Document:

<PAGE>

                                                                    EXHIBIT 10.1

                              FINANCING AGREEMENT

                         Dated as of February 23, 2001

                                 by and among

                    LERNOUT & HAUSPIE SPEECH PRODUCTS N.V.,
                      as debtor and debtor-in-possession,

                         CERTAIN OF ITS SUBSIDIARIES,
                     as debtors and debtors-in-possession,

                   __________________________________________

           THE FINANCIAL INSTITUTIONS FROM TIME TO TIME PARTY HERETO

                   __________________________________________

                                      and

                              ABLECO FINANCE LLC,

                                   as Agent
<PAGE>

                               TABLE OF CONTENTS

<TABLE>
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ARTICLE I   DEFINITIONS; CERTAIN TERMS..................................................    1
--------------------------------------
      SECTION 1.01.   Definitions.......................................................    1
      ---------------------------
      SECTION 1.02.   Terms Generally...................................................   22
      -------------------------------
      SECTION 1.03.   Accounting and Other Terms........................................   22
      ------------------------------------------
      SECTION 1.04.   Time References...................................................   23
      -------------------------------

ARTICLE II   THE LOANS..................................................................   23
----------------------
      SECTION 2.01.   Revolving Credit Commitments......................................   23
      --------------------------------------------
      SECTION 2.02.   Making the Loans..................................................   23
      --------------------------------
      SECTION 2.03.   Notes; Repayment of Loans.........................................   26
      -----------------------------------------
      SECTION 2.04.   Interest..........................................................   27
      ------------------------
           (a)   Loans..................................................................   27
           -----------
           (b)   Default Interest.......................................................   27
           ----------------------
           (c)   Interest Payment.......................................................   27
           ----------------------
           (d)   General................................................................   27
           -------------
      SECTION 2.05.   Reduction of Commitment; Prepayment of Loans......................   27
      ------------------------------------------------------------
           (a)   Reduction of Revolving Credit Commitments..............................   27
           -----------------------------------------------
           (b)   Optional Prepayment....................................................   28
           -------------------------
           (c)   Mandatory Prepayment...................................................   28
           --------------------------
           (d)   Cumulative Prepayments.................................................   29
           ----------------------------
           (e)   Application of Payments................................................   29
           -----------------------------
      SECTION 2.06.   Fees..............................................................   29
      --------------------
           (a)   Closing Fees...........................................................   29
           ------------------
           (b)   Unused Line Fee........................................................   30
           ---------------------
           (c)   Loan Servicing Fee.....................................................   30
           ------------------------
           (d)   Administration Fee.....................................................   30
           ------------------------
      SECTION 2.07.   Securitization....................................................   30
      ------------------------------
      SECTION 2.08.   Taxes.............................................................   31
      ---------------------

ARTICLE III   SECURITY AND ADMINISTRATIVE PRIORITY......................................   32
--------------------------------------------------
      SECTION 3.01.   Collateral; Grant of Lien and Security Interest...................   32
      ---------------------------------------------------------------
      SECTION 3.02.   Administrative Priority...........................................   33
      ---------------------------------------
      SECTION 3.03.   Grants, Rights and Remedies.......................................   33
      -------------------------------------------
      SECTION 3.04.   No Filings Required...............................................   34
      -----------------------------------
      SECTION 3.05.   Survival..........................................................   34
      ------------------------

ARTICLE IV   FEES, PAYMENTS AND OTHER COMPENSATION......................................   34
--------------------------------------------------
      SECTION 4.01.   Audit and Collateral Monitoring Fees..............................   34
      ----------------------------------------------------
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                                      -i-
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      SECTION 4.02.   Payments; Computations and Statements.............................   35
      -----------------------------------------------------
      SECTION 4.03.   Sharing of Payments, Etc..........................................   36
      -----------------------------------------
      SECTION 4.04.   Apportionment of Payments.........................................   36
      -----------------------------------------
      SECTION 4.05.   Increased Costs and Reduced Return................................   36
      --------------------------------------------------
      SECTION 4.06.   Joint and Several Liability of the Borrowers......................   37
      ------------------------------------------------------------

ARTICLE V   CONDITIONS TO LOANS.........................................................   38
-------------------------------
      SECTION 5.01.   Conditions Precedent to Effectiveness.............................   38
      -----------------------------------------------------
           (a)   Final Bankruptcy Court Order; Concordat................................   38
           ---------------------------------------------
           (b)   Payment of Fees, Etc...................................................   38
           ---------------------------
           (c)   Representations and Warranties; No Event of Default....................   39
           ---------------------------------------------------------
           (d)   Legality...............................................................   39
           --------------
           (e)   Delivery of Documents..................................................   39
           ---------------------------
           (f)   Material Adverse Effect................................................   41
           -----------------------------
           (g)   Proceedings; Receipt of Documents......................................   41
           ---------------------------------------
           (h)   Payment of Debtor-In-Possession Obligations............................   41
           -------------------------------------------------
      SECTION 5.02.   Conditions Precedent to Final Facility Effectiveness..............   41
      --------------------------------------------------------------------
           (a)   Payment of Fees, Etc...................................................   41
           ---------------------------
           (b)   Representations and Warranties; No Event of Default....................   41
           ---------------------------------------------------------
           (c)   Liens; Priority........................................................   41
           ---------------------
           (d)   Material Adverse Effect................................................   41
           -----------------------------
           (e)   Field Survey/Audit.....................................................   41
           ------------------------
           (f)   Budget.................................................................   42
           ------------
           (g)   Cash Management........................................................   42
           ---------------------
           (h)   Borrowing Base.........................................................   42
           --------------------
      SECTION 5.03.   Conditions Precedent to all Revolving Loans.......................   42
      -----------------------------------------------------------
           (a)   Payment of Fees, Etc...................................................   42
           ---------------------------
           (b)   Representations and Warranties; No Event of Default....................   42
           ---------------------------------------------------------
           (c)   Bankruptcy Court Order.................................................   42
           ----------------------------
           (d)   Legality...............................................................   42
           --------------
           (e)   Notices................................................................   43
           -------------
           (f)   Proceedings; Receipt of Documents......................................   43
           ---------------------------------------

ARTICLE VI   REPRESENTATIONS AND WARRANTIES.............................................   43
-------------------------------------------
      SECTION 6.01.   Representations and Warranties....................................   43
      ----------------------------------------------
           (a)   Organization, Good Standing, Etc.......................................   43
           ---------------------------------------
           (b)   Authorization, Etc.....................................................   43
           -------------------------
           (c)   Governmental Approvals.................................................   43
           ----------------------------
           (d)   Execution and Binding Effect...........................................   44
           ----------------------------------
           (e)   Subsidiaries...........................................................   44
           ------------------
           (f)   Litigation.............................................................   44
           ----------------
           (g)   Financial Condition....................................................   44
           -------------------------
           (h)   Compliance with Law, Etc...............................................   44
           -------------------------------
           (i)   ERISA..................................................................   45
           -----------
           (j)   Taxes, Etc.............................................................   45
           -----------------
           (k)   Regulation T, U and X..................................................   45
           ---------------------------
           (l)   Type of Business.......................................................   46
           ----------------------
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                                      -ii-
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           (m)   Adverse Agreements, Etc................................................   46
           ------------------------------
           (n)   Permits, Etc...........................................................   46
           -------------------
           (o)   Properties.............................................................   46
           ----------------
           (p)   Full Disclosure........................................................   46
           ---------------------
           (q)   Environmental Matters..................................................   47
           ---------------------------
           (r)   Insurance..............................................................   47
           ---------------
           (s)   Use of Proceeds........................................................   47
           ---------------------
           (t)   INTENTIONALLY OMITTED..................................................   47
           ---------------------------
           (u)   INTENTIONALLY OMITTED..................................................   47
           ---------------------------
           (v)   Intellectual Property..................................................   47
           ---------------------------
           (w)   Holding Company and Investment Company Acts............................   47
           -------------------------------------------------
           (x)   Place of Business; Chief Executive Office..............................   48
           -----------------------------------------------
           (y)   Administrative Priority; Lien Priority.................................   48
           --------------------------------------------
           (z)   Schedules..............................................................   48
           ---------------

ARTICLE VII   COVENANTS OF THE BORROWER.................................................   48
---------------------------------------
      SECTION 7.01.   Affirmative Covenants.............................................   48
      -------------------------------------
           (a)   Reporting Requirements.................................................   49
           ----------------------------
           (b)   Additional Guaranties and Collateral Security..........................   52
           ---------------------------------------------------
           (c)   Compliance with Laws, Etc..............................................   52
           --------------------------------
           (d)   Preservation of Existence, Etc.........................................   52
           -------------------------------------
           (e)   Keeping of Records and Books of Account................................   53
           ---------------------------------------------
           (f)   Inspection Rights......................................................   53
           -----------------------
           (g)   Maintenance of Properties, Etc.........................................   53
           -------------------------------------
           (h)   Maintenance of Insurance...............................................   53
           ------------------------------
           (i)   Obtaining of Permits, Etc..............................................   54
           --------------------------------
           (j)   Environmental..........................................................   54
           -------------------
           (k)   Further Assurances.....................................................   55
           ------------------------
           (l)   Borrowing Base.........................................................   55
           --------------------
           (m)   Intellectual Property..................................................   55
           ---------------------------
           (n)   Security Agreements; Pledge Agreements; Etc............................   55
           --------------------------------------------------
           (o)   Securities Account.....................................................   56
           ------------------------
      SECTION 7.02.   Negative Covenants................................................   56
      ----------------------------------
           (a)   Final Bankruptcy Court Order; Administrative Priority; Lien Priority;
           ---------------------------------------------------------------------------
                  Payment of Claims.....................................................   56
                  -----------------
           (b)   Liens, Etc.............................................................   56
           -----------------
           (c)   Indebtedness...........................................................   57
           ------------------
           (d)   Fundamental Changes; Dispositions......................................   57
           ---------------------------------------
           (e)   Change in Type of Business.............................................   57
           --------------------------------
           (f)   Loans, Advances, Investments, Etc......................................   57
           ----------------------------------------
           (g)   Lease Obligations......................................................   58
           -----------------------
           (h)   Capital Expenditures...................................................   58
           --------------------------
           (i)   Restricted Payments....................................................   58
           -------------------------
           (j)   Payments...............................................................   59
           --------------
           (k)   Transactions with Affiliates...........................................   59
           ----------------------------------
           (l)   Environmental..........................................................   59
           -------------------
           (m)   Multiemployer Plans....................................................   59
           -------------------------
           (n)   Excess Cash............................................................   60
           -----------------
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                                     -iii-
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ARTICLE VIII   MANAGEMENT, COLLECTION AND STATUS OF ACCOUNTS RECEIVABLE AND
---------------------------------------------------------------------------
                 OTHER COLLATERAL.......................................................   60
                -----------------
      SECTION 8.01.   Collection of Accounts Receivable; Management of Collateral.......   60
      ---------------------------------------------------------------------------
      SECTION 8.02.   Accounts Receivable Documentation.................................   62
      -------------------------------------------------
      SECTION 8.03.   Status of Accounts Receivable and Other Collateral................   62
      ------------------------------------------------------------------
      SECTION 8.04.   Collateral Custodian..............................................   63
      ------------------------------------

ARTICLE IX   EVENTS OF DEFAULT..........................................................   64
------------------------------
      SECTION 9.01.   Events of Default.................................................   64
      ---------------------------------

ARTICLE X   AGENT ......................................................................   67
-----------------
      SECTION 10.01.   Appointment......................................................   67
      ----------------------------
      SECTION 10.02.   Nature of Duties.................................................   68
      ---------------------------------
      SECTION 10.03.   Rights, Exculpation, Etc.........................................   69
      ------------------------------------------
      SECTION 10.04.   Reliance.........................................................   69
      -------------------------
      SECTION 10.05.   Indemnification..................................................   69
      --------------------------------
      SECTION 10.06.   Agent Individually...............................................   70
      -----------------------------------
      SECTION 10.07.   Successor Agent..................................................   70
      --------------------------------
      SECTION 10.08.   Collateral Matters...............................................   71
      -----------------------------------

ARTICLE XI   MISCELLANEOUS..............................................................   72
--------------------------
      SECTION 11.01.   Notices, Etc.....................................................   72
      ------------------------------
      SECTION 11.02.   Amendments, Etc..................................................   73
      ---------------------------------
      SECTION 11.03.   No Waiver; Remedies, Etc.........................................   74
      ------------------------------------------
      SECTION 11.04.   Expenses; Taxes; Attorneys' Fees.................................   74
      -------------------------------------------------
      SECTION 11.05.   Right of Set-off.................................................   75
      ---------------------------------
      SECTION 11.06.   Severability.....................................................   75
      -----------------------------
      SECTION 11.07.   Assignments and Participations...................................   75
      -----------------------------------------------
      SECTION 11.08.   Counterparts.....................................................   78
      -----------------------------
      SECTION 11.09.   GOVERNING LAW....................................................   78
      ------------------------------
      SECTION 11.10.   WAIVER OF JURY TRIAL, ETC........................................   78
      -------------------------------------------
      SECTION 11.11.   Consent by the Agent and Lenders.................................   79
      -------------------------------------------------
      SECTION 11.12.   No Party Deemed Drafter..........................................   79
      ----------------------------------------
      SECTION 11.13.   Administrative Borrower..........................................   79
      ----------------------------------------
      SECTION 11.14.   Indemnification..................................................   80
      --------------------------------
      SECTION 11.15.   Records..........................................................   80
      ------------------------
      SECTION 11.16.   Binding Effect...................................................   80
      -------------------------------
      SECTION 11.17.   Interest.........................................................   81
      -------------------------
      SECTION 11.18.   Agent as Party in Interest.......................................   82
      -------------------------------------------
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                                      -iv-
<PAGE>

                            SCHEDULES AND EXHIBITS

Schedule 1.01(A).............  Guarantors

Schedule 1.01(B).............  Lenders and Lenders' Commitments

Schedule 1.01(C).............  Restricted Subsidiaries

Schedule 1.01(D).............  Long Term Budget

Schedule 6.01(a).............  Organization, Good Standing, Etc.

Schedule 6.01(e).............  Subsidiaries

Schedule 6.01(f).............  Litigation

Schedule 6.01(i).............  ERISA

Schedule 6.01(j).............  Taxes

Schedule 6.01(m).............  Adverse Agreements, Etc.

Schedule 6.01(o).............  Real Property

Schedule 6.01(q).............  Environmental Matters

Schedule 6.01(r).............  Insurance

Schedule 6.01(x).............  Place of Business; Chief Executive Office

Schedule 7.01(m).............  Intellectual Property

Schedule 7.02(j).............  Payments

Exhibit A-1..................  Form of Revolving Credit Note

Exhibit A-2..................  Form of Term A Note

Exhibit A-3..................  Form of Term B Note

Exhibit B....................  Form of Guaranty

Exhibit C....................  Form of Pledge Agreement

Exhibit D....................  Form of Security Agreement

Exhibit E....................  Form of Notice of Borrowing

Exhibit F....................  Form of Final Bankruptcy Court Order

Exhibit G....................  Form of Assignment and Acceptance

                                      -v-
<PAGE>

                              FINANCING AGREEMENT

          Financing Agreement, dated as of February 23, 2001, by and among
Lernout & Hauspie Speech Products N.V., as a debtor and a debtor-in-possession,
a company incorporated under Belgian laws as a "naamlooze vennootschap" with
registered seat at Flanders Language Valley, 899 Ieper, Belgium, registered with
the Commercial Registers of Ieper under No. 31.360, Brussels under No. 610.455
and Antwerpen under No. 329.244 (the "Parent"), Dictaphone Corporation
                                      ------
("Dictaphone"), and L&H Holdings USA, Inc. ("L&H Holdings"), each a wholly-owned
  ----------
subsidiary of the Parent, as a debtor and a debtor-in-possession (together with
the Parent, individually a "Borrower" and collectively, the "Borrowers"), the
                            --------                         ---------
financial institutions from time to time party hereto (individually a "Lender"
                                                                       ------
and collectively, the "Lenders") and Ableco Finance LLC, a Delaware limited
                       -------
liability company, as agent for the Lenders (in such capacity, the "Agent").
                                                                    -----

                                   RECITALS

          WHEREAS, the Borrowers have commenced (i) cases (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 District of Delaware (the
----
"Bankruptcy Court") and (ii) concordat proceedings with the Ieper, Belgium
 ----------------
Commercial Court (the "Concordat"), and the Borrowers have retained possession
                       ---------
of their assets and are authorized under the Bankruptcy Code and pursuant to the
Concordat to continue the operation of their businesses as debtors-in-
possession;

          WHEREAS, the Bankruptcy Court has entered an order authorizing the
joint administration of the bankruptcy estate of each Borrower; and

          WHEREAS, the Borrowers have requested that the Lenders make post-
petition loans and advances to the Borrowers, jointly and severally, in an
aggregate principal amount not to exceed $60,000,000 and, subject to the terms
and conditions set forth herein, the Lenders have agreed to provide such
facility;

          In consideration of the premises and the covenants and agreements
contained herein, the parties hereto agree as follows:

                                   ARTICLE I

                          DEFINITIONS; CERTAIN TERMS

          SECTION 1.01.   Definitions.  As used in this Agreement, the following
                          -----------
terms shall have the respective meanings indicated below, such meanings to be
applicable equally to both the singular and plural forms of such terms:

          "Account Debtor" means each debtor, customer or obligor in any way
           --------------
obligated on or in connection with any Account Receivable.
<PAGE>

          "Account Receivable" means any and all rights of any Borrower to
           ------------------
payment for goods sold and/or services rendered, including accounts, general
intangibles and any and all such rights evidenced by chattel paper, instruments
or documents, whether due or to become due and whether or not earned by
performance, and whether now or hereafter acquired or arising in the future and
any proceeds arising therefrom or relating thereto.

          "Action" has the meaning specified therefor in Section 11.11.
           ------

          "Administration Fee" has the meaning specified therefor in Section
           ------------------
2.06(d).

          "Administrative Borrower" means Dictaphone or any other Borrower
           -----------------------
designated as such by the Borrowers in a written notice to the Agent.

          "Affiliate" means, as to any Person, any other Person that directly or
           ---------
indirectly through one or more intermediaries, controls, is controlled by, or is
under common control with, such Person.  For purposes of this definition,
"control" of a Person means the power, directly or indirectly, either to (i)
vote 10% or more of the Capital Stock having ordinary voting power for the
election of directors of such Person or (ii) direct or cause the direction of
the management and policies of such Person whether by contract or otherwise.
Notwithstanding anything herein to the contrary, in no event shall the Agent or
any Lender be considered an "Affiliate" of any Loan Party.

          "Agent" means the Agent or such Person selected by the Agent, after
           -----
consultation with the Administrative Borrower, to perform the duties of the
Agent and such other duties as the Agent shall determine, including, without
limitation, funding the Loans, calculating and monitoring the Borrowing Base,
cash management and other related duties.

          "Agent Advances" has the meaning specified therefor in Section
           --------------
10.08(a).

          "Agent's Account" means an account at a bank designated by the Agent
           ---------------
from time to time as the account into which the Borrowers shall make all
payments to the Agent for the benefit of the Agent and the Lenders under this
Agreement and the other Loan Documents.

          "Agreed Administrative Expense Priorities" shall mean that
           ----------------------------------------
administrative expenses with respect to the Borrowers entitled to priority
pursuant to Sections 503 and 507 of the Bankruptcy Code and, with respect to
sub-clause (ii) of clause "first", any official committee appointed by the
                           -----
Bankruptcy Court shall have the following order of priority:

               first, (i) amounts payable pursuant to 28 U.S.C. (S) 1930(a)(6)
               -----
     and (ii) allowed fees and expenses of attorneys, accountants and other
     professionals retained in the Chapter 11 Cases pursuant to Sections 327 and
     1103 of the Bankruptcy Code, but the amount entitled to priority under sub-
     clause (ii) of this clause first ("Priority Professional Expenses") shall
                                -----   ------------------------------
     not exceed $3,000,000 outstanding in the aggregate at any time (inclusive
     of any holdbacks required by the Bankruptcy Court) (the "Professional
                                                              ------------
     Expense Cap"); provided, however, that (A) after the Agent has provided
     -----------    --------  -------
     written by-hand or facsimile notice to the Administrative Borrower of the
     occurrence of an Event of Default hereunder or a default by the Borrowers
     in any of their obligations under the Final Bankruptcy Court Order, any
     payments actually made to such professionals after

                                      -2-
<PAGE>

     the occurrence and during the continuance of such Event of Default or
     default, under Sections 330 and 331 of the Bankruptcy Code or otherwise,
     shall reduce the Professional Expense Cap on a dollar-for-dollar basis and
     (B) for the avoidance of doubt, any payment actually made to such
     professionals prior to the notice described in subclause (A) above may be
     retained by such professionals and not reduce the Professional Expense Cap,

               second, all Obligations, and
               ------

               third, all other allowed administrative expenses.
               -----

          "Agreement" means this Financing Agreement, including all amendments,
           ---------
modifications and supplements and any exhibits or schedules to any of the
foregoing, and shall refer to the Agreement as the same may be in effect at the
time such reference becomes operative.

          "Applicable Margin" means (i) from the Effective Date until May 31,
           -----------------
2001, two percent (2%) and (ii) on and after the first day of each month
commencing June 1, 2001, the Applicable Margin for the month immediately
preceding such month plus an additional one percent (1%).

          "A/R Advance Percentage" means the advance rate, designated as a
           ----------------------
percentage, of Eligible Accounts Receivable determined by the Agent in the
exercise of its business judgment, based upon the results of a Field Survey and
Audit and the lending practices of the Agent and advised by the Agent to the
Administrative Borrower in writing immediately prior to the making of the
initial Revolving Loan hereunder.

          "Assignment and Acceptance" means an assignment and acceptance entered
           -------------------------
into by an assigning Lender and an assignee, and accepted by the Agent, in
accordance with Section 11.07 hereof and substantially in the form of Exhibit G
hereto.

          "Authorized Officer" means the chief financial officer, president or
           ------------------
executive vice president of the Administrative Borrower.

          "Avoidance Actions" means all causes of action arising under Sections
           -----------------
542, 544, 545, 547, 548, 549, 550, 551, 553(b) or 724(e) of the Bankruptcy Code
and any proceeds therefrom.

