Document:

<PAGE>

                                                                   EXHIBIT 10.21

-----------------------------------------------------
Portions denoted with an asterisk have been omitted
and filed separately with the Securities and Exchange
Commission pursuant to a request for confidential
treatment.
-----------------------------------------------------

================================================================================

                              PURCHASE AGREEMENT

                                 BY AND AMONG

                        THE BABY EINSTEIN COMPANY, LLC,

                              JULIE AIGNER-CLARK,

                                 WILLIAM CLARK

                                      AND

                          ARTISAN ENTERTAINMENT INC.

                         DATED AS OF FEBRUARY 4, 2000

================================================================================
<PAGE>

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                             Page
<S>                                                                                          <C>
ARTICLE I    DEFINITIONS...................................................................     1

             1.1    Definitions............................................................     1

ARTICLE II   PURCHASE AND SALE OF MEMBERSHIP INTEREST......................................     8

             2.1    Membership Interest Purchase...........................................     8
             2.2    Closing; Closing Transactions; Conditions Precedent to Closing.........     8

ARTICLE III  REPRESENTATIONS AND WARRANTIES CONCERNING THE COMPANY.........................    10

             3.1    Organization and Limited Liability Company Power.........................  10
             3.2    Authorization of Transactions..........................................    10
             3.3    Capital Structure of the Company.......................................    10
             3.4    Subsidiaries, Investments and Notes....................................    10
             3.5    Absence of Conflicts...................................................    11
             3.6    Financial Statements...................................................    11
             3.7    Absence of Undisclosed Liabilities.....................................    11
             3.8    Absence of Certain Developments........................................    12
             3.9    Title to Properties....................................................    13
             3.10   Accounts Receivable....................................................    13
             3.11   Taxes..................................................................    13
             3.12   Contracts and Commitments..............................................    14
             3.13   Proprietary Rights.....................................................    16
             3.14   Litigation; Proceedings................................................    17
             3.15   Brokerage..............................................................    17
             3.16   Governmental Licenses and Permits......................................    17
             3.17   Employee Benefit Plans.................................................    18
             3.18   Insurance..............................................................    19
             3.19   Officers and Managing Members; Bank Accounts...........................    19
             3.20   Compliance with Laws...................................................    19
             3.21   Powers of Attorney; Guarantees.........................................    20
             3.22   No Further Representations or Warranties...............................    20

ARTICLE IV   REPRESENTATIONS AND WARRANTIES WITH RESPECT TO SELLERS........................    20

             4.1    Authorization of Transactions..........................................    20
             4.2    Absence of Conflicts...................................................    20
             4.3    Brokerage..............................................................    20
             4.4    Membership Interests...................................................    21
             4.5    Litigation.............................................................    21
             4.6    No Further Representations or Warranties...............................    21

ARTICLE V    REPRESENTATIONS AND WARRANTIES OF BUYER.......................................    21
</TABLE>

                                      i
<PAGE>

<TABLE>
<S>                                                                                            <C>
             5.1    Organization and Corporate Power........................................   21
             5.2    Authorization of Transactions...........................................   21
             5.3    No Violation............................................................   22
             5.4    Governmental Authorities and Consents...................................   22
             5.5    Litigation..............................................................   22
             5.6    Brokerage...............................................................   22
             5.7    No Further Representations or Warranties................................   22

ARTICLE VI   INDEMNIFICATION AND RELATED MATTERS............................................   22

             6.1    Survival................................................................   22
             6.2    Indemnification.........................................................   23

ARTICLE VII  ADDITIONAL AGREEMENTS..........................................................   25

             7.1    The Purchase Option.....................................................   25
             7.2    Payment of the Purchase Option Exercise Price...........................   25
             7.3    Closing Distribution....................................................   26
             7.4    Purchase Option Closing Date............................................   26
             7.5    Conduct Prior to the Lapse of the Purchase Option.......................   26
             7.6    Payment of the Purchase Option Exercise Price...........................   27
             7.7    Disputes as to Purchase Option Exercise Price or the Purchase
                    Option Closing Distribution.............................................   27
             7.8    Company Call Option.....................................................   27
             7.9    Payment of the Call Option Exercise Price...............................   27
             7.10   Call Option Closing Date................................................   28
             7.11   Disputes as to Call Option Exercise Price...............................   28
             7.12   Third Party Transaction.................................................   28
             7.14   Press Releases and Announcements........................................   29
             7.15   Further Transfers.......................................................   29
             7.16   Specific Performance....................................................   29
             7.17   Expenses................................................................   29
             7.18   Assignment of Proprietary Rights........................................   29
             7.19   Certificates............................................................   29
             7.20   Remedies................................................................   30
             7.21   Duration and Scope of Covenants.........................................   30
             7.22   Insurance...............................................................   30
             7.23   Confidentiality Agreement...............................................   30
             7.24   Post Closing Purchase Option EBIT Adjustment............................   30
</TABLE>

                                      ii
<PAGE>

<TABLE>
<S>                                                                                            <C>
ARTICLE VIII  MISCELLANEOUS.................................................................   31

              8.1   Amendment and Waiver....................................................   31
              8.2   Notices.................................................................   31
              8.3   Binding Agreement; Assignment...........................................   31
              8.4   Severability............................................................   32
              8.5   Construction............................................................   32
              8.6   Captions................................................................   32
              8.7   Entire Agreement........................................................   32
              8.8   Counterparts............................................................   32
              8.9   Governing Law...........................................................   32
              8.10  Parties in Interest.....................................................   33
              8.11  Consent to Jurisdiction.................................................   33
              8.12  Arbitration.............................................................   33
              8.13  Delivery by Facsimile...................................................   34
</TABLE>

                                      iii
<PAGE>

                               INDEX OF EXHIBITS
                               -----------------

Exhibit A              Distribution Agreement
Exhibit B              Confidentiality and Non-Compete Agreements
Exhibit C              Amended & Restated Operating Agreement
Exhibit D              Form of Opinion of the Company's Counsel
Exhibit E              Confidentiality Agreement

                              INDEX OF SCHEDULES
                              ------------------

Schedule 1             Purchase Option EBIT Adjustments
Schedule 2.1           Membership Interests Ownership
Schedule 2.2(b)(ii)    Minority Purchase Price Calculation
Schedule 2.2(b)(iv)    Closing Distribution Calculation
Schedule 3.1           Organization and Limited Liability Company Power
Schedule 3.4           Subsidiaries, Investments and Notes
Schedule 3.5           Absence of Conflicts
Schedule 3.6           Financial Statements
Schedule 3.7           Absence of Undisclosed Liabilities
Schedule 3.8           Absence of Certain Developments
Schedule 3.10          Accounts Receivable
Schedule 3.11          Taxes
Schedule 3.12(a)       Contracts and Commitments
Schedule 3.13(a)       Proprietary Rights
Schedules 3.13(b)      Proprietary Rights
Schedule 3.14          Litigation; Proceedings
Schedule 3.15          Brokerage (Company)
Schedule 3.16          Governmental Licenses and Permits
Schedule 3.17          Employee Benefit Plans
Schedule 3.18          Insurance
Schedule 3.19          Officers and Managing members; Bank Accounts
Schedule 3.21          Powers of Attorney; Guarantees
Schedule 4.3           Brokerage (Sellers)
Schedule 7.1           Certain Assets

                                      iv
<PAGE>

                              PURCHASE AGREEMENT

          THIS AGREEMENT (the "Agreement"), is made as of February 4, 2000, by
                               ---------
and among The Baby Einstein Company, LLC, a limited liability company (the

"Company"), Julie Aigner-Clark and William E. Clark (collectively, the "Sellers"
 -------                                                                -------
and individually, the "Seller"), and Artisan Entertainment Inc., a Delaware
                       ------
corporation (the "Buyer").  The Company, Sellers and Buyer are collectively
                  -----
referred to herein as the "Parties" and individually as a "Party."
                           -------                         -----

                                   RECITALS
                                   --------

          The Sellers own beneficially and of record 100% and hold in equal
shares, as detailed on Schedule 2.1 (under Pre-Closing), all of the Membership
                       ------------
Interests (the "Membership Interests") in the Company.
                --------------------

          Buyer desires to acquire from Sellers, and Sellers desire to sell to
Buyer, 20% of the outstanding Membership Interests.

          Buyer desires to acquire from Sellers, and Sellers desire to sell to
Buyer, an option to acquire 100% of the remaining Membership Interests.

          NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Parties agree as follows:

                                   ARTICLE I

                                  DEFINITIONS
                                  -----------

          1.1  Definitions.  For purposes of this Agreement, the following terms
               -----------
shall have the meanings set forth below:

          "AAA" shall have the meaning set forth in Section 8.12 hereof.
           ---

          "Affiliate" of any particular Person means any other Person
           ---------
controlling, controlled by or under common control with such particular Person,
where "control" means the possession, directly or indirectly, of the power to
direct the management and policies of a Person whether through the ownership of
voting securities or otherwise. An affiliate of an individual includes members
of their immediate family and persons controlling, controlled by or under common
control with the individuals or their immediate family.

          "Agreement" shall have the meaning set forth in the introductory
           ---------
paragraph for this Agreement.

          "Applicable Limitation Date" shall have the meaning set forth in
           --------------------------
Section 6.1(a) hereof.

          "Arbitrable Dispute" shall have the meaning set forth in Section 8.12
           ------------------
hereof.

                                       1
<PAGE>

          "Arbitration Expenses" shall have the meaning set forth in Section
           --------------------
8.12(c) hereof.

          "Arbitrators" shall have the meaning set forth in Section 8.12(b)
           -----------
hereof.

          "Basket" shall have the meaning set forth in Section 6.2(c)(ii)
           ------
hereof.

          "Buyer" shall have the meaning set forth in the introductory paragraph
           -----
to this Agreement.

          "Buyer Parties" shall have the meaning set forth in Section 6.2(a)
           -------------
hereof.

          "Call Option" shall have the meaning set forth in Section 7.8 hereof.
           -----------

          "Call Option Closing Date" shall have the meaning set forth in Section
           ------------------------
7.10 hereof.

          "Call Option Exercise Period" shall have the meaning set forth in
           ---------------------------
Section 7.8 hereof.

          "Call Option Exercise Price" shall be equal to *.
           --------------------------

          "Call Option Notice" shall have the meaning set forth in Section 7.8
           ------------------
hereof.

          "Cap" shall have the meaning set forth in Section 6.2(c)(iv) hereof.
           ---

          "Certificates" shall have the meaning set forth in Section 7.19
           ------------
hereof.

          "Closing" shall have the meaning set forth in Section 2.2(a) hereof.
           -------

          "Closing Date" shall have the meaning set forth in Section 2.2(a)
           ------------
hereof.

          "Closing Distribution" means *.
           --------------------

          "Closing Transactions" shall have the meaning set forth in Section
           --------------------
2.2(b) hereof.

          "COBRA" means Sections 601 et. seq. of ERISA.
           -----                     --  ---

          "Code" means the Internal Revenue Code of 1986, as amended from time
           ----
to time.

          "Company" shall have the meaning set forth in the introductory
           -------
paragraph for this Agreement.

          "Confidential Information" means all confidential or proprietary
           ------------------------
records, data, trade secrets or any other confidential or proprietary
information whatever relating to the Company or its Affiliates or to the Buyer's
business and the business of its Affiliates, including, without limitation,
information with respect to customer lists, customer needs, price and
performance information, processes, specifications, hardware, software,
firmware, programs, devices, supply sources and characteristics, business
opportunities or plans, marketing, promotional, pricing and financing techniques
or strategies, specialized employee training, and other information.

                                       2
<PAGE>

          "Confidentiality and Non-Compete Agreement" shall mean the agreement
           -----------------------------------------
attached hereto as Exhibit B.
                   ---------

          "Contract" shall mean any contract, license, sublicense, franchise,
           --------
permit, mortgage, purchase orders, indenture, loan agreement, lease, sublease,
agreement, obligation, instrument or other arrangement or any commitment to
enter into any of the foregoing (in each case, whether written or oral) to which
the Company is a party or by which any of its assets are bound.

          "Cost and Fees" shall have the meaning set forth in Section 8.12(c)
           -------------
hereof.

          "Distribution Agreement" shall mean the distribution agreement entered
           ----------------------
into by the Parties concurrently with this Agreement and attached hereto as

Exhibit A.
---------

          "EBIT" shall be earnings before interest and taxes, determined on a
           ----
consolidated basis in accordance with generally accepted accounting principals
consistently applied.

          "EBIT Adjustments" shall include *.
           ----------------

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

          "Financial Statements" shall have the meaning set forth in Section 3.6
           --------------------
hereof.

          "GAAP" means United States generally accepted accounting principles.
           ----

          "Indebtedness" means (i) any indebtedness for borrowed money or issued
           ------------
in substitution for or exchange of indebtedness for borrowed money, (ii) any
indebtedness evidenced by any note, bond, debenture or other debt security,
(iii) any indebtedness for the deferred purchase price of property or services
with respect to which a Person is liable, contingently or otherwise, as obligor
or otherwise (other than trade payables and other current liabilities incurred
in the ordinary course of business which are not more than six months past due),
(iv) any commitment by which a Person assures a creditor against loss
(including, without limitation, contingent reimbursement obligations with
respect to letters of credit), (v) any indebtedness guaranteed in any manner by
a Person (including, without limitation, guarantees in the form of an agreement
to repurchase or reimburse), (vi) any obligations under capitalized leases with
respect to which a Person is liable, contingently or otherwise, as obligor,
guarantor or otherwise, or with respect to which obligations a Person assures a
creditor against loss, (vii) any indebtedness secured by a Lien on a Person's
assets, (viii) any unsatisfied obligation for "withdrawal liability" to a
"multiemployer plan" as such terms are defined under ERISA and (ix) any amounts
owed to any Person under any noncompetition or consulting arrangements.
Notwithstanding the foregoing, the Parties agree that any timing differences
between obligations and benefit received created in the ordinary course of
business before the date Buyer exercises its Purchase Option will be discussed
and reasonably resolved by them to the extent such timing differences may affect
the Purchase Option Exercise Price.

          "Indemnified Party" shall have the meaning set forth in Section 6.2(d)
           -----------------
hereof.

          "Indemnifying Party" shall have the meaning set forth in Section
           ------------------
6.2(d) hereof.

                                       3
<PAGE>

          "Knowledge" as used in the phrases "to the Knowledge of Sellers," "to
           ---------
Sellers' Knowledge" or phrases of similar import means the actual knowledge or
awareness of the Sellers, and as used in the phrases "the Knowledge of Buyers,"
"to Buyer's Knowledge" or phrases of similar import means the actual knowledge
or awareness of the Buyer.

          "Liens" shall have the meaning of any mortgage, security interests,
           -----
pledge, hypothecation, assignment, deposit arrangement, incumbrance, lien
(statutory or otherwise), charge, preference, priority or other security
agreement, option, warrant, attachment, right of first refusal, preemptive,
conversion, put, call or other claim or right, restriction on transfer (other
than restrictions imposed by federal and state securities laws) or preferential
arrangement of any kind or nature whatsoever (including any restriction on the
transfer of any assets, any conditional sale or other title retention agreement,
any financing lease involving substantially the same economic effect as any of
the foregoing in the filing of any financial statement under the Uniform
Commercial Code or comparable law of any jurisdiction).

          "Loss" or "Losses" shall have the meaning set forth in Section 6.2(a)
           ----      ------
hereof.

          "Material Adverse Effect" means any matter that has resulted in or
           -----------------------
would reasonably be expected to result in costs, liabilities, expenses, damages,
or claims to or against the Company involving $25,000 or more.

          "Member" shall mean a member of the Company as the term is used in the
           ------
Operating Agreement.

          "Membership Interests" shall have the meaning set forth in the
           --------------------
Recitals hereof.

          "Minority Interest" shall have the meaning set forth in Section 2.1
           -----------------
hereof.

          "Minority Interest Purchase Price" shall be equal to *.
           --------------------------------

          "Operating Documents" shall have the meaning set forth in Section
           -------------------
2.2(b) hereof.

          "Organizational Documents" shall mean complete and correct copies of
           ------------------------
the Articles of Organization and the Operating Agreement of the Company.

          "Parties" or "Party" shall have the meaning set forth in the
           -------      -----
introductory paragraph to this Agreement.

          "Permitted Lien" means any Lien which (i) is reflected in the
           --------------
Financial Statements, (ii) is not material in amount, (iii) constitutes a
statutory lien arising in the ordinary course of business, or (iv) does not
materially detract from the value of the property or materially detract from or
interfere with the use of the property in the ordinary course of business as
presently conducted.

          "Person" means an individual, a partnership, a limited liability
           ------
company a corporation, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.

                                       4
<PAGE>

          "Phantom Equity Interest" shall mean non-equity employee compensation
           -----------------------
interests arising under a duly adopted employee benefit plan in which benefits
are determined by reference to the performance of the Company.

          "Post Closing Purchase Option EBIT Adjustment" shall have the meaning
           --------------------------------------------
set forth in Section 7.24 hereof.

          "Proprietary Rights" means all of the following items owned or used by
           ------------------
the Company along with all income, royalties, damages and payments due or
payable prior to or at the Closing or thereafter (including, without limitation,
damages and payments for past, present or future infringements or
misappropriations thereof, the right to sue and recover for past infringements
or misappropriations thereof and any and all corresponding rights that, now or
hereafter, may be secured throughout the world): (i) patents, patent
applications, patent disclosures and inventions (whether or not patentable and
whether or not reduced to practice) and any reissue, continuation, continuation-
in-part, division, revision, extension or reexamination thereof; (ii)
trademarks, service marks, trade dress, logos, trade names, corporate names,
domain names and URL addresses, together with all goodwill associated therewith;
registered and unregistered copyrights, copyrightable works, works of authorship
and mask works; (iii) all registrations, applications for registration
extensions and renewals for any of the foregoing; (iv) trade secrets and
Confidential Information (including, without limitation, ideas, formulae,
compositions, know-how, manufacturing and production processes and techniques,
research and development information, drawings, specifications, designs, plans,
proposals, technical data, financial plans, business plans and marketing plans,
and customer and supplier lists, subscriber lists and related information); (v)
computer software, software systems and internet websites (including, without
limitation, data, databases and related documentation); (vi) other proprietary
rights; (vii) licenses or other agreements to or from third parties regarding
the foregoing; and (viii) all copies and tangible embodiments of the foregoing
(in whatever form or medium), in each case including, without limitation, the
items set forth on Schedule 5.14.
                   -------------

          "Purchase Option" shall have the meaning set forth in Section 7.1
           ---------------
hereof.

          "Purchase Option Closing Date" shall have the meaning set forth in
           ----------------------------
Section 7.4 hereof.

          "Purchase Option Closing Distribution" means *.
           ------------------------------------

          "Purchase Option EBIT Adjustments," shall mean *.
           --------------------------------

          "Purchase Option Exercise Period," shall be from January 1, 2001
           -------------------------------
through the Purchase Option Lapse Date.

          "Purchase Option Exercise Price" shall be equal to *.  The Purchase
           ------------------------------
Option Exercise Price is based on the assumption that the Company will be free
of debt and cash at close. For purposes of the foregoing sentence, "free of debt
and cash" means that the Company will net cash, accounts receivable, accounts
payable, inventory and current interest-bearing liabilities and distribute the
net amount immediately prior to the Purchase Option Closing Date.

                                       5
<PAGE>

          "Purchase Option Lapse Date" shall mean the later of March 31, 2001,
           --------------------------
or 30 days following delivery of audited financial statements for the Company's
fiscal year ending December 31, 2000.

          "Purchase Option Notice Date" shall mean the date Buyer delivers the
           ---------------------------
Purchase Option Notice to Seller.

          "Sale" shall mean the sale of all or substantially all of the assets
           ----
or a controlling interest in the outstanding Membership Interests of the
Company, including such sale accomplished by merger or consolidation.

          "Sale Notice" shall have the meaning set forth in Section 7.12 hereof.
           -----------

          "Seller" or "Sellers" shall have the meaning set forth in the
           ------      -------
introductory paragraph to this Agreement.

          "Seller Parties" shall have the meaning set forth in Section 6.2(b)
           --------------
hereof.

          "Subsidiary" means, with respect to any Person, any corporation,
           ----------
partnership, association or other business entity of which (i) if a corporation,
a majority of the total voting power of shares of stock entitled (without regard
to the occurrence of any contingency) to vote in the election of managing
members, managers or trustees thereof is at the time owned or controlled,
directly or indirectly, by that Person or one or more of the other Subsidiaries
of that Person or a combination thereof, or (ii) if a partnership, limited
liability company, association or other business entity, a majority of the
partnership or other similar ownership interest thereof is at the time owned or
controlled, directly or indirectly, by any Person or one or more Subsidiaries of
that Person or a combination thereof. For purposes hereof, a Person or Persons
shall be deemed to have a majority ownership interest in a partnership, limited
liability company, association or other business entity if such Person or
Persons shall be allocated a majority of partnership, association or other
business entity gains or losses or shall be or control the managing member or
general partner of such partnership, association or other business entity.

          "Tax" or "Taxes" means any federal, state, local or foreign income,
           ---      -----
gross receipts, franchise, alternative or add-on minimum, estimated, sales, use,
transfer, registration, value added, excise, natural resources, severance,
stamp, occupation, premium, windfall profit, environmental, customs, duties,
real property, personal property, capital stock, social security, unemployment,
disability, payroll, license, employee or other withholding, or other tax, of
any kind whatsoever, including any interest, penalties or additions to tax or
additional amounts in respect of the foregoing.

          "Tax Returns" means returns, declarations, reports, claims for refund,
           -----------
information returns or other documents (including any related or supporting
schedules, statements or information) filed or required to be filed in
connection with the determination, assessment or collection of Taxes of any
party or the administration of any laws, regulations or administrative
requirements relating to any Taxes.

          "Transaction Documents" means this Agreement, the Distribution
           ---------------------
Agreement and  the Confidentiality and Non-Compete Agreements.

                                       6
<PAGE>

                                  ARTICLE II

                   PURCHASE AND SALE OF MEMBERSHIP INTEREST
                   ----------------------------------------

          2.1  Membership Interest Purchase.  On and subject to the terms and
               ----------------------------
conditions set forth in this Agreement, on the Closing Date, (a) Buyer shall
purchase from each Seller, and each Seller shall sell and transfer to Buyer, 20%
of the outstanding Membership Interests owned by such Seller as such ownership
is set forth on Schedule 2.1 (the "Minority Interest"), free and clear of any
                ------------       -----------------
Liens, restrictions on transfer, options, warrants, rights, calls, commitments,
proxies or other contract rights, other than those contained in the
Organizational Documents or the Transaction Documents, and (b) in consideration
of the sale of the Minority Interest and the covenants and agreements of the
Sellers contained in Article 7, Buyer shall deliver to the Sellers the
consideration specified in Section 2.2.

          2.2  Closing; Closing Transactions; Conditions Precedent to Closing.
               --------------------------------------------------------------

          (a)  Closing.  The closing of the transactions contemplated by this
               -------
Agreement (the "Closing") shall take place at the offices of Kirkland & Ellis,
                -------
777 South Figueroa Street, Suite 3700, Los Angeles, California 90017, on
February 4, 2000, providing that all conditions to Closing shall have been
satisfied or waived, or at such other place or on such other date as may be
mutually agreeable to Buyer and Sellers. The date and time of the Closing are
herein referred to as the "Closing Date."
                           ------------

          (b)  Closing Transactions. Subject to the conditions set forth in this
               ---------------------
Agreement, the Parties shall consummate the following "Closing Transactions," as
                                                       --------------------
conditions precedent to the Closing, on the Closing Date:

               (i)     Buyer shall deliver to Sellers, by wire transfer of
     immediately available funds to an account or accounts designated by
     Sellers, an aggregate amount equal to $2,275,981, the Minority Interest
     Purchase Price, as calculated on Schedule 2.2(b)(ii) attached hereto.
                                      -------------------

               (ii)    Execution by the Parties within one (1) business day of
     the Closing, the Distribution Agreement in the form of Exhibit A attached
                                                            ---------
     hereto.

               (iii)   Execution by each of the Sellers as of the Closing,
     confidentiality and non-compete agreements with the Buyer in the form of
     Exhibit B hereto (the "Confidentiality and Non-Compete Agreements").
     ---------              ------------------------------------------

               (iv)    The Company shall have distributed to the Sellers,
     immediately prior to the Closing, the Closing Distribution, calculated as
     of January 1, 2000, as calculated on Schedule 2.2(b)(iv) attached hereto,
                                          -------------------
     in the form of $575,000 in cash and $1,222,142 as note payables to Sellers
     accruing interest at the Prime Rate (as defined in the Company's Amended
     and Restated Operating Agreement).

               (v)     Sellers shall properly amend the Operating Agreement of
     The Baby Einstein Company, LLC and any other organizational or other
     documents as necessary (the "Operating Documents"), in the form attached
                                  -------------------
     hereto as Exhibit C, which will, among other

                                       7
<PAGE>

     things, add Buyer as a Member, adjust the Sharing Ratios as defined in the
     Operating Agreement and as set forth on Schedule 2.1, and take all other
                                             ------------
     necessary action to reflect Buyer's acquisition of the Minority Interest
     and such terms of this Agreement.

               (vi) The Company, Sellers and Buyer shall deliver the following
     opinions, certificates and other documents and instruments:

                    (A)  Sellers shall have obtained and delivered evidence
          satisfactory to Buyer of  releases on terms satisfactory to Buyer of
          any and all Liens held by third parties except for any Permitted
          Liens, as reasonably requested by Buyer;

                    (B)  Buyer shall have received an opinion, dated as of the
          Closing Date, of Holme Roberts & Owen LLP, counsel to the Company and
          Sellers, in the form of Exhibit D hereto; and
                                  ---------

                    (C)  In addition to the above, Sellers shall deliver to
          Buyer:

                         (1) copies of all third party and governmental
               consents, approvals, filings, releases, terminations, payoff
               letters, etc. required in connection with the consummation of the
               transactions contemplated herein;

                         (2) certificates of the secretary of state of the state
               in which the Company is organized and each state where it is
               qualified to do business (including, without limitation, the
               states listed on Schedule 3.1) stating that the Company is in
                                ------------
               good standing;

                         (3) copies of settlement agreements relating to all
               outstanding or, to the Knowledge of Sellers, threatened
               litigation against the Company;

                         (4) assignments of entire right, title and interest of
               Julie Clark (including Julie Aigner Clark and/or Julie Aigner-
               Clark whether doing business under "I Think I Can Productions" or
               as an individual) in any Proprietary Rights used by the Company
               prior to the Closing;

                         (5) such other documents or instruments as Buyer may
               reasonably request to effect the transactions contemplated
               hereby.

                                       8
<PAGE>

                                  ARTICLE III

                        REPRESENTATIONS AND WARRANTIES
                            CONCERNING THE COMPANY
                            ----------------------

          As a material inducement to Buyer to enter into this Agreement, the
Company and each Seller jointly and severally hereby represents and warrants
that:

          3.1  Organization and Limited Liability Company Power.  The Company
               ------------------------------------------------
is a limited liability company duly organized, validly existing and in good
standing under the laws of the jurisdiction of its organization and is duly
authorized and qualified to do business in every jurisdiction, except where the
failure to so qualify has not had or would not to have a Material Adverse
Effect. All such jurisdictions in which the Company is authorized and qualified
are set forth on Schedule 3.1. The Company has all requisite power and
                 ------------
authority and all material licenses, permits and authorizations necessary to own
and operate its properties, to carry on its business as now conducted and
presently proposed to be conducted. The copies of the Company's Organizational
Documents which have been furnished to Buyer reflect all amendments made thereto
at any time prior to the date of this Agreement and are correct and complete.
The Company is not in default under or in violation of any provision of its
Organizational Documents.

          3.2  Authorization of Transactions. The Company has all requisite
               -----------------------------
power and authority to enter into and perform the obligations pursuant to the
terms of this Agreement. The Company has the full legal right, power and
authority to enter into this Agreement and the transactions contemplated hereby.
This Agreement is a legal, valid and binding obligation of the Company and each
Member, enforceable in accordance with its terms.

          3.3  Capital Structure of the Company.  The capital structure of the
               --------------------------------
Company consists of the Membership Interests in the percentages set forth in
Schedule 2.1.  All of the Membership Interests are owned of record and
------------
beneficially by the persons in the percentages set forth  in Schedule 2.1 (under
                                                             ------------
Pre-Closing), free and clear of all Liens other than those contained in the
Organizational Documents or the Transaction Documents, duly authorized and
validly issued and not subject to requirements to make any capital contributions
that have not previously been made. None of the Members shall be required to
make any capital contributions to the Company as a result of the transactions
contemplated hereby. All of the issued and outstanding Membership Interests were
offered, issued, sold and delivered by the Company in compliance with all
applicable state and federal laws concerning the issuance of securities.
Further, none of such Membership Interests were issued in violation of any
preemptive rights. There are no voting agreements or voting trusts with respect
to any of the outstanding Membership Interests. The Company is not subject to
any obligation (contingent or otherwise) to repurchase or otherwise acquire or
retire any Membership Interests.

          3.4  Subsidiaries, Investments and Notes.  The Company does not own
               -----------------------------------
or hold any shares of stock or any other security or interest in any other
Person or any rights to acquire any such stock or other security or interest,
and the Company has never owned any Subsidiary. There are no promissory notes
that have been issued to, or are held by, the Company except for those
contemplated by the Organizational Documents or the Transaction Documents.

                                       9
<PAGE>

          3.5  Absence of Conflicts.  Except as set forth in Schedule 3.5, the
               --------------------                          ------------
execution, delivery and performance of this Agreement and the other Transaction
Documents and the consummation of the transactions contemplated hereby and
thereby by the Company and/or each Seller do not and shall not (a) conflict with
or result in any breach of any of the terms, conditions or provisions of, (b)
constitute a default under, (c) result in a violation of, (d) give any third
party the right to modify, terminate or accelerate any obligation under, (e)
result in the creation of any Lien, other than those contained in the
Organizational Documents or the Transaction Documents, upon the Minority
Interest or the assets of the Company, or (f) require any authorization,
consent, approval, exemption or other action by or notice or declaration to, or
filing with, any court or administrative or other governmental body or agency,
other than those required under the Hart-Scott-Rodino Act, under the provisions
of the Organizational Documents of the Company or any indenture, mortgage,
lease, loan agreement or other agreement or instrument to which the Company is
bound or affected, or any law, statute, rule or regulation to which the Company
is subject or any judgment, order or decree to which the Company is subject.

          3.6  Financial Statements.  Schedule 3.6 includes or will include
               --------------------   ------------
true, complete and correct copies of the Company's audited balance sheet as of
December 31, 1999 (the end of its most recent completed fiscal year) and income
statement for the period May 1, 1999 through December 31, 1999 (collectively,
"Financial Statements").  To the Sellers' Knowledge, each of the Financial
 --------------------
Statements present fairly in all material respects the Company's financial
condition and results of operations as of the times and for the periods referred
to therein, and has been prepared in accordance with GAAP, consistently applied,
except as disclosed in the notes to the Financial Statements. Sellers, to their
Knowledge, have provided complete and accurate books, records and relevant
information as requested by the Company's auditors for preparation of the
Financial Statements.

          3.7  Absence of Undisclosed Liabilities.  Except as set forth in
               ----------------------------------
Schedule 3.7 or as contemplated by the Organizational Documents or the
------------
Transaction Documents, to the Knowledge of the Sellers, the Company does not
have any obligations or liabilities (whether accrued, absolute, contingent,
unliquidated or otherwise, whether due or to become due and regardless of when
asserted) arising out of transactions entered into at or prior to the Closing,
or any action or inaction at or prior to the Closing, or any state of facts
existing at or prior to the Closing, including Taxes with respect to or based
upon transactions or events occurring on or before the Closing, or to Sellers
(whether in each of their capacities as Seller hereunder, as a Member, officer
or Manager of the Company), except (a) obligations under Contracts or
commitments described in Schedule 3.12 or under Contracts and commitments which
                         -------------
are not required to be disclosed thereon (but not liabilities for breaches
thereof), (b) liabilities reflected on the liabilities side of the Financial
Statements, (c) liabilities which have arisen after the date of the Financial
Statements in the ordinary course of business or otherwise in accordance with
the terms and conditions of this Agreement (none of which is a liability for
breach of contract, breach of warranty, tort or infringement or a claim or
lawsuit or an environmental liability), (d) liabilities disclosed on Schedule
                                                                     --------
3.7, and (e) obligations or liabilities that would not have a Material Adverse
---
Effect.

          3.8  Absence of Certain Developments.  Except as set forth in
               -------------------------------
Schedule 3.8 and except as expressly contemplated by this Agreement, since the
------------
date of the Financial Statements the Company has not:

                                       10
<PAGE>

          (a)  suffered a Material Adverse Effect or suffered any theft, damage,
destruction or casualty loss adversely affecting the properties or business of
the Company, whether or not covered by insurance or suffered any substantial
destruction of the Company's books and records;

          (b)  other than as contemplated by the Organizational Documents or the
Transaction Documents, made any change in the capital structure of the Company
or in its outstanding Membership Interests, or any grant of any options,
warrants, calls, conversion rights or commitments;

          (c)  made any declaration or payment of any distribution in respect of
the Membership Interests (other than the Closing Distribution), or any direct or
indirect redemption, purchase or other acquisition of any of the Membership
Interests of the Company;

          (d)  other than as contemplated by the Organizational Documents or the
Transaction Documents, borrowed any amount or incurred or become subject to any
Indebtedness or other liabilities, except liabilities incurred in the ordinary
course of business;

          (e)  discharged or satisfied any Lien other than a Permitted Lien or
paid any obligation or liability, other than liabilities paid in the ordinary
course of business, or prepaid any amount of Indebtedness for borrowed money;

          (f)  subjected any portion of its properties or assets to any Lien
other than a Permitted Lien;

          (g)  sold, leased, assigned or transferred (including, without
limitation, transfers to Sellers) a portion of its tangible or intangible assets
(including Proprietary Rights), except for sales of inventory in the ordinary
course of business, or canceled without fair consideration any material debts or
claims owing to or held by it, or disclosed any confidential information (other
than pursuant to agreements requiring the disclosure to maintain the
confidentiality of and preserving all rights of the Company in such confidential
information);

          (h)  suffered any extraordinary losses or waived any rights of
material value, whether or not in the ordinary course of business;

          (i)  entered into, amended or terminated any material Contract other
than in the ordinary course of business;

          (j)  entered into any other material transaction, whether or not in
the ordinary course of business, or materially changed any business practice;

          (k)  made or granted any bonus or any wage, salary or compensation
increase per year to any managing member, officer, employee or sales
representative, group of employees or consultant or made or granted any increase
in any employee benefit plan or arrangement, or amended or terminated any
existing employee benefit plan or arrangement or adopted any new employee
benefit plan or arrangement;

          (l)  made any other change in employment terms for any of its managing
Members, officers, and employees outside the ordinary course of business, or
except as specifically

                                       11
<PAGE>

contemplated by this Agreement, entered into any Contract, agreement or
transaction, other than in the ordinary course of business and at arm's length,
with Persons who are Affiliates;

          (m)  incurred intercompany charges or conducted its cash management
customs and practices other than in the ordinary course of business (including,
without limitation, with respect to maintenance of working capital balances,
collection of accounts receivable and payment of accounts payable, other than
the Closing Distribution);

          (n)  made any capital expenditures that aggregate in excess of
$10,000;

          (o)  made any loans or advances to, or guarantees for the benefit of,
any Persons;

          (p)  made any charitable contributions, pledges, association fees or
dues in excess of $10,000;

          (q)  changed or authorized any change in its Organizational Documents;
or

          (r)  committed or agreed to any of the foregoing.

          3.9  Title to Properties.     The Company does not own or lease any
               -------------------
real property.

          3.10 Accounts Receivable.  Except as set forth on Schedule 3.10,
               -------------------                          -------------
all of the notes and accounts receivable of the Company reflected in its
Financial Statements are good and valid receivables (subject to no counterclaims
or offset) and shall be collected (net of the allowance for doubtful accounts
recorded on the Financial Statements) within 90 days after the Closing Date at
the aggregate amount recorded therefor on the applicable Financial Statements.
There are no individual accounts receivable which are over $5,000 and 90 days
past due, except as set forth on Schedule 3.10. As of the Closing Date, no
                                 -------------
Person shall have any Lien other than a Permitted Lien on such receivables or
any part thereof, and no agreement for deduction, free services, discount or
other deferred price or quantity adjustment shall have been made with respect to
any such receivables.

          3.11 Taxes.
               -----

          (a)  The Company has timely filed or shall timely file all Tax Returns
which are required to be filed on or before the Closing Date, all such Tax
Returns are true, complete and accurate, and all Taxes due and payable by the
Company, whether or not shown on a Tax Return, have been paid by the Company or
Sellers or are shown in the Financial Statements and no Taxes are delinquent.
The unpaid Taxes of the Company did not, as of December 31, 1999, exceed the
reserve for Tax liability (rather than any reserve for deferred Taxes
established to reflect timing differences between book and Tax income) set forth
in the Financial Statements, and do not exceed that reserve adjusted for the
passage of time through the Closing Date in accordance with the past custom and
practice of the Company in filing its Tax Returns.

          (b)  Except as set forth on Schedule 3.11, (i) no deficiency for any
                                      -------------
amount of Tax has been asserted or assessed by a taxing authority against the
Company and neither the Company nor any Seller reasonably expects that any such
assertion or assessment of Tax liability will be made, (ii) the Company has not
consented to extend the time in which any Tax may be assessed or collected

                                       12
<PAGE>

by any taxing authority, (iii) the Company has been treated as a partnership for
federal, state and local income tax purposes since April 29, 1999, the date
formed as an LLC, (iv) no claim has ever been made by a taxing authority in a
jurisdiction where the Company does not file Tax Returns that the Company is or
may be subject to Taxes assessed by such jurisdiction, (v) the Company is not
party to or bound by any Tax allocation or Tax sharing agreement with any other
Person and has no liability for Taxes of any other Person as a transferee, by
contract, or otherwise, (vi) the Company has withheld and paid all Taxes
required to have been withheld and paid in connection with amounts paid or owing
to any employee, independent contractor, creditor, member or other third party,
(vii) since December 31, 1999, the Company has not incurred any liability for
Taxes other than in the ordinary course of business; and (viii) the Company will
not be required (A) as a result of a change in method of accounting for a
taxable period ending on or prior to the Closing Date, to include any adjustment
in taxable income for any taxable period (or any portion thereof) ending after
the Closing Date or (B) as a result of any "closing agreement," as described in
Section 7121 of the Code (or any corresponding provision of state, local or
foreign income Tax law), to include any item of income in, or exclude any item
of deduction from, taxable income for any taxable period (or portion thereof)
ending after the Closing Date. Schedule 3.11 contains a list of states,
                                -------------
territories and jurisdictions (whether foreign or domestic) in which the Company
is required to file Tax Returns.

          3.12   Contracts and Commitments.
                 -------------------------

          (a)    Except as specifically contemplated by this Agreement or except
as set forth in Schedule 3.12(a), the Company is not a party to or bound by,
                ----------------
whether written or oral, any:

                 (i)   collective bargaining agreement or Contract with any
     labor union or any bonus, pension, profit sharing, retirement or any other
     form of deferred compensation plan or any membership interest purchase,
     equity option, hospitalization insurance or similar plan or practice,
     whether formal or informal ;

                 (ii)  Contract for the employment of any officer, individual
     employee or other person on a full-time or consulting basis or any
     severance agreements;

                 (iii) agreement or indenture relating to the borrowing of money
     or to mortgaging, pledging or otherwise placing a Lien other than a
     Permitted Lien on any of its assets;

                 (iv)  agreements with respect to the lending or investing of
     funds;

                 (v)   license or royalty agreements;

                 (vi)  guaranty of any obligation, other than endorsements made
     for collection;

                 (vii) lease or agreement under which it is lessee of, or holds
     or operates, any personal property owned by any other party calling for
     payments in excess of $50,000 annually or under which it is lessor of or
     permits any third party to hold or operate any property, real or personal,
     owned or controlled by it;

                                       13
<PAGE>

                 (viii)  Contract or group of related Contracts with the same
     party or group of related parties for the purchase or sale of supplies,
     products or other personal property or for the furnishing or receipt of
     services which either calls for performance over a period of more than one
     year (except if such Contracts do not involve a sum in excess of $7,500
     annually) or involves a sum in excess of $7,500;

                 (ix)    Contract or group of related Contracts with the same
     party or group of related parties continuing over a period of more than six
     months from the date or dates thereof, not terminable by it on 30 days or
     less notice without penalties or involving more than $7,500;

                 (x)     Contract which prohibits it from freely engaging in
     business anywhere in the world;

                 (xi)    Contract relating to the distribution, marketing or
     sales of its products;

                 (xii)   agreements, Contracts or understandings pursuant to
     which the Company subcontracts work to third parties; or

                 (xiii)  other agreement material to it, whether or not entered
     into in the ordinary course of business.

          (b)    Except as disclosed in Schedule 3.12(b), (i) to the Knowledge
                                        ----------------
of the Sellers, no Contract or commitment required to be disclosed on Schedule
                                                                      --------
3.12(a) has been breached materially or canceled by the other party, and the
-------
Sellers have no Knowledge of any anticipated material breach by any other party
to any Contract set forth on Schedule 3.12(a), (ii) since December 31, 1999 no
                             ----------------
customer or supplier has indicated in writing or orally to the Company or any
Seller that it shall stop or decrease the rate of business done with the Company
or that it desires to renegotiate its Contract with the Company, (iii) the
Company has performed all the material obligations required to be performed by
it in connection with the Contracts or commitments required to be disclosed on

Schedule 3.12(a) and is not in default under or in breach of any Contract or
----------------
commitment required to be disclosed on the Schedule 3.12(a) that would result in
                                           ----------------
a Material Adverse Effect, and no event has occurred which with the passage of
time or the giving of notice or both would result in a default or breach
thereunder that would result in a Material Adverse Effect, (iv) the Company does
not have a present expectation or intention of not fully performing any material
obligation pursuant to any Contract set forth on Schedule 3.12(a), (vi) each
                                                 ----------------
agreement is legal, valid, binding, enforceable and in full force and effect and
will continue as such following the consummation of the transactions
contemplated hereby, and (vii) to the Knowledge of Sellers, no unfilled customer
order or commitment obligating the Company to process, manufacture or deliver
products or perform services shall result in a loss to the Company upon
completion of performance.

