hereunder as such Agent, the provisions of this Article VIII shall
inure to its benefit as to any actions taken or omitted to be taken by it while
it was such Agent under this Agreement.





     SECTION 8.11. Reports and Financial Statements. Promptly after receipt thereof
from the Borrowers, the Administrative Agent shall remit to each Lender and the
Collateral Agent copies of (a) all financial statements, compliance
certificates and Borrowing Base Certificates, as required to be delivered by
the Borrowers hereunder, (b) all commercial finance examinations and appraisals
of the Collateral received by the Administrative Agent and (c) such other
information regarding the operations, business affairs and financial condition
of any Borrower, or compliance with the terms of any Loan Document, as any
Lender may reasonably request.





     SECTION 8.12. Syndication Agent, Documentation Agent, and Arranger. Notwithstanding the provisions of this Agreement or any of the other Loan
Documents, the Syndication Agents, the Documentation Agents, and, except as
provided in the term sheet for this transaction, the Arranger shall have no
powers, rights, duties, responsibilities or liabilities with respect to this
Agreement and the other Loan Documents.


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ARTICLE IX

MISCELLANEOUS






     SECTION 9.1. Notices. Except in the case of notices and other communications
expressly permitted to be given by telephone, all notices and other
communications provided for herein shall be in writing and shall be delivered
by hand or overnight courier service, mailed by certified or registered mail or
sent by telecopy, as follows:


     (a)  if to any Borrower, to such Borrower at Zale Corporation, 901 W.
Walnut Hill Lane, Irving, Texas 75038-1003 Attention: General Counsel (Telecopy
No. (972) 580-4934) with copies to (i) Zale Corporation, 901 W. Walnut Hill
Lane, Irving, Texas 75038-1003 Attention: Treasurer (Telecopy No. (972)
580-5547) and (ii) Troutman Sanders LLP, 600 Peachtree Street, N.E., Suite
5200, Atlanta, Georgia 30308-2216, Attention: Hazen H. Dempster, Esq. (Telecopy
No. (404) 962-6544) and John C. Beane, Esq. (Telecopy No. (404) 962-6508);


     (b)  If to the Administrative Agent or Swingline Lender to Fleet National
Bank, 40 Broad Street, Boston, Massachusetts 02109, Attention: Judith Kelly
(Telecopy No. (617) 434-6685, with a copy to Bingham McCutchen LLP, 150 Federal
Street, Boston, Massachusetts 02110-1726, Attention: Robert A.J. Barry, Esq.
(Telecopy No. (617) 951-8736);


     (c)  if to the Collateral Agent to Fleet Retail Finance Inc., 40 Broad
Street, Boston, Massachusetts 02109, Attention: Betsy Ratto (Telecopy No. (617)
434-4339), with a copy to Bingham McCutchen LLP, 150 Federal Street, Boston,
Massachusetts 02110-1726, Attention: Robert A.J. Barry, Esq. (Telecopy No.
(617) 951-8736);


     (d)  if to any other Lender, to it at its address (or telecopy number) set
forth on the signature pages hereto or on any Assignment and Acceptance for
such Lender.


Any party hereto may change its address or telecopy number for notices and
other communications hereunder by notice to the other parties hereto. All
notices and other communications given to any party hereto in accordance with
the provisions of this Agreement shall be deemed to have been given on the date
of receipt.





     SECTION 9.2. Waivers; Amendments.


     (a)  No failure or delay by the Agents, the Issuing Bank or any Lender in
exercising any right or power hereunder or under any other Loan Document shall
operate as a waiver thereof, nor shall any single or partial exercise of any
such right or power, or any abandonment or discontinuance of steps to enforce
such a right or power, preclude any other or further exercise
thereof or the exercise of any other right or power. The rights and
remedies of the Agents, the Issuing Bank and the Lenders hereunder and under
the other Loan Documents are cumulative and are not exclusive of any rights or
remedies that they would otherwise have. No waiver of any provision of any Loan
Document or consent to any departure by any Borrower therefrom shall in any
event be effective unless the same shall be permitted by paragraph (b) of this
Section, and then such waiver or consent shall be effective only in the
specific instance and for the purpose for which given. Without limiting the
generality of the foregoing, the making of a Loan or issuance of a Letter of
Credit shall not be construed as a waiver of any Default, regardless of


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whether
the Agents, any Lender or the Issuing Bank may have had notice or knowledge of
such Default at the time.