          "Bankruptcy Code" has the meaning specified therefor in the recitals
           ---------------
hereto.

          "Bankruptcy Court" has the meaning specified therefor in the recitals
           ----------------
hereto.

          "Board" means the Board of Governors of the Federal Reserve System of
           -----
the United States.

          "Book Value" means, as to any Inventory, the lower of (i) cost (as
           ----------
reflected in the general ledger of any Borrower before customary (but not
extraordinary) reserves established by such Borrower in good faith and in
accordance with GAAP) and (ii) market value, in each case determined in
accordance with GAAP calculated on a first in first out basis).

                                      -3-
<PAGE>

          "Borrower" and "Borrowers" have the meanings specified therefor in the
           ------------------------
preamble hereto.

          "Borrowing Base" means, at any time, the difference between (i) the
           --------------
sum of (A) the A/R Advance Percentage of the Borrowers' Net Amount of Eligible
Accounts Receivable at such time plus (B) up to 0% of the Book Value of the
                                 ----
Borrowers' aggregate Eligible Inventory at such time or such other percentage as
shall be determined by the Agent in the exercise of its business judgment based
upon the results of the Field Survey and Audit and subject to the lending
practices of the Agent and (ii) the sum of (A) $3,000,000 plus (B) such reserves
                                                          ----
as the Agent may deem appropriate in the exercise of its reasonable business
judgment based upon the lending practices of the Agent, consistent with the
practices customary in the commercial finance industry generally and advised by
the Agent to the Administrative Borrower.  The Agent and the Lenders may include
other assets of the Borrowers in the Borrowing Base, based upon the results of
the Field Survey and Audit and subject to the lending practices of the Agent and
the Lenders.  In addition, the Agent and the Lenders may include the accounts
receivable, inventory and other assets of any Guarantor which becomes a debtor
in the Chapter 11 Cases, based upon legal and financial due diligence with
respect to such Guarantor, consistent with the diligence that was performed with
respect to the Borrowers, which shall be acceptable to the Agent in its sole and
absolute discretion.  Any such inclusion of additional assets in the Borrowing
Base will be at advance rates and subject to eligibility criteria, reserves and
other limitations to be determined by the Agent and the Lenders in their sole
judgment.

          "Borrowing Base Certificate" means a certificate signed by an
           --------------------------
Authorized Officer of the Administrative Borrower and setting forth the
calculation of the Borrowing Base in compliance with Section 7.01(a)(xii), in a
form satisfactory to the Agent.

          "Budget" means the Short Term Budget or the Long Term Budget, as the
           ------
context requires.

          "Business Day" means any day other than a Saturday, Sunday or other
           ------------
day on which commercial banks in New York City are authorized or required to
close.

          "Capital Expenditures" means, with respect to any Person for any
           --------------------
period, the sum of (i) the aggregate of all expenditures by such Person during
such period that in accordance with GAAP are or should be included in "property,
plant and equipment" or similar fixed asset account on its balance sheet,
whether such expenditures are paid in cash or financed and including all
Capitalized Lease Obligations paid or payable during such period, and (ii) to
the extent not covered by clause (i) above, the aggregate of all expenditures by
such Person and its Subsidiaries to acquire by purchase or otherwise the
business or fixed assets of, or the Capital Stock of, any other Person.

          "Capital Guideline" means any law, rule, regulation, policy, guideline
           -----------------
or directive (whether or not having the force of law and whether or not the
failure to comply therewith would be unlawful) (i) regarding capital adequacy,
capital ratios, capital requirements, the calculation of a bank's capital or
similar matters, or (ii) affecting the amount of capital required to be obtained
or maintained by a Lender or any Person controlling any Lender, or the manner in

                                      -4-
<PAGE>

which a Lender or any Person controlling any Lender allocate capital to any of
their contingent liabilities (including letters of credit), advances,
acceptances, commitments, assets or liabilities.

          "Capitalized Lease" means, with respect to any Person, any lease of
           -----------------
real or personal property by such Person as lessee which is required under GAAP
to be capitalized on the balance sheet of such Person.

          "Capitalized Lease Obligations" means, with respect to any Person,
           -----------------------------
obligations of such Person under Capitalized Leases, and, for purposes hereof,
the amount of any such obligation shall be the capitalized amount thereof
determined in accordance with GAAP.

          "Capital Stock" means (i) with respect to any Person that is a
           -------------
corporation, any and all shares, interests, participations or other equivalents
(however designated and whether or not voting) of corporate stock, and (ii) with
respect to any Person that is not a corporation, any and all partnership,
membership or other equity interests of such Person.

          "Carve-Out Expenses" means those amounts, fees, expenses and claims
           ------------------
set forth in clause "first" of the definition of the term "Agreed Administrative
                     -----
Expense Priorities."

          "Change of Control" means Phillipe Bodson shall cease to be involved
           -----------------
in the day-to-day operations and management of the business of the Borrowers and
a successor reasonably acceptable to the Lenders is not appointed on terms
reasonably acceptable to the Lenders within 30 days of such cessation of
involvement.

          "Chapter 11 Cases" has the meaning given that term in the recitals to
           ----------------
this Agreement.

          "Closing Fees" has the meaning specified therefor in Section 2.06(a).
           ------------

          "Code" means the Internal Revenue Code of 1986, as amended (or any
           ----
successor statute thereto) and the regulations thereunder.

          "Collateral" has the meaning specified therefor in Section 3.01(a).
           ----------

          "Collection Account" has the meaning specified therefor in Section
           ------------------
8.01(a).

          "Commitments" means, with respect to each Lender, such Lender's
           -----------
Revolving Credit Commitment, Term Loan A Commitment and Term Loan B Commitment.

          "Concordat" has the meaning specified therefor in the recitals hereto.
           ---------

          "Contingent Obligation" means, with respect to any Person, any
           ---------------------
obligation of such Person guaranteeing or intended to guarantee any
Indebtedness, leases, dividends or other obligations ("primary obligations") of
any other Person (the "primary obligor") in any manner, whether directly or
indirectly, including, without limitation, (i) the direct or indirect guaranty,
endorsement (other than for collection or deposit in the ordinary course of
business), co-making, discounting with recourse or sale with recourse by such
Person of the obligation of a primary obligor, (ii) the obligation to make take-
or-pay or similar payments, if required, regardless of

                                      -5-
<PAGE>

nonperformance by any other party or parties to an agreement, (iii) any
obligation of such Person, whether or not contingent, (A) to purchase any such
primary obligation or any property constituting direct or indirect security
therefor, (B) to advance or supply funds (1) for the purchase or payment of any
such primary obligation or (2) to maintain working capital or equity capital of
the primary obligor or otherwise to maintain the net worth or solvency of the
primary obligor, (C) to purchase property, assets, securities or services
primarily for the purpose of assuring the owner of any such primary obligation
of the ability of the primary obligor to make payment of such primary obligation
or (D) otherwise to assure or hold harmless the holder of such primary
obligation against loss in respect thereof; provided, however, that the term
                                            --------  -------
"Contingent Obligation" shall not include any products warranties extended in
the ordinary course of business. The amount of any Contingent Obligation shall
be deemed to be an amount equal to the stated or determinable amount of the
primary obligation with respect to which such Contingent Obligation is made (or,
if less, the maximum amount of such primary obligation for which such Person may
be liable pursuant to the terms of the instrument evidencing such Contingent
Obligation) or, if not stated or determinable, the maximum reasonably
anticipated liability with respect thereto (assuming such Person is required to
perform thereunder), as determined by such Person in good faith.

          "Control Agreement" means a control agreement, in form and substance
           -----------------
satisfactory to the Agent, between a Borrower, the Agent, and a securities
intermediary with respect to a Securities Account and related Investment
Property.

          "Default" means an event which, with the giving of notice or the lapse
           -------
of time or both, would constitute an Event of Default.

          "Dictaphone" has the meaning specified therefor in the preamble
           ----------
hereto.

          "Disposition" means any transaction, or series of related
           -----------
transactions, pursuant to which any Person sells, assigns, transfers or
otherwise disposes of any property or assets (whether now owned or hereafter
acquired) to any other Person, in each case whether or not the consideration
therefor consists of cash, securities or other assets owned by the acquiring
Person, excluding any sales of Inventory in the ordinary course of business on
        ---------
ordinary business terms.

          "Dollar," "Dollars" and the symbol "$" each means lawful money of the
           ------    -------                  -
United States of America.

          "Effective Date" means the date, on or before February 23, 2001, on
           --------------
which all of the conditions precedent set forth in Section 5.01 are satisfied
and the Term Loan A is made.

          "Eligible Accounts Receivable" means the Accounts Receivable which
           ----------------------------
are, and at all times continue to be, acceptable to the Agent in the exercise of
its reasonable business judgment based on the lending practices of the Agent,
consistent with criteria customary in the commercial finance industry generally.
In general, an Account Receivable may, in the reasonable business judgment of
the Agent, be deemed to be eligible if:  (i) delivery of the merchandise or the
rendition of the services has been completed (other than in the case of service
agreements which are billed in advance and for which the Account Debtor is
obligated to pay whether or not any service is rendered); (ii) with respect to
such Account Receivable, no return,

                                      -6-
<PAGE>

rejection, repossession or dispute has occurred, the Account Debtor has not
asserted any setoff, defense or counterclaim, and there has not occurred any
extension of the time for payment without the consent of the Agent, provided,
                                                                    --------
that, in the case of any dispute, setoff, defense or counterclaim with respect
----
to an Account Receivable, the portion of such Account Receivable not subject to
such dispute, setoff, defense or counterclaim will not be ineligible solely by
reason of this clause (ii); (iii) such Account Receivable is lawfully owned by a
Borrower free and clear of any Lien other than in favor of the Agent for the
benefit of the Lenders and otherwise continues to be in full conformity with all
representations and warranties made by the Borrowers to the Agent and the
Lenders with respect thereto in the Loan Documents; (iv) such Account Receivable
is unconditionally payable in Dollars within 90 days from the invoice date and
is not evidenced by a promissory note, chattel paper or any other instrument or
other document unless the original of such document is in the possession of the
Agent and contains all necessary indorsements in favor of the Agent; (v) no more
than 60 days have elapsed from the invoice due date and no more than 90 days
have elapsed from the invoice date with respect to such Account Receivable; (vi)
such Account Receivable is not due from an Affiliate of the Borrowers; (vii)
such Account Receivable does not constitute an obligation of the United States
or any other Governmental Authority (unless all steps required by the Agent in
connection therewith, including notice to the United States Government under the
Federal Assignment of Claims Act or any action under any state statute
comparable to the Federal Assignment of Claims Act, have been duly taken in a
manner satisfactory to the Agent); (viii) the Account Debtor (or the applicable
office of the Account Debtor) with respect to such Account Receivable is located
in the continental United States, unless such Account Receivable is supported by
a letter of credit or other similar obligation satisfactory to the Agent; (ix)
the Account Debtor with respect to such Account Receivable is not also a
supplier to or creditor of the Borrowers, unless such Account Debtor has
executed a no-offset letter satisfactory to the Agent; (x) not more than 50% of
the aggregate amount of all Accounts Receivable of the Account Debtor with
respect to such Account Receivable have remained unpaid 60 days past the invoice
due date or 90 days past the invoice date; (xi) the Account Debtor with respect
to such Account Receivable (A) has not filed a petition for bankruptcy or any
other relief under the Bankruptcy Code or any other law relating to bankruptcy,
insolvency, reorganization or relief of debtors, made an assignment for the
benefit of creditors, had filed against it any petition or other application for
relief under the Bankruptcy Code or any such other law, (B) has not failed,
suspended business operations, become insolvent or called a meeting of its
creditors for the purpose of obtaining any financial concession or
accommodation, (C) has not had or suffered to be appointed a receiver or a
trustee for all or a significant portion of its assets or affairs or (D) in the
case of an Account Debtor who is an individual, is not an employee of the
Borrowers or any of their Affiliates and has not died or been declared
incompetent; and (xii) the Agent is, and continues to be, satisfied with the
credit standing of the Account Debtor in relation to the amount of credit
extended and the Agent believes, in its reasonable business judgment, that the
prospect of collection of such Account Receivable is not impaired for any
reason.

          "Eligible Inventory" means, with respect to any Borrower, all finished
           ------------------
goods Inventory (including finished components thereof) that meets all of the
following specifications:  (i) such Inventory is lawfully owned by such Borrower
free and clear of any existing Lien, other than that of the Agent for the
benefit of the Lenders under the Loan Documents; (ii) such Inventory is not held
on consignment and may be lawfully sold and it continues to be in full
conformity with all representations and warranties made by such Borrower with
respect thereto

                                      -7-
<PAGE>

in the Loan Documents; (iii) such Borrower has the right to grant Liens on such
Inventory; (iv) such Inventory arose or was acquired in the ordinary course of
the business of such Borrower and does not represent damaged, obsolete or
unsalable goods; (v) no Account Receivable or document of title has been created
or issued with respect to such Inventory; (vi) such Inventory is located in one
of the continental United States; (vii) if such Inventory consists of finished
goods Inventory sold under a licensed trademark or if such Inventory contains or
uses a medium subject to a copyright (A) the Agent shall have entered into a
waiver letter, in form and substance satisfactory to the Agent, with the
licensor with respect to the rights of the Agent to use the licensed trademark
or copyright to sell or otherwise dispose of such Inventory or (B) the Agent
shall otherwise be satisfied, in its sole discretion, that the Agent has rights
to sell or dispose of such Inventory; (viii) the Inventory is not raw materials
(other than finished components of finished goods), work-in-process, supplies or
packaging; and (ix) such Inventory is and at all times shall continue to be
acceptable to the Agent in the exercise of its reasonable business judgment
based upon the lending practices of the Agent, consistent with criteria
customary in the commercial finance industry generally.

          "Employee Plan" means an employee benefit plan (other than a
           -------------
Multiemployer Plan) covered by Title IV of ERISA and maintained (or was
maintained at any time during the six (6) calendar years preceding the date of
any borrowing hereunder) for employees of any Borrower or any of its ERISA
Affiliates.

          "Entry Date" has the meaning specified therefor in Section 5.01(a).
           ----------

          "Environmental Actions" means any complaint, summons, citation,
           ---------------------
notice, directive, order, claim, litigation, investigation, judicial or
administrative proceeding, judgment, letter or other communication from any
Governmental Authority involving violations of Environmental Laws or Releases of
Hazardous Materials (i) from any assets, properties or businesses of any Loan
Party or any of its Subsidiaries or any predecessor in interest; (ii) from
adjoining properties or businesses; or (iii) onto any facilities which received
Hazardous Materials generated by any Loan Party or any of its Subsidiaries or
any predecessor in interest.

          "Environmental Laws" means the Comprehensive Environmental Response,
           ------------------
Compensation and Liability Act (42 U.S.C. (S) 9601, et seq.), the Hazardous
                                                    -- ---
Materials Transportation Act (49 U.S.C. (S) 1801, et seq.), the Resource
                                                  -- ---
Conservation and Recovery Act (42 U.S.C. (S) 6901, et seq.), the Federal Clean
                                                   -- ---
Water Act (33 U.S.C. (S) 1251 et seq.), the Clean Air Act (42 U.S.C. (S) 7401 et
                              -- ---                                          --
seq.), the Toxic Substances Control Act (15 U.S.C. (S) 2601 et seq.) and the
---                                                         -- ---
Occupational Safety and Health Act (29 U.S.C. (S) 651 et seq.), as such laws may
                                                      -- ---
be amended or otherwise modified from time to time, and any other present or
future federal, state, local or foreign statute, ordinance, rule, regulation,
order, judgment, decree, permit, license or other binding determination of any
Governmental Authority imposing liability or establishing standards of conduct
for protection of the environment.

          "Environmental Liabilities and Costs" means all liabilities, monetary
           -----------------------------------
obligations, Remedial Actions, losses, damages, punitive damages, consequential
damages, treble damages, costs and expenses (including all reasonable fees,
disbursements and expenses of counsel, experts and consultants and costs of
investigations and feasibility studies), fines, penalties, sanctions and
interest incurred as a result of any claim or demand by any Governmental

                                      -8-
<PAGE>

Authority or any third party, and which relate to any environmental condition or
a Release of Hazardous Materials from or onto (i) any property presently or
formerly owned by any Loan Party or any of its Subsidiaries or (ii) any facility
which received Hazardous Materials generated by any Loan Party or any of its
Subsidiaries.

          "Environmental Lien" means any Lien in favor of any Governmental
           ------------------
Authority for Environmental Liabilities and Costs.

          "ERISA" means the Employee Retirement Income Security Act of 1974, as
           -----
amended, and any successor statute of similar import, and regulations
thereunder, in each case as in effect from time to time.  References to sections
of ERISA shall be construed also to refer to any successor sections.

          "ERISA Affiliate" means, with respect to any Person, any trade or
           ---------------
business (whether or not incorporated) which is a member of a group of which
such Person is a member and which would be deemed to be a "controlled group"
within the meaning of Sections 414(b), (c), (m) and (o) of the Code.

          "Event of Default" means any of the events set forth in Section 9.01.
           ----------------

          "Exchange Act" means the Securities Exchange Act of 1934, as amended.
           ------------

          "Expense Deposit" means the expense deposit in the amount of $200,000
           ---------------
paid by the Borrowers to the Agent on or prior to the Effective Date to pay the
out-of-pocket costs and expenses of the Agent in connection with the performance
of due diligence, the appraising and securing of Collateral and other property
and assets of the Loan Parties, and the preparation of agreements, instruments
and other documents in connection with the transactions contemplated hereby and
by the other Loan Documents, and otherwise in connection with the consummation
of such transactions.

          "Federal Funds Rate" means, for any period, a fluctuating interest
           ------------------
rate per annum equal for each day during such period of the weighted average of
the rates on overnight Federal funds transactions with members of the Federal
Reserve System arranged by Federal funds brokers, as published on the next
succeeding Business Day by the Federal Reserve Bank of New York, or, if such
rate is not so published for any day which is a Business Day, the average of the
quotations for such day on such transactions received by the Agent from three
Federal funds brokers of recognized standing selected by it.

          "Field Survey and Audit" has the meaning specified therefor in Section
           ----------------------
5.02(e).

          "Filing Date" means the date on which the Chapter 11 Cases were
           -----------
commenced.

          "Final Bankruptcy Court Order" means the order of the Bankruptcy Court
           ----------------------------
approving the Loans made and to be made to the Borrowers in accordance with this
Agreement, substantially in the form of Exhibit F, as the same may be amended,
modified or supplemented from time to time with the express written joinder or
consent of the Agent, the Lenders and the Borrowers.

                                      -9-
<PAGE>

          "Final Maturity Date" means the date which is the earliest of (i)
           -------------------
February 23, 2001, if the Final Bankruptcy Court Order has not been entered on
or prior to such date, (ii) the date of the substantial consummation (as defined
in Section 1101(2) of the Bankruptcy Code) of a plan of reorganization in the
Chapter 11 Cases that have been confirmed by an order of the Bankruptcy Court,
(iii) March 20, 2002, or (iv) such earlier date on which either (A) all Loans
shall become due and payable, in whole, in accordance with the terms of this
Agreement and the other Loan Documents or (B) all Loans and all other
Obligations for the payment of money shall be paid in full and the Total
Revolving Credit Commitment and this Agreement are terminated.

          "GAAP" means generally accepted accounting principles in effect from
           ----
time to time in the United States, applied on a consistent basis.

          "Governmental Authority" means any nation or government, any Federal,
           ----------------------
state, city, town, municipality, county, local or other political subdivision
thereof or thereto and any department, commission, board, bureau,
instrumentality, agency or other entity exercising executive, legislative,
judicial, taxing, regulatory or administrative powers or functions of or
pertaining to government.

          "Guaranties" means each guaranty substantially in the form attached as
           ----------
Exhibit B hereto, made by a Guarantor in favor of the Agent for the benefit of
the Lenders.

          "Guarantor" means (i) each non-debtor Subsidiary of the Parent listed
           ---------
on Schedule 1.01(A) hereto and (ii) each other Person which guarantees, pursuant
to Section 7.01(b) or otherwise, all or any part of the Obligations.

          "Hazardous Materials" means (a) any element, compound or chemical that
           -------------------
is defined, listed or otherwise classified as a contaminant, pollutant, toxic
pollutant, toxic or hazardous substances, extremely hazardous substance or
chemical, hazardous waste, special waste, or solid waste under Environmental
Laws; (b) petroleum and its refined products; (c) polychlorinated biphenyls; (d)
any substance exhibiting a hazardous waste characteristic, including but not
limited to, corrosivity, ignitability, toxicity or reactivity as well as any
radioactive or explosive materials; and (e) any raw materials or building
components, including but not limited to, asbestos-containing materials and
manufactured products containing hazardous substances.

          "Hedging Agreement" means any interest rate, foreign currency,
           -----------------
commodity or equity swap, collar, cap, floor or forward rate agreement, or other
agreement or arrangement designed to protect against fluctuations in interest
rates or currency, commodity or equity values (including, without limitation,
any option with respect to any of the foregoing and any combination of the
foregoing agreements or arrangements), and any confirmation executed in
connection with any such agreement or arrangement.

          "Highest Lawful Rate" means, with respect to the Agent or a Lender,
           -------------------
the maximum non-usurious interest rate, if any, that at any time or from time to
time may be contracted for, taken, reserved, charged or received on the
Obligations under laws applicable to the Agent or such Lender which are
currently in effect or, to the extent allowed by law, under

                                      -10-
<PAGE>

such applicable laws which may hereafter be in effect and which allow a higher
maximum non-usurious interest rate than applicable laws now allow.

