Document:

Preliminary Term Sheet By and Between United Air Lines, Inc

Exhibit 10.1

IN RE UAL CORPORATION, ET AL. (Case No. 02-B-48191)

Settlement Agreement By and Among UAL Corporation and all Direct
and Indirect Subsidiaries and Pension Benefit Guaranty Corporation

            This
Settlement Agreement (this "Agreement") is made effective as of the Approval
Date (defined below) by and among UAL Corporation, all of its direct and
indirect subsidiaries, and all members of its "controlled group" as defined
under the Employee Retirement Income Security Act of 1974 (as amended,
"ERISA"), and all of its successors and assigns (collectively, "United"),
and Pension Benefit Guaranty Corporation ("PBGC") (United and PBGC each
shall be referred to herein individually as a "Party" and collectively
as the "Parties").

            WHEREAS,
on December 9, 2002, United filed voluntary petitions for relief (the "Chapter
11 Cases") under Chapter 11 of Title 11 of the United States Code (the
"Bankruptcy Code") in the United States Bankruptcy Court for the Northern
District of Illinois, Eastern Division (the "Bankruptcy Court"), as Case
Numbers 02-B-48191 et. seq. and continue to operate their business as debtors-in-possession
pursuant to Sections 1107 and 1108 of the Bankruptcy Code;

            WHEREAS,
the Parties have reached a settlement and compromise (the "Agreement")
with respect to their various disputes and controversies in connection
with their defined benefit pension plans, and this Agreement sets forth
the principal terms and conditions under which United and PBGC will agree
to a settlement and compromise of their various disputes in connection
with United's Pilot Plan, the Flight Attendant Plan, the Ground Plan, the
Management, Administrative and Public Contact Employee ("MA&PC") Plan,
and the Variable Plan (collectively, the "Pension Plans"), all on the terms
and conditions hereinafter set forth.

            NOW,
THEREFORE, in consideration of the above recitals and for other good and
valuable consideration, the receipt and adequacy of which are hereby mutually
acknowledged, and intending to be legally bound hereby, the Parties do
hereby agree as follows.

                   
1.    Termination of Agreement. Prior to the Approval
Date, the Parties may continue to explore alternatives

to the termination of the Pension Plans, and if the Parties agree,
in each of their respective sole and absolute discretion, to pursue any
such alternative, this Agreement will terminate.

                   
2.    Consideration to PBGC.

                          
a.    United's proposed plan of reorganization (the "POR")
shall provide for the distribution of the

                                 
following property to PBGC (collectively, the "PBGC Securities"):

                                       
(i)    $500 million 6% Senior Subordinated Notes described
more fully on Exhibit A (the

                                              
"Senior Notes");

                                       
(ii)   $500 million 8% Contingent Senior Subordinated Notes described
more fully on Exhibit

                                              
B (the "Contingent Notes").

                                       
(iii)  $500 million 2% Convertible Preferred Stock, described more
fully on Exhibit C (the

                                              
"Preferred Stock").

                           
b.    Indenture. The documentation of the PBGC Securities
shall include default and remedy

                                  
provisions that are customarily found in public market securities and covenants
that contain the

                                  
most beneficial terms contained in any other securities of similar or junior
ranking issued under

                                  
the POR.

                   
3.    Safety Valve. If, in the Parties' judgment,
the provisions of this Agreement relating to the issuance of any of the
PBGC Securities, are materially impairing, hindering, or delaying United's
ability to obtain exit financing, including any debt or equity based component
thereof, the Parties may elect to modify the terms of the PBGC Securities
to eliminate any features thereof which relate to, among other things,
convertibility into common or preferred stock of reorganized United; provided,
however,
that the fair economic value of the modified PBGC Securities shall remain
the same.

                   
4.    Termination of Pension Plans. Subject to Paragraph
1:

                          
a.    Flight Attendant and MA&PC Plans. As soon
as practicable after the date that the Bankruptcy

                                 
Court enters an order approving the Agreement (the "Approval Date"), PBGC
staff will initiate

                                 
termination under 29 U.S.C. § 1342 of the Flight Attendant and MA&PC
Plans. If and when

                                 
PBGC issues Notices of Determination that the Flight Attendant and MA&PC
Plans should

                                 
terminate, then PBGC and United shall execute termination and trusteeship
agreements with

                                 
respect to such Plans;

      b.    Ground Plan.
As soon as practicable after the Approval Date, PBGC and United shall execute

            
termination and trusteeship agreements with respect to the Ground Plan;
      c.    Pilot Plan.
As soon as practicable after the Approval Date, PBGC and United shall execute

            
termination and trusteeship agreements with respect to the Pilot Plan,
with a termination date that is

            
either mutually agreed by the Parties or judicially determined (but in
neither event any later than the

            
latest termination date for any of the other Pension Plans); provided,
however,
that:

            
(i)    nothing in this subparagraph shall be construed to
limit the PBGC's rights to seek its proposed

                   
plan termination date of December 30, 2004;

            
(ii)   nothing in this subparagraph shall require United to act
in a manner inconsistent with that certain

                   
Letter of Agreement by and between UAL Corp., United Air Lines, Inc., and
the Air Line

                   
Pilots in the service of United Air Lines, Inc., as represented by the
Air Line Pilots

                   
Association, International, dated as of January 1, 2005 (the "ALPA LOA");
and

            
(iii)  PBGC reserves the right to appeal any such judicial determination
until there is a final,

                   
non-appealable order.

       d.    Variable
Plan. The Parties shall cooperate in United's merger of the Variable
Plan into the

             
MA&PC Plan effective as of a date that is prior to the termination
date of the MA&PC Plan, to

             
the extent permitted by law. If United decides to merge such Plans, and
the Parties agree that such

             
merger can proceed in a timely manner, then the amount by which the Variable
Plan is overfunded

             
as of the effective date of such merger, as mutually determined by the
Parties on a PBGC

             
termination basis (the "Overfunded Amount"), shall be used to reduce on
a dollar for dollar basis

             
the face amount of the Senior Notes.

        e.   Mutual
Cooperation. If and when a Pension Plan is terminated involuntarily,
United and the PBGC

             
will cooperate with each other in connection with the involuntary termination
process, including

             
without limitation (and to the extent necessary):

            
(i)    Seeking Bankruptcy Court authority to the extent
required to execute termination and

                   
trusteeship agreements with PBGC;

            
(ii)   Requesting that any order authorizing United's entry into
a termination and trusteeship

                   
agreement also provide for the termination and discharge of any rights
or obligations of the IFS

                   
(defined below) in connection with the Pension Plans, including any rights
or obligations under

                   
the FSA; and

            
(iii)  Cooperation in any federal court action required to be brought
in the event that the Bankruptcy

                   
Court does not provide United with such authority to execute such termination
and trusteeship

                   
agreements.

 5.    Termination Date.

        a.    Termination
Dates. The termination date for the Pension Plans shall be as follows:

              
(i)    For the Flight Attendant and MA&PC Plans, five
business days after the date of PBGC's

                     
Notice of Determination that the Plans should terminate;

              
(ii)   For the Ground Plan, March 11, 2005; and

              
(iii)  For the Pilot Plan, as determined pursuant to subparagraph
4(c).

        b.    Statutory
Trustee and Similar Obligations. As of the date specified in the termination
and

              
trusteeship agreement with respect to each Pension Plan:

              
(i)    PBGC shall become statutory trustee of each such
Pension Plan; and

              
(ii)   United shall no longer have any plan administrator, fiduciary,
or similar powers, rights, duties,

                     
or obligations in connection with such Pension Plan.

        c.    Recapture
Rights. PBGC retains whatever rights it has to recapture under ERISA
§ 4045 any

              
amounts paid to Pension Plan participants (consistent with the terms of
the Pension Plan) within

              
the 3 year period prior to the relevant termination date.

 6.    Restoration Rights.

        a.    Any
defined contribution plan proposed to be provided by United to its employees
following

              
termination of the Pension Plans shall be subject to PBGC's consent, such
consent not to be

              
unreasonably withheld. To the extent the Parties dispute the reasonableness
of PBGC's

              
withholding of its consent, United (and not any other party) shall have
the right to request the

              
judicial determination of the reasonableness of such withheld consent in
the Chicago federal court

              
as requested by the PBGC (United not to challenge such selection). Such
court shall have

              
exclusive jurisdiction to make such a determination. The Parties further
agree that such

              
determination shall be final, and both Parties waive their right to appeal
or seek reconsideration,

              
modification, or vacatur of such determination by such court.

        b.    Subject
to subparagraph 18(d), PBGC shall be deemed to have waived its rights to
restore any of

              
the Pension Plans in full or in part, and to cease any activities undertaken
to terminate any of the

              
Pension Plans in full or part, pursuant to 29 U.S.C. § 1347 or otherwise:

              
(i)    As of the date that the PBGC consents to the proposed
defined contribution plans set forth

                     
in subparagraph 6(a); and

              
(ii)   If PBGC does not consent to the defined contribution plans
set forth in subparagraph 6(a),

                     
then as of the date that the court determines that PBGC's consent was unreasonably

                     
withheld.

        c.    United
shall not establish any new ERISA-qualified defined benefit plans for a
period of ten (10)

              
years after the Exit Date. United separately has informed PBGC that it
will not establish any new

              
non-ERISA-qualified defined benefit plans for the same period of time.

 7.    Claims Against United.

        a.    Unfunded
Liability Claim. Subject to Paragraph 13, United agrees to provide
in the POR that

              
PBGC shall have a single prepetition, general, unsecured unfunded liability
claim (the "Unfunded

              
Liability Claim") against the United Air Lines, Inc. bankruptcy estate
(and not separate, joint and

              
several claims against each United entity) arising from the termination
of the Pension Plans, in an

              
amount to be determined under PBGC regulations, taking into account, among
other things, the

              
effect of this Agreement (including without limitation the joint and several
nature of the PBGC's

              
claims, the value provided to PBGC under the Agreement, and PBGC's waiver
of certain of its

              
claims under the Agreement).

        b.    Minimum
Funding Claims. PBGC shall be deemed to have settled and released any
and all claims

              
on its own behalf or on behalf of the Pension Plans against United arising
from or related to any

              
minimum funding obligations, including without limitation, any and all
unpaid minimum funding

              
contribution claims, claims for interest and penalties; provided,
however,
that with respect to its

              
claims for breach of fiduciary duty:

              
(i)    Such claims shall be deemed to have been settled
and released automatically unless PBGC

                     
provides written notice to United, on or before three business days before
the date on which

                     
a hearing to determine the adequacy of the disclosure statement on the
POR is first scheduled

                     
to occur, that PBGC intends to reserve the right to pursue such claims,
in which case United

                     
may in its sole and absolute discretion exercise the right to terminate
the Agreement prior to

                     
such disclosure statement hearing.