     (b)  Neither this Agreement nor any other Loan Document nor any provision
hereof or thereof may be waived, amended or modified except, in the case of
this Agreement, pursuant to an agreement or agreements in writing entered into
by the Borrowers and the Required Lenders or, in the case of any other Loan
Document, pursuant to an agreement or agreements in writing entered into by the
Agents and the Borrowers that are parties thereto, in each case with the
consent of the Required Lenders, provided, that no such agreement shall (i)
increase the Commitment of any Lender without the written consent of each
Lender affected, (ii) reduce the rate of interest on any Loan or L/C
Disbursement, or reduce any fees payable hereunder, without the written consent
of each Lender affected thereby, (iii) postpone the scheduled date of payment
of the principal amount of any Loan or L/C Disbursement, or any interest
thereon, or any fees payable hereunder, or reduce the amount of, waive or
excuse any such payment, or postpone the scheduled date of expiration of the
Commitments or the Maturity Date, without the written consent of each Lender
affected thereby, (iv) change any of the provisions of this Section 9.2 or the
definition of the term “Required Lenders”, “Required Supermajority Lenders” or
any other provision of any Loan Document specifying the number or percentage of
Lenders required to waive, amend or modify any rights thereunder or make any
determination or grant any consent thereunder, without the written consent of
each Lender, (v) except for sales described in Section 6.5 or as permitted in
the Security Documents, release any material portion of the Collateral from the
Liens of the Security Documents, without the written consent of each Lender;
provided, that the foregoing shall not limit the discretion of the Required
Supermajority Lenders to change the definition of the term “Permitted Asset
Sales”, (vi) change the definition of the term “Borrowing Base” or any
component definition thereof (other than changes to the Inventory Advance Rate)
if as a result thereof the amounts available to be borrowed by the Borrowers
would be increased, without the written consent of each Lender, provided, that
the foregoing shall not limit the discretion of the Administrative Agent to
change, establish or eliminate any Reserves in accordance with Section 2.2 or
to determine whether Inventory or Accounts are Eligible Inventory or Eligible
Credit Card Receivables, respectively, (vii) increase the Permitted
Overadvance, without the written consent of each Lender, and provided, further,
that no such agreement shall amend, modify or otherwise affect the rights or
duties of the Agents or the Issuing Bank without the prior written consent of
the Agents or the Issuing Bank, as the case may be, and (viii) increase the
principal amount of the Swingline Loan, without the written consent of the
Required Supermajority Lenders.


     (c)  Notwithstanding anything to the contrary contained herein, no
modification, amendment or waiver which increases the maximum amount of the
Swingline Loans to an amount in excess of $50,000,000 (or such greater amount
to which such limit has been
previously increased in accordance with the provisions of this Section
9.2(c)) shall be made without the written consent of the Required Lenders.


     (d)  Notwithstanding anything to the contrary contained in this Section
9.2, in the event that the Borrowers request that this Agreement or any other
Loan Document be modified, amended or waived in a manner which would require
the consent of the Lenders pursuant to Section 9.2(b) or 9.2(c) and such
amendment is approved by the Required Lenders, but not by the requisite
percentage of the Lenders, the Borrowers, and the Required Lenders shall be


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permitted to amend this Agreement without the consent of the Lender or Lenders
which did not agree to the modification or amendment requested by the Borrowers
(such Lender or Lenders, collectively the “Minority Lenders”) to provide for
(w) the termination of the Commitment of each of the Minority Lenders, (x) the
addition to this Agreement of one or more other financial institutions, or an
increase in the Commitment of one or more of the Required Lenders, so that the
aggregate Commitments after giving effect to such amendment shall be in the
same amount as the aggregate Commitments immediately before giving effect to
such amendment, (y) if any Loans are outstanding at the time of such amendment,
the making of such additional Loans by such new or increasing Lender or
Lenders, as the case may be, as may be necessary to repay in full the
outstanding Loans (including principal, interest, and fees) of the Minority
Lenders immediately before giving effect to such amendment and (z) such other
modifications to this Agreement or the Loan Documents as may be appropriate and
incidental to the foregoing.


     (e)  No notice to or demand on any Borrower shall entitle any Borrower to
any other or further notice or demand in the same, similar or other
circumstances. Each holder of a Note shall be bound by any amendment,
modification, waiver or consent authorized as provided herein, whether or not a
Note shall have been marked to indicate such amendment, modification, waiver or
consent and any consent by a Lender, or any holder of a Note, shall bind any
Person subsequently acquiring a Note, whether or not a Note is so marked. No
amendment to this Agreement shall be effective against the Borrowers unless
signed by the Borrowers.





     SECTION 9.3. Expenses; Indemnity; Damage Waiver.


          The Borrowers shall jointly and severally pay (i) all reasonable and
documented third-party out-of-pocket expenses incurred by the Agents and their
Affiliates, including the reasonable and documented fees, charges and
disbursements of counsel for the Agents, outside consultants for the Agents,
appraisers, and for commercial finance examinations, in connection with the
syndication of the credit facilities provided for herein, the preparation and
administration of the Loan Documents or any amendments, modifications or
waivers of the provisions thereof (whether or not the transactions contemplated
hereby or thereby shall be consummated), (ii) all reasonable and documented
third-party out-of-pocket expenses incurred by the Issuing Bank in connection
with any demand for payment under any Letter of Credit, and (iii) all
reasonable and documented third-party out-of-pocket expenses incurred by the
Agents, the Issuing Bank or any Lender, including the reasonable fees, charges
and disbursements of any counsel and any outside consultants for the Agents,
the Issuing Bank or any Lender, for appraisers, commercial finance
examinations, and environmental site assessments, in connection with the
enforcement or protection of its rights in connection with the Loan Documents,
including its rights under this Section, or in connection with the Loans made
or Letters of Credit issued hereunder, including all such reasonable and
documented third-party out-of-pocket
expenses incurred during any workout, restructuring or negotiations in
respect of such Loans or Letters of Credit; provided, that the Lenders who are
not the Agents or the Issuing Bank shall be entitled to reimbursement for no
more than one counsel representing all such Lenders (absent a conflict of
interest in which case the Lenders may engage and be reimbursed for additional
counsel). Notwithstanding anything to the contrary herein, the Borrowers shall
be responsible for all reasonable costs of no more than one (1) commercial
financial examination and no more than one (1) inventory appraisal during any
period of twelve (12) consecutive months unless an Event of Default has
occurred and is continuing or a Cash Control Event has occurred and
is