          "Indebtedness" means, without duplication, with respect to any Person,
           ------------
(i) all indebtedness of such Person for borrowed money; (ii) all obligations of
such Person for the deferred purchase price of property or services (other than
trade payables or other account payables incurred in the ordinary course of such
Person's business and not past due for more than 90 days after the date such
payable was created); (iii) all obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments or upon which interest payments
are customarily made; (iv) all obligations and liabilities of such Person
created or arising under any conditional sales or other title retention
agreement with respect to property used and/or acquired by such Person, even
though the rights and remedies of the lessor, seller and/or lender thereunder
are limited to repossession or sale of such property; (v) all Capitalized Lease
Obligations of such Person; (vi) all obligations and liabilities, contingent or
otherwise, of such Person, in respect of letters of credit, acceptances and
similar facilities; (vii) all obligations and liabilities, calculated on a basis
satisfactory to the Agent and in accordance with accepted practice, of such
Person under Hedging Agreements; (viii) all Contingent Obligations; (ix)
liabilities incurred under Title IV of ERISA with respect to any plan (other
than a Multiemployer Plan) covered by Title IV of ERISA and maintained for
employees of such Person or any of its ERISA Affiliates (other than liabilities
incurred under benefit plans, other than defined benefit plans, not past due for
more than 90 days after the date such liabilities were incurred); (x) withdrawal
liability incurred under ERISA by such Person or any of its ERISA Affiliates to
any Multiemployer Plan; (xi) all other items (other than those expressly
excluded in clauses (i) through (x) of this definition) which, in accordance
with GAAP, would be included as liabilities on the liability side of the balance
sheet of such Person; and (xii) all obligations referred to in clauses (i)
through (xi) of this definition of another Person secured by (or for which the
holder of such Indebtedness has an existing right, contingent or otherwise, to
be secured by) a Lien upon property owned by such Person, even though such
Person has not assumed or become liable for the payment of such Indebtedness.
The Indebtedness of any Person shall include the Indebtedness of any partnership
of or joint venture in which such Person is a general partner or a joint
venturer.

          "Indemnified Matters" has the meaning specified therefor in Section
           -------------------
11.14.

          "Indemnitees" has the meaning specified therefor in Section 11.14.
           -----------

          "Inventory" means all goods and merchandise of any Borrower,
           ---------
including, without limitation, all raw materials, work-in-process, packaging,
supplies, materials and finished goods of every nature used or usable in
connection with the shipping, storing, advertising or sale of such goods and
merchandise, whether now owned or hereafter acquired, and all such other
property the sale or other disposition of which would give rise to an Account
Receivable or cash.

          "Investment Property" means "investment property" as that term is
           -------------------
defined in Section 9-115 of the Uniform Commercial Code.

          "L&H Holdings" has the meaning specified therefor in the preamble
           ------------
hereto.

                                      -11-
<PAGE>

          "Lender" has the meaning specified therefor in the preamble hereto.
           ------

          "Liabilities" has the meaning specified therefor in Section 2.07.
           -----------

          "Lien" means any mortgage, deed of trust, pledge, lien (statutory or
           ----
otherwise), security interest, charge or other encumbrance or security or
preferential arrangement of any nature, including, without limitation, any
conditional sale or title retention arrangement, any Capitalized Lease and any
assignment, deposit arrangement or financing lease intended as, or having the
effect of, security.

          "Loan" means any Revolving Loan or Term Loan made by the Agent or a
           ----
Lender to the Borrowers pursuant to Article II hereof.

          "Loan Account" means an account maintained hereunder by the Agent on
           ------------
its books of account, at the Payment Office and with respect to the Borrowers,
in which the Borrowers will be charged with all Loans made to, and all other
Obligations incurred by, the Borrowers.

          "Loan Documents" means this Agreement, the Notes, the Final Bankruptcy
           --------------
Court Order, the Guaranties, the Security Agreements, the Pledge Agreements, the
Mortgages and all other agreements, instruments, and other documents executed
and delivered pursuant hereto or thereto or otherwise evidencing or securing any
Loan or other Obligation.

          "Loan Parties" means the Borrowers and the Guarantors.
           ------------

          "Loan Servicing Fee" has the meaning specified therefor in Section
           ------------------
2.06(c).

          "Lockboxes" has the meaning specified therefor in Section 8.01(a).
           ---------

          "Lockbox Bank" has the meaning specified therefor in Section 8.01(a).
           ------------

          "Long Term Budget" means the profit and loss and cash flow projections
           --------- ------
of the Parent and its Subsidiaries (other than Mendez and its Subsidiaries and
L&H Korea) attached hereto as Schedule 1.01(D).

          "Material Adverse Deviation" means a deviation of more than 15% from
           --------------------------
any of the following line items set forth in the Long Term Budget:  (i) Revenue;
(ii) Gross Margin; (iii) Operating Income; (iv) Net Income before Income Taxes
and Restructuring Expense; (v) EBITDAR; (vi) the sum of (x) DIP Financing plus
(y) so long as no Event of Default shall have occurred and be continuing, the
Permitted Carry-Forward (as hereinafter defined); or (vii) the sum of (x) Cash
Restructuring Costs plus (y) so long as no Event of Default shall have occurred
and be continuing, the Permitted Carry-Forward.  For purposes of this definition
of "Material Adverse Deviation", "Permitted Carry-Forward" shall mean, for any
period, the amount (if any) by which the projected amount of such line item as
shown in the Long Term Budget for the immediately preceeding period exceeded the
actual amount of such line item for such immediately preceeding period.

                                      -12-
<PAGE>

          "Material Adverse Effect" means a material adverse effect on any of
           -----------------------
(i) the operations, business, assets, properties, condition (financial or
otherwise) or prospects of Dictaphone, individually, the Borrowers, taken as a
whole, or the Loan Parties, taken as a whole (other than as a result of (x) the
filing of the Chapter 11 Cases or the commencement of the Concordat, (y) the
restatement of the financial statements for the years ended December 31, 1998,
December 31, 1999, and December 31, 2000, and for the six (6) month period ended
June 30, 2000, in order to conform such financial statements with GAAP, and (z)
the failure to comply with SEC reporting requirements), (ii) the ability of any
Borrower to perform any of its obligations under any Loan Document to which it
is a party or the ability of the Loan Parties, taken as a whole, to perform any
of their obligations under the Loan Documents, (iii) the legality, validity or
enforceability of this Agreement or any other Loan Document, (iv) the rights and
remedies of the Agent and the Lenders under any Loan Document, or (v) the
validity, perfection or priority of a Lien in favor of the Agent for the benefit
of the Lenders on any of the Collateral.

          "Mendez" means Mendez S.A./N.V. (f/k/a L&H Speech and Language
           ------
Consulting & Services N.V.), a company incorporated under Belgian laws as a
"naamlooze vennootschap" with registered seat at L'Arsenal, Louis Schmidtlaan 3
at 1040 Brussels, Belgium, registered with the Commercial Register of Brussels
under No. 646.783.

          "Moody's" means Moody's Investors Service, Inc. and any successor
           -------
thereto.

          "Mortgage" means each mortgage, deed of trust, deed to secure debt, or
           --------
other similar instrument, in form and substance satisfactory to the Agent, made
by any Loan Party in favor of the Agent for the benefit of the Lenders, securing
the Obligations and delivered to the Agent pursuant to Section 5.02 or Section
7.01(b).

          "Multiemployer Plan" means a "multiemployer plan" as defined in
           ------------------
Section 4001(a)(3) of ERISA for which any Borrower or any ERISA Affiliate has
contributed to, or has been obligated to contribute to, at any time during the
preceding six (6) years.

          "Net Amount of Eligible Accounts Receivable" means the aggregate
           ------------------------------------------
unpaid invoice amount of Eligible Accounts Receivable less, without duplication,
sales, excise or similar taxes, returns, discounts, chargebacks, claims, advance
payments, credits and allowances of any nature at any time issued, owing,
granted, outstanding, available or claimed.

          "Net Cash Proceeds" means, (i) with respect to any Disposition by any
           -----------------
Person, the amount of cash received (or, in the case of any Disposition outside
of the United States, the amount of cash received by such Person that under
applicable law can be repatriated to the United States) (directly or indirectly)
from time to time (whether as initial consideration or through the payment of
deferred consideration) by or on behalf of such Person or any of its
Subsidiaries, in connection therewith after deducting therefrom only (A) the
principal amount of any Indebtedness secured by any Lien not prohibited by
Section 7.02(b) on any asset (other than Indebtedness assumed by the purchaser
of such asset) (or, in the case of any Disposition outside the United States,
any Indebtedness whether secured or unsecured) which is (x) required to be, and
is, repaid in connection with such Disposition (other than Indebtedness under
this Agreement) or (y) in escrow in connection with such Person contesting such
Indebtedness or the

                                      -13-
<PAGE>

Lien securing such Indebtedness in connection with such Disposition, (B)
reasonable expenses related thereto incurred by such Person in connection
therewith, (C) transfer taxes paid by such Person in connection therewith, and
(D) net income taxes to be paid in connection with such Disposition (after
taking into account any tax credits or deductions and any tax sharing
arrangements) and (ii) with respect to the sale or issuance by any Person of any
shares of its Capital Stock, the aggregate amount of cash received (or, in the
case of any sale or issuance outside of the United States, the amount of cash
received by such Person that under applicable law can be repatriated to the
United States) (directly or indirectly) from time to time (whether as initial
consideration or through the payment of deferred consideration) by or on behalf
of such Person or any of its Subsidiaries in connection therewith after
deducting therefrom only reasonable brokerage commissions, underwriting fees and
discounts, legal fees and similar fees and commissions, transfer taxes paid by
such Person in connection therewith, and net income taxes to be paid in
connection with such Disposition (after taking into account any tax credits or
deductions and any tax sharing arrangements).

          "Notes" means, collectively, the Term A Notes, the Term B Notes and
           -----
the Revolving Credit Notes.

          "Notice of Borrowing" has the meaning specified therefor in Section
           -------------------
2.02.

          "Obligations" means (i) the obligations of each Borrower to pay, as
           -----------
and when due and payable (by scheduled maturity, required prepayment,
acceleration, demand or otherwise), all amounts from time to time owing by it in
respect of the Loan Documents, whether for principal, interest, fees,
indemnification payments, expense reimbursements or otherwise, and (ii) the
obligations of each Borrower and each other Loan Party to perform or observe all
of its obligations from time to time existing under the Loan Documents.

          "Operating Lease Obligations" means all obligations for the payment of
           ---------------------------
rent for any real or personal property under leases or agreements to lease,
other than Capitalized Lease Obligations.

          "Parent" has the meaning specified therefor in the preamble hereto.
           ------

          "Participant Register" has the meaning specified therefor in Section
           --------------------
11.07(b)(v).

          "Payment Office" means the Agent's office located at 450 Park Avenue,
           --------------
28/th/ Floor, New York, New York 10022, or at such other office or offices of
the Agent in New York as may be designated in writing from time to time by the
Agent to the Administrative Borrower.

          "PBGC" means the Pension Benefit Guaranty Corporation or any successor
           ----
thereto.

          "Permitted Indebtedness" means:
           ----------------------

          (a) any Indebtedness owing to the Agent and the Lenders under this
Agreement and the other Loan Documents;

                                      -14-
<PAGE>

          (b) any Indebtedness existing on the Effective Date;

          (c) Indebtedness of non-debtor Subsidiaries of the Loan Parties for
which such non-debtor Subsidiaries are liable solely as a result of such
Subsidiaries being a general partner or joint venturer in a partnership or joint
venture that has incurred such Indebtedness;

          (d) any Indebtedness arising in respect of a loan or advance permitted
under Section 7.02(f);

          (e) Indebtedness evidenced by commercial insurance premium finance
arrangements entered into prior to the Effective Date;

          (f) Contingent Obligations of one Subsidiary for the Indebtedness or
obligations of another Subsidiary, provided that such Indebtedness or
                                   --------
obligations are not prohibited by the terms of this Agreement; and

          (g) any additional Indebtedness in an aggregate amount for all Loan
Parties and Restricted Subsidiaries not in excess of $500,000.

          "Permitted Investments" means (i) marketable direct obligations issued
           ---------------------
or unconditionally guaranteed by the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States, in
each case maturing within six months from the date of acquisition thereof; (ii)
commercial paper, maturing not more than 270 days after the date of issue rated
P-1 by Moody's or A-1 by Standard & Poor's; (iii) certificates of deposit
maturing not more than 270 days after the date of issue, issued by commercial
banking institutions and money market or demand deposit accounts maintained at
commercial banking institutions, each of which is a member of the Federal
Reserve System and has a combined capital and surplus and undivided profits of
not less than $500,000,000; (iv) repurchase agreements having maturities of not
more than 90 days from the date of acquisition which are entered into with major
money center banks included in the commercial banking institutions described in
clause (iii) above and which are secured by readily marketable direct
obligations of the Government of the United States of America or any agency
thereof; (v) money market accounts maintained with mutual funds having assets in
excess of $2,500,000,000; (vi) tax exempt securities rated A or better by
Moody's or A+ or better by Standard & Poor's; and (vii) any other investments
acceptable to the Agent and the Administrative Borrower.

          "Permitted Liens" means:
           ---------------

          (a) Liens securing the Obligations;

          (b) Liens for taxes, assessments and governmental charges the payment
of which is not required under Section 7.01(c);

          (c) Liens imposed by law, such as carriers', warehousemen's,
mechanics', materialmen's and other similar Liens arising (provided they are
subordinate to the Agent's Liens on Collateral) in the ordinary course of
business and securing obligations (other than Indebtedness for borrowed money)
that are not overdue by more than 30 days or are being

                                      -15-
<PAGE>

contested in good faith and by appropriate proceedings promptly initiated and
diligently conducted, and a reserve or other appropriate provision, if any, as
shall be required by GAAP shall have been made therefor;

          (d) Liens existing on the Filing Date, but not the extension of
coverage thereof to other property or the extension of maturity, refinancing or
other modification of the terms thereof or the increase of the Indebtedness
secured thereby;

          (e) Liens imposed by law, such as carriers', warehouseman's,
mechanics', materialman's and other similar Liens existing on the Filing Date;

          (f) deposits and pledges securing (i) obligations incurred in respect
of workers' compensation, unemployment insurance or other forms of governmental
insurance or benefits, (ii) the performance of bids, tenders, leases, contracts
(other than for the payment of money) and statutory obligations or (iii)
obligations on surety or appeal bonds, but only to the extent such deposits or
pledges are incurred or otherwise arise in the ordinary course of business and
secure obligations not past due;

          (g) easements, zoning restrictions, and similar encumbrances on real
property and minor irregularities in the title thereto that do not (i) secure
obligations for the payment of money or (ii) materially impair the value of such
property or its use by any Loan Party or any of its Subsidiaries in the normal
conduct of such Person's business; and

          (h) Liens with respect to equipment leases and other contractual
obligations (not constituting Indebtedness) entered into in the ordinary course
of business;

          (i) Pre-petition Liens asserted by Artesia Banking Corporation N.V. in
the assets of the Parent located in Belgium (for the avoidance of doubt, in the
case of intellectual property, all rights to use in the United States any
intellectual property interests of any Borrower registered under the laws of the
United States shall not constitute assets of the Parent located in Belgium),
subject to the terms set forth in the Final Bankruptcy Court Order;

          (j) Pre-petition Liens asserted by KBC Bank N.V. in the Accounts
Receivable of the Parent for which the Account Debtor (or the applicable office
of the Account Debtor) is located outside of the United States (including, for
purposes of this clause (j) only, all claims of the Parent in respect of such
Accounts Receivable irrespective of whether such claims are for payment for
goods sold or services rendered), subject to the terms set forth in the Final
Bankruptcy Court Order;

          (k) Liens granted in favor of each Borrower in all assets and property
of each other Borrower (other than Avoidance Actions), subject to the terms set
forth in the Final Bankruptcy Court Order;

          (l) Liens with respect to commercial insurance premium finance
arrangements existing on the Effective Date;

          (m) Liens with respect to source code deposit arrangements of the Loan
Parties entered into in the ordinary course of business; and

                                      -16-
<PAGE>

          (n) Pre-petition Lien and/or right of set-off asserted by Deutsche
Bank AG against the account balance existing on the Filing Date (including any
interest thereon) in Dictaphone account no. 0298494 located at Deutsche Bank
(London Branch).

          "Permitted Priority Liens" means those Liens set forth in clauses (e),
           ------------------------
(f), (g), (h), (i), (j) and (n) of the definition of the term "Permitted Liens".

          "Person" means an individual, corporation, limited liability company,
           ------
partnership, association, joint-stock company, trust, unincorporated
organization, joint venture or Governmental Authority.

          "Pledge Agreement" means a Pledge and Security Agreement made by each
           ----------------
Borrower and Guarantor in favor of the Agent for the benefit of the Lenders,
substantially in the form of Exhibit C, securing the Obligations and delivered
to the Agent.

          "Post-Default Rate" means a rate of interest per annum equal to the
           -----------------
rate of interest otherwise in effect from time to time pursuant to the terms of
this Agreement plus 4%.

          "Priority Professional Expenses" shall mean those expenses entitled to
           ------------------------------
a priority as set forth in sub-clause (ii) of the clause "first" of the
                                                          -----
definition of the term "Agreed Administrative Expense Priorities".

          "property" means any right or interest in or to property of any kind
           --------
whatsoever, whether real, personal or mixed and whether tangible or intangible.

          "Pro Rata Share" means:
           --------------

          (a) with respect to a Lender's obligation to make Revolving Loans and
receive payments of interest, fees, and principal with respect thereto, the
percentage obtained by dividing (i) such Lender's Revolving Credit Commitment,
by (ii) the Total Revolving Credit Commitment, provided, that, if the Total
                                               --------
Revolving Credit Commitment has been reduced to zero, the numerator shall be the
aggregate unpaid principal amount of such Lender's Revolving Loans (including
Agent Advances) and the denominator shall be the aggregate unpaid principal
amount of all of the Revolving Loans (including Agent Advances),

          (b) with respect to a Lender's obligation to make a Term Loan A and
receive payments of interest, fees, and principal with respect thereto, the
percentage obtained by dividing (i) such Lender's Term Loan A Commitment, by
(ii) the Total Term Loan A Commitment, provided that if the Total Term Loan A
Commitment has been reduced to zero, the numerator shall be the aggregate unpaid
principal amount of such Lender's Term Loan A and the denominator shall be the
aggregate unpaid principal amount of the Term Loans A of all Lenders,

          (c) with respect to a Lender's obligation to make a Term Loan B and
receive payments of interest, fees, and principal with respect thereto, the
percentage obtained by dividing (i) such Lender's Term Loan B Commitment, by
(ii) the Total Term Loan B Commitment, provided that if the Total Term Loan B
Commitment has been reduced to zero, the numerator shall be the aggregate unpaid
principal amount of such Lender's Term Loan B and the

                                      -17-
<PAGE>

denominator shall be the aggregate unpaid principal amount of the Term Loans B
of all Lenders, and

          (d) with respect to all other matters (including, without limitation,
the indemnification obligations arising under Section 10.05), the percentage
obtained by dividing (i) the sum of such Lender's Revolving Credit Commitment
and principal amount of Term Loans, by (ii) the sum of the Total Revolving
Credit Commitment and the aggregate principal amount of all Term Loans,
provided, that if such Lender's Revolving Credit Commitment shall have been
--------
reduced to zero, such Lender's Revolving Credit Commitment shall be deemed to be
the aggregate unpaid principal amount of such Lender's Revolving Loans
(including Agent Advances) and if the Total Revolving Credit Commitment shall
have been reduced to zero, the Total Revolving Credit Commitment shall be deemed
to be the aggregate unpaid principal amount of all Revolving Loans (including
Agent Advances).

          "Rating Agencies" has the meaning specified therefor in Section 2.07.
           ---------------

          "Reference Bank" means The Chase Manhattan Bank, N.A., its successors
           --------------
or any other commercial bank designated by the Agent to the Borrowers from time
to time.

          "Reference Rate" means the rate of interest publicly announced by the
           --------------
Reference Bank in New York, New York from time to time as its reference rate,
base rate or prime rate.  The prime rate is determined from time to time by the
Reference Bank as a means of pricing some loans to its borrowers and neither is
tied to any external rate of interest or index nor necessarily reflects the
lowest rate of interest actually charged by the Reference Bank to any particular
class or category of customers.  Each change in the Reference Rate shall be
effective from and including the date such change is publicly announced as being
effective.

          "Register" has the meaning specified therefor in Section 11.07(b)(ii).
           --------

          "Registered Loan" has the meaning specified therefor in Section
           ---------------
2.03(c).

          "Registered Note" has the meaning specified therefor in Section
           ---------------
2.03(c).

          "Regulation T", "Regulation U" and "Regulation X" mean, respectively,
           ------------    ------------       ------------
Regulations T, U and X of the Board or any successor, as the same may be amended
or supplemented from time to time.

          "Release" means any spilling, leaking, pumping, pouring, emitting,
           -------
emptying, discharging, injecting, escaping, leaching, seeping, migrating,
dumping or disposing of any Hazardous Material (including the abandonment or
discarding of barrels, containers and other closed receptacles containing any
Hazardous Material) into the indoor or outdoor environment, including ambient
air, soil, surface or ground water.

          "Remedial Action" means all actions taken to (i) clean up, remove,
           ---------------
remediate, contain, treat, monitor, assess, evaluate or in any other way address
Hazardous Materials in the indoor or outdoor environment; (ii) prevent or
minimize a Release or threatened Release of Hazardous Materials so they do not
migrate or endanger or threaten to endanger public health or welfare or the
indoor or outdoor environment; (iii) perform pre-remedial studies and

                                      -18-
<PAGE>

investigations and post-remedial operation and maintenance activities; or (iv)
any other actions authorized by 42 U.S.C. 9601.

          "Reportable Event" means an event described in Section 4043 of ERISA
           ----------------
(other than an event not subject to the provision for 30-day notice to the PBGC
under the regulations promulgated under such Section).

          "Required Lenders" means Lenders whose Pro Rata Shares aggregate at
           ----------------
least 51%.

          "Restricted Subsidiary" means (i) any direct or indirect Subsidiary of
           ---------------------
the Parent that is organized under the laws of the United States of America or a
state or territory thereof, (ii) Mendez, (iii) any direct or indirect Subsidiary
of Mendez, and (iv) any other Subsidiary listed on Schedule 1.01(C) hereto.

          "Revolving Credit Commitment" means, with respect to each Lender, the
           ---------------------------
commitment of such Lender to make Revolving Loans to the Borrowers after the
entry of the Final Bankruptcy Court Order and after the Revolving Credit
Facility Effective Date, in the amount set forth opposite such Lender's name in
Schedule 1.01(B) hereto, as such amount may be terminated or reduced from time
to time in accordance with the terms of this Agreement.

          "Revolving Credit Facility Effective Date" means the date on which all
           ----------------------------------------
of the conditions precedent set forth in Section 5.02 are satisfied.