              
(ii)   In connection with PBGC's evaluation of whether to pursue
such claims for breach of

                     
fiduciary duty within the time period set forth above, the Parties shall
cooperate with each

                     
other to facilitate PBGC's due diligence with respect to such claims for
breach of fiduciary

                     
duty.

              
(iii)  In the event that United does not timely exercise its right
to terminate the Agreement in

                     
accordance with subparagraph 7(b)(i) and PBGC pursues such claims for breach
of fiduciary

                     
duty, PBGC shall only enforce such claims against, and limit any recovery
on account of such

                     
claims to, applicable, actual, and available insurance proceeds.

        c.    Insurance
Premiums. PBGC shall be deemed to have settled and released any claims
for any

              
PBGC insurance premiums (including without limitation claims for interest
and penalties).

        d.    Waiver
of Other Claims. PBGC shall be deemed to have settled and released
any claims against

              
United (other than Unfunded Liability Claims and fiduciary duty claims
not released and settled

              
pursuant to subparagraph 7(b)) on its own behalf or on behalf of the Pension
Plans relating in any

              
way to United's Pension Plans, as well as any claims against any other
entity, based on "controlled

              
group" liability or any other theory, relating in any way to United's Pension
Plan obligations or

              
liabilities.

                    
8.    Release of Liens. PBGC shall be deemed to have
fully, finally, and forever released any purported liens against any United
entity that exist (or could have been asserted) on or before the effective
date of the POR (the "Exit Date") as of such Exit Date.

                    
9.    Termination of Appointment of IFS.

                           
a.    United shall seek to terminate that certain Fiduciary
Services Agreement by and between United

                                  
and Independent Fiduciary Services, Inc. ("IFS") (and accepted by the Department
of Labor

                                  
("DOL")), dated as of September 3, 2004 (the "FSA") so that such termination
is effective (taking

                                  
into account, among other things any notice requirements) as of the termination
date of the

                                  
respective Pension Plan. PBGC shall support United's termination of the
FSA.

                           
b.    United shall seek to terminate that certain Agreement
for Appointment of Independent Fiduciary,

                                  
dated as of August 17, 2004, by and between United and the DOL (the "IFS
Appointment

                                  
Agreement"), so that such termination is effective (taking into account,
among other things, any

                                  
notice requirements) as of the termination date of the Pension Plans. PBGC
shall support United's

                                  
termination of the IFS Appointment Agreement.

                    
10.    PBGC Appeal of ALPA Settlement. PBGC shall
be deemed to have dismissed with prejudice its appeal of the order approving
the ALPA LOA (the "ALPA Settlement Order").

                    
11.    Setoff Rights. PBGC shall not assert any alleged
setoff rights in United's bankruptcy case.

                    
12.    Restructuring Activities and Plan of Reorganization.

                             
a.    PBGC shall affirmatively support, in a manner not
inconsistent with this Agreement or the

                                    
Bankruptcy Code, including, without limitation, Section 1125 of the Bankruptcy
Code, United's

                                    
restructuring activities and positions in the Chapter 11 Cases and the
POR in connection with the

                                    
implementation of this Agreement and related initiatives. Nothing herein
shall limit or impair

                                    
PBGC in the exercise of its fiduciary duties in its capacity as a member
of the Official Committee

                                    
of Unsecured Creditors. Nothing herein shall limit or impair PBGC's rights
to object to the claims

                                    
of other creditors.

                             
b.    If the Bankruptcy Court confirms a POR that does not
provide for the terms of the Agreement,

                                    
or if a POR containing the terms of the Agreement does not become effective,
then Paragraphs

                                    
7 (other than the settlement and release of fiduciary duty claims, if such
settlement and release

                                    
already has occurred pursuant to the terms of subparagraph 7(b)(i)), 8,
11, 13, and 14 shall be

                                    
null and void.

                    
13.    Release and/or Assignment of Claims. At United's
option, PBGC shall assign 45% of the distribution that it receives or is
to receive on account of its claims in the Chapter 11 Cases as directed
in writing by United.

                    
14.    PBGC's Professional Fees and Expenses. On
the Exit Date, United shall reimburse PBGC for its outside professionals'
fees and actual out of pocket expenses incurred in connection with the
Chapter 11 Cases, but in no event more than $7 million.

                    
15.    Conditions Precedent. The effectiveness of
the Agreement shall be subject to Bankruptcy Court approval (which the
Parties shall use commercially reasonable efforts to obtain); provided,
however,
that judicial approval of the Agreement shall otherwise have the same meaning
and effect as the judicial approval of the 2003 amendments to United's
collective bargaining agreements entered on April 30, 2003.

                    
16.    Conditions Subsequent. The effectiveness of
the Agreement shall be subject to the occurrence of the following conditions
subsequent prior to the date on which a hearing to confirm the POR is first
scheduled to occur:

                             
a.    Termination of all of the Pension Plans pursuant to
Title IV of ERISA;

                             
b.    PBGC's waiver of its restoration and cessation rights
set forth in Paragraph 6.

                             
c.    United having determined, in its sole and absolute
discretion, and in good faith, that its liability on

                                    
account of the following claims has been resolved to United's satisfaction
(through release,

                                    
waiver, discharge, exculpation, court order, agreement, or otherwise):

                                    
(i)    any and all claims arising from or related to any
minimum funding obligations, including

                                           
without limitation, any and all unpaid minimum funding contribution claims,
claims for

                                           
interest, penalties, and/or excise taxes, and fiduciary duty claims; and

                                    
(ii)   any and all claims (other than Unfunded Liability Claims)
relating in any way to United's

                                           
Pension Plans, as well as any claims against any other entity, based on
"controlled group"

                                           
liability or any other theory, relating in any way to United's Pension
Plan obligations or

                                           
liabilities.

                             
d.    United having determined, in its sole and absolute
discretion, and in good faith, that the rights of

                                    
the parties (including without limitation any alleged liability of United)
under that certain

                                    
Stipulation and Agreed Order Under Fed. R. Bankr. P. 9019 Approving the
Settlement of

                                    
Controversy Between the Debtors and the United States of America (the "Setoff
Stipulation")

                                    
has been resolved to its satisfaction.

                             
e.    Termination of the FSA and the IFS Appointment Agreement
in accordance with the Agreement

                                    
(subject to United's right to waive such condition subsequent).

                             
f.    The ALPA Settlement Order becoming an order no longer
subject to appeal, reconsideration, or

                                   
modification (subject to United's right to waive such condition subsequent).

                    
17.    Further Assurances. From time to time, as
and when requested by either Party hereto, the other Party hereto shall
execute and deliver, or cause to be executed and delivered, all such documents
and instruments and shall take, or cause to be taken, all such further
or other actions (subject to any limitations set forth in this Agreement),
as such other Party may reasonably deem necessary or desirable to consummate
the transactions contemplated by this Agreement, all at the sole cost and
expense of the requesting Party, including without limitation ensuring
the occurrence of all conditions subsequent to the Agreement.

                    
18.    Disputes.

                             
a.    No Litigation. Except as otherwise provided
herein, each Party hereto agrees that it shall not

                                    
commence or proceed with any litigation against the other Party or take
any action inconsistent

                                    
with the terms of the Agreement.

                             
b.    Jurisdiction Over Disputes. All disputes arising
between the Parties under the Agreement, or any

                                    
document entered pursuant hereto shall, prior to the issuance of a final
decree from the

                                    
Bankruptcy Court closing the Chapter 11 Cases, be resolved by the United
States Bankruptcy

                                    
Court for the Northern District of Illinois which has exclusive jurisdiction
over such disputes;

                                   

provided, however, that each Party reserves its rights with
respect to which is the proper court

                                    
to adjudicate an involuntary complaint to terminate a Pension Plan.

                             
c.    Termination Notice. This Agreement may be terminated
by either Party, on written notice, upon

                                    
the occurrence of any material breach of the other Party's obligations
under this Agreement,

                                    
or of any failure of any condition under this Agreement, unless such breach
or failure of condition

                                    
is cured to the reasonable satisfaction of the other Party within ten (10)
days of such notice. In

                                    
the event of such termination, this Agreement shall become null and void
in its entirety, and the

                                    
Parties shall thereafter be governed by the status quo ante without regard
to this Agreement.

                             
d.    Additional Remedies. In addition to other remedies
otherwise available to PBGC under this

                                    
Agreement, upon United's material breach of this Agreement, then PBGC,
on written notice,

                                    
may declare such breach under the Agreement, and unless such breach is
cured to the

                                    
reasonable satisfaction of PBGC within ten (10) days of such notice, then
PBGC's waiver

                                    
of rights in subparagraph 6(b) shall be null and void, and PBGC can again
assert its rights

                                    
under 29 U.S.C. § 1347.

                    
19.    Miscellaneous.

                             
a.    Authority. Subject to Bankruptcy Court approval
in United's Chapter 11 case, United

                                    
represents that it has the authority to enter into this Agreement and to
enter into the transactions

                                    
contemplated thereby.

                             
b.    Waiver. Except with respect to the requirement
for court approval or judicial determination,

                                    
each Party may waive in writing the benefit of the other Party's compliance
with any particular

                                    
provision of this Agreement. No waiver by a Party with respect to any breach
or default or of

                                    
any right or remedy and no course of dealing or performance, will be deemed
to constitute a

                                    
continuing waiver of any other breach or default or of any other right
or remedy, unless such

                                    
waiver is expressed in writing signed by the Party to be bound. Failure
of a Party to exercise

                                    
any right will not be deemed a waiver of such right or rights in the future.

                             
c.    Non-Severability. Each of the terms of this
Agreement are a material and integral part hereof.

                                    
Should any provision of this Agreement be held unenforceable or contrary
to law, the entire

                                    
Agreement shall be deemed null and void.

                             
d.    Notices. Any notice required or permitted to
be given under this Agreement shall be in writing

                                    
and shall be deemed to have been given upon the earlier of receipt or (i)
three (3) business days

                                    
after deposit in the United States mail, registered or certified mail,
postage prepaid, return

                                    
receipt requested, (ii) one (1) business day after deposit with Federal
Express or similar

                                    
overnight courier, or (iii) same day if delivered by hand, and addressed
as provided in Exhibit

                                    
D attached hereto or such other address as either party may, from time
to time, specify in

                                    
writing to the other.