          (c)    Sellers have provided Buyer with a true and correct copy of all
written Contracts which are required to be disclosed on Schedule 3.12(a), in
                                                        ----------------
each case together with all amendments, waivers or other changes thereto (all of
which are disclosed on Schedule 3.12(a)).  Schedule 3.12(a) contains an accurate
                       ----------------    ----------------
and complete description of all material terms of all oral Contracts referred to
therein.

                                       14
<PAGE>

          3.13   Proprietary Rights.
                 ------------------

          (a)    Schedule 3.13(a) sets forth a complete and correct list of:
                 ----------------

                 (i)     all patented or registered Proprietary Rights and all
     pending patent applications or other applications for registration of
     Proprietary Rights owned, filed or used by the Company;

                 (ii)    all trade names, unregistered trademarks, and domain
     names owned or used by the Company;

                 (iii)   all material unregistered copyrights, copyrightable
     works, works of authorship, mask works and computer software owned or used
     by the Company; and

                 (iv)    all licenses or similar agreements or arrangements to
     which the Company is a party, either as licensee or licensor, for the
     Proprietary Rights, in each case identifying the subject Proprietary
     Rights.

          (b)    Except as set forth in Schedule 3.13(b), (i) the Company owns
and possesses all right, title and interest in and to, or has a valid and
enforceable right to use, each of the Proprietary Rights, free and clear of all
Liens other than Permitted Liens, and no claim by any third party contesting the
validity, enforceability, use or ownership of any of the Proprietary Rights has
been made, is currently outstanding or, to the Knowledge of the Sellers, is
threatened, and to the Knowledge of the Sellers, there are no grounds for same,
(ii) the Proprietary Rights comprise all proprietary rights necessary for the
operation of the Company's business as currently conducted, and as currently
proposed to be conducted, (iii) the Company has not received any notices of, nor
is the Company aware of any facts which indicate a likelihood of, any
infringement or misappropriation by, or conflict with, any third party with
respect to any potential Proprietary Right used or owned by, or issued or
licensed to, the Company (including, without limitation, any demand or request
that the Company license rights from a third party), (iv) to the Sellers'
Knowledge, the Company has not infringed, misappropriated or otherwise
conflicted with any rights of any third parties and the Company is not aware of
any infringement, misappropriation or conflict which shall occur as a result of
the continued operation of the Company's business as currently conducted or as
currently proposed to be conducted, and (v) to the Sellers' Knowledge, the
Proprietary Rights used or owned by, or issued or licensed to the Company have
not been infringed, misappropriated or conflicted by any third party.

          (c)    The transactions contemplated by this Agreement shall have no
adverse effect on the Company's right, title and interest in and to any of the
Proprietary Rights. The Company has not disclosed any of its Confidential
Information to any third party other than pursuant to a written confidentiality
agreement or other binding obligation of confidentiality. The Company has taken
all other reasonable actions to maintain and protect its Proprietary Rights so
as to not adversely affect the validity or enforcement of such Proprietary
Rights. To the Sellers' Knowledge, the owners of any Proprietary Rights licensed
to the Company have taken all necessary and desirable actions to maintain and
protect the Proprietary Rights which are subject to such licenses.

          3.14   Litigation; Proceedings.  Except as set forth in Schedule
                 -----------------------                          --------
3.14, there are no actions, suits, proceedings, orders, judgments, decrees or
----
investigations pending or, to the Sellers'

                                       15
<PAGE>

Knowledge, threatened against or affecting the Company at law or in equity, or
before or by any federal, state, municipal or other governmental department,
commission, board, bureau, agency or instrumentality, domestic or foreign, and
to the Sellers' Knowledge there is no basis known for any of the foregoing.
Except as set forth on Schedule 3.14, the Company has not received any opinion
                       -------------
or legal advice in writing to the effect that the Company is exposed from a
legal standpoint to any liability or disadvantage which may be material to the
Company's business as previously or presently conducted or business prospects.
The Company is not subject to any outstanding order, judgement or decree issued
by any court or quasi-judicial or administrative agency of any federal, state,
local or foreign jurisdiction or any arbitrator.

          3.15  Brokerage. Except as set forth in Schedule 3.15, there are no
                ---------                         -------------
claims for brokerage commissions, finders' fees or similar compensation in
connection with the transactions contemplated by this Agreement based on any
arrangement or agreement made by or on behalf of the Company.

          3.16  Governmental Licenses and Permits.  Schedule 3.16 contains a
                ---------------------------------   -------------
complete listing and summary description of all permits, licenses, franchises,
certificates, approvals and other authorizations of foreign, federal, state and
local governments or other similar rights (collectively, the "Licenses") owned
                                                              --------
or possessed by the Company or used by the Company in the conduct of its
business.  Except as indicated on Schedule 3.16, the Company owns or possesses
                                  -------------
all right, title and interest in and to all Licenses which are necessary to
conduct its business as presently conducted and as proposed to be conducted and
shall use its reasonable efforts to maintain all such Licenses.  No loss or
expiration of any License is pending or, to the Sellers'  Knowledge, threatened
or reasonably foreseeable (including, without limitation, as a result of the
transactions contemplated hereby) other than expiration in accordance with the
terms thereof.

          3.17  Employee Benefit Plans.
                ----------------------

          (a)   Except as set forth on Schedule 3.17, with respect to current or
                                       -------------
former employees of the Company, the Company does not maintain or contribute to
any (i) deferred compensation or bonus or retirement plans or arrangements, (ii)
qualified or nonqualified defined contribution or defined benefit plans or
arrangements which are employee pension benefit plans (as defined in Section
3(2) of ERISA), or (iii) employee welfare benefit plans, (as defined in Section
3(1) of ERISA), equity option or equity purchase plans, or material fringe
benefit plans or programs whether in writing or oral and whether or not
terminated.  The Company has never contributed to any multiemployer pension plan
(as defined in Section 3(37) of ERISA), and the Company has never maintained or
contributed to any defined benefit plan (as defined in Section 3(35) of ERISA).
The Company does not maintain or contribute to any employee welfare benefit plan
which provides health, accident or life insurance benefits to former employees,
their spouses or dependents, other than in accordance with Section 4980B of the
Code.

          (b)   The employee pension benefit plans and employee welfare benefit
plans (and related trusts and insurance contracts) comply in form and in
operation in all material respects with the requirements of applicable laws and
regulations, including ERISA and the Code and the nondiscrimination rules
thereof; and the employee pension benefit plans which are intended to be
"qualified plans" qualify under Section 401(a) of the Code, and each such
employee pension benefit plan, and each trust (if any) forming a part thereof,
has received a favorable determination letter from the Internal Revenue Service
as to the qualification under the Code of such plan and the tax-exempt

                                       16
<PAGE>

status of such related trust and Sellers have no Knowledge of any event that has
occurred since the date of such determination letter that could adversely affect
the qualification of such plan or the tax exempt status of such related trust.

          (c)   All required reports and descriptions (including Form 5500
Annual Reports, Summary Annual Reports and Summary Plan Descriptions) with
respect to the employee pension benefit plans and employee welfare benefit plans
have been properly and timely filed with the appropriate government agency and
distributed to participants as required except for any failure that would not
result in a Material Adverse Effect. The Company has complied in all material
respects with the requirements of COBRA.

          (d)   With respect to each employee pension benefit plan, all material
contributions which are due (including all employer contributions and employee
salary reduction contributions) have been paid to such employee pension benefit
plan, all material contributions for prior plan years which are not yet due and
with respect to the current plan year for the period ending on the Closing Date
have been made or accrued in accordance with GAAP, and, with respect to the
employee welfare benefit plans, all material premiums or other payments which
are due have been paid.

          (e)   The Company has not incurred any liability to the Pension
Benefit Guarantee Corporation, the Internal Revenue Service, any multiemployer
plan or otherwise with respect to any employee pension benefit plan currently or
previously maintained by members of the controlled group of companies (as
defined in Sections 414(b) and (c) of the Code) that includes or included the
Company (the "Controlled Group") that has not been satisfied in full, and to the
              ----------------
Knowledge of Sellers, no condition exists that presents a material risk to the
Company or any member of the Controlled Group of incurring such a liability.

          (f)   With respect to each employee pension benefit plan and each
employee welfare benefit plan, (i) there have been no prohibited transactions as
defined in Section 406 of ERISA or Section 4975 of the Code that would result in
a Material Adverse Effect, (ii) no fiduciary (as defined in Section 3(21) of
ERISA) has any material liability for breach of fiduciary duty or any other
failure to act or comply in connection with the administration or investment of
the assets of such plans, and (iii) no actions, investigations, suits or claims
with respect to the assets thereof (other than routine claims for benefits) are
pending or threatened, and the Company has no Knowledge of any facts which would
give rise to or could reasonably be expected to give rise to any such actions,
suits or claims.

          (g)   With respect to each of the plans listed on Schedule 3.18,
                                                            -------------
Sellers have furnished to Buyer true and complete copies of (i) the plan
documents, summary plan descriptions and summaries of material modifications and
other material employee communications, (ii) the most recent determination
letter received from the Internal Revenue Service, (iii) the Form 5500 Annual
Report (including all schedules and other attachments for the most recent three
years), (iv) all related trust agreements, insurance contracts or other funding
agreements which implement such plans and (v) all contracts relating to each
such plan, including, without limitation, service provider agreements, insurance
contracts, investment management agreements and recordkeeping agreements.

          3.18  Insurance.  Schedule 3.18 lists and briefly describes each
                ---------   -------------
insurance policy maintained by or on behalf of the Company with respect to its
properties, assets and business, together with a claims history for the past
five years.  All of such insurance policies are in full force

                                       17
<PAGE>

and effect, and the Company is not and has never been in default with respect to
its obligations under any such insurance policies and the Company has never been
denied insurance coverage. Except as set forth on Schedule 3.18, the Company
                                                  -------------
does not have any self-insurance or co-insurance programs, and the reserves set
forth in the Financial Statements are adequate to cover all anticipated
liabilities with respect to any such self-insurance or coinsurance programs.

          3.19  Officers and Managing Members; Bank Accounts.  Schedule 3.19
                --------------------------------------------   -------------
lists all officers and managing members of the Company, and all bank accounts,
safety deposit boxes and lock boxes (designating each authorized signatory with
respect thereto) for the Company.

          3.20  Compliance with Laws.  The Company and its officers, managing
                --------------------
members, agents and employees have complied with all applicable laws,
regulations and ordinances of foreign, federal, state and local governments and
all agencies thereof which are applicable to the business, business practices
(including, but not limited to, the Company's production, marketing, sales and
distribution of its products and services) or any owned or leased properties of
the Company and to which the Company may be subject, except for violations that
would not have a Material Adverse Effect, and no claims have been filed against
the Company alleging a violation of any such laws or regulations, and the
Company has not received notice of any such violations.

          3.21  Powers of Attorney; Guarantees.  Except as set forth on Schedule
                ------------------------------                          --------
3.21, there are no outstanding powers of attorney executed on behalf of the
----
Company. The Company is not a guarantor or otherwise liable for any Indebtedness
of any other person, firm or corporation other than endorsements for collection
in the ordinary course of business.

          3.22  No Further Representations or Warranties. Except  as expressly
                ----------------------------------------
set forth in this Article III and Article IV, neither the Company nor any Seller
is making or shall be deemed to have made any representation or warranty of any
kind, either express or implied.

                                  ARTICLE IV

            REPRESENTATIONS AND WARRANTIES WITH RESPECT TO SELLERS
            ------------------------------------------------------

          As a material inducement to Buyer to enter into this Agreement, each
Seller represents and warrants jointly and severally to Buyer that:

          4.1   Authorization of Transactions.  Such Seller has full power,
                -----------------------------
authority and legal capacity to enter into this Agreement and the other
documents contemplated hereby to which such Seller is a party and to perform his
obligations hereunder and thereunder.  This Agreement and the other documents
contemplated hereby to which such Seller is a party have been duly executed and
delivered by such Seller and constitute the valid and binding agreements of such
Seller, enforceable in accordance with their respective terms.

          4.2   Absence of Conflicts.  Neither the execution and the delivery of
                --------------------
this Agreement and the other documents contemplated hereby to which such Seller
is a party, nor the consummation of the transactions contemplated hereby and
thereby, shall (a) conflict with, result in a breach of any of the provisions
of, (b) constitute a default under, (c) result in the violation of, (d) give any
third party the right to terminate or to accelerate any obligation under, (e)
result in the

                                       18
<PAGE>

creation of any Lien upon the Minority Interest owned by such Seller, or (f)
require any authorization, consent, approval, execution or other action by or
notice to any court or other governmental body, under the provisions of any
indenture, mortgage, lease, loan agreement or other agreement or instrument to
which such Seller is bound or affected, or any statute, regulation, rule,
judgment, order, decree or other restriction of any government, governmental
agency or court to which such Seller is subject, except for such conflicts,
defaults, violations or rights that would not have a Material Adverse Effect. No
notice to, filing with or authorization, consent or approval of any government
or governmental agency, other than those required under the Hart-Scott-Rodino
Act, by such Seller is necessary for the consummation of the transactions
contemplated by this Agreement and the other documents contemplated hereby to
which such Seller is a party.

          4.3   Brokerage.  Except as set forth on Schedule 4.3, there are no
                ---------                          ------------
claims for brokerage commissions, finders' fees or similar compensation in
connection with the transactions contemplated by this Agreement based on any
arrangement or agreement made by or on behalf of such Seller.

          4.4   Membership Interests.  Such Seller holds of record and owns
                --------------------
beneficially the Membership Interests set forth opposite its name on Schedule
                                                                     --------
2.1 (under Pre-Closing), and at the Closing such Seller will transfer to Buyer
---
good and marketable title to the Minority Interest, in each case free and clear
of any Liens, restrictions on transfer (other than any restrictions under the
Securities Act of 1933, as amended, and applicable state securities laws),
options, warrants, rights, calls, commitments, proxies or other contract rights
other than those contained in the Organizational Documents of the Transaction
Documents.  Such Seller is not a party to any option, warrant, right, Contract,
call, put or other agreement or commitment providing for the disposition or
acquisition of any interest in the Company (other than those contained in the
Organizational Documents of the Transaction Documents).  Such Seller is not a
party to any voting trust, proxy or other agreement or understanding with
respect to the voting of any interest of the Company other than those contained
in the Organizational Documents of the Transaction Documents.

          4.5   Litigation.  There are no actions, suits, proceedings or orders
                ----------
pending or, to Sellers' Knowledge, threatened against or affecting Sellers at
law or in equity, or before or by any federal, state, municipal or other
governmental department, commission, board, bureau, agency or instrumentality,
domestic or foreign, which would adversely affect Sellers' performance under
this Agreement and the other agreements contemplated hereby to which Sellers are
a party or the consummation of the transactions contemplated hereby or thereby.

          4.6   No Further Representations or Warranties.  Except as expressly
                ----------------------------------------
set forth in this Article III and Article IV, neither the Company nor any Seller
is making or shall be deemed to have made any representation or warranty of any
kind, either express or implied.

                                   ARTICLE V

                    REPRESENTATIONS AND WARRANTIES OF BUYER
                    ---------------------------------------

          As a material inducement to Sellers to enter into this Agreement,
Buyer hereby represents and warrants to Sellers that:

                                       19
<PAGE>

          5.1  Organization and Corporate Power.  Buyer is a corporation duly
               --------------------------------
organized, validly existing and in good standing under the laws of the State of
Delaware, with full corporate power and authority to enter into this Agreement
and the other agreements contemplated hereby to which Buyer is a party and
perform its obligations hereunder and thereunder.

          5.2  Authorization of Transactions.  The execution, delivery and
               -----------------------------
performance of this Agreement and the other agreements contemplated hereby to
which Buyer is a party have been duly and validly authorized by all requisite
corporate action on the part of Buyer, and no other corporate proceedings on its
part are necessary to authorize the execution, delivery or performance of this
Agreement.  This Agreement constitutes, and each of the other agreements
contemplated hereby to which Buyer is a party shall when executed constitute, a
valid and binding obligation of Buyer, enforceable in accordance with their
terms.

          5.3  No Violation.  Buyer is not subject to or obligated under its
               ------------
certificate of incorporation, its by-laws, any applicable law, or rule or
regulation of any governmental authority, or any agreement or instrument, or any
license, franchise or permit, or subject to any order, writ, injunction or
decree, which would be breached or violated by its execution, delivery or
performance of this Agreement and the other agreements contemplated hereby to
which Buyer is a party.

          5.4  Governmental Authorities and Consents.  Buyer is not required to
               -------------------------------------
submit any notice, report or other filing with any governmental authority in
connection with the execution or delivery by it of this Agreement and the other
agreements contemplated hereby to which Buyer is a party or the consummation of
the transactions contemplated hereby or thereby.  No consent, approval or
authorization of any governmental or regulatory authority or any other party or
person is required to be obtained by Buyer in connection with its execution,
delivery and performance of this Agreement and the other agreements contemplated
hereby to which Buyer is a party or the transactions contemplated hereby or
thereby, other than those required under the Hart-Scott-Rodino Act.

          5.5  Litigation.  There are no actions, suits, proceedings or orders
               ----------
pending or, to Buyer's knowledge, threatened against or affecting Buyer at law
or in equity, or before or by any federal, state, municipal or other
governmental department, commission, board, bureau, agency or instrumentality,
domestic or foreign, which would adversely affect Buyer's performance under this
Agreement and the other agreements contemplated hereby to which Buyer is a party
or the consummation of the transactions contemplated hereby or thereby.

          5.6  Brokerage.  There are no claims for brokerage commissions,
               ---------
finders' fees or similar compensation in connection with the transactions
contemplated by this Agreement based on any arrangement or agreement made by or
on behalf of Buyer.

          5.7  No Further Representations or Warranties.  Except as expressly
               ----------------------------------------
set forth in this Article V, the Buyer is not making or shall be deemed to have
made any representation or warranty of any kind, either express or implied.

                                       20
<PAGE>

                                  ARTICLE VI

                      INDEMNIFICATION AND RELATED MATTERS
                      -----------------------------------

          6.1  Survival.
               --------

          (a)  Survival of Representations and Warranties.  All representations
               ------------------------------------------
and warranties set forth in this Agreement, the Transaction Documents or in any
writing or certificate delivered in connection with this Agreement shall survive
the Closing Date and continue in full force and effect until the "Applicable
                                                                  ----------
Limitation Date," which shall be the later of (i) April 30, 2002, or (ii)
---------------
completion of the financial statements for the fiscal year ended December 31,
2001 by the Company's auditors, provided, however, that the indemnification
obligations with respect to any claim for which a person has given written
notice under Section 6.2(d) hereof prior to such date will survive until the
final resolution of such claim, and further provided that the indemnification
obligations with respect to the representations and warranties contained in
Sections 3.1 (Organization and Limited Liability Company Power), 3.2
(Authorization of Transactions), 3.3 (Capital Structure of the Company) and 3.4
(Subsidiaries, Investments and Notes) shall survive indefinitely.  No party
shall be entitled to recover for any Loss pursuant to Section 6.2(a) or Section
6.2(b) unless written notice of a claim thereof is delivered to the other Party
prior to the Applicable Limitation Date.

          (b)  Risk Allocation.  The representations, warranties, covenants and
               ---------------
agreements made herein, together with the indemnification provisions herein, are
intended among other things to allocate the economic cost and the  risks
inherent in the transactions contemplated hereby between the Parties and,
accordingly, a Party shall be entitled to the indemnification or other remedies
provided in this Agreement by reason of any breach of any such representation,
warranty, covenant or agreement by another Party notwithstanding whether any
employee, representative or agent of the Party seeking to enforce a remedy knew
or had reason to know of such breach.  To the Buyer's Knowledge, at the date of
this Agreement, there are no such breaches.

          6.2  Indemnification.
               ---------------

          (a)  Sellers' Indemnification.  Sellers shall jointly and severally
               ------------------------
indemnify Buyer and its officers, employees, agents, representatives,
affiliates, successors and permitted assigns (collectively, the "Buyer Parties")
                                                                 -------------
and hold each of them harmless from and against and pay on behalf of or
reimburse such Buyer Parties in respect of any loss (including diminution in
value), liability, demand, claim, action, cause of action, cost, damage,
deficiency, tax, penalty, fine or expense, whether or not arising out of third
party claims (including, without limitation, interest, penalties, reasonably
attorneys' fees and expenses, court costs and all amounts paid in investigation,
defense or settlement of any of the foregoing) (collectively, "Losses" and
                                                               ------
individually, a "Loss") which any such Buyer Party may suffer, sustain or become
                 ----
subject to, as a result of, in connection with, relating or incidental to or by
virtue of:

               (i)  the breach of any representation or warranty made by the
     Company or any Seller contained in this Agreement, the other Transaction
     Documents, any Exhibit or Schedule hereto or any certificate delivered by
     the Company or any Seller to Buyer with respect hereto or thereto in
     connection with the Closing;

                                       21
<PAGE>

               (ii) the breach of any covenant or agreement made by the Company
     or any Seller contained in this Agreement, the other Transaction Documents,
     any Exhibit or Schedule hereto or any certificate delivered by the Company
     or any Seller to Buyer with respect hereto or thereto in connection with
     the Closing;

          (b)  Buyer Indemnification.  Buyer shall indemnify Sellers and its
               ---------------------
employees, agents, representatives, affiliates, successors and permitted assigns
(collectively, the "Seller Parties") and hold Sellers harmless from and against
                    --------------
and pay on behalf of or reimburse Sellers in respect of any Loss which Sellers
may suffer, sustain or become subject to, as the result of, in connection with,
relating to or incidental to or by virtue of the breach by Buyer of any
representation, warranty or covenant made by Buyer contained in this Agreement,
any other Transaction Document or any certificate delivered by Buyer to Sellers
with respect thereto in connection with the Closing.

          (c)  Limitations on Indemnity.  The indemnification provided for in
               ------------------------
subsections (a) and (b) above is subject to the following limitations:
---------------     ---

               (i)   No Party will be liable hereunder with respect to claims
     referred to in subsection (a) or subsection (b) above unless the other
     Party gives written notice thereof within the Applicable Limitation Date.
     Notwithstanding any implication to the contrary contained in this
     Agreement, so long as a Party delivers written notice of a claim no later
     than the Applicable Limitation Date, the other Party shall be required to
     indemnify hereunder for all Losses which such parties may incur (subject to
     the Basket and the Cap) in respect of the matters which are the subject of
     such claim, regardless of when incurred.

               (ii)  Sellers shall not be liable to Buyer Parties, and Buyer
     shall not be liable to Sellers, for any Loss arising under subsection (a)
     or subsection (b), above, unless the aggregate amount of all such Losses
     exceeds $25,000 in the aggregate (the "Basket"), in which case such
                                            ------
     Party(ies) shall be liable for all such Losses in excess of $25,000 up to
     the Cap; provided that the foregoing limitations (i.e., the Basket and the
     Cap) shall not apply with respect to any Loss arising from or related to a
     breach of any covenant of Sellers or Buyer, or with respect to the
     representations and warranties contained in Sections 3.1 (Organization and
     Limited Liability Company Power), 3.2 (Authorization of Transactions), 3.3
     (Capital Structure of the Company) and 3.4 (Subsidiaries, Investments and
     Notes).

               (iii) Notwithstanding anything to the contrary contained herein,
     for purposes of determining whether there has been a breach and the amount
     of any Losses that are the subject matter of a claim for indemnification
     hereunder, the Basket amount shall be the materiality standard for all
     purposes hereunder and, therefore, each representation, warranty and other
     provision contained in this Agreement and each certificate delivered
     pursuant hereto shall be read without regard and without giving effect to
     any materiality, or Material Adverse Effect standard or qualification
     contained in such representation or warranty (as if such standard or
     qualification were deleted from such representation and warranty).

               (iv)  The aggregate amount of the Sellers' liability to the Buyer
     and the aggregate amount of the Buyer's liability to the Seller and to the
     Company under this Article VI shall not exceed 50% of the Minority Interest
     Purchase Price, and upon Buyer's exercise of the Purchase Option, the
     aggregate amount of the Sellers' liability to the Buyer and the

                                       22
<PAGE>

     aggregate amount of the Buyer's liability to the Seller and the Company
     under this Article VI shall not exceed 50% of the Purchase Option Exercise
     Price (the "Cap"), provided that the indemnification obligations with
                 ---
     respect to the representations and warranties contained in Sections 3.1
     (Organization and Limited Liability Company Power), 3.2 (Authorization of
     Transactions), 3.3 (Capital Structure of the Company) and 3.4
     (Subsidiaries, Investments and Notes) shall not be subject to the
     limitations contained in this Section 6.2(c)(iv).

          (d)  Procedure.  If a party hereto seeks indemnification under this
               ---------
Article VI, such party (the "Indemnified Party") shall give written notice to
----------                   -----------------
the other party(ies) (the "Indemnifying Party") after receiving written notice
                           ------------------
of any action, lawsuit, proceeding, investigation or other claim against it (if
by a third party) or discovering the liability, obligation or facts giving rise
to such claim for indemnification, describing the claim, the amount thereof (if
known and quantifiable), and the basis thereof; provided that the failure to so
notify the Indemnifying Party shall not relieve the Indemnifying Party of its or
his obligations hereunder except to the extent such failure shall have harmed
the Indemnifying Party.  In that regard, if any action, lawsuit, proceeding,
investigation or other claim  shall be brought or asserted by any third party
which, if adversely determined, would entitle the Indemnified Party to indemnity
pursuant to this Article VI, the Indemnified Party shall promptly notify the
                 ----------
Indemnifying Party of the same in writing, specifying in detail the basis of
such claim and the facts pertaining thereto and the Indemnifying Party shall be
entitled to participate in the defense of such action, lawsuit, proceeding,
investigation or other claim giving rise to the Indemnified Party's claim for
indemnification at its expense.

          (e)  Waiver, Release and Discharge.  Effective upon the Closing, each
               -----------------------------
Seller hereby irrevocably waives, releases and discharges the Company from any
and all liabilities and obligations to such Seller of any kind or nature
whatsoever, whether in his capacity as Seller hereunder, as a member, officer or
managing member of the Company or otherwise (including, without limitation, in
respect of rights of contribution or indemnification), in each case whether
absolute or contingent, liquidated or unliquidated, known or unknown, and
whether arising hereunder or under any other agreement or understanding or
otherwise at law or equity, and each Seller shall not seek to recover any
amounts in connection therewith or thereunder from the Company.

                                  ARTICLE VII

                             ADDITIONAL AGREEMENTS
                             ---------------------

          7.1  The Purchase Option.  Buyer shall have an option (the "Purchase
               -------------------                                    --------
Option") to purchase all of the remaining outstanding Membership Interests in
------
the Company as held by Sellers, by delivering written notice (the "Purchase
                                                                   --------
Option Notice") to Sellers during the Purchase Option Exercise Period.  The
-------------
Parties shall execute a Purchase Agreement which shall be substantially
identical in form to  this Agreement.  Seller may, at any time on or after the
Purchase Option Closing Date acquire the Company's Avid equipment, as detailed
in the Company's Wells Fargo Equipment Finance Master Lease No. 51696 dated
September 28, 1999, by assuming all obligations under such Lease.  Buyer shall
also negotiate in good faith with Sellers the sale by the Company to Sellers of
the other property listed on Schedule 7.1 hereof.
                             ------------

                                       23
<PAGE>

          7.2  Payment of the Purchase Option Exercise Price.  Buyer shall pay
               ---------------------------------------------
to the Sellers the Purchase Option Exercise Price in cash on the Purchase Option
Closing Date.

          7.3  Purchase Option Closing Distribution.  The Company shall have
               ------------------------------------
distributed to the Members (determined immediately prior to the Purchase Option
Closing Date), immediately prior to the Purchase Option Closing Date, the
Purchase Option Closing Distribution, calculated by the Company's accountants,
as selected in accordance with Section 7.5, as of the last day of the month
immediately preceding the Purchase Option Closing Date.

          7.4  Purchase Option Closing Date.  The Purchase Option notice shall
               ----------------------------
specify the "Purchase Option Closing Date," which shall be scheduled for a date
             ----------------------------
no later than 90 days after the end of the calendar quarter during which Buyer
delivers the Purchase Option Notice to Sellers. Buyer and Sellers shall use
their best efforts to close the acquisition on the Purchase Option Closing Date,
and the Purchase Option shall lapse if the acquisition has not been closed on or
before the Purchase Option Closing Date unless due to a default by Sellers or
their Affiliates, or unless otherwise extended by mutual written agreement of
the Parties.

          7.5  Conduct Prior to the Lapse of the Purchase Option.  Prior to the
               -------------------------------------------------
Purchase Option Lapse Date, the Sellers will conduct the Company's business, and
the Company will conduct its business, only in the ordinary course, consistent
with past practice, and will use their best efforts to maintain the value of the
Company's business as a going concern, and will comply with the following:

          (a)  Buyer will not require formal management meetings regarding the
operation of the Company's business, but the Parties will hold formal business
review meetings at the end of each quarter of the fiscal year, during which the
Parties will discuss the Company's operations, activities, and performance,
including items such as sales performance, marketing expenses and operating
expenses versus budget for the trailing quarter, current quarter and year-end.
Buyer shall approve independent auditors to conduct audit for the Company's
fiscal year ending December 31, 2000, and will pay for such audit fees.  Buyer
will also make all of such auditor's work papers available for review by Sellers
and to other accountants or auditors retained by Sellers at Sellers' expense.

          (b)  The Company and Sellers will not, without the prior written
consent of Buyer:

               (i)   enter into or perform any transaction for the acquisition,
     selection, clearance, maintenance, enforcement, assignment and licensing of
     any or all intellectual property developed, owned or used by the Company;

               (ii)  enter into or perform any transactions with Affiliates, or
     enter into any transactions which are not on an arms length basis; or

               (iii) increase any compensation or benefit arrangement for any
     employee, officer, or Member (it being understood that up to * per annum
     may be paid to Members); or

               (iv)  pay any distributions or re-purchase any Membership
     Interests in whole or in part; or

                                       24
<PAGE>

               (v)  grant profit participations or equity interests in the
     Company or any properties of the Company or encumber any of the assets of
     the Company in any way, except that the Sellers may grant (i) equity
     interests to their children, and (ii) Phantom Equity Interests to employees
     or independent contractors, so long as such grants do not dilute Buyer's
     interest or in any way affect its rights under this Agreement, and provided
     that any interests granted hereunder will be subject to the tag along/drag
     along rights provided under Section 7.10 of this Agreement, which will be
     paid from the proceeds in the event that Buyer exercises the Purchase
     Option; or

               (vi) make or change any election, change an annual accounting
     period, adopt or change any accounting method, file any amended Tax Return,
     enter into any closing agreement, settle any Tax claim or assessment
     relating to the Company, surrender any right to claim a refund of Taxes,
     consent to any extension or waiver of the limitation period applicable to
     any Tax claim or assessment relating to the Company, or take any other
     similar action, or omit to take any action relating to the filing of any
     Tax Return or the payment of any Tax, if such election, adoption, change,
     amendment, agreement, settlement, surrender, consent or other action or
     omission would have the effect of increasing the present or future Tax
     liability or decreasing any present or future Tax asset of the Company,
     Buyer or any Affiliate Buyer.

          7.6  Payment of the Purchase Option Exercise Price.  Buyer shall pay
               ---------------------------------------------
to the Sellers the Purchase Option Exercise Price in cash on the Purchase Option
Closing Date.

          7.7  Disputes as to Purchase Option Exercise Price or the Purchase
               -------------------------------------------------------------
Option Closing Distribution.  In the event of any dispute between the Sellers,
---------------------------
the Company and Buyer concerning the calculation of amount of the Purchase
Option Exercise Price, then on the Purchase Option Closing Date, Buyer shall pay
the Sellers the greater of (i) 85% of Sellers' good faith determination of the
Purchase Option Exercise Price based upon the financial information previously
delivered by Sellers to Buyer, or (ii) 100% of Buyer's good faith determination
of the Purchase Option Exercise Price, and the difference between the amount
paid and 100% of Sellers' good faith determination of the Purchase Option
Exercise Price shall be placed in an interest-bearing escrow account (with
interest to be paid in proportion to the  ultimate entitlement to the escrowed
funds) with a third-party escrow holder pending final determination of the
Purchase Option Exercise Price pursuant to arbitration in the manner set forth
in Section 8.12 hereof.  Any claims relating to the calculation of the Purchase
Option Exercise Price must be submitted in writing within six months after the
Purchase Option Closing Date.  The Parties agree to follow a similar method to
resolve any dispute over the Purchase Option Closing Distribution.

          7.8  Company Call Option.  In the event that Buyer does not exercise
               -------------------
its Purchase Option before the Purchase Option Lapse Date or the Purchase Option
otherwise lapses, the Company shall have a "Call Option" entitling the Company
                                            -----------
to acquire all (but not less than all) of the Minority Interest by delivering
written notice (the "Call Option Notice") to Buyer between April 1, 2001 through
                     ------------------
March 31, 2002 (the "Call Option Exercise Period").
                     ---------------------------

          7.9  Payment of the Call Option Exercise Price.  The Sellers shall pay
               -----------------------------------------
to  Buyer the Call Option Exercise Price in cash on the Call Option Closing
Date.

                                       25
<PAGE>

          7.10 Call Option Closing Date.  The Call Option Notice shall specify
               ------------------------
the "Call Option Closing Date," which shall be scheduled for a date no later
     ------------------------
than 90 days after the end of the calendar quarter during which the Company
delivers the Call Option Notice to Buyer. Sellers and Buyer shall use their best
efforts to close the acquisition on the Call Option Closing Date, and the Call
Option shall lapse if the acquisition has not been closed unless due to a
default by the Buyer or its Affiliates, or unless otherwise extended by mutual
written agreement of the Parties.

          7.11 Disputes as to Call Option Exercise Price.  In the event of any
               -----------------------------------------
dispute between the Sellers, the Company and Buyer concerning the calculation of
amount of the Call Option Exercise price, then on the Call Option Closing Date,
Sellers shall pay the Buyer the greater of (i) 85% of Buyer's good faith
determination of the Call Option Exercise Price based upon the financial
information previously delivered by Sellers to Buyer, or (ii) 100% of Sellers'
good faith determination of the Call Option Exercise Price, and the difference
between the amount paid and 100% of Buyer's good faith determination of the Call
Option Exercise Price shall be placed in an interest-bearing escrow account
(with interest to be paid in proportion to the  ultimate entitlement to the
escrowed funds) with a third-party escrow holder pending final determination of
the Call Option Exercise Price pursuant to arbitration in the manner set forth
in Section 8.12 hereof.  Any claims relating to the calculation of the Call
Option Exercise price must be submitted in writing within six months after the
Call Option Closing Date.

          7.12 Third Party Transaction. In the event that Buyer does not
               -----------------------
exercise its Purchase Option, and the Company does not exercise its Call Option,
Sellers may enter into a Sale with a third party.  In the event of any such
Sale, the Sellers must deliver to Buyer at least 30 days prior to the Sale, a
written notice (the "Sale Notice"), specifying in reasonable detail the identity
                     -----------
of the prospective buyer(s), the  percentage of Membership Interests to be sold,
and the terms of and conditions of the Sale.  Additionally:

          (a)  Buyer shall have tag along rights which permit Buyer to
participate in the Sale at the same pro rata price and at the same terms by
delivering written notice of Buyer's intention to participate in the Sale to the
Sellers within 30 days after delivery of the Sale Notice; and

          (b)  Seller shall have drag along rights which require Buyer to
participate in any such Sale for which it received timely and adequate Sale
Notice, on the same terms and at the same pro rata price as the Seller, provided
that Buyer, under this Section 7.9, shall only be required to sell its Minority
Interest for an amount no less than the greater of (i) the Minority Interest
Purchase Price, or (ii) Buyer's pro rata share of the total amount of the
proceeds from such Sale.

          7.13 Tax Matters.
               -----------

          (a)  If requested by the Buyer, the Company shall make an election on
its United States federal income tax return to adjust the basis of its assets
under Section 754 of the Code.

          (b)  As set forth in the Amended and Restated Operating Agreement of
the Baby Einstein Company, LLC attached hereto is Exhibit  C, to the extent of
Cash Flow (as defined in the Amended and Restated Operating Agreement), the
Company shall make annual cash distributions to each Member for each fiscal year
equal to the product of (i) the highest marginal rate of federal income tax
applicable to individuals for the fiscal year plus 5%, times (ii) the taxable
income allocated to the Member by the Company for such fiscal year.

                                       26
<PAGE>

          7.14 Press Releases and Announcements.  At and prior to the Closing
               --------------------------------
Date, no press releases related to this Agreement and the transactions
contemplated herein, or other announcements to the employees, customers or
suppliers of the Company shall be issued without the mutual approval of all
Parties, except for any public disclosure which is required by law or regulation
(in which case the disclosure shall be prepared jointly by the Company and
Buyer).  After the Closing Date, no press releases related to this Agreement and
the transactions contemplated herein, or other announcements to the employees,
customers or suppliers of the Company, shall be issued without Sellers' and
Buyer's prior written consent.

          7.15 Further Transfers.  Each Seller shall execute and deliver such
               -----------------
further instruments of conveyance and transfer and take such additional action
as Buyer may reasonably request to effect, consummate, confirm or evidence the
transfer to Buyer of the Minority Interests and any other transactions
contemplated hereby.

          7.16 Specific Performance.  Each Seller acknowledges that the
               --------------------
Company's business is unique and recognizes and affirms that in the event of a
breach of this Agreement by such Seller, money damages may be inadequate and
Buyer may have no adequate remedy at law.  Accordingly, each Seller agrees that
Buyer shall have the right, in addition to any other rights and remedies
existing in its favor, to enforce its rights and such Seller's obligations
hereunder not only by an action or actions for damages but also by an action or
actions for specific performance, injunctive and/or other equitable relief.

          7.17 Expenses.  Except as otherwise provided herein, each of the
               --------
Company and Buyer shall pay all of its own fees, costs and expenses (including,
without limitation, fees, costs and expenses of legal counsel, investment
bankers, brokers or other representatives and consultants and appraisal fees,
costs and expenses) incurred in connection with the negotiation of this
Agreement, the performance of its obligations hereunder, and the consummation of
the transactions contemplated hereby; it being understood that the Company shall
pay the fees, costs and expenses of the Sellers.

          7.18 Assignment of Proprietary Rights.  Julie Clark (including Julie
               --------------------------------
Aigner Clark and/or Julie Aigner-Clark whether doing business under "I Think I
Can Productions" or as an individual) covenants and agrees to assign to the
Company her entire right, title and interest in any Proprietary Rights, and
agrees to fully cooperate in the Company's perfection of title in any such
Proprietary Right, including, without limitation, the Company's recordation of
any assignment from Julie Clark that has not already been assigned or perfected
at the date of the Closing.

          7.19 Certificates.  Sellers shall deliver to Buyer any and all
               ------------
documents, instruments or other evidence (the "Certificates") necessary to
                                               ------------
transfer the Minority Interest owned by such Sellers as soon as possible after
the Closing.

          7.20 Remedies.  Sellers acknowledge and agree that any breach by him,
               --------
her or it of any of the covenants of this Article 7 would result in irreparable
                                          ---------
injury and damage for which money damages would not provide an adequate remedy.
Therefore, if any of the Sellers breaches, or threatens to commit a breach of,
any of the covenants of this Article 7, the Buyer, shall have in addition to,
                             ---------
and not in lieu of, any other rights and remedies available to them under law or
in equity (including, without limitation, the recovery of damages) the right to
have such covenants specifically enforced by any court having equity
jurisdiction, including, without limitation, the right to an entry

                                       27
<PAGE>

against the Sellers of restraining orders and injunctions against violations,
threatened or actual, and whether or not then continuing, of such covenants.

          7.21 Duration and Scope of Covenants.   If any court or other
               -------------------------------
decision-maker of competent jurisdiction determines that any of the covenants
contained in this Article 7, or any part thereof, is unenforceable because of
                  ---------
the duration or geographical scope of such provision, then the duration or scope
of such provision, as the case may be, shall be reduced so that such provision
becomes enforceable and, in its reduced form, such provision shall then be
enforceable and shall be enforced.

          7.22 Insurance.  Sellers covenant and agree that prior to the Purchase
               ---------
Option Closing Date, they will secure insurance to be maintained by or on behalf
of the Company for coverage types and amounts that are customary for the size
and line of business of the Company, and will name Buyer as a beneficiary of
such insurance policies.

          7.23 Confidentiality Agreement.  The Parties covenant and agree that
               -------------------------
nothing in this Agreement does or shall be construed to supersede the
Confidentiality Agreement entered into by the Parties on December 3, 1999, which
is attached as Exhibit E hereto, and that, as such, that Confidentially
               ---------
Agreement continues in full force and affect.