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continuing, in which case the Borrowers shall be responsible for reasonable
costs of all such examinations and appraisals.


     (b)  The Borrowers shall, jointly and severally, indemnify the Agents, the
Issuing Bank and each Lender, and each Related Party of any of the foregoing
Persons (each such Person being called an “Indemnitee”) against, and hold each
Indemnitee harmless from, any and all losses, claims, damages, liabilities and
related expenses, including the reasonable and documented fees, charges and
disbursements of any counsel for any Indemnitee, incurred by or asserted
against any Indemnitee arising out of, in connection with, or as a result of
(i) the execution or delivery of any Loan Document or any other agreement or
instrument contemplated hereby, the performance by the parties to the Loan
Documents of their respective obligations thereunder or the consummation of the
transactions contemplated by the Loan Documents or any other transactions
contemplated hereby, (ii) any Loan or Letter of Credit or the use of the
proceeds therefrom (including any refusal by the Issuing Bank to honor a demand
for payment under a Letter of Credit if the documents presented in connection
with such demand do not strictly comply with the terms of such Letter of
Credit), (iii) any actual or alleged presence or release of Hazardous Materials
on or from any property currently or formerly owned or operated by any Borrower
or any of the Subsidiaries, or any Environmental Liability related in any way
to any Borrower or any of the Subsidiaries, or (iv) any actual or prospective
claim, litigation, investigation or proceeding relating to any of the
foregoing, whether based on contract, tort or any other theory and regardless
of whether any Indemnitee is a party thereto, provided, that such indemnity
shall not, as to any Indemnitee, be available to the extent that such losses,
claims, damages, liabilities or related expenses resulted from the gross
negligence, willful misconduct, bad faith or breach of contractual obligations
of such Indemnitee or with respect to a claim by one Indemnitee against another
Indemnitee.


     (c)  If, for any reason, the indemnification under paragraph (b) of this
Section is unenforceable as a matter of law or with respect to a claim by one
Indemnitee against another Indemnitee, then the Borrowers shall contribute to
the amount paid or payable by such Indemnitee as a result of such loss, claim,
damage or liability to the maximum amount legally permissible. The Borrowers
also agree that no Indemnitee shall have any liability to the Borrowers, any
Person asserting claims on behalf of or in right of the Borrowers or any other
Person in connection with or as a result of this Agreement or any agreement or
instrument contemplated hereby, the transactions contemplated by the Loan
Documents, any Loan or Letter of Credit or the use of the proceeds thereof,
except to the extent that the losses, claims, damages, liabilities or expenses
incurred by the Borrowers resulted from the gross negligence, willful
misconduct, bad faith or breach of contractual obligations of such Indemnitee.


     (d)  To the extent that any Borrower fails to pay any amount required to be
paid by it to the Agents or the Issuing Bank under paragraph (a) or (b) of this
Section, each Lender severally agrees to pay to the Agents or the Issuing Bank,
as the case may be, such Lender’s Commitment Percentage of such unpaid amount,
provided, that the unreimbursed expense or indemnified loss, claim, damage,
liability or related expense, as the case may be, was incurred by or asserted
against the Agents or the Issuing Bank.


     (e)  To the extent permitted by applicable law, no Borrower shall assert,
and each hereby waives, any claim against any Indemnitee, on any theory of
liability, for special, indirect,


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consequential or punitive damages (as opposed
to direct or actual damages) arising out of, in connection with, or as a result
of, this Agreement or any agreement or instrument contemplated hereby, the
transactions contemplated by the Loan Documents, any Loan or Letter of Credit
or the use of the proceeds thereof.


     (f)  All amounts due under this Section shall be payable promptly after
written demand therefor.


     (g)  The covenants contained in this Section 9.3 shall survive payment or
satisfaction in full of all other Obligations.





     SECTION 9.4. Successors and Assigns.


          The provisions of this Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and assigns
permitted hereby (including any Affiliate of the Issuing Bank that issues any
Letter of Credit), except that no Borrower may assign or otherwise transfer any
of its rights or obligations hereunder without the prior written consent of
each Lender (and any such attempted assignment or transfer without such consent
shall be null and void). Nothing in this Agreement, expressed or implied, shall
be construed to confer upon any Person (other than the parties hereto, their
respective successors and assigns permitted hereby (including any Affiliate of
the Issuing Bank that issues any Letter of Credit) and, to the extent expressly
contemplated hereby, the Related Parties of each of the Agents, the Issuing
Bank and the Lenders) any legal or equitable right, remedy or claim under or by
reason of this Agreement.