                             
e.    Governing Law. Federal law shall govern this
agreement, and to the extent applicable and not

                                    
inconsistent therewith, the law of the State of Illinois shall apply.

                             
f.     Amendments. The Parties may amend or
modify this Agreement in a writing executed by both

                                    
Parties.

                             
g.    Counterparts. This Agreement may be executed
in one or more counterparts, each of which

                                    
together or separately shall constitute an original and when taken together,
shall be considered

                                    
one and the same binding agreement.

                             
h.    Business Day. As used herein, the term "Business
Day" means any calendar day other than a

                                    
Saturday, Sunday, or any nationally recognized holiday or other day on
which the Office of the

                                    
Clerk of the Bankruptcy Court shall be closed.

                             
i.     Acceptance of Facsimile Signatures. Delivery
of an executed signature page of this Agreement

                                    
by facsimile transmission shall be as effective as delivery of a manually
executed counterpart

                                    
hereof.

* * * * * * *
(signature pages to follow)

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

	 	UNITED AIR LINES, INC.
By: Its Duly Authorized Agent

Name:_/s/_Frederic F. Brace____________

Title:_Chief Financial Officer_____________

Dated: _April 22, 2005_________________

	 	

PENSION BENEFIT GUARANTY CORPORATION
By: Its Duly Authorized Agent

Name:_/s/ Bradley D. Belt_______________

Title:_Executive Director________________

Dated: _April 22, 2005_________________

 

 

 

EXHIBIT A

	 	 	Senior Subordinated Notes
	Issuer:	 	Reorganized UAL Corp.
	Guarantor:	 	United Air Lines, Inc.
	Issue:	 	6% Senior Subordinated Notes (the "Senior Notes")
to be issued no later than the Exit Date (the "Issuance Date").
	Initial Holder:	 	Pension Benefit Guaranty Corporation.
	Principal Amount:	 	$500,000,000 in denominations of $1,000 (subject
to potential reductions set forth in the Agreement).
	Term:	 	25 years from the Issuance Date.
	Amortization:	 	None prior to maturity; full principal to be
repaid at the maturity date.
	Interest Rate	 	Interest shall be payable with in-kind notes
or common stock on a semi-annual basis in arrears through 2011; thereafter,
interest shall be paid in cash in arrears on a semi-annual basis. Notwithstanding
the foregoing, the interest rate on the Senior Subordinated Convertible
Notes (the "Pilot Notes") provided to the pilots under the ALPA LOA shall
not be more than the interest rate on the Senior Notes.
	Security:	 	None.
	Ranking:	 	Pari passu with all current and future UAL Corp.
or United Air Lines, Inc. senior unsecured debt; senior to all current
and future subordinated debt; senior to any notes contemplated to be issued
to any labor groups under a POR (including without limitation the Pilot
Notes). 
	Transferability:	 	The Notes shall not contain any transfer restrictions.
	Call Rights:	 	Callable at 100% of par at any time.
	Mandatory Prepayments:	 	Mandatory prepayment at par upon a "fundamental
change"; no prepayment obligations for mergers in which the Issuer is the
surviving entity.
	Other Terms and Conditions:	 	The documentation of the Notes shall include
such other terms and conditions as are customarily found in public market
securities.

 

EXHIBIT B

	 	 	Contingent Senior Subordinated Notes
	Issuer:	 	Reorganized UAL Corp.
	Guarantor:	 	United Air Lines, Inc.
	Issue:	 	8% Contingent Senior Subordinated Notes (the
"Contingent Notes") to be issued no later than 45 days following the end
of any given fiscal year in which there is a Trigger Date (each, an "Issuance
Date").
	Initial Holder:	 	Pension Benefit Guaranty Corporation.
	Principal Amount:	 	Up to eight (8) tranches of $62,500,000 each,
in denominations of $1,000.
	Term:	 	Each tranche shall mature 15 years from its
respective Trigger Date.
	Amortization:	 	None prior to maturity; full principal to be
repaid at the maturity date.
	Interest Rate	 	Interest shall accrue beginning on the Trigger
Date and shall be paid in cash on a semi-annual basis in arrears following
Issuance.
	Conditions to Issuance:	 	Contingent Notes will be issued on the Issuance
Date following any fiscal year, starting with the fiscal year ending December
31, 2009 and ending with the fiscal year ending December 31, 2017, in which
there is a Trigger Date. 
"Trigger Date" is any Measuring Date where the following condition to
Issuance is met: LTM EBITDAR exceeds $3.5 billion; provided, however,
that (w) no more than two tranches of Contingent Notes may be issued upon
any Issuance Date; (x) no more than eight tranches of Contingent Notes
may be issued in total; (y) United shall not agree to provisions in the
documentation of such securities existing at the time that explicitly prohibit
the issuance of the Contingent Notes; and (z) if the issuance of additional
Contingent Notes would cause a default under documentation of any securities
existing at the time, then United shall issue Common Stock having a value
of $62.5 million to PBGC in lieu of each tranche of Contingent Notes that
otherwise would be issued.

A "Measuring Date" occurs on the following dates: June 30 and December
31.

	Security:	 	None.
	Ranking:	 	Pari passu with all current and future UAL Corp.
or United Air Lines, Inc. senior unsecured debt; senior to all current
and future subordinated debt; senior to any notes contemplated to be issued
to any labor groups under a POR (including without limitation the Pilot
Notes). 
	Transferability:	 	The Contingent Notes shall not contain any transfer
restrictions.
	Call Rights:	 	Callable at 100% of par at any time.
	Mandatory Prepayments:	 	Once issued, mandatory prepayment at par upon
a "fundamental change"; no prepayment obligations for mergers in which
the Issuer is the surviving entity.
	Other Terms and Conditions:	 	Once issued, the documentation of the Contingent
Notes shall include such other terms and conditions as are customarily
found in public market securities.

 

EXHIBIT C

	 	 	Convertible Preferred Stock
	Issuer:	 	Reorganized UAL Corp.
	Guarantor:	 	United Air Lines, Inc.
	Issue:	 	Convertible Preferred Stock (the "Preferred
Stock") to be issued no later than the Exit Date (the "Issuance Date").
	Initial Holder:	 	Pension Benefit Guaranty Corporation.
	Shares:	 	5,000,000
	Liquidation Preference:	 	$100 per share (the "Issue Price"), plus the
sum of all accrued and unpaid dividends.
	Term:	 	15 years from the Issuance Date.
	Conversion:	 	Convertible into common stock of Reorganized
UAL Corp. at a conversion price ("Conversion Price") equal to 125% of the
average of the closing prices of the Common Stock during the first 60 days
following the Exit Date.
	Dividends	 	2% annual coupon shall be paid in-kind on a
semi-annual basis in arrears.
	Optional Conversion:	 	The Holder may convert shares of Preferred Stock
at any time after the 2nd anniversary of the Issuance Date.
	Security	 	None.
	Ranking	 	Pari passu with all current and future UAL Corp.
or United Air Lines, Inc. preferred stock; subordinated to all current
and future debt obligations; senior to all current and future classes of
common stock.
	Transferability:	 	The preferred stock shall be non-transferable
for a period of two years following the Issuance Date.
	Optional Redemption:	 	Redeemable at any time at the Issuer's option
at 100% of Liquidation Preference, subject to a 45 day notice period during
which time the Holder shall have the right to convert.
	Mandatory Redemption:	 	Mandatory redemption upon a "fundamental change";
no mandatory redemption obligations for mergers in which the Issuer is
the surviving entity.
	Anti-Dilution Protections:	 	The Conversion Price will be subject to customary
anti-dilution adjustments, including upon (i) stock or extraordinary dividends,
(ii) reclassifications, subdivisions or combinations of the Common Stock,
(iii) the issuance of rights or warrants to all holders of Common Stock
convertible into or exercisable for Common Stock at less than the then-current
market price, (iv) distribution of the capital stock of an Issuer subsidiary
to holders of the Common Stock and (v) any other distributions of assets
by the Issuer to holders of the Common Stock.
	Voting Rights:	 	None prior to conversion; upon conversion, the
Common Stock shall have voting rights no less than any other class of common
stock.
	Other Terms and Conditions:	 	The documentation of the Preferred Stock shall
include such other terms and conditions as are customarily found in public
market securities.

 

EXHIBIT D

(Notice Addresses)

	If to the Company:	United Air Lines, Inc.

1200 East Algonquin Road

Elk Grove Township, Illinois 60007

Attention: Paul Lovejoy

Facsimile: 847-700-4099
	with copies to:	Kirkland & Ellis

200 East Randolph Drive

Chicago, Illinois 60601

Attention: James H.M. Sprayregen

Facsimile: 312-861-2200
	 	 
	If to PBGC	PENSION BENEFIT GUARANTY CORPORATION

Office of the Chief Counsel

1200 K Street, NW, Suite 340

Attention: Jeffrey B. Cohen

Facsimile: 202-326-4112
	 	 
	with copies to:	Kelley Drye & Warren LLP

333 West Wacker Drive

Chicago, Illinois 60606

Attention: Christopher T. Sheean

Facsimile: 312-857-7095

and

Kelley Drye & Warren LLP

101 Park Avenue

New York, New York 10178

Attention: Merrill B. Stone

Facsimile: (212) 808-7897EXHIBIT 10.1 - 04/28/2005 FORM 8-K

EXHIBIT 10.1

Bally Total
Fitness Holding Corporation

Employment
Agreement

            
THIS EMPLOYMENT AGREEMENT (the “Agreement”) made in Chicago, Illinois,
dated as of May 2, 2005 (the “Effective Date”), by and between Bally
Total Fitness Holding Corporation, a Delaware Corporation with its headquarters
at 8700 West Bryn Mawr Avenue, Chicago, Illinois, 60631-3707 (hereinafter called
the “Company” or “Bally”), and Jim McDonald (hereinafter
called the “Executive”). 

            
WHEREAS, the Company desires to obtain the Executive’s experience,
skills, knowledge, and background for the benefit of the Company and the
efficient achievement of its long-term strategy, and is therefore willing to
employ the Executive upon the terms and conditions, and in consideration of the
compensation and other benefits, provided herein; and 

            
WHEREAS, the Executive is willing to serve the Company under such terms
and conditions; 

            
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements of the parties herein contained, the parties hereto
agree as follows: 

	1.	Definitions.  
For purposes of this Agreement, the following capitalized terms shall have the
indicated meanings: 

	 	(a)	“Annual
Bonus” shall mean the Executive’s Annual Bonus, as defined in
Section 4(b) of this Agreement. 