          7.24 Post Closing Purchase Option Adjustments. The Parties covenant
               ----------------------------------------
and agree that if Buyer exercises its Purchase Option, by October 31, 2001, the
Parties will recalculate and restate the Purchase Option Exercise Price and the
Purchase Option Closing Distribution as of September 30, 2001 as follows:

          (a)  the Parties agree that the "Post Closing Purchase Option
                                           ----------------------------
Adjustment" shall be equal to the difference between *;
----------

          (b)  the Parties agree to recalculate the Purchase Option Exercise
Price as of  September 30, 2001 for the sole purpose of taking into account the
Post Closing Purchase Option Adjustment in Section 7.24(a) as an additional
Purchase Option EBIT Adjustment.  In the event of an increase in the Purchase
Option Exercise Price, Buyer shall pay to Sellers by November 15, 2001 the
difference between the revised Purchase Option Exercise Price and the amount
previously paid to Sellers in respect thereof.  In the event of a decrease in
the Purchase Option Exercise Price, Sellers shall pay to Buyer by November 15,
2001 the difference between the revised Purchase Option Exercise Price and the
amount previously paid to Sellers in respect thereof; and

          (c)  the Parties further agree to recalculate the Purchase Option
Closing Distribution by October 31, 2001 as of September 30, 2001 to reflect the
amount of the Post Closing Purchase Option Adjustment calculated in Section
7.24(a) above.  In the event of an increase in the Purchase Option Closing
Distribution, Buyer shall pay to Members (determined immediately prior to the
Purchase Option Closing Date) by November 15, 2001 the difference between the
revised Purchase Option Closing Distribution and the amount previously paid to
Members (determined immediately prior to the Purchase Option Closing Date) in
respect thereof.  In the event of a decrease in the Purchase Option Closing
Distribution, Members (determined immediately prior to the Purchase Option
Closing Date) shall pay to Buyer by November 15, 2001 the difference between

                                       28
<PAGE>

the revised Purchase Option Closing Distribution and the amount previously paid
to Members (determined immediately prior to the Purchase Option Closing Date) in
respect thereof.

                                 ARTICLE VIII

                                 MISCELLANEOUS
                                 -------------

          8.1  Amendment and Waiver.  This Agreement may be amended and any
               --------------------
provision of this Agreement may be waived, provided that any such amendment or
waiver shall be binding upon a Party only if such amendment or waiver is set
forth in a writing executed by Buyer and Sellers. No course of dealing between
or among any persons having any interest in this Agreement shall be deemed
effective to modify, amend or discharge any part of this Agreement or any rights
or obligations of any Party under or by reason of this Agreement.

          8.2  Notices.  All notices, demands and other communications given or
               -------
delivered under this Agreement shall be in writing and shall be deemed to have
been given when personally delivered, mailed by first class mail, return receipt
requested, or delivered by express courier service or telecopied (with hard copy
to follow). Notices, demands and communications to Sellers, the Company and
Buyer shall, unless another address is specified in writing, be sent to the
address or telecopy number indicated below:

Notices to Sellers:                       with copies to:
------------------                        --------------

The Baby Einstein Company, LLC            O'Melveny & Myers LLP
10840 South Bobcat Terrace                1999 Avenue of the Stars, Suite 700
Littleton, CO 80124                       Los Angeles, CA 90067
Attn: Julie A. Clark                      Attn: Robert Haymer
Telecopy: (303) 706-9864                  Telecopy: (310) 246-6779

Notices to Buyer:                         with copies to:
----------------                          --------------

Artisan Entertainment Inc.                Kirkland & Ellis
2700 Colorado Avenue                      777 South Figueroa Street, Suite 3700
Santa Monica, CA 90404                    Los Angeles, CA 90017
Attn: Ken Schapiro                        Attention: Eva Davis
Telecopy: (310) 255-3840                  Telecopy:  (213) 680-8500

          8.3  Binding Agreement; Assignment.  This Agreement and all of the
               -----------------------------
provisions hereof shall be binding upon and inure to the benefit of the Parties
and their respective successors and permitted assigns; provided that neither
this Agreement nor any of the rights, interests or obligations hereunder may be
assigned by any Seller or Buyer without the prior written consent of Buyer or
Sellers, respectively.  Notwithstanding the foregoing, without the prior written
consent of Sellers, Buyer may at any time, in its sole discretion, assign, in
whole or in part, (a) its rights and obligations pursuant to this Agreement to
one or more of its Affiliates; (b) its rights under this

                                       29
<PAGE>

Agreement for collateral security purposes to any lender providing financing to
Buyer, the Company or any of their Affiliates and any such lender may exercise
all of the rights and remedies of Buyer hereunder; and (c) its rights under this
Agreement, in whole or in part, to any subsequent purchaser of the Company or
any of its divisions or any material portion of its assets (whether such sale is
structured as a sale of equity, sale of assets, merger, recapitalization or
otherwise).

          8.4  Severability.  Whenever possible, each provision of this
               ------------
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision shall be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of such provisions or the remaining provisions of this Agreement.

          8.5  Construction.  The language used in this Agreement shall be
               ------------
deemed to be the language chosen by the Parties to express their mutual intent,
and no rule of strict construction shall be applied against any person.  The
Parties intend that each representation, warranty, and covenant contained herein
shall have independent significance.  If any Party has breached any
representation, warranty, or covenant contained herein in any respect, the fact
that there exists another representation, warranty, or covenant relating to the
same subject matter (regardless of the relative levels of specificity) which the
Party has not breached shall not detract from or mitigate the fact that the
Party is in breach of the first representation, warranty, or covenant.

          8.6  Captions. The captions used in this Agreement are for convenience
               --------
of reference only and do not constitute a part of this Agreement and shall not
be deemed to limit, characterize or in any way affect any provision of this
Agreement, and all provisions of this Agreement shall be enforced and construed
as if no caption had been used in this Agreement.

          8.7  Entire Agreement.  The schedules identified in this Agreement are
               ----------------
incorporated herein by reference. This Agreement and the documents referred to
herein contain the entire agreement between the Parties and supersede any prior
understandings, agreements or representations by or between the Parties, written
or oral, which may have related to the subject matter hereof in any way,
including, without limitation, the Letter of Intent dated November 8, 1999 and
signed by the Company, the Sellers and the Buyer, except for the Confidentiality
Agreement referenced in Section 7.23 herein which the Parties have agreed is not
superseded by this Agreement and continues in full force and effect.

          8.8  Counterparts.  This Agreement may be executed in multiple
               ------------
counterparts, each of which shall be deemed an original but all of which taken
together shall constitute one and the same instrument.

          8.9  Governing Law.  All questions concerning the construction,
               -------------
validity and interpretation of this Agreement shall be governed by and construed
in accordance with the domestic laws of the State of California, without giving
effect to any choice of law or conflict of law provision (whether of the State
of California or any other jurisdiction) that would cause the application of the
laws of any jurisdiction other than the State of California.

          8.10 Parties in Interest.  Nothing in this Agreement, express or
               -------------------
implied, is intended to confer on any person other than the Parties and their
respective successors and assigns any rights or remedies under or by virtue of
this Agreement.

                                       30
<PAGE>

          8.11 CONSENT TO JURISDICTION.  THE PARTIES AGREE THAT JURISDICTION
               -----------------------
AND VENUE IN ANY ACTION BROUGHT BY ANY PARTY PURSUANT TO THIS AGREEMENT SHALL
PROPERLY (BUT NOT EXCLUSIVELY) LIE IN ANY FEDERAL OR STATE COURT LOCATED IN LOS
ANGELES, CALIFORNIA. BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH PARTY
IRREVOCABLY SUBMITS TO THE JURISDICTION OF SUCH COURTS FOR ITSELF AND IN RESPECT
OF ITS PROPERTY WITH RESPECT TO SUCH ACTION. THE PARTIES IRREVOCABLY AGREE THAT
VENUE WOULD BE PROPER IN SUCH COURT, AND HEREBY WAIVE ANY OBJECTION THAT SUCH
COURT IS AN IMPROPER OR INCONVENIENT FORUM FOR THE RESOLUTION OF SUCH ACTION.
THE PARTIES FURTHER AGREE THAT THE MAILING BY CERTIFIED OR REGISTERED MAIL,
RETURN RECEIPT REQUESTED, OF ANY PROCESS REQUIRED BY ANY SUCH COURT SHALL
CONSTITUTE VALID AND LAWFUL SERVICE OF PROCESS AGAINST THEM, WITHOUT NECESSITY
FOR SERVICE BY ANY OTHER MEANS PROVIDED BY STATUTE OR RULE OF COURT.

          8.12 Arbitration.
               -----------

          Except for disputes, controversies, or claims seeking injunctive
relief, and except as expressly provided elsewhere in this Agreement or the
other Transaction Documents, any dispute, controversy, or claim arising under or
relating to the Transaction Documents or any breach of threatened breach thereof
("Arbitrable Dispute") shall be resolved by final and binding arbitration
  ------------------
administered by the American Arbitration Association ("AAA") under its
                                                       ---
Commercial Arbitration Rules, subject to the following:

          (a)  Any Party may demand that any Arbitrable Dispute be submitted to
binding arbitration.  The demand for arbitration shall be in writing, shall be
served on the other Party in the manner prescribed herein for the giving of
notices, and shall set forth a short statement of the factual basis for the
claim, specifying the matter or matters to be arbitrated.

          (b)  The arbitration shall be conducted by a panel of three
arbitrators, one selected by Buyer, one selected by Sellers and the third to be
selected jointly by the arbitrators selected by Buyer and Sellers (collectively,
the "Arbitrators") who shall conduct such evidentiary or other hearings as they
     -----------
deem necessary or appropriate and thereafter shall make their determination as
soon as practicable.  Notwithstanding the foregoing, no Arbitrator may serve
who, during the three-year period preceding the date the arbitration demand is
served, has had a material personal or financial relationship with any Party to
the dispute or any Affiliate of any such Party.  Any arbitration pursuant hereto
shall be conducted by the Arbitrators under the guidance of the Federal Rules of
Civil Procedure and the Federal Rules of Evidence, but the Arbitrators shall not
be required to comply strictly with such Rules in conducting any such
arbitration.  All such arbitration proceedings shall take place in Los Angeles,
California.

          (c)  Except as provided herein:

               (i) each Party shall bear its own "Costs and Fees," which are
                                                  --------------
     defined as all reasonable pre-award expenses of the arbitration, including
     travel expenses, out-of-pocket expenses (including, but not limited to,
     copying and telephone) witness fees, and reasonable attorney's fees and
     expenses;

                                       31
<PAGE>

               (ii)  the fees and expenses of the Arbitrators and all other
     costs and expenses incurred in connection with the arbitration
     ("Arbitration Expenses") shall be borne equally by the Parties; and
       --------------------

               (iii) notwithstanding the foregoing, the Arbitrators shall be
     empowered to require any one or more of the Parties to bear all or any
     portion of such Costs and Fees and/or the fees and expenses of the
     Arbitrators in the event that the Arbitrators determine such Party has
     acted unreasonably or in bad faith.

          (d)  Arbitrators are not empowered to award damages in excess of
compensatory damages, and each Party hereby waives any damages in excess of
compensatory damages.  The Arbitrators shall render their decision and award
upon the concurrence of at least two (2) of their number.  Such decision and
award shall be in writing and counterpart copies thereof shall be delivered to
each Party.  The decision and award of the Arbitrators shall be binding on all
Parties.  In rendering such decision and award, the Arbitrators shall not add
to, subtract from or otherwise modify the provisions of the Transaction
Documents.  Any Party to the arbitration may seek to have judgment upon the
award rendered by the Arbitrators entered in any court having jurisdiction
thereof.

          (e)  Each Party agrees that it will not file any suit, motion,
petition or otherwise commence any legal action or proceeding for any matter
which is required to be submitted to arbitration as contemplated herein except
in connection with the enforcement of an award rendered by the Arbitrators. Upon
the entry of an order dismissing or staying any action or proceeding filed
contrary to the preceding sentence, the Party which filed such action or
proceeding shall promptly pay to the other Party the reasonable attorney's fees,
costs and expenses incurred by such other Party prior to the entry of such
order.

          8.13 Delivery by Facsimile.  This Agreement and any Transaction
               ---------------------
Document, and any amendments hereto or thereto, to the extent signed and
delivered by means of a facsimile machine, shall be treated in all manner and
respects as an original Contract and shall be considered to have the same
binding legal effects as if it were the original signed version thereof
delivered in person.  At the request of any party hereto or to any such
Contract, each other party hereto or thereto shall re-execute original forms
thereof and deliver them to all other parties. No party hereto or to any such
Contract shall raise the use of a facsimile machine to deliver a signature or
the fact that any signature or Contract was transmitted or communicated through
the use of facsimile machine as a defense to the formation of a Contract and
each such party forever waives any such defense.

                              *     *     *     *

                                       32
<PAGE>

          IN WITNESS WHEREOF, the Parties have executed this Agreement as of the
date first written above.

                              THE BABY EINSTEIN COMPANY, LLC

                              By: /s/ Julie Aigner-Clark
                                  ----------------------

                              Its: Manager
                                   ---------------------

                              JULIE AIGNER-CLARK

                              /s/ Julie Aigner-Clark
                              --------------------------

                              WILLIAM CLARK

                              /s/ William Clark
                              --------------------------

                              ARTISAN ENTERTAINMENT INC.

                              By: /s/ Ken Schapiro
                              --------------------------
                              Its: EVP

                                      S-1
<PAGE>

(DISCLOSURE SCHEDULES)

PRODUCT DEVELOPMENT CAP CALCULATION

*

ADJUSTED EBIT CALCULATION

*

CLOSING DISTRIBUTION CALCULATION

*

SCHEDULE 3.1

Organization and Limited Liability Company Power
------------------------------------------------

Colorado

SCHEDULE 3.4

Subsidiaries, Investment and Notes
----------------------------------

*

SCHEDULE 3.5

Absence of Conflicts
--------------------

None

SCHEDULE 3.6

Financial Statements
--------------------

Compilation Financial Statements dated April 30, 1999 and Audited Financial
Statements dated December 31, 1999 have been previously provided to Buyer and
are attached.

*

                                       1
<PAGE>

SCHEDULE 3.7

Absence of Undisclosed Liabilities
----------------------------------
*

SCHEDULE 3.8

Absence of Certain Developments
-------------------------------

*

SCHEDULE 3.10

Accounts Receivable
-------------------

*

SCHEDULE 3.11

Taxes
-----

Colorado, United States of America

SCHEDULE 3.12(a)

Contracts and Commitments
-------------------------

*

SCHEDULE 3.13(a)

Proprietary Rights
------------------

Patent Application, previously provided to Buyer
------------------------------------------------
Interactive Flash Cards provisional patent application

Registered Trademarks, previously provided to Buyer
---------------------------------------------------
Video Board Book
Baby Mozart

Intent to Use or Commercial Use Trademark Applications, previously provided to
------------------------------------------------------------------------------
Buyer
-----
babyeinstein.com
Great minds start little

                                       2
<PAGE>

Intent to Use or Commercial Use Trademark Applications, previously provided to
------------------------------------------------------------------------------
Buyer
-----
Baby Mozart, Class 15
Baby Mozart, Class 16
Baby Mozart, Class 25
Baby Mozart, Class 28
Baby Einstein, Class 9
Baby Einstein, Class 16
Baby Einstein, Class 28
Baby Bach, Class 9
Baby Bach, Class 16
Baby Beethoven, Class 9
Baby Beethoven, Class 16
Baby Shakespeare, Class 9
Baby Shakespeare, Class 16
Baby Van Gogh, Class 2
Baby Van Gogh, Class 9
Baby Van Gogh, Class 16
Baby Webster, Class 9
Baby Webster, Class 16
Baby Webster, Class 28
Baby Edison, Class 9
Baby Edison, Class 16
Baby Edison, Class 28
Baby Newton, Class 9
Baby Newton, Class 16
Baby Newton, Class 28
Baby daVinci, Class 9
Baby daVinci, Class 16
Baby daVinci, Class 28
Little Bach, Class 9
Little Mozart, Class 9
Little Mozart, Class 16
Little Beethoven, Class 9
Little Shakespeare, Class 9
Little Shakespeare, Class 16
Little Van Gogh, Class 9
Little Van Gogh, Class 16
Little Webster, Class 9
Little Webster, Class 16
Little Webster, Class 28
Little Galileo, Class 9
Little Galileo, Class 16
Little Galileo, Class 28
Little Columbus, Class 9
Little Columbus, Class 16
Little Columbus, Class 28
Little Edison, Class 9
Little Edison, Class 16

                                       3
<PAGE>

Little Edison, Class 28
Little Newton, Class 9
Little Newton, Class 16
Little Newton, Class 28
Little daVinci, Class 9
Little daVinci, Class 16
Little daVinci, Class 28

Baby Einstein International Trademark Applications in Classes 9, 16, 25, 28,
----------------------------------------------------------------------------
previously provided to Buyer
----------------------------

Israel
South Korea
Mexico
New Zealand
Taiwan
South Africa
Australia
Canada
Switzerland
European Union
Ireland
Turkey
Japan, filed by Comtec Co. Ltd., to be assigned to The Baby Einstein Company

Domain name registrations, previously provided to Buyer
-------------------------------------------------------
www.babyeinstein.com
--------------------
www.babyeinstein.net
--------------------
www.babymozart.com
------------------
www.babybach.com
----------------
www.babywebster.com
-------------------
www.babyvangogh.com
-------------------
www.babyrembrandt.com
---------------------
www.babynewton.com
------------------
www.babyedison.com
------------------
www.babydavinci.com
-------------------

Copyright Certificates and Applications, previously provided to Buyer
---------------------------------------------------------------------
Baby Einstein copyright certificate
Baby Mozart video copyright certificate
Baby Mozart CD and audiocassette copyright application
Baby Bach video copyright certificate
Baby Bach CD and audiocassette copyright application
Baby Beethoven CD and audiocassette copyright application
Baby Shakespeare video copyright application
Baby Shakespeare book copyright application

                                       4
<PAGE>

Baby Webster flash cards copyright application

Licenses and Similar Agreements, previously provided to Buyer
-------------------------------------------------------------

*

Licenses and Similar Agreements (See Schedule 3.8)
--------------------------------------------------

*

SCHEDULE 3.13(b)

Proprietary Rights
------------------

*

SCHEDULE 3.14

Litigation Proceedings
----------------------

*

SCHEDULE 3.15

Brokerage (Company)
-------------------

None

SCHEDULE 3.16

Government Licenses and Permits
-------------------------------

Federal Employer Identification No., previously provided to Buyer.

Federal Pension Plan Identification No., previously provided to Buyer.

Colorado Business Registration, previously provided to Buyer.

Colorado Wage Withholding License, previously provided to Buyer.

Colorado Notice of Employer Liability and Unemployment Insurance Tax Number,
previously provided to Buyer.

                                       5
<PAGE>

Colorado Sales Tax License, 1999 license previously provided to Buyer, 2000
license previously provided to Buyer.

SCHEDULE 3.17

Employee Benefit Plans
----------------------

Employment Term Sheet

The Company provides employees with an Employment Term Sheet.  These term sheets
outline title and responsibilities, compensation, health benefits (if
applicable), 401(k) and 401(k) matching, bonus (if applicable), severance (if
applicable), holiday schedule, and vacation and paid time-off allowances.  Such
Employment Term Sheet(s) have been previously provided to Buyer.

Group Medical Insurance

Group medical coverage is offered to every employee.  The Company provided 100
percent coverage of the employee.  At the employee's election, the coverage can
be extended to cover the employee's family.  The additional cost of such
coverage is paid by the employee through salary deductions.  The Company's group
medical policy has been previously provided to Buyer.  See Schedule 3.18 for
additional information.

Pension Plan

In 1998 while still a sole proprietorship, the Company established a pension
plan through Benetech consisting of a Money Purchase Plan and a Profit-Sharing
Plan.  When the Company incorporated as a Limited Liability Company (LLC) on
April 30, 1999, Benetech made the required revisions to the pension plan.
Effective May 1, 1999 the Profit-Sharing Plan was converted into a 401(k) Plan.
On January 1, 2000, the Money Purchase Plan was merged with the 401(k) Plan.

Copies of the Company's Money Purchase Plan and 401(k) Plan have been previously
provided to Buyer.  A copy of the most recent IRS determination letter is
attached in Schedule 3.16.  The year-end statement for the pension plan
brokerage account, dated December 31, 1999, has been previously provided to
Buyer.

SCHEDULE 3.18

Insurance
---------

Workers' Compensation

The Company maintains Workers' Compensation policy no. 4020361 with Pinnacol
Assurance.  A Policy Information Page is attached.  A copy of the policy has
been previously provided to Buyer.

Group Medical

The Company maintains group medical insurance under contract Holder No. 125308
with Aetna U.S. Healthcare, Inc.  A copy of the policy has been previously
provided to Buyer.  See Schedule 3.17 for additional information.

Business Property

                                       6
<PAGE>

The Company maintains Commercial Policy no. BFW (00) 52 61 14 38 with The Ohio
Casualty Group.  A copy of the policy has been previously provided to Buyer.

Homeowners Insurance
The Sellers maintain and the Company pays for Homeowners policy no. 91442-92-77
with Farmers Insurance Group.  A copy of the policy has been previously provided
to Buyer.

E&O Insurance
On February 1, 2000, the Company received Professional Media Liability Insurance
from Royal Surplus Lines.  A certificate naming Artisan Entertainment, Inc. as
an additional insured was delivered to Buyer on February 2, 2000.

General Business Liability (pending)
As of January 29, 2000, the Company is shopping for general business liability
insurance.

SCHEDULE 3.19

Officers and Managing Members; Bank Accounts
--------------------------------------------

Officers
Julie Aigner-Clark  Managing Member, President and Chief Executive Officer
William Clark       Member and Chief Financial Officer
Jeffrey Mettais     Executive Vice President
Pamela Peccolo      Vice President

Bank accounts
*

Pension plan brokerage account

*

SCHEDULE 3.21

Powers of Attorney
------------------

Power of attorney have been granted to Holme Roberts & Owens, "as its attorneys
to prosecute this application to registration, to transact all business in the
United States Patent and Trademark Office connected therewith, and to receive
the Certificate of Registration."  A copy of this power of attorney has been
previously provided to Buyer.

SCHEDULE 4.3

Brokerage (Sellers)
-------------------

                                       7
<PAGE>

None

SCHEDULE 7.1

Property
--------

Production equipment being leased from Wells Fargo Equipment Finance, Inc.,
including a Sony PVW-D30WSL Camera Package, Avid Express System and Sonic
Solutions DVD5001 SYSTEM.

(4) Apple G3 Power PC computers

(2) Apple G3 PowerBook computers

(2) Apple G4 Power PC computers

(1) HP 8100 printer

(1) Tektronix 740 printer

(1) Xerox Workcentre 1000

(2) HP 300 fax machines

(1) Tekline shelving system

(3) Tekline desks

(1) Tekline conference table

(10) Herman Miller chairs

                                       8
<PAGE>

                                   Exhibit A

                            Distribution Agreement
                            ----------------------

ARTISAN HOME ENTERTAINMENT INC.
2700 Colorado Ave., 2nd Floor
Santa Monica, CA  90404

As of January 20, 2000

The Baby Einstein Company LLC
10840 South Bobcat Terrace
Littleton, CO  80124
Attn:  Julie Aigner-Clark

Re:  Sales and Marketing Services Agreement

Ladies and Gentlemen:

This letter agreement (this "Agreement") will confirm the principal terms of the
agreement under which The Baby Einstein Company, LLC ("EINSTEIN") has agreed to
engage ARTISAN HOME ENTERTAINMENT INC. ("ARTISAN") and ARTISAN has agreed to
furnish certain marketing, promotion and distribution services (the "Services")
in connection with the marketing and sale of certain Programs (as defined below)
produced by EINSTEIN.

The principal terms of the Agreement are as follows:

1.   Purpose:  The intent of the parties in entering into this Agreement is to
     -------
provide for ARTISAN furnishing the Services during the Term (as defined below)
to permit EINSTEIN to:

     (a) further develop the Baby Einstein brand;

     (b) expand the infant and toddler market for media products;

     (c) exploit the Home Video Rights (as defined below) in the Domestic
Territory (as defined below) in the Programs, and if EINSTEIN elects, the
Theatrical, Television Rights, Ancillary Rights and Home Video Rights in the
International Territory (as defined below) in the existing Programs and any
additional Programs developed by EINSTEIN which EINSTEIN elects to sell in the
domestic Home Video market; and

     (d) optimize operations of EINSTEIN in anticipation of a sale of the
company in 2001.

2.   Term:  The term of this Agreement shall be three (3) years beginning on the
     ----
date hereof, unless earlier terminated or extended pursuant to the terms in
Paragraph 19(d) below.

3.   Obligations of the Parties:
     --------------------------

                                       1
<PAGE>

     (a)  ARTISAN agrees that it will furnish the following Services in
connection with the marketing, promotion and sale of Videograms (as defined
below) of the Programs in the Domestic Territory, and if requested by EINSTEIN,
in the International Territory.

          (i)     Develop a strategic publicity plan to build brand awareness
                  and create new demand for EINSTEIN's Programs;

          (ii)    Review and redefine, if necessary, the promotional insert and
                  trailer materials in consultation with EINSTEIN;

          (iii)   Service EINSTEIN's existing distributor, specialty, catalog
                  and internet accounts in coordination with EINSTEIN's sales
                  representative;

          (iv)    Explore the development of new specialty accounts in
                  coordination with EINSTEIN's sales representative;

          (v)     Review marketing programs for EINSTEIN's specialty, catalog
                  and internet accounts in coordination with EINSTEIN;

          (vi)    Develop channel entry and account development plans for the
                  rental, gift, supermarket and mass channels and implement such
                  plans as may be approved by EINSTEIN in accordance with the
                  terms of Paragraph 11(a) below;

          (vii)   Develop a DVD distribution strategy in collaboration with
                  EINSTEIN;

          (viii)  At EINSTEIN's request, create a merchandise licensing program
                  in collaboration with EINSTEIN and if requested by EINSTEIN
                  coordinate any licensing efforts which EINSTEIN elects to
                  pursue ("Merchandise Licensing");

          (ix)    Assume the customer billing and accounts receivable management
                  functions; and

          (x)     Assume distribution, inventory management, customer service
                  and, subject to Paragraph 11(c), Videogram manufacturing
                  functions.

     (b)  EINSTEIN agrees that it will meet the following obligations:

          (i)     Provide the reasonable availability of Julie Clark for
                  publicity purposes subject to her personal and professional
                  obligations;

          (ii)    Provide the full-time availability of a sales representative
                  specifically to manage the specialty channel and also to
                  advise and coordinate joint sales efforts;

          (iii)   Provide the full-time availability of a marketing and
                  communications representative specifically to coordinate joint
                  marketing and public

                                       2
<PAGE>

                 relations efforts;

          (iv)   Introduce ARTISAN's sales personnel to the buyers of all
                 existing accounts and key vendors; and

          (v)    Train ARTISAN staff (e.g., sales, marketing, customer service
                 and inventory management), as requested by ARTISAN.

4.   Fee:
     ---

     (a)  In consideration for performance of the Services under this Agreement,
from one hundred percent (100%) of Gross Receipts, as defined in Schedule 1,
derived by ARTISAN from sales of the Programs, ARTISAN shall be entitled to
deduct and retain the following service fee:

          (i)    *

          (ii)   *

          (iii)  *

     (b)  After ARTISAN's Service Fee, ARTISAN shall deduct any approved
Distribution Expenses advanced by ARTISAN, as defined in Schedule 2.

     (c)  All Gross Receipts after deduction of ARTISAN's Service Fee and
approved Distribution Expenses shall be the property of and shall be paid to
EINSTEIN.  ARTISAN has not made any express or implied representation, warranty,
guarantee or agreement as to the amount of proceeds which will be derived from
the distribution of the Programs, nor has ARTISAN made any express or implied
representation, warranty, guarantee or agreement that there will be any sums
payable to EINSTEIN hereunder, or that the Programs will be favorably received
by the public.  In no event shall ARTISAN incur any liability based upon any
claim that ARTISAN has failed to realize receipts or revenue which should or
could have been realized.

     (d)  Certain Defined Terms:
          ---------------------

          (i)    "Contract Year" means a twelve-month period commencing on the
                 date of this Agreement and ending on the date 12 months later.
                 Each succeeding twelve-month period during the Term shall
                 likewise be a Contract Year.

          (ii)   "Domestic Territory" means the United States and Canada and
                 their respective territories and possessions.

          (iii)  "International Territory" means the world excluding the
                 Domestic Territory.

5.   Programs:
     --------

                                       3
<PAGE>

     (a)  "Programs" refers individually and collectively to the audio-visual
programs listed in Schedule 3 annexed hereto and incorporated by its reference
herein, as well as any additional titles in the "Baby Einstein" series of audio-
visual programs hereafter acquired, produced and/or licensed by EINSTEIN.

     (b)  All Programs distributed hereunder shall be released on the Artisan
Family Home Entertainment label (or another label owned or controlled by
ARTISAN, subject to the prior written approval of EINSTEIN).  During the Term
and within the Domestic Territory, EINSTEIN agrees to add the Artisan Family
Home Entertainment logo to its video masters and packaging after the existing
inventory has been exhausted.

     (c)  In the event ARTISAN assumes the inventory management function, all
materials delivered or made available to ARTISAN are and will be of a quality
suitable for the manufacture therefrom of commercially acceptable copies
comparable to the quality of the Videograms previously manufactured by EINSTEIN.

6.   Program Changes:  EINSTEIN will have the sole and absolute right to make
     ---------------
any program changes as EINSTEIN in its sole and absolute discretion may elect
and EINSTEIN will be solely responsible for producing any such changes.  ARTISAN
shall not make or authorize any person to make any changes whatsoever to the
Programs.

7.   New Program Development:  The parties will discuss and agree to the content
     -----------------------
and release schedule of any new Programs which EINSTEIN, in the exercise of
EINSTEIN's sole and absolute discretion, may elect to produce or acquire, to
insure their smooth integration into marketing and sales activities; provided,
however, in the event the parties do not agree, EINSTEIN's decisions in all such
matters shall be final.

8.   Distribution:
     ------------

     (a)  Billing:  By March 1, 2000, all sales of Videograms incorporating the
          -------
Programs in the Domestic Territory, other than mail order purchases handled by
EINSTEIN as described in Paragraph 9 below, will be billed by ARTISAN.

     (b)  Existing Specialty Retail Accounts:  EINSTEIN will continue to perform
          ----------------------------------
sales functions for all of EINSTEIN's specialty retail accounts existing as of
the date of this Agreement.  ARTISAN will furnish all billing, collection,
manufacturing [subject to Paragraph 11(c)], shipping (from Fox or any successor
thereto) and distribution services in connection with such sales.

     (c)  New Channels and Accounts:  ARTISAN will introduce the Programs to
          -------------------------
ARTISAN's new channels of distribution and accounts in the Domestic Territory.
In connection therewith, ARTISAN will prepare a marketing and entry plan that
shall be subject to EINSTEIN's prior written approval, which shall not be
unreasonably withheld.  Notwithstanding the foregoing, it is understood and
agreed that (i) ARTISAN shall have final determination concerning *.  EINSTEIN's
approval shall not be deemed granted unless ARTISAN shall have received
EINSTEIN's written approval or ARTISAN shall have spoken directly with one of

                                       4
<PAGE>

EINSTEIN's Designated Representatives either in person or by telephone and such
person shall have approved ARTISAN's proposal.

9.   Mail Order Distribution:  Notwithstanding anything to the contrary
     -----------------------
contained herein, EINSTEIN shall retain and reserve the right to continue to
operate its mail order business, it being understood that such mail order rights
shall be on a non-exclusive basis with ARTISAN (i.e., ARTISAN may sell copies of
the Programs in the Domestic Territory to mail order companies).  EINSTEIN
assumes all responsibility for all such EINSTEIN mail order sales, including
manufacturing, returns, collections and bad debt.  EINSTEIN agrees to consult
with ARTISAN on a regular and periodic basis in order to prevent any material
conflicts between EINSTEIN's mail order activities and distributor or retail
accounts serviced by ARTISAN.

10.  Exclusive Services:  ARTISAN shall have the exclusive right and obligation
     ------------------
to furnish the Services in connection with EINSTEIN's exploitation of Home Video
Rights to the Programs in the Domestic Territory during the Term.

     "Home Video Rights" shall mean the sole and exclusive (except with respect
to the home video rights reserved by EINSTEIN hereunder) right to manufacture,
advertise, promote and distribute on a sale or rental basis on its own or
through licensees, videocassettes, cartridges, DVD's, tape, video discs, laser
discs, 8mm recordings (in whatever form), or any other visual or optical
recording devices (including, but not limited to, CD-I, CD ROM, DVD) and all
other optically read devices now known or hereafter discovered, containing any
and all language versions of the Programs for use by consumers in their homes
(collectively, "Videograms") throughout the Domestic Territory during the Term
(defined below).

     All rights in the Programs are reserved by EINSTEIN.  Without limiting the
generality of the foregoing, EINSTEIN shall retain sole and exclusive right to
exploit the Programs in the following media (the "Einstein Reserved Rights");
provided, however, that EINSTEIN agrees that during the Term it will not
exercise the Einstein Reserved Rights during the Term in the Domestic Territory
unless EINSTEIN engages ARTISAN under this Agreement to furnish the Services (or
comparable Services) in connection with such exploitation in the Domestic
Territory.

     (a) Non-theatrical Rights:  The sole and exclusive right to exploit the
         ---------------------
Programs in non-theatrical markets, i.e., schools, libraries, hospitals, hotels,
airlines, military or armed services installations, ships at sea and aircraft
and other institutions that typically license recorded entertainment materials
from programming suppliers during the Term (collectively, "Non-Theatrical");

     (b) Video-on-Demand Rights:  "Video-On-Demand" shall mean the right to
         ----------------------
transmit or authorize the transmission of a selected Program from a central
video library via a television, cable or related electronic system where
reception of said Program at a viewing time selected by the viewer is available
only upon payment of a charge therefor, which charge is in addition to any
charge for reception of the television service and/or programming channel;

     (c) Theatrical Rights:  The sole and exclusive right to rent, lease,
         -----------------
license, exhibit, distribute and otherwise deal in and with the Programs on any
and all sizes and gauges of film

                                       5
<PAGE>

and in any and all languages or versions in the theatrical field for viewing by
the public, including, without limitation, to make rentals, leases and licenses
respecting all theaters or other places of public viewing, during the Term
(collectively, "Theatrical");

     (d) Television Rights:  The sole and exclusive right to exploit the
         -----------------
Programs through all television media now known or hereafter developed,
including, but not limited to, "Cable" or "Pay Television" (which shall mean
exhibition over a service for which subscribers pay a premium for the
programming transmitted), "Pay-Per-View" (which shall mean exhibition over a
service for which subscribers pay a premium on a per-picture basis for each
picture which they choose to receive), and "Free Television" (which shall mean
exhibition over television broadcast stations, whether network stations or
independent stations, where no charge is made to the viewer and/or exhibition by
means of satellite or cable television for which subscribing members of the
public may pay for the transmission service provided by the satellite or cable
system, but do not otherwise pay a premium for the programming transmitted by
the satellite or cable system and/or any other delivery system now known or
hereafter devised) during the Term (collectively, "Television"); and

     (e) International Distribution Rights:  The parties agree to jointly
         ---------------------------------
consider international distribution or licensing of EINSTEIN Products.  EINSTEIN
shall retain the right, in its sole discretion, to authorize ARTISAN to solicit
proposals for the sale of Videograms of the Programs in the International
Territory.  ARTISAN acknowledges that EINSTEIN has existing licenses and
relationships in place in several international markets and that ARTISAN shall
not have the right or be obligated to furnish any Services with respect to any
such existing international licensees and Gross Receipts shall not include any
amounts received by EINSTEIN from such existing international licensees.

     (f) Non-licensed Merchandising:  EINSTEIN shall have the right to
         --------------------------
manufacture and sell any and all merchandise (e.g., puzzles, games, books,
clothing, toys, music albums, etc.) based on or derived from the Programs
without any obligation to ARTISAN.  However, if during the Term within the
Domestic Territory EINSTEIN elects to license to a third party the right to
manufacture and sell Baby Einstein merchandise on a royalty basis, EINSTEIN
shall engage ARTISAN and ARTISAN shall furnish all services required by EINSTEIN
to enter into and administer any such merchandise licensing agreement and
ARTISAN shall be entitled to receive the fee described in 4(a)(iii) above with
respect to all net sums actually received by EINSTEIN pursuant to such license
agreement during the Term.

     (g) Derivative Audio-Visual Television Productions:  If during the Term
         ----------------------------------------------
EINSTEIN elects to produce any television productions based upon the Baby
Einstein Programs, ARTISAN will be entitled to furnish the Services described in
this Agreement with respect to the sale of any Videograms containing such
televisions productions within the Domestic Territory during the Term.

11.  Exploitation Decisions:
     ----------------------

     (a) Approvals:  EINSTEIN shall have the right of prior written approval
         ---------
over all marketing, including, without limitation, marketing plans and
associated budgets for the Programs, and any advertising or promotional
materials produced by or for ARTISAN, such

                                       6
<PAGE>

approval shall not be unreasonably withheld. EINSTEIN's approval shall be deemed
to include the approval of any required third parties. All of such materials, as
delivered by EINSTEIN to ARTISAN hereunder for any of the Programs shall be
deemed to be preapproved by EINSTEIN; provided, however, if ARTISAN desires to
make any changes whatsoever to such items, such revised materials will be
submitted to EINSTEIN for EINSTEIN's prior written approval. Once a particular
item is approved by EINSTEIN, subsequent approval shall not be required for any
other use of such item hereunder. EINSTEIN's approval shall not be deemed
granted unless ARTISAN shall have received EINSTEIN's written approval or
ARTISAN shall have spoken directly with one of EINSTEIN's Designated
Representatives either in person or by telephone and such person shall have
approved ARTISAN's proposal. For purposes of the approvals in this subparagraph,
EINSTEIN hereby designates Julie Aigner-Clark or William Clark as EINSTEIN's
authorized representative for such approvals (the "Einstein Designated
Representatives"). All current uses are deemed approved.

     (b) Logos:  During the Term, ARTISAN shall have the right to use all of
         -----
EINSTEIN'S logos in connection with the Services rendered hereunder, including,
without limitation, on all advertising, marketing and promotional materials
relating to the Programs, subject to the approval requirement in Paragraph 11(a)
above and subject further to all of EINSTEIN's reserved rights hereunder.

     (c) Manufacturing:  EINSTEIN will be responsible for the manufacturing and
         -------------
distribution of Products required for all sales made by EINSTEIN pursuant to its
reserved rights.  ARTISAN will be responsible for the manufacturing through
ARTISAN's suppliers and distribution through Fox (or any successor thereto) for
all Videograms that are either sold by ARTISAN or sold by EINSTEIN and fulfilled
by ARTISAN (e.g., for any sales of Videograms that are either billed, collected,
manufactured, shipped or distributed by ARTISAN).

     (d) Marketing and Advertising:  EINSTEIN shall have the right of prior
         -------------------------
written approval of the marketing and advertising budget for the Programs which
such approval shall not be unreasonably withheld ("Approved Budget").  ARTISAN
shall have the reasonable right to reallocate the subcategories contained in the
Approved Budget for the Programs and shall have the right to spend up to * above
the Approved Budget without EINSTEIN's prior approval.  EINSTEIN agrees to
engage and pay, at EINSTEIN's expense, third-party marketing and advertising
costs, such as public relations agencies, design firms, etc., consistent with
the Approved Budget, provided that EINSTEIN will use and pay for ARTISAN in-
house staff when in EINSTEIN's good faith opinion such services are of
comparable quality and cost to those of external sources.  In the event the
parties agree in writing that ARTISAN rather than EINSTEIN engage any third-
party, consistent with the Approved Budget, the costs associated with such
engagement can be deducted from Gross Receipts as approved Distribution
Expenses.

12.  Third Party Payments:  All participations in any of the Products, whether
     --------------------
cast, director, writer, producer or otherwise, payable to any third party,
including, without limitation, any guild or other collective bargaining
agreement shall be the sole responsibility of EINSTEIN and EINSTEIN shall pay
the same.

13.  Accounting and Audit Rights:  Statements shall be issued for each calendar
     ---------------------------
quarter from and including the quarter in which Videograms of any of the
Programs are first sold.  ARTISAN

                                       7
<PAGE>

agrees to deliver all such statements to EINSTEIN within sixty (60) days after
the end of the period for which it is rendered. *.  Each advance paid shall be
recouped from EINSTEIN's share of Gross Receipts hereunder commencing with the
quarterly accounting statement to be issued following payment of such advance
(e.g., applied to and in reduction of the actual amount due to EINSTEIN pursuant
to such accounting statement). The Programs shall be accounted for on a fully
cross-collateralized basis. Each statement must be accompanied by payment of all
monies then due EINSTEIN. If ARTISAN shall extend credit to any account with
respect to any Program, and if such credit has been included in Gross Receipts,
and if, in the opinion of ARTISAN, any such indebtedness shall be uncollectible,
the uncollected amount may be deducted in any subsequent earning statement.
Should ARTISAN make any overpayment to EINSTEIN hereunder for any reason,
ARTISAN shall have the right to deduct and retain for its own account an amount
equal to any such overpayment from any sums that may thereafter become due or
payable by ARTISAN to EINSTEIN or for EINSTEIN's account, or may demand
repayment from EINSTEIN, in which event EINSTEIN shall repay the same when such
demand is made. Continuing until two (2) years from the date of each statement
received by EINSTEIN, EINSTEIN, on twenty (20) business days prior notice, may
examine, on its own or through its auditors, ARTISAN's financial records
regarding the Programs.

14.  Representations and Warranties:  EINSTEIN represents and warrants that
     ------------------------------
EINSTEIN has full authority to execute this Agreement, to carry out the terms
hereof; that no encumbrances on the Programs affecting ARTISAN's Services
hereunder do now or will at any time hereafter exist; that upon delivery to
ARTISAN of each Program, such Programs shall be entitled to full copyright
protection throughout the Domestic Territory for the Term; that nothing in any
Program infringes any right (trademark, copyright, etc.) of any third party; and
that all materials delivered hereunder will be of a first-class technical
quality suitable for the manufacture of Videograms necessary for ARTISAN to
furnish the Services provided hereunder.  Should any claim be made which, if
proven true, would constitute a breach by EINSTEIN of any of the above
warranties and representations, then ARTISAN, in addition to any other rights or
remedies it may have in such event, will have the right to withhold and off-set
such amounts as are necessary, in ARTISAN's reasonable judgment, to defend or
satisfy such claim against any sums due EINSTEIN hereunder.