          "Revolving Credit Note" means a promissory note of the Borrowers,
           ---------------------
substantially in the form of Exhibit A-1, made jointly and severally payable to
the order of a Lender, evidencing the Indebtedness resulting from the making by
such Lender to the Borrowers of Revolving Loans and delivered to such Lender
pursuant to Article V, as such promissory note may be amended, supplemented,
restated, modified or extended from time to time, and any promissory note or
notes issued in exchange or replacement therefor.  The term "Revolving Credit
Note" shall include any Registered Note evidencing the Revolving Loans and
delivered pursuant to Section 2.03(c).

          "Revolving Loan" means a loan made by a Lender to the Borrowers
           --------------
pursuant to Section 2.01(a)(iii).

          "SEC" means the Securities and Exchange Commission or any other
           ---
similar or successor agency of the Federal government administering the
Securities Act.

          "Securities Account" means a "securities account" (as that term is
           ------------------
defined in Section 8-501 of the Uniform Commercial Code) established by the
Borrowers pursuant to Section 7.01(o).

          "Securities Act" means the Securities Act of 1933, as amended, or any
           --------------
similar Federal statute, and the rules and regulations of the SEC thereunder,
all as the same shall be in effect at the time.

          "Securitization" has the meaning specified therefor in Section 2.07.
           --------------

                                      -19-
<PAGE>

          "Securitization Parties" has the meaning specified therefor in Section
           ----------------------
2.07.

          "Security Agreement" means a Security Agreement made by a Loan Party
           ------------------
in favor of the Agent for the benefit of the Lenders, substantially in the form
of Exhibit D, securing the Obligations and delivered to the Agent.

          "Settlement Period" has the meaning specified therefor in Section
           -----------------
2.02(d)(i) hereof.

          "Short Term Budget" means the thirteen week cash requirement forecast
           -----------------
setting forth cash collections of the Parent and its Subsidiaries (other than
Mendez and its Subsidiaries) for the periods covered thereby or any other
projections or forecasts prepared on a weekly basis by or on behalf of the
Parent and delivered by the Parent to the Agent and the Lenders on or before the
Effective Date pursuant to Section 5.01(e)(ix) hereto and each week thereafter
pursuant to Section 7.01(a)(iv) hereto, which are in form consistent with the
thirteen week cash requirement forecast heretofore delivered to the Agent and
shall be in substance satisfactory to the Agent at the time of delivery thereof.

          "Standard & Poor's" means Standard & Poor's Ratings Services, a
           -----------------
division of The McGraw-Hill Companies, Inc., and any successor thereto.

          "Subagent" has the meaning specified therefor in Section 10.01(b).
           --------

          "Subsidiary" means, with respect to any Person at any date, any
           ----------
corporation, limited or general partnership, limited liability company, trust,
association or other entity (i) the accounts of which would be consolidated with
those of such Person in such Person's consolidated financial statements if such
financial statements were prepared in accordance with GAAP or (ii) of which more
than 50% of (A) the outstanding Capital Stock having (in the absence of
contingencies) ordinary voting power to elect a majority of the board of
directors of such corporation, (B) the interest in the capital or profits of
such partnership or limited liability company or (C) the beneficial interest in
such trust or estate is, at the time of determination, owned or controlled
directly or indirectly through one or more intermediaries, by such Person.

          "Term A Note" means a promissory note of the Borrowers, substantially
           -----------
in the form of Exhibit A-2, made jointly and severally payable to the order of a
Lender, evidencing the Indebtedness resulting from the making by such Lender to
the Borrowers of a Term Loan A and delivered to such Lender pursuant to Article
V, as such promissory note may be amended, supplemented, restated, modified or
extended from time to time, and any promissory note or notes issued in exchange
or replacement therefor.  The term "Term A Note" shall include any Registered
Note evidencing the Term Loans A and delivered pursuant to Section 2.03(c).

          "Term B Note" means a promissory note of the Borrowers, substantially
           -----------
in the form of Exhibit A-3, made jointly and severally payable to the order of a
Lender, evidencing the Indebtedness resulting from the making by such Lender to
the Borrowers of a Term Loan B and delivered to such Lender pursuant to Article
V, as such promissory note may be amended, supplemented, restated, modified or
extended from time to time, and any promissory note or notes issued in exchange
or replacement therefor.  The term "Term B Note" shall include any Registered
Note evidencing the Term Loans B and delivered pursuant to Section 2.03(c).

                                      -20-
<PAGE>

          "Term Loan A" means a loan made by a Lender to the Borrowers on the
           -----------
Effective Date pursuant to Section 2.01(a)(i).

          "Term Loan A Commitment" means, with respect to each Lender, the
           ----------------------
commitment of such Lender to make a Term Loan A to the Borrowers after the entry
of the Final Bankruptcy Order, in the amount set forth opposite such Lender's
name in Schedule 1.01(B) hereto, as the same may be terminated or reduced from
time to time in accordance with the terms of this Agreement.

          "Term Loan B" means a loan made by a Lender to the Borrowers on the
           -----------
Term Loan B Effective Date pursuant to Section 2.01(a)(ii).

          "Term Loan B Commitment" means, with respect to each Lender, the
           ----------------------
commitment of such Lender to make a Term Loan B to the Borrowers after the entry
of the Final Bankruptcy Order, in the amount set forth opposite such Lender's
name in Schedule 1.01(B) hereto, as the same may be terminated or reduced from
time to time in accordance with the terms of this Agreement.

          "Term Loan B Effective Date" means the Business Day on which all of
           --------------------------
the following conditions shall have been satisfied in a manner satisfactory to
the Agent:  (i) the Borrowers shall have established a Securities Account, (ii)
the Bankruptcy Court shall have denied the Motion of Former Principal
Shareholders of Dragon Systems, Inc. for the Appointment of Chapter 11 Trustee,
dated February 6, 2001, and (iii) all of the conditions precedent set forth in
Section 5.03 shall have been satisfied.

          "Term Loan Commitments" means, collectively, the Term Loan A
           ---------------------
Commitments and the Term Loan B Commitments.

          "Term Loans" means, collectively, the Term Loan A and the Term Loan B.
           ----------

          "Termination Event" means (i) a Reportable Event with respect to any
           -----------------
Employee Plan other than the commencement of the Chapter 11 Cases, (ii) any
event that causes any Borrower or any of its ERISA Affiliates to incur liability
under Section 409, 502(i), 502(l), 515, 4062, 4063, 4064, 4069, 4201, 4204 or
4212 of ERISA or Section 4971 or 4975 of the Code, (iii) the filing of a notice
of intent to terminate an Employee Plan or the treatment of an Employee Plan
amendment as a termination under Section 4041 of ERISA, (iv) the institution of
proceedings by the PBGC to terminate an Employee Plan, or (v) any other event or
condition which might constitute grounds under Section 4042 of ERISA for the
termination of, or the appointment of a trustee to administer, any Employee
Plan.

          "Total Commitment" means the sum of the Total Revolving Credit
           ----------------
Commitment, the Total Term Loan A Commitment and the Total Term Loan B
Commitment.

          "Total Revolving Credit Commitment" means the sum of the amounts of
           ---------------------------------
the Lenders' Revolving Credit Commitments set forth in Schedule 1.01(B) hereto
(which, on the Effective Date, shall be $20,000,000), in each case, as may be
reduced from time to time pursuant to the terms of this Agreement or as may be
limited by order of the Bankruptcy Court.

                                      -21-
<PAGE>

          "Total Term Loan A Commitment" means the sum of the amounts of the
           ----------------------------
Lenders' Term Loan A Commitments set forth in Schedule 1.01(B) hereto (which, on
the Effective Date, shall be $30,000,000), in each case, as may be reduced from
time to time pursuant to the terms of this Agreement or as may be limited by
order of the Bankruptcy Court.

          "Total Term Loan B Commitment" means the sum of the amounts of the
           ----------------------------
Lenders' Term Loan B Commitments set forth in Schedule 1.01(B) hereto (which, on
the Effective Date, shall be $10,000,000), in each case, as may be reduced from
time to time pursuant to the terms of this Agreement or as may be limited by
order of the Bankruptcy Court.

          "Uniform Commercial Code" has the meaning specified therefor in
           -----------------------
Section 1.03.

          "Unrestricted Subsidiary" means any direct or indirect Subsidiary of
           -----------------------
the Parent which is not a Restricted Subsidiary.

          "Unused Line Fee" has the meaning specified therefor in Section
           ---------------
2.06(b).

          "WARN" has the meaning specified therefor in Section 6.01(i).
           ----

          SECTION 1.02.   Terms Generally.  The definitions of terms herein
                          ---------------
shall apply equally to the singular and plural forms of the terms defined.
Whenever the context may require, any pronoun shall include the corresponding
masculine, feminine and neuter forms.  The words "include", "includes" and
"including" shall be deemed to be followed by the phrase "without limitation".
The word "will" shall be construed to have the same meaning and effect as the
word "shall".  Unless the context requires otherwise, (a) any definition of or
reference to any agreement, instrument or other document herein shall be
construed as referring to such agreement, instrument or other document as from
time to time amended, supplemented or otherwise modified (subject to any
restrictions on such amendments, supplements or modifications set forth herein),
(b) any reference herein to any Person shall be construed to include such
Person's successors and assigns, (c) the words "herein", "hereof" and
"hereunder", and words of similar import, shall be construed to refer to this
Agreement in its entirety and not to any particular provision hereof, (d) all
references herein to Articles, Sections, Exhibits and Schedules shall be
construed to refer to Articles and Sections of, and Exhibits and Schedules to,
this Agreement and (e) the words "asset" and "property" shall be construed to
have the same meaning and effect and to refer to any and all tangible and
intangible assets and properties, including cash, securities, accounts and
contract rights.  References in this Agreement to "determination" by the Agent
include good faith estimates by the Agent (in the case of quantitative
determinations) and good faith beliefs by the Agent (in the case of qualitative
determinations).

          SECTION 1.03.   Accounting and Other Terms.  Unless otherwise
                          --------------------------
expressly provided herein, each accounting term used herein shall have the
meaning given it under GAAP applied on a basis consistent with those used in
preparing the Financial Statements.  All terms used in this Agreement which are
defined in Article 8 or Article 9 of the Uniform Commercial Code in effect in
the State of New York on the date hereof (the "Uniform Commercial Code") and
which are not otherwise defined herein shall have the same meanings herein as
set forth therein.

                                      -22-
<PAGE>

          SECTION 1.04.   Time References.  Unless otherwise indicated herein,
                          ---------------
all references to time of day refer to Eastern standard time or Eastern daylight
saving time, as in effect in New York City on such day.  For purposes of the
computation of a period of time from a specified date to a later specified date,
the word "from" means "from and including" and the words "to" and "until" each
means "to but excluding"; provided, however, that with respect to a computation
                          --------  -------
of fees or interest payable to the Agent or any Lender, such period shall in any
event consist of at least one full day.

                                  ARTICLE II

                                   THE LOANS

          SECTION 2.01.   Revolving Credit Commitments.  (a) Subject to the
                          ----------------------------
terms and conditions and relying upon the representations and warranties herein
set forth and subject to the Final Bankruptcy Court Order:

               (i)    each Lender that has a Term Loan A Commitment severally
agrees to make a Term Loan A to the Borrowers on the Effective Date, in an
aggregate principal amount not to exceed the amount of such Lender's Term Loan A
Commitment,

               (ii)   each Lender that has a Term Loan B Commitment severally
agrees to make a Term Loan B to the Borrowers on the Term Loan B Effective Date,
in an aggregate principal amount not to exceed the amount of such Lender's Term
Loan B Commitment, and

               (iii)  each Lender that has a Revolving Credit Commitment
severally agrees to make Revolving Loans to the Borrowers at any time and from
time to time from the Revolving Credit Facility Effective Date to the Final
Maturity Date, or until the earlier reduction of its Revolving Credit Commitment
to zero in accordance with the terms hereof, in an aggregate principal amount of
Revolving Loans at any time outstanding not to exceed the amount of such
Lender's Revolving Credit Commitment.

          (b)  Notwithstanding the foregoing, the aggregate principal amount of
Revolving Loans outstanding at any time to the Borrowers shall not exceed the
lower of (i) the Total Revolving Credit Commitment as in effect at such time and
(ii) the then current Borrowing Base.  The Revolving Credit Commitment of each
Lender and the Total Revolving Credit Commitment shall automatically and
permanently be reduced to zero on the Final Maturity Date.  Prior to the
Revolving Credit Facility Effective Date, the Lenders shall not be obligated to
make any Revolving Loans available to the Borrowers.  Within the foregoing
limits, the Borrowers may borrow, repay and reborrow any Revolving Loan, on or
after the Revolving Credit Facility Effective Date and prior to the Final
Maturity Date, subject to the terms, provisions and limitations set forth
herein.  The principal amount of any Term Loan repaid or prepaid may not be
reborrowed.

          SECTION 2.02.   Making the Loans.  (a) The Administrative Borrower
                          ----------------
shall give the Agent prior telephone notice (immediately confirmed in writing,
in substantially the form of Exhibit E hereto (a "Notice of Borrowing"), not
                                                  -------------------
later than 12:00 noon (New York City time) on

                                      -23-
<PAGE>

the date which is five (5) Business Days prior to the date of the proposed Loan
(or such shorter period as any Subagent is willing to accommodate from time to
time), provided, that, the Notice of Borrowing for the Term Loan A may be given
       --------  ----
to the Agent not later than 12:00 noon (New York City time) on the date of such
Loan. Such Notice of Borrowing shall be irrevocable and shall specify (i) the
principal amount of the proposed Loan, (ii) the use of the proceeds of such
proposed Loan, (iii) the proposed borrowing date, which must be a Business Day,
provided, that, with respect to the Term Loan A, the proposed borrowing date
--------  ----
must be the Effective Date and with respect to the Term Loan B, the proposed
borrowing date must be the Term Loan B Effective Date, and (iv) whether such
Loan is a Term Loan or a Revolving Loan. The Agent and the Lenders may act
without liability upon the basis of written, telecopied or telephonic notice
believed by the Agent in good faith to be from the Administrative Borrower (or
from any Authorized Officer thereof designated in writing purportedly from the
Administrative Borrower to the Agent). The Borrowers hereby waive the right to
dispute the Agent's record of the terms of any such telephonic Notice of
Borrowing. The Agent and each Lender shall be entitled to rely conclusively on
any Authorized Officer's authority to request a Loan on behalf of the Borrowers
until the Agent receives written notice to the contrary. The Agent and the
Lenders shall have no duty to verify the authenticity of the signature appearing
on any written Notice of Borrowing. Except as otherwise provided in this Section
2.02, Loans shall be made ratably by the Lenders in accordance with their
respective Commitments.

          (b)  Each Notice of Borrowing pursuant to this Section 2.02 shall be
irrevocable and the Borrowers shall be bound to make a borrowing in accordance
therewith.  Except as otherwise provided in Section 4.02(a), each Revolving Loan
shall be made in a minimum amount of $1,000,000 and shall be in an integral
multiple of $500,000.

          (c)  (i)  Except as otherwise provided in this subsection 2.02(c), all
Loans under this Agreement shall be made by the Lenders simultaneously and
proportionately to their Pro Rata Shares of the Total Commitment, it being
understood that no Lender shall be responsible for any default by any other
Lender in that other Lender's obligations to make a Loan requested hereunder,
nor shall the Commitment of any Lender be increased or decreased as a result of
the default by any other Lender in that other Lender's obligation to make a Loan
requested hereunder, and each Lender shall be obligated to make the Loans
required to be made by it by the terms of this Agreement regardless of the
failure by any other Lender.

               (ii) Notwithstanding any other provision of this Agreement, and
in order to reduce the number of fund transfers among the Borrowers, the Agent
and the Lenders, the Borrowers, the Agent and the Lenders agree that the Agent
may (but shall not be obligated to), and the Borrowers and the Lenders hereby
irrevocably authorize the Agent to, fund, on behalf of the Lenders with a
Revolving Loan Commitment, Revolving Loans pursuant to Section 2.01, subject to
the procedures for settlement set forth in subsection 2.02(d); provided,
                                                               --------
however, that (a) the Agent shall in no event fund such Revolving Loans if the
-------
Agent shall have received written notice from the Required Lenders on the
Business Day prior to the day of the proposed Revolving Loan that one or more of
the conditions precedent contained in Section 5.03 will not be satisfied on the
day of the proposed Revolving Loan, and (b) the Agent shall not otherwise be
required to determine that, or take notice whether, the conditions precedent in
Section 5.03 have been satisfied.  If the Administrative Borrower gives a Notice
of Borrowing requesting a Revolving Loan and the Agent elects not to fund such
Revolving Loan on behalf of

                                      -24-
<PAGE>

the Lenders, then promptly after receipt of the Notice of Borrowing requesting
such Revolving Loan, the Agent shall notify each Lender of the specifics of the
requested Revolving Loan and that it will not fund the requested Revolving Loan
on behalf of the Lenders. If the Agent notifies the Lenders that it will not
fund a requested Revolving Loan on behalf of the Lenders, each Lender with a
Revolving Loan Commitment shall make its Pro Rata Share of the Revolving Loan
available to the Agent, in immediately available funds, at the Payment Office no
later than 3:00 p.m. (New York City time) (provided that the Agent requests
payment from such Lender not later than 1:00 p.m.) on the date of the proposed
Revolving Loan. The Agent will make the proceeds of such Revolving Loans
available to the Borrowers on the day of the proposed Revolving Loan by causing
an amount, in immediately available funds, equal to the proceeds of all such
Revolving Loans received by the Agent at the Payment Office or the amount funded
by the Agent on behalf of the Lenders to be deposited in an account designated
by the Administrative Borrower.

               (iii) If the Agent has notified a Lender that the Agent, on
behalf of the Lenders, will fund a particular Revolving Loan pursuant to
subsection 2.02(c)(ii), the Agent may assume that such Lender has made such
amount available to the Agent on such day and the Agent, in its sole discretion,
may, but shall not be obligated to, cause a corresponding amount to be made
available to the Borrowers on such day. If the Agent makes such corresponding
amount available to the Borrowers and such corresponding amount is not in fact
made available to the Agent by such Lender, the Agent shall be entitled to
recover such corresponding amount on demand from such Lender together with
interest thereon, for each day from the date such payment was due until the date
such amount is paid to the Agent, at the Federal Funds Rate for three Business
Days and thereafter at the Reference Rate. During the period in which such
Lender has not paid such corresponding amount to the Agent, notwithstanding
anything to the contrary contained in this Agreement or any other Loan Document,
the amount so advanced by the Agent to the Borrowers shall, for all purposes
hereof, be a Revolving Loan made by the Agent for its own account. Upon any such
failure by a Lender to pay the Agent, the Agent shall promptly thereafter notify
the Administrative Borrower of such failure and the Borrowers shall immediately
pay such corresponding amount to the Agent for its own account.

               (iv)  Nothing in this subsection 2.02(c) shall be deemed to
relieve any Lender from its obligations to fulfill its Revolving Credit
Commitment hereunder or to prejudice any rights that the Agent or the Borrowers
may have against any Lender as a result of any default by such Lender hereunder.

          (d)  (i)   With respect to all periods for which the Agent has funded
Revolving Loans pursuant to subsection 2.02(c), on Friday of each week, or if
the applicable Friday is not a Business Day, then on the following Business Day,
or such shorter period as the Agent may from time to time select (any such week
or shorter period being herein called a "Settlement Period"), the Agent shall
                                         -----------------
notify each Lender with a Revolving Loan Commitment of the unpaid principal
amount of the Revolving Loans outstanding as of the last day of each such
Settlement Period.  In the event that such amount is greater than the unpaid
principal amount of the Revolving Loans outstanding on the last day of the
Settlement Period immediately preceding such Settlement Period (or, if there has
been no preceding Settlement Period, the amount of the Revolving Loans made on
the date of such Lender's initial funding), each Lender with a Revolving Loan
Commitment shall promptly (and in any event not later than 2:00 p.m. if the

                                      -25-
<PAGE>

Agent requests payment from such Lender not later than 12:00 noon on such day)
make available to the Agent its Pro Rata Share of the difference in immediately
available funds.  In the event that such amount is less than such unpaid
principal amount, the Agent shall promptly pay over to each Lender with a
Revolving Loan Commitment its Pro Rata Share of the difference in immediately
available funds.  In addition, if the Agent shall so request at any time when a
Default or an Event of Default shall have occurred and be continuing, or any
other event shall have occurred as a result of which the Agent shall determine
that it is desirable to present claims against the Borrowers for repayment, each
Lender with a Revolving Loan Commitment shall promptly remit to the Agent or, as
the case may be, the Agent shall promptly remit to each Lender with a Revolving
Loan Commitment, sufficient funds to adjust the interests of the Lenders with a
Revolving Loan Commitment in the then outstanding Revolving Loans to such an
extent that, after giving effect to such adjustment, each such Lender's interest
in the then outstanding Revolving Loans will be equal to its Pro Rata Share
thereof.  The obligations of the Agent and each Lender under this subsection
2.02(d) shall be absolute and unconditional.  Each Lender shall only be entitled
to receive interest on its Pro Rata Share of the Revolving Loans which have been
funded by such Lender.

               (ii)  In the event that any Lender fails to make any payment
required to be made by it pursuant to subsection 2.02(d)(i), the Agent shall be
entitled to recover such corresponding amount on demand from such Lender
together with interest thereon, for each day from the date such payment was due
until the date such amount is paid to the Agent, at the Federal Funds Rate for
three Business Days and thereafter at the Reference Rate. During the period in
which such Lender has not paid such corresponding amount to the Agent,
notwithstanding anything to the contrary contained in this Agreement or any
other Loan Document, the amount so advanced by the Agent to the Borrowers shall,
for all purposes hereof, be a Revolving Loan made by the Agent for its own
account. Upon any such failure by a Lender to pay the Agent, the Agent shall
promptly thereafter notify the Administrative Borrower of such failure and the
Borrowers shall immediately pay such corresponding amount to the Agent for its
own account. Nothing in this subsection 2.02(d)(ii) shall be deemed to relieve
any Lender from its obligation to fulfill its Revolving Credit Commitment
hereunder or to prejudice any rights that the Agent or the Borrowers may have
against any Lender as a result of any default by such Lender hereunder.