	 	(b)	“Bally”
shall mean the Company. 

	 	(c)	“Base
Salary” shall mean the Executive’s Base Salary, as defined in
Section 4(a) of this Agreement. 

	 	(d)	“Benefit”
shall mean a Benefit, as defined in Section 8(a) of this Agreement.

	 	(e)	“Board”
shall mean the Board of Directors of the Company. 

	 	(f)	“Business
Relocation Beyond a Reasonable Commuting Distance” shall mean a change
in the Executive’s principal work location to a location that (i) is more
than twenty (20) highway miles from the Executive’s principal work location
immediately prior to the Change in Control, and (ii) increases the
Executive’s commuting distance in highway mileage. 

	 	(g)	“Cause”
shall mean the Executive’s:

	 	(i)	Conviction of a
crime, including by a plea of guilty or nolo contendere, involving theft,
fraud, perjury, or moral turpitude;

	 	(ii)	Intentional or
grossly negligent disclosure of confidential or trade secret information of the
Company to anyone not entitled to such information;

	 	(iii)	Omission or
dereliction of any statutory or common law duty of loyalty to the Company;

	 	(iv)	Failure to cure
a material violation of the Company’s Code of Conduct or any other written
Company policy within thirty (30) days following the Company’s written
notice to the Executive of such material violation and the steps required by the
Executive to effect such cure; or

	 	(v)	Repeated
failure to carry out the material components of the Executive’s duties
despite specific written notice to do so by the Board.

	 	(h)	“CEO”
shall mean the Chief Executive Officer of the Company. 

	 	(i)	“Change
In Control” shall mean the happening of any of the following events:

	 	(i)	An acquisition
by any individual, entity, or group (within the meaning of Sections 13(d)(3) or
14(d)(2) of the Exchange Act) (an “Entity”) of beneficial ownership
(within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 50% or
more of either (A) the then-outstanding shares of common stock of the Company
(the “Outstanding Company Common Stock”), or (B) the combined voting
power of the then-outstanding voting securities of the Company entitled to vote
generally in the election of directors (the “Outstanding Company Voting
Securities”); excluding, however, the following: (1) any acquisition
directly from the Company, other than an acquisition by virtue of the exercise
of a conversion privilege unless the security being so converted was itself
acquired directly from the Company, (2) any acquisition by the Company, (3) any
acquisition by any employee benefit plan (or related trust) sponsored or
maintained by the Company or any corporation controlled by, or under common
control with, the Company, or (4) any acquisition by any corporation pursuant to
a transaction which complies with clauses (A), (B), and (C) of subsection (iii)
of this Section (i);

	 	(ii)	A change in the
composition of the Board such that the individuals who, as of the Effective
Date, constitute the Board (such Board shall be hereinafter referred to as the
“Incumbent Board”) cease for any reason to constitute at least a
majority of the Board; provided, however, that for purposes of
this definition, any individual who becomes a member of the Board subsequent to
the Effective Date, whose election, or nomination for election, by the
Company’s stockholders was approved by a vote of at least a majority of
those individuals who are members of the Board and who were also members of the
Incumbent Board (or deemed to be such pursuant to this provision), shall be
considered as though such individual 

-2-

	 	 	were a member
of the Incumbent Board; and
provided further, however, that any such individual whose initial
assumption of office occurs as a result of or in connection with either an
actual or threatened election contest (as such terms are used in Rule 14a-11 of
Regulation 14A promulgated under the Exchange Act) or other actual or threatened
solicitation of proxies or consents by or on behalf of an Entity other than the
Board shall not be so considered as a member of the Incumbent Board;

	 	(iii)	The approval by
the stockholders of the Company of a merger, reorganization, consolidation, or
sale or other disposition of all or substantially all of the assets of the
Company (each, a “Corporate Transaction”) or, if consummation of such
Corporate Transaction is subject, at the time of such approval by stockholders,
to the consent of any government or governmental agency, the obtaining of such
consent (either explicitly or implicitly by consummation, followed by the
consummation of the Corporate Transaction); excluding, however, such a Corporate
Transaction pursuant to which (A) all or substantially all of the individuals
and entities who are the beneficial owners, respectively, of the Outstanding
Company Common Stock and Outstanding Company Voting Securities immediately prior
to such Corporate Transaction will beneficially own, directly or indirectly,
more than sixty percent (60%) of, respectively, the outstanding shares of common
stock, and the combined voting power of the then-outstanding voting securities
entitled to vote generally in the election of directors, as the case may be, of
the corporation resulting from such Corporate Transaction (including, without
limitation, a corporation or other person which as a result of such transaction
owns the Company or all or substantially all of the Company’s assets either
directly or through one or more subsidiaries (a “Parent Company”) in
substantially the same proportions as their ownership, immediately prior to such
Corporate Transaction, of the Outstanding Company Common Stock and Outstanding
Company Voting Securities, as the case may be, (B) no Entity (other than the
Company, any employee benefit plan (or related trust) of the Company, such
corporation resulting from such Corporate Transaction, or, if reference was made
to equity ownership of any Parent Company for purposes of determining whether
clause (A) above is satisfied in connection with the applicable Corporate
Transaction, such Parent Company) will beneficially own, directly or indirectly,
twenty percent (20%) or more of, respectively, the outstanding shares of common
stock of the corporation resulting from such Corporate Transaction or the
combined voting power of the outstanding voting securities of such corporation
entitled to vote generally in the election of directors unless such ownership
resulted solely from ownership of securities of the Company prior to the
Corporate Transaction, and (C) individuals who were members of the Incumbent
Board will immediately after the consummation of the Corporate Transaction
constitute at least a majority of the members of the board of directors of the
corporation resulting from such Corporate Transaction (or, if reference was made
to 

-3-

	 	 	equity
ownership of any Parent Company for purposes of determining whether clause (A)
above is satisfied in connection with the applicable Corporate Transaction, of
the Parent Company); or 

	 	(iv)	The approval by
the stockholders of the Company of a complete liquidation or dissolution of the
Company. 

	 	(j)	“Code”
shall mean the Internal Revenue Code of 1986, as amended. 

	 	(k)	“Company”
shall mean Bally Total Fitness Holding Corporation, a Delaware corporation.

	 	(l)	“Competitive
Activity” shall mean a Competitive Activity, as defined in Section
5(a)(i)of this Agreement.

	 	(m)	 “Effective
Date” shall mean May 2, 2005. 

	 	(n)	“Exchange
Act” shall mean the Securities Exchange Act of 1934, as amended.

	 	(o)	“Excise
Tax” shall mean the Excise Tax, as defined in Section 8(a) of this
Agreement.        

	 	(p)	“Excise
Tax Adjustment Payment” shall mean the Excise Tax Adjustment Payment,
as defined in Section 8(a) of this Agreement.

	 	(q)	“Executive”
shall mean Jim McDonald. 

	 	(r)	“Expiration
Date” shall mean the Expiration Date, as defined in Section 3 of this
Agreement. 

	 	(s)	“Extension
Date” shall mean the Extension Date, as defined in Section 3 of this
Agreement.
 

	 	(t)	“Firm”
shall mean the Firm, as defined in Section 8(b) of this Agreement. 

	 	(u)	“Good
Reason” shall mean the occurrence of any of the following events
without the Executive’s express written consent: 

	 	(i)	A material
Reduction in Authority or Responsibility; 

	 	(ii)	A Reduction in
Compensation; or 

	 	(iii)	A Business
Relocation Beyond a Reasonable Commuting Distance. 

	 	A Reduction in
Authority or Responsibility shall be determined in accordance with the criteria
set forth in the definition of such term below; provided, however,
that (A) changes in reporting relationships (so long as Executive still directly
reports to the Chairman or Chief Executive Officer) or (B) a reduction in the

-4-

	 	Executive’s
business unit’s budget or a reduction in the Executive’s business
unit’s head count, by themselves, shall not constitute Good Reason.

	 	(v)	“Income
Tax Gross-Up Payment” shall mean the Income Tax Gross-Up Payment, as
defined in Section 4(d) of this Agreement.

	 	(w)	“Income
Taxes” shall mean any Federal, state, or local income taxes or FICA
taxes. 

	 	(x)	“Indemnitees”
shall mean the Indemnitees, as defined in Section 6(h) of this Agreement.

	 	(y)	“IRS”
shall mean the Internal Revenue Service.

	 	(z)	“Long-Term
Disability” shall mean the Executive’s mental or physical
condition which would render the Executive eligible to receive disability
benefits under the Basic Bally Long-Term Disability Plan and Bally Executive
Medical Plan or any successor to such plans. 

	 	(aa)	“LTIP”
shall mean the LTIP, as defined in Section 4(b) of this Agreement. 

	 	(bb)	“Products”
shall mean the Products, as defined in Section 19 of this Agreement. 

	 	(cc)	“Reduction
in Authority or Responsibility” shall mean, during the Term of
Employment, (i) the assignment to the Executive, within six (6) months before or
any time after a Change in Control, of any duties that are materially
inconsistent in any respect with the Executive’s position (which may
include status, offices, titles, and reporting requirements), authority, duties,
or responsibilities as in effect immediately prior to such assignment, or (ii)
any other action by the Company which results in a diminution in such position,
authority, duties, or responsibilities, excluding for this purpose (A) an
isolated, insubstantial, and inadvertent action taken in good faith and which is
remedied by the Company promptly after receipt of notice thereof given by the
Executive, or (B) any temporary Reduction in Authority or Responsibility while
the Executive is absent from active service on any approved disability, or other
approved leave of absence. 

	 	 	By way of
example, a reduction under this subsection (cc) shall include, but not be
limited to: 

	 	(A)	The removal of
any division, business or operating unit, or other business organization from
the direct managerial responsibility of the Executive, or material reduction in
the size or scope of responsibility or operating budget of any division,
business, operating unit, or other business organization for which the Executive
has direct managerial responsibility; or

-5-

	 	(B)	A reduction in
the Executive’s authority to legally bind the Company without first
obtaining any additional authority or approval. 

	 	 	It is intended
by this definition that a Change in Control by itself, absent a Reduction in
Authority or Responsibility as described above, will not constitute Good Reason.

	 	(dd)	“Reduction
in Compensation” shall mean a reduction in the Executive’s
“Total Annual Compensation” (defined as the sum of the
Executive’s annual Base Salary rate and Target Annual Bonus) for any
calendar or fiscal year, as applicable, to an amount that is less than the
Executive’s Total Annual Compensation in effect immediately prior to such
reduction. 

	 	(ee)	“Related
Company” shall mean any subsidiary or affiliate of the Company. 