     (b)  Any Lender may assign to one or more assignees all or a portion of its
rights and obligations under this Agreement (including all or a portion of its
Commitment and the Loans at the time owing to it), provided, that (i) except in
the case of an assignment to a Lender or an Affiliate of a Lender, (1) the
Agents and the Issuing Bank must give their prior written consent to such
assignment (which consent shall not be unreasonably withheld or delayed) and
(2) so long as no Default or Event of Default has occurred and is continuing,
the Borrowers shall give their prior written consent to such assignment (which
consent shall not be unreasonably withheld or delayed), (ii) except in the case
of an assignment to a Lender or an Affiliate of a Lender or an assignment of
the entire remaining amount of the assigning Lender’s Commitment or Loans, the
amount of the Commitment or Loans of the assigning Lender subject to each such
assignment (determined as of the date the Assignment and Acceptance with
respect to such assignment is delivered to the Administrative Agent) shall not
be less than $5,000,000 unless the Administrative Agent and the Borrowers
otherwise consent, (iii) each partial assignment shall be
made as an assignment of a proportionate part of all the assigning
Lender’s rights and obligations, (iv) the parties to each assignment shall
execute and deliver to the Administrative Agent an Assignment and Acceptance,
and, after completion of the syndication of the Loans, together with a
processing and recordation fee of $3,500 (which shall not be payable or
reimbursable by the Borrowers). Subject to acceptance and recording thereof
pursuant to paragraph (d) of this Section, from and after the effective date
specified in each Assignment and Acceptance the assignee thereunder shall be a
party hereto and, to the extent of the interest assigned by such Assignment and
Acceptance, have the rights and obligations of a Lender under this Agreement,
and the assigning Lender thereunder shall, to the extent of the interest
assigned 

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by such Assignment and Acceptance, be released from its obligations
under this Agreement (and, in the case of an Assignment and Acceptance covering
all of the assigning Lender’s rights and obligations under this Agreement, such
Lender shall cease to be a party hereto but shall continue to be entitled to
the benefits of Section 9.3). Any assignment or transfer by a Lender of rights
or obligations under this Agreement that does not comply with this paragraph
shall be treated for purposes of this Agreement as a sale by such Lender of a
participation in such rights and obligations in accordance with paragraph (e)
of this Section.


     (c)  The Administrative Agent, acting for this purpose as an agent of the
Borrowers, shall maintain at one of its offices in Boston, Massachusetts a copy
of each Assignment and Acceptance delivered to it and a register for the
recordation of the names and addresses of the Lenders, and the Commitment of,
and principal amount of the Loans and L/C Disbursements owing to, each Lender
pursuant to the terms hereof from time to time (the “Register”). The entries in
the Register shall be conclusive absent manifest error and the Borrowers, the
Administrative Agent, the Issuing Bank and the Lenders may treat each Person
whose name is recorded in the Register pursuant to the terms hereof as a Lender
hereunder for all purposes of this Agreement, notwithstanding notice to the
contrary. The Register shall be available for inspection by the Borrowers, the
Issuing Bank and any Lender, at any reasonable time and from time to time upon
reasonable prior notice.


     (d)  Upon its receipt of a duly completed Assignment and Acceptance
executed by an assigning Lender and an assignee, the processing and recordation
fee referred to in paragraph (b) of this Section and any written consent to
such assignment required by paragraph (b) of this Section, the Administrative
Agent shall accept such Assignment and Acceptance and record the information
contained therein in the Register. No assignment shall be effective for
purposes of this Agreement unless it has been recorded in the Register as
provided in this paragraph.


     (e)  Any Lender may sell participations to one or more banks or other
entities (a “Participant”) in all or a portion of such Lender’s rights and
obligations under this Agreement (including all or a portion of its Commitment
and the Loans owing to it), provided, that (i) so long as no Default or Event
of Default has occurred and is continuing, the Borrowers give their prior
written consent to such participation (which consent shall not be unreasonably
be withheld or delayed), (ii) such Lender’s obligations under this Agreement
shall remain unchanged, (iii) such Lender shall remain solely responsible to
the other parties hereto for the performance of such obligations and (iv) the
Borrowers, the Agents, the Issuing Bank and the other Lenders shall continue to
deal solely and directly with such Lender in connection with such Lender’s
rights and obligations under this Agreement. Any agreement or instrument
pursuant to which a Lender sells such a participation in the Commitments, the
Loans and the Letters of Credit
Outstandings shall provide that such Lender shall retain the sole right to
enforce the Loan Documents and to approve any amendment, modification or waiver
of any provision of the Loan Documents, provided, that such agreement or
instrument may provide that such Lender will not, without the consent of the
Participant, agree to any amendment, modification or waiver described in the
first proviso to Section 9.2(b) that affects such Participant. Subject to
paragraph (f) of this Section, the Borrowers agree that each Participant shall
be entitled to the benefits of Section 2.23, Section 2.25 and Section 2.26 to
the same extent as if it were a Lender and had acquired its interest by
assignment pursuant to paragraph (b) of this Section. To the extent permitted
by law, each Participant also shall be entitled to the benefits of Section 9.9
as


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though it were a Lender, provided, such Participant agrees to be subject to
Section 2.25(c) and Section 2.28 as though it were a Lender.