          SECTION 2.03.   Notes; Repayment of Loans.  (a) All Revolving Loans
                          -------------------------
made by a Lender to the Borrowers shall be evidenced by a single Revolving
Credit Note, duly executed on behalf of the Borrowers.  The Term Loan A made by
a Lender to the Borrowers shall be evidenced by a single Term A Note, duly
executed on behalf of the Borrowers.  The Term Loan B made by a Lender to the
Borrowers shall be evidenced by a single Term B Note, duly executed on behalf of
the Borrowers.  Each such Note shall be dated the Effective Date, and delivered
to and made jointly and severally payable to the order of such Lender in a
principal amount equal to the maximum amount of such Lender's respective
Commitments.

          (b)  The outstanding principal of all Loans shall be due and payable
on the Final Maturity Date.

          (c)  The Administrative Borrower agrees to record each Loan on the
Register referred to in Section 11.07(b).  Each Loan recorded on the Register
(the "Registered Loan") may
      ---------------

                                      -26-
<PAGE>

not be evidenced by a promissory note other than a Term A Note, a Term B Note or
Revolving Credit Note, as the case may be, which is a Registered Note (as
defined below). Upon the registration of any Loan, any promissory note (other
than a Registered Note) evidencing the same shall be null and void and shall be
returned to the Administrative Borrower. The Borrowers agree, at the request of
any Lender, to execute and deliver to such Lender a promissory note in
registered form to evidence such Registered Loan (i.e. containing the registered
note language set forth in Exhibits A-1 and A-2) and registered as provided in
Section 11.07(b) (a "Registered Note"), dated the date hereof, payable to such
                     ---------------
Lender and otherwise duly completed. Once recorded on the Register, the Loans
evidenced by such Registered Note may not be removed from the Register so long
as it remains outstanding, and a Registered Note may not be exchanged for a
promissory note that is not a Registered Note.

          SECTION 2.04.   Interest.
                          --------

          (a) Loans.  Each Loan shall bear interest on the principal amount
              -----
thereof from time to time outstanding, from the date of such Loan until such
principal amount becomes due, at a rate per annum equal to the greater of (i)
the Reference Rate plus the Applicable Margin and (ii) 9.5% plus the Applicable
Margin.

          (b) Default Interest.  To the extent permitted by law, upon the
              ----------------
occurrence and during the continuance of an Event of Default, the principal of,
and all accrued and unpaid interest on, all Loans and, to the extent then due
and payable, all fees, indemnities or any other Obligations of the Borrowers
under this Agreement, the Notes and the other Loan Documents, shall bear
interest, from the date such Event of Default occurred until such Event of
Default is cured or waived in writing in accordance herewith, at a rate per
annum equal at all times to the Post-Default Rate.

          (c) Interest Payment.  Interest on each Loan shall be payable monthly,
              ----------------
in arrears, on the first day of each month, commencing on the first day of the
month following the month in which such Loan is made and at maturity (whether
upon demand, by acceleration or otherwise).  Interest at the Post-Default Rate
shall be payable on demand.  The Borrowers hereby authorize the Agent to, and
the Agent may, from time to time, charge the Loan Account pursuant to Section
4.02 with the amount of any interest payment due hereunder.

          (d) General.  All interest shall be computed on the basis of a year of
              -------
360 days for the actual number of days, including the first day but excluding
the last day, elapsed.

          SECTION 2.05.   Reduction of Commitment; Prepayment of Loans.
                          --------------------------------------------

          (a) Reduction of Revolving Credit Commitments.  The Total Revolving
              -----------------------------------------
Credit Commitment shall terminate on the Final Maturity Date.  In addition, the
Total Revolving Credit Commitment shall permanently reduce as provided in
Section 2.05(c) and Section 2.05(e).  The Borrowers may, without premium or
penalty, reduce the Total Revolving Credit Commitment to an amount (which may be
zero) not less than the sum of (A) the aggregate unpaid principal amount of all
Revolving Loans then outstanding and (B) the aggregate principal amount of all
Revolving Loans not yet made as to which a Notice of Borrowing has been given by
the Administrative Borrower under Section 2.02.  Each such reduction shall be in
an amount

                                      -27-
<PAGE>

which is an integral multiple of $1,000,000, (unless the Total Revolving Credit
Commitment in effect immediately prior to such reduction is less than
$1,000,000) shall be made by providing not less than five Business Days' prior
written notice to the Agent and shall be irrevocable, except to the extent given
in connection with a refinancing of the Total Revolving Credit Commitment, in
which case, such notice may be conditioned upon the occurrence of such
refinancing. Once reduced the Total Revolving Credit Commitment may not be
increased. Each such reduction of the Total Revolving Credit Commitment shall
reduce the Revolving Credit Commitment of each Lender proportionately in
accordance with its Pro Rata Share thereof.

          (b)  Optional Prepayment.  The Borrowers may prepay without penalty or
               -------------------
premium the principal of any Loan, in whole or in part.

          (c)  Mandatory Prepayment.
               --------------------

               (i)   Dispositions. Immediately upon any Disposition by any Loan
                     ------------
Party or any Restricted Subsidiary, the Borrowers shall prepay the outstanding
principal of the Loans in an amount equal to 100% of the Net Cash Proceeds
received by such Person in connection with such Disposition to the extent that
the aggregate amount of Net Cash Proceeds received by all Loan Parties and
Restricted Subsidiaries (and not paid to the Agent as a prepayment of the Loans)
shall exceed $500,000 for all such Dispositions since the Effective Date. In
addition, immediately upon any Disposition by any Unrestricted Subsidiary of the
Parent, the Borrowers shall prepay the outstanding principal of the Loans in an
amount equal to 100% of the Net Cash Proceeds received by such Unrestricted
Subsidiary in connection with such Disposition to the extent that the aggregate
amount of Net Cash Proceeds received by all Unrestricted Subsidiaries (and not
paid to the Agent as a prepayment of the Loans) shall exceed $1,000,000 for all
such Dispositions since the Effective Date.

               (ii)  Upon the loss, destruction or taking by condemnation of any
Collateral, the Borrowers shall prepay the outstanding principal of the Loans in
an amount equal to 100% of the proceeds received by any Loan Party in connection
therewith, net of any reasonable expenses incurred in collecting such net
proceeds; provided, that, (i) except during the continuance of a Default or an
          --------  ----
Event of Default, proceeds from insurance covering loss, destruction or taking
of any Collateral shall not be required to be so prepaid on such date to the
extent such insurance proceeds are either (A) deposited and remain in a
Securities Account or (B) used to replace or restore the properties or assets in
respect of which such proceeds were paid, provided, the Administrative Borrower
                                          --------
delivers a certificate to the Agent on or prior to such date stating that such
proceeds shall be used to replace or restore any such properties or assets
(which certificate shall set forth estimates of the proceeds to be so expended).

               (iii) Simultaneously with the receipt by any Borrower of any tax
refund or the proceeds of any judgment, settlement or other consideration of any
kind in connection with any causes of action arising under the Bankruptcy Code
or otherwise (other than Avoidance Actions), the Borrower shall prepay the
outstanding principal of the Loans in an amount equal to 100% of the net
proceeds received.

               (iv)  The Borrowers will immediately prepay the Revolving Loans
at any time when the aggregate principal amount of all Revolving Loans exceeds
the Borrowing

                                      -28-
<PAGE>

Base, to the full extent of any such excess. On each day that any Revolving
Loans are outstanding, the Borrowers shall hereby be deemed to represent and
warrant to the Agent and the Lenders that the Borrowing Base calculated as of
such day equals or exceeds the aggregate principal amount of all Revolving Loans
on such day.

          (d)  Cumulative Prepayments. Except as otherwise expressly provided in
               ----------------------
this Section 2.05, payments with respect to any subsection of this Section 2.05
are in addition to payments made or required to be made under any other
subsection of this Section 2.05.

          (e)  Application of Payments.  Each prepayment pursuant to Section
               -----------------------
2.05(c)(i), (ii) and (iii) above shall be applied, first to the Term Loan A
until paid in full, second to the Term Loan B until paid in full, and third, to
the Revolving Loans with a corresponding permanent reduction in the Revolving
Credit Commitment, provided, that, notwithstanding the foregoing, (i) the Net
                   --------
Cash Proceeds received in connection with the Disposition of the CREC and SDX
technology developed by L&H Holdings USA, Inc. (f/k/a Dragon Systems, Inc.) in
connection with a joint venture with Visteon Corporation shall be applied to the
Revolving Loans and shall not permanently reduce the Revolving Credit Commitment
if such Disposition occurs within 45 days of the Effective Date, (ii) the net
proceeds of any tax refunds (x) in an aggregate amount not in excess of $150,000
received within 45 days of the Effective Date and (y) in respect of value added
taxes ("VAT") prepaid in the ordinary course business shall be applied to the
Revolving Loans and shall not permanently reduce the Revolving Credit
Commitment, (iii) the portion of the Net Cash Proceeds received from a
Disposition of a division or business of a Borrower that is attributable (in the
reasonable determination of the Agent) to any assets then included in the
Borrowing Base shall be applied to the Revolving Loans and shall not permanently
reduce the Revolving Credit Commitment, and (iv) the Net Cash Proceeds received
upon the Disposition of Mendez shall be applied to the Revolving Loans and shall
not permanently reduce the Revolving Credit Commitment, provided, that, after
                                                        --------
such Disposition, all Revolving Loans shall be cash collateralized.

          SECTION 2.06.   Fees.
                          ----

          (a)  Closing Fees.  (i) On or prior to the Effective Date, the
               ------------
Borrowers shall pay to the Agent for the account of the Lenders with a Term Loan
A Commitment in accordance with their Pro Rata Shares a non-refundable closing
fee (the "Term A Facility Closing Fee") equal to $400,000 which shall be deemed
          ---------------------------
fully earned when paid.

               (ii)  On the date of the Term Loan B Effective Date, the
Borrowers shall pay to the Agent for the account of the Lenders with a Term Loan
B Commitment in accordance with their Pro Rata Shares a non-refundable closing
fee (the "Term B Facility Closing Fee") equal to $200,000 which shall be deemed
          ---------------------------
fully earned when paid.

               (iii) On the date of the Revolving Credit Facility Effective
Date, the Borrowers shall pay to the Agent for the account of the Lenders with a
Revolving Credit Commitment in accordance with their Pro Rata Shares a non-
refundable closing fee (the "Revolving Credit Facility Closing Fee" and together
                             -------------------------------------
with the Term A Facility Closing Fee and the Term B Facility Closing Fee,
collectively, the "Closing Fees") equal to $400,000 which shall be deemed fully
                   ------------
earned when paid.

                                      -29-
<PAGE>

          (b) Unused Line Fee.  From and after the Revolving Credit Facility
              ---------------
Effective Date and until the Final Maturity Date, the Borrowers shall pay to the
Agent for the account of the Lenders with a Revolving Credit Commitment in
accordance with their Pro Rata Shares an unused line fee (the "Unused Line
                                                               -----------
Fee"), which shall accrue at the rate per annum of 0.5% on the excess, if any,
---
of the Total Revolving Credit Commitment over the sum of the average principal
amount of Revolving Loans outstanding from time to time and shall be payable
monthly in arrears on the first day of each month commencing March 1, 2001.

          (c) Loan Servicing Fee.  From and after the Effective Date and until
              ------------------
the Final Maturity Date, the Borrowers shall pay to the Agent a non-refundable
loan servicing fee (the "Loan Servicing Fee") equal to $25,000 each month,
                         ------------------
payable on the Effective Date and monthly in advance thereafter on the first day
of each calendar month commencing on March 1, 2001.

          (d) Administration Fee.  From and after the Effective Date and until
              ------------------
the Final Maturity Date, the Borrowers shall pay to the Agent a non-refundable
administration fee (the "Administration Fee") equal to $10,000 each month,
                         ------------------
payable on the Effective Date and monthly in advance thereafter on the first day
of each calendar month commencing on March 1, 2001.

          SECTION 2.07.   Securitization.  The Borrowers hereby acknowledge that
                          --------------
the Lenders and any of their Affiliates may sell or securitize the Loans (a
"Securitization") through the pledge of the Loans as collateral security for
 --------------
loans to the Lenders or their Affiliates or through the sale of the Loans or the
issuance of direct or indirect interests in the Loans, which loans to the
Lenders or their Affiliates or direct or indirect interests will be rated by
Moody's, Standard & Poor's or one or more other rating agencies (the "Rating
                                                                      ------
Agencies").  The Borrowers shall cooperate with the Lenders and their Affiliates
--------
to effect the Securitization, including, without limitation, by (a) amending
this Agreement and the other Loan Documents, and executing such additional
documents, as reasonably requested by the Lenders in connection with the
Securitization, provided that (i) any such amendment or additional documentation
                -------- ----
does not impose material additional costs on the Borrowers and (ii) any such
amendment or additional documentation does not materially adversely affect the
rights, or materially increase the obligations, of the Borrowers under the Loan
Documents or change or affect in a manner adverse to the Borrowers the financial
terms of the Loans, (b) providing such information as may be reasonably
requested by the Lenders in connection with the rating of the Loans or the
Securitization, and (c) providing in connection with any rating of the Loans a
certificate (i) agreeing to indemnify the Lenders and any of their Affiliates,
any of the Rating Agencies, or any party providing credit support or otherwise
participating in the Securitization (collectively, the "Securitization Parties")
                                                        ----------------------
for any losses, claims, damages or liabilities (the "Liabilities") to which the
                                                     -----------
Lenders, their Affiliates or such Securitization Parties may become subject
insofar as the Liabilities arise out of or are based upon any untrue statement
or alleged untrue statement of any material fact contained in any Loan Document
or in any writing delivered by or on behalf of any Loan Party to the Lenders in
connection with any Loan Document or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein, or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading and such indemnity
shall survive any transfer by the Lenders or their successors or assigns of the
Loans and (ii) agreeing to reimburse the Lenders and any of their Affiliates for
any legal or other expenses reasonably incurred by such Persons in connection
with defending the Liabilities.

                                      -30-
<PAGE>

          SECTION 2.08.   Taxes.
                          -----

          (a)  All payments made by the Borrowers hereunder, under the Notes or
under any other Loan Document shall be made without set-off, counterclaim,
deduction or other defense.  All such payments shall be made free and clear of
and without deduction for any present or future income, franchise, sales, use,
excise, stamp or other taxes, levies, imposts, deductions, charges, fees,
withholdings, restrictions or conditions of any nature now or hereafter imposed,
levied, collected, withheld or assessed by any jurisdiction (whether pursuant to
United States Federal, state, local or foreign law) or by any political
subdivision or taxing authority thereof or therein, and all interest, penalties
or similar liabilities, excluding taxes on the net income of, and branch profit
taxes of, the Agent or any Lender imposed by the jurisdiction in which the Agent
or such Lender is organized or any political subdivision thereof or taxing
authority thereof or any jurisdiction in which such Person's principal office or
relevant lending office is located or any political subdivision thereof or
taxing authority thereof (such nonexcluded taxes being hereinafter collectively
referred to as "Taxes").  If the Borrowers shall be required by law to deduct or
to withhold any Taxes from or in respect of any amount payable hereunder,

               (i)   the amount so payable shall be increased to the extent
necessary so that after making all required deductions and withholdings
(including Taxes on amounts payable to the Lenders pursuant to this sentence)
the Lenders receive an amount equal to the sum they would have received had no
such deductions or withholdings been made,

               (ii)  the Borrowers shall make such deductions or withholdings,
and

               (iii) the Borrowers shall pay the full amount deducted or
withheld to the relevant taxation authority in accordance with applicable law.
Whenever any Taxes are payable by the Borrowers, as promptly as possible
thereafter, the Administrative Borrower shall send the Lenders and the Agent an
official receipt (or, if an official receipt is not available, such other
documentation as shall be satisfactory to the Lenders or the Agent, as the case
may be) showing payment. In addition, the Borrowers agree to pay any present or
future taxes, charges or similar levies which arise from any payment made
hereunder or from the execution, delivery, performance, recordation or filing
of, or otherwise with respect to, this Agreement, the Notes or any other Loan
Document other than the foregoing excluded taxes (hereinafter referred to as
"Other Taxes").

          (b)  The Borrowers will indemnify the Lenders for the amount of Taxes
or Other Taxes (including, without limitation, any Taxes or Other Taxes imposed
by any jurisdiction on amounts payable under this Section 2.08) paid by any
Lender and any liability (including penalties, interest and expenses for
nonpayment, late payment or otherwise) arising therefrom or with respect
thereto, whether or not such Taxes or Other Taxes were correctly or legally
asserted. This indemnification shall be paid within 30 days from the date on
which such Lender makes written demand which demand shall identify the nature
and amount of Taxes or Other Taxes for which indemnification is being sought and
the basis of the claim.

          (c)  Each Lender that is organized in a jurisdiction other than the
United States, a State thereof or the District of Columbia hereby agrees that:

                                      -31-
<PAGE>

               (i)   it shall, no later than the Effective Date (or, in the case
of a Lender which becomes a party hereto pursuant to Section 11.07 hereof after
the Effective Date, the date upon which such Lender becomes a party hereto)
deliver to the Administrative Borrower and the Agent: (A) two accurate, complete
and signed originals of U.S. Internal Revenue Service Form 4224 or successor
form, or (B) two accurate, complete and signed originals of U.S. Internal
Revenue Service Form 1001 or successor form, in each case indicating that such
Lender is on the date of delivery thereof entitled to receive payments of
principal, interest and fees for the account of its lending office under this
Agreement free from withholding of United States Federal income tax;

               (ii)  if at any time such Lender changes its lending office or
offices or selects an additional lending office it shall, at the same time or
reasonably promptly thereafter, deliver to the Administrative Borrower through
the Agent in replacement for, or in addition to, the forms previously delivered
by it hereunder: (A) if such changed or additional lending office is located in
the United States, two accurate, complete and signed originals of such Form 4224
or successor form, or (B) two accurate, complete and signed originals of such
Form 1001 or successor form, in each case indicating that such Lender is on the
date of delivery thereof entitled to receive payments of principal, interest and
fees for the account of such changed or additional lending office under this
Agreement free from withholding of United States Federal income tax; and

               (iii) it shall, promptly upon the Administrative Borrower's
reasonable request to that effect, deliver to the Administrative Borrower such
other forms or similar documentation as may be required from time to time by any
applicable law, treaty, rule or regulation in order to establish such Lender's
tax status for withholding purposes.

          (d)  If the Borrowers fail to perform their obligations under this
Section 2.08, the Borrowers shall indemnify the Lenders for any taxes, interest
or penalties that may become payable as a result of any such failure.

                                  ARTICLE III

                     SECURITY AND ADMINISTRATIVE PRIORITY

          SECTION 3.01.   Collateral; Grant of Lien and Security Interest.
                          -----------------------------------------------

          (a)  As security for the full and timely payment and performance of
all of the Obligations, each Borrower hereby as of the Entry Date assigns,
pledges, transfers and grants to the Agent, for the benefit of the Lenders, a
first priority security interest in and to and Lien on all of the property,
assets or interests in property or assets of such Borrower, of any kind or
nature whatsoever, real or personal, now existing or hereafter acquired or
created (including, without limitation, all property of the estate (within the
meaning of the Bankruptcy Code), accounts, inventory, contract rights,
instruments, documents, chattel paper, patents, trademarks, copyrights, general
intangibles, machinery and equipment, real property, all of the Capital Stock or
other equity interests in each Subsidiary of such Borrower, investment property,
and all causes of action arising under the Bankruptcy Code or otherwise (other
than Avoidance Actions)), and all

                                      -32-
<PAGE>

proceeds, rents, products and profits of any of the foregoing (all property of
the Borrowers subject to the security interest referred to in this Section
3.01(a) being hereafter referred to as the "Collateral"); provided, that, (x)
                                            ----------    --------
such security interest and Lien shall be subject to Permitted Priority Liens,
(y) the security interest and Lien granted to the Agent with respect to the
property, assets or interests in property or assets of the Parent located
outside the United States shall be subject to compliance by the Agent and each
Borrower with any local law requirements regarding the perfection of such
security interest and Lien (and to that end, the Agent hereby reserves the right
to take any and all action to comply, and cause each Borrower to comply, with
any such local law requirements), and (z) at no time shall the Capital Stock or
other equity interests of any Subsidiary of Dictaphone or L&H Holdings not
organized under the laws of the United States or any state thereof pledged to
the Agent pursuant to this Section 3.01(a) exceed 65% of the Capital Stock or
other equity interests of such Subsidiary.

          (b) Upon entry of the Final Bankruptcy Court Order, the Liens and
security interests in favor of the Agent referred to in Section 3.01(a) hereof
shall be valid and perfected Liens and security interests in the Collateral,
prior to all other Liens and security interests in the Collateral, except for
Permitted Priority Liens.  Such Liens and security interests and their priority
shall remain in effect until the Commitments have been terminated and all
Obligations have been repaid in cash in full.

          (c) Notwithstanding anything herein to the contrary (i) all proceeds
received by the Agent and the Lenders from the Collateral subject to the Liens
granted in this Section 3.01 and in each other Loan Document and by the Final
Bankruptcy Court Order shall be subject to the prior payment of the Carve-Out
Expenses having priority over the Obligations to the extent set forth in the
definition of Agreed Administrative Expense Priorities, (ii) no Person entitled
to Carve-Out Expenses shall be entitled to sell or otherwise dispose, or seek or
object to the sale or other disposition, of any Collateral, and (iii) the
administrative expense claim status of the Obligations granted in the Final
Bankruptcy Court Order and described in Section 3.02 shall not apply to
Avoidance Actions.

          SECTION 3.02.   Administrative Priority.  Each of the Borrowers agrees
                          -----------------------
that the Obligations of the Borrowers shall constitute (a) so-called
"boedelschulden van het faillissement" in the Concordat in accordance with
Article 44 of the Belgian law of July 17, 1997 regarding judicial composition
and (b) allowed administrative expenses in the Chapter 11 Cases having priority
over all administrative expenses of and unsecured claims against the Borrowers
now existing or hereafter arising, of any kind or nature whatsoever, including
without limitation all administrative expenses of the kind specified in Sections
503(b) and 507(b) of the Bankruptcy Code, subject, as to priority, only to
Carve-Out Expenses having priority over the Obligations to the extent set forth
in the definition of Agreed Administrative Expense Priorities.