	 	(ff)	“Target
Annual Bonus” shall mean the Executive’s Target Annual Bonus, as
defined in Section 4(b) of this Agreement. 

	 	(gg)	“Term
of Employment” shall mean the Executive’s Term of Employment, as
defined in Section 3 of this Agreement. 

	 	(hh)	“Termination
Date” shall mean the Termination Date, as defined in Section 3 of this
Agreement. 

	 	(ii)	“Works”
shall mean the Works, as defined in Section 19 of this Agreement. 

	2.	Employment and Duties.

	 	(a)	Position.  
The Company hereby agrees to employ the Executive, and the Executive hereby
agrees to serve the Company, during the Term of Employment under the title of
Senior Vice President, Chief Marketing Officer of Bally, who shall have such
authority, duties, and responsibilities as are commensurate with such position
on the terms and conditions hereinafter set forth, and who shall directly report
to the Chief Executive Officer. 

	 	(b)	Performance
of Duties.   The Executive shall devote his full working attention and
energies to the performance of his duties as Senior Vice President, Chief
Marketing Officer or as may otherwise be directed by the Chief Executive
Officer, and agrees to use his reasonable best efforts to perform his duties
faithfully and efficiently. 

	 	(c)	Related
Companies.   The Executive agrees to serve, as requested, as an officer or
director of any Related Company, and shall receive no additional compensation
for such service. 

	3.	Term of Employment.  
The Company shall employ the Executive for a period of time beginning on the
Effective Date and ending on his Termination Date as hereby described in this
Section 3 (the “Term of Employment”). Unless the Executive’s
employment is 

-6-

	 	sooner
terminated, as provided in Section 6 of this Agreement, the Term of Employment
shall end on May 1, 2008 (“Termination Date”);
provided, however, that on May 2, 2008, and on each anniversary of
May 2, 2008 thereafter until the Term of Employment ends (each such May 2 is
hereinafter referred to as the “Extension Date”), the Term of
Employment shall be automatically extended for twelve (12) additional months
unless, at least ninety (90) days prior to any such Extension Date, either party
gives written notice to the other that the Term of Employment shall not be so
extended, in which case the Executive’s employment with the Company shall
terminate on the day immediately preceding the relevant Extension Date (the
“Expiration Date”). The day immediately preceding the relevant
extension date (the “Expiration Date”) shall then become the
“Termination Date.”

	4.	Executive’s
Compensation and Benefits.   As remuneration to the Executive for his
services to the Company hereunder, the Company shall compensate the Executive as
follows during the Term of Employment: 

	 	(a)	Base Salary.  
The Executive’s annual base salary (“Base Salary”) shall be
$350,000 commencing as of the Effective Date and, except as it may be modified
in accordance with this Section 4, continuing throughout the Term of Employment.
The Base Salary shall be payable in conformity with the Company’s
then-current payroll practices, as modified from time to time. The Base Salary
as of the Effective Date may not be decreased during the Term of Employment and
will be reviewed during the Term of Employment in accordance with Bally’s
usual salary review process for executive officers. Effective as of the date of
any increase in the Executive’s Base Salary, the Base Salary as so
increased shall be considered the new Base Salary for all purposes of this
Agreement. 

	 	(b)	Annual Incentive.  
For each calendar year during the Term of Employment, the Executive shall be
eligible to receive an annual cash bonus (“Annual Bonus”), based upon
the attainment of such performance criteria as may be reasonably established by
the Board. The Executive’s target Annual Bonus (“Target Annual
Bonus”) for each full calendar year shall be fifty percent (50%) of his
annual Base Salary (prorated for the calendar year in which the Term of
Employment ends prior to December 31). During the Term of Employment, the
performance goals to be achieved, and the extent to which those goals have been
achieved for purposes of calculating the amount of the actual payment as a
percentage of target (which percentage may be more or less than one hundred
percent (100%) of target), will be determined by the Chief Executive (b)
Officer. For the calendar year 2005, Executive shall receive a guaranteed
minimum bonus of one hundred fifty thousand dollars ($150,000) payable in March
2006. 

	 	(c)	Long-Term Incentive.  
The Executive shall be eligible to participate in the Bally Total Fitness 1996
Long-Term Incentive Plan (“LTIP”) and any and all successor or
replacement plans, as may be determined by the Board or duly authorized
Committee of the Board. 

-7-

	 	(d)	Restricted Shares Tax Gross-Up.  
If at any time following a Change in Control the vesting of any restricted
shares of Company stock awarded to the Executive under the LTIP subjects the
Executive to any Federal, state, or local income taxes or FICA taxes
(collectively, “Income Taxes”), then the Executive shall be entitled
to an additional lump-sum cash payment from the Company (the “Income Tax
Gross-Up Payment”), subject to mandatory withholding. The Income Tax
Gross-Up Payment shall equal the amount of Income Taxes payable only with
respect to the first twelve dollars ($12.00) of compensation recognized by the
Executive for each such share of stock, plus the Income Taxes attributable to
such Income Tax Gross-Up Payment. For purposes of calculating an Income Tax
Gross-Up Payment to the Executive in any year, it shall be assumed that the
Executive is subject to Income Taxes at the highest marginal Federal and
applicable state and local income tax rates, respectively, for the year in which
the Income Tax Gross-Up Payment is paid. Also, the Income Tax Gross-Up Payment
to the Executive shall reflect the Federal tax benefits attributable to the
deduction of applicable state and local income taxes. 

	 	(e)	Supplemental Retirement Plan.  
The Company shall use its reasonable best efforts to develop and adopt a
supplemental retirement plan for the benefit of the Executive, which may include
such other senior executive officers of the Company as the Board determines is
appropriate, and which may provide for benefit accruals retroactive to the
Effective Date of this Agreement. The benefits, terms, and conditions of such
plan shall be in the sole discretion of the Company. 

	 	(f)	Car Allowance.  
The Executive shall be entitled to receive a monthly payment of $1,250.00 as a
car allowance. 

	 	(g)	Financial Counseling Services.  
The Executive shall be entitled to receive reimbursement of up to $8,000 per
calendar year for financial counseling services from a qualified financial
counselor, including the preparation of personal income tax returns, plus a tax
adjustment payment equal to the amount, calculated in accordance with the
Company’s practice for senior executives, to cover the Income Taxes
estimated to be incurred by the Executive by reason of any imputed income for
financial counseling services and the tax adjustment payment provided for in
this Section 4(g). Reimbursement for such financial counseling services shall be
made to the Executive upon presentation of appropriate invoices from the
qualified financial counselor. 

	 	(h)	Home Security Services.  
The Executive shall be entitled to receive reimbursement of up to $2,000 per
calendar year for expenses incurred for the provision of personal security
services for the Executive and his immediate family. Reimbursement for such
personal security services shall be made to the Executive upon presentation of
appropriate invoices. 

	 	(i)	Life Insurance.  
The Company shall obtain at its expense life insurance coverage on the life of
the Executive for each calendar year during the Term of Employment, providing a
death benefit to the Executive’s designated beneficiary 

-8-

	 	 	or
beneficiaries in an amount equal to three (3) times the sum of the
Executive’s annual Base Salary rate in effect as of the last day of the
immediately preceding calendar year plus the amount of the Executive’s
Annual Bonus paid in such preceding calendar year. 

	 	(j)	 Vacation.  
The Executive shall be entitled to no less than four (4) weeks of paid vacation
each calendar year (prorated for the calendar year in which the Term of
Employment ends prior to December 31), and such personal days and paid holidays
as are generally available to other similarly situated executive employees of
the Company. The Company agrees that Executive may take as vacation days June 24
- July 5, 2005 for a previously booked vacation. 

	 	(k)	Deferral Account.  
The Executive shall be entitled to participate in the Company’s executive
deferred compensation program in accordance with its terms. The benefits, terms,
and conditions of such program shall be in the sole discretion of the
Company.

	 	(l)	Expenses.  
The Executive shall be entitled to receive prompt reimbursement for all
reasonable and necessary expenses incurred by the Executive in the connection
with the performance of his duties hereunder, in accordance with Company
policies for similarly situated senior executives. 

	 	(m)	Signing Bonus.  
The Executive shall receive a twenty five thousand dollar ($25,000) signing
bonus in the first pay period following the Effective Date.

	5.	Restrictive Covenants.

	 	(a)	Noncompetition.  
The following noncompetition provisions shall apply: 

	 	(i)	The Executive
shall not, at any time during his employment with the Company or the twelve (12)
month period commencing on the day immediately following the date (the
“Termination Date”) on which his employment with the Company
terminates for any reason, without the consent of the Board, directly or
indirectly engage in any activity that the Board, in the exercise of its
reasonable business judgment, determines is competitive with the Company’s
business whether alone, as a partner of any partnership or joint venture, or as
an officer, director, employee, independent contractor, consultant, or investor
(a “Competitive Activity”). In furtherance of the immediately
foregoing sentence, the Executive shall promptly notify the Board (or its
representative) in advance in writing (which shall include a description of the
activity) of his intention to engage in any activity which could reasonably be
deemed to be subject to this noncompetition provision, and the Board shall
respond to the Executive in writing within 10 calendar days indicating its
approval or objections to the Executive’s engagement in the activity;
provided, however, that if the Board (or its representative) does
not respond to or request additional information from the Executive within such
ten (10) day 

-9-

	 	 	period the
Board’s approval shall be deemed to be granted. If the Executive fails to
notify the Board of his intended activity in advance, the Board shall retain all
its rights of objections. Notwithstanding the preceding provisions of this
subsection (a)(i), this subsection (a)(i) shall not be construed as preventing
the Executive from investing his personal assets in any business that competes
with the Company, in such form or manner as will not require any services on the
part of the Executive in the operation of the affairs of the business in which
such investments are made, but only if the Executive does not own or control
five percent (5%) or more of any class of the outstanding stock, or of any
profits interest or capital interest (as applicable), of such
business.

	 	(ii)	The payments,
benefits, and other entitlements under this Agreement are being made in
consideration of, among other things, the obligations of this Section 5 and, in
particular, compliance with Section 5(a) of this Agreement; provided,
however, that all such payments, benefits, or other entitlements under
the Agreement are subject to and conditioned upon the Executive’s entering
into the Release and Agreement referred to in Section 6(h) of this
Agreement.