15.  Indemnification:  Each party ("Indemnifying Party") hereby indemnifies,
     ---------------
defends and holds harmless the other party and its successors, licensees,
assigns, and employees, officers and directors (collectively for the purposes of
this Paragraph,  "an Indemnified Party") from and against any and all liability,
loss, damage, cost and expense, including, without limitation, reasonable
attorney's fees (but excluding lost profits or consequential damages) arising
out of any breach or alleged breach, or claim by a third party with respect to
any warranty or representation made by the Indemnifying Party herein.  The
Indemnified Party shall promptly notify the Indemnifying Party in writing of any
claim to which the foregoing indemnification applies and the Indemnifying Party
shall undertake, at its own cost and expense, the defense thereof.  The
Indemnified Party may, at its option and expense, engage its own counsel.  If
the Indemnifying Party fails to promptly appoint competent and experienced
counsel, the Indemnified Party may engage its own counsel and the reasonable
charges in connection therewith shall promptly be paid by the Indemnifying
Party.  If the Indemnified Party settles or compromises any such suit, claim or
proceeding, the amount thereof shall be charged to the

                                       8
<PAGE>

Indemnifying Party, provided that the Indemnifying Party's reasonable prior
approval has been secured.

16.  Confidentiality:  The parties shall mutually approve a press release to be
     ---------------
issued announcing this Agreement following the execution hereof.  Neither
EINSTEIN nor ARTISAN shall disclose to any third party (other than its
respective employees, directors; and officers, in their capacity as such on a
need-to-know basis), any information with respect to the financial terms and
provisions of this Agreement except: (i) to the extent necessary to comply with
the law or the valid order of a court of competent jurisdiction, in which
event(s) the party making such disclosure shall so notify the other as promptly
as practicable, prior to making such disclosure and shall seek confidential
treatment of such information, (ii) to the extent necessary to comply with SEC
or similar disclosure requirements, (iii) to its parent and affiliated
companies, their banks (and their respective advisors and attorneys),
prospective financiers and investors (and such persons' investment bankers,
agents, attorneys, accountants and necessary experts), auditors, investment
bankers, attorneys and similar professionals, provided that such companies,
banks, advisors, financiers, investors, investment bankers, experts, auditors,
accountants, attorneys and similar professionals agree to be bound by the
provisions of this subparagraph, and (iv) in order to enforce its rights
pursuant to this Agreement.

17.  Insurance:  As a condition precedent to ARTISAN's release of each Product
     ---------
hereunder,  EINSTEIN shall procure and maintain in full force and effect during
the Term standard producer's liability (errors and omissions) insurance with
limits of $1,000,000 per occurrence and $3,000,000 in the aggregate issued by a
nationally recognized insurance carrier covering such Product and deliver to
ARTISAN certificates of insurance evidencing such coverage in a form and
substance satisfactory to ARTISAN.  Upon request, ARTISAN will assist EINSTEIN
in securing such insurance.

18.  Notice:  Any notice or communications provided for hereunder must be in
     ------
writing and delivered either personally, by telecopy, telex or by registered
mail, postage prepaid to the following addresses (or to such other address as
specified by like notice):

     (a)  for EINSTEIN:
          The Baby Einstein Company LLC
          10840 South Bobcat Terrace
          Littleton, CO 80124
          Attn:  Julie Aigner-Clark

     (b)  for ARTISAN:
          Artisan Home Entertainment Inc.
          2700 E. Colorado Avenue, 2nd Floor
          Santa Monica, CA 90404
          Attn: Ken Schapiro and Amir Malin

19.  Miscellaneous:
     -------------

     (a) Nothing contained herein shall be deemed to create a relationship of
partnership, joint venture, agency, fiduciary or employment between the parties.
This Agreement sets forth

                                       9
<PAGE>

the entire understanding of the parties regarding the subject matter hereof and
supersedes all prior oral or written agreements between them. No waiver of any
default or breach of this Agreement by either party shall be deemed a continuing
waiver or a waiver of any other breach or default, no matter how similar. This
Agreement may not be changed, modified, amended or supplemented, except in a
writing signed by both parties. Neither party shall assign their rights or
delegate their duties or obligations under this Agreement without first securing
the other party's prior written consent. Nothing herein contained shall be
binding upon the parties until a copy of this Agreement has been executed by an
officer of each party and has been delivered to the other party. Paragraph
headings are inserted herein for convenience only and do not constitute a part
of this Agreement.

     (b) This Agreement and all matters or issues related hereto or arising
hereunder shall be governed by the laws of the State of California, without
regard to the application of principles of conflicts of laws.  Except for
matters subject to arbitration hereunder, the parties hereto agree to venue and
personal jurisdiction in the United States District Court for the Central
District of California, unless for any reason the Federal court should lack
jurisdiction over the action, in which case the parties agree that venue and
jurisdiction shall be in any state court sitting in Los Angeles, California, and
the parties hereby submit to the jurisdiction of such courts.

     In the event of the commencement of any proceeding of any kind or of any
type arising from or based upon this Agreement brought by either party against
the other, the prevailing party shall be entitled to recover from the other its
reasonable attorneys' fees and costs in addition to any relief to which it may
be entitled.

     (c) The parties agree that any controversy or claim arising out of or
relating to this Agreement or any alleged breach or default thereof shall be
settled by arbitration in Los Angeles, California, pursuant to the Commercial
Arbitration Rules of the American Arbitration Association ("AAA"), except that:
(1) the parties shall have the right to take discovery within the time limits
set forth below; (2) the parties shall have the right to appeal the arbitrator's
decision to a panel of three arbitrators mutually selected by the parties; (3)
the arbitrator(s) shall follow California substantive law in deciding the
matter; and (4) the arbitrator(s) shall follow the federal rules of evidence.
The arbitrator(s) shall be selected by mutual agreement of the parties but shall
be a person (and, in the case of appeals panel, persons) with substantial
experience in the entertainment industry.  The foregoing shall not prevent
either party, however, from seeking injunctive relief and other forms of non-
monetary relief in the state and federal courts of Los Angeles County.  Judgment
upon any award rendered by the arbitrator (or, if there is an appeal, by the
Appeals Panel) shall be final and may be entered in any court having
jurisdiction.  Each party agrees to submit to such arbitration.  Notice of any
demand for arbitration shall be filed in writing with the other parties and with
the AAA.  In no event shall the demand for arbitration be made after the date
when institution of legal or equitable proceedings based on such claim, dispute
or other matter in question would be barred by the applicable statute of
limitations.  The agreement to arbitrate shall be specifically enforceable under
the prevailing arbitration law.  The party desiring arbitration shall serve
notice upon the other party, together with designation of the first party's
arbitrator.  If the person designated by the first party as arbitrator is
acceptable to the other party, the other party shall so notify the first party
within ten (10) days; if not acceptable, the other party shall designate its own
arbitrator in a notice to the first party within the same ten (10) day period.
The two arbitrators so named, if such is the case, shall within ten (10) days

                                      10
<PAGE>

thereafter appoint a third arbitrator, and such third arbitrator shall proceed
within five (5) days to hear and determine the matter. Any controversy or claim
submitted to arbitration as provided herein shall be settled by the arbitrator
within ten (10) days after such arbitrator begins its determination of the
matter.

     (d) Neither party shall have the right to terminate this Agreement without
the written consent of the other party.  *.

     (e) ARTISAN and its successors and assigns are hereby empowered to bring,
prosecute, defend and appear in suits, actions and proceedings of any nature
under or concerning any third party furnishing any Services in violation of the
engagement of ARTISAN to furnish exclusive Services under this Agreement.
EINSTEIN may participate in any suit, action or proceeding using counsel of its
choice at its own expense.  If EINSTEIN elects not to participate, any such sums
in connection therewith shall be deemed Gross Receipts.

     (f) EINSTEIN and ARTISAN shall execute, acknowledge and deliver any and all
further documents consistent with this Agreement that are necessary, expedient
or proper to implement, administer and effectuate the purpose and intent of this
Agreement.

     (g) Notwithstanding anything to the contrary contained in Schedule 1
(Definition of Gross Receipts) or Schedule 2 (Definition of Distribution
Expenses) attached hereto, as of the date of this Agreement, ARTISAN is being
engaged to furnish the Services solely in connection with the Home Video market
in the Domestic Territory.  Accordingly, any provisions in Schedule 1 and 2
relating to any media, market or geographic area other than the Domestic Home
Video market shall not be applicable and shall be of no force or effect until
such time, if ever, as EINSTEIN shall engage ARTISAN to furnish Services in
connection with such other media, market or geographic area.

                                      11
<PAGE>

     Please confirm your agreement with the foregoing by signing below, and
return both copies to the undersigned, after which we will return a fully
executed copy to you.

ACCEPTED AND AGREED:
THE BABY EINSTEIN COMPANY LLC

By: /s/ Julie Aigner-Clark
    -------------------------
Its: Manager
     ------------------------

ARTISAN HOME ENTERTAINMENT INC.

By: /s/ Ken Schapiro
    ------------------------
Its: EVP
     -----------------------

                                      S-1
<PAGE>

                                  SCHEDULE 1

                         Definition of Gross Receipts

          1.   Definition of Distributor:  "Distributor" means _________________
               -------------------------
and its subdivisions and affiliates to the extent such subdivisions and
affiliates are engaged in the business of distributing theatrical motion
pictures, but shall not include any other persons, firms or corporations
licensed by Distributor to distribute motion pictures in any part of the world.
Nor shall such term include: exhibitors or others who may actually exhibit a
Picture to the public; radio or television broadcasters; cable services or
operators; manufacturers, wholesalers or retailers of video discs, cassettes or
similar devices; book or music publishers; phonograph record producers or
distributors; manufacturers, distributors, wholesalers, retailers or operators
of any types of merchandise, goods, services or theme park or other attractions,
whether or not any of the foregoing are subdivisions or affiliates of
Distributor.  As used in this paragraph, "affiliate" as applied to Distributor
shall mean any entity controlling, controlled by or under common control with
Distributor, and the word "control" (including "controlled by" and
"controlling") shall be deemed to mean possession, directly or indirectly, of
the power to direct or cause the direction of the management and policies of
such entity through the ownership of more than fifty percent (50%) of such
entity's voting securities.

          2.   Definition of Gross Receipts.  "Gross Receipts" with respect to a
               ----------------------------
Picture means all monies and other things of value actually received or used by,
or credited to the account of Distributor arising from or attributable to the
Picture including, without limitation, the following:

          (a)  All Film Rentals (as defined below) (whether money or other items
of value) actually received by or used or credited to the account of Distributor
from parties exhibiting such Picture in theaters and on television where
Distributor distributes directly to such parties (hereinafter referred to as
"exhibitors").

          (b)   *

                                       1
<PAGE>

          (c) All monies and other things of value actually received or used by,
or credited to the account of Distributor from the following: (i) trailers; (ii)
licenses of theatrical distribution rights for a flat sum; (iii) exhibition or
distribution or other exploitation rights in and to such Picture other than
those referred to in (a), (b), and (c) (ii) of this Section 2, specifically
including licenses to cable operators (specifically including all forms of pay,
subscription and other types of non-free television), and including all net
revenues received by Distributor from the sale of commercial air time in
connection with the exhibition of such Picture on television, after deducting
any advertising agency commissions charges; (iv) the lease of positive prints
(as distinguished from the licensing thereof for a Film Rental) and the sale or
licensing of advertising accessories, souvenir programs and booklets; and (v)
recoveries by Distributor for infringement, unfair competition, violations of
Section 43(a) of the Lanham Act, trademark, patent infringement, defamation and
piracy actions with respect to such Picture.

          (d) All monies actually received by Distributor on account of direct
subsidies, aide or prizes relating specifically to such Picture.

          (e) All sums received by Distributor from copyright tribunal, cable
retransmission, rental rights and other forms of government administered or
mandated reuse payments relating specifically to the Picture.

          (f) All sums derived by Distributor from distribution of the Picture
on a four-wall basis (as such term is commonly understood in the motion picture
industry).

          (g) The sums to be included in Gross Receipts under Exhibits 1, 2 and
3 to this Schedule 1.

          Notwithstanding anything to the contrary contained herein, no sums
received by Distributor from any of its affiliates with respect to a Picture
shall be included in Gross Receipts hereunder if such affiliate's revenues with
respect to such Picture have already been included in Gross Receipts hereunder.

          Gross Receipts shall not include all sums paid or accrued on account
of withholding, sales, use, receipts, income, excise and other taxes (however
denominated other than remittance taxes) to any governmental authority assessed
upon the negatives, duplicate negatives, prints or sound records of Pictures, or
upon the use or distribution of the Picture, or upon the revenues derived
therefrom (other than foreign remittance and withholding taxes), or any part
thereof, any and all sums paid or accrued on account of duties, customs and
imposts, costs of acquiring permits, "Kontingents," or and any similar authority
to secure the entry, licensing, exhibition, performance, use or televising of
the Picture in any country or part thereof, regardless of whether such payments
or accruals are assessed against the  Picture or the proceeds thereof or against
a group of motion pictures in which the Picture may be included or the proceeds
thereof.  In no event shall the deductible amount of any such tax (however
denominated) imposed upon Distributor, be decreased (nor the Gross Receipts
increased)

                                       2
<PAGE>

because of the manner in which such taxes are elected to be treated by
Distributor in filing net income, corporate franchise, excess profits or similar
tax returns. Subject to the foregoing: Distributor's own United States federal
and state income taxes and franchise taxes based on Distributor's net income
shall not be deducted hereunder.

          3. Film Rentals:  As used herein, "Film Rentals" shall be determined
             ------------
after all rebates, refunds, credits, discounts, allowances and adjustments
granted to exhibitors, broadcasters and other licensees, whether occasioned by
condemnation by boards of censorship, settlement of disputes or otherwise.
Advance payments and security deposits shall be included in Film Rentals upon
their receipt by Distributor, provided that if they are returnable, then in the
event they are so returned Distributor shall correspondingly reduce gross
receipts for the accounting period involved.  No cost (regardless of how
incurred, paid or allowed) of Distributor's share of cooperative and/or theater
advertising shall be deducted in determining Film Rentals.  Where allowances are
granted and paid on account of Distributor's share of cooperative theater or
joint advertising, such payments shall not be deducted in determining Film
Rental, and where Distributor's share of cooperative theater or joint
advertising is deducted by the exhibitor, Distributor's share of cooperative
theater or joint advertising shall be added back into the Film Rentals received
from such exhibitor, and all such costs (i.e., allowances paid or granted on
                                         ----
account of cooperative theater or joint advertising) payments, discounts and
allowances shall be treated as Distribution Expenses.

          4. Allocations.  Wherever Distributor (i) receives from any license
             -----------
either a flat sum or a percentage of the receipts, or both, for any right to a
group of motion pictures (including any Picture) under any agreement (whether or
not the same shall provide for the exhibition, lease or delivery of positive
prints of any of said motion pictures) which does not specify what portion of
the license payments apply to the respective motion pictures in the group (or to
such prints or other material, if any, as may be supplied), or (ii) receives
foreign currency under Section 5 hereof relating to a group of motion pictures
(including any Picture) without specification of what portion of such payment
applies to the respective motion pictures in the group then in any and all such
situations Distributor shall include in, or deduct from, Gross Receipts, as the
case may be, such sums, determined in good faith, as may be reasonable and
consistent with Distributor's usual practice in such matters.

          5. Foreign Receipts:  Sums received by Distributor which relate to a
             ----------------
Picture shall not be included in Gross Receipts hereunder unless and until such
sums: (i) have been received by Distributor in U.S. dollars in the United
States; or (ii) are freely remittable to the United States; or (iii) are used by
Distributor for any purpose in the territory involved.  In the event, the U.S.
dollar equivalent of the currency utilized in a territory shall be included in
Gross Receipts hereunder for the accounting period during which such Gross
Receipts became freely transmittable or were so utilized (as applicable), such
U.S. dollar equivalent to be computed at the then-prevailing official or
unofficial rate of exchange, as Distributor may elect to use consistent with the
rates used for Distributor's own motion pictures at the applicable time.
Distributor will, promptly after receipt of a written request (but not more
frequently than semi-annually), advise Participant in writing as to foreign
revenues not included in Gross Receipts, as aforesaid, and Distributor shall,
upon written request of Participant (subject to any and all limitations,
restrictions, laws, rules and regulations affecting such transactions), deposit
into an account with a bank designated by Participant, such part thereof as
would have been
<PAGE>

payable to Participant hereunder. Such deposits or payments to or for
Participant shall constitute due remittance to Participant, and Distributor
shall have no further interest therein or responsibility therefor. At
Participant's written request, Distributor will use its best efforts to convert
such deposits or payments into U.S. dollars to the same extent and in the same
proportion that Distributor is able to convert is own blocked currencies in the
country or countries involved at the relevant times. Distributor makes no
representations or warranties that any part of any such foreign currencies may
be converted into U.S. dollars or transferred to the account of Participant in
any foreign country.

                                       4
<PAGE>

                                   Exhibit 1
                                      to
                                  Schedule 1

                            MUSIC PUBLISHING INCOME

          There shall also be included in Gross Receipts with respect to a
Picture, in each case to the extent received and retainable by Distributor for
its own account.

          A sum equal to one-hundred percent (100%) of Distributor's share of
the "publisher's share" of mechanical reproduction, synchronization license and
performing fees received in U.S. currency by Distributor's subsidiary or
affiliated publisher with respect to music and lyrics written specifically for
and synchronized in the Picture as released.  The "publisher's share" of
mechanical reproduction and synchronization license fees shall be the full
amount paid by the licensee, less the share of such fees payable to any
composer, author, arranger, adapter, translator or other party having an
interest in the copyright thereof, and less the costs and charges of the
publisher or any agent, trustee or administrator acting for the publisher for
the collection of such fees, not to exceed five percent (5%) thereof.

          The "publisher's share" of performing fees shall be the net amount
actually received by the publisher from any performing rights society in respect
of the music and lyrics involved; or, if Distributor or the publisher shall
administer the collection of all or any part of performance fees, the full
amount of all performance fees collected by Distributor or the publisher, less
the shares of such fees payable to any composer, author, arranger, adapter,
translator or other party having an interest in the copyright hereof and all
reasonable costs and expenses in administering the collection of such fees.  If
Distributor or its subsidiary or affiliated publisher is not entitled to one-
hundred percent (100%) of the publisher's share of mechanical reproduction,
synchronization license and performing fees by reason of a "split" publishing
agreement with the composer or lyricist of the music and lyrics involved, or any
corporation furnishing the services of such composer or lyricist, then only the
pro-rata share of Distributor or its subsidiary or affiliated publisher shall be
included for the purpose of the foregoing computations.

                                       5
<PAGE>

                                   Exhibit 2
                                      to
                                  Schedule 1

                           SOUNDTRACK RECORD INCOME

          There shall also be included in Gross Receipts with respect to a
Picture royalties on soundtrack records, as herein defined, in each case to the
extent received and retainable by Distributor for its own account.

          A sum equal to one-hundred percent (100%) of the net royalty actually
received and retainable by Distributor for its own account from the record
company with respect to the sale of soundtrack records relating to the Picture,
as such royalty may be reduced, calculated, computed and paid in the same manner
as the soundtrack record royalty paid to Distributor under the applicable
agreement with the record company is reduced, calculated, accounted for and paid
(including without limitation deductions representing the pro rata share of re-
use fees and costs of recording and manufacturing masters advanced by
Distributor or the record company); provided that if any soundtrack record
contains selections from other sources, the applicable gross royalty received
and retainable by Distributor with respect to such records shall be prorated on
the basis of the total number of minutes of selections from the soundtrack of
the Picture compared to the total number of minutes on such records.

          As used herein, the term "soundtrack records" means and refers to
phonograph records, tapes, or other sound recordings which contain either (i)
portions of the soundtrack transferred directly to phonograph record masters
from sound records which form a part of the soundtrack of the Picture; or (ii)
sound recordings recorded separately but utilizing substantially the same
musical score, parts and instrumentation, and essentially the same artists,
music and/or dialogue and/or sound effects as is contained in the soundtrack of
the Picture; or (iii) a combination of (i) and (ii).  Soundtrack records do not,
however, include any recordings produced solely for the purpose of advertising
and exploiting the Picture and copies of which are not distributed to the
public.

                                       6
<PAGE>

                                   Exhibit 3
                                      to
                                  Schedule 1

                             MERCHANDISING INCOME

          There shall be included in Gross Receipts with respect to a Picture,
in each case to the extent received and retainable by Distributor for its own
account:

          (i)  A sum equal to one-hundred percent (100%) of all license fees (in
excess of all royalties and participations) received by Distributor directly as
a result of the exercise by Distributor itself of merchandising license rights.
If, however, Distributor shall sublicense or sub-contract any of such
merchandising license rights to a non-affiliated entity, Distributor shall
include in Gross Receipts hereunder a sum equal to one-hundred percent (100%) of
the net sums (in excess of all royalties and sublicensee's fees) received from
such sublicensee.

          (ii) All net sums received by Distributor from non-affiliated or non-
subsidiary publishers from the publication of such underlying literary material
and of novelizations of the screenplay of the Picture, and (ii) the net receipts
of Distributor's subsidiary or affiliated publishers from the publication of
such material and novelizations, less, in either case, royalties paid out of (i)
or (ii) to the writers of such material and novelizations.

                                       7
<PAGE>

                              RIDER TO SCHEDULE 1
                         DEFINITION OF GROSS RECEIPTS

The following are modifications to Schedule 1 to the Agreement dated as of
January 20, 2000 between Artisan Home Entertainment Inc. ("Artisan" or
"Distributor") and The Baby Einstein Company LLC ("EINSTEIN").

Schedule 1 is subject to the terms and conditions in the Agreement to which the
Schedule is attached.  If and to the extent there are any conflicts between the
terms of the Agreement and the terms in Schedule 1, the terms in the Agreement
shall govern.
*

<PAGE>

                                  SCHEDULE 2

                      Definition of Distribution Expenses

          1.   Distribution Expenses.  With respect to each Picture,
               ---------------------
Distributor's "Distribution Expenses" in connection with such Picture shall
include all direct costs, charges and expenses incurred and paid in connection
with the distribution, advertising, exploitation and turning to account of the
Picture of whatever kind or nature, or which are customarily treated as
distribution expenses under customary accounting procedures in the motion
picture industry incurred in connection with the exploitation of the Picture.
Without limiting the generality of the foregoing, the following particular items
shall be included in Distribution Expenses hereunder with respect to the
exploitation of each Picture.

          (a)  The costs and expense of all duped and dubbed negatives (prepared
     for exploitation in the United States), sound tracks, prints, release
     prints, tapes, cassettes, duplicating material and facilities and all other
     material manufactured for use in connection with the Picture, including the
     cost of inspecting, repairing, checking and renovating film, reels,
     containers, cassettes, packing, storing and shipping and all other expenses
     connected therewith and inspecting and checking exhibitors' projection and
     sound equipment and facilities. Distributor may manufacture or cause to be
     manufactured as many or as few duped negatives, positive prints and other
     material for use in connection with the Picture as Distributor, in its sole
     discretion, may consider advisable or desirable.

          (b)  All direct costs and charges for advertisements, press books,
     artwork, advertising accessories and trailers, advertising, publicizing and
     exploiting the Picture by such means and to such extent as Distributor may,
     in its uncontrolled discretion, deem desirable, including, without
     limitation, pre-release advertising and publicity, so-called cooperative
     and/or theater advertising, and/or other advertising engaged in with or for
     exhibitors, to the extent Distributor pays, shares in, or is charged with
     all or a portion of such costs and all other exploitation costs relating to
     such theater exhibition.

          (c)  All direct costs of preparing and delivering the Picture for
     distribution, including, without limitation, any and all costs and expenses
     in connection with changing the title of the Picture, recutting, re-editing
     or shortening or lengthening the Picture, or in order to conform to the
     requirements of censorship authorities.

          (d)  All shipping and delivery charges, including the cost of
     containers, packing, handling, "pick, pack and ship", transportation,
     storage and insurance and all duties and customs imposed in connection with
     such shipments and including, without limitation, fees payable to any
     parties rendering services on behalf of Distributor.

                                       2
<PAGE>

          (e)  Expenses of transmitting to the United States any funds accruing
     to Distributor from the Picture in foreign countries, such as cable
     expenses, and any discounts from such funds taken to convert such funds
     directly or indirectly into U.S. dollars including remittance taxes and
     other withholding taxes incurred for a Picture.

          (f)  *

          (h)  All discounts, rebates, credits and other similar benefits
     (whether based on volume or otherwise) accorded to Distributor in whole or
     in part in connection with Distributor's distribution of the Pictures shall
     be allocated to and credited against the Distribution Expenses on a fair
     and reasonable basis as between the Pictures and other motion pictures.

          (i)  If Distributor makes any expenditure or incurs any liability in
     respect of a group of motion pictures including any Picture or any rights
     therein that does not specify which applicable expenditure or liability
     applies to the respective motion pictures in such group (or to such prints
     or other material, if any, as may be supplied), then in any and all
     situations Distributor shall include in Distribution Expenses, or deduct
     from Gross Receipts, as the case may be, such sums, determined in good
     faith, as may be allocable to such Pictures and reasonable and consistent
     with Distributor's usual practice in such matters.

                                       3
<PAGE>

          (j)  In the event any person shall make a claim relating to the
     Picture against Distributor or any of its licensees, which claim in
     Distributor's judgment is of sufficient merit to constitute a reasonable
     probability of ultimate loss, cost, damage or expense, Distributor may
     deduct under such amount as Distributor may deem necessary to cover any
     potential loss, cost, damage or expense which may be suffered as a result
     thereof. After the settlement of any such claim, or after the final
     judicial determination thereof, the amount previously deducted hereunder
     shall be adjusted accordingly with the next accounting statement rendered
     hereunder. Nothing herein contained shall be construed as a waiver of any
     of Participant's warranties contained in this agreement, or a waiver of any
     right or remedy at law or otherwise which may exist in favor of
     Distributor, including, but not limited to, the right to require
     Participant to reimburse Distributor on demand for any liability, cost,
     damage or expense arising out of, or resulting from, any breach by
     Participant of any warranty, undertaking or obligation by Participant, or
     any right on the part of Distributor to recoup or recover any such cost or
     expense out of Participant's share of any monies payable hereunder, rather
     than treating such costs or expenses as Distribution Expenses.

                                       4
<PAGE>

                              RIDER TO SCHEDULE 2
                         DEFINITION OF GROSS RECEIPTS

The following are modifications to Schedule 2 to the Agreement dated as of
January 20, 2000 between Artisan Home Entertainment Inc. ("Artisan" or
"Distributor") and The Baby Einstein Company LLC ("Einstein").

Schedule 2 is subject to the terms and conditions in the Agreement to which the
Schedule is attached.  If and to the extent there are any conflicts between the
terms of the Agreement and the terms in Schedule 2, the terms in the Agreement
shall govern.
*

<PAGE>

                                  SCHEDULE 3

                              LISTING OF PROGRAMS

1.   "Baby Bach"

2.   "Baby Einstein"

3.   "Baby Mozart"

4.   "Baby Shakespeare"

<PAGE>

                                   Exhibit B

                   Confidentiality and Non-Compete Agreement
                   -----------------------------------------

     This Confidentiality and Non-Compete Agreement is given by the undersigned
(the "Member"), in connection with the acquisition by Artisan Entertainment Inc.
      ------
(the "Buyer") of an equity interest in The Baby Einstein Company, LLC, a
      -----
Colorado limited liability company (the "Company"), which produces and
                                         -------
distributes video product geared towards infants and young children.  This
Confidentiality and Non-Compete Agreement, which is dated as of February 4,
2000, shall be effective upon the Purchase Option Closing Date.  In
consideration of the acquisition, Member agrees that for * years after the
Purchase Option Closing Date (the "Restricted Period"), the Member shall be
                                   -----------------
bound by the terms set forth herein.  (Capitalized terms used herein, and not
defined herein, shall be defined in the Purchase Agreement between The Baby
Einstein Company, LLC, Julie A. Clark, William E. Clark and Buyer (the "Purchase
                                                                        --------
Agreement.")
---------

          1.   Confidential Information.  Member acknowledges that the
               ------------------------
information, observations and data relating to the business of the Company which
Member has  obtained as an employee, officer, and Member of the Company or shall
obtain during the course of his association with the Company and his performance
under this Agreement are the property of the Company.  Member agrees that he
shall not use for his own or any other's purposes or disclose to any third party
any of such information, observations or data without the prior written consent
of the Company and the Buyer unless and to the extent that the aforementioned
matters (i) were in Member's possession prior to the date of disclosure, (ii)
are in the public domain or publicly known or available from public sources
prior to the date of disclosure, (iii) become part of the public domain or
publicly known or available other than as a result of a disclosure by Buyer or
Buyer's Representatives, (iv) become available to Member on a nonconfidential
basis from a source (other than Buyer or known to Member to be Buyer's
representatives) which is not prohibited from disclosing such information to
Member by a legal, contractual or fiduciary obligation to Buyer, or (v) are or
become independently developed or acquired by Member.  Member shall deliver to
the Company at the termination of his association with the Company or at any
other time as Buyer may so reasonably request, all memoranda, notes, plans,
records, reports, computer tapes, printouts and software and other documentation
(and copies thereof) relating to the business of the Company and its
subsidiaries which Members may then possess or have under his control.

          2.   Work Product.  Member acknowledges that all Proprietary Rights
               ------------
and Confidential Information which relate to the actual or anticipated business,
research and development or existing or anticipated future products or services
of the Company and which are conceived, developed or made by him during the
Restricted Period ("Work Product") belong to the Company.  Member shall promptly
                    ------------
disclose such Work Product to the Company and shall perform all actions
reasonably requested by the Company to establish and confirm such ownership
(including, without limitation, assignments, powers of attorney and other
instruments).

                                       1
<PAGE>

          3.   Non-Competition.
               ---------------

          (a)  During the Restricted Period, Member shall not, directly or
indirectly, either for himself or for any other person, partnership, corporation
or company, permit his name to be used by or engage or participate in any
business or enterprise identical to or similar to any such business which is
engaged in by the Company as of the date of this Agreement (collectively
"Competitive Business"). For purposes of this Agreement, the term "participate"
 --------------------
includes any direct or indirect interest in any enterprise, whether as an
officer, managing member, employee, partner, sole proprietor, agent,
representative, independent contractor, consultant, franchisor, franchisee,
creditor, owner or otherwise; provided that the term "participate" shall not
include ownership of less than 2% of the stock of a publicly-held corporation
whose stock is traded on a national securities exchange or in the over-the-
counter market.  Member agrees that this covenant is reasonable with respect to
its duration, geographical area and scope.

          (b)  During the Restricted Period, Member shall not (i) induce or
attempt to induce any employee of the Company or any of its subsidiaries to
leave their employ or in any way interfere with the relationship between the
Company and any of its employees, (ii) hire any person who was an employee of
the Company at any time during the Restricted Period, or (iii) induce or attempt
to induce any supplier, licensee, licensor, franchisee or other business
relation of the Company to cease doing business with them or in any way
interfere with the relationship between the Company and any such person or
business relation.

          (c)  The Parties hereto agree that the Company or Buyer would suffer
irreparable harm from a breach by Member of any of the covenants or agreements
contained herein.  In the event of an alleged or threatened breach by the Member
of any of the provisions of this Agreement, the Company or its successors or
assigns or Buyer may, in addition to all other rights and remedies existing in
its favor, apply to any court of competent jurisdiction for specific performance
and/or injunctive or other relief in order to enforce or prevent any violations
of the provisions hereof (including the extension of the Restricted Period by a
period equal to the length of the violation of this Agreement).  In the event of
an alleged breach or violation by Consultant of any of the provisions of this
Agreement, the Restricted Period described above shall be tolled until such
alleged breach or violation has been duly cured.  Member agrees that these
restrictions are reasonable.

          (d)  If, at the time of enforcement of any of the provisions of this
Agreement, a court holds that the restrictions stated therein are unreasonable
under the circumstances then existing, the Parties hereto agree that the maximum
period, scope or geographical are reasonable under such circumstances shall be
substituted for the stated period, scope or area.

          (e)  Member agrees that the covenants made in this Agreement including
paragraph 3 hereof  shall be construed as an agreement independent of any other
provision of this Agreement and shall survive any order of a court of competent

                                       2
<PAGE>

jurisdiction terminating any other provision of this Agreement.

          (e)  Member and Company acknowledge and agree that Buyer will suffer
harm from a breach by Member of any of the covenants or agreements contained
herein and shall have the right to enforce this Agreement directly against
Member in the event of such breach.

          4.   Successors and Assigns.  This Agreement shall be binding upon and
               ----------------------
inure to the benefit of the Company and Buyer and its or their affiliates,
successors and assigns and shall be binding upon and inure to the benefit of
Member and his legal representatives and assigns.  The Company or Buyer may
assign or transfer its or their rights hereunder to any of its affiliates or to
a successor corporation in the event of merger, consolidation or transfer or
sale of all or substantially all of the assets of the Company.

          5.   Modification of Waiver.  No amendment, modification or waiver of
               ----------------------
this Agreement shall be binding or effective for any purpose unless it is made
in a writing signed by the Party against who enforcement of such amendment,
modification or waiver is sought.  No course of dealing between the Parties to
this Agreement shall be deemed to affect or to modify, amend or discharge any
provision or term of this Agreement.  No delay on the part of the Company or
Member in the exercise of any of their respective rights or remedies shall
operate as a waiver thereof, and no single or partial exercise by the Company or
Member of any such right or remedy shall preclude other or further exercises
thereof.  A waiver of right or remedy on any one occasion shall not be construed
as a bar to or waiver of any such right or remedy on any other occasion.

          6.   Governing Law.  All issues and questions concerning the
               -------------
construction, validity, enforcement and interpretation of this Agreement and the
exhibits and schedules hereto shall be governed by, and construed in accordance
with, the laws of the State of California without giving effect to any choice of
law or conflict of law rules or provisions (whether of the State of California
or any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of California.

          7.   Severability.  Whenever possible each provision and term of this
               ------------
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision or term of this Agreement shall be held to
be prohibited by or invalid under such applicable law, then such provision or
term shall be ineffective only to the extent of such prohibition or invalidity,
without invalidating or affecting in any manner whatsoever the remainder of such
provision or term or the remaining provisions or terms of this Agreement;
provided that if a court having competent jurisdiction shall find that the
covenant contained in paragraph 2(a) hereof is not reasonable, such court shall
have the power to reduce the duration and/or geographic area and/or scope of
such covenant, and the covenant shall be enforceable in this reduced form.

          8.   No Strict Construction.  The language used in this Agreement
               ----------------------
shall

                                       3
<PAGE>

be deemed to be the language chosen by the Parties hereto to express their
mutual intent, and no rule of strict construction shall be applied against any
Party.

          9.   Member's Representations.  Member represents and warrants to the
               ------------------------
Company that (i) his execution, deliver and performance of this Agreement does
not and shall not conflict with, or result in the breach of or violation of, any
other agreement, instrument, order, judgment or decree to which he is a party or
by which he is bound, (ii) he is not a party to or bound by any employment
agreement, non-compete agreement or confidentiality agreement and delivery of
this Agreement by the Company, this Agreement shall be valid and binding
obligation of his, enforceable in accordance with its terms.

          10.  Notice.  Any notice required or permitted hereunder shall be
               ------
given in writing and shall be deemed effectively given upon personal delivery or
upon deposit in the United States Post Office mail, postage prepaid, addressed
to the other Party hereto at his or its address shown below:

          If to the Company:
          -----------------

          Artisan Entertainment Inc.
          2700 Colorado Blvd., 2/nd/ Floor
          Santa Monica, California 90404
          Attn: Ken Schapiro

          with a copy to:
          --------------

          Kirkland & Ellis
          777 South Figueroa Street, Suite 3700
          Los Angeles, California 90017
          Attn: Eva Herbst Davis

          and

          If to the Member:
          ----------------

          The Baby Einstein Company, LLC
          10840 South Bobcat Terrace
          Littleton, Colorado 80124
          Attn: Julie A. Clark

          with a copy to:
          --------------

          O'Melveny & Myers LLP
          1999 Avenue of the Stars, Suite 700
          Los Angeles, CA 90067
          Attn: Robert Haymer

                                       4
<PAGE>

          Telecopy: (310) 246-6779

or at such other address as such Party may designate by ten days advance written
notice to the other Party.

          11.  Captions.  The captions used in this Agreement are for
               --------
convenience of reference only and do not constitute a part of this Agreement and
shall not be deemed to limit, characterize or in any way affect any provision of
this Agreement, and all provisions of this Agreement shall be enforced and
construed as if no caption had been used in this Agreement.

          12.  Counterparts.  This Agreement may be executed in counterparts,
               ------------
any of which need not contain the signatures of more than one party, but all
such counterparts taken together shall constitute one and the same instrument.

                                       5
<PAGE>

          IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first above written.

                              ARTISAN ENTERTAINMENT INC.

                              By: /s/ Ken Schapiro
                                  ------------------------
                              Its: EVP
                                   -----------------------

                              MEMBER
                              /s/ William Clark
                              ----------------------------
                              Member's Name: William Clark
                                             -------------

                              THE BABY EINSTEIN COMPANY LLC

                              By: /s/ Julie Aigner-Clark
                                  -------------------------
                              Its: Manager
                                   ------------------------

                                       6
<PAGE>

                   Confidentiality and Non-Compete Agreement
                   -----------------------------------------

     This Confidentiality and Non-Compete Agreement is given by the undersigned
(the "Member"), in connection with the acquisition by Artisan Entertainment Inc.
      ------
(the "Buyer") of an equity interest in The Baby Einstein Company, LLC, a
      -----
Colorado limited liability company (the "Company"), which produces and
                                         -------
distributes video product geared towards infants and young children.  This
Confidentiality and Non-Compete Agreement, which is dated as of February 4,
2000, shall be effective upon the Purchase Option Closing Date.  In
consideration of the acquisition, Member agrees that for * years after the
Purchase Option Closing Date (the "Restricted Period"), the Member shall be
                                   -----------------
bound by the terms set forth herein.  (Capitalized terms used herein, and not
defined herein, shall be defined in the Purchase Agreement between The Baby
Einstein Company, LLC, Julie A. Clark, William E. Clark and Buyer (the "Purchase
                                                                        --------
Agreement.")
---------

          1.   Confidential Information.  Member acknowledges that the
               ------------------------
information, observations and data relating to the business of the Company which
Member has  obtained as an employee, officer, and Member of the Company or shall
obtain during the course of his association with the Company and his performance
under this Agreement are the property of the Company.  Member agrees that he
shall not use for his own or any other's purposes or disclose to any third party
any of such information, observations or data without the prior written consent
of the Company and the Buyer unless and to the extent that the aforementioned
matters (i) were in Member's possession prior to the date of disclosure, (ii)
are in the public domain or publicly known or available from public sources
prior to the date of disclosure, (iii) become part of the public domain or
publicly known or available other than as a result of a disclosure by Buyer or
Buyer's Representatives, (iv) become available to Member on a nonconfidential
basis from a source (other than Buyer or known to Member to be Buyer's
representatives) which is not prohibited from disclosing such information to
Member by a legal, contractual or fiduciary obligation to Buyer, or (v) are or
become independently developed or acquired by Member.  Member shall deliver to
the Company at the termination of his association with the Company or at any
other time as Buyer may so reasonably request, all memoranda, notes, plans,
records, reports, computer tapes, printouts and software and other documentation
(and copies thereof) relating to the business of the Company and its
subsidiaries which Members may then possess or have under his control.

          2.   Work Product.  Member acknowledges that all Proprietary Rights
               ------------
and Confidential Information which relate to the actual or anticipated business,
research and development or existing or anticipated future products or services
of the Company and which are conceived, developed or made by him during the
Restricted Period ("Work Product") belong to the Company.  Member shall promptly
                    ------------
disclose such Work Product to the Company and shall perform all actions
reasonably requested by the Company to establish and confirm such ownership
(including, without limitation, assignments, powers of attorney and other
instruments).

                                       7
<PAGE>

          3.   Non-Competition.
               ---------------

          (a)  During the Restricted Period, Member shall not, directly or
indirectly, either for himself or for any other person, partnership, corporation
or company, permit his name to be used by or engage or participate in any
business or enterprise identical to or similar to any such business which is
engaged in by the Company as of the date of this Agreement (collectively
"Competitive Business").  For purposes of this Agreement, the term "participate"
 --------------------
includes any direct or indirect interest in any enterprise, whether as an
officer, managing member, employee, partner, sole proprietor, agent,
representative, independent contractor, consultant, franchisor, franchisee,
creditor, owner or otherwise; provided that the term "participate" shall not
include ownership of less than 2% of the stock of a publicly-held corporation
whose stock is traded on a national securities exchange or in the over-the-
counter market.  Member agrees that this covenant is reasonable with respect to
its duration, geographical area and scope.

          (b)  During the Restricted Period, Member shall not (i) induce or
attempt to induce any employee of the Company or any of its subsidiaries to
leave their employ or in any way interfere with the relationship between the
Company and any of its employees, (ii) hire any person who was an employee of
the Company at any time during the Restricted Period, or (iii) induce or attempt
to induce any supplier, licensee, licensor, franchisee or other business
relation of the Company to cease doing business with them or in any way
interfere with the relationship between the Company and any such person or
business relation.

          (c)  The Parties hereto agree that the Company or Buyer would suffer
irreparable harm from a breach by Member of any of the covenants or agreements
contained herein.  In the event of an alleged or threatened breach by the Member
of any of the provisions of this Agreement, the Company or its successors or
assigns or Buyer may, in addition to all other rights and remedies existing in
its favor, apply to any court of competent jurisdiction for specific performance
and/or injunctive or other relief in order to enforce or prevent any violations
of the provisions hereof (including the extension of the Restricted Period by a
period equal to the length of the violation of this Agreement).  In the event of
an alleged breach or violation by Consultant of any of the provisions of this
Agreement, the Restricted Period described above shall be tolled until such
alleged breach or violation has been duly cured.  Member agrees that these
restrictions are reasonable.