          SECTION 3.03.   Grants, Rights and Remedies.  The Liens and security
                          ---------------------------
interests granted pursuant to Section 3.01(a) hereof and administrative priority
granted pursuant to Section 3.02 hereof may be independently granted by the Loan
Documents and by other Loan Documents hereafter entered into.  This Agreement,
the Final Bankruptcy Court Order and such other Loan Documents supplement each
other, and the grants, priorities, rights and remedies of the Agent and the
Lenders hereunder and thereunder are cumulative.

                                      -33-
<PAGE>

          SECTION 3.04.   No Filings Required.  The Liens and security interests
                          -------------------
referred to herein shall be deemed valid and perfected by entry of the Final
Bankruptcy Court Order, and entry of the Final Bankruptcy Court Order shall have
occurred on or before the date of any Loan hereunder.  The Agent shall not be
required to file any financing statements, Mortgages, notices of Lien or similar
instruments in any jurisdiction or filing office or to take any other action in
order to validate or perfect the Lien and security interest granted by or
pursuant to this Agreement, the Final Bankruptcy Court Order or any other Loan
Document.

          SECTION 3.05   Survival.  The Liens, lien priority, administrative
                         --------
priorities and other rights and remedies granted to the Agent and the Lenders
pursuant to this Agreement, the Final Bankruptcy Court Order and the other Loan
Documents (specifically including, but not limited to, the existence, perfection
and priority of the Liens and security interests provided herein and therein,
and the administrative priority provided herein and therein) shall not be
modified, altered or impaired in any manner by any other financing or extension
of credit or incurrence of debt by any Borrower (pursuant to Section 364 of the
Bankruptcy Code or otherwise), or by any dismissal or conversion of any of the
Chapter 11 Cases, or by any other act or omission whatever.  Without limitation,
notwithstanding any such order, financing, extension, incurrence, dismissal,
conversion, act or omission:

          (a) except for the Carve-Out Expenses having priority over the
Obligations to the extent set forth in the definition of Agreed Administrative
Expense Priorities, no costs or expenses of administration which have been or
may be incurred in the Chapter 11 Cases or any conversion of the same or in any
other proceedings related thereto, and no priority claims, are or will be prior
to or on a parity with any claim of any Lender against the Borrowers in respect
of any Obligation,

          (b) the Liens in favor of the Agent and the Lenders set forth in
Section 3.01(a) hereof shall constitute valid and perfected Liens and security
interests, subject only to the Permitted Priority Liens, to which such Liens and
security interests may be subordinate and junior, and shall be prior to all
other Liens and security interests, now existing or hereafter arising, in favor
of any other creditor or any other Person whatsoever, and

          (c) the Liens in favor of the Agent and the Lenders set forth herein
and in the Loan Documents shall continue to be valid and perfected without the
necessity that the Agent file financing statements, Mortgages or otherwise
perfect its Lien under applicable nonbankruptcy law.

                                  ARTICLE IV

                     FEES, PAYMENTS AND OTHER COMPENSATION

          SECTION 4.01.   Audit and Collateral Monitoring Fees.  The Borrowers
                          ------------------------------------
acknowledge that the Agent or its designee may visit the Borrowers and the
Guarantors and/or conduct audits, inspections and/or field examinations of the
Borrowers and the Guarantors at any time and from time to time in a manner so as
to not unduly disrupt the business of the Borrowers and the Guarantors.  The
Borrowers agree to pay $1,500 per day per examiner plus the

                                      -34-
<PAGE>

examiner's out-of-pocket costs and reasonable expenses incurred in connection
with all such visits, inspections, audits and examinations.

          SECTION 4.02.   Payments; Computations and Statements.  (a)  The
                          -------------------------------------
Borrowers will make each payment under the Revolving Notes not later than 12:00
noon (New York City time) on the day when due, in lawful money of the United
States of America and in immediately available funds, to the Agent at the
Payment Office.  All payments received by the Agent after 12:00 noon (New York
City time) on any Business Day will be credited to the Loan Account on the next
succeeding Business Day.  All payments shall be made by the Borrowers without
defense, set-off or counterclaim to the Agent and the Lenders.  Except as
provided in Section 2.02, after receipt, the Agent will promptly thereafter
cause to be distributed like funds relating to the payment of principal ratably
to the Lenders in accordance with their Pro Rata Shares and like funds relating
to the payment of any other amount payable to any Lender to such Lender, in each
case to be applied in accordance with the terms of this Agreement, provided,
                                                                   --------
that, the Agent will cause to be distributed all interest and fees received from
----
or for the account of the Borrowers not less than once each month and in any
event promptly after receipt thereof.  The Lenders and the Borrowers hereby
authorize the Agent to, and the Agent may, from time to time charge the Loan
Account of the Borrowers with any amount due and payable by the Borrowers under
any Loan Document.  Each of the Lenders and the Borrowers agree that the Agent
shall have the right to make such charges whether or not any Event of Default or
Default shall have occurred and be continuing or whether any of the conditions
precedent in Section 5.03 have been satisfied.  Any amount charged to the Loan
Account of the Borrowers shall be deemed a Revolving Loan hereunder made by the
Lenders to the Borrowers, funded by the Agent on behalf of the Lenders and
subject to Section 2.02 of this Agreement.  The Lenders and the Borrowers
confirm that any charges which the Agent may so make to the Loan Account of the
Borrowers as herein provided will be made as an accommodation to the Borrowers
and solely at the Agent's discretion, provided, that, the Agent shall from time
                                      --------  ----
to time, charge the Loan Account of the Borrowers with any amount due and
payable under any Loan Document.  Whenever any payment to be made under any such
Loan Document shall be stated to be due on a day other than a Business Day, such
payment shall be made on the next succeeding Business Day and such extension of
time shall in such case be included in the computation of interest or fees, as
the case may be.  All computations of fees shall be made by the Agent on the
basis of a year of 360 days for the actual number of days (including the first
day but excluding the last day) occurring in the period for which such fees are
payable.  Each determination by the Agent of an interest rate or fees hereunder
shall be conclusive and binding for all purposes in the absence of manifest
error.

          (b) The Agent shall provide the Administrative Borrower, promptly
after the end of each calendar month, a summary statement (in the form from time
to time used by the Agent) of the opening and closing daily balances in the Loan
Account of the Borrowers during such month, the amounts and dates on all Loans
made to the Borrowers during such month, the amounts and dates of all payments
on account of the Loans to the Borrowers during such month and the Loans to
which such payments were applied, the amount of interest accrued on the Loans to
the Borrowers during such month, and the amount and nature of any charges to
such Loan Account made during such month on account of fees, commissions,
expenses and other Obligations.  All entries on any such statement shall be
presumed to be correct and, if not

                                      -35-
<PAGE>

contested by the Administrative Borrower in writing within 30 days after the
same is sent, shall be final and conclusive absent manifest error.

          SECTION 4.03.   Sharing of Payments, Etc.  Except as provided in
                          -------------------------
Section 2.02 hereof, if any Lender shall obtain any payment (whether voluntary,
involuntary, through the exercise of any right of set-off, or otherwise) on
account of any Obligation in excess of its ratable share of payments on account
of similar obligations obtained by all the Lenders, such Lender shall forthwith
purchase from the other Lenders such participations in such similar obligations
held by them as shall be necessary to cause such purchasing Lender to share the
excess payment ratably with each of them; provided, however, that if all or any
                                          --------  -------
portion of such excess payment is thereafter recovered from such purchasing
Lender, such purchase from each Lender shall be rescinded and such Lender shall
repay to the purchasing Lender the purchase price to the extent of such recovery
together with an amount equal to such Lender's ratable share (according to the
proportion of (i) the amount of such Lender's required repayment to (ii) the
total amount so recovered from the purchasing Lender of any interest or other
amount paid by the purchasing Lender in respect of the total amount so
recovered).  The Borrowers agree that any Lender so purchasing a participation
from another Lender pursuant to this Section 4.03 may, to the fullest extent
permitted by law, exercise all its rights (including the Lender's right of set-
off) with respect to such participation as fully as if such Lender were the
direct creditor of the Borrowers in the amount of such participation.

          SECTION 4.04.   Apportionment of Payments.  (a)  Subject to Section
                          -------------------------
2.02 hereof and to any written agreement among the Agent and the Lenders, all
payments of principal and interest in respect of outstanding Loans, all payments
of fees (other than the fees set forth in Sections 2.06(c) and (d) hereof and
the audit and collateral monitoring fee provided for in Section 4.01 hereof) and
all other payments in respect of any other Obligations, shall be allocated by
the Agent among such of the Lenders as are entitled thereto, in proportion to
their respective Pro Rata Shares or otherwise as provided herein or, in respect
of payments not made on account of Loans as designated by the Person making
payment when the payment is made.

          (b) Subject to any written agreement among the Agent and the Lenders,
after the occurrence and during the continuance of an Event of Default, the
Agent may, and upon the direction of the Required Lenders shall, apply all
payments in respect of any Obligations and all proceeds of the Collateral,
subject to the provisions of this Agreement (i) first, to pay the Obligations in
                                                -----
respect of any fees, expense reimbursements, indemnities and other amounts then
due to the Agent until paid in full; (ii) second, ratably to pay the Obligations
                                          ------
in respect of any fees and indemnities then due to the Lenders until paid in
full; (iii) third, ratably to pay interest due in respect of the Loans and Agent
            -----
Advances until paid in full; (iv) fourth, ratably to pay principal of the Loans
                                  ------
and Agent Advances until paid in full; and (v) fifth, to the ratable payment of
                                               -----
all other Obligations then due and payable.

          SECTION 4.05.   Increased Costs and Reduced Return.
                          ----------------------------------

          (a) If any Lender shall have determined that any Capital Guideline or
adoption or implementation of, or any change in, any Capital Guideline by the
Governmental Authority charged with the interpretation or administration
thereof, or compliance by any Lender or any Person controlling any Lender with
any Capital Guideline or with any request or directive

                                      -36-
<PAGE>

of any such Governmental Authority with respect to any Capital Guideline, or the
implementation of, or any change in, any applicable accounting principles (in
each case, whether or not having the force of law), either (i) affects or would
affect the amount of capital required or expected to be maintained by any Lender
or any Person controlling any Lender, and any Lender determines that the amount
of such capital is increased as a direct or indirect consequence of any Loans
made or maintained, or any Lender's or any such other controlling Person's other
obligations hereunder, or (ii) has or would have the effect of reducing the rate
of return on any Lender's or any such other controlling Person's capital to a
level below that which such Lender or such controlling Person could have
achieved but for such circumstances as a consequence of any Loans made or
maintained, or any agreement to make Loans, or such Lender's or such other
controlling Person's other obligations hereunder (in each case, taking into
consideration, such Lender's or such other controlling Person's policies with
respect to capital adequacy), then, upon demand by any Lender, the Borrowers
shall pay to such Lender from time to time such additional amounts as will
compensate such Lender for such cost of maintaining such increased capital or
such reduction in the rate of return on such Lender's or such other controlling
Person's capital.

          (b) All amounts payable under this Section 4.05 shall bear interest
from the date that is ten days after the date of demand by a Lender until
payment in full to such Lender at the Reference Rate.  A certificate of any
Lender claiming compensation under this Section 4.05 specifying the event herein
above described and the nature of such event shall be submitted by such Lender
to the Administrative Borrower, setting forth the additional amount due and an
explanation of the calculation thereof and such Lender's reasons for invoking
the provisions of this Section 4.05, and shall be final and conclusive absent
manifest error.

          SECTION 4.06.  Joint and Several Liability of the Borrowers.
                         --------------------------------------------

          (a) Notwithstanding anything in this Agreement or any other Loan
Document to the contrary, each of the Borrowers hereby accepts joint and several
liability hereunder and under the other Loan Documents in consideration of the
financial accommodations to be provided by the Agent and the Lenders under this
Agreement and the other Loan Documents, for the mutual benefit, directly and
indirectly, of each of the Borrowers and in consideration of the undertakings of
the other Borrowers to accept joint and several liability for the Obligations.
Each of the Borrowers, jointly and severally, hereby irrevocably and
unconditionally accepts, not merely as a surety but also as a co-debtor, joint
and several liability with the other Borrowers, with respect to the payment and
performance of all of the Obligations (including, without limitation, any
Obligations arising under this Section 4.06), it being the intention of the
parties hereto that all the Obligations shall be the joint and several
obligations of each of the Borrowers without preferences or distinction among
them.  If and to the extent that any of the Borrowers shall fail to make any
payment with respect to any of the Obligations as and when due or to perform any
of the Obligations in accordance with the terms thereof, then in each such event
the other Borrowers will make such payment with respect to, or perform, such
Obligation.  Subject to the terms and conditions hereof, the Obligations of each
of the Borrowers under the provisions of this Section 4.06 constitute the
absolute and unconditional, full recourse Obligations of each of the Borrowers
enforceable against each such Person to the full extent of its properties and
assets, irrespective of the validity, regularity or enforceability of this
Agreement, the other Loan Documents or any other circumstances whatsoever.

                                      -37-
<PAGE>

          (b)  The provisions of this Section 4.06 are made for the benefit of
the Agent, the Lenders and their successors and assigns, and may be enforced by
them from time to time against any or all of the Borrowers as often as occasion
therefor may arise and without requirement on the part of the Agent, the Lenders
or such successors or assigns first to marshal any of its or their claims or to
exercise any of its or their rights against any of the other Borrowers or to
exhaust any remedies available to it or them against any of the other Borrowers
or to resort to any other source or means of obtaining payment of any of the
Obligations hereunder or to elect any other remedy.  The provisions of this
Section 4.06 shall remain in effect until all of the Obligations shall have been
paid in full or otherwise fully satisfied.

          (c)  Each of the Borrowers hereby agrees that it will not enforce any
of its rights of contribution or subrogation against the other Borrowers with
respect to any liability incurred by it hereunder or under any of the other Loan
Documents, any payments made by it to the Agent or the Lenders with respect to
any of the Obligations or any Collateral until such time as all of the
Obligations have been paid in full in cash.  Any claim which any Borrower may
have against any other Borrower with respect to any payments to the Agent or the
Lenders hereunder or under any other Loan Documents are hereby expressly made
subordinate and junior in right of payment, without limitation as to any
increases in the Obligations arising hereunder or thereunder, to the prior
payment in full in cash of the Obligations.

                                   ARTICLE V

                              CONDITIONS TO LOANS

          SECTION 5.01.   Conditions Precedent to Effectiveness.  This Agreement
                          -------------------------------------
shall become effective as of the Business Day (the "Effective Date") when each
                                                    --------------
of the following conditions precedent shall have been satisfied in a manner
satisfactory to the Agent:

          (a)  Final Bankruptcy Court Order; Concordat.  (i)  The Final
               ---------------------------------------
Bankruptcy Court Order shall have been entered by the Bankruptcy Court ("Entry
                                                                         -----
Date") and the Agent shall have received a certified copy of such order, and
----
such order shall be in full force and effect and shall not have been reversed,
stayed, modified or amended absent prior written consent of the Agent and the
Borrowers.

               (ii)  The composition trustees appointed by the Ieper, Belgium
Commercial Court shall have approved the Parent's entering into this Agreement
and granting to the Agent the security interests and Liens referred to in
Section 3.01(a) hereof, and the Agent shall have received evidence of such
approval, and the continued effectiveness thereof, in form and substance
satisfactory to the Agent.

          (b)  Payment of Fees, Etc.  The Borrowers shall have paid on or before
               ---------------------
the date of this Agreement all fees, costs, expenses and taxes then payable
pursuant to Sections 2.06 and 11.04 to the extent that invoices therefor have
been delivered to the Administrative Borrower on or prior to the Effective Date
(it being understood that the Expense Deposit will be applied to reduce the
amount of such fees, costs, expenses and taxes).

                                      -38-
<PAGE>

          (c)  Representations and Warranties; No Event of Default.  The
               ---------------------------------------------------
following statements shall be true and correct:  (i) the representations and
warranties contained in Article VI and in each other Loan Document, certificate
or other writing delivered to the Agent or the Lenders pursuant hereto or
thereto on or prior to the Effective Date are true and correct on and as of the
Effective Date as though made on and as of such date and (ii) no Default or
Event of Default shall have occurred and be continuing on the Effective Date or
would result from this Agreement or the other Loan Documents becoming effective
in accordance with its or their respective terms.

          (d)  Legality.  The making of the Term Loan A shall not contravene any
               --------
law, rule or regulation applicable to the Agent or the Lenders.

          (e)  Delivery of Documents. The Agent shall have received on or before
               ---------------------
the Effective Date the following, each in form and substance satisfactory to the
Agent and, unless indicated otherwise, dated the Effective Date:

               (i)   a Revolving Credit Note, a Term A Note and a Term B Note,
each payable to the order of each Lender with a Revolving Credit Commitment, a
Term Loan A Commitment or a Term Loan B Commitment, as the case may be, duly
executed by the Borrowers;

               (ii)  a Guaranty, duly executed by each Guarantor;

               (iii) a pledge and security agreement, in form and substance
satisfactory to the Agent, duly executed by the Parent and providing for a
pledge by the Parent to the Agent of, and a grant to the Agent for the benefit
of the Lenders of a security interest in, all of the assets of and all of the
shares of Capital Stock of each Belgian Subsidiary of the Parent, together with,
as the case may be (x) all certificates representing such shares accompanied by
duly executed instruments of transfer or assignment in blank, or (y) a certified
copy of the relevant pages of the shareholders register of such Subsidiary (the
shares of which have been pledged to the Agent) evidencing the entry of the
pledge to the Agent for the benefit of the Lenders;

               (iv)  a Pledge Agreement, duly executed by the Parent, with
respect to certain indebtedness owing to the Parent and all of the shares of
Capital Stock of each Subsidiary of the Parent not incorporated under Belgian
laws, together with all promissory notes evidencing such indebtedness and all
certificates representing such shares, accompanied by duly executed instruments
of transfer or assignment in blank;

               (v)   opinions of counsel to the Borrowers, in form and substance
satisfactory to the Agent;

               (vi)  a copy of the resolutions of each Loan Party, certified as
of the Effective Date by an Authorized Officer thereof, authorizing (A) the
borrowings hereunder and the transactions contemplated by the Loan Documents to
which such Loan Party is or will be a party, and (B) the execution, delivery and
performance by such Loan Party of each Loan Document to which such Loan Party is
or will be a party and the execution and delivery of the other documents to be
delivered by such Person in connection herewith and therewith;

                                      -39-
<PAGE>

               (vii)  a certificate of an Authorized Officer of each Loan Party,
certifying the names and true signatures of the representatives of such Loan
Party authorized to sign each Loan Document to which such Loan Party is or will
be a party and the other documents to be executed and delivered by such Loan
Party in connection herewith and therewith, together with evidence of the
incumbency of such authorized officers;

               (viii) a certificate of the appropriate official(s) of the state
of organization of each Loan Party certifying as to the subsistence in good
standing of, and if available, the payment of taxes by, such Loan Party in such
states;

               (ix)   a true and complete copy of the charter, certificate of
formation, certificate of limited partnership or other publicly filed
organizational document of each Loan Party certified as of a recent date not
more than 30 days prior to the Effective Date by an appropriate official of the
state of organization of such Loan Party;

               (x)    a copy of the charter and by-laws, limited liability
company agreement, operating agreement, agreement of limited partnership or
other organizational document of each Loan Party, together with all amendments
thereto, certified as of the Effective Date by an Authorized Officer of such
Loan Party;

               (xi)   a copy of the Short Term Budget, together with a
certificate of an authorized officer of the Parent stating that such Budget has
been prepared on a reasonable basis and in good faith and is based on
assumptions believed by the Parent to be reasonable at the time made and from
the best information then available to the Parent, which Budgets shall be in
form and substance satisfactory to the Agent;

               (xii)  a certificate of an Authorized Officer of each Loan Party,
certifying as to the matters set forth in subsection (c) of this Section 5.01;

               (xiii) a certificate of an Authorized Officer of the Parent,
certifying the names and true signatures of the persons that are authorized to
provide Notices of Borrowings and all other notices under this Agreement and the
other Loan Documents;

               (xiv)  evidence of the insurance coverage required by Section
7.01(h) and such other insurance coverage with respect to the business and
operations of the Loan Parties as the Agent may reasonably request, in each
case, where requested by the Agent, with such indorsements as to the named
insureds or loss payees thereunder as the Agent may request and providing that
such policy may be terminated or canceled (by the insurer or the insured
thereunder) only upon 30 days' prior written notice to the Agent and each such
named insured or loss payee, together with evidence of the payment of all
premiums due in respect thereof (including through the premium financing
agreements referred to in clause (e) of the definition of "Permitted
Indebtedness") for such period as the Agent may request; and

               (xv)   such other agreements, instruments, approvals, opinions
and other documents, each satisfactory to the Agent in form and substance, as
the Agent may reasonably request.

                                      -40-
<PAGE>

          (f) Material Adverse Effect.  The Agent shall have determined, in its
              -----------------------
sole judgment, that no change having a Material Adverse Effect shall have
occurred since January 15, 2001.

          (g) Proceedings; Receipt of Documents.  All proceedings in connection
              ---------------------------------
with the making of the Term Loan A and the other transactions contemplated by
this Agreement and the other Loan Documents, and all documents incidental hereto
and thereto, shall be satisfactory to the Agent and its counsel, and the Agent
and such counsel shall have received all such information and such counterpart
originals or certified or other copies of such documents as the Agent or such
counsel may reasonably request.

          (h) Payment of Debtor-In-Possession Obligations.  All obligations
              -------------------------------------------
owing to General Electric Capital Corporation under its existing debtor-in-
possession financing facility shall be repaid in full (which may be with the
proceeds of the Term Loan A made hereunder) and all liens securing such
obligations shall be terminated.

          SECTION 5.02.   Conditions Precedent to Revolving Credit Facility
                          -------------------------------------------------
Effectiveness.  The Commitment of the Lenders to make Revolving Loans to the
-------------
Borrowers shall commence as of the Business Day (the "Revolving Credit Facility
                                                      -------------------------
Effective Date") when each of the following conditions precedent shall have been
--------------
satisfied in a manner satisfactory to the Agent:

          (a) Payment of Fees, Etc.  The Borrowers shall have paid on or before
              ---------------------
such date all fees, costs, expenses and taxes then payable pursuant to Sections
2.06 and 11.04 to the extent that invoices therefor have been delivered to the
Administrative Borrower on or prior to the Revolving Credit Facility Effective
Date.