	 	(iii)	During the
twenty-four (24) month period commencing on the day immediately following the
Termination Date, the Executive shall not (A) influence or attempt to influence
any person, firm, association, partnership, corporation, or other entity that is
a contracting party with the Company to terminate any written agreement with the
Company, except to the extent the Executive is acting on behalf of the Company
in good faith, or (B) hire or attempt to hire for employment any person who is
employed by the Company, or attempt to influence any such person to terminate
employment with the Company, except to the extent the Executive is acting on
behalf of the Company in good faith; provided, however, that
nothing herein shall prohibit the Executive from generally advertising for
personnel not specifically targeting any executive or other personnel of the
Company.

	 	(iv)	During the Term
of Employment and for the twenty-four (24) month period immediately thereafter,
the Executive shall not publicly criticize or disparage the Company, any Related
Company, or any director, officer, executive, or agent of the Company or any
Related Company, except as may be required by law.

	 	(v)	During the Term
of Employment and for the twenty-four (24) month period immediately thereafter,
the Company shall not issue any defamatory statements about the
Executive.

	 	(b)	Confidentiality.  
The Executive agrees that he will not, at any time during his Term of Employment
or thereafter, disclose or use any trade secret, proprietary, or confidential
information of the Company or any Related Company (other than 

-10-

	 	 	any such
information that is in the public domain other than through the fault of the
Executive), except as may be required in the course of his employment by the
Company, as may be otherwise allowed with the written permission of the Company
or, as applicable, such Related Company, or as may be required by law;
provided, however, that, if the Executive is required by any
subpoena, court order, regulation, or law to disclose such information, he shall
promptly notify the Company and cooperate with the Company in seeking a
protective order. 

	 	 	The Executive
agrees that on or prior to the Termination Date, regardless of whether his
employment is terminating at the initiative of the Executive or the Company, and
regardless of the reasons therefor, he will deliver to the Company, and not keep
or deliver to anyone else, any and all physical matter, including any and all
notes, files, memoranda, papers, and other documents, containing information
regarding the conduct of the business of the Company or any Related Company,
except that the Executive may retain such physical matter that does not contain
any trade secret, proprietary, or confidential information as may be allowed
with the written permission of the Chief Executive Officer. 

	 	(c)	Breach.  

	 	(i)	Any material
breach by the Executive of the provisions of Sections 5(a) or 5(b) of this
Agreement shall relieve the Company of all obligations to make any further
payments to the Executive pursuant to Sections 4 and 6 of this Agreement
(including under all Company equity award grants pursuant to Section 4 of this
Agreement) or otherwise under any incentive or equity awards made by the
Company, and shall entitle the Company to repayment from the Executive, upon
demand, of any previously paid equity award grants pursuant to Section 4 of this
Agreement; provided, however, that no forfeiture, cancellation, or
repayment shall take place with respect to any payments, benefits, or
entitlements under this Agreement or any other award agreement, plan, or
practice, unless the Company shall have first given the Executive written notice
of its intent to so forfeit, cancel, or require repayment and the Executive has
not, within thirty (30) days after such notice has been given, ceased such
impermissible activity; and provided further, however, that such
prior notice procedure shall not be required with respect to (A) a Competitive
Activity or violation of Section 5(b) of this Agreement which the Executive
initiated after the Company had informed the Executive in writing that it
believed such action violated this Agreement or Bally’s noncompetition
guidelines, or (B) any Competitive Activity regarding products or services which
are part of a line of business which the Executive knew or should have known
represented more than five percent (5%) of the Company’s consolidated gross
revenues for its most recent completed fiscal year at the time the
Executive’s employment is terminated.

-11-

	 	(ii)	The Executive
acknowledges that the restrictions contained in this Section 5 are reasonable
and necessary to protect the legitimate interests of the Company and that any
breach by the Executive of any portion of this Section 5 will result in
irreparable injury to the Company. The Executive agrees that the Company’s
remedies at law would be inadequate in the event of a breach or threatened
breach of this Section 5 and, accordingly, that the Company shall be entitled,
in addition to its rights at law, to temporary, preliminary, and permanent
injunctive relief and other equitable relief, without the need to post a
bond.

	6.	Termination
Provisions.

	 	(a)	Benefits
upon Involuntary Termination Other than for Cause; Benefits upon Involuntary
Termination Other than Within Two Years Following Change in
Control.   In the event that the Executive’s employment is
involuntarily terminated by the Company, and such termination is other than for
Cause and other than within two (2) years following a Change in Control, the
Executive shall be entitled to:

	 	(i)	An immediate
lump sum payment equal to the greater of (A) all amounts of Base Salary that
would otherwise be payable for the remainder of the then-current Term of
Employment and that remain unpaid, or (B) 1.5 times the Executive’s
then-current annual Base Salary;

	 	(ii)	If such
termination occurs prior to the payment of the Executive’s Annual Bonus
payable with respect to the immediately preceding calendar year, immediate
payment of the full amount of the Executive’s Annual Bonus for such
year;

	 	(iii)	Immediate
payment of an amount equal to 1.5 times the Executive’s Target Annual Bonus
for the then-current calendar year;

	 	(iv)	Immediate
payment for any unused, earned vacation days (but not for any unearned vacation
days) for the calendar year in which his employment is terminated and for any
approved and unexpired carryover days (not to exceed the number of carryover
days as approved by the Company) from the prior year;

	 	(v)	Immediate
vesting of, and continuation of the ability of the Executive to exercise through
the LTIP’s exercise period (as if the Executive remained an active employee
of the Company), all awards granted to the Executive under the LTIP prior to his
Termination Date, subject to the terms and conditions of the LTIP;
and

	 	(vi)	Company-provided
continuation of medical coverage (on either an insured or a self-insured basis,
in the sole discretion of the Company) for the Executive and his eligible
dependents (as determined under the terms of the Company’s medical expense
plan), on substantially the same terms of 

-12-

	 	 	such coverage
that are in existence immediately prior to the Executive’s termination of
employment (subject to commercial availability of such coverage), for a period
of eighteen (18) months; provided, however, that such coverage
shall run concurrently with any coverage available to the Executive and his
eligible dependents under COBRA; and provided further, however,
that the Executive shall immediately notify the Company if he becomes covered
under Medicare or another employer’s group health plan, at which time the
Company’s provision of medical coverage for the Executive and his eligible
dependents will cease.

	 	(b)	Death or
Long-Term Disability.   If, at any time after the Effective Date,
the Executive’s employment terminates before the Expiration Date as a
result of the Executive’s death or Long-Term Disability, the Executive or
his estate (as applicable) shall be entitled to:

	 	(i)	Immediate
payment of any unpaid Base Salary through the date of his death or Long-Term
Disability; 

	 	(ii)	If such
termination occurs prior to the payment of the Executive’s Annual Bonus
payable with respect to the immediately preceding calendar year, immediate
payment of the full amount of the Executive’s Annual Bonus for such
preceding year; 

	 	(iii)	Immediate
payment for any unused, earned vacation days (but not for any unearned vacation
days) for the calendar year in which his employment is terminated and for any
approved and unexpired carryover days (not to exceed the number of carryover
days as approved by the Company) from the prior year; and 

	 	(iv)	Immediate
vesting of, and continuation of the ability of the Executive or Executive’s
beneficiaries (as applicable) to exercise (as if the Executive remained an
active employee of the Company), all awards granted to the Executive under the
LTIP prior to his Termination Date, subject to the terms and conditions of the
LTIP. 

	 	(c)	Termination
for Cause.   In the event the Executive’s employment is
terminated for Cause at any time on or after the Effective Date, the Executive
shall not receive any payments, benefits, or other amounts provided by this
Agreement (but shall still be subject to the restrictive covenants set forth in
Section 5 of this Agreement). The Executive may, however, be eligible for
certain benefits under the Company’s tax-qualified pension and other
employee benefit plans. The Executive’s employment may not be terminated
for Cause prior to advance written notice to the Executive containing reasonable
detail of the activity, facts, or circumstances constituting Cause for
termination, the actions that the Executive must take to cease such activity or
cure such facts and circumstances, and a reasonable amount of time (not to
exceed thirty (30) days) for the Executive to effectuate such cure.

-13-

	 	(d)	Voluntary
Resignation Without Good Reason.   In the event the Executive
voluntarily resigns without Good Reason on or after the Effective Date, the
Executive shall not receive any payments, benefits, or other amounts provided by
this Agreement (but shall still be subject to the restrictive covenants set
forth in Section 5 of this Agreement) other than as required under applicable
law. The Executive may, however, be eligible for certain benefits under the
Company’s tax-qualified pension and other employee benefit
plans.

	 	(e)	Termination
for Good Reason, or Involuntary Termination (Other than for Cause) Within Two
Years Following a Change in Control.   If the Executive’s
employment is involuntarily terminated by the Company other than for Cause
within two (2) years following a Change in Control, or the Executive terminates
his employment for Good Reason, the Executive shall be entitled to:

	 	(i)	A severance
payment that is a lump sum cash payment equal to two hundred percent (200%) of
the sum of (A) the Executive’s highest annual Base Salary rate in effect on
or after the day immediately preceding the date of the Change in Control, plus
(B) the Executive’s Target Annual Bonus for the year in which the Change in
Control occurs (or, if the Change in Control occurs prior to the date in a
calendar year on which the Executive’s Target Annual Bonus is determined,
for the preceding calendar year);

	 	(ii)	If such
termination occurs prior to the payment of the Executive’s Annual Bonus
payable with respect to the immediately preceding calendar year, immediate
payment of the full amount of the Executive’s Annual Bonus for such
preceding year;

	 	(iii)	Immediate
payment for any unused, earned vacation days (but not for any unearned vacation
days) for the calendar year in which his employment is terminated and for any
approved and unexpired carryover days (not to exceed the number of carryover
days as approved by the Company) from the prior year;

	 	(iv)	Immediate
vesting of, and continuation of the ability of the Executive or Executive’s
beneficiaries (as applicable) to exercise (as if the Executive remained an
active employee of the Company), all awards granted to the Executive under the
LTIP prior to such Termination Date, subject to the terms and conditions of the
LTIP;

	 	(v)	Company-provided
continuation of medical coverage (on either an insured or a self-insured basis,
in the sole discretion of the Company) for the Executive and his eligible
dependents (as determined under the terms of the Company’s medical expense
plan), on substantially the same terms of such coverage that are in existence
immediately prior to the Executive’s termination of employment (subject to
commercial availability of such coverage), for a period of eighteen (18) months;
provided, however, that 

-14-

	 	 	such coverage
shall run concurrently with any coverage available to the Executive and his
eligible dependents under COBRA; and provided further, however,
that the Executive shall immediately notify the Company if he becomes covered
under Medicare or another employer’s group health plan, at which time the
Company’s provision of medical coverage for the Executive and his eligible
dependents will cease; and

	 	(vi)	The services of
a Company-paid and Company-approved outplacement or career transition consultant
in accordance with the Company’s then-current practices for senior
executives in effect as of the Termination Date; provided, however,
that commencement of such transition counseling services, if desired, must begin
prior to the first anniversary of the Termination Date.