          (d)  If, at the time of enforcement of any of the provisions of this
Agreement, a court holds that the restrictions stated therein are unreasonable
under the circumstances then existing, the Parties hereto agree that the maximum
period, scope or geographical are reasonable under such circumstances shall be
substituted for the stated period, scope or area.

          (e)  Member agrees that the covenants made in this Agreement including
paragraph 3 hereof  shall be construed as an agreement independent of any other
provision of this Agreement and shall survive any order of a court of competent
jurisdiction terminating any other provision of this Agreement.

          (f)  Member and Company acknowledge and agree that Buyer will suffer
harm from a breach by Member of any of the covenants or agreements contained
herein and

                                       8
<PAGE>

shall have the right to enforce this Agreement directly against Member in the
event of such breach.

          4.   Successors and Assigns.  This Agreement shall be binding upon and
               ----------------------
inure to the benefit of the Company and Buyer and its or their affiliates,
successors and assigns and shall be binding upon and inure to the benefit of
Member and his legal representatives and assigns.  The Company or Buyer may
assign or transfer its or their rights hereunder to any of its affiliates or to
a successor corporation in the event of merger, consolidation or transfer or
sale of all or substantially all of the assets of the Company.

          5.   Modification of Waiver.  No amendment, modification or waiver of
               ----------------------
this Agreement shall be binding or effective for any purpose unless it is made
in a writing signed by the Party against who enforcement of such amendment,
modification or waiver is sought.  No course of dealing between the Parties to
this Agreement shall be deemed to affect or to modify, amend or discharge any
provision or term of this Agreement.  No delay on the part of the Company or
Member in the exercise of any of their respective rights or remedies shall
operate as a waiver thereof, and no single or partial exercise by the Company or
Member of any such right or remedy shall preclude other or further exercises
thereof.  A waiver of right or remedy on any one occasion shall not be construed
as a bar to or waiver of any such right or remedy on any other occasion.

          6.   Governing Law.  All issues and questions concerning the
               -------------
construction, validity, enforcement and interpretation of this Agreement and the
exhibits and schedules hereto shall be governed by, and construed in accordance
with, the laws of the State of California without giving effect to any choice of
law or conflict of law rules or provisions (whether of the State of California
or any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of California.

          7.   Severability.  Whenever possible each provision and term of this
               ------------
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision or term of this Agreement shall be held to
be prohibited by or invalid under such applicable law, then such provision or
term shall be ineffective only to the extent of such prohibition or invalidity,
without invalidating or affecting in any manner whatsoever the remainder of such
provision or term or the remaining provisions or terms of this Agreement;
provided that if a court having competent jurisdiction shall find that the
covenant contained in paragraph 2(a) hereof is not reasonable, such court shall
have the power to reduce the duration and/or geographic area and/or scope of
such covenant, and the covenant shall be enforceable in this reduced form.

          8.   No Strict Construction.  The language used in this Agreement
               ----------------------
shall be deemed to be the language chosen by the Parties hereto to express their
mutual intent, and no rule of strict construction shall be applied against any
Party.

          9.   Member's Representations.  Member represents and warrants to the
               ------------------------
Company that (i) his execution, deliver and performance of this Agreement does
not and shall not conflict with, or result in the breach of or violation of, any
other agreement, instrument,

                                       9
<PAGE>

order, judgment or decree to which he is a party or by which he is bound, (ii)
he is not a party to or bound by any employment agreement, non-compete agreement
or confidentiality agreement and delivery of this Agreement by the Company, this
Agreement shall be valid and binding obligation of his, enforceable in
accordance with its terms.

          10.  Notice.  Any notice required or permitted hereunder shall be
               ------
given in writing and shall be deemed effectively given upon personal delivery or
upon deposit in the United States Post Office mail, postage prepaid, addressed
to the other Party hereto at his or its address shown below:

          If to the Company:
          -----------------

          Artisan Entertainment Inc.
          2700 Colorado Blvd., 2/nd/ Floor
          Santa Monica, California 90404
          Attn: Ken Schapiro

          with a copy to:
          --------------

          Kirkland & Ellis
          777 South Figueroa Street, Suite 3700
          Los Angeles, California 90017
          Attn: Eva Herbst Davis

          and

          If to the Member:
          ----------------

          The Baby Einstein Company, LLC
          10840 South Bobcat Terrace
          Littleton, Colorado 80124
          Attn: Julie A. Clark

          with a copy to:
          --------------

          O'Melveny & Myers LLP
          1999 Avenue of the Stars, Suite 700
          Los Angeles, CA 90067
          Attn: Robert Haymer
          Telecopy: (310) 246-6779

or at such other address as such Party may designate by ten days advance written
notice to the other Party.

          11.  Captions.  The captions used in this Agreement are for
               --------
convenience

                                      10
<PAGE>

of reference only and do not constitute a part of this Agreement and shall not
be deemed to limit, characterize or in any way affect any provision of this
Agreement, and all provisions of this Agreement shall be enforced and construed
as if no caption had been used in this Agreement.

          12.  Counterparts.  This Agreement may be executed in counterparts,
               ------------
any of which need not contain the signatures of more than one party, but all
such counterparts taken together shall constitute one and the same instrument.

                                      11
<PAGE>

          IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first above written.

                              ARTISAN ENTERTAINMENT INC.

                              By: /s/ Ken Schapiro
                                  ------------------------
                              Its: EVP
                                   -----------------------

                              MEMBER
                              /s/ William Clark
                              ----------------------------
                              Member's Name: William Clark
                                             -------------

                              THE BABY EINSTEIN COMPANY LLC

                              By: /s/ Julie Aigner-Clark
                                  ------------------------
                              Its: Manager
                                   -----------------------

                                      12
<PAGE>

                                   Exhibit C

                     Amended & Restated Operating Agreement

                                       1
<PAGE>

                              AMENDED AND RESTATED
                              OPERATING AGREEMENT
                                       OF
                         THE BABY EINSTEIN COMPANY, LLC

                                       2
<PAGE>

                              AMENDED AND RESTATED

                              OPERATING AGREEMENT

                                       OF

                         THE BABY EINSTEIN COMPANY, LLC
<PAGE>

<TABLE>
<CAPTION>

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

                                                                            Page
                                                                            ----
<S>                                                                         <C>
ARTICLE 1 - THE LIMITED LIABILITY COMPANY..................................... 1
     1.1    Formation......................................................... 1
            ---------
     1.2    Articles of Organization.......................................... 2
            ------------------------
     1.3    Business Purpose.................................................. 2
            ----------------
     1.4    Registered Office; Agent.......................................... 2
            ------------------------
     1.5    Removal of Members; Additional Members............................ 2
            --------------------------------------

ARTICLE 2 - DEFINITIONS....................................................... 2
     2.1    Cash Flow......................................................... 2
            ---------
     2.2    Code.............................................................. 2
            ----
     2.3    Distribution Agreement............................................ 3
            ----------------------
     2.4    Manager........................................................... 3
            -------
     2.5    Non-Voting Member................................................. 3
            -----------------
     2.6    Prime Rate........................................................ 3
            ----------
     2.7    Profit or Loss.................................................... 3
            --------------
     2.8    Sale Transaction Note............................................. 3
            ---------------------
     2.9    Sharing Ratio..................................................... 3
            -------------
     2.10   Treasury Regulations.............................................. 3
            --------------------
     2.11   Voting Interest................................................... 4
            ---------------
     2.12   Voting Member..................................................... 4
            -------------

ARTICLE 3 - CAPITAL CONTRIBUTIONS; MEMBER LOANS............................... 4
     3.1    Capital Accounts.................................................. 4
            ----------------
     3.2    Additional Capital Contributions.................................. 4
            --------------------------------
     3.3    Default; Remedies................................................. 5
            -----------------
     3.4    Return of Capital Contributions................................... 6
            -------------------------------

ARTICLE 4 - DISTRIBUTIONS..................................................... 6
     4.1    Nonliquidating Distributions...................................... 6
            ----------------------------
     4.2    Liquidating Distributions......................................... 6
            -------------------------

ARTICLE 5 - ALLOCATION OF PROFIT AND LOSS..................................... 7
     5.1    Determination of Profit and Loss.................................. 7
            --------------------------------
     5.2    Loss Allocation................................................... 7
            ---------------
     5.3    Profit Allocation................................................. 7
            -----------------
     5.4    Regulatory Allocations and Curative Provisions.................... 7
            ----------------------------------------------

ARTICLE 6 - ALLOCATION OF TAXABLE INCOME AND LOSS............................. 8
     6.1    In General........................................................ 8
            ----------
     6.2    Allocation of Section 704(c) Items................................ 9
            ----------------------------------
     6.3    Integration With Section 754 Election............................. 9
            -------------------------------------

ARTICLE 7 - MANAGER........................................................... 9
     7.1    Management Authority.............................................. 9
            --------------------
</TABLE>

                                       i
<PAGE>

<TABLE>
<S>                                                                             <C>
     7.2    Duties............................................................  10
            ------
     7.3    Time Devoted to Business..........................................  11
            ------------------------
     7.4    Number............................................................  11
            ------
     7.5    Tenure............................................................  11
            ------
     7.6    Reliance by Third Parties.........................................  11
            -------------------------
     7.7    Transactions Between Company and Manager..........................  11
            ----------------------------------------
     7.8    Management Fees and Reimbursements................................  11
            ----------------------------------
     7.9    Other Activities..................................................  11
            ----------------
     7.10   Insurance.........................................................  12
            ---------
     7.11   Exculpation.......................................................  12
            -----------
     7.12   Tax Matters Partner...............................................  12
            -------------------

ARTICLE 8 - MEMBERS...........................................................  12
     8.1    Participation in Management.......................................  12
            ---------------------------
     8.2    Quorum............................................................  12
            ------
     8.3    Informal Action...................................................  12
            ---------------
     8.4    Meetings..........................................................  12
            --------
     8.5    Place of Meeting..................................................  13
            ----------------
     8.6    Notice of Meeting.................................................  13
            -----------------
     8.7    Proxies...........................................................  13
            -------
     8.8    Conduct of Meeting................................................  13
            ------------------
     8.9    Other Activities..................................................  13
            ----------------

ARTICLE 9 - ACCOUNTING AND REPORTING..........................................  13
     9.1    Books.............................................................  13
            -----
     9.2    Capital Accounts..................................................  13
            ----------------
     9.3    Transfers During Year.............................................  14
            ---------------------
     9.4    Reports...........................................................  14
            -------
     9.5    Section 754 Election..............................................  14
            --------------------
     9.6    Partnership Classification........................................  14
            --------------------------

ARTICLE 10 - TRANSFERS; RIGHT OF FIRST REFUSAL................................  14
     10.1   Restrictions......................................................  14
            ------------
     10.2   Offer to Company..................................................  15
            ----------------
     10.3   Acceptance of Offer...............................................  15
            -------------------
     10.4   Failure to Accept Offer...........................................  15
            -----------------------
     10.5   Cash Equivalents..................................................  15
            ----------------
     10.6   Direct and Indirect Transfers.....................................  15
            -----------------------------
     10.7   Substitution of a Member..........................................  15
            ------------------------
     10.8   Conditions to Substitution........................................  16
            --------------------------
     10.9   Waiver as to Certain Transfers....................................  16
            ------------------------------
     10.10  Artisan Purchase Option...........................................  17
            -----------------------
     10.11  Company Call Option...............................................  18
            -------------------
     10.12  Tag-Along/Drag-Along Rights.......................................  18
            ---------------------------
ARTICLE 11 - TERM.............................................................  19
</TABLE>

                                      ii
<PAGE>

<TABLE>
<S>                                                                             <C>
ARTICLE 12 - DISSOLUTION AND TERMINATION......................................  19
     12.1   Final Accounting..................................................  19
            ----------------
     12.2   Liquidation.......................................................  19
            -----------
     12.3   Distribution in Kind..............................................  20
            --------------------
     12.4   Waiver of Right to Court Decree of Dissolution....................  20
            ----------------------------------------------
     12.5   Articles of Dissolution...........................................  20
            -----------------------

ARTICLE 13 - NOTICES..........................................................  20
     13.1   Method of Notices.................................................  20
            -----------------
     13.2   Computation of Time...............................................  20
            -------------------

ARTICLE 14 - GENERAL PROVISIONS...............................................  21
     14.1   Entire Agreement..................................................  21
            ----------------
     14.2   Amendment.........................................................  21
            ---------
     14.3   Applicable Law....................................................  21
            --------------
     14.4   Pronouns..........................................................  21
            --------
     14.5   Counterparts......................................................  21
            ------------
</TABLE>

                                      iii
<PAGE>

                                   EXHIBIT A
                             Non-Compete Agreement
<PAGE>

                                   EXHIBIT B

                           I.R.C. (S) 754 Election:

                               Basis Allocation

                  Capital Assets/I.R.C. (S) 1231(b) Property
                                      And
                                Other Property
<PAGE>

     THIS OPERATING AGREEMENT (this "Agreement") is entered into this 4th day of
                                     ---------
February, 2000, among Julie A. Clark ("J. A. Clark"), William E. Clark ("W. E.
Clark"), and Artisan Entertainment Inc., a Delaware corporation ("Artisan"), all
of whom are referred to collectively in this Agreement as the "Members" and
                                                               -------
individually as a "Member."
                   ------

RECITALS
--------

     A.   The Baby Einstein Company, LLC (the "Company") was organized as a
                                               -------
Colorado limited liability company on April 29, 1999.

     B.   J. A. Clark and W. E. Clark, as the original members of the Company
(collectively, the "Original Members"), have adopted an Operating Agreement of
                    ----------------
The Baby Einstein Company, LLC, dated October 8, 1999 (the "Operating
                                                            ---------
Agreement"), for the purpose of governing the operations of the Company.
---------

     C.   Pursuant to that certain Purchase Agreement, dated as of February 4,
2000 (the "Purchase Agreement"), by and among the Company, J. A. Clark, W. E.
           ------------------
Clark, and Artisan, the Original Members have agreed to sell a 20% membership
interest in the Company to Artisan (the "Sale Transaction").
                                         ----------------

     D.   In connection with the Sale Transaction and Artisan's admission as a
substituted Member of the Company, the parties desire to amend and restate the
Operating Agreement as provided herein.

     NOW, THEREFORE, in consideration of the mutual promises contained herein
the Members agree as follows:

                                   ARTICLE 1
                                   ---------
                         THE LIMITED LIABILITY COMPANY

     1.1  Formation.  The Members hereby continue the Company as a limited
          ---------
liability company pursuant to the Colorado Limited Liability Company Act (the
"Act"), subject to the terms and conditions provided in this Agreement.  The
----
name of the limited liability company shall continue to be THE BABY EINSTEIN
COMPANY, LLC (the "Company").
                   -------

     1.2  Articles of Organization.  The Manager has caused articles of
          ------------------------
organization that comply with the requirements of the Act to be filed with the
Secretary of State for the State of Colorado.  In the future, the Manager shall
execute such further documents (including amendments to the articles of
organization) and take such further action as shall be appropriate or necessary
to comply with the requirements of law for the formation and operation of a
limited liability company in all jurisdictions where the Company elects to carry
on its business.

     1.3  Business Purpose.  The purpose of the Company shall be to engage in
          ----------------
such
<PAGE>

lawful activities as the Manager may from time to time deem desirable. The
Company may sell, exchange, or otherwise dispose of all or substantially all of
its assets as contemplated in this Agreement and any such transaction shall be
considered to be within the scope of the Company's purpose.

     1.4  Registered Office; Agent.  The registered office of the Company shall
          ------------------------
be located at 10840 South Bobcat Terrace, Littleton, Colorado 80124 and the
Company's registered agent at such address shall be J. A. Clark.  The registered
office of the Company, its registered agent at such address, or both may be
changed from time to time by the Manager.

     1.5  Removal of Members; Additional Members.  (a)  The Manager may not
          --------------------------------------
remove any Member of the Company.  Except as provided in Section 7.1(b), the
Manager may admit additional Members to the Company and such Members shall have
such rights and interests in the Company as determined and set forth in writing
by the Manager.  The Sharing Ratios of all Members shall be adjusted to account
for any interest acquired by an additional Member.  Upon the admission of an
additional Member, the Members' capital accounts shall be adjusted in the manner
provided in Treasury Regulation section 1.704-1(b)(2)(iv)(f) to reflect a
revaluation of the Company's assets.  Additional Members shall not be admitted
to the Company without the prior written consent of the Manager.

          (b) The Manager hereby acknowledges that Artisan is admitted as a
substituted Member in the Company, to the extent of its Sharing Ratio, with all
the rights and obligations of a Member as provided in this Agreement and the
Act.

                                   ARTICLE 2
                                   ---------
                                  DEFINITIONS

     2.1  Cash Flow.  "Cash Flow" shall mean all cash receipts of the Company
          ---------
reduced by:  (i) payments on any indebtedness owed by the Company to any Member
(including, without limitation, principal and interest payments on the Sale
Transaction Notes and any other loans made by a Member to the Company) or third
party; (ii) cash disbursements to pay expenses of the Company; and (iii)
reserves deemed reasonably necessary by the Manager to meet the business needs
of the Company.

     2.2  Code.  "Code" shall mean the Internal Revenue Code of 1986, as
          ----
amended, or any successor statute.

     2.3  Distribution Agreement.  "Distribution Agreement" shall mean the
          ----------------------
letter agreement, dated as of February 4, 2000, between the Artisan and the
Company, under which the Company has engaged Artisan and Artisan has agreed to
furnish certain marketing, promotion, and distribution services in connection
with the marketing and sale of certain products produced by the Company.

     2.4  Manager.  "Manager" shall mean Julie A. Clark or any successor elected
          -------
or appointed pursuant to Section 7.5 then serving in a representative capacity
                         -----------
to manage the
<PAGE>

business and affairs of the Company.

     2.5  Non-Voting Member.  "Non-Voting Member" shall mean the non-voting
          -----------------
interest of a Member that has no right to participate in the management and
affairs of the Company.

     2.6  Prime Rate.  "Prime Rate" for any Member loan shall mean the prime
          ----------
rate of interest charged by Norwest Bank Colorado N.A., or its successor, as of
the date of the loan.

     2.7  Profit or Loss.  "Profit" or "Loss" shall mean the profit or loss of
          --------------
the Company as determined under the capital accounting rules of Treasury
Regulations section 1.704-1(b)(2)(iv) for purposes of adjusting the capital
accounts of the Members including, without limitation, the provisions of
paragraphs (b), (f), and (g) of those regulations relating to the computation of
items of income, gain, deduction, and loss.

     2.8  Sale Transaction Notes.  "Sale Transaction Notes" shall mean the
          ----------------------
promissory notes, each in the principal amount of *, issued by the Company to J.
A. Clark and W. E. Clark immediately prior to closing of the Sale Transaction.
The Sale Transaction Notes shall bear interest at * and contain such other terms
as mutually agreed between the parties to the Purchase Agreement.

     2.9  Sharing Ratio.  The "Sharing Ratio" of each Member shall be as
          -------------
follows:

          Member              Type of Interest              Sharing Ratio
          ------              ----------------              -------------

          J. A. Clark         Voting Member                      0.8%
          W. E. Clark         Voting Member                      0.8%
          Artisan             Voting Member                      0.4%
          J. A. Clark         Non-Voting Member                 39.2%
          W. E. Clark         Non-Voting Member                 39.2%
          Artisan             Non-Voting Member                 19.6%

          The Sharing Ratios of the Members shall be adjusted from time to time
to account for transfers of interests in the Company and other transactions
authorized under this Agreement.

     2.10 Treasury Regulations.  "Treasury Regulations" shall mean regulations
          --------------------
issued by the Department of Treasury under the Code.  Any reference to a
specific section or sections of the Treasury Regulations shall be deemed to
include a reference to any corresponding provision of future regulations under
the Code.

     2.11 Voting Interest.  "Voting Interest" shall mean a number of votes equal
          ---------------
to a Voting Member's Sharing Ratio multiplied by 100.

     2.12 Voting Member.  "Voting Member" shall mean the voting interest of a
          -------------
Member
<PAGE>

that has all of the rights of a Member to participate in the management and
affairs of the Company as provided in the Act and this Agreement. J. A. Clark,
W. E. Clark, and Artisan shall constitute the sole Voting Members unless
additional Members are admitted and expressly given the right to vote by the
Manager pursuant to Section 1.5.
                    -----------

                                   ARTICLE 3
                                   ---------
                      CAPITAL CONTRIBUTIONS; MEMBER LOANS

     3.1  Capital Accounts.  The Members acknowledge that, as of the date of
          ----------------
this Agreement, the Members' capital accounts shall be determined in accordance
with Treasury Regulation section 1.704-1(b)(2)(iv) including, without
limitation, the provisions of paragraphs (l) and (m) of those regulations
relating to transfers of interests in the Company.

     3.2  Additional Capital Contributions.  (a)  If from time to time in the
          --------------------------------
reasonable judgment of the Manager the Company requires additional funds for the
operation of its business, the Manager may, in her discretion, borrow the funds
from a third party or assess the Members for such additional funds required by
the Company.  The Manager shall assess the Members for additional funds under
this Section 3.2(a) by sending the Members a written notice that specifies the
     --------------
additional funds that the Member is required to contribute to the Company.  The
Members obligated to contribute additional funds to the Company shall deliver to
the Company cash in an amount equal to the additional funds specified in the
written notice no later than 30 days following the date such notice is given.
If the Manager assesses the Members for the additional funds required by the
Company, the Members shall contribute funds to the Company in the following
order and priority:

               (i)   First, J. A. Clark and W. E. Clark shall loan funds to the
Company in an amount up to, but not in excess of, the principal amount of the
Sale Transaction Notes. J. A. Clark and W. E. Clark shall advance funds under
this Section 3.2(a)(i) in such relatives amounts as they may agree and, in the
     -----------------
absence of agreement, in accordance with the relative principal amount of the
Sale Transaction Note issued to each of the them.  Any loan made by J. A. Clark
and W. E. Clark under this Section 3.2(a)(i) shall bear interest at the Prime
                           -----------------
Rate and contain such other terms as mutually agreed between the Company and the
Member making the loan.

               (ii)  Second, Artisan shall loan funds to the Company as provided
in paragraph 13 of the Distribution Agreement.

               (iii) Third, the Members shall make capital contributions to the
Company in an amount up to, but not in excess of, $500,000 in any calendar year.
Additional capital contributions under this Section 3.2(a)(iii) shall be shared
                                            -------------------
among the Members in proportion to their Sharing Ratios.

          (b) Except as provided in Section 3.2(a), no Member shall be obligated
                                    --------------
to contribute any additional capital or to make a loan to the Company.  If the
Company requires additional funds to meet its obligations, the Company may
accept additional capital contributions from one or more Members, or the Company
may borrow such additional funds
<PAGE>

from any source, including any Member. Upon the acceptance of additional capital
contributions from a Member pursuant to this Section 3.2(b), the Manager shall
                                             --------------
adjust the Sharing Ratios of the Members as the Members then agree. Any loan
made by a Member to the Company under this Section 3.2(b) shall be represented
                                           --------------
by a promissory note, bearing interest at a rate equal to the Prime Rate, and
shall be payable out of first available funds, including proceeds from the sale
of all or any portion of the assets of the Company.

     3.3  Default; Remedies.  (a)  Upon the failure of a Member to make payment
          -----------------
when due of any funds under Section 3.2(a), the defaulting Member's interest as
                            --------------
a Voting Member shall be automatically converted into a Non-Voting Member
interest in the Company and any non-defaulting Member may notify the defaulting
Member, in writing, of its default and make demand upon it for prompt payment
thereof.  The failure of the defaulting Member to pay the amount due within 30
days after receipt of such notice shall constitute a default and shall entitle
the Company, and any non-defaulting Member on behalf of the Company, to pursue
any of the rights and remedies set forth in this Section 3.3, which rights and
                                                 -----------
remedies shall be cumulative and in addition to any other rights and remedies
available hereunder or under applicable law.

          (b)  If a defaulting Member has not cured its default as provided in
Section 3.3(a), any non-defaulting Member may make a capital contribution to the
--------------
Company in an amount equal to the unpaid  advance or contribution of the
defaulting Member, and such capital contribution shall be credited to the
capital account of the non-defaulting Member making the contribution.  In the
event a capital contribution is made pursuant to this Section 3.3(b), the
Sharing Ratio of the defaulting Member shall be reduced by an amount equal to
the following:

                     Unpaid Contribution of Defaulting Member
                     ----------------------------------------
                    Total Capital Contributions By All Members

The Sharing Ratio of the non-defaulting Member that makes the contribution shall
be increased by an amount equal to the reduction in the Sharing Ratio of the
defaulting Member and the Members' capital accounts shall be adjusted in the
manner provided in Treasury Regulation section 1.704-1(b)(2)(iv)(f).  If more
than one non-defaulting Member elects to make a capital contribution under this
Section 3.3(b), such non-defaulting Members shall contribute the defaulting
--------------
Member's unpaid contribution and their Sharing Ratios shall be increased in the
manner in which they all agree and, in the absence of agreement, in accordance
with their relative Sharing Ratios.

          (c) If a defaulting Member has not cured its default as provided in
Section 3.3(a), any non-defaulting Member may make such advance or contribution
--------------
on behalf of the defaulting Member and elect to treat the payment as a loan to
the defaulting Member and a capital contribution of that sum to the Company by
the defaulting Member.  The defaulting Member shall pay such non-defaulting
Member, within 1 year of the date of such advance, the amount of such advance
plus interest from the date of the advance at a rate equal to the Prime Rate.
If such advance and interest thereon are not paid when due, the non-defaulting
Member that advanced the funds shall be entitled to:  (i) pursue any remedies at
law to collect the debt
<PAGE>

and recover the costs of collection, and (ii) receive one hundred percent (100%)
of all amounts that would otherwise be distributed by the Company to the
defaulting Member until such debt and interest plus the costs of collection
(including reasonable attorneys fees) are paid in full. If more than one non-
defaulting Member elects to make an advance under this Section 3.3(c), such non-
                                                       --------------
defaulting Members shall make the advance in the manner in which they all agree
and, in the absence of agreement, in accordance with their relative Sharing
Ratios.

          (d)  If a defaulting Member has not cured its default as provided in
Section 3.3(a), the Company may:  (i) sell the entire interest of the defaulting
--------------
Member to a third party and hold the defaulting Member personally liable for the
amount by which the unpaid advance or contribution, plus interest from the date
of the default at a rate equal to the Prime Rate, plus the costs of collection,
exceeds the amount realized by the Company as a result of such sale; and (ii)
withhold payment of distributions under Article 4 against the unpaid amount.

     3.4  Return of Capital Contributions.  Capital contributions shall be
          -------------------------------
expended in furtherance of the business of the Company.  All costs and expenses
of the Company shall be paid from its funds.  No interest shall be paid on
capital contributions.  No Manager shall have any personal liability for the
repayment of any capital contribution or loan made to the Company.

                                   ARTICLE 4
                                   ---------
                                 DISTRIBUTIONS

     4.1  Nonliquidating Distributions.  Except as provided in Section 4.2, the
          ----------------------------                         -----------
Company shall make distributions of Cash Flow among the Members in the following
order and priority:

          (a)  First, the Company shall distribute Cash Flow to each Member at
least annually in an amount equal to the Profit allocated to such Member
pursuant to Section 5.3 multiplied by the sum of the highest federal income tax
            -----------
rate payable by an individual plus 5%.

          (b)  Except as provided in Section 7.1(b), the Company shall make
                                    --------------
additional distributions of Cash Flow at such times and in such amounts as the
Manager shall determine.  Except as provided in Section 4.2, all distributions
                                                -----------
under this Section 4.1(b) shall be made to the Members in accordance with their
           --------------
respective Sharing Ratios.

     4.2  Liquidating Distributions.  All distributions made in connection with
          -------------------------
the sale, exchange, or other disposition of all or substantially all of the
Company assets and all distributions made in connection with the liquidation of
the Company shall be made to the Members in accordance with their relative
positive capital account balances at the time of distribution, after giving
effect to the allocation of any Profit or Loss under Article 5.
                                                     ---------
<PAGE>

                                   ARTICLE 5
                                   ---------
                         ALLOCATION OF PROFIT AND LOSS

     5.1  Determination of Profit and Loss.  Profit or Loss shall be determined
          --------------------------------
on an annual basis and for such other periods as may be required.

     5.2  Loss Allocation.  Except as provided in Section 5.4, all Loss shall be
          ---------------                         -----------
allocated to the Members in accordance with their relative Sharing Ratios.

     5.3  Profit Allocation.
          -----------------

          (a)  Except as provided in Section 5.3(b) or Section 5.4, Profit shall
                                     --------------    -----------
be allocated to the Members in accordance with their relative Sharing Ratios.

          (b)  Any Profit with respect to the sale, exchange, or other
disposition of all or substantially all of the Company assets or with respect to
the liquidation of the Company shall be allocated in the following order of
priority:

               (i)  first, to the Members until they have been allocated an
amount of Profit that will cause the balances of their respective capital
accounts to be zero (on a pro rata basis in accordance with the relative amounts
necessary to bring such balances to zero); and

               (ii) the balance, to the Members in accordance with their
relative Sharing Ratios.

          (c)  For purposes of Section 5.3(b), the capital accounts of the
                               --------------
Members shall be determined (i) before giving effect to distributions under
Section 4.2, (ii) after allocating all other items of Profit and Loss for such
-----------
period, and (iii) after making all distributions under Section 4.1.
                                                       -----------

          (d)  If Profit with respect to the sale or other taxable disposition
of all or substantially all of the Company's assets is reported on the
installment sale method for federal income tax purposes, the portion of the
Profit allocated to each Member under the provisions of Section 5.3(b) for each
                                                        --------------
year shall be determined by the Company's accountants under such reasonable
standards, consistently applied, as will result in an allocation of the total
Profit from the sale among the Members in accordance with the provisions of
Section 5.3(b).
--------------

     5.4  Regulatory Allocations and Curative Provisions.
          ----------------------------------------------

          (a)  The "qualified income offset" provisions of Treasury Regulations
section 1.704-1(b)(2)(ii)(d) are incorporated herein by reference and shall
apply to adjust the allocation of Profit and Loss otherwise provided for under
Sections 5.2 and 5.3 to the extent provided in that regulation.
--------------------
<PAGE>

          (b)  The "minimum gain" provisions of Treasury Regulations section
1.704-2 are incorporated herein by reference and shall apply to adjust the
allocation of Profit and Loss otherwise provided for under Sections 5.2 and 5.3
                                                           --------------------
to the extent provided in that regulation.

          (c)  Notwithstanding the provisions of Section 5.2, if during any
                                                 -----------
fiscal year of the Company the allocation of any loss or deduction, net of any
income or gain, to a Member would cause or increase a negative balance in a
Member's capital account as of the end of that fiscal year, only the amount of
such loss or deduction that reduces the balance to zero shall be allocated to
the Member and the remaining amount shall be allocated to the other Members. For
the purpose of the preceding sentence, a capital account shall be reduced by the
adjustments, allocations, and distributions described in Treasury Regulations
sections 1.704-1(b)(2)(ii)(d)(4), (5), and (6), and increased by the amount if
any, of the negative balance in the Member's capital account that the Member is
obligated to restore within the meaning of Treasury Regulations section 1.704-
1(b)(2)(ii)(c) as of that time or is deemed obligated to restore under Treasury
Regulations section 1.704-2(g)(1) or section 1.704-2(i)(5).

          (d) All allocations pursuant to the foregoing provisions of this
Section 5.4 (the "Regulatory Allocations") shall be taken into account in
-----------       ----------------------
computing allocations of other items under Sections 5.2 and 5.3, including, if
                                           --------------------
necessary, allocations in subsequent fiscal years, so that the net amounts
reflected in the Members' capital accounts and the character for income tax
purposes of the taxable income recognized (e.g., as capital or ordinary) will,
to the extent possible, be the same as if no Regulatory Allocations had been
given effect.

                                   ARTICLE 6
                                   ---------
                     ALLOCATION OF TAXABLE INCOME AND LOSS

     6.1  In General.
          ----------

          (a)  Except as provided in Sections 6.1(b) and 6.2, each item of
                                     -----------------------
income, gain, loss, and deduction of the Company for federal income tax purposes
shall be allocated among the Members in the same manner as such item is
allocated for capital account purposes under Article 5.
                                             ---------

          (b)  To the extent of any recapture income (as defined below)
resulting from the sale or other taxable disposition of a Company asset, the
amount of any gain from such disposition allocated to (or recognized by) a
Member (or its successor in interest) for federal income tax purposes shall be
deemed to consist of recapture income to the extent such Member (or such
Member's predecessor in interest) has been allocated or has claimed any
deduction directly or indirectly giving rise to the treatment of such gain as
recapture income. For this purpose "recapture income" shall mean any gain
recognized by the Company (but computed without regard to any adjustment
required by sections 734 and 743 of the Code) upon the disposition of any
property or asset of the Company that does not constitute capital gain for
federal income tax purposes because such gain represents the recapture of
deductions previously taken with respect to such property or assets.
<PAGE>

     6.2  Allocation of Section 704(c) Items.  The Members recognize that with
          ----------------------------------
respect to property contributed to the Company by a Member and with respect to
property revalued in accordance with Treasury Regulations section 1.704-
1(b)(2)(iv)(f), there will be a difference between the agreed values or
"carrying values" of such property at the time of contribution or revaluation
and the adjusted tax basis of such property at that time. All items of tax
depreciation, cost recovery, amortization, amount realized, and gain or loss
with respect to such assets shall be allocated among the Members to take into
account the book-tax disparities in accordance with the provisions of sections
704(b) and 704(c) of the Code and the Treasury Regulations under those sections.

     6.3  Integration With Section 754 Election.  All items of income, gain,
          -------------------------------------
loss, deduction, and credit recognized by the Company for federal income tax
purposes and allocated to the Members in accordance with the provisions hereof
and all basis allocations to the Members shall be determined without regard to
any election under section 754 of the Code that may be made by the Company;
provided, however, that such allocations, once made, shall be adjusted as
necessary or appropriate to take into account the adjustments permitted by
sections 734 and 743 of the Code.

                                   ARTICLE 7
                                   ---------
                                    MANAGER

     7.1  Management Authority.
          --------------------

          (a)  Management of the Company shall be vested in the Manager. Except
as provided in Section 7.1(b): (i) the Manager shall have the power and
authority to conduct the business of the Company; (ii) the Manager is hereby
expressly authorized on behalf of the Company to make all decisions with respect
to the Company's business and to take all actions necessary to carry out such
decisions; and (iii) consistent with Section 1.3, the Manager, without the
                                     -----------
consent or approval of the Members, may sell, exchange, or otherwise dispose of
all or substantially all of the Company's assets, and any such transaction shall
be considered within the scope of the Manager's authority.

          (b)  Notwithstanding anything to the Contrary in this Section 7.1,
                                                               -----------
prior to expiration of the Artisan Purchase Option under Section 10.10, the
                                                         -------------
Manager shall use her best efforts to maintain the value of the Company's
business as a going concern and the Manager shall not take the following actions
without the written consent of Artisan: (i) take any action that is not in the
ordinary course of business and consistent with past practices; (ii) enter into
or perform any transaction for the acquisition, selection, clearance,
maintenance, enforcement, assignment, and licensing of any or all intellectual
property developed, owned, or used by the Company; (iii) cause the Company to
enter into or perform any transactions with any Manager, Member or their
affiliates or to enter into or perform any transactions with terms that are not
comparable to and competitive with those available to the Company from others
dealing at arm's length; (iv) except for compensation payable under Section 7.8,
                                                                    -----------
increase any compensation payable to or benefit arrangement for any employee or
officer of the Company; (v) except for compensation payable under Section 7.8,
                                                                  -----------
tax distributions under Section 4.1(a), or repayment of the Sale Transaction
                        --------------
Notes or other loans made by the Members to the
<PAGE>

Company, make any distribution to the Members or cause the Company to purchase
the interest of any Member; (vi) except as provided under Section 10.9, cause
                                                          ------------
the Company to issue or consent to the transfer of any interest in the equity of
the Company or any of the Company's assets; (vii) mortgage, pledge or encumber
any asset of the Company; or (viii) admit additional Members to the Company.

          (c)  The Manager may from time to time delegate all or a portion of
her power and authority to individuals designated as officers of the Company,
which officers shall have only the power and authority granted to them in
writing by the Manager. The Manager may also remove any such officer or officers
from time to time or alter their power or authority. No delegation of power or
authority by the Manager under this Section 7.1(c) shall relieve the Manager of
                                    --------------
liability for her duties or responsibilities.

          (d)  Subject to the powers granted to the Manager under Section
                                                                  -------
7.1(c), J. A. Clark shall serve as the president and W. E. Clark shall serve as
------
the vice-president and chief financial officer of the Company. As president, J.
A. Clark shall (i) be the chief executive officer of the Company and have
general and active control of its affairs and business and general supervision
of its officers, agents and employees; and (ii) perform all other duties
normally incident to the office of president of a corporation. As vice-president
and chief financial officer, W. E. Clark shall have the primary responsibility
for product development and for management of the financial affairs of the
Company and shall assist the president and perform such other duties as may be
assigned to him by the president from time to time.

          (e)  Except for matters that require the approval of Artisan under
Section 7.1(b), all documents executed on behalf of the Company need only be
--------------
signed by the Manager, by an officer designated in Section 7.1(d) or by an
                                                   --------------
officer appointed pursuant to Section 7.1(c); provided, however, that an officer
                              --------------
other than the president, vice-president or chief financial officer of the
Company may only execute a document if (i) the execution of such document is
expressly authorized by a written instrument executed by the Manager or (ii) the
execution of the document would come within the apparent authority of an officer
of similar title and position in a Colorado corporation.  All documents that
relate to matters that require the approval of Artisan under Section 7.1(b)
                                                             --------------
shall be signed by the Manager and an officer of Artisan; provided, however,
that the Manager may act as the sole signatory on any documents that relate to
matters that require the approval of Artisan under Section 7.1(b) if the consent
                                                   --------------
from Artisan approving the action authorizes the Manager to sign all documents
required to carry out such action.

     7.2  Duties.  A Manager shall carry out his or her duties in good faith, in
          ------
a manner that the Manager believes to be in the best interests of the Company,
and with such care as an ordinarily prudent person in a like position would use
under similar circumstances.  A Manager who so performs his or her duties shall
not have any liability by reason of being or having been a Manager.

     7.3  Time Devoted to Business.  A Manager shall devote such time to the
          ------------------------
business
<PAGE>

of the Company as the Manager, in his or her discretion, deems necessary for the
efficient carrying on of the Company's business.

     7.4  Number.  Initially, there shall be one Manager.  A majority of the
          ------
Voting Interests may increase or decrease the number of Managers from time to
time.

     7.5  Tenure.  The initial Manager shall be J. A. Clark.  The Manager shall
          ------
hold office until she resigns, dies, becomes bankrupt or incompetent, or is
removed by a majority of the Voting Interests. If the Manager ceases for any
reason to act, W. E. Clark or, if he is unavailable or unwilling to act, a
successor Manager designated in writing by the Manager who acted most recently
shall act as Manager. If no Manager is appointed and acting pursuant to the
foregoing provisions of this Section 7.5, a majority of the Voting Interests
                             -----------
may elect a successor to fill such vacancy and serve as Manager.

     7.6  Reliance by Third Parties.  No third party dealing with the Company
          -------------------------
shall be required to ascertain whether a Manager is acting in accordance with
the provisions of this Agreement. All third parties may rely on a document
executed by the Manager as binding the Company. A Manager acting without
authority shall be liable to the Members for any damages arising out of its
unauthorized actions.

     7.7  Transactions Between Company and Manager.  Except as provided in
          ----------------------------------------
Section 7.1(b), the Manager, on behalf of the Company, may contract and deal
--------------
with a Manager, or cause any person or entity affiliated with a Manager to
contract or deal with the Company; provided that such contracts and dealings are
on terms comparable to and competitive with those available to the Company from
others dealing at arm's length or are approved in writing by all of the Voting
Members.

     7.8  Management Fees and Reimbursements.  The Manager and any officer of
          ----------------------------------
the Company shall be entitled to a reasonable management fee or salary for
managing the operations of the Company. The determination of a reasonable fee or
salary shall be made by a majority of the Voting Interests; provided, however,
prior to expiration of the Artisan Purchase Option under Section 10.10, the
                                                         -------------
management fee or salary payable to all Managers and officers who are Members of
the Company shall not exceed $250,000 per year without the written consent of
Artisan. Any fee paid under this Section 7.8 to a Manager or officer who is also
                                 -----------
a Member shall be treated as a guaranteed payment under section 707(c) of the
Code. Further, the Manager and any officer of the Company shall be reimbursed by
the Company for any reasonable out-of-pocket costs incurred on behalf of the
Company.

     7.9  Other Activities.  Except as permitted under the terms of the
          ----------------
Confidentiality and Non-Compete Agreement, a copy of which is attached as
Exhibit A, the Manager may not engage for his or her own account in any business
that competes directly with the business of the Company.

     7.10 Insurance.  The Company shall maintain for the protection of the
          ---------
Company and all of its Members such insurance as the Manager, in his or her sole
discretion, deems necessary for the operations being conducted.
<PAGE>

     7.11 Exculpation.  The Company shall indemnify and hold harmless the
          -----------
Manager, its officers, agents and employees against and from any personal loss,
liability, or damage incurred as a result of any act or omission, or any error
of judgment, unless such loss, liability, or damage results from such person's
willful misconduct, gross negligence, or knowing violation of law. Any such
indemnification shall be paid only from the assets of the Company, and no
Member, Manager, or third party shall have recourse against the personal assets
of any Member for such indemnification.