     (f)  A Participant shall not be entitled to receive any greater payment
under Section 2.23 or Section 2.26 than the applicable Lender would have been
entitled to receive with respect to the participation sold to such Participant,
unless the sale of the participation to such Participant is made with the
Borrowers’ prior written consent. A Participant that would be a Foreign Lender
if it were a Lender shall not be entitled to the benefits of Section 2.26
unless (i) the Borrowers are notified of the participation sold to such
Participant and such Participant agrees, for the benefit of the Borrowers, to
comply with Section 2.26(e) as though it were a Lender and (ii) such
Participant is eligible for complete exemption from the withholding tax
referred to therein, following compliance with Section 2.26(e).


     (g)  Any Lender may at any time pledge or assign a security interest in all
or any portion of its rights under this Agreement to secure obligations of such
Lender, including any pledge or assignment to secure obligations to a Federal
Reserve Bank, and this Section shall not apply to any such pledge or assignment
of a security interest, provided, that no such pledge or assignment of a
security interest shall release a Lender from any of its obligations hereunder
or substitute any such pledgee or assignee for such Lender as a party hereto.





     SECTION 9.5. Accession. Except as otherwise provided herein, the Borrowers may
solicit certain lending institutions (an “Acceeding Bank”) to become party to
this Agreement by entering into an Instrument of Accession in substantially the
form of Exhibit C hereto (an “Instrument of Accession”) with the Borrowers and
the Administrative Agent and assuming thereunder a Commitment in an amount to
be agreed upon by the Borrowers, such Acceding Bank or the Administrative
Agent, to make Loans and participate in the risk relating to the Letters of
Credit pursuant to the terms hereof, and the Total Commitment shall thereupon
be increased by the amount of such Acceding Bank’s Commitment; provided,
however, that (a) the Administrative Agent shall have given its prior written
consent to such accession, which consent shall not be unreasonably conditioned,
delayed or withheld and (b) in no event shall the Total Commitment be increased
under any one or more of such Instruments of Accession so as to exceed, in the
aggregate, $500,000,000 (measured on the date of such increase). On the
effective date specified in any Instrument of Accession, Schedule 1.1 hereto
shall be deemed to be amended to reflect (c) the name, address, Commitment and
Commitment Percentage of such Acceding Bank, (d) the Total Commitment as
increased by such Acceding Bank’s Commitment, and (e) the changes to the other
Lenders’ respective Commitment Percentages, and any changes to the other
Lenders’ respective
Commitments (in the event such Lender is also the Acceding Bank) resulting from
such assumption and such increased Total Commitment.





     SECTION 9.6. Survival. All covenants, agreements, representations and
warranties made by the Borrowers in the Loan Documents and in the certificates
or other instruments delivered in connection with or pursuant to this Agreement
or any other Loan Document shall be considered to have been relied upon by the
other parties hereto and shall survive the execution and delivery of the Loan
Documents and the making of any Loans and issuance of any Letters of Credit,
regardless of any investigation made by any such other party or on its behalf
and notwithstanding that the Agents, the Issuing Bank or any Lender may have
had notice or knowledge of any Default or incorrect representation or warranty
at the time any credit is

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extended hereunder, and shall continue in full force
and effect as long as the principal of or any accrued interest on any Loan or
any fee or any other amount payable under this Agreement is outstanding and
unpaid or any Letter of Credit is outstanding and so long as the Commitments
have not expired or terminated. The provisions of Section 2.23, Section 2.26
and Section 9.3 and Article VIII shall survive and remain in full force and
effect regardless of the consummation of the transactions contemplated hereby,
the repayment of the Loans, the expiration or termination of the Letters of
Credit and the Commitments or the termination of this Agreement or any
provision hereof.





     SECTION 9.7. Counterparts; Integration; Effectiveness. This Agreement may be
executed in counterparts (and by different parties hereto on different
counterparts), each of which shall constitute an original, but all of which
when taken together shall constitute a single contract. This Agreement, the
other Loan Documents and any separate letter agreements with respect to fees
payable to the Agents constitute the entire contract among the parties relating
to the subject matter hereof and supersede any and all previous agreements and
understandings, oral or written, relating to the subject matter hereof. Except
as provided in Section 4.1, this Agreement shall become effective when it shall
have been executed by the Agents and the Lenders and when the Administrative
Agent shall have received counterparts hereof that, when taken together, bear
the signatures of each of the other parties hereto, and thereafter shall be
binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns. Delivery of an executed counterpart of a
signature page of this Agreement by telecopy shall be effective as delivery of
a manually executed counterpart of this Agreement.