	 	(f)	Payments and
Benefits upon Termination at Expiration Date.   If the
Executive’s employment with the Company terminates, other than by the
Company for Cause, on the Expiration Date, the Executive shall be entitled
to:

	 	(i)	One (1) times
the Executive’s then-current annual Base Salary;

	 	(ii)	If such
termination occurs prior to the payment of the Executive’s Annual Bonus
payable with respect to the calendar year in which such Expiration Date occurs,
immediate payment of the full amount of the Executive’s Annual Bonus for
such year;

	 	(iii)	Immediate
payment of an amount equal to one (1) times the Executive’s Target Annual
Bonus for such calendar year;

	 	(iv)	Immediate
payment for any unused, earned vacation days (but not for any unearned vacation
days) for the calendar year in which his employment is terminated and for any
approved and unexpired carryover days (not to exceed the number of carryover
days as approved by the Company) from the prior year; and

	 	(v)	Company-provided
continuation of medical coverage (on either an insured or a self-insured basis,
in the sole discretion of the Company) for the Executive and his eligible
dependents (as determined under the terms of the Company’s medical expense
plan), on substantially the same terms of such coverage that are in existence
immediately prior to the Executive’s termination of employment (subject to
commercial availability of such coverage), for a period of eighteen (18) months;
provided, however, that such coverage shall run concurrently with
any coverage available to the Executive and his eligible dependents under COBRA;
and provided further, however, that the Executive shall
immediately notify the Company if he becomes covered under Medicare or another
employer’s group health plan, at which time the Company’s provision of
medical coverage for the Executive and his eligible dependents will
cease.

-15-

	 	(g)	Notification
Requirements for Termination for Good Reason.

	 	(i)	In the event
the Executive determines that Good Reason exists to terminate his employment
with the Company, the Executive shall notify the Company in writing of the
specific event, within sixty (60) days after the occurrence of such event, and
such notice shall also include the date on which the Executive will terminate
employment with the Company, which date shall be no earlier than fifteen (15)
days after the date of such notice. The date set forth in the notice for
termination, or such earlier or later date as the Executive and the Company
shall mutually agree in writing, shall be the Executive’s Termination
Date.

	 	(ii)	Within seven
(7) days after the Company’s receipt of such written notice, the Company
shall notify the Executive that it agrees or disagrees with the Executive’s
determination that the event specified in the Executive’s notice
constitutes Good Reason. Notwithstanding any other provision of this Agreement,
the Company’s determination whether it agrees or disagrees with the
Executive’s determination that the event specified in the Executive’s
notice constitutes Good Reason shall be reasonable, based on all the relevant
facts and circumstances. The arbitrator in any arbitration proceeding initiated
pursuant to Section 10 of this Agreement, in which the existence of Good Reason
is an issue, shall be expressly empowered and directed to review, de
novo, the facts and circumstances claimed by the Executive to constitute
Good Reason.

	 	(iii)	In the event
the Company notifies the Executive that it agrees with the Executive’s
determination that the event specified in the Executive’s notice
constitutes Good Reason, the Executive shall terminate employment with the
Company on his Termination Date.

	 	(iv)	In the event
the Company notifies the Executive that it disagrees with the Executive’s
determination that the event specified in the Executive’s notice
constitutes Good Reason, the Executive may terminate his employment on the date
specified in the notice (or such later date as the Executive and the Company may
mutually agree in writing) or may elect to continue his employment by so
notifying the Company in writing. In either event, the Executive shall be
entitled to pursue the arbitration procedures set out in Section 10 of this
Agreement without first filing a claim. If the Executive’s claim, or
arbitration, is ultimately concluded in the Executive’s favor, the
Executive shall retain the right to receive the payments and benefits under this
Agreement.

	 	(h)	Conditional
Payments.   Any payments or benefits made pursuant to this Section
6 will be subject to (i) the provisions, restrictions, and limitations of
Section 5 of this Agreement, but not otherwise subject to offset or mitigation,
(ii) the Executive’s signing (following his termination of employment), and
the Company’s receipt of, a Release and Agreement releasing the Company,
Related 

-16-

	 	 	Companies, and
their respective directors, officers, employees and agents
(“Indemnitees”) from any and all claims and liabilities, and promising
never to sue any of the Indemnitees (such Release and Agreement shall be in such
form as is then currently in use for departing Company senior executives), and
(iii) the Company’s receipt of the Executive’s resignation from all
offices, directorships, and fiduciary positions with the Company, its Related
Companies, and their respective employee benefit plans.

	7.	Legal Fees.  
In the event that it shall be necessary or desirable for the Executive to retain
legal counsel or incur other costs and expenses in connection with enforcement
of his rights following a Change in Control, or other matters directly related
to the Executive’s termination from employment with the Company following a
Change in Control, the Company shall reimburse the Executive for his reasonable
attorneys’ fees and costs and expenses if a final decision in connection
with a material issue of the litigation (or arbitration) is issued in the
Executive’s favor by an arbitrator or a court of competent jurisdiction.

	8.	Excise Tax.

	 	(a)	Excise Tax
Adjustment Payment Calculation.   If any element of compensation
or benefit provided to the Executive under the terms of this Agreement following
a Change in Control, or under any other plan, program, policy, or other
arrangement (“Benefit”), either alone or in combination with other
elements of compensation and benefits paid or provided to the Executive,
constitutes an “excess parachute payment”, as that term is defined in
Code Section 280G and the regulations thereunder, and subjects the Executive to
the excise tax pursuant to Code Section 4999, and any interest and penalties
thereon (collectively, the “Excise Tax”), then the Executive shall be
entitled to an additional lump-sum cash payment from the Company (the
“Excise Tax Adjustment Payment”), subject to mandatory withholding, in
an amount equal to the Excise Taxes (including the Excise Tax attributable to
the Excise Tax Adjustment Payment related to the Benefit) plus any Income Taxes
and any interest and penalties thereon attributable to the Excise Tax Adjustment
Payment. For purposes of calculating an Excise Tax Adjustment Payment to the
Executive in any year, it shall be assumed that the Executive is subject to
Income Taxes at the highest marginal Federal and applicable state and local
income tax rates, respectively, for the year in which the Excise Tax Adjustment
Payment is paid. Also, the Excise Tax Adjustment Payment to the Executive shall
reflect the Federal tax benefits attributable to the deduction of applicable
state and local income taxes.

	 	(b)	Independent
Firm.   Subject to the provisions of Section 8(c) of this
Agreement, all determinations required to be made under this Section 8,
including whether and when an Excise Tax Adjustment Payment is required and the
amount of such Excise Tax Adjustment Payment and the assumptions utilized in
arriving at such determinations, shall be made by an independent accounting or
consulting firm chosen by the Company (the “Firm”). The Firm shall
provide detailed supporting calculations to the Company and to the Executive
within thirty (30) business days 

-17-

	 	 	after the
receipt of notice from the Company or the Executive that there has been a
benefit provided to which these Excise Tax provisions apply (or such earlier
time as requested by the Company). Any Excise Tax Adjustment Payment shall be
paid by the Company to the Executive within fifteen (15) business days after the
Company’s receipt of the Firm’s determination.

	 	(i)	If it is
established pursuant to a final determination of a court or an IRS proceeding,
or in the opinion of independent counsel agreed upon by the Company and the
Executive, that the Excise Tax payable by the Executive on the benefit is less
than the amount initially taken into account under Section 8(a) for purposes of
calculating the Excise Tax Adjustment Payment related to such benefit, the Firm
shall recalculate the Excise Tax Adjustment Payment to reflect the actual Excise
Tax related to such benefit. Within thirty (30) business days following the
Executive’s receipt of notice of the results of such recalculation from the
Firm and/or the Company, the Executive shall repay to the Company the excess of
the initial Excise Tax Adjustment Payment over the recalculated Excise Tax
Adjustment Payment.

	 	(ii)	If it is
established pursuant to a final determination of a court or an IRS proceeding,
or in the opinion of an independent counsel agreed upon by the Company and the
Executive, that the Excise Tax payable by the Executive on the benefit is more
than the amount initially taken into account under subsection (b)(i) above for
purposes of calculating the Excise Tax Adjustment Payment, the Firm shall
recalculate the Excise Tax Adjustment Payment to reflect the actual Excise Tax.
Within fifteen (15) business days following the Company’s receipt of notice
of the results of such recalculation from the Firm, the Company shall pay to the
Executive the excess of the recalculated Excise Tax Adjustment Payment over the
initial Excise Tax Adjustment Payment.

	 	(iii)	All fees and
expenses of the Firm shall be borne solely by the Company.

	 	(c)	Notice.  
The Executive shall notify the Company in writing of any written claim by the
IRS that, if successful, would require the payment by the Company of an Excise
Tax Adjustment Payment or the recalculation of an Excise Tax Adjustment Payment.
The notification shall apprise the Company of the nature of such claim,
including (i) a copy of the written claim from the IRS, (ii) the identification
of the element of compensation and/or benefit that is the subject of such IRS
claim, and (iii) the date on which such claim is requested to be paid. Such
notification shall be given as soon as practicable, but no later than ten (10)
business days after the Executive actually receives notice in writing of such
claim. The failure of the Executive to properly notify the Company of the IRS
claim (or to provide any required information with respect thereto) shall not
affect any rights granted to the Executive under this Section 8, except to the
extent that the Company is materially prejudiced in the challenge to such claim
as a direct result of such failure. 

-18-

	 	(d)	Payment.  
Within ten (10) business days following receipt of such written notification by
the Executive of such IRS claim, the Company shall pay to the Executive an
Excise Tax Adjustment Payment, or the excess of a recalculated Excise Tax
Adjustment Payment over the initial Excise Tax Adjustment Payment, as
applicable, related to the element of compensation and/or benefit which is the
subject of the IRS claim. Within ten (10) business days following such payment
to the Executive, the Executive shall provide to the Company written evidence
that he or she has paid the claim to the IRS (the United States
Treasury).