     7.12 Tax Matters Partner.  Pursuant to section 6231(a) of the Code, W. E.
          -------------------
Clark shall be designated as the tax matters partner for the Company, if the
Manager determines that such designation is necessary or appropriate, and he is
hereby authorized to perform, on behalf of the Company or any Member, any act
that may be necessary to make this designation effective.

                                   ARTICLE 8
                                   ---------
                                    MEMBERS

     8.1  Participation in Management.  Except as provided in Section 7.1(b), a
          ---------------------------                         --------------
Member, in its capacity as a Member, shall take no part in the control,
management, direction, or operation of the business or affairs of the Company
and shall have no power to bind the Company.

     8.2  Quorum.  A majority of the Voting Interests, represented in person or
          ------
by proxy, shall be necessary to constitute a quorum at meetings of the Members.
Each of the Members hereby consents and agrees that one or more Members may
participate in a meeting of the Members by means of conference telephone or
similar communication equipment by which all persons participating in the
meeting can hear each other at the same time, and such participation shall
constitute presence in person at the meeting. If a quorum is present, the
affirmative vote of a majority of the Voting Interests entitled to vote on the
subject matter shall be the act of the Members, unless a greater number is
required by the Act or this Agreement. In the absence of a quorum, those present
may adjourn the meeting for any period, but in no event shall such period exceed
sixty days.

     8.3  Informal Action.  Any action required or permitted to be taken at a
          ---------------
meeting of the Members may be taken without a meeting if the action is evidenced
by a written consent describing the action taken, signed by each Voting Member
entitled to vote. Action taken under this Section 8.3 is effective when all
                                          -----------
Voting Members entitled to vote have signed the consent, unless the consent
specifies a different effective date.

     8.4  Meetings.  The Members shall hold a formal business review meeting
          --------
("Business Review Meeting") on the 15th day following the last day of each
calendar quarter. At each Business Review Meeting the Members shall review and
discuss: (i) sales performance, (ii) marketing expenses as compared to the
Company's budget, (iii) operating expenses as compared to the Company's budget,
and (iv) such other matters as the Members deem appropriate. If the date of any
Business Review Meeting falls on a Saturday, Sunday, or legal holiday, the date
of such meeting shall be deferred until the next day which is not a
<PAGE>

Saturday, Sunday, or legal holiday. Other meetings of the Members for any
purpose or purposes may be called by the Manager or by holders of not less than
ten percent (10%) of all outstanding Voting Interests.

     8.5  Place of Meeting.  All meetings of the Members shall be held at the
          ----------------
registered office of the Company or such other place either within or without
Colorado as all of the Voting Members may determine.

     8.6  Notice of Meeting.  Written notice stating the place, day and hour of
          -----------------
the meeting and the purpose or purposes for which the meeting is called, shall
be delivered either personally or by mail, by or at the direction of the Manager
or other person(s) calling the meeting, to each Member.

     8.7  Proxies.  At all meetings of Members, a Voting Member may vote in
          -------
person or by proxy executed in writing by the Voting Member or by its duly
authorized attorney-in-fact. Such proxy shall be filed with the Manager of the
Company before or at the time of the meeting. No proxy shall be valid after
eleven months from the date of its execution, unless otherwise provided in the
proxy.

     8.8  Conduct of Meeting.  At each meeting of the Members, a Manager shall
          ------------------
serve as Chairman of the meeting. The Chairman shall preside over and conduct
the meeting and shall appoint someone in attendance to make accurate minutes of
the meeting. Following each meeting, the minutes of the meeting shall be sent to
each Manager and Member.

     8.9  Other Activities.  Except as permitted under the terms of the
          ----------------
Confidentiality and Non-Compete Agreement, a copy of which is attached as
Exhibit A, the Members may not engage for their own account in any business that
competes directly with the business of the Company.

                                   ARTICLE 9
                                   ---------
                           ACCOUNTING AND REPORTING

     9.1  Books.  The Company shall maintain complete and accurate books of
          -----
account. The Company shall use reasonable efforts to provide any Member with any
information requested relating to the business of the Company. During ordinary
business hours, any Member or its authorized representative shall have access to
all books, records, and materials regarding the Company and its activities.

     9.2  Capital Accounts.  The Company shall maintain a separate capital
          ----------------
account for each Member in accordance with the Treasury Regulations under
section 704(b) of the Code and such other accounts as may be necessary or
desirable to comply with the requirements of applicable law and regulations.

     9.3  Transfers During Year.  In order to avoid an interim closing of the
          ---------------------
Company's books, the share of profits and losses under Article 5 of a Member who
                                                       ---------
transfers part or all of its interest in the Company during the Company's
accounting year may be determined by
<PAGE>

taking its pro rata share of the amount of such profits and losses for the year.
The proration shall be based on the portion of the Company's accounting year
which has elapsed prior to the transfer or may be determined under any other
reasonable method as determined by the Manager; provided, however, that any gain
or loss from the sale of Company assets shall be allocated to the owner of the
Company interest at the time of such sale. The balance of the profits and losses
attributable to the Company interest transferred shall be allocated to the
transferee of such interest.

     9.4  Reports.  The books of account shall be closed promptly after the end
          -------
of each fiscal year. As soon as practicable thereafter, the Company shall
deliver a written report to each Member which shall include a statement of
receipts, expenditures, profits, and losses for the year, a statement of each
Member's capital account and such additional statements with respect to the
status of the Company's assets and the distribution of Company funds as are
necessary to advise the Members properly about their investment in the Company.
Prior to March 1st of each year, the Members shall also be provided with a copy
of the Company federal income tax return (Form 1065) to be filed for the
preceding year.

     9.5  Section 754 Election.  In connection with the interest in the Company
          --------------------
acquired by Artisan in the Sale Transaction, the Members agree that the Company
shall make the election provided for under section 754 of the Code. The Members
agree the increase in basis resulting from the election under section 754 of the
Code shall be allocated among the Company's capital assets and property
described in section 1231(b) of the Code, on the one hand, and other property of
the Company, on the other, in the manner provided on the attached Exhibit B. Any
cost attributable to making such election shall be borne solely by the
requesting Member.

     9.6  Partnership Classification.  The Manager on behalf of the Company
          --------------------------
shall endeavor to make (or refrain from making, as applicable) all reasonable
and appropriate filings, applications or elections and take (or refrain from
taking, as applicable) all other reasonable and appropriate actions to the
extent required to ensure that the Company is classified as a "partnership" for
federal income tax purposes as of the date of its formation, and shall
thereafter endeavor to take (or refrain from taking, as applicable) all
reasonable additional actions required to ensure that the Company retains its
classification as a "partnership" for federal income tax purposes for so long as
Artisan holds a Sharing Ratio of at least 20%.

                                  ARTICLE 10
                                  ----------
                       TRANSFERS; RIGHT OF FIRST REFUSAL

     10.1 Restrictions. Except as provided in Section 10.12, a Member shall not
          ------------                        -------------
sell, assign, pledge or otherwise transfer all or any portion of its interest in
the Company without the written consent of all of the Voting Members (which
consent may be withheld in the absolute discretion of each Voting Member).  Any
transfer or attempted transfer in violation of this restriction shall be void.

     10.2 Offer to Company.  Except as provided in Section 10.12, if at any time
          ----------------                         -------------
any
<PAGE>

Member ("the Offeror") receives a bona fide written offer from an unrelated
             -------
third-party, pursuant to which the Offeror proposes to sell, assign, or
otherwise dispose of all or any part of its interest in the Company (the
"Offered Interest"), the Offeror shall make a written offer (the "Offer") to
 ----------------                                                 -----
sell the Offered Interest to the Company on the same terms and conditions set
forth in the written offer received from the proposed transferee. The Offer
shall state the name of the proposed transferee and all of the terms and
conditions of the proposed transfer, including the price and form of
consideration to the proposed transferee, and a copy of the written offer
received from the proposed transferee shall be attached.

     10.3 Acceptance of Offer.  The Company shall have the right for a period of
          -------------------
30 days after delivery of the Offer, or such longer period as may be required
under Section 10.5, to elect to purchase all of the Offered Interest. To
      ------------
exercise its rights of purchase, the Company shall deliver written notice to the
Offeror.

     10.4 Failure to Accept Offer.  If the Company does not elect to purchase
          -----------------------
all of the Offered Interest within the applicable time period set forth in
Section 10.3, the Offeror may transfer the Offered Interest to the proposed
------------
transferee named in the Offer.  However, if that transfer is not closed within
90 days after the end of the applicable time period set forth in Section 10.3, a
                                                                 ------------
new Offer shall be made to the Company and the provisions of this Article 10
                                                                  ----------
shall again apply.

     10.5 Cash Equivalents.  If the written offer received from the proposed
          ----------------
offeree described in Section 10.2 is for consideration other than cash or cash
                     ------------
plus deferred payments of cash, the Company may pay the cash equivalent of such
other consideration.  The Offeror and the Company shall attempt to agree upon a
cash equivalent of such other consideration.  If they cannot agree within 20
days after the beginning of the 30-day period under Section 10.3, the Company or
                                                    ------------
the Offeror may, by five days' written notice to the other, initiate arbitration
proceedings for determination of the cash equivalent consideration (without
regard to the income tax consequences to the Offeror as a result of receiving
cash rather than the other consideration).  The Company may elect to purchase
the Offered Interest at the determined cash equivalent amount by delivering
notice of such election to the Offeror within ten days after the arbitrator's
final decision.

     10.6 Direct and Indirect Transfers.  For purposes of this Agreement,
          -----------------------------
restrictions upon the transfer of a Member's interest in the Company shall
extend to any direct or indirect transfer including, without limitation, an
involuntary transfer such as a transfer pursuant to a foreclosure sale or a
transfer resulting by operation of law.

     10.7 Substitution of a Member.
          ------------------------

          (a)  Except as provided in Section 10.12, no assignee, legatee, or
                                     -------------
transferee (by conveyance, operation of law, or otherwise) of the whole or any
portion of a Member's interest in the Company shall have the right to become a
substituted Member without the written consent of all of the Voting Members
(which consent may be withheld in the absolute discretion of each Voting
Member). A substituted Member shall succeed to all the rights and interest of
its assignor in the Company. An assignee of a Member who is not admitted as a
<PAGE>

Member shall be entitled only to the distributions to which its assignor would
otherwise be entitled.

          (b)  Except as otherwise provided in this Section 10.7(b), if a Non-
                                                    ---------------
Voting Member shall die, the Non-Voting Member's executor, administrator, or
trustee, or if a Non-Voting Member shall be adjudicated insane or incompetent,
the Non-Voting Member's committee, conservator, or representative, or if a Non-
Voting Member shall be dissolved, merged, or consolidated, the Non-Voting
Member's successor in interest shall have the same rights and obligations that
such Non-Voting Member would have had if the Non-Voting Member had not died,
been adjudicated insane or incompetent, or dissolved, merged or consolidated,
except that the executor, administrator, trustee, committee, conservator,
representative, or successor shall not become a substituted Non-Voting Member
without the written consent of the Voting Members (which consent may be withheld
in the absolute discretion of each Voting Member). If a Voting Member shall die,
the Voting Member's executor, administrator, or trustee, or if a Voting Member
shall be adjudicated insane or incompetent, the Voting Member's committee,
conservator, or representative, or if a Voting Member shall be dissolved,
merged, consolidated, or experience a change in control, the Voting Member's
successor in interest shall have the same rights and obligations that such
Voting Member would have had if the Voting Member had not died, been adjudicated
insane or incompetent, or dissolved, merged, consolidated, or experienced a
change in control, and such Voting Member's executor, administrator, trustee,
committee, conservator, representative, or representative shall constitute a
substituted Voting Member for purposes of this Agreement.

          (c)  No transfer of any interest in the Company otherwise permitted
under this Agreement shall be effective for any purpose whatsoever until the
transferee shall have assumed the transferor's obligations to the extent of the
interest transferred and shall have agreed to be bound by all the terms and
conditions hereof, by written instrument, duly acknowledged, in form and
substance reasonably satisfactory to the Manager.

     10.8 Conditions to Substitution.  As conditions to admission as a Member
          --------------------------
(i) any assignee, legatee, transferee, or successor of a Member shall execute
and deliver such instruments, in form and substance satisfactory to all of the
Voting Members, as the Voting Members shall deem necessary and (ii) such
assignee, legatee, transferee, or successor shall pay all reasonable expenses in
connection with its admission as a substituted Member.

     10.9 Waiver as to Certain Transfers.  Notwithstanding the foregoing
          ------------------------------
provisions of this Article 10, the restrictions on transfer of this Article 10
                   ----------                                       ----------
shall not apply to: (a) a distribution of an interest in the Company to the
beneficial owners of a Member which is a trust; (b) a transfer by gift during
lifetime or at death of all or any portion of a Member's interest to any other
Member or the descendants of any Member, whether outright or in trust or custody
for the benefit of any other Member or descendants of such Member; (c) the grant
of "phantom equity interests" to employees or independent contractors; provided
that the grant does not dilute Artisan's equity interest or affect Artisan's
rights under this Agreement; further provided that such "phantom equity
interests" shall be non-transferable and subject to Section 10.10 of this
                                                    -------------
Agreement; or (d) a transfer by Artisan to a parent corporation or wholly-owned
subsidiary of a parent of Artisan.  Notwithstanding anything to the contrary in
this Section
     -------
<PAGE>

10.9, the provisions of Section 10.7 and Section 10.8 shall apply to any
-----                   ------------
distribution, transfer, or grant permitted under this Section 10.9.
                                                      ------------

     10.10  Artisan Purchase Option.
            -----------------------

            (a)  Commencing on January 1, 2001, and ending on the later of March
31, 2001 or 30 days following delivery of audited financial statements for the
Company's fiscal year ending on December 31, 2000 (the "Artisan Option Period"),
                                                        ---------------------
Artisan shall have an option (the "Artisan Purchase Option") to elect to
                                   -----------------------
purchase all other Members' interests in the Company and any employees' or
independent contractors' phantom equity interests at the Artisan Purchase Price
(as defined in Section 10.10(b)).  To exercise the Artisan Purchase Option,
               ----------------
Artisan shall give written notice to the Manager prior to expiration of the
Artisan Option Period.

            (b)  The "Artisan Purchase Price" shall be equal to *.

            (c)  If Artisan elects to exercise the Artisan Purchase Option, the
sale shall be closed within 90 days following the last day of the Artisan Option
Period at a time and place to be mutually agreed upon by the parties, and, in
the absence of agreement, the closing shall be held at the Company's registered
office at 10:00 a.m. on the 90th day following the last day of the Artisan
Option Period. Immediately prior to closing, the Company shall make a "Purchase
Option Closing Distribution" (as defined in the Purchase Agreement) in order
that the Company is free of debt and cash as of the closing. The Purchase Option
Closing Distribution shall be subject to adjustment as described in section 7.24
of the Purchase Agreement. At the closing: (i) the Members other than Artisan
and any employees and independent contractors holding phantom equity interests
shall execute such documents as necessary to effectively transfer their
interests in the Company to Artisan; and (ii) Artisan shall pay the Artisan
Purchase Price and any adjustment thereto in immediately available funds.

            (d)  If Artisan elects to exercise the Artisan Purchase Option,
Artisan shall have the right, in its sole discretion, to terminate the Company's
employment relationship with any Member who is employed as a Manager or officer
of the Company or to continue any such employment relationship upon terms to be
mutually agreed upon between the parties. If Artisan elects to terminate the
Company's employment relationship with any Member employed as a Manager or
officer of the Company, at closing of the Artisan Purchase Option such Member
shall enter into a non-compete agreement containing such terms as outlined in
the closing documents for the Sale Transaction. If Artisan elects to continue
the Company's employment relationship with any Member employed as a Manager or
officer of the Company, the parties shall negotiate an employment agreement in
good faith that includes such cash and other compensation as commensurate with
the Member's duties and responsibilities and which is agreeable to the parties.

     10.11  Company Call Option.
            -------------------

            (a)  In the event that Artisan does not elect to exercise the
Artisan Purchase Option, the Company shall have an option (the "Company Call
                                                                ------------
Option"), for a period of one
-------
<PAGE>

year commencing on the day following expiration of the Artisan Option Period
(the "Company Option Period"),to elect to purchase all Artisan's interest in the
      ---------------------
Company at the Company Purchase Price (as defined in Section 10.11(b)). To
                                                     ----------------
exercise the Company Call Option, the Company shall give written notice to
Artisan prior to expiration of the Company Option Period.

            (b)  The "Company Purchase Price" shall be equal to *.

            (c)  If the Company elects to exercise the Company Call Option, the
sale shall be closed within 90 days following the last day of the calendar
quarter in which the Company gives written notice of its election to exercise
the Company Call Option at a time and place to be mutually agreed upon by the
parties, and, in the absence of agreement, the closing shall be held at the
Company's registered office at 10:00 a.m. on the 90th day following the last day
of the calendar quarter in which the Company gives written notice of its
election to exercise the Company Call Option. At the closing: (i) Artisan shall
execute such documents as necessary to effectively transfer its membership
interest to the Company; and (ii) the Company shall pay the Company Purchase
Price in immediately available funds.

     10.12  Tag-Along/Drag-Along Rights.
            ---------------------------

            (a) Notwithstanding anything to the contrary in this Article 10, if
                                                                 ----------
the Company does not elect to exercise the Company Call Option, upon expiration
of the Company Option Period J. A. Clark and W. E. Clark shall be free to enter
into a "Sale" (as defined in the Purchase Agreement) with a third party (the
"Buyer") at a price and upon such terms as they may negotiate.  Upon entering
 -----
into an agreement for a Sale of their interests in the Company to the Buyer, J.
A. Clark and W. E. Clark shall give Artisan written notice (the "Sale Notice")
                                                                 -----------
of the name of the Buyer and all of the terms and conditions of the proposed
Sale, including the price and form of consideration to the Buyer, and a copy of
any written offer received from the Buyer.

            (b)  Artisan shall have the right for a period of 30 days (the "Tag-
                                                                            ---
Along Option Period") after delivery of the Sale Notice to elect to sell (the
-------------------
"Tag-Along Right")  a proportionate share of its interest in the Company (the
----------------
"Artisan Percentage") at the Sale Price (as defined in Section 10.12(d)) to the
-------------------                                    ----------------
Buyer identified in the Sale Notice.  The Artisan Percentage shall be the
product of Artisan's Sharing Ratio multiplied by a fraction, the numerator of
which is the Sharing Ratio being sold to the Buyer and the denominator of which
is the Sharing Ratios of those Members participating in the sale (the "Selling
                                                                       -------
Members").  To exercise the Tag-Along Right, Artisan shall give written notice
-------
to the Selling Members prior to expiration of the Tag-Along Option Period.  If
Artisan elects to exercise the Tag-Along Right, unless the Selling Members have
agreed otherwise with the Buyer, the Sharing Ratio being sold by the Selling
Members shall be reduced by an amount equal to the Artisan Percentage and the
sale to the Buyer shall be closed according to the terms set forth in the Sale
Notice.

            (c)  In the event that Artisan does not elect to exercise the Tag-
Along Right, the Selling Members shall have the right for a period of 30 days
(the "Drag-Along Option Period") after expiration of the Tag-Along Option Period
      ------------------------
to elect to have Artisan participate
<PAGE>

and sell (the "Drag-Along Right") the Artisan Percentage at the Sale Price (as
               ----------------
defined in Section 10.12(d)) to the Buyer identified in the Sale Notice. To
           ----------------
exercise the Drag-Along Right, the Selling Members shall give written notice to
Artisan prior to expiration of the Drag-Along Option Period. If Selling Members
elect to exercise the Drag-Along Right, unless the Selling Members have agreed
otherwise with the Buyer, the Sharing Ratio being sold by the Selling Members
shall be reduced by an amount equal to the Artisan Percentage and the sale to
the Buyer shall be closed according to the terms set forth in the Sale Notice.

          (d)  For purposes of this Section 10.12, the "Sale Price" shall mean
                                    -------------
an amount equal to the greater of: (i) the Artisan Percentage times the purchase
price paid by Artisan in the Sale Transaction; or (ii) the Artisan Percentage
times the price to the Buyer as set forth in the Sale Notice.

                                  ARTICLE 11
                                  ----------
                                     TERM

     Notwithstanding any provision of the Act, the Company shall have indefinite
duration and shall continue until dissolved by the unanimous written consent of
all of the Voting Members.

                                  ARTICLE 12
                                  ----------
                          DISSOLUTION AND TERMINATION

     12.1 Final Accounting.  In the event of the dissolution of the Company, a
          ----------------
proper accounting shall be made as provided in Section 9.4 from the date of the
                                               -----------
last previous accounting to the date of dissolution.

     12.2 Liquidation.  Upon the dissolution of the Company, the Manager or, if
          -----------
the Manager is unable to act, some person selected by the Voting Members whose
Sharing Ratios comprise more than 50 percent of the combined Sharing Ratios of
the Voting Members, shall act as liquidator to wind up the Company. The
liquidator shall have full power and authority to sell, assign, and encumber any
or all of the Company's assets and to wind up and liquidate the affairs of the
Company in an orderly and businesslike manner. All proceeds from liquidation
shall be distributed in the following order of priority: (i) to the payment of
debts and liabilities of the Company and the expenses of liquidation; (ii) to
the setting up of such reserves as the liquidator may reasonably deem necessary
for any contingent liabilities of the Company; and (iii) to the Members in
accordance with Section 4.2.
                -----------

     12.3 Distribution in Kind.  If the liquidator shall determine that a
          --------------------
Company asset should be distributed in kind, the liquidator shall obtain an
independent appraisal of the fair market value of the asset as of a date
reasonably close to the date of liquidation. Any unrealized appreciation or
depreciation with respect to such asset shall be allocated among the Members (in
accordance with the provisions of Article 5 assuming that the asset were sold
                                  ---------
for the appraised value) and taken into consideration in determining the balance
in the Members' capital accounts as of the date of liquidation.  Distribution of
any such asset in kind to a Member shall be considered a distribution of an
amount equal to the asset's fair market value
<PAGE>

for purposes of Section 12.2. The liquidator, in its sole discretion, may
                ------------
distribute any percentage of any asset in kind to a Member even if such
percentage exceeds the percentage in which the Member shares in distributions;
provided that the sum of the cash and fair market value of all the assets
distributed to each Member equals the amount of the distribution to which each
Member is entitled.

     12.4 Waiver of Right to Court Decree of Dissolution.  The Members agree
          ----------------------------------------------
that irreparable damage would be done to the Company if any Member brought an
action in court to dissolve the Company or partition its assets.  Accordingly,
each of the Members accepts the provisions of this Agreement as its sole
entitlement during the term of and upon the termination of its membership in the
Company.  Each Member hereby waives and renounces its right to seek a court
decree of dissolution, to seek the appointment by a court of a liquidator for
the Company, or to seek a partition of Company assets.

     12.5 Articles of Dissolution.  Upon the completion of the distribution of
          -----------------------
Company assets as provided in this Article 12, the Company shall be terminated
                                   ----------
and the person acting as liquidator shall file articles of dissolution and shall
take such other actions as may be necessary to terminate the Company.

                                   ARTICLE 13
                                   ----------
                                    NOTICES

     13.1 Method of Notices.  All notices required or permitted by this
          -----------------
Agreement shall be in writing and shall be hand delivered, sent by registered or
certified mail (postage prepaid), or by facsimile or electronic mail (the
receipt of which is acknowledged in writing, including by facsimile of
electronic mail), and shall be effective when received or, if mailed, on the
earlier of (i) the date set forth on the receipt of registered or certified mail
or (ii) the fifth day after mailing.

     13.2 Computation of Time.  In computing any period of time under this
          -------------------
Agreement, the day of the act, event, or default from which the designated
period of time begins to run shall not be included.  The last day of the period
so computed shall be included, unless it is a Saturday, Sunday, or legal
holiday, in which event the period shall run until the end of the next day which
is not a Saturday, Sunday, or legal holiday.

                                   ARTICLE 14
                                   ----------
                               GENERAL PROVISIONS

     14.1 Entire Agreement.  This Agreement embodies the entire understanding
          ----------------
and agreement among the parties concerning the Company and supersedes any and
all prior negotiations, understandings, or agreements in regard thereto.

     14.2 Amendment.  This Agreement may only be amended with the unanimous
          ---------
written consent of the Voting Members.  No rights hereunder may be waived except
by an instrument in writing signed by the party sought to be charged with such
or waiver.
<PAGE>

     14.3 Applicable Law.  This Agreement shall be construed in accordance with
          --------------
and governed by the laws of the State of Colorado.

     14.4 Pronouns.  References to a Member or to a Manager, including by use of
          --------
a pronoun, shall be deemed to include the masculine or feminine, the singular or
plural, and individuals or entities where applicable.

     14.5 Counterparts.  This instrument may be executed in any number of
          ------------
counterparts, each of which shall be considered an original.

[SIGNATURE PAGE TO FOLLOW]
<PAGE>

     IN WITNESS WHEREOF the parties have executed this Agreement to be effective
as of the date first above written.

               MEMBERS:
               -------

               /s/ Julie A. Clark
               -----------------------------  Date: February 4, 2000
               Julie A. Clark                       ----------------

               /s/ William E. Clark
               -----------------------------  Date: February 4, 2000
               William E. Clark                     -----------------

               ARTISAN ENTERTAINMENT INC.,
                  a Delaware corporation

               By: /s/ Ken Schapiro           Date: February 4, 2000
                  -------------------------         ----------------
               Name:
                    -----------------------
               Title:  EVP
                     ----------------------

               MANAGER:
               -------
               /s/ Julie A. Clark             Date: Februray 4, 2000
               ----------------------------         ----------------
               Julie A. Clark
<PAGE>

                                   EXHIBIT B

                            I.R.C. (S) 754 Election:

                                Basis Allocation

                   Capital Assets/I.R.C. (S) 1231(b) Property
                   ------------------------------------------

*
<PAGE>

                                   EXHIBIT D
February 4, 2000
Artisan Entertainment, Inc.
2700 Colorado Avenue
Santa Monica, CA 90404

Attention:  Mr. Ken Schapiro

Re:  Purchase Agreement, dated as of February 4, 2000, by and among
     The Baby Einstein Company, LLC, Julie Aigner-Clark, William Clark
     and Artisan Entertainment, Inc. (the "Purchase Agreement")

Ladies and Gentlemen:

We have acted as counsel to The Baby Einstein Company, LLC, a Colorado limited
liability company (the "Company"), and the Sellers in connection with the
                        -------
transaction (the "Transaction") provided for by the Purchase Agreement.  This
                  -----------
opinion is being delivered to you pursuant to Section 2.2(b)(v)(C) of the
Purchase Agreement.  Capitalized terms used but not defined herein have the
meanings ascribed thereto in the Purchase Agreement.

                               MATERIAL EXAMINED
                               -----------------

In connection with this opinion, we have examined the following documents:

i.   The Purchase Agreement;

ii.  The amendment to the Operating Documents, as set forth in Section
     2.2(b)(iv) of the Purchase Agreement;

iii. The Distribution Agreement;

iv.  Photocopies of the articles of organization and operating agreement of the
     Company and applicable member resolutions of the Company pertaining to the
     transactions provided for by the Purchase Agreement, certified as being
     complete, true and correct by the Manager of the Company; and

v.   Certificate issued by the Colorado Secretary of State, dated as of January
     14, 2000, relating to the good standing of the Company in the State of
     Colorado (a copy of which is attached hereto).

The documents listed in paragraphs i through iii are referred to herein
individually as a "Transaction Document" and collectively as the "Transaction
                   --------------------                           -----------
Documents."
---------

We have also examined originals or photocopies of such other corporate documents
and
<PAGE>

records of the Company, certificates of public officials relating to the
Company and certificates of the Manager of the Company as we have deemed
necessary as a basis for the opinions expressed herein.  As to all factual
matters material to the opinions expressed herein, we have (with your permission
and without any investigation or independent verification) relied upon, and
assumed the accuracy and completeness of, such certificates and corporate
records and the representations and warranties contained in the Transaction
Documents.

                                  ASSUMPTIONS
                                  -----------

In connection with this opinion, we have, with your consent and without
investigation or independent verification, assumed the following:

     a.   With respect to all parties who are parties to the Transaction
          Documents other than the Company:

          (1)  The Transaction Documents have been duly authorized, executed and
               delivered by such parties, and all such documents and instruments
               constitute legal, valid and binding obligations of such parties
               enforceable against such parties in accordance with their
               respective terms;

          (2)  Neither the execution, the delivery nor the performance of the
               Transaction Documents by any such party will result in any
               violation of or be in conflict with or constitute a default under
               the charter, bylaws or other governing documents of such party,
               or any other document or instrument to which such party is a
               party the consequences of which would affect the validity,
               binding effect or enforceability of the Transaction Documents or
               the performance by such party of its obligations thereunder;

          (3)  No such party is in violation of any order, judgment or decree of
               any court, arbiter or arbitration panel or governmental
               authority, the consequences of which would affect the validity,
               binding effect or enforceability of the Transaction Documents or
               the performance by such party of its obligations thereunder;

          (4)  Such parties are not subject to any special laws, regulations or
               other restrictions that are not generally applicable to parties
               participating in transactions of the type provided for by the
               Transaction Documents and that would affect the validity, binding
               effect or enforceability of the Transaction Documents or the
               performance by such parties of their obligations thereunder; and

          (5)  Such parties are, to the extent necessary, duly formed entities
               and are duly qualified to transact business in Colorado.
<PAGE>

          b.   All signatures (except signatures on behalf of the Company) are
               genuine, all documents and instruments submitted to us as
               originals are authentic and all documents and instruments
               submitted to us as photocopies, telecopies or facsimiles conform
               to the original documents and instruments.

          c.   To the extent the Transaction Documents are governed by laws
               other than the State of Colorado, the Transaction Documents are
               legal, valid and binding and are enforceable in accordance with
               their respective terms .

                                    OPINION
                                    -------

Based solely upon the foregoing and subject to the comments, qualifications and
other matters set forth herein, we are of the opinion that:

     1.  The Company is a limited liability company validly existing, in good
         standing and duly qualified to transact business under the laws of the
         State of Colorado.

     2.  The Company has the requisite limited liability company power and
         authority to conduct its business as presently being conducted, to
         enter into the Transaction Documents to which it is a party and to
         perform its obligations thereunder.

     3.  The Transaction Documents to which the Company is a party have been
         duly authorized by all requisite limited liability company action on
         the part of the Company, have been duly executed and delivered by the
         Company, and constitute the legal, valid and binding obligations of the
         Company, enforceable against the Company in accordance with their
         respective terms.

     4.  The execution and delivery by the Company of the Transaction Documents
         to which it is a party do not, and performance by the Company of its
         obligations thereunder will not, violate, breach or result in a default
         under (a) its articles of organization or its operating agreement, (b)
         the provisions of any United States federal or State of Colorado law,
         rule or regulation known to us to be applicable to the Company, (c) any
         judgment or order of any United States federal or State of Colorado
         governmental authority known to us and binding upon the Company, or (d)
         any contract or agreement listed on Schedule I hereto.

     5.  Schedule II attached to this opinion correctly sets forth the
         Membership Interests in the Company, and all of the outstanding
         Membership Interests in the Company have been duly authorized.

     6.  To our knowledge, there are no outstanding options for the purchase of,
         or any agreements providing for the issuance (contingent or otherwise)
         of, or any commitments or claims of any character relating to, any of
         the Company's Membership Interests or any obligations (contingent or
         otherwise) of the Company to repurchase, exchange or otherwise acquire
         or retire any
<PAGE>

         Membership Interests.

                          COMMENTS AND QUALIFICATIONS
                          ---------------------------

The foregoing opinions are limited by, subject to and based upon the following
comments and qualifications:

     A.  Factual Matters.  With respect to certain factual matters relating to
         ---------------
         the opinions expressed herein we have relied, without independent
         investigation, upon the certificates of the Manager of the Company
         attached hereto. In particular, please note that our opinions set forth
         in clauses "(c)" and "(d)" of paragraph 4 and paragraph 6 are based on
         such certificates. Without limiting the generality of the foregoing, we
         note that we do not generally represent the Company with respect to
         litigation matters and, accordingly, our opinions set forth in
         paragraph 4(c) above are based solely on a certificate of the Manager
         of the Company attached hereto.

     B.  Existence, Good Standing and Due Qualification to Transact Business.
         -------------------------------------------------------------------
         The opinions expressed herein with respect to the Company's existence,
         good standing and due qualification to transact business are based
         solely upon the good standing certificate reviewed by us and described
         in the Material Examined.

     C.  Tax, Anti-Trust and Securities Laws.  In rendering the opinions
         -----------------------------------
         expressed herein we have made no examination of and express no opinion
         with respect to the characterization of the Transaction under federal,
         state or local tax laws and regulations or the tax liabilities of the
         parties with respect thereto, as to matters of any federal or state
         anti-trust laws, or as to matters of federal or state securities laws.

     D.  Equitable Principles and Remedies.  The Transaction Documents are
         ---------------------------------
         subject to general principles of equity (whether considered in a
         proceeding in equity or at law), including without limitation, concepts
         of materiality, reasonableness, good faith and fair dealing and to the
         discretion of the court before which any proceeding therefor may be
         brought, and public policy considerations. Certain remedies, waivers
         and other provisions of the Transaction Documents may be limited,
         affected or rendered unenforceable by applicable law and judicial
         decisions; however such laws and decisions should not render the
         Transaction Documents invalid as a whole. Without limiting the
         generality of the foregoing, no opinion is expressed herein with
         respect to (i) provisions in the Transaction Documents that provide for
         arbitration, provide for penalties or liquidated damages or appoint one
         party as attorney-in-fact for an adverse party, or (ii) any
         indemnification provision that relieves or would purport to relieve any
         party from its obligation to mitigate damages or indemnifies or
         purports to indemnify a party from its own negligence, willful or
         intentional misconduct, intentional torts or criminal or other unlawful
         acts, or with respect to criminal
<PAGE>

         penalties or exemplary or punitive damages.

     E.  Bankruptcy, etc.  The Transaction Documents may be limited, affected
         ----------------
         or rendered unenforceable by federal or state bankruptcy, insolvency,
         reorganization, fraudulent conveyance, moratorium or other statutes or
         rules of law affecting creditors' rights generally.

     F.  Performance.  To the extent that operation of the Company's business
         -----------
         constitutes "performance" by the Company of its agreements in the
         Transaction Documents, various notices, filings, registrations,
         consents, authorizations, approvals and other acts may be required with
         various governmental authorities or regulatory bodies or third parties.
         We express no opinion as to whether such notices, filings,
         registrations, consents, authorizations, approvals or other acts have
         been made, obtained or done or will be made, obtained or done. We
         express no opinion as to compliance by the Company with any requirement
         of laws, rules, regulations, orders, judgments, writs, injunctions or
         decrees in the operation of its business or with any contract or
         agreement to which the Borrower may be a party or which affects or
         binds its properties.

     G.  Additional Documents and Instruments.  The Transaction Documents make
         ------------------------------------
         reference to documents and instruments not examined by us in connection
         with this opinion. The opinions expressed herein are subject to the
         matters that would be revealed by an examination of such documents and
         instruments.

     H.  Knowledge.  In connection with the opinions expressed herein as being
         ---------
         limited to "our knowledge," "known to us" or words of similar import,
         our examination has been limited to discussions with representatives of
         the Company in the course of the Transaction, review of the
         certificates of the Manager of the Company attached hereto, and the
         actual knowledge of those lawyers in this firm with active involvement
         in negotiating the Transaction and in preparing or commenting on any of
         the Transaction Documents or in preparing this opinion, but without any
         other investigation or inquiry or any review of court or other public
         records.

     I.  Choice of Law and Forum.  We express no opinion as to the
         -----------------------
         enforceability of any choice of law or choice of forum or venue
         provision or consent to jurisdiction contained in any of the
         Transaction Documents. We note that the Transaction Documents generally
         provide that they are governed by the laws of the State of California.
         For the purpose of this opinion and with your consent, we have assumed
         that, notwithstanding such provisions, the substantive laws of the
         State of Colorado will govern the Transaction Documents and the
         validity, binding effect and enforceability thereof.

     J.  Law Limitation.  The opinions expressed herein are limited to the laws
         --------------
         of the State of Colorado and the federal laws of the United States of
         America.
<PAGE>

         The opinions expressed herein are rendered as of the date hereof. We do
         not undertake to advise you of matters that may come to our attention
         subsequent to the date hereof and that may affect the opinions
         expressed herein, including without limitation, future changes in
         applicable law. This letter is our opinion as to certain legal
         conclusions as specifically set forth herein and is not and shall not
         be deemed to be a representation or opinion as to any factual matters.
         The opinions expressed herein may be relied upon only by the addressee
         hereof and its counsel in connection with the Transaction. Without our
         prior written consent, this opinion may not be quoted in whole or in
         part or otherwise used or referred to in connection with any other
         transactions and may not be furnished to or filed with any governmental
         agency or other person or entity without the prior written consent of
         this firm.

         Very truly yours,

         HOLME ROBERTS & OWEN LLP

         By: /s/ Charles A. Ramunno
             -------------------------------
                 Charles A. Ramunno, Partner

         cc: William Clark
             Julie Aigner-Clark
<PAGE>

                                   Schedule I
                                   ----------

                            Contracts and Agreements
                            ------------------------

(Reproduced from Schedule 3.12(a) of the Purchase Agreement)

Employment Term Sheets with Jeffrey Mettais, Pamela Peccolo, Kathy Burr and
Terry Blank (start date 2/2/00), including salary, medical benefits, if any,
401(k) program and company matching, and holiday schedule.  The Mettais, Burr,
Peccolo and Blank agreements have been previously provided to Buyer.  The
Company's Employment Term Sheet and employment practices are further described
in Schedule 3.17 of the Purchase Agreement.

Group medical coverage is offered to every employee.

In 1998 while still a sole proprietorship, the Company established a pension
plan through Benetech consisting of a Money Purchase Plan and a Profit-Sharing
Plan. The contribution calculation statements dated February 25, 1999, has been
previously provided to Buyer.  When the Company incorporated as a Limited
Liability Company (LLC) on April 30, 1999, Benetech made the required revisions
to the pension plan.  Effective May 1, 1999 the Profit-Sharing Plan was
converted into a 401(k) Plan.  On January 1, 2000, the Money Purchase Plan was
merged with the 401(k) Plan.  Copies of the Company's Money Purchase Plan and
401(k) Plan have been previously provided to Buyer.  A copy of the most recent
IRS determination letter and the year-end statement for the pension plan
brokerage account, dated December 31, 1999, is attached in Schedule 3.17 of the
Purchase Agreement.

License with The Hebrew University of Jerusalem for use of certain rights in the
name and mark "Einstein," a copy of has been previously provided to Buyer.  See
Schedule 3.8 of the Purchase Agreement for additional information.

Baby Mozart and Baby Bach Music Development and Royalty agreements with William
Weisbach, previously provided to Buyer.  Form of and drafts of revised Music
Development and Royalty Agreement and associated Purchase Option Agreement,
previously provided to Buyer directly to Artisan for comment.

Equipment lease with Wells Fargo Equipment Leasing for video production
equipment, previously provided to Buyer.  The lease is personally guaranteed by
Julie and William Clark.

Videotape duplication pricing agreements with Reel Picture and WRS, previously
provided to Buyer.

Distribution agreements with Penton Overseas and Fast Forward Marketing, Inc.,
previously provided to Buyer.

Verbal agreement with Mark Burr to retain Burr at a rate of $5,000 per month as
an
<PAGE>

independent contractor providing video production services.  This amount was
included in budget prepared by the Company for 2000 and previously provided to
Buyer in the Company's FY 00 Business Plan.

In 1999, the Company sold Penton Overseas approximately $843,800 in product. In
August 1999, Valley Media, a Penton account, became a direct account of the
Company.  In January 2000, Learningsmith, another Penton account, declared
bankruptcy. 62 Learningsmith stores have been sold to The Store of Knowledge and
The Discovery Stores, both direct accounts of the Company.  Also see Schedules
 .3.7, 3.8 and 3.10 of the Purchase Agreement for related information.

Usage agreement with J. D. Marsden for Baby Shakespeare photos, previously
provided to Buyer.

Usage agreement with University Press of New England for use of James Wright's
poem, "Lying in a Hammock at William Duffy's Farm in Pine Island, Minnesota,"
used in Baby Shakespeare, previously provided to Buyer.

Usage agreement with Casarotto Ramsay & Associates Limited for use of Tennessee
William's, "Heavenly Grass," used in Baby Shakespeare, previously provided to
Buyer.

Usage agreement with Simon & Schuster, Inc. for use of W. B. Yeat's poem, "The
Cat and the Moon," used in Baby Shakespeare, previously provided to Buyer.

Usage agreement with Holy Cow! Press. for use of Ray A. Young Bear's poem,
"Wadasa Nakamoon," used in Baby Shakespeare, previously provided to Buyer.

Usage agreement with Pearson Education for use of Rowena Bennett's poem, "A
Modern Dragon," used in Baby Shakespeare, previously provided to Buyer.

Usage agreement with Steve Crow for use of his poem, "Revival," used in Baby
Shakespeare, previously provided to Buyer.

Usage agreement with Henry Holt and Company for use of Robert Frost's poem,
"Nothing Gold Can Stay," used in Baby Shakespeare, previously provided to Buyer.

Usage agreement with Random House, Inc. for use of Langston Hughes' poem, "My
Loves," used in Baby Shakespeare, previously provided to Buyer.

Usage agreement with Houghton Mifflin for use of Galway Kinnel's poem, "The
Apple Tree," used in Baby Shakespeare, previously provided to Buyer.

Settlement Agreement with Deborah Lynn Friedman and Sounds Write Productions for
the unauthorized publication of a composition, previously provided to Buyer.

Various permission forms for children appearing in Baby Einstein, Baby Mozart,
Baby Bach
<PAGE>

and Baby Shakespeare, previously provided to Buyer.