          (b) Representations and Warranties; No Event of Default.  The
              ---------------------------------------------------
following statements shall be true and correct:  (i) the representations and
warranties contained in Article VI and in each other Loan Document, certificate
or other writing delivered to the Agent, or the Lenders pursuant hereto or
thereto on or prior to the Revolving Credit Facility Effective Date are true and
correct on and as of the Revolving Credit Facility Effective Date as though made
on and as of such date and (ii) no Default or Event of Default shall have
occurred and be continuing on the Revolving Credit Facility Effective Date or
would result from the making of Revolving Loans on such date.

          (c) Liens; Priority.  The Agent shall be satisfied that it has been
              ---------------
granted, and still continues to hold, for the benefit of the Lenders, a
perfected, first priority Lien on and security interest in all of the Collateral
of the Borrowers referred to in Section 3.01(a) hereof (to the extent required
by said Section 3.01(a)).

          (d) Material Adverse Effect.  The Agent shall have determined, in its
              -----------------------
sole judgment, that no change having a Material Adverse Effect shall have
occurred since the Effective Date.

          (e) Field Survey/Audit.  The Agent shall have received the results of
              ------------------
a field survey, audit and appraisal by auditors, examiners and/or appraisers
selected by the Agent (the "Field Survey and Audit"), the results of which shall
                            ----------------------
be acceptable to the Agent, in its reasonable

                                      -41-
<PAGE>

business judgment based upon the lending practices of the Agent, consistent with
criteria customary in the commercial finance industry generally. The costs of
such field survey, audit and appraisal shall be paid by the Borrowers.

          (f) Budget.  The Agent shall have received an updated Short Term
              ------
Budget in accordance with Section 7.01(a)(iv) hereof, together with a
certificate of an Authorized Officer stating that such Budget has been prepared
on a reasonable basis and in good faith and is based on assumptions believed by
the Parent to be reasonable at the time made and from the best information then
available to the Parent.

          (g) Cash Management The Borrowers shall have established Lockboxes
              ---------------
and Collection Accounts in accordance with Section 8.01.

          (h) Borrowing Base  The Agent shall be satisfied that the initial
              --------------
Revolving Loans are in compliance with the then current Borrowing Base.

          SECTION 5.03.   Conditions Precedent to all Revolving Loans.  The
                          -------------------------------------------
obligation of the Agent or any Lender to make any Revolving Loan is subject to
the fulfillment, in a manner satisfactory to the Agent, of each of the following
conditions precedent:

          (a) Payment of Fees, Etc.  The Borrowers shall have paid all fees,
              ---------------------
costs, expenses and taxes then payable by the Borrowers to the Agent and the
Lenders pursuant to this Agreement and the other Loan Documents, including,
without limitation, Sections 2.06 and 11.04 hereof, to the extent that invoices
therefor have been delivered to the Administrative Borrower on or prior to the
date of such Revolving Loan.

          (b) Representations and Warranties; No Event of Default.  The
              ---------------------------------------------------
following statements shall be true and correct, and the submission by the
Administrative Borrower to the Agent of a Notice of Borrowing with respect to
each such Revolving Loan, and the Borrowers' acceptance of the proceeds of such
Revolving Loan shall each be deemed to be a representation and warranty by the
Borrowers on the date of such Revolving Loan that:  (i) the representations and
warranties contained in Article VI and in each other Loan Document, certificate
or other writing delivered to the Agent pursuant hereto or thereto on or prior
to the date of such Revolving Loan are true and correct on and as of such date
as though made on and as of such date, (ii) at the time of and after giving
effect to the making of such Revolving Loan and the application of proceeds
thereof, no Default or Event of Default has occurred and is continuing or would
result from the making of the Revolving Loan to be made on such date and (iii)
the conditions set forth in this Section 5.03 have been satisfied as of the date
of such request.

          (c) Bankruptcy Court Order.  On the date of such Revolving Loan, the
              ----------------------
Final Bankruptcy Court Order shall have been signed by the Bankruptcy Court, and
the Agent shall have received a certified copy of the same and such order shall
be in full force and effect and shall not have been reversed, stayed, modified
or amended absent the consent of the Agent, the Lenders and the Borrowers.

          (d) Legality.  The making of such Revolving Loan shall not contravene
              --------
any law, rule or regulation applicable to the Agent or the Lenders.

                                      -42-
<PAGE>

          (e) Notices.  The Agent shall have received a Notice of Borrowing
              -------
pursuant to Section 2.02 hereof.

          (f) Proceedings; Receipt of Documents.  All proceedings in connection
              ---------------------------------
with the making of such Revolving Loan and the other transactions contemplated
by this Agreement and the other Loan Documents, and all documents incidental
hereto and thereto, shall be satisfactory to the Agent and its counsel, and the
Agent and such counsel shall have received all such information and such
counterpart originals or certified or other copies of such documents, in form
and substance satisfactory to the Agent, as the Agent or such counsel may
reasonably request.

                                  ARTICLE VI

                        REPRESENTATIONS AND WARRANTIES

          SECTION 6.01.   Representations and Warranties.  Each Borrower hereby
                          ------------------------------
represents and warrants to the Agent and the Lenders as follows:

          (a) Organization, Good Standing, Etc.  Each Loan Party (i) is a
              ---------------------------------
corporation, limited liability company or limited partnership duly organized,
validly existing and in good standing under the laws of the state or
jurisdiction of its organization, (ii) subject to the entry of the Final
Bankruptcy Court Order, has all requisite power and authority to conduct its
business as now conducted and as presently contemplated and, in the case of the
Borrowers, to make the borrowings hereunder, and to execute and deliver each
Loan Document to which it is a party, and to consummate the transactions
contemplated thereby, and (iii) except as set forth on Schedule 6.01(a), is duly
qualified to do business and is in good standing in each jurisdiction in which
the character of the properties owned or leased by it or in which the
transaction of its business makes such qualification necessary.

          (b) Authorization, Etc.  The execution, delivery and performance by
              -------------------
each Loan Party of each Loan Document to which it is or will be a party, (i)
upon entry of the Final Bankruptcy Court Order, have been duly authorized by all
necessary action, (ii) do not and will not contravene its charter or by-laws,
its limited liability company or operating agreement or its certificate of
partnership or partnership agreement, as applicable, or any applicable law or
any contractual restriction binding on or otherwise affecting it or any of its
properties (other than conflicts, breaches and defaults as to which consent has
been obtained or the enforcement of which will be stayed by virtue of the filing
of the Chapter 11 cases), (iii) do not and will not result in or require the
creation of any Lien (other than pursuant to any Loan Document) upon or with
respect to any of its properties, and (iv) do not and will not result in any
suspension, revocation, impairment, forfeiture or nonrenewal of any permit,
license, authorization or approval applicable to its operations or any of its
properties.

          (c) Governmental Approvals.  Except for the entry of the Final
              ----------------------
Bankruptcy Court Order, the approval by the commissioners ("commissarissen
inzake opschorting") appointed by the Ypres (Belgium) Commercial Court, and any
authorization, approval, action, notice or filing required to be taken by any
Loan Party pursuant to Section 7.01(n), no

                                      -43-
<PAGE>

authorization or approval or other action by, and no notice to or filing with
any Governmental Authority is required in connection with the due execution,
delivery and performance by any Loan Party of any Loan Document to which it is
or will be a party.

          (d)  Execution and Binding Effect.  As of the entry of the Final
               ----------------------------
Bankruptcy Court Order and the approval of the Ieper, Belgium Commercial Court,
each Loan Document required to be executed and delivered on or prior to the date
thereof has been duly and validly executed and delivered by each of the Loan
Parties which is a party thereto and constitutes the legal, valid and binding
obligations of each of the Loan Parties which is a party thereto enforceable in
accordance with the terms hereof or thereof.  Each Loan Document that is not
required to be executed and delivered by any Loan Party prior to the Entry Date,
when executed and delivered, will be validly executed and delivered by the Loan
Party party thereto, and will constitute legal, valid and binding obligations of
the Loan Party party thereto, enforceable in accordance with the terms thereof.

          (e)  Subsidiaries.  Schedule 6.01(e) is a complete and correct
               ------------
description of the name, jurisdiction of incorporation and ownership of the
outstanding Capital Stock of all of the Subsidiaries of the Parent in existence
on the date hereof.  All of the issued and outstanding shares of Capital Stock
of all domestic Subsidiaries and Mendez have been validly issued and are fully
paid and nonassessable, and the holders thereof are not entitled to any
preemptive, first refusal or other similar rights.  Except as indicated on such
Schedule, all such Capital Stock is owned by the Parent or one or more of its
wholly-owned Subsidiaries, free and clear of all Liens.

          (f)  Litigation. Except as set forth in Schedule 6.01(f) and excluding
               ----------
pre-petition litigations which are stayed by 11 U.S.C. (S) 362, there is no
pending or, to the knowledge of any Loan Party, threatened action, suit or
proceeding affecting any Loan Party before any court or other Governmental
Authority or any arbitrator that (i) could have a Material Adverse Effect or
(ii) relates to this Agreement, the Notes or any other Loan Document or any
transaction contemplated hereby or thereby.

          (g)  Financial Condition.
               -------------------

               (i)   Since January 15, 2001, no event or development has
occurred that has had or could have a Material Adverse Effect.

               (ii)  On or before the Effective Date, the Parent has furnished
to the Lenders a projected Short Term Budget and a projected Long Term Budget,
and the Short Term Budget shall be updated from time to time pursuant to Section
7.01(a)(iv). Each such Budget, when delivered and, in the case of the Short Term
Budget, as so updated, shall be believed by the Parent at the time furnished to
be reasonable, shall have been prepared on a reasonable basis and in good faith
by the Parent, and shall have been based on assumptions believed by the Parent
to be reasonable at the time made and upon the best information then reasonably
available to the Parent, and the Parent is not be aware of any facts or
information that would lead it to believe that such Budget, as so updated, is
incorrect or misleading in any material respect.

          (h)  Compliance with Law, Etc.  None of the Loan Parties is in
               -------------------------
violation of its organizational documents, any law, rule, regulation, judgment
or order of any Governmental

                                      -44-
<PAGE>

Authority applicable to it or any of its property or assets which is reasonably
likely to have a Material Adverse Effect, and no Default or Event of Default has
occurred and is continuing.

          (i) ERISA.  Except as set forth on Schedule 6.01(i), (i) each Employee
              -----
Plan is in substantial compliance with ERISA and the Code, (ii) no Termination
Event has occurred prior to the Entry Date, and no Termination Event has
occurred after the Entry Date nor is a Termination Event reasonably expected to
occur, with respect to any Employee Plan which, combined with all other
Termination Events, could have a Material Adverse Effect, (iii) the most recent
annual report (Form 5500 Series) with respect to each Employee Plan, including
any required Schedule B (Actuarial Information) thereto, copies of which have
been filed with the Internal Revenue Service and will promptly be delivered upon
request to the Agent, is complete and correct in all material respects and
fairly presents the funding status of such Employee Plan, and since the date of
such report there has been no material adverse change in such funding status,
(iv) no Employee Plan had an accumulated or waived funding deficiency or
permitted decreases which would create a deficiency of in excess of $250,000 in
its funding standard account or has applied for an extension of any amortization
period within the meaning of Section 412 of the Code at any time during the
previous 60 months, and (v) no Lien imposed under the Code or ERISA exists on
account of any Employee Plan within the meaning of Section 412 of the Code.
Except as set forth on Schedule 6.01(i), none of the Loan Parties or any of
their ERISA Affiliates have incurred any withdrawal liability under ERISA with
respect to any Multiemployer Plan.  Except as required by Section 4980B of the
Code and as set forth on Schedule 6.01(i), none of the Loan Parties or any of
their ERISA Affiliates maintains an employee welfare benefit plan (as defined in
Section 3(1) of ERISA) which provides health or welfare benefits (through the
purchase of insurance or otherwise) for any retired or former employee of any
Loan Party or any of its ERISA Affiliates or coverage after a participant's
termination of employment.  None of the Loan Parties or any of their ERISA
Affiliates has incurred any liability or obligation under the Worker Adjustment
and Retraining Notification Act ("WARN") or similar state law prior to the Entry
                                  ----
Date, and none of the Loan Parties or any of their ERISA Affiliates has incurred
any such liability or obligation after the Entry Date which remains unpaid or
unsatisfied for more than 90 days.

          (j) Taxes, Etc.  Except as set forth on Schedule 6.01(j), all Federal,
              -----------
state and local tax returns and other reports required by applicable law to be
filed by any Loan Party have been filed, or extensions have been obtained, and
all taxes, assessments and other governmental charges imposed upon any Loan
Party or any property of any Loan Party and which have become due and payable on
or prior to the date hereof have been paid, except to the extent contested in
good faith by proper proceedings which stay the imposition of any penalty, fine
or Lien resulting from the non-payment thereof and with respect to which
adequate reserves in accordance with GAAP have been set aside for the payment
thereof.

          (k) Regulation T, U and X.  None of the Loan Parties is nor will be
              ---------------------
engaged in the business of extending credit for the purpose of purchasing or
carrying margin stock (within the meaning of Regulations T, U or X), and no
proceeds of any Loan will be used to purchase or carry any margin stock or to
extend credit to others for the purpose of purchasing or carrying any margin
stock.

                                      -45-
<PAGE>

          (l)  Type of Business.  None of the Loan Parties is engaged in any
               ----------------
business other than the development, sale and licensing of technologies,
products and services relating to computerized speech recognition, language
translation, intelligent content management, technologies that permit the
searching and indexing of information in audio files and the retrieval of
information from such files, text-to speech, speech and music compression, voice
recording and playback, voice and data management and medical transcriptions,
and activities directly related to the foregoing.

          (m)  Adverse Agreements, Etc. Except as set forth on Schedule 6.01(m),
               ------------------------
none of the Loan Parties is subject to any charter, limited liability company
agreement, partnership agreement or other corporate, partnership or limited
liability company restriction or any judgment, order, regulation, ruling or
other requirement of a court or other Governmental Authority which has, or in
the future could have, a Material Adverse Effect.

          (n)  Permits, Etc. Each Loan Party has, and is in compliance with, all
               -------------
permits, licenses, authorizations, approvals, entitlements and accreditations
required for such Person lawfully to own, lease, manage or operate, or to
acquire, each business currently owned, leased, managed or operated, or to be
acquired, by such Person except for the failure to obtain and maintain
compliance with permits, licenses, authorizations, approvals, entitlements and
accreditations which is not reasonably likely to have a Material Adverse Effect.
No condition exists or event has occurred which, in itself or with the giving of
notice or lapse of time or both, would result in the suspension, revocation,
impairment, forfeiture or non-renewal of any such permit, license,
authorization, approval, entitlement or accreditation, and there is no claim
that any thereof is not in full force and effect, except for the occurrence of
such conditions or events which is not reasonably likely to have a Material
Adverse Effect.

          (o)  Properties.  (i)  Each Loan Party has good and indefeasible title
               ----------
to, or valid leasehold interests in or valid licenses to use, all property and
assets material to its business, free and clear of all Liens except Permitted
Liens.  The properties are generally in good working order and condition,
ordinary wear and tear excepted.

               (ii)  Schedule 6.01(o) sets forth a complete and accurate list as
of the Effective Date of all real property owned by each Loan Party.

          (p)  Full Disclosure.  Each Loan Party has disclosed to the Agent all
               ---------------
agreements, instruments and corporate or other restrictions to which it is
subject, and all other matters known to it, that, individually or in the
aggregate, could result in a Material Adverse Effect.  None of the other
reports, financial statements, certificates or other information furnished by or
on behalf of any Loan Party to the Agent in connection with the negotiation of
this Agreement or delivered hereunder (as modified or supplemented by other
information so furnished), taken as a whole, contains any material misstatement
of fact or omits to state any material fact necessary to make the statements
therein, in the light of the circumstances under which it was made, not
misleading; provided that, with respect to projected financial information, each
            --------
Loan Party represents only that such information was prepared in good faith
based upon assumptions believed to be reasonable at the time.

                                      -46-
<PAGE>

          (q) Environmental Matters.  Except as set forth on Schedule 6.01(q),
              ---------------------
(i) the operations of each Loan Party are in compliance in all material respects
with Environmental Laws; (ii) there has been no Release at any of the properties
owned or operated by any Loan Party or a predecessor in interest, or at any
disposal or treatment facility which received Hazardous Materials generated by
any Loan Party or any predecessor in interest which could have a Material
Adverse Effect; (iii) no Environmental Action has been asserted against any Loan
Party or any predecessor in interest nor does any Loan Party have knowledge or
notice of any threatened or pending Environmental Action against any Loan Party
or any predecessor in interest which could have a Material Adverse Effect; and
(iv) no Environmental Actions have been asserted against any facilities that may
have received Hazardous Materials generated by any Loan Party or any predecessor
in interest which could have a Material Adverse Effect.

          (r) Insurance.  Each Loan Party keeps or causes other Persons to keep
              ---------
its property adequately insured and maintains or causes other Persons to
maintain (i) insurance to such extent and against such risks, including fire, as
is customary with companies in the same or similar businesses, (ii) workmen's
compensation insurance in the amount required by applicable law, (iii) public
liability insurance, which shall include product liability insurance, in the
amount customary with companies in the same or similar business against claims
for personal injury or death on properties owned, occupied or controlled by it,
and (iv) such other insurance as may be required by law or as may be reasonably
required by the Agent (including, without limitation, against larceny,
embezzlement or other criminal misappropriation).  Schedule 6.01(r) sets forth a
list of all insurance maintained by each Loan Party on the Effective Date.

          (s) Use of Proceeds.  The proceeds of the Loans shall be used for
              ---------------
general corporate purposes of the Borrowers and to repay the existing debtor-in-
possession financing facility of the Borrowers.

          (t) INTENTIONALLY OMITTED

          (u) INTENTIONALLY OMITTED

          (v) Intellectual Property.  Each Loan Party owns or licenses or
              ---------------------
otherwise has the right to use (and when delivered, Schedule 7.01(m) shall set
forth for each Loan Party) all licenses, permits, patents, patent applications,
trademarks, trademark applications, service marks, tradenames, copyrights,
copyright applications, franchises, authorizations and other intellectual
property rights which are necessary for the operation of such Loan Party's
business in substantially the same manner as operated as of the Effective Date,
without infringement upon or conflict with the rights of any other Person with
respect thereto, except for (i) such infringements and conflicts which,
individually or in the aggregate, could not have a Material Adverse Effect and
(ii) the failure to own or otherwise have rights to use immaterial intellectual
property.  Upon the delivery thereof, and at all times thereafter, Schedule
7.01(m) shall accurately list the storage locations of the source code relating
to all such intellectual property.

          (w) Holding Company and Investment Company Acts.  None of the Loan
              -------------------------------------------
Parties is (i) a "holding company" or a "subsidiary company" of a "holding
company" or an "affiliate" of a "holding company", as such terms are defined in
the Public Utility Holding Company Act of 1935, as amended, or (ii) an
"investment company" or an "affiliated person" or

                                      -47-
<PAGE>

"promoter" of, or "principal underwriter" of or for, an "investment company", as
such terms are defined in the Investment Company Act of 1940, as amended.

          (x)  Place of Business; Chief Executive Office.  Schedule 6.01(x) sets
               -----------------------------------------
forth a complete and accurate list as of the date hereof of (i) each place of
business of each Loan Party and (ii) the chief executive office of each Loan
Party.

          (y)  Administrative Priority; Lien Priority.
               --------------------------------------

               (i)    After the Entry Date, the Obligations of the Borrowers
will constitute (a) so-called "boedelschulden van het faillissement" in the
Concordat in accordance with Article 44 of the Belgian law of July 17, 1997
regarding judicial composition and (b) allowed administrative expenses in the
Chapter 11 Cases having priority in payment over all other administrative
expenses and unsecured claims against the Borrowers now existing or hereafter
arising, of any kind or nature whatsoever, including without limitation all
administrative expenses of the kind specified in Sections 503(b) and 507(b) of
the Bankruptcy Code, subject, as to priority, only to Carve-Out Expenses having
priority over the Obligations to the extent set forth in the Agreed
Administrative Expense Priorities.

               (ii)   The Lien and security interest of the Agent on the
Collateral shall be a valid and perfected first priority Lien"); provided, that,
                                                                 --------
(x) such Lien and security interest shall be subject to Permitted Priority Liens
and (y) the Lien and security interest granted to the Agent with respect to the
property, assets or interests in property or assets of the Parent located
outside the United States shall be subject to compliance by the Agent with any
local law requirements regarding the perfection of such Lien and security
interest.

               (iii)  The Final Bankruptcy Court Order is in full force and
effect and has not been appealed, reversed, stayed, modified or amended absent
the consent of the Agent, the Lenders and the Borrowers.

          (z)  Schedules.  All of the information which is required to be
               ---------
scheduled to this Agreement is set forth on the Schedules attached hereto, is
correct and accurate and does not omit to state any information material
thereto.