	 	(e)	Contest.  
If the Company notifies the Executive in writing, within sixty (60) business
days following receipt from the Executive of notification of the IRS claim, that
it desires to contest such claim, the Executive shall: 

	 	(i)	Give the
Company any information reasonably requested by the Company relating to such
claim;

	 	(ii)	Take such
action in connection with contesting such claim as the Company shall reasonably
request in writing from time to time including, without limitation, accepting
legal representation with respect to such claim by an attorney selected by the
Company and reasonably acceptable to the Executive; 

	 	(iii)	Cooperate with
the Company in good faith in order to effectively contest such claim; and

	 	(iv)	Permit the
Company to participate in any proceedings relating to such claim if the Company
elects not to assume and control the defense of such claim; 

	 	 	provided,
however, that the Company shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold harmless the Executive, on an
after-tax basis, for any Excise Tax and Income Taxes (including interest and
penalties with respect thereto) imposed as a result of such representation and
payment of costs and expenses. Without limitation on the foregoing provisions of
this Section 8, the Company shall have the right, at its sole option, to assume
the control of all proceedings in connection with such contest, in which case it
may pursue or forego any and all administrative appeals, proceedings, hearings,
and conferences with the taxing authority in respect of such claim, and may
direct the Executive to sue for a refund or contest the claim in any permissible
manner, and the Executive agrees to prosecute such contest to a determination
before any administrative tribunal, in a court of initial jurisdiction and in
one or more appellate courts, as the Company shall determine; and provided
further, however, that any extension of the statute of limitations
relating to payment of tax for the taxable year of the Executive with respect to
which such contested amount is claimed to be due is limited solely to such
contested amount. Furthermore, the Company’s rights to assume the control
of the contest shall be limited to issues with respect to which  

-19-

	 	 	an Excise Tax
Adjustment Payment would be payable hereunder, and the Executive shall be
entitled to settle or contest, as the case may be, any other issue raised by the
IRS or any other taxing authority. To the extent that the contest to the IRS
claim is successful, the Excise Tax Adjustment Payment related to the element of
compensation and/or benefit that was the subject of the claim shall be
recalculated in accordance with the provisions of Section 8(a).  

	9.	Wage
Withholding and Reporting.   All taxable payments,
reimbursements, benefits, and other amounts payable or provided by the Company
pursuant to this Agreement shall be subject to applicable wage withholding of
Income Taxes and FUTA (unemployment taxes), and shall be reported on IRS Form
W-2.

	10.	Dispute
Resolution.   At the option of the Executive or the Company,
any dispute, controversy, or question arising under, out of, or relating to this
Agreement or the breach thereof, other than that for injunctive relief under
Sections 5(c), shall be referred for decision by arbitration in the State of
Illinois by a neutral arbitrator selected by the parties hereto. The proceeding
shall be governed by the Rules of the American Arbitration Association then in
effect or such rules last in effect (in the event such Association is no longer
in existence). If the parties are unable to agree upon such a neutral arbitrator
within thirty (30) days after either party has given the other written notice of
the desire to submit the dispute, controversy, or question for decision as
aforesaid, then either party may apply to the American Arbitration Association
for an appointment of a neutral arbitrator, or if such Association is not then
in existence or does not act in the matter within thirty (30) days after
application, either party may apply to the Presiding Judge of the Superior Court
of any county in Illinois for an appointment of a neutral arbitrator to hear the
parties and settle the dispute, controversy, or questions, and such Judge is
hereby authorized to make such appointment. In the event that either party
exercises the right to submit a dispute arising hereunder to arbitration, the
decision of the neutral arbitrator shall be final, conclusive, and binding on
all interested persons, and no action at law or equity shall be instituted or,
if instituted, further prosecuted by either party other than to enforce the
award of the neutral arbitrator. The award of the neutral arbitrator may be
entered in any court that has jurisdiction. In the event that the Executive is
successful in pursuing any material claims or disputes arising out of this
Agreement, the Company shall pay all of the Executive’s attorneys’
fees and costs reasonably incurred, including the compensation and expenses of
any arbitrator. In any other case, the Executive and the Company shall each bear
all their own respective costs and attorneys fees, except the Company shall in
all events pay the costs of any arbitrator appointed hereunder.

	11.	Termination Provisions.

	 	(a)	Executive.  
This Agreement is a personal contract, and the rights and interests of Executive
hereunder may not be sold, transferred, assigned, pledged, or hypothecated by
him, but shall be binding upon and inure to the benefit of his heirs,
administrators, and executors. 

	 	(b)	Company.  
This Agreement shall inure to the benefit of and be binding upon the Company and
its successors and assigns; provided, however, that the Company 

-20-

	 	 	may not assign
this Agreement except in connection with an assignment or disposition of all or
substantially all of the assets or stock of the Company or the division,
subsidiary, or business unit for which the Executive is providing services under
this Agreement, or by law as a result of a merger or consolidation. In the event
of such assignment, a failure by the successor to specifically assume in writing
the obligations and liabilities of the Company hereunder, and to deliver notice
of such assumption to the Executive, shall be deemed a material breach of this
Agreement by the Company. 

	12.	Other
Benefit Plans.   Executive shall be eligible to participate in
plans available to Senior Executives of the Company. Subject to the terms of
this agreement, the Company reserves the right to discontinue or modify its
compensation, incentive, benefit, and perquisite plans, programs, and practices
at any time and from time to time. Moreover, the brief summaries contained
herein are subject to the terms of such plans, programs, and practices. For
purposes of any and all employee benefit plans, the definition of compensation
is as stated in such plans. Amounts payable under any other plan, program, or
practice of the Company with regard to termination of employment shall not
duplicate amounts paid under this Agreement upon a termination of
employment.

	13.	Entire
Agreement; Amendments.   This Agreement represents the entire
agreement between the Executive and the Company in respect of the subject matter
contained herein and supersedes all prior agreements, promises, covenants,
arrangements, communications, representations, or warranties, whether oral or
written, by any officer, executive, or representative of any party hereto. No
amendments or modifications to this Agreement may be made except in writing
signed by the Company (as authorized by the Board) and the
Executive.

	14.	Survivorship.  
The respective rights and obligations of the parties hereunder shall survive any
termination of the Executive’s employment to the extent necessary to the
intended preservation of such rights and obligations.

	15.	Notices.  
Any notice and all other communications provided for in this Agreement given to
a party shall be in writing and shall be deemed to have been duly given when
delivered in person or two (2) days after being placed in the United States
mails by certified or registered mail, postage prepaid, return receipt
requested, duly addressed to the party concerned at the address indicated below
or to such changed address as such party may subsequently furnish to the other
in writing in accordance herewith, except that notices of change of address
shall be effective only upon receipt:

-21-

	 	If to the Company:	Bally Total Fitness Holding Corporation

8700 West Bryn Mawr Avenue

Chicago, IL 60631-3507

Attn: Senior Vice President, Chief Administrative Officer

	 	If to the Executive:	Jim McDonald

[Home Address]

	16.	Severability.  
The unenforceability of any provision of this Agreement shall not affect the
validity or enforceability of any other provision of this Agreement. If any
provision of this Agreement shall be held invalid or unenforceable in part, the
remaining portion of such provision, together with all other provisions of this
Agreement, shall remain valid and enforceable and continue in full force and
effect to the fullest extent consistent with law. In furtherance and not in
limitation of the foregoing, should the duration or geographical extent of, or
business activities covered by, any provision of this Agreement be in excess of
that which is valid and enforceable under applicable law, then such provision
shall be construed to cover only that duration, extent, or activities which may
be validly enforced.

	17.	Headings.  
Headings to Sections hereof are for convenience of reference only and shall not
be construed to alter or affect the meaning of any provision of this
Agreement.

	18.	No Assignment or Attachment.  
Except as required by law, no right to receive payments under this Agreement
shall be subject to anticipation, commutation, alienation, sale, assignment,
encumbrance, charge, pledge, or hypothecation, or to execution, attachment,
levy, or similar process or assignment by operation of law, and any attempt,
voluntary or involuntary, to effect any such action shall be null, void, and of
no effect; provided, however, that nothing in this Section 18
shall preclude the assumption of such rights by executors, administrators, or
other legal representatives of the Executive or his estate and their assigning
any rights hereunder to the person or persons entitled thereto.

	19.	Work For
Hire Acknowledgment; Assignment.   The Executive acknowledges
that all of the Executive’s work on and contributions to the Company’s
products (the “Products”), including, without limitation, any and all
patterns, designs, and other expressions in any tangible medium (collectively,
the “Works”) are within the scope of the Executive’s employment
and are a part of the services, duties, and responsibilities of the Executive.
All of the Executive’s work on and contributions to the Works will be
rendered and made by the Executive for, at the instigation of, and under the
overall direction of, the Company, and all of the Executive’s said work and
contributions, as well as the Works, are and at all times shall be regarded as
“work made for hire” as that term is used in the United States
copyright laws. Without curtailing or limiting this acknowledgment, the
Executive hereby assigns, grants, and delivers exclusively to the Company, as to
work on and contribution to the Products pursuant hereto, all rights, 

-22-

	 	titles,
and renewals. The Executive will execute and deliver to the Company, or its
successors and assigns, such other and further assignments, instruments, and
documents as it from time to time reasonably may request for the purpose of
establishing, evidencing, and enforcing or defending its complete, exclusive,
perpetual, and worldwide ownership of all rights, titles, and interests of every
kind and nature whatsoever, including all copyrights, in and to the Works. The
Executive hereby constitutes and appoints the Company as its agent and
attorney-in-fact, with full power of substitution, to execute and deliver said
assignments, instruments, or documents as the Executive may fail or refuse to
execute and deliver, this power and agency being coupled with an interest and
being irrevocable.

	20.	Governing Law.  
The validity, interpretation, construction, and performance of this Agreement
shall be governed by the laws of the State of Illinois, without consideration of
conflict of law principles.

	21.	Supersession.  
From and after the Effective Date, this Agreement shall supersede any other
employment or severance agreement between the parties.

-23-

IN WITNESS WHEREOF,
the parties hereto have executed this Agreement effective as of the Effective
Date. 

	Executive:	/s/ Jim McDonald	 

	 	
	 

	 	Jim McDonald	 

	Date:	April 20, 2005	 

	 	
	 

	Attest:	
	 

	Date:	
	 

Company:

	By:	/s/ John W. Rogers, Jr.	 

	 	
	 

	 	John W. Rogers,
Jr., Chairperson, Compensation Committee	 

	Date:	April 25, 2005	 

	 	
	 

	Attest:	
	 

	Date:	
	 

	By:	/s/ Harold Morgan	 

	 	
	 

	 	Harold Morgan,
SVP, Chief Administrative Officer	 

	Date:	April 21, 2005	 

	 	
	 

	Attest:	
	 

	Date:	
	 

-24-

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