Distribution License with Comtec Co. Ltd, Japan, previously provided to Buyer.

Distribution License with Ex-Over, Israel, previously provided to Buyer.

Distribution License with Tinman Consulting Ltd, New Zealand, previously
provided to Buyer.

Distribution License with Sidney Rose/Associates, South Africa, previously
provided to Buyer.

Distribution License with A. I. Limited, Turkey, previously provided to Buyer.

Distribution License with Essential Minds, Inc, Spain, previously provided to
Buyer.

Distribution License with Cubic Enterprises, Inc., previously provided to Buyer.
The Company has started the process of terminating Cubic for cause (non-payment
of advances on royalties, lack of reporting, copyright infringement,
unauthorized sublicensing). See memo attached to Purchase Agreement to Jennifer
Rabin of Holme Roberts & Owens outlining Cubic breaches.
<PAGE>

                                  Schedule II
                                  -----------

                              Membership Interests
                              --------------------

<TABLE>
<CAPTION>
Pre-Closing:
-----------

                            Member                  Type of Interest           Sharing Ratio
                            ------                  ----------------           -------------
                       <S>                         <C>                         <C>
                        Julie A. Clark               Voting Member                   1%

                       William E. Clark              Voting Member                   1%

                        Julie A. Clark             Non-voting Member                49%

                       William E. Clark            Non-voting Member                49%

<CAPTION>
Post-Closing:
------------

                            Member                  Type of Interest           Sharing Ratio
                            ------                  ----------------           -------------
                       <S>                          <C>                        <C>
                         Julie A. Clark                 Voting Member               0.8%

                         Julie A. Clark               Non-voting Member            39.2%

                        William E. Clark                Voting Member               0.8%

                        William E. Clark              Non-voting Member            39.2%

                   Artisan Entertainment Inc.           Voting Member               0.4%

                   Artisan Entertainment Inc.         Non-voting Member            19.6%
</TABLE>
<PAGE>

                                   Exhibit E

                           Confidentiality Agreement

                           CONFIDENTIALITY AGREEMENT

          This Confidentiality Agreement ("Agreement") is made as of December 3,
1999, by and between The Baby Einstein Company LLC (the "Company") and Artisan
Entertainment Inc. ("Artisan").

          In the course of dealings between the Company and Artisan, Artisan,
its affiliates, or their Representatives (as defined below) have learned or
received or may learn or receive from the Company "Information" (as defined
below).  The Company and Artisan desire to establish and set forth certain
obligations with respect to the Company's Information.  In consideration of the
foregoing, the Company and Artisan agree as follows:

          1.   The term "Information" shall mean any and all information, data,
reports, and other records which Artisan, its affiliates, or their
Representatives learn or receive from the Company, except that which:  (1) was,
on or prior to its being furnished to Artisan by or on behalf of the Company,
generally known to the public; or (2) became generally known to the public after
its being furnished to Artisan by or on behalf of the Company, other than as a
result of the act or omission of Artisan, its affiliates, or any of their
directors, officers, partners, employees, agents, representatives or contractors
(collectively "Representatives"); or (3) was known to Artisan, its affiliates,
or their Representatives prior to Artisan's learning or receiving same from the
Company; or (4) was disclosed by the Company to third parties generally without
restriction on use and dislcosure; or (5) was lawfully received by Artisan, its
affiliates, or their Representatives from a third party without knowledge of the
third party's breach of agreement or obligation of trust.

          2.   The Company considers all Information to be proprietary to the
Company.  All Information shall at all times, and throughout the world, remain
the property of the Company, exclusively, and all applicable rights in patents,
copyrights and trade secrets shall remain in the Company, exclusively.

          3.   None of Artisan, its affiliates, or their Representatives shall
directly or indirectly use any of the Information for any purpose, except to the
extent reasonable to perform their review of potential transactions with the
Company and, if a further contractual relationship between the Company and
Artisan or an affiliate of Artisan is created, any obligations of Artisan or its
affiliates under said Agreement.

          4.   Neither Artisan nor its affiliates shall disclose, or permit
access to, any portion of the Information to any person except if:  (1) such
person is a Representative of Artisan or its affiliates and has a reasonable
need to know the Information for said person to evaluate potential transactions
with the Company; and (2) such person agrees to comply with the provisions of
this Agreement.
<PAGE>

          5.   Artisan shall indemnify the Company against all reasonable losses
and expenses incurred by the Company (including but not limited to reasonable
counsel fees), which result from the breach of any portion of this Agreement by
Artisan, its affiliates, or their Representatives.

          6.   This Agreement is the complete and exclusive statement of the
agreement between the parties, and supersedes all prior written and oral
communications and agreements relating to the subject matter hereof. No
modification, termination, extension, renewal or waiver of any provision of this
Agreement shall be effective unless in writing and signed by an authorized
representative of each party. This Agreement is governed by the laws of the
State of California.

    This Agreement is duly executed as of the first date set forth above.

                             ARTISAN ENTERTAINMENT INC.

                             By: /s/ Ken Schapiro
                                ----------------------------------
                                        (signature)

                             Name:   Ken Schapiro
                                  --------------------------------
                                         (print)

                             Title:  EVP
                                   -------------------------------
                                         (print)

                             THE BABY EINSTEIN COMPANY LLC

                             By: /s/ Julie A. Clark
                                ----------------------------------
                                        (signature)

                             Name:   Julie A. Clark
                                  --------------------------------
                                         (print)

                             Title:      Manager
                                   -------------------------------
                                         (print)<PAGE>

                                                                   Exhibit 10.22

                          LOAN AND SECURITY AGREEMENT

                            Dated October 20, 1998

                                by and between

                             ARTISAN PICTURES INC.
                          --------------------------
                                  as Borrower

                                  95-4178252
                        -------------------------------
                       (Federal Tax ID No. of Borrower)

                                      and

                          FINOVA CAPITAL CORPORATION
                                   as Lender

                                 $4,082,899.24
                               -----------------
                                Amount of Loan

                           ========================

                         COMMERCIAL EQUIPMENT FINANCE

                           ========================
<PAGE>

                          LOAN AND SECURITY AGREEMENT
                          ---------------------------

     AGREEMENT, dated as of October 20, 1998, by and between Artisan Pictures
Inc., a California corporation ("Borrower"), having its principal place of
business at 2700 Colorado Avenue, Santa Monica, California 90404; and FINOVA
CAPITAL CORPORATION, a Delaware corporation ("Lender"), having a place of
business at 115 West Century Road, Paramus, New Jersey 07652.

                             W I T N E S S E T H :
                             - - - - - - - - - -

     WHEREAS, Borrower has requested Lender to make a loan to Borrower and
Lender is willing to make such loan to Borrower upon the terms and conditions
hereinafter set forth.

     NOW, THEREFORE, in consideration of the premises and of the mutual
covenants herein contained and intending to be legally bound hereby, the parties
hereto covenant and agree as follows:

                     ARTICLE 1.  DEFINITIONS; CONSTRUCTION

     1.1  Definitions.
          -----------

     In addition to other words and terms defined elsewhere in this Agreement
(including the Schedule), as used herein the following words and terms have the
following meanings, respectively, unless the context hereof otherwise clearly
requires:

     "Agreement" means this Loan and Security Agreement as amended, modified or
supplemented from time to time.

     "Business Day" means any day other than a Saturday, Sunday or other day on
which banking institutions are authorized or obligated to close in New Jersey,
New York or Arizona.

     "Closing Date" means the date on which the parties enter into this
Agreement.

     "Collateral" means all assets of Borrower in which Borrower has granted or
will grant a Lien to Lender, pursuant to this Agreement or otherwise, including
those assets described in Section 3.1 hereof.

     "Constituent Documents" means the certificate of incorporation, agreement
of partnership or limited partnership, organizational agreement, operating
agreement, by-laws, or such other similar document pursuant to which Borrower
was organized or its affairs are governed.

     "Default" means an event which with notice or lapse of time, or both, would
constitute an Event of Default.

     "Disbursement Date" means the date on which all conditions to the Loan are
satisfied by Borrower (which shall not be later than the Outside Date) and the
Loan proceeds are disbursed to Borrower or to other Persons at Borrower's
direction.

     "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.

     "Event of Default" means any of the Events of Default described in Section
7.1 hereof.

     "Executive Officer" means the President, the Chief Executive Officer, or
the Chief Financial Officer of Borrower elected from time to time.

     "GAAP" means generally accepted accounting principles in the United States
of America (as such principles may change from time to time) applied on a
consistent basis (except for changes in application in which Borrower's
independent certified public accountants concur), applied both to classification
of items and amounts.

     "Interest Rate" means the "Interest Rate" defined on the Schedule.
<PAGE>

     "Law" means any law (including common law), constitution, statute, treaty,
regulation, rule, ordinance, order, injunction, writ, decree or award of any
government or governmental agency.

     "Legal Requirements" means any and all present and future judicial, and
administrative rulings or decisions, and any and all present and future federal,
state, and local laws, ordinances, rules, regulations, permits and certificates,
in each case, in any way applicable to Borrower (or the ownership or use of the
Collateral or its other assets), or this transaction.

     "Lien" means any mortgage, pledge, lien, security interest (including
without limitation any conditional sale or other title retention agreement),
grant of a leasehold, charge or other encumbrance of any nature whatsoever, and
also means the filing of or the agreement to give any financing statement or
analogous document under the UCC or analogous law of any jurisdiction.

     "Loan" has the meaning given to such term in Section 2.1 hereof.

     "Loan Documents" means this Agreement, the Note, the Insurance Letter and
any other agreements, instruments and documents required to be, or which are,
executed by Borrower in connection with this Agreement or the Loan (as the same
may from time to time be amended, modified or supplemented).

     "Maturity Date" means the "Maturity Date" defined on the Schedule.

     "Note" means the promissory note of Borrower executed and delivered by
Borrower under this Agreement, in substantially the form annexed hereto as
Exhibit A with the blanks appropriately filled in.

     "Obligations" means all of the indebtedness, liabilities and obligations of
every kind and nature of Borrower to Lender, whether now existing or hereafter
arising, whether or not currently contemplated, howsoever arising, including,
without limitation, all indebtedness, liabilities and obligations arising under,
in connection with or evidenced by this Agreement, the Note, the other Loan
Documents, or otherwise.

     "Office", when used in connection with Lender, means its office located at
115 West Century Road, Paramus, New Jersey 07652, or such other office of Lender
as may be designated in writing from time to time by Lender to Borrower.

     "Outside Date" means the "Outside Date" defined on the Schedule.

     "Person" means an individual, corporation, national banking association,
partnership, trust, unincorporated association, joint venture, joint-stock
company, government (including political subdivisions), governmental authority
or agency, or any other entity.

     "Plan" means any employee benefit plan which is covered by ERISA and which
is maintained by Borrower or, in the case of a plan to which more than one
employer contributes, to which Borrower made contributions at any time within
the five plan years preceding the date of termination.

     "Premises" means the "Premises" defined on the Schedule.

     "Schedule" means the Schedule annexed to this Agreement and made a part
hereof.  The Schedule is an integral part of this Agreement.  All references to
"herein", "herewith", "hereunder" and "hereof" and words of similar import shall
for all purposes be deemed to include the Schedule.

     "Term" means the period beginning on the first payment date following the
Disbursement Date and ending on the Maturity Date.

     "UCC" means the Uniform Commercial Code as adopted in the State of New
York.

     1.2  General Interpretive Principles.
          -------------------------------

     For purposes of this Agreement, except as otherwise expressly provided
herein or unless the context otherwise requires:

                                      -2-
<PAGE>

               (i)     any pronoun used shall be deemed to cover both gender
forms as well as the neuter form;

               (ii)    all references to the plural shall include the singular,
the singular the plural and the part the whole;

               (iii)   the word "or" has the inclusive meaning frequently
identified by the phrase "and/or";

               (iv)    accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with GAAP;

               (v)     the words "herein", "herewith", "hereunder" and "hereof"
and similar terms in this Agreement refer to this Agreement as a whole and not
to any particular provision of this Agreement;

               (vi)    references herein to "Articles", "Sections",
"Subsections", "Paragraphs", and other subdivisions without reference to a
document are to designated Articles, Sections, Subsections, Paragraphs and other
subdivisions of this Agreement;

               (vii)   a reference to a Subsection without further reference to
a Section is a reference to such Subsection as contained in the same Section in
which the reference appears, and this rule shall also apply to Paragraphs and
other subdivisions;

               (viii)  the term "include" or "including" shall mean, without
limitation, by reason of enumeration; and

               (ix)    the term "satisfactory to Lender" or "satisfaction of
Lender" or "satisfactory to counsel" or "satisfaction of counsel" or other
similar terms means satisfactory to Lender or its counsel in its sole and
absolute discretion.

                              ARTICLE 2. THE LOAN

     2.1  The Loan.
          --------

     Subject to the terms and conditions and relying upon the representations
and warranties herein set forth, including, without limitation, the fulfillment
of each and every condition of lending, Lender agrees to make a Loan to Borrower
in the principal amount set forth on the Schedule (the "Loan").

     2.2  Use of Proceeds.
          ---------------

     The proceeds of the Loan shall be used by Borrower solely for the purposes
set forth on the Schedule.

     2.3  The Note.
          --------

     The obligation of Borrower to repay the Loan and to pay interest thereon
shall be evidenced by the Note.  The Note shall be dated the Closing Date and
shall be executed by Borrower delivered to Lender on the Closing Date.

     2.4  Disbursement.
          ------------

     Subject to the conditions set forth herein, Lender shall, on the
Disbursement Date, credit, by wire transfer, the amount of the Loan to the
account of Borrower or the Person or Persons specified in writing by Borrower.

     2.5  Loan Account.
          ------------

     Lender shall maintain a loan account on its books in the name of Borrower
for the Loan in which will be recorded all payments of principal thereof and all
accruals and payments of interest thereon.  The entries in the loan account (in
the absence of manifest error in the making thereof) shall be conclusive
evidence of the outstanding principal thereof and accrued interest thereon from
time to time.  Lender shall provide Borrower with statements of said account
from time to time on request.

                                      -3-
<PAGE>

     2.6  Interest Rates.
          --------------

          2.6.1  Interest Prior to Maturity.  Prior to maturity (whether by
                 --------------------------
acceleration or otherwise) the unpaid principal amount of the Loan shall bear
interest at the Interest Rate.

          2.6.2  Interest After Maturity.  Commencing with the day after the
                 -----------------------
principal amount of any part of the Loan shall have become due and payable (by
acceleration or otherwise), such part of the Loan or the entire Loan (as the
case may be) shall bear interest at the daily rate of one percent (1%) per annum
above the Interest Rate (the "Default Rate").

          2.6.3  Maximum Rate.  Lender and Borrower intend the Loan Documents to
                 ------------
comply in all respects with all provisions of Law and not to violate, in any
way, any legal limitations on interest charges. Accordingly, if, for any reason,
Borrower is required to pay, or has paid, interest at a rate in excess of the
highest rate of interest which may be charged by Lender or which Borrower may
legally contract to pay under applicable law (the "Maximum Rate"), then the
Interest Rate shall be deemed to be reduced, automatically and immediately, to
the Maximum Rate, and interest payable hereunder shall be computed and paid at
the Maximum Rate and the portion of all prior payments of interest in excess of
the Maximum Rate shall be deemed to have been prepayments of the outstanding
principal of the Loan and applied to the installments in the inverse order of
their maturities.

     2.7  Payments.
          --------

          2.7.1  Time; Place; Manner.  All payments to be made in respect of
                 -------------------
principal, interest, or other amounts due from Borrower hereunder or under the
Note shall become due at 12:00 o'clock noon, New Jersey time, on the day when
due without presentment, demand, protest or notice of any kind, all of which are
hereby expressly waived.  Such payments shall be made to Lender in lawful money
of the United States of America in immediately available funds.

          2.7.2  Payments of Principal and Interest.  The Loan, together with
                 ----------------------------------
interest thereon shall be repaid by Borrower to Lender in the amounts and on the
dates and as otherwise set forth on the Schedule.

          2.7.3  Application of Payments.  Each payment under this Agreement and
                 -----------------------
the other Loan Documents shall be applied, first to fees, costs, expenses and
charges, if any, owing to Lender, then to interest as may be due hereunder, and
the balance of such payment shall be applied to the principal balance of the
Loan.

          2.7.4  Net Payments.  All payments hereunder and under the Note shall
                 ------------
be made by Borrower to Lender without defense, set-off, claim or counterclaim
and without deduction for any present or future income, stamp or other taxes,
levies, imposts, deductions, charges or withholdings whatsoever imposed,
assessed, levied or collected by or for the benefit of any jurisdiction or
taxing authority.  In addition, Borrower shall pay any and all taxes (stamp or
otherwise) payable or determined to be payable in connection with the execution
and delivery of this Agreement, the Note and the other Loan Documents and on all
payments to be made by Borrower hereunder and under the Note and the other Loan
Documents (other than Lender's income taxes) and all taxes payable in connection
with or related to the Collateral.

     2.8  Prepayments.
          -----------

     The Loan may be prepaid only as set forth on the Schedule.

     2.9  Administrative Costs.
          --------------------

     If Borrower shall fail to make any payment of principal or interest within
ten (10) days after the same is due, Borrower shall pay a late charge of two and
one-half percent (2.5%) of the unpaid amounts, but in no event greater than the
maximum rate permitted by law, and such amount shall be payable upon demand.
Such payment is not interest for the use of money, but is solely to cover
Lender's administrative costs occasioned by such delay.

                                      -4-
<PAGE>

                             ARTICLE 3.  SECURITY

     3.1  Security.
          --------

     As security for the full and timely payment and performance of all of the
Obligations of Borrower to Lender, Borrower hereby assigns, pledges, transfers
and sets over to Lender, and hereby agrees that Lender shall have, and hereby
grants to and creates in favor of Lender, a first security interest under the
UCC subject to no other Liens, in and to the following, in each case, whether
now existing or hereafter arising, now owned or hereafter acquired, wherever
located:

          3.1.1  All equipment, machinery, furniture, fixtures and other assets
listed on Schedule A annexed hereto; and

          3.1.2  All accessions and additions thereto, substitutions for, and
all replacements of, any and all of the foregoing, and all proceeds of the
foregoing, cash and non-cash, including insurance proceeds.

     3.2  Lender Has Rights and Remedies of a Secured Party.
          -------------------------------------------------

     In addition to all rights and remedies given to Lender by this Agreement,
Lender shall have all the rights and remedies of a secured party under the UCC.

     3.3  Additional Provisions Applicable to the Collateral.
          --------------------------------------------------

     The parties agree that, at all times during the term of this Agreement, the
following provisions shall be applicable to the Collateral:

          3.3.1  Borrower covenants and agrees that it will keep accurate and
complete books and records concerning the Collateral owned or acquired by it in
accordance with GAAP.

          3.3.2  Lender shall have the right to review the books and records of
Borrower pertaining to the Collateral and to copy the same and to make excerpts
therefrom, all at such reasonable times upon reasonable notice and as often as
Lender may reasonably request.

          3.3.3  Borrower shall maintain and keep its principal place of
business and its chief executive office at the address set forth at the
beginning of this Agreement, and at no other location without giving Lender at
least thirty (30) days prior written notice of any move.  Borrower shall
maintain and keep its records concerning the Collateral at such address and at
no other location without giving Lender at least thirty (30) days prior written
notice of any move.  Borrower shall keep all Collateral only at the Premises.
Borrower may not move the Collateral without the prior written consent of
Lender.

          3.3.4  Except for Liens granted to Lender, Borrower shall not sell,
lease, transfer or otherwise dispose of or encumber any of the Collateral,
provided that so long as there is no Default, Borrower may, in the ordinary
course of its business, (a) replace obsolete and worn-out equipment with
substantially identical equipment having a fair market value of not less than
the replaced equipment, provided further that (i) Lender shall be granted a
first and only perfected Lien covering such equipment, and (ii) if requested,
Borrower shall execute and deliver to Lender such financing statements as Lender
shall reasonably require in order to perfect Lender's first and only Lien
covering such equipment.

          3.3.5  Borrower shall cause the Collateral to be maintained and
preserved in the same condition, repair and working order as when new, ordinary
wear and tear excepted, and shall promptly make or cause to be made all repairs,
replacements and other improvements in connection therewith which are necessary
or desirable to that end.

          3.3.6  Borrower shall not affix or permit the Collateral to become
affixed to real estate or to any other goods, and such Collateral shall remain
personal property, whether or not so affixed.

     3.4  Certain Covenants.
          -----------------

     Borrower covenants and agrees with Lender for the benefit of Lender that:

          3.4.1  Borrower has and will have good and merchantable title to all
of its assets,

                                      -5-
<PAGE>

including the Collateral, in each case as from time to time owned or acquired by
it, and shall keep the Collateral free and clear of all Liens, other than those
granted to Lender. Borrower will defend such title against the claims and
demands of all Persons whomsoever.

          3.4.2  Borrower will faithfully preserve and protect Lender's Liens in
the Collateral and will, at its own cost and expense, cause said Liens to be
perfected and continued perfected, and for such purpose Borrower will from time
to time at the request of Lender and at the expense of Borrower, make, execute,
acknowledge and deliver, and file or record, or cause to be filed or recorded,
in the proper filing places, all such instruments, documents and notices,
including without limitation financing statements and continuation statements,
as Lender may deem necessary or advisable from time to time in order to perfect
and continue perfected said security interest.  Borrower will do all such other
acts and things and make, execute, acknowledge and deliver all such other
instruments and documents, including without limitation further security
agreements, pledges, endorsements, assignments and notices, as Lender may deem
necessary or advisable from time to time in order to perfect and preserve the
priority of said Liens as a first and only Lien on and security interest in the
Collateral prior to the rights of all other Persons therein or thereto.

          3.4.3  Borrower will not, without the prior written consent of Lender,
(i) borrow or permit any Person to borrow against the Collateral other than the
Loan to Borrower from Lender pursuant to this Agreement; (ii) create, incur,
assume or suffer to exist any Lien with respect to any of the Collateral; (iii)
permit any levy or attachment to be made against any of the Collateral except
any levy or attachment relating to this Agreement; or (iv) permit any financing
statement to be on file with respect to any of the Collateral, except financing
statements in favor of Lender and those relating to subordinate Liens held by
the Subordinated Creditor permitted hereunder.

          3.4.4  Risk of loss of, damage to or destruction of the Collateral is
and shall remain upon Borrower.  Borrower will insure the Collateral as provided
in Section 6.3 of this Agreement.  If Borrower fails to effect and keep in full
force and effect such insurance or fails to pay the premiums thereon when due,
Lender may do so for the account of Borrower and add the cost thereof to the
Obligations and the same shall be payable to Lender on demand.  Borrower hereby
assigns and sets over unto Lender for the benefit of Lender all moneys which may
become payable on account of such insurance, including without limitation any
return of unearned premiums which may be due upon cancellation of any such
insurance and directs the insurers to pay Lender any amount so due.  Lender, its
officers, employees and authorized agents and its successors and assigns, are
hereby appointed attorneys-in-fact of Borrower, for the purpose of endorsing any
draft or check which may be payable to Borrower in order to collect the proceeds
of such insurance or any return of unearned premiums.  Such appointment is
irrevocable and coupled with an interest.  The proceeds of insurance shall be
applied to reduction of the Obligations in any order Lender may choose or, in
Lender's sole discretion, to the repair or replacement of the Collateral, or any
part thereof, in which case Lender may impose such conditions on the
disbursement of the proceeds as Lender in its sole discretion deems appropriate.

          3.4.5  Upon the occurrence and during the continuation or existence of
any Event of Default, Borrower shall promptly upon demand by Lender assemble the
Collateral and make it available to Lender at the place or places to be
designated by Lender.  The right of Lender to have the Collateral assembled and
made available to it is of the essence of this Agreement and Lender may, at its
election, enforce such right in equity for specific performance.

          3.4.6  Lender shall have no duty as to the collection or protection of
the Collateral or any part thereof or any income thereon, or as to the
preservation of any rights pertaining thereto, beyond exercising reasonable care
in the custody of any Collateral actually in the possession of Lender.  Lender
shall be deemed to have exercised reasonable care in the custody and
preservation of such of the Collateral as may be in its possession if it takes
such action for that purpose as Borrower shall request in writing, provided that
such requested action shall not, in the judgment of Lender, impair Lender's
security interest in the Collateral or its rights in, or

                                      -6-
<PAGE>

the value of, the Collateral, and provided further that such written request is
received by Lender in sufficient time to permit it to take the requested action.

                       ARTICLE 4.  CONDITIONS OF CLOSING

     The obligation of Lender to make the Loan hereunder is subject to the
accuracy, as of the date hereof and the Disbursement Date, of the
representations and warranties herein contained, to the performance by Borrower
of its obligations to be performed hereunder on or before such Disbursement Date
and to the fulfillment (to the satisfaction of Lender and its counsel) of the
following further conditions. If all conditions contained herein are not so
satisfied by the Outside Date, Lender shall have no obligation whatsoever to
make the Loan and shall have no liability for its refusal to do so.

     4.1  Representations and Warranties.
          ------------------------------

     The representations and warranties contained in Article 5 hereof shall be
true on the Closing Date and on and as of the Disbursement Date with the same
effect as if made on and as of such date.

     4.2  Corporate Action.
          ----------------

     On the Closing Date, Borrower shall deliver to Lender a certificate in form
and substance satisfactory to Lender, dated the Closing Date, signed by a duly
authorized officer of Borrower, certifying as to (a) true copies of the
Constituent Documents of Borrower, all as in effect on such date, (b) true
copies of all action taken by Borrower relative to this Agreement, the Note and
the other Loan Documents, and (c) the names, true signatures and incumbency of
the officer or officers of Borrower authorized to execute and deliver this
Agreement, the Note and the other Loan Documents on behalf of Borrower (and
Lender may conclusively rely on such certificate unless and until a later
certificate revising the prior certificate has been furnished to Lender).
Borrower shall also deliver to Lender good standing certificates for Borrower
issued by the Secretary of State of its State of incorporation and each state in
which it is required by Law to be qualified.

     4.3  Opinion of Counsel.
          ------------------

     On the Closing Date, Lender shall have received a favorable written opinion
of counsel for Borrower, dated the Closing Date and in form and substance
satisfactory to Lender and its counsel, Winick & Rich, P.C.

     4.4  No Change of Law or Facts.
          -------------------------

     No change shall have occurred after the date of execution and delivery of
this Agreement in applicable Law or regulations thereunder or interpretations
thereof by appropriate regulatory authorities which, in the opinion of Lender or
its counsel, would make it illegal for Lender to acquire the Note, make the
Loan, or otherwise to participate in the Loan, nor shall any facts come to the
attention of Lender, concerning Borrower, its business or financial condition
which, in the opinion of Lender would increase the risk to Lender of repayment
of the Loan by Borrower.

     4.5  Documents.
          ---------

     The following documents shall have been duly authorized, executed and
delivered by the respective party or parties thereto, shall be in form and
substance satisfactory to Lender and its counsel and shall be in full force and
effect on the Closing Date and on the Disbursement Date, and an executed
counterpart of each thereof shall have been delivered to Lender and its counsel:

          4.5.1  this Agreement;

          4.5.2  the Note;

          4.5.3  insurance certificates or policies of insurance evidencing the
coverages required by Section 6.3 hereof;

          4.5.4  the Schedule, whose terms and conditions are incorporated in
this Agreement as if fully stated in this Agreement; and

          4.5.5  other Loan Documents, if any.

                                      -7-
<PAGE>

     4.6  Collateral.
          ----------

     Borrower shall provide to Lender a complete description of the Collateral,
together with evidence, in form and substance satisfactory to Lender in its sole
discretion, that Borrower owns legal title to the Collateral, free and clear of
all Liens, except for Liens granted to Lender.

     4.7  Financing Statements.
          --------------------

     On the Closing Date, UCC financing statements covering the security
interest created by this Agreement in the Collateral shall have been duly filed
in the office of the Secretary of State of the State where the Collateral is
located and in all other places as, in the opinion of Lender, or its counsel,
are necessary or desirable to perfect such Liens, and Lender shall have been
granted a perfected first and only Lien covering the Collateral.

     4.8  Licenses and Permits.
          --------------------

     All appropriate action shall have been taken prior to the Closing Date in
order to permit consummation of the transactions contemplated herein and hereby
and enforcement of all of the terms hereof and thereof, and all licenses,
permits, waivers, exemptions, authorizations and approvals required (or, in the
opinion of Lender or its counsel, advisable) to be in effect on the Closing Date
shall have been issued and shall be in full force and effect on such date, and
copies thereof shall have been delivered to Lender.

     4.9  Additional Conditions.
          ---------------------

          4.9.1  Lender shall have received all other agreements, instruments,
financing statements, certificates, waivers, searches, releases, terminations,
corporate or other action, agreements with suppliers of Collateral, ownership of
the Collateral and other documents as Lender or its counsel shall have requested
(each in form and substance satisfactory to Lender and its counsel).

          4.9.2  After giving effect to the Loan, there shall be no Default or
Event of Default hereunder or under the other Loan Documents.

          4.9.3  All legal matters incident to the Loan shall be satisfactory to
Lender and its counsel.

          4.9.4  All additional conditions set forth on the Schedule shall have
been satisfied, true and in full force and effect.

                  ARTICLE 5.  REPRESENTATIONS AND WARRANTIES

     Borrower represents and warrants to Lender that:

     5.1  Organization and Qualification.
          ------------------------------

     Borrower is duly organized, validly existing and in good standing as a
corporation under the Laws of the State set forth on the Schedule with full
power and authority to own its properties and to transact its business as now
transacted and as contemplated to be transacted.  Borrower is qualified and in
good standing to transact business in each jurisdiction set forth on the
Schedule, which are all of the jurisdictions where the ownership of its
properties or the transaction of its business requires such qualification.

     5.2  Authority and Authorization.
          ---------------------------

     Borrower has full power and authority to execute, deliver and carry out the
provisions of this Agreement, the Note and the other Loan Documents to which it
is a party, to borrow hereunder and under the other Loan Documents and to create
the Liens provided for herein, and to perform its obligations hereunder and
thereunder, and all such action has been duly and validly authorized by all
necessary proceedings on its part.

     5.3  Execution and Binding Effect.
          ----------------------------

     This Agreement, the Note and the other Loan Documents to which Borrower is
a party have been duly and validly executed and delivered by Borrower and
constitute the legal, valid and binding obligation of Borrower enforceable in
accordance with their respective terms.

                                      -8-
<PAGE>

     5.4  Authorizations and Filings.
          --------------------------

     Except for the filing of UCC financing statements, no authorization,
consent, approval, license, exemption or other action by, and no registration,
qualification, designation, declaration or filing with, any governmental
authority is or will be necessary or advisable in connection with the execution
and delivery of this Agreement, the Note and the other Loan Documents or the
consummation by Borrower of the transactions herein and therein contemplated, or
performance by Borrower of or compliance by Borrower with, the terms and
conditions hereof or thereof.

     5.5  Absence of Conflicts.
          --------------------

     Neither the execution and delivery of this Agreement, the Note or the other
Loan Documents, nor consummation of the transactions herein or therein
contemplated nor performance of, or compliance with the terms and conditions
hereof or thereof will (a) result in any violation or breach of (i) the
provisions of Borrower's Constituent Documents, or (ii) any Law, or the order,
rule or regulation of any court or governmental agency or body having
jurisdiction over Borrower or any of its properties, or (iii) any agreement,
bond, note, instrument or indenture to which Borrower is a party or pursuant to
which any of its properties are affected, or (b) result in the creation or
imposition of any Lien upon any property (now owned or hereafter acquired) of
Borrower, except for the Lien created by this Agreement.

     5.6  Financial Statements.
          --------------------

     Borrower has heretofore furnished to Lender certain financial statements
and related financial information ("Financial Statements").  Such Financial
Statements (including the notes thereto) present fairly the financial condition
of Borrower as of the dates of the balance sheets contained therein, and the
results of its operations for the periods then ended, all in conformity with
GAAP on a basis consistent with that of Financial Statements for corresponding
prior periods.  Except as disclosed therein, Borrower has no material contingent
liabilities (including liabilities for taxes), unusual forward or long-term
commitments or unrealized or anticipated losses from unfavorable commitments.

     5.7  No Defaults.
          -----------

     There is no Default under the Loan Documents.

     5.8  Litigation.
          ----------

     There is no pending or threatened claim or proceeding by or before any
court or governmental agency against or affecting Borrower which, if adversely
decided would have a material adverse effect on the business, operations or
financial condition of Borrower or on the ability of Borrower to perform its
obligations under this Agreement, the Note or the other Loan Documents or on the
Collateral.

     5.9  Title to Collateral.
          -------------------

     Borrower has good title to all of the Collateral, free and clear of all
Liens covering the Collateral, other than the Liens granted hereunder to Lender
covering the Collateral, which are and will at all times be perfected first
Liens covering the Collateral.

     5.10  Taxes.
           -----

     All tax returns required to be filed by Borrower have been properly
prepared, executed and filed.  All taxes, assessments, fees and other
governmental charges upon Borrower or upon any of its properties, incomes, sales
or franchises which are due and payable have been paid.

     5.11  Financial Accounting Practices.
           ------------------------------

     Borrower makes and keeps books, records and accounts which, in reasonable
detail, accurately and fairly reflect Borrower's transactions and dispositions
of its assets.

     5.12  Power To Carry On Business.
           --------------------------

     Borrower has all requisite power and authority to own and operate its
properties and to carry on its business as now conducted and as presently
planned to be conducted.

                                      -9-
<PAGE>

     5.13  No Material Adverse Change.
           --------------------------

     Since the date of the Financial Statements referred to in Section 5.6,
there has been no material adverse change in the business, operations or
financial condition of Borrower.

     5.14  Compliance with Laws.
           --------------------

     Borrower is not in violation of any Law, except for violations which in the
aggregate do not have a material adverse effect on the business, operations or
financial condition of Borrower or on the Collateral.

     5.15  Compliance with Agreements.
           --------------------------

     Borrower is not in default under any agreement, bond, note, indenture or
contract, except for defaults which in the aggregate do not have a material
adverse effect on the business, operation or financial condition of Borrower or
on the Collateral.

     5.16  Bankruptcy.
           ----------

     Borrower has not made or contemplated an assignment for the benefit of
creditors.  No application or petition has been filed for the appointment of a
custodian, trustee, receiver or agent to take possession of the Collateral, or
to take possession of any of the other properties or assets of Borrower.
Borrower is generally paying its debts as such debts become due.  Borrower is
not "insolvent" as that term is defined in Section 101(26) of the "Bankruptcy
Code" (Title 11 of the United States Code, 11 U.S.C. Section 101, et seq.) or
would be insolvent after giving effect to the Loan and the transactions
contemplated by the Loan Documents.   Borrower has not filed a petition with the
Bankruptcy Court under the Bankruptcy Code, or commenced any proceeding relating
to Borrower under any bankruptcy or reorganization statute or under any
arrangement, insolvency, readjustment of debt, dissolution or liquidation law of
any jurisdiction.  No petition or application of the type described above has
been filed or commenced against Borrower, in which (i) Borrower, by any act, has
indicated or intends to indicate its approval thereof, consent thereto, or
acquiescence therein; (ii) an order has been or is expected to be entered
appointing any such custodian, trustee, receiver or agent, adjudicating Borrower
bankrupt or insolvent, or approving such petition or application in any such
proceeding; (iii) the Bankruptcy Court has ordered or is expected to order
relief against Borrower under the Bankruptcy Code; or (iv) such petition or
application was not dismissed within ninety (90) days of such filing or
commencement.

     5.17  Accurate and Complete Disclosure.
           --------------------------------

     No representation or warranty made by Borrower in this Agreement and no
statement made by Borrower in the Financial Statements furnished pursuant to
Section 5.6 hereof or otherwise, or any certificate, report, exhibit or document
furnished by Borrower to Lender pursuant to or in connection with this Agreement
or the Loan is false or misleading in any material respect (including by
omission of material information necessary to make such representation, warranty
or statement not misleading).

     5.18  Regulations G and U.
           -------------------

     Borrower is not engaged in the business of extending credit for the purpose
of purchasing or carrying "margin stock", as such term is used in Regulations G
or U promulgated by the Board of Governors of the Federal Reserve System as
amended from time to time.  No part of the proceeds of the Loan will be used to
purchase or carry any margin stock or to extend credit to others for the purpose
of purchasing or carrying any "margin stock". Borrower does not own any "margin
stock".

     5.19  Perfection.
           ----------

     Except for the filings under Article 9 of the UCC specified in Section 4.7
hereof (and continuation statements at periodic intervals), no further filing or
recording is necessary under the UCC or under any other Laws of any
jurisdiction, in order to perfect in all applicable jurisdictions the Liens of
Lender in the Collateral.  Upon such filings, Lender will be granted a perfected
first Lien covering the Collateral.  There are no other Liens covering the
Collateral.

                                      -10-
<PAGE>

     5.20  Place of Business.
           -----------------

     Both the place of business (or chief executive office if there is more than
one place of business) of Borrower and the place where it keeps its corporate
records concerning the Collateral and all of its interest in, to and under this
Agreement are located at the address set forth at the beginning of this
Agreement.

     5.21  Location of Collateral.
           ----------------------

     For all purposes, including, without limitation, perfection of security
interests therein under Article 9 of the UCC, the Collateral is deemed located
and at all times shall be located at the Premises.

     5.22 Name Changes, Mergers, Acquisitions.
          -----------------------------------

     Except as set forth in Borrower's 10K for 1996, in its 10Q for its fiscal
quarter ended March 1997 and except for the change of name from Live Film and
Media Works Inc. to Artisan Pictures Inc.,  Borrower has not within the six-year
period immediately preceding the Closing Date, changed its name, been the
surviving entity of a merger or consolidation, acquired all or substantially all
of the assets of any Person, acquired any asset from any Person not in the
business of selling such asset, or assumed any obligations of any other Person.

                             ARTICLE 6.  COVENANTS

     Borrower covenants that from and after the date hereof and until payment in
full of the Note and interest thereon and all other amounts due from Borrower
hereunder or under the Note or the other Loan Documents, unless Lender shall
otherwise consent in writing:

     6.1  Reporting and Information Requirements.
          --------------------------------------

          6.1.1  Annual Financial Statements.  As soon as practicable, and in
                 ---------------------------
any event within ninety (90) days after the close of each fiscal year of
Borrower, Borrower shall furnish to Lender its annual audit reports for such
year for Borrower, including audited statements of income, retained earnings and
changes in financial position of Borrower for such fiscal year and audited
balance sheets of Borrower as of the close of such fiscal year, and notes to
each, all in reasonable detail, setting forth in comparative form the
corresponding figures for the preceding fiscal year where such presentation is
appropriate under GAAP, certified without qualification by independent certified
public accountants of recognized standing selected by Borrower and satisfactory
to Lender, together with (or included in such certification) a written statement
of such accountants substantially to the effect that (i) such accountants
examined such financial statements in accordance with generally accepted
auditing standards and accordingly made such tests of accounting records and
such other auditing procedures as they considered necessary in the circumstances
and (ii) in the opinion of such accountants such financial statements present
fairly the financial position of Borrower as of the end of such fiscal year and
the results of its operations and the changes in its financial position for the
fiscal year then ended, in conformity with GAAP applied on a basis consistent
with that of the preceding fiscal year (except for changes in application in
which such accountants concur).

          6.1.2  Quarterly Financial Statements.  Within forty-five (45) days
                 ------------------------------
after the end of each of the first three fiscal quarters of each fiscal year,
Borrower shall furnish to Lender a copy of its interim financial statements of
the type described in Section 6.1.1 above, certified by an Executive Officer of
Borrower.

          6.1.3  Notice of Event of Default.  Promptly upon becoming aware of
                 --------------------------
any Default or Event of Default, Borrower shall give Lender notice thereof,
together with a written statement of a Chief Executive Officer of Borrower
setting forth the details thereof and any action with respect thereto taken or
contemplated to be taken by Borrower.

          6.1.4  Notice of Material Proceedings.  Promptly upon becoming aware
                 ------------------------------
thereof Borrower shall give Lender written notice of the commencement, existence
or threat of any proceeding by or before any court or administrative agency
against or affecting Borrower or the Collateral which, if adversely decided,
would have a

                                      -11-
<PAGE>

material adverse effect on the business, operations or financial condition of
Borrower or on the ability of Borrower to perform its obligations under this
Agreement, the Note, the other Loan Documents or on the Collateral.

          6.1.5  Visitation.  Borrower shall permit such persons as Lender may
                 ----------
designate to visit and inspect the Collateral and to examine the books and
records of Borrower, at such reasonable times and as often as Lender may
reasonably request.

          6.1.6  Other Deliveries.  Promptly upon their becoming available,
                 ----------------
Borrower shall furnish to Lender, copies of all registration statements and any
amendments and supplements thereto and any regular and periodic reports filed by
Borrower with any securities exchange or with the Securities and Exchange
Commission or any governmental authority succeeding to any or all of the
functions of said commissions.

     6.2  Preservation of Existence and Franchises.
          ----------------------------------------

          6.2.1  Borrower shall not enter into any merger, reorganization or
consolidation, or wind up, liquidate or dissolve, nor agree to do any of the
foregoing.

          6.2.2  Borrower will qualify to do business and will remain in good
standing under the laws of each jurisdiction in which it is required to be
qualified by reason of the location of the properties owned or leased by it or
the conduct of its business.

          6.2.3  Borrower shall do, or cause to be done, all things reasonably
necessary to preserve and keep in full force and effect its corporate existence
and all permits, licenses, rights and privileges necessary or appropriate for
the conducting of its business as now and hereafter conducted.  Borrower shall
not change its name.  Borrower shall continue to engage in the same kind of
business and shall not make any material change in its business or in the nature
of its operations or engage in any unrelated line of business.