     SECTION 9.8. Severability. Any provision of this Agreement held to be invalid,
illegal or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such invalidity, illegality or unenforceability
without affecting the validity, legality and enforceability of the remaining
provisions hereof; and the invalidity of a particular provision in a particular
jurisdiction shall not invalidate such provision in any other jurisdiction.





     SECTION 9.9. Right of Setoff. If an Event of Default shall have occurred and be continuing, each Lender
and each of its Affiliates is hereby authorized at any time and from time to
time, to the fullest extent permitted by law, to set off and apply any and all
deposits (general or special, time or demand, provisional or final) at any time
held and other obligations at any time owing by such Lender or Affiliate to or
for the credit or the account of the Borrowers against any of and all the
obligations of the Borrowers now or hereafter existing under this Agreement
held by such Lender, irrespective of whether or not such Lender shall have made
any demand under this Agreement and although such obligations may be unmatured.
The rights of each Lender under this Section are in addition to other rights
and remedies (including other rights of setoff) that such Lender may have.





     SECTION 9.10. Governing Law; Jurisdiction; Consent to Service of Process.


     (a)  EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN ANY OF THE LOAN DOCUMENTS,
IN ALL RESPECTS, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND
PERFORMANCE, THIS AGREEMENT AND EACH OTHER LOAN DOCUMENTS AND THE OBLIGATIONS
SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS
OF THE STATE

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OF NEW YORK INCLUDING, WITHOUT LIMITATION, SECTIONS 5-1401 AND
5-1402 OF THE NEW YORK GENERAL OBLIGATIONS LAW, AND ANY APPLICABLE LAWS OF THE
UNITED STATES OF AMERICA.


     (b)  Each party to this Agreement irrevocably consents to service of
process in the manner provided for notices in Section 9.1. Nothing in this
Agreement or any other Loan Document will affect the right of any party to this
Agreement to serve process in any other manner permitted by law.


     (c)  EACH OF THE BORROWERS, EACH OF THE AGENTS AND EACH LENDER AGREES THAT
ANY SUIT FOR THE ENFORCEMENT OF THIS AGREEMENT OR ANY OF THE OTHER LOAN
DOCUMENTS MAY BE BROUGHT IN THE COURTS OF THE STATE OF NEW YORK OR ANY FEDERAL
COURT SITTING THEREIN AND CONSENTS TO THE NONEXCLUSIVE JURISDICTION THAT IT MAY
NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH SUIT OR ANY SUCH COURT OR THAT
SUCH SUIT IS BROUGHT IN AN INCONVENIENT COURT.





     SECTION 9.11. Waiver of Jury Trial. EACH PARTY HERETO HEREBY WAIVES, TO THE
FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY
JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING
TO THIS AGREEMENT, ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED
HEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO
(A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS
REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE
EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND
(B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO
ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND
CERTIFICATIONS IN THIS SECTION.





     SECTION 9.12. Headings. Article and Section headings and the Table of Contents
used herein are for convenience of reference only, are not part of this
Agreement and shall not affect the construction of, or be taken into
consideration in interpreting, this Agreement.





     SECTION 9.13. Interest Rate Limitation. Notwithstanding anything herein to the
contrary, if at any time the interest rate applicable to any Loan, together
with all fees, charges and other amounts that are treated as interest on such
Loan under applicable law (collectively the “Charges”), shall exceed the
maximum lawful rate (the “Maximum Rate”) that may be contracted for, charged,
taken, received or reserved by the Lender holding such Loan in accordance with
applicable law, the rate of interest payable in respect of such Loan hereunder,
together with all Charges payable in respect thereof, shall be limited to the
Maximum Rate and, to the extent lawful, the interest and Charges that would
have been payable in respect of such Loan but were not payable as a result of
the operation of this Section shall be cumulated and the interest and Charges
payable to such Lender in respect of other Loans or periods shall be increased
(but not above the Maximum Rate therefor) until such cumulated amount, together


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with interest thereon at the Federal Funds Effective Rate to the date of
repayment, shall have been received by such Lender.





     SECTION 9.14. Confidentiality. Each of the Lenders and the Agents agrees,
on behalf of itself and each of its affiliates, directors, officers, employees
and representatives, to use reasonable precautions to keep confidential, in
accordance with their customary procedures for handling confidential
information of the same nature and in accordance with safe and sound practices,
any non-public information supplied to it by the Borrowers or of their
Subsidiaries pursuant to this Agreement that is identified by such Person as
being confidential at the time the same is delivered to such Lender, or such
Agent, provided that nothing herein shall limit the disclosure of any such
information (a) after such information shall have become public other than
through a violation of this Section 9.14 (b) to the extent required by statute,
rule, regulation or judicial process, (c) to counsel for any of the Lenders, or
the Administrative Agent or the Collateral Agent, (d) to bank examiners, the
National Association of Insurance Commissioners or any other U.S. federal or
foreign regulatory authority having jurisdiction over any Lender, the
Administrative Agent or the Collateral Agent, or to auditors or accountants,
(e) to the Administrative Agent, the Collateral Agent or any other Lender, (f)
in connection with any litigation to which the Administrative Agent, the
Collateral Agent or any Lender is a party, or in connection with the
enforcement of rights or remedies hereunder or under any other Loan Document,
or (g) to any assignee or participant (or prospective assignee or participant)
so long as such assignee or participant agrees to be bound by the provisions of
this Section 9.14.