          6.2.4  Borrower will comply with all Laws relative to the conduct of
its business or the location of the properties owned or leased by it, the non-
compliance with which could have a material adverse effect on the business,
operations, assets or financial or other condition of Borrower, as contemplated
hereby, or the ability of Borrower to perform its Obligations under this
Agreement, the Note or the other Loan Documents and will obtain or cause to be
obtained as promptly as possible any permit, license, consent, privilege or
approval of any governmental authority and make any filing or registration
therewith which at the time shall be required with respect to the performance of
its Obligations under this Agreement, the Note or the other Loan Documents or
for the operation of its business as presently conducted or as contemplated by
it.

          6.2.5  Borrower shall not, except as otherwise permitted in this
Agreement, (a) convey, assign, sell, mortgage, encumber, pledge, hypothecate,
grant a security interest in, grant options with respect to, lease or otherwise
dispose of all or any part of any legal or beneficial interest in any part or
all of the Collateral or any interest therein; or (b) convey, assign, transfer
or otherwise dispose of all or substantially all of its assets (other than the
Collateral, the prohibition on transfer of which is governed by subparagraph (a)
above).

     6.3  Insurance.
          ---------

     Borrower shall, at its own expense, maintain and deliver evidence to Lender
of such insurance required by Lender, written by insurers and in amounts
satisfactory to Lender.

     6.4  Maintenance of Properties.
          -------------------------

     Borrower shall maintain or cause to be maintained in good repair, working
order and condition the Collateral, and shall make or cause to be made all
needful and proper repairs, renewals, replacements and improvements thereto so
that the business carried on in connection therewith may be properly and
advantageously conducted at all times.

     6.5  Payment of Taxes and Other Potential Charges.
          --------------------------------------------

     Borrower shall pay or discharge

                                      -12-
<PAGE>

          6.5.1  all taxes, assessments and other governmental charges or levies
imposed upon it or any of its properties, including the Collateral, or income
(including such as may arise under ERISA or any similar provision of law), on or
prior to the date on which penalties attach thereto; and

          6.5.2  all lawful claims of materialmen, mechanics, carriers,
warehousemen, landlords and other like Persons which, if unpaid, might result in
the creation of a Lien upon any such property, on or prior to the date when due;
provided, that unless and until foreclosure, distraint, levy, sale or similar
--------
proceedings shall have been commenced, Borrower need not pay or discharge any
such tax, assessment, charge, levy, claim or current liability so long as (i)
the validity thereof is contested in good faith and by appropriate proceedings
diligently pursued, (ii) in Lender's sole judgment there is no reasonably
foreseeable risk of forfeiture of the Collateral, and (iii) such reserves or
other appropriate provisions as may be required by GAAP shall have been made
therefor, and so long as such failure to pay or discharge does not have a
material adverse effect on the business, operations or financial condition of
Borrower or the Collateral.

     6.6  Financial Accounting Practices.
          ------------------------------

     Borrower shall make and keep books, records and accounts which, in
reasonable detail, accurately and fairly reflect its business, including all
transactions and dispositions of its assets, all prepared in accordance with
GAAP.

     6.7  Compliance with Laws.
          --------------------

     Borrower shall comply with all applicable Laws in all respects, provided,
                                                                     --------
that Borrower shall not be deemed to be in violation of this Section 6.7 as a
result of any failures to comply which would not result in fines, penalties,
injunctive relief or other civil or criminal liabilities which, in the
aggregate, would not materially affect the business or operations of Borrower or
the ability of Borrower to perform its obligations under this Agreement, the
Note or the other Loan Documents or the Collateral.

     6.8  Material Obligations.
          --------------------

     Borrower shall pay and satisfy, when due, all material liabilities and
obligations, including, without limitation, all obligations under all leases
(real or personal property) to which it is a party.

     6.9  Maintenance of Collateral.
          -------------------------

     Borrower will maintain and preserve the Collateral in good condition,
repair and working order, promptly repairing, replacing or rebuilding any part
of the Collateral which may be destroyed by any casualty, or become damaged,
worn or dilapidated.

     6.10 Maintenance of Principal Place of Business.
          ------------------------------------------

     Borrower shall maintain and keep its principal place of business and chief
executive office at the address set forth at the beginning of this Agreement,
and at no other location without giving Lender written notice of any move.
Borrower shall maintain and keep its records at such address and at no other
location without giving Lender written notice of any move.

     6.11 Names.
          -----

     Borrower shall not use any corporate or fictitious name other than its
corporate name as set forth in its Articles or Certificate of Incorporation on
the date hereof or as set forth on the Schedule;

     6.12 Margin Security.
          ---------------

     Borrower shall not own, purchase or acquire (or enter into any contract to
purchase or acquire) any "margin security" as defined by any regulation of the
Federal Reserve Board as now in effect or as the same may hereafter be in
effect.

     6.13 Satisfaction of Certain Obligations.
          -----------------------------------

     In the event Borrower fails to make any payment or do any act as herein
provided (including, but not limited to, maintaining any insurance required to
be maintained under the Loan Documents or paying all taxes in accordance with
the terms hereof) or there shall be a claim or Lien

                                      -13-
<PAGE>

asserted or filed against the Collateral, Lender may, but shall not be obligated
to (and without releasing Borrower from any obligation hereunder), make all such
payments and perform all such acts or otherwise satisfy such obligations. All
sums paid by Lender in respect thereof and all costs, fees and expenses,
including reasonable attorneys' fees, court costs, expenses and other charges
relating thereto, which are incurred by Lender on account thereof, shall bear
interest at the Default Rate, shall be payable on demand by Borrower to Lender,
and shall be additional Obligations hereunder secured by the Collateral.

     6.14 Transactions With Affiliates.
          ----------------------------

     Borrower shall not, and shall not permit any of its subsidiaries, to,
directly or indirectly, enter into any purchase, sale, lease or other
transaction with any affiliate, except in the ordinary course of business on
terms that are no less favorable than those which might be obtained at the time
in a comparable arm's length transaction with any Person who is not an
affiliate.

     6.15 Year 2000.
          ---------

     Borrower shall take all action necessary to assure that there will be no
material adverse change to Borrower's business by reason of the advent of the
year 2000, including, without limitation, that all computer-based systems,
embedded microchips and other processing capabilities effectively recognize and
process dates after April 1, 1999.  At Lender's request, Borrower shall provide
to Lender assurance reasonably acceptable to Lender that Borrower's computer-
based systems, embedded microchips and other processing capabilities are year
2000 compatible.

     6.16 Further Assurances.
          ------------------

     Borrower shall cause to be done, executed, acknowledged and delivered all
and every such further act, conveyance and assurance as Lender shall require for
accomplishing the purposes of this Agreement, the Note and the other Loan
Documents.  Borrower will defend and protect its title with respect to the
Collateral and will indemnify Lender with respect thereto.  Any payment in
respect of such indemnity shall be made directly to Lender on demand in
immediately available funds.  Forthwith after notice from Lender, Borrower shall
promptly, without further consideration, execute, acknowledge and deliver such
further instruments and documents and will take such other actions as Lender may
deem necessary or advisable from time to time to ensure the enforceability or
priority of the Liens granted hereby, or otherwise to confirm and carry out the
intent and purpose of this Agreement.

               ARTICLE 7.   DEFAULTS AND REMEDIES

     7.1  Events of Default.
          -----------------

     The occurrence of one or more of the following described events is an Event
of Default:

          7.1.1   Borrower fails to make any payment of principal of or interest
on the Note, within ten (10) days after the date upon which the same shall be
due; or

          7.1.2   Borrower fails to perform or observe any of its covenants or
agreements contained herein or in any other Loan Documents which cannot be
cured; or

          7.1.3   Borrower fails to perform or observe any other covenant or
agreement to be performed or observed by it hereunder or under the other Loan
Documents and such failure continues unremedied for a period of thirty (30)
consecutive days after Borrower obtains knowledge of such occurrence; or

          7.1.4   Borrower voluntarily creates, suffers to exist, incurs or
assumes any Lien, security interest, charge or encumbrance on, or with respect
to, any part of or all the Collateral, and such Lien shall not be removed within
thirty (30) days of its creation, or the Liens held by Lender in and to the
Collateral shall cease to be the first perfected Lien in and to the Collateral;
or

          7.1.5   Except as otherwise permitted in this Agreement, Borrower
sells, assigns, leases, or otherwise disposes of or relinquishes possession of,
any Collateral; or

                                      -14-
<PAGE>

          7.1.6   any representation or warranty made by Borrower herein or in
any other Loan Document or in any document or certificate furnished by Borrower
to Lender in connection herewith or therewith at any time proves to have been
incorrect in any material respect when made; or

          7.1.7   this Agreement or any Loan Document at any time for any reason
ceases to be in full force and effect or is declared by a court or governmental
agency of competent jurisdiction to be null and void; or

          7.1.8   Borrower breaches or defaults (after giving effect to any
applicable grace or cure periods) under the terms of any agreement, instrument
or document with or for the benefit of Lender which is not a Loan Document or
under any other loan, credit facility or other financial accommodation made by
Lender to Borrower, including, without limitation, all promissory notes,
guaranties, equipment leases, security agreements, mortgages and deeds of trust;
or

          7.1.9   there is a material adverse change in the business,
operations or financial condition of Borrower or in the Collateral; or

          7.1.10  a proceeding is instituted seeking a decree or order for
relief in respect of Borrower in an involuntary case under any applicable
bankruptcy, insolvency or other similar law now or hereafter in effect or for
the appointment of a receiver, liquidator, assignee, custodian, trustee,
sequestrator (or other similar official) of Borrower, or for any substantial
part of its properties or for the dissolution, winding-up or liquidation of its
affairs or any substantial part of any of its properties and such proceeding
remains undismissed or unstayed for a period of sixty (60) consecutive days or
such court enters a decree or order granting the relief sought in such
proceeding; or

          7.1.11  Borrower voluntarily suspends transaction of its business,
commences a voluntary case under any applicable bankruptcy, insolvency or other
similar law now or hereafter in effect, consents to the entry of an order for
relief in an involuntary case under any such law or consents to the appointment
of or taking possession by a receiver, liquidator, assignee, trustee, custodian,
sequestrator (or other similar official) of Borrower for any substantial part of
any of its properties, or makes a general assignment for the benefit of
creditors, or takes any action in furtherance of any of the foregoing; or

          7.1.12  final judgment(s) for the payment of money in excess of
$500,000 shall be rendered against Borrower which within thirty (30) days from
the entry of such judgment(s) shall not have been discharged or stayed pending
appeal or which shall not have been discharged or bonded in full within thirty
(30) days from the entry of a final order of affirmance on appeal; or

          7.1.13  Borrower fails to perform or observe any of its covenants or
agreements contained in Section 6.3 hereof or in the letter regarding insurance
requirements delivered by Borrower in connection with the Loan or the Loan
Documents (the "Insurance Letter") or any such insurance shall at any time cease
to be in full force and effect; or

          7.1.14  there shall be a default under or breach of any term or
condition contained in any of the Chase Loan Documents (or any loan or credit
documents executed in connection with any loan facility which replaces, is in
substitution for or whose proceeds are used to repay all or a portion of the
indebtedness covered or evidenced by the Chase Loan Documents or subsequent loan
documents) and all or a portion of such indebtedness shall have been declared
due and payable or otherwise accelerated prior to the date on which such
indebtedness would otherwise be due and payable; or

          7.1.15  the Letter of Credit shall at any time cease to be in full
force and effect; or

          7.1.16  Borrower ceases to operate its business at either of the
Premises.

     7.2  Consequences of Event of Default.
          --------------------------------

          7.2.1  If an Event of Default occurs, Lender may, by notice to
Borrower, declare the unpaid principal amount of the Note and interest accrued
thereon and all other Obligations and

                                      -15-
<PAGE>

liabilities of Borrower hereunder or under the Note or the Loan Documents to be
immediately due and payable and the same shall thereupon become and be
immediately due and payable without presentment, demand, protest or other notice
of any kind, all of which are hereby expressly waived, and an action therefor
shall immediately accrue.

          7.2.2  In addition, if an Event of Default occurs, Lender shall have
all rights and remedies granted herein and in the other Loan Documents and all
rights or remedies available at law (including, without limitation, the UCC) or
equity, whether as a secured party or otherwise (including specifically those
granted by the Uniform Commercial Code as in effect in the jurisdiction or
jurisdictions where the Collateral is located) and, except as limited by Law,
all remedies of Lender (i) shall be cumulative and concurrent; (ii) may be
pursued separately, successively or concurrently against Borrower or against all
or any portion of the Collateral, at the sole discretion of Lender; (iii) may be
exercised as often as occasion therefor shall arise, it being agreed by Borrower
that the exercise or failure to exercise any rights or remedies shall in no
event be construed as a waiver or release thereof or of any other right, remedy
or recourse; and (iv) are intended to be, and shall be, nonexclusive.  To the
fullest extent permitted by applicable Law, Lender may resort to the rights,
remedies and recourses set forth herein and any other security therefor in such
order and manner as Lender may elect.

          7.2.3  Without limiting any of the foregoing, Borrower agrees that (i)
Lender may, with or without notice and without legal process, enter upon any
property owned, leased or otherwise under the real or apparent control of
Borrower or any agent thereof or any other location where the Collateral may be
located and disassemble, disconnect, render unusable or repossess all or any
item of the Collateral; (ii) written notice mailed to Borrower, as provided in
this Agreement for the giving of notice, shall be reasonable if given ten (10)
days prior to (a) any public sale or (b) the date after which a private sale may
be made; (iii) a sale of the Collateral may be made as a unit or in parcels and
for cash and upon terms; (iv) Lender may buy the Collateral at any public sale
and at any private sale as permitted by the UCC; and (v) such public or private
sale or sales may be held or adjourned from time to time, and Lender shall have
the right to conduct such sale or sales on Borrower's premises (including,
without limitation, the Premises) or elsewhere where the Collateral is located,
and shall have the right to use Borrower's premises without charge for such sale
or sales for such time or times as Lender may determine.

               ARTICLE 8.  EXPENSES AND INDEMNITIES

     8.1  Expenses.
          --------

     Borrower shall promptly reimburse Lender for all costs, fees and expenses
incurred by Lender in connection with the negotiation, preparation, execution,
delivery, administration, operation and enforcement of each of the Loan
Documents, including, but not limited to, the attorneys' and paralegals' fees of
in-house and outside counsel, expert witness fees, lien, title search and
insurance fees, appraisal fees, all charges and expenses incurred in connection
with any and all environmental reports and environmental remediation activities,
and all other costs, expenses, taxes and filing or recording fees payable in
connection with the transactions contemplated by this Agreement, including,
without limitation, all such costs, fees and expenses as Lender shall incur or
for which Lender shall become obligated in connection with (i) any inspection or
verification of the Collateral, (ii) any proceeding relating to the Loan
Documents or the Collateral, (iii) actions taken with respect to the Collateral
and Lender's security interest therein, including, without limitation, the
defense or prosecution of any action involving Lender and Borrower or any third
party, (iv) enforcement of any of Lender's rights and remedies with respect to
the Obligations or Collateral, (v) consultation with Lender's attorneys and
participation in any workout, bankruptcy or other insolvency or other proceeding
involving Borrower or any affiliate of Borrower, whether or not suit is filed,
and (vi) any other matters relating to or arising out of the Loan and/or the
Loan Documents.  Notwithstanding anything to the contrary contained herein,
Borrower's obligation for the payment or reimbursement of the fees, costs and
expenses of Lender's outside counsel incurred in connection with the
negotiation, preparation, execution, delivery and

                                      -16-
<PAGE>

closing of the Loan Documents and the transactions contemplated thereby shall
not exceed $6,000.

               ARTICLE 9.   MISCELLANEOUS

     9.1  Further Assurances.
          ------------------

     Borrower shall at any time and from time to time upon the written request
of Lender, execute and deliver such further agreements, instruments and
documents and do such further acts and things as Lender may reasonably request
in order to effect the purposes of this Agreement.

     9.2  General Indemnity.
          -----------------

          Borrower shall indemnify, defend and hold harmless Lender from and
against, and, upon demand, reimburse Lender for, all claims, demands,
liabilities, losses, damages, judgments, penalties, costs and expenses,
including, without limitation, reasonable attorneys' fees and disbursements,
which may be imposed upon, asserted against or incurred or paid by Lender, on
account of any act performed or omitted to be performed under this Agreement,
the Note or the other Loan Documents or on account of any transaction arising
out of or in any way connected with the Collateral or this Agreement, the Note
or the other Loan Documents (including, without limitation, any litigation
matter involving claims or alleged claims by or disputes with third parties),
except as a result of the willful misconduct or gross negligence of Lender.

     9.3  No Implied Waiver; Cumulative Remedies.
          --------------------------------------

     No course of dealing and no delay or failure of Lender in exercising any
right, power or privilege under this Agreement, the Note or any of the other
Loan Documents shall affect such right, power or privilege except as and to the
extent that the assertion of any such right, power or privilege shall be barred
by an applicable statute of limitations; nor shall any single or partial
exercise thereof or any abandonment or discontinuance of steps to enforce such a
right, power or privilege preclude any further exercise thereof or of any other
right, power or privilege.  The rights and remedies of Lender under this
Agreement, the Note or the other Loan Documents are cumulative and not exclusive
of any rights or remedies which Lender would otherwise have.

     9.4  Taxes.
          -----

     Borrower agrees to pay or reimburse Lender for any and all stamp, document,
transfer, recording or filing taxes or fees and all similar impositions payable
or hereafter determined by Lender to be payable in connection with this
Agreement, the Note or the other Loan Documents (including but not limited to
those necessary or advisable to record or to ensure the enforceability or
priority of this Agreement, the Note or the other Loan Documents), as determined
by Lender in its sole discretion from time to time, and any other documents,
instruments or transactions pursuant to or in connection herewith, and Borrower
agrees to save Lender harmless from and against any and all present or future
claims or liabilities with respect to or resulting from any delay in paying or
omission to pay any such taxes, fees or similar impositions.

     9.5  Time of Essence.
          ---------------

     Time is of the essence for the performance by Borrower of the Obligations
set forth in this Agreement and the other Loan Documents.

     9.6  Modifications, Amendments or Waivers.
          ------------------------------------

     Lender and Borrower may from time to time enter into written agreements
amending, modifying or supplementing this Agreement, the Note or the other Loan
Documents or changing the rights of Lender or Borrower hereunder or thereunder,
and Lender may from time to time grant waivers or consents to a departure from
the due performance of the obligations of Borrower thereunder.  Any such
agreement, waiver or consent must be in writing and shall be effective only to
the extent set forth in such writing.  In the case of any such waiver or
consent, any Event of Default so waived or consented to shall be deemed to be
cured and not continuing, but no such waiver or consent shall extend to any
subsequent or other Event of Default or impair any right consequent thereto.

                                      -17-
<PAGE>

     9.7  Holidays.
          --------

     Except as otherwise provided herein, whenever any payment or action to be
made or taken hereunder or the Note or any other Loan Document shall be stated
to be due on a day which is not a Business Day, such payment or action shall be
made or taken on the next following Business Day (and such day shall be included
in the calculation of interest due), unless such next succeeding Business Day
falls in a different calendar month, in which case payment or action shall be
made or taken on the next preceding Business Day.

     9.8  Notices.
          -------

          9.8.1  Except as otherwise provided herein, all notices and other
communications required under the terms and provisions of this Agreement, the
Note or the other Loan Documents shall be in writing and shall become effective
when delivered by hand or received by overnight courier, telex, facsimile,
telegram or registered first class mail, postage prepaid, addressed as follows:

     If to Lender, at:

     FINOVA Capital Corporation
     115 West Century Road
     Paramus, New Jersey 07652
     Facsimile No. 201-634-3325
     Attention:  Pamela Marchant
                 Vice President

     with a copy to:

     Winick & Rich, P.C.
     919 Third Avenue
     New York, New York 10022
     Facsimile No. 212-308-5945
     Attention:  Michael A. Karpen, Esq.

     If to Borrower, at the address set forth on the Schedule or at such other
address as either party may, from time to time, designate in writing to the
other party hereto.

          9.8.2  If any notice is given by telex, facsimile transmission, or
telegram, the party giving such notice shall confirm such notice by a writing
delivered by hand or overnight courier; provided, however, that for all purposes
                                        --------  -------
hereunder, notice shall be deemed effective at the time given by telex,
telecopier or telegram.

     9.9  Governing Law.
          -------------

     THIS AGREEMENT, THE NOTE, THE OTHER LOAN DOCUMENTS AND THE RIGHTS AND
OBLIGATIONS OF THE PARTIES HERETO AND THERETO SHALL BE GOVERNED BY AND CONSTRUED
AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.

     9.10 Personal Jurisdiction and Service of Process.
          ---------------------------------------------

     BORROWER IRREVOCABLY CONSENTS THAT ANY LEGAL ACTION OR PROCEEDING AGAINST
BORROWER UNDER, ARISING OUT OF, OR IN ANY MANNER RELATING TO THIS AGREEMENT, THE
NOTE OR THE OTHER LOAN DOCUMENTS MAY BE BROUGHT IN ANY STATE COURT OF THE STATE
OF NEW YORK LOCATED IN NEW YORK COUNTY OR IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF NEW YORK.  BORROWER, BY ITS EXECUTION AND DELIVERY
OF THIS AGREEMENT, EXPRESSLY AND IRREVOCABLY CONSENTS AND SUBMITS TO THE
PERSONAL JURISDICTION OF ANY OF SUCH COURTS IN ANY SUCH ACTION OR PROCEEDING.
BORROWER FURTHER AGREES THAT ANY LEGAL ACTION OR PROCEEDING BORROWER MAY BRING,
ARISING OUT OF OR IN ANY MANNER RELATING TO THIS AGREEMENT OR THE OTHER LOAN
DOCUMENTS, SHALL ONLY BE BROUGHT IN ANY STATE COURT OF THE STATE OF NEW YORK
LOCATED IN NEW YORK COUNTY OR IN THE UNITED STATES DISTRICT COURT FOR THE
SOUTHERN DISTRICT OF NEW YORK. BORROWER ALSO IRREVOCABLY CONSENTS TO THE SERVICE
OF ANY COMPLAINT, SUMMONS, NOTICE OR OTHER PROCESS RELATING TO SUCH

                                      -18-
<PAGE>

ACTION OR PROCEEDING BY DELIVERY THEREOF TO BORROWER IN THE MANNER PROVIDED FOR
NOTICES IN THIS AGREEMENT. BORROWER HEREBY EXPRESSLY AND IRREVOCABLY WAIVES ANY
CLAIM OR DEFENSE IN ANY SUCH ACTION OR PROCEEDING BASED ON ANY ALLEGED LACK OF
PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON CONVENIENS OR ANY SIMILAR
                                         ----- --- ----------
BASIS. BORROWER SHALL NOT BE ENTITLED IN ANY SUCH ACTION OR PROCEEDING TO ASSERT
ANY DEFENSE GIVEN OR ALLOWED UNDER THE LAWS OF ANY STATE OTHER THAN THE STATE OF
NEW YORK, UNLESS SUCH DEFENSE IS ALSO GIVEN OR ALLOWED BY THE LAWS OF THE STATE
OF NEW YORK. NOTHING HEREIN SHALL AFFECT OR IMPAIR IN ANY MANNER OR TO ANY
EXTENT THE RIGHT OF LENDER TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED
AGAINST BORROWER IN ANY OTHER JURISDICTION OR TO SERVE PROCESS IN ANY MANNER
PERMITTED BY LAW.

     9.11 Waiver of Jury Trial.
          --------------------

     BORROWER AND LENDER HEREBY WAIVE ANY RIGHT TO TRIAL BY JURY WITH RESPECT TO
ANY ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY AGREEMENT, INSTRUMENT
OR DOCUMENT EXECUTED AND DELIVERED IN CONNECTION HEREWITH OR THEREWITH,
INCLUDING THE LOAN DOCUMENTS.

     9.12 Severability.
          ------------

     The provisions of this Agreement, the Note and any other Loan Document are
intended to be severable.  If any such provision is held invalid or
unenforceable in whole or in part in any jurisdiction, such provision shall, as
to such jurisdiction, be ineffective to the extent of such invalidity or
unenforceability without in any manner affecting the validity or enforceability
thereof in any other jurisdiction or the remaining provisions hereof in any
jurisdiction.

     9.13 Prior Understandings.
          --------------------

     This Agreement and the other Loan Documents supersede all prior
understandings and agreements, whether written or oral, between the parties
hereto relating to the transactions provided for herein or therein.

     9.14 Survival.
          --------

     All representations and warranties of Borrower contained in this Agreement
or any other Loan Document or made in writing in connection herewith or
therewith shall survive the execution and delivery of this Agreement, the Note
and the other Loan Documents, any investigation or inspection by Lender, the
making of the Loan hereunder, the payment of the Note or the expiration of this
Agreement.  All covenants and agreements of Borrower contained herein shall
continue in full force until payment in full of the Obligations.  Borrower's
obligation to pay the principal of and interest on the Note and all such other
amounts shall be absolute and unconditional under any and all circumstances.

     9.15 Successors and Assigns.
          ----------------------

     This Agreement shall be binding upon and shall inure to the benefit of
Lender and Borrower and their respective successors and permitted assigns,
except that Borrower may not assign, delegate or transfer any of its rights or
obligations hereunder or any interest herein without the written consent of
Lender which Lender may withhold in its absolute discretion.  Any actual or
attempted assignment by Borrower without Lender's consent shall be null, void
and of no effect whatsoever.  Lender may assign or otherwise transfer any or all
of its rights, title, interests and obligations hereunder and under the Note and
the other Loan Documents in whole or in part.  If Lender makes such an
assignment, the assignee shall have all of the rights of the Lender and Borrower
shall not assert against the assignee any defense, counterclaims or setoff which
Borrower may have against Lender.  Except to the extent otherwise required by
its context, the word "Lender" where used in this Agreement shall mean and
include the holder of the Note originally issued to Lender, and the holder of
such Note shall be bound by and have the benefits of this Agreement

                                      -19-
<PAGE>

to the same extent as if such holder had been a signatory hereto, except that no
assignee shall be deemed to assume any obligation or duty imposed upon Lender
hereunder or the other Loan Documents and Borrower shall look only to Lender for
performance thereof. As used in this Section 9.16, "assign" shall be deemed to
include a pledge, sale of, or grant of a mortgage on, or a security interest in,
any of the Collateral or this Agreement or the other Loan Documents by Lender
and the term "assignee" shall be deemed to refer to the recipient of such
pledge, sale, mortgage or security interest.

     9.16 Counterparts.
          ------------

     This Agreement may be executed in any number of counterparts and by the
different parties hereto on separate counterparts each of which, when so
executed and delivered by the parties, constituting an original but all such
counterparts together constituting but one and the same instrument.

     9.17 Publicity.
          ---------

     Lender is hereby authorized to issue appropriate press releases and to
cause a tombstone to be published announcing the consummation of the
transactions contemplated in this Agreement, including the aggregate amount of
the Loan.  All such press releases and tombstones shall be subject to the prior
approval of Borrower.

     IN WITNESS WHEREOF, the parties hereto, by their officers thereunto duly
authorized, have executed and delivered this Agreement effective as of the day
and year first above written.

ARTISAN PICTURES INC.

By: /s/ Mark Curcio
   ________________________________

Name: MARK CURCIO
      _____________________________

Title: CEO
      _____________________________

By: /s/ Robert L Denton
   ________________________________

Name: ROBERT L DENTON
      _____________________________

Title: SR VP
      _____________________________

FINOVA CAPITAL CORPORATION

By: /s/ A. Holland
    _______________________________

Name: A. HOLLAND
      _____________________________

Title: Director, Cont. Admin.
      _____________________________

                                      -20-
<PAGE>

                                   EXHIBIT A
                                   ---------

                                      Note
                                      ----

                                 See attached.

<PAGE>

                            SECURED PROMISSORY NOTE

$4,082,899.24                                                   October 20, 1998
                                                              New York, New York

     FOR VALUE RECEIVED, the undersigned, ARTISAN PICTURES INC., a Delaware
corporation ("Borrower"), hereby promises to pay to the order of FINOVA CAPITAL
CORPORATION ("Lender"), the principal sum of Four Million Eighty-Two Thousand
Eight Hundred Ninety-Nine and 24/100 Dollars ($4,082,899.24), together with
interest on the unpaid principal balance hereof from time to time outstanding at
the rate per annum and on the dates and all as otherwise provided in that
certain Loan and Security Agreement of even date herewith (the "Loan Agreement")
by and between Lender and Borrower.

     This Note is the Note referred to in the Loan Agreement, is secured as set
forth in the Loan Agreement, may not be prepaid except as provided in the Loan
Agreement and is entitled to the benefits of the Loan Agreement.  All
capitalized terms used in this Note which are not otherwise defined herein shall
have the respective meanings ascribed to them in the Loan Agreement.

     All payments of principal and interest on this Note are to be made in
lawful money of the United States of America in immediately available funds,
without setoff, counterclaim or deduction of any nature, at the office of Lender
at 115 West Century Road, Paramus, New Jersey 07652 (or such other place as the
holder hereof shall designate to Borrower in writing), prior to 12:00 Noon,
local time, on the day when due.

     If any payment of principal or interest becomes due on a day which is not a
Business Day, that payment shall be made on the next Business Day unless such
next Business Day falls in another calendar month in which event that payment
shall be made on the next preceding Business Day.

     Lender and Borrower intend this Note to comply in all respects with all
provisions of law and not to violate, in any way, any legal limitations on
interest charges.  Accordingly, if, for any reason, Borrower is required to pay,
or has paid, interest at a rate in excess of the highest rate of interest which
may be charged by Lender or which Borrower may legally contract to pay under
applicable law (the "Maximum Rate"), then the interest rate shall be deemed to
be reduced, automatically and immediately, to the Maximum Rate, and interest
payable hereunder shall be computed and paid at the Maximum Rate and the portion
of all prior payments of interest in excess of the Maximum Rate shall be deemed
to have been prepayments of the outstanding principal of this Note and applied
to the installments in the inverse order of their maturities.

     If Borrower fails to make any payment of principal or interest within ten
(10) days after the payment is due, Borrower shall pay a late charge of two and
one-half percent (2.5%) of the unpaid amount, but in no event more than the
maximum amount permitted by applicable law, and such amount shall be payable
upon demand.  Such payment is not interest for the use of money, but is intended
to cover Lender's administrative costs occasioned by such delay.

     Upon the occurrence of an Event of Default, Lender shall have all of the
rights and remedies contained in the Loan Agreement, including, without
limitation, the right, at its option, to declare all indebtedness under this
Note to be immediately due and payable.

     Borrower hereby expressly waives presentment for payment, demand for
payment, notice of dishonor, protest, notice of protest, notice of non-payment,
and all lack of diligence or delays in collection or enforcement of this Note or
the Loan Agreement.
<PAGE>

     Lender may extend the time of payment of this Note, postpone the
enforcement hereof, release any Collateral, or grant any other indulgences
whatsoever, without affecting or diminishing Lender's right of recourse against
Borrower, as provided herein and in the Loan Agreement and in the other Loan
Documents, which right is hereby expressly reserved.  The failure to assert any
right by Lender shall not be deemed a waiver thereof.

     Borrower agrees to pay all costs, fees and expenses of collection,
including, without limitation, Lender's reasonable attorneys' fees and
disbursements, in the event that any action, suit or proceeding is brought by
the holder hereof to collect this Note or if an Event of Default occurs.

     THIS NOTE IS DEEMED TO HAVE BEEN MADE IN, AND SHALL BE CONSTRUED IN
ACCORDANCE WITH THE LAWS OF, THE STATE OF NEW YORK.  BORROWER IRREVOCABLY
CONSENTS THAT ANY LEGAL ACTION OR PROCEEDING AGAINST BORROWER UNDER, ARISING OUT
OF, OR IN ANY MANNER RELATING TO THIS NOTE, THE LOAN AGREEMENT OR THE OTHER LOAN
DOCUMENTS MAY BE BROUGHT IN ANY STATE COURT OF THE STATE OF NEW YORK LOCATED IN
NEW YORK COUNTY OR IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT
OF NEW YORK.  BORROWER, BY ITS EXECUTION AND DELIVERY OF THIS NOTE, EXPRESSLY
AND IRREVOCABLY CONSENTS AND SUBMITS TO THE PERSONAL JURISDICTION OF ANY OF SUCH
COURTS IN ANY SUCH ACTION OR PROCEEDING.  BORROWER FURTHER AGREES THAT ANY LEGAL
ACTION OR PROCEEDING BORROWER MAY BRING, ARISING OUT OF OR IN ANY MANNER
RELATING TO THIS NOTE, THE LOAN AGREEMENT OR THE OTHER LOAN DOCUMENTS, SHALL
ONLY BE BROUGHT IN ANY STATE COURT OF THE STATE OF NEW YORK LOCATED IN NEW YORK
COUNTY OR IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW
YORK.  BORROWER ALSO IRREVOCABLY CONSENTS TO THE SERVICE OF ANY COMPLAINT,
SUMMONS, NOTICE OR OTHER PROCESS RELATING TO SUCH ACTION OR PROCEEDING BY
DELIVERY THEREOF TO BORROWER IN THE MANNER PROVIDED FOR NOTICES IN THE LOAN
AGREEMENT.  BORROWER HEREBY EXPRESSLY AND IRREVOCABLY WAIVES ANY CLAIM OR
DEFENSE IN ANY SUCH ACTION OR PROCEEDING BASED ON ANY ALLEGED LACK OF PERSONAL
JURISDICTION, IMPROPER VENUE OR FORUM NON CONVENIENS OR ANY SIMILAR BASIS.
                                ----- --- ----------
BORROWER SHALL NOT BE ENTITLED IN ANY SUCH ACTION OR PROCEEDING TO ASSERT ANY
DEFENSE GIVEN OR ALLOWED UNDER THE LAWS OF ANY STATE OTHER THAN THE STATE OF NEW
YORK, UNLESS SUCH DEFENSE IS ALSO GIVEN OR ALLOWED BY THE LAWS OF THE STATE OF
NEW YORK.  NOTHING HEREIN SHALL AFFECT OR IMPAIR IN ANY MANNER OR TO ANY EXTENT
THE RIGHT OF LENDER TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST
BORROWER IN ANY OTHER JURISDICTION OR TO SERVE PROCESS IN ANY MANNER PERMITTED
BY LAW.

     IN WITNESS WHEREOF, Borrower has duly executed this Note on the date first
above written.

                                ARTISAN PICTURES INC.

                                By: /s/ Mark Curcio
                                   --------------------------------

                                Name:  Mark Curcio
                                     ------------------------------

                                Title: CEO
                                      -----------------------------

                                By: /s/ Robert L. Denton
                                   --------------------------------

                                Name: Robert L. Denton
                                      -----------------------------

                                Title: SVP
                                      -----------------------------

                                Federal Tax Identification No 95-4178252

                                      -2-
<PAGE>

                                  SCHEDULE TO
                          LOAN AND SECURITY AGREEMENT

Borrower: Artisan Pictures Inc.

Address:  2700 Colorado Avenue
          Santa Monica, California 90404

Date: October 20, 1998

This Schedule forms an integral part of the Loan and Security Agreement between
the above Borrower and FINOVA Capital Corporation dated the above date, and all
references herein and therein to "this Agreement" shall be deemed to refer to
said Agreement and to this Schedule (as each of the same may be amended,
modified or supplemented from time to time.)

================================================================================

Additional Definitions (Section 1.1):

     "Chase Loan Documents" means the Amended and Restated Credit and Guaranty
Agreement dated as of July 9, 1998 by and among Borrower, the Guarantors named
therein, the Lenders named therein and The Chase Manhattan Bank, as
Administrative Agent and Fronting Bank, and all agreements, instruments and
documents executed in connection therewith.

     "Interest Rate" means twelve and fifty-three hundredths (12.53%) percent,
provided that if the yield, as published in The Wall Street Journal, on the
                                            --- ---- ------ -------
first (1st) Business Day preceding the Disbursement Date, for Treasury Notes
having a maturity date on or closest to the Maturity Date is greater than four
and sixty-eight (4.68%) percent, the Interest Rate shall be increased by the
amount of such excess.  Interest shall be calculated on the basis of a year of
360 days and twelve months of thirty (30) days each and charged on a daily
basis.

     "Maturity Date" means the date upon which the forty-eighth (48th)
consecutive monthly payment of principal and interest is scheduled to be due.

     "Outside Date" means October 30, 1998.

     "Premises" means 2700 Colorado Avenue, Santa Monica, California 90404 and
157 Chambers Street, New York, New York 10007.

================================================================================

The Loan (Section 2.1):

     "Principal Amount of the Loan:  $4,082,899.24
<PAGE>

================================================================================

Use of Proceeds (Section 2.2):

     The proceeds of the Loan shall be used by Borrower solely to pay to
     suppliers thereof the purchase price of equipment located at the Premises
     and which is Collateral hereunder or to reimburse Borrower for its payment
     to such supplier, the purchase price of such equipment:

================================================================================

Payments of Principal and Interest (Section 2.7.2):

     The Loan, together with interest thereon at the Interest Rate, shall be
     repaid in forty-eight (48) equal consecutive monthly payments of principal
     and interest each in an amount which will fully amortize the Loan at the
     Interest Rate over the Term. If the Disbursement Date is the thirtieth
     (30th) day of a month, the first such monthly payment of principal and
     interest shall be due and payable on the Disbursement Date. If the
     Disbursement Date is not the thirtieth (30th) day of a month, the first
     such monthly payment of principal and interest shall be due and payable on
     the thirtieth (30th) day of the month in which the Disbursement Date
     occurs, provided that in such event, Borrower shall also pay on such
     thirtieth (30th) day, interest on the outstanding principal of the Loan, at
     the Interest Rate, from the Disbursement Date to the thirtieth (30th) day
     of the month in which the Disbursement Date occurs. Payments of principal
     and interest shall continue to be due and payable on the thirtieth (30th)
     day of each and every month thereafter through and including the Maturity
     Date, when the entire unpaid principal balance which was not payable
     earlier, whether due to regularly scheduled payments, acceleration or
     otherwise, together with any unpaid interest, fees, costs and charges shall
     be due and payable. Lender shall compute the amount of each payment and
     advise Borrower of such amount. After the maturity of all or any part of
     the Loan (by acceleration or otherwise), interest on the Loan or such part
     thereof shall be due and payable at the Default Rate on demand.
     Contemporaneously herewith, Lender will deliver to Borrower an amortization
     schedule.

================================================================================

Prepayments (Section 2.8):

          Borrower may not prepay the Loan, in whole or in part, prior to the
          first regularly scheduled payment date occurring after the first
          anniversary of the Disbursement Date. Borrower shall have the right,
          upon not less than ten (10) days prior written notice to Lender, on
          any regularly scheduled payment date occurring after the first
          anniversary of the Disbursement Date, to prepay the outstanding
          principal balance of the Loan in whole, but not in part, provided that
          Borrower shall pay to Lender, together with the principal balance of
          the Loan, (i) all accrued and unpaid interest on the amount prepaid
          through the date of prepayment, (ii) all outstanding fees, charges and
          other amounts then due under the Loan Documents, and (iii) a
          prepayment fee in an amount equal to the product of (A) the
          outstanding principal balance of the Loan at the time of prepayment,
          times (B) the applicable percentage set forth opposite the year of the
          Term in which the prepayment is made, as set forth below:

                                      -2-
<PAGE>

               Year of Term of Loan in
               Which Prepayment is Made            Percentage
               -----------------------             ----------
                        1                           No prepayment permitted
                        2                           4.25%
                        3                           3.0%
                        4                           1.5%

     Once given, the notice of prepayment shall be irrevocable. Any acceleration
     of the Loan as a consequence of the occurrence of an Event of Default shall
     be presumed to be a mechanism to avoid the requirements of this provision
     and shall be deemed a prepayment and subject to the appropriate prepayment
     premium set forth above, in addition to all damages and other amounts
     otherwise due under this Agreement and the other Loan Documents. If the
     Loan is accelerated prior to the date upon which prepayment is permitted to
     be made hereunder, the applicable percentage shall be 5.5%.

================================================================================

Additional Conditions (Section 4.11):

     The obligation of Lender to make the Loan hereunder is subject to the
     fulfillment, to the satisfaction of Lender and its counsel, of each of the
     following conditions, in addition to the other conditions set forth in
     Article 4 above:

     (a)  There shall have been no material adverse change in the business,
          operations or financial condition of Borrower or in the Collateral
          since ________________.

     (b)  Additional conditions:

          (i)  Borrower shall have delivered to Lender a Letter of Credit in the
               face amount of $1,000,000 issued by a bank and otherwise in form
               and substance satisfactory to Lender in its sole and absolute
               discretion (the "Letter of Credit").

================================================================================

Organization and Qualification (Section 5.1):

     Borrower:

          State of Organization, etc.: Delaware

          States of Qualification, etc.: California, New York

                                      -3-

<PAGE>

================================================================================

Names (Section 6.12):     None

================================================================================

Notices (Section 9.9.1)

     Address of Notices to Borrower:

               Artisan Pictures Inc.
               2700 Colorado Avenue
               Santa Monica, California 90404
               Facsimile No.:  310-255-3840
               Attention: Kenneth Schapiro

================================================================================

     IN WITNESS WHEREOF, the parties hereto, by their officers thereunto duly
authorized, have executed and delivered this Schedule effective as of the day
and year first above written.

                    ARTISAN PICTURES INC.

                    By: /s/ Mark Curcio
                       -----------------------------------
                    Name:   Mark Curcio
                         ---------------------------------
                    Title:  CEO
                          --------------------------------

                    By: /s/ Robert L. Denton
                       -----------------------------------
                    Name: Robert L. Denton
                         ---------------------------------
                    Title: SR -VP
                          --------------------------------

                    Federal Tax Identification No. 95-4178252

                    FINOVA CAPITAL CORPORATION

                    By:  /s/ A. Holland
                       -----------------------------------
                    Name:  A. Holland
                         ---------------------------------
                    Title: Director, Cont. Admin.
                          --------------------------------

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