     Notwithstanding anything to the contrary set forth herein, each of the
Lenders and the Agents may disclose to any and all Governmental Authority
having jurisdiction over tax or similar matters, without limitation of any
kind, the tax treatment and tax structure of the transactions contemplated
herein and all materials of any kind (including opinions or other tax analyses)
that are provided to such Lender or Agent relating to such tax treatment and
tax structure, provided that, any such disclosure shall not be made to the
extent prohibited by applicable securities law. This authorization of tax
disclosure is retroactively effective to the commencement of the first
discussions between the parties regarding the financial transactions
contemplated herein. (The “tax treatment, structure or tax aspects” shall refer
to that phrase as used in Section 1.6011-4T(a)(3) (or any successor provision)
of the Treasury Regulations (the “Confidentiality Regulation”) promulgated
under Section 6011 of the Code or any similar regulation which may otherwise
require any Lender or Agent to file Form 8886.)


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     SECTION 9.15. Additional Waivers. (a) The Obligations are the joint and
several obligations of each Borrower. To the fullest extent permitted by
applicable law, the obligations of each Borrower hereunder shall not be
affected by (i) the failure of any Agent or any other Secured Party to assert
any claim or demand or to enforce or exercise any right or remedy against any
other Borrower under the provisions of this Agreement, any other Loan Document
or otherwise, (ii) any rescission, waiver, amendment or modification of, or any
release from any of the terms or provisions of, this Agreement, any other Loan
Document, or any other agreement, including with respect to any other Borrower
of the Obligations under this Agreement, or (iii) the failure to perfect any
security interest in, or the release of, any of the security held by or on
behalf of the Collateral Agent or any other Secured Party.


     (b)  The obligations of each Borrower hereunder shall not be subject to any
reduction, limitation, impairment or termination for any reason (other than the
indefeasible payment in full in cash of the Obligations), including any claim
of waiver, release, surrender, alteration or compromise of any of the
Obligations, and shall not be subject to any defense or set-off, counterclaim,
recoupment or termination whatsoever by reason of the invalidity, illegality or
unenforceability of the Obligations or otherwise. Without limiting the
generality of the foregoing, the obligations of each Borrower hereunder shall
not be discharged or impaired or otherwise affected by the failure of any Agent
or any other Secured Party to assert any claim or demand or to enforce any
remedy under this Agreement, any other Loan Document or any other agreement, by
any waiver or modification of any provision of any thereof, by any default,
failure or delay, willful or otherwise, in the performance of the Obligations,
or by any other act or omission that may or might in any manner or to any
extent vary the risk of any Borrower or that would otherwise operate as a
discharge of any Borrower as a matter of law or equity (other than the
indefeasible payment in full in cash of all the Obligations).


     (c)  To the fullest extent permitted by applicable law, each Borrower
waives any defense based on or arising out of any defense of any other Borrower
or the unenforceability of the Obligations or any part thereof from any cause,
or the cessation from any cause of the liability of any other Borrower, other
than the indefeasible payment in full in cash of all the Obligations. The
Collateral Agent and the other Secured Parties may, at their election,
foreclose
on any security held by one or more of them by one or more judicial or
nonjudicial sales, accept an assignment of any such security in lieu of
foreclosure, compromise or adjust any part of the Obligations, make any other
accommodation with any other Borrower, or exercise any other right or remedy
available to them against any other Borrower, without affecting or impairing in
any way the liability of any Borrower hereunder except to the extent that all
the Obligations have been indefeasibly paid in full in cash. Pursuant to
applicable law, each Borrower waives any defense arising out of any such
election even though such election operates, pursuant to applicable law, to
impair or to extinguish any right of reimbursement or subrogation or other
right or remedy of such Borrower against any other Borrower, as the case may
be, or any security.


     (d)  Upon payment by any Borrower of any Obligations, all rights of such
Borrower against any other Borrower arising as a result thereof by way of right
of subrogation, contribution, reimbursement, indemnity or otherwise shall in
all respects be subordinate and junior in right of payment to the prior
indefeasible payment in full in cash of all the Obligations. In addition, any
indebtedness of any Borrower now or hereafter held by any other Borrower is


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hereby subordinated in right of payment to the prior payment in full of the
Obligations. None of the Borrowers will demand, sue for, or otherwise attempt
to collect any such indebtedness. If any amount shall erroneously be paid to
any Borrower on account of (a) such subrogation, contribution, reimbursement,
indemnity or similar right or (b) any such indebtedness of any Borrower, such
amount shall be held in trust for the benefit of the Secured Parties and shall
forthwith be paid to the Collateral Agent to be credited against the payment of
the Obligations, whether matured or unmatured, in accordance with the terms of
the Loan Documents.


[balance of page left intentionally blank; signature pages follow]



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     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as a sealed instrument as
of the day and year first above written.



	 	 	 	 	 
	 	 	ZALE DELAWARE, INC.
	 	 	as Borrower
	 	 	
By:	 	/s/ Mark R. Lenz
	 	 	 	 	

	 	 	
Name:
	 	 	
Title:
	 	 	 	 	 
	 	 	ZALE CORPORATION
	 	 	as Borrower
	 	 	
By:	 	/s/ Mark R. Lenz
	 	 	 	 	

	 	 	
Name:
	 	 	
Title:
	 	 	 	 	 
	 	 	DDCC, Inc.
	 	 	as Borrower
	 	 	
By:	 	/s/ Mark R. Lenz
	 	 	 	 	

	 	 	
Name:
	 	 	
Title:
	 	 	 	 	 
	 	 	TXDC, L.P.
	 	 	as Borrower
	 
	 	 	
By:
	 	ZALE DELAWARE, INC.
	 	 	 	 	Its General Partner
	 	 	
By:	 	/s/ Mark R. Lenz
	 	 	 	 	

	 	 	
Name:
	 	 	
Title:




 






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	 	 	FLEET NATIONAL BANK, as Administrative

Agent, Issuing Bank and as a Lender
	 
	 	 	By:	 	/s/ Judith C.E. Kelly
	 	 	 	 	


	 	 	Name:	Judith C.E. Kelly
	 	 	Title:	Managing Director




 






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	 	 	FLEET RETAIL FINANCE, INC., as Collateral

Agent and as a Lender
	 
	 	 	By:	 	/s/ Betsy Ratto
	 	 	 	 	


	 	 	Name:	Betsy Ratto
	 	 	Title:	Managing Director




 







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	 	 	CONGRESS FINANCIAL CORPORATION

(SOUTHWEST),as Syndication Agent and as a

Lender
	 
	 	 	By:	 	/s/ Vicky
Balmot
	 	 	 	 	


	 	 	Name: Vicky
Balmot
	 	 	Title: Executive
Vice President




 






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	 	 	BANK ONE, NA, as Syndication Agent and as a

Lender
	 
	 	 	By:	 	/s/ Andrew Hall
	 	 	 	 	


	 	 	Name: Andrew Hall
	 	 	Title: Director




 






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	 	 	BANK OF AMERICA, N.A., as Documentation

Agent and as a Lender
	 
	 	 	By:	 	/s/ Philip Sefchovich
	 	 	 	 	

	 	 	Name:	Philip Scfchovich
	 	 	Title:	Assistant Vice President




 






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	 	 	JPMORGAN CHASE BANK, as Documentation

Agent and as a Lender
	 
	 	 	By:	 	/s/ Lavea Eisenberg
	 	 	 	 	


	 	 	Name:	Lavea Eisenberg
	 	 	Title:	Vice President




 






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	 	 	GENERAL ELECTRIC CAPITAL

CORPORATION, as a Lender
	 
	 	 	By:	 	/s/ Todd Gronski
	 	 	 	 	


	 	 	Name:	Todd Gronski
	 	 	Title:	Duly Authorized Signatory




 






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	 	 	ABN/AMRO BANK, as a Lender
	 
	 	 	By:	 	/s/ Ronald Spurga
	 	 	 	 	


	 	 	Name: Ronald
Spurga
	 	 	Title:
	 
	 	 	By:	 	/s/ Frederick G. Jennings
	 	 	 	 	


	 	 	Name: Frederick G. Jennings
	 	 	Title: VP




 






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	 	 	THE CIT GROUP/BUSINESS CREDIT, INC., as a

Lender
	 
	 	 	By:	 	/s/ Albert J.
Forzano
	 	 	 	 	


	 	 	Name: Albert J.
Forzano
	 	 	Title: Vice
President




 






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	 	 	NATIONAL CITY COMMERCIAL FINANCE,
 INC., as
a Lender
	 
	 	 	By:	 	/s/ Kathryn C.
Ellero
	 	 	 	 	


	 	 	Name: Kathryn
C. Ellero
	 	 	Title: Vice
President




 






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	 	 	WELLS FARGO RETAIL FINANCE, LLC, as a

Lender
	 
	 	 	By:	 	/s/ Sanat
Amladi
	 	 	 	 	


	 	 	Name: Sanat Amaladi
	 	 	Title: Vice
President




 






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	 	 	KEYBANK NATIONAL ASSOCIATION,
 as a
Lender
	 
	 	 	By:	 	/s/ Michael F.
McCullough
	 	 	 	 	


	 	 	Name:  Michael
F. McCullough
	 	 	Title:   Sr.
Vice President




 






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	 	 	THE BANK OF NEW YORK, as a Lender
	 
	 	 	By:	 	/s/ Lucille C. Madden
	 	 	 	 	


	 	 	Name:  Lucille C.
Madden
	 	 	Title:   Vice President




 






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	 	 	HIBERNIA NATIONAL BANK, as a Lender
	 
	 	 	By:	 	/s/ Laura Watts
	 	 	 	 	


	 	 	Name:  Laura
Watts
	 	 	Title:   Vice
President — Portfolio Manager