                                  ARTICLE VII

                           COVENANTS OF THE BORROWER

          SECTION 7.01.   Affirmative Covenants.  So long as any principal of or
                          ---------------------
interest on any Loan or any other Obligation for the payment of money shall
remain unpaid or any Lender shall have any Commitment hereunder, the Borrowers
will, unless the Required Lenders shall otherwise consent in writing:

                                      -48-
<PAGE>

          (a)  Reporting Requirements.  Furnish to the Agent and each Lender:
               ----------------------

               (i)    as soon as available, and in any event within 45 days of
the end of each fiscal quarter of the Parent (except that with respect to the
first fiscal quarter of the Parent after the Effective Date, such period shall
be 60 days) commencing March 2001, internally prepared consolidated balance
sheets, consolidated statements of operations and consolidated statements of
cash flows for such fiscal quarter of the Parent and its Subsidiaries for such
fiscal quarter and for the period commencing at the end of the immediately
preceeding fiscal year to the end of such fiscal quarter, all in reasonable
detail and certified by an Authorized Officer as fairly presenting, in all
material respects, the financial position of the Parent and its Subsidiaries as
of the end of such fiscal quarter and the results of operations and cash flows
of the Parent and its Subsidiaries for such fiscal quarter, in accordance with
GAAP applied in a manner consistent with that of the most recent audited
financial statements furnished to the Lenders, subject to normal year-end
adjustments;

               (ii)   as soon as available, and in any event within 30 days of
the end of each fiscal month of the Parent and its domestic Subsidiaries (except
that with respect to the months of February, March and April of the year 2001,
such period shall be 45 days) commencing February 2001, internally prepared
consolidated and consolidating balance sheets, consolidated and consolidating
statements of operations and consolidated and consolidating statements of cash
flows for such fiscal month of the Parent and its domestic Subsidiaries for such
fiscal month and for the period commencing at the end of the immediately
preceeding fiscal year to the end of such fiscal month, all in reasonable detail
and certified by an Authorized Officer as fairly presenting, in all material
respects, the financial position of the Parent and its domestic Subsidiaries as
of the end of such fiscal month and the results of operations and cash flows of
the Parent and its domestic Subsidiaries for such fiscal month, in accordance
with GAAP applied in a manner consistent with that of the most recent audited
financial statements furnished to the Lenders, subject to normal year-end
adjustments;

               (iii)  simultaneously with the delivery of the financial
statements of the Parent required by clauses (i) and (ii) of this Section
7.01(a), a certificate of an Authorized Officer stating that such Authorized
Officer has reviewed the provisions of this Agreement and the other Loan
Documents and has made or caused to be made under his or her supervision a
review of the condition and operations of the Parent and its Subsidiaries during
the period covered by such financial statements with a view to determining
whether the Parent and its Subsidiaries were in compliance with all of the
provisions of such Loan Documents at the times such compliance is required by
the Loan Documents, and that such review has not disclosed, and such Authorized
Officer has no knowledge of, the existence during such period of an Event of
Default or Default or, if an Event of Default or Default existed, describing the
nature and period of existence thereof and the action which the Parent and its
Subsidiaries propose to take or have taken with respect thereto;

               (iv)   on Friday of each week, a Short Term Budget supplementing
and superseding the Short Term Budget referred to in Section 6.01(g)(ii),
prepared on a weekly basis and otherwise in form and substance satisfactory to
the Agent. Such Budget, when delivered and as so updated, shall be believed by
the Parent at the time furnished to be reasonable, shall have been prepared on a
reasonable basis and in good faith, and shall have been based on assumptions

                                      -49-
<PAGE>

believed by the Parent to be reasonable at the time made and upon the best
information then reasonably available to the Parent, and shall be accompanied by
a certificate of an Authorized Officer stating that such Budget has been
prepared on a reasonable basis and in good faith and is based on assumptions
believed by the Parent to be reasonable at the time made and from the best
information then available to the Parent;

               (v)    promptly after filing thereof, copies of all pleadings,
motions, applications, financial information and other papers and documents
filed by the Borrowers in the Chapter 11 Cases, which such papers and documents
shall also be given or served on the Agent's counsel;

               (vi)   promptly after the sending thereof, copies of all written
reports given by the Borrowers to any official or unofficial creditors'
committee in the Chapter 11 Cases, provided that the Borrowers may redact
confidential information contained in any such report if it provides a summary
of the nature of the information redacted to the Agent.

               (vii)  promptly after submission to any Government Authority, all
documents and written information furnished to such Government Authority in
connection with any investigation of any Loan Party other than routine inquiries
by such Governmental Authority provided, that, with respect to documents and
                               --------
written information furnished to the SEC in connection with the restatement of
the financial statements for the years ended December 31, 1998, December 31,
1999 and December 31, 2000, and for the six (6) month period ended June 30,
2000, an index of such documents and written information shall be submitted to
the Agent and copies of such documents and information shall be made available
to the Agent at the Agent's request;

               (viii) as soon as possible, and in any event within three days
after the occurrence of an Event of Default or Default or the occurrence of any
event or development that could have a Material Adverse Effect, the written
statement of an Authorized Officer setting forth the details of such Event of
Default, Default, other event or Material Adverse Effect and the action which
the Parent and its Subsidiaries propose to take with respect thereto;

               (ix)   (A) as soon as possible and in any event (1) within 10
days after any Loan Party or any ERISA Affiliate thereof knows or has reason to
know that any Termination Event described in clause (i) of the definition of
Termination Event with respect to any Employee Plan has occurred, (2) within 10
days after any Borrower or any ERISA Affiliate thereof knows or has reason to
know that any other Termination Event with respect to any Employee Plan has
occurred, or (3) within 10 days after any Loan Party or any ERISA Affiliate
thereof knows or has reason to know that an accumulated funding deficiency has
been incurred or an application has been made to the Secretary of the Treasury
for a waiver or modification of the minimum funding standard (including
installment payments) or an extension of any amortization period under Section
412 of the Code with respect to an Employee Plan, a statement of an Authorized
Officer setting forth the details of such occurrence and the action, if any,
which such Loan Party or such ERISA Affiliate proposes to take with respect
thereto, (B) promptly and in any event within three days after receipt thereof
by any Loan Party or any ERISA Affiliate thereof from the PBGC, copies of each
notice received by any Loan Party or any ERISA Affiliate thereof of the PBGC's
intention to terminate any Plan or to have a trustee appointed to

                                      -50-
<PAGE>

administer any Plan, (C) promptly and in any event within 10 days after the
filing thereof with the Internal Revenue Service if requested by the Agent,
copies of each Schedule B (Actuarial Information) to the annual report (Form
5500 Series) with respect to each Employee Plan and Multiemployer Plan, (D)
promptly and in any event within 10 days after any Loan Party or any ERISA
Affiliate thereof knows or has reason to know that a required installment within
the meaning of Section 412 of the Code has not been made when due with respect
to an Employee Plan, and (E) promptly and in any event within 10 days after any
Loan Party or any ERISA Affiliate thereof send notice of a plant closing or mass
layoff (as defined in WARN) to employees, copies of each such notice sent by
such Loan Party or such ERISA Affiliate thereof;

               (x)    promptly after the commencement thereof but in any event
not later than 5 days after service of process with respect thereto on, or the
obtaining of knowledge thereof by, any Loan Party, notice of each action, suit
or proceeding before any court or other Governmental Authority or other
regulatory body or any arbitrator which, if adversely determined, could have a
Material Adverse Effect;

               (xi)   except as provided in clause (vii) of this Section
7.01(a), promptly after the sending or filing thereof, copies of all statements,
reports and other information any Loan Party sends to any holders of its
Indebtedness or its securities or files with the SEC or any national (domestic
or foreign) securities exchange;

               (xii)  as soon as available and in any event within 5 Business
Days after the end of each week, commencing with the first week ending after the
Effective Date, a Borrowing Base Certificate current as of the close of business
on the Friday of the immediately preceding week, supported by schedules showing
the derivation thereof, including, without limitation, (A) commencing with the
first week ending after the Effective Date, an aging report with respect to the
Borrowers' Accounts Receivables and (B) commencing with the week prior to the
date on which the Agent determines that Eligible Inventory shall be included in
the Borrowing Base, a listing of all Inventory of the Borrowers as of such day,
containing a breakdown of such Inventory by type and amount, the Book Value
thereof (by location) and the warehouse and production facility location, in
each case of (A) and (B), containing such detail and other information as the
Agent may request from time to time, provided, that, (A) the Borrowing Base set
                                     --------  ----
forth in the Borrowing Base Certificate shall be effective from and including
the date such Borrowing Base Certificate is duly received by the Agent but not
including the date on which a subsequent Borrowing Base Certificate is received
by the Agent, unless the Agent disputes the eligibility of any property for
inclusion in the calculation of the Borrowing Base or the valuation thereof by
notice of such dispute to the Administrative Borrower, (B) in the event of any
dispute about the eligibility of any property for inclusion in the calculation
of the Borrowing Base or the valuation thereof, the Agent's good faith judgment
shall control and (C) in the event that assets or additions to Accounts
Receivable are added to the Borrowing Base, the Agent may require reporting with
respect to such assets as is customary in the lending practices of the Agent;

               (xiii) within 30 days after the Effective Date, and monthly
thereafter, a list setting forth for each Loan Party and Restricted Subsidiary,
as of the date of delivery thereof, of all source code deposit arrangements
referred to in clause (m) of the definition of "Permitted Liens"; and

                                      -51-
<PAGE>

               (xiv)  promptly upon request, such other information concerning
the condition or operations, financial or otherwise, of any Loan Party as the
Agent may from time to time may reasonably request.

          (b)  Additional Guaranties and Collateral Security.  If requested by
               ---------------------------------------------
the Agent, cause each non-debtor Restricted Subsidiary of any Loan Party not a
Guarantor on the Effective Date, other than (i) Heitmann of America, Inc.,
Lernout & Hauspie, LLC and Omnivoice Technologies, Inc., (ii) Restricted
Subsidiaries not organized under the laws of the United States or any state
thereof and (iii) Restricted Subsidiaries that do not own assets with a book
value in excess of $250,000 for any such individual Restricted Subsidiary or
$1,000,000 for all such Restricted Subsidiaries, to execute and deliver to the
Agent promptly and in any event within 10 Business Days after the change in
status thereof (A) a Guaranty guaranteeing the Obligations, (B) a Security
Agreement, (C) if such Restricted Subsidiary has any Subsidiaries, a Pledge
Agreement together with (x) certificates evidencing all of the Capital Stock of
any Person owned by such Restricted Subsidiary and (y) undated stock powers
executed in blank with signature guaranteed, (D) one or more Mortgages creating
on all real property of such Restricted Subsidiary owned in fee, a perfected,
first priority Lien on such real property, subject to any Permitted Priority
Liens, each in form and substance satisfactory to the Agent, together with such
other agreements, instruments and documents as the Agent may require, and (E)
such other agreements, instruments, approvals or other documents reasonably
requested by the Agent in order to create, perfect, establish the first priority
of or otherwise protect any Lien purported to be covered by any such Security
Agreement, Pledge Agreement or Mortgage (subject to any Permitted Priority
Liens) or otherwise to effect the intent that such Restricted Subsidiary shall
become bound by all of the terms, covenants and agreements contained in the Loan
Documents and that substantially all property and assets of such Restricted
Subsidiary shall become Collateral for the Obligations.

          (c)  Compliance with Laws, Etc.  Comply, and cause each of their
               --------------------------
Subsidiaries to comply, in all material respects with all applicable laws,
rules, regulations and orders (including, without limitation, all Environmental
Laws), such compliance to include, without limitation, (i) paying before the
same become delinquent all post-petition taxes, assessments and governmental
charges or levies imposed upon it or upon its income or profits or upon any of
its properties, and (ii) paying all lawful claims the enforcement of which is
not stayed by the filing of the Chapter 11 Cases before the same become a Lien
or charge upon any of its properties, except to the extent contested in good
faith by proper proceedings which stay the imposition of any penalty, fine or
Lien resulting from the non-payment thereof and with respect to which adequate
reserves in accordance with GAAP have been set aside for the payment thereof.

          (d)  Preservation of Existence, Etc.   Except to the extent permitted
               -------------------------------
by Section 7.02(d)(ii) hereof and except as disclosed in writing to the Agent
prior to the Effective Date, maintain and preserve, and cause each of their
Restricted Subsidiaries to maintain and preserve, their existence, rights and
privileges, and use their commercially reasonable efforts to become or remain
duly qualified and in good standing in each jurisdiction in which the character
of the properties owned or leased by them or in which the transaction of their
business makes such qualification necessary.

                                      -52-
<PAGE>

          (e) Keeping of Records and Books of Account.  Keep, and cause each of
              ---------------------------------------
their domestic Subsidiaries to keep, adequate records and books of account, with
complete entries made in accordance with GAAP and cause all foreign Subsidiaries
which maintain records and books of account in accordance with local generally
accepted accounting principles to reconcile such records and books of account to
GAAP not less frequently than quarterly.

          (f) Inspection Rights.  Permit, and cause each of their Restricted
              -----------------
Subsidiaries to permit, the Agent or representatives thereof at any time and
from time to time during normal business hours, at the expense of the Borrowers,
to examine and make copies of and abstracts from their records and books of
account, to visit and inspect their properties, to verify materials, leases,
notes receivable, deposit accounts and other assets of the Loan Parties and
their Restricted Subsidiaries, to conduct audits, physical counts, valuations,
appraisals, environmental assessments or examinations and to discuss their
affairs, finances and accounts with any of the directors, officers, managerial
employees, independent accountants or other representatives thereof.  The
Borrowers agree to pay the reasonable cost of such audit, appraisal, assessment
or examination.

          (g) Maintenance of Properties, Etc.  Maintain and preserve, and cause
              -------------------------------
each of their Restricted Subsidiaries to maintain and preserve, all of their
properties which are necessary or useful in the proper conduct of their business
in good working order and condition, ordinary wear and tear excepted, and
comply, and cause each of their Restricted Subsidiaries to comply, at all times
in all material respects with the provisions of all leases to which each of them
is a party as lessee or under which each of them occupies property, so as to
prevent any loss or forfeiture thereof or thereunder, in each case, other than
sales of property or rejection of leases approved by the Bankruptcy Court and
otherwise permitted by the terms of this Agreement.

          (h) Maintenance of Insurance.  Maintain, and cause each of their
              ------------------------
Subsidiaries to maintain, or other Persons to maintain for the Parent and its
Subsidiaries, insurance with responsible and reputable insurance companies or
associations (including, without limitation, comprehensive general liability,
hazard, rent and business interruption insurance) with respect to their
properties (including all real properties leased or owned by them) and business,
in such amounts and covering such risks as is required by any Governmental
Authority having jurisdiction with respect thereto or as is carried generally in
accordance with sound business practice by companies in similar businesses
similarly situated and, in the case of Restricted Subsidiaries, in any event in
amount, adequacy and scope reasonably satisfactory to the Agent.  To the extent
such policies name a Loan Party or its Restricted Subsidiaries as a named
insured, all policies covering the Collateral are to be made payable to the
Agent for the benefit of the Lenders, as its interests may appear, in case of
loss, under a standard non-contributory "lender" or "secured party" clause and
are to contain such other provisions as the Agent may require to fully protect
the Lenders' interest in the Collateral and to any payments to be made under
such policies.  All certificates of insurance are to be delivered to the Agent
and the property policies are to be premium prepaid (including through the
premium finance arrangements referred to in clause (e) of the definition of
"Permitted Indebtedness"), with the loss payable and additional insured
endorsement on all policies to be made in favor of Agent and such other Persons
as the Agent may designate from time to time, and all policies shall provide for
not less than 30 days' prior written notice to the Agent of the exercise of any
right of cancellation.  If the Loan Parties or any of their Restricted
Subsidiaries fail to maintain such insurance, the Agent may arrange for

                                      -53-
<PAGE>

such insurance, but at the Borrowers' expense and without any responsibility on
the Agent's part for obtaining the insurance, the solvency of the insurance
companies, the adequacy of the coverage, or the collection of claims. Upon the
occurrence of an Event of Default, the Agent shall have the sole right, in the
name of the Lenders, the Loan Parties and their Restricted Subsidiaries, to file
claims under any property insurance policies, to receive, receipt and give
acquittance for any payments that may be payable thereunder, and to execute any
and all endorsements, receipts, releases, assignments, reassignments or other
documents that may be necessary to effect the collection, compromise or
settlement of any claims under any such property insurance policies.

          (i) Obtaining of Permits, Etc.  Obtain, maintain and preserve, and
              --------------------------
cause each of their Restricted Subsidiaries to obtain, maintain and preserve,
all permits, licenses, authorizations, approvals, entitlements and
accreditations which are necessary or useful in the proper conduct of its
business, except where the failure to obtain, maintain or preserve such permits,
licenses, authorizations, approvals entitlements and accreditations is not
reasonably likely to have a Material Adverse Effect, and use commercially
reasonable efforts to become or remain, and cause each of their Restricted
Subsidiaries to use commercially reasonable efforts to become or remain, duly
qualified and in good standing in each jurisdiction in which the character of
the properties owned or leased by it or in which the transaction of its business
makes such qualification necessary.

          (j) Environmental.  Except as provided in Schedule 6.01(q), (i) keep
              -------------
any property either owned or operated by them or any of their Restricted
Subsidiaries free of any Environmental Liens; (ii) comply, and cause their
Restricted Subsidiaries to comply, in all material respects with Environmental
Laws and provide to the Agent documentation of such compliance which the Agent
reasonably requests; (iii) immediately notify the Agent of any Release of a
Hazardous Material in excess of any reportable quantity from or onto property
owned or operated by the Loan Parties or any of their Restricted Subsidiaries
and take any Remedial Actions required to abate said Release to the extent that
any such Release would have a Material Adverse Effect; (iv) promptly provide the
Agent with written notice within 10 days of the receipt of any of the following:
(A) notice that an Environmental Lien has been filed against any property of any
Loan Party or any of its Restricted Subsidiaries; (B) commencement of any
Environmental Action or notice that an Environmental Action will be filed
against any Loan Party or any of its Restricted Subsidiaries; and (C) notice of
a violation, citation or other administrative order which could have a Material
Adverse Effect and (v) defend, indemnify and hold harmless the Agent and the
Lenders and their transferees, and their respective employees, agents, officers
and directors, from and against any claims, demands, penalties, fines,
liabilities, settlements, damages, costs or expenses (including, without
limitation, attorney and consultant fees, investigation and laboratory fees,
court costs and litigation expenses) arising out of (A) the presence, disposal,
release or threatened release of any Hazardous Materials on any property at any
time owned or occupied by any Loan Party or any of its Restricted Subsidiaries
(or its respective predecessors in interest or title), (B) any personal injury
(including wrongful death) or property damage (real or personal) arising out of
or related to such Hazardous Materials, (C) any investigation, lawsuit brought
or threatened, settlement reached or government order relating to such Hazardous
Materials and/or (D) any violation of any Environmental Law.

                                      -54-
<PAGE>

          (k) Further Assurances.  Take such action and execute, acknowledge and
              ------------------
deliver, and cause each of the other Loan Parties to take such action and
execute, acknowledge and deliver, at their sole cost and expense, such
agreements, instruments or other documents as the Agent may require from time to
time in order (i) to carry out more effectively the purposes of this Agreement
and the other Loan Documents, (ii) to subject to valid and perfected first
priority Liens (subject to Permitted Priority Liens), any of the Collateral or
any other property of the Loan Parties other than immaterial assets of any
Guarantor, (iii) to establish and maintain the validity and effectiveness of any
of the Loan Documents and the validity, perfection and priority of the Liens
intended to be created thereby (subject to Permitted Priority Liens), and (iv)
to better assure, convey, grant, assign, transfer and confirm unto the Agent the
rights now or hereafter intended to be granted to the Agent and the Lenders
under this Agreement or any other Loan Document.  The assurances contemplated by
this Section 7.01(k) shall be given under applicable nonbankruptcy law (to the
extent not inconsistent with the Bankruptcy Code and orders of the Bankruptcy
Court) as well as the Bankruptcy Code, it being the intention of the parties
that the Agent may request assurances under applicable nonbankruptcy law, and
such request shall be complied with (if otherwise made in good faith by the
Agent) whether or not the Final Bankruptcy Court Order is in force and whether
or not dismissal of the Chapter 11 Cases or any other action by the Bankruptcy
Court is imminent, likely or threatened.

          (l) Borrowing Base.  After the Revolving Credit Facility Effective
              --------------
Date, maintain all Revolving Loans in compliance with the then current Borrowing
Base.

          (m) Intellectual Property.  (i) Within 30 days after the Effective
              ---------------------
Date, deliver to the Agent a Schedule 7.01(m) to this Agreement, which shall be
in form and scope satisfactory to the Agent and shall set forth for each Loan
Party, as of the date of delivery thereof, (x) all licenses, permits, patents,
patent applications, trademarks, trademark applications, service marks,
tradenames, copyrights, copyright applications, franchises, authorizations and
other intellectual property rights of such Loan Party which are necessary for
the operation of such Loan Party's business in substantially the same manner as
operated as of the Effective Date and (y) the storage locations of the source
code relating to all of the foregoing intellectual property; and (ii) take, and
cause each of their Restricted Subsidiaries to take, either directly or through
licensees, all action necessary to maintain all of the trademarks, patents and
copyrights identified on such Schedule 7.01(m) in full force and effect, and not
permit (and not permit any licensee thereof to) do any act or knowingly omit to
do any act whereby any such trademarks, patents or copyrights may become
invalidated.

          (n) Security Agreements; Pledge Agreements; Etc.  Within 10 days after
              --------------------------------------------
the Effective Date, deliver to the Agent (i) (A) Pledge Agreements duly executed
and delivered by Dictaphone and L&H Holdings, (B) Pledge Agreements and Security
Agreements duly executed and delivered by each Guarantor, (C) in the case of the
Guarantors, UCC-1 financing statements and such other agreements, instruments or
documents reasonably requested by the Agent in order to create, perfect and
establish the first priority Lien purported to be covered by each such Pledge
Agreement and Security Agreement, and (D) if requested by the Agent, Mortgages,
in recordable form, duly executed and delivered by each Loan Party in favor of
the Agent with respect to all real property owned in fee by such Loan Party;
provided that the Agent will not require perfected Liens on immaterial assets of
--------
any Guarantor, and (ii) an opinion of counsel to the Guarantors, in form and
substance satisfactory to the Agent.

                                      -55-
<PAGE>

          (o)  Securities Account.  Within 20 days after the Effective Date,
               ------------------
establish one or more Securities Accounts and the Agent shall have received a
Control Agreement, duly executed and in full force and effect, in respect of
each such Securities Account.  Each Borrower agrees that it will not transfer
assets out of any such Securities Account; provided, however, that, so long as
                                           --------  -------
no Default or Event of Default has occurred and is continuing or would result
therefrom, each Borrower may use such assets to the extent permitted by this
Agreement.

          SECTION 7.02.   Negative Covenants.  So long as any principal of or
                          ------------------
interest on any Loan or any other Obligation for the payment of money shall
remain unpaid or any Lender shall have any Commitment hereunder, the Borrowers
shall not, unless the Required Lenders shall otherwise consent in writing:

          (a)  Final Bankruptcy Court Order; Administrative Priority; Lien
               -----------------------------------------------------------
Priority; Payment of Claims:
---------------------------

               (i)    At any time seek, consent to or suffer to exist any
modification, stay, vacation or amendment of the Final Bankruptcy Court Order
except for modifications and amendments agreed to by the Agent and the Lenders;

               (ii)   At any time suffer to exist a priority for any
administrative expense or unsecured claim against any Borrower (now existing or
hereafter arising of any kind or nature whatsoever, including without limitation
any administrative expenses of the kind specified in Sections 503(b) and 507(b)
of the Bankruptcy Code) equal or superior to the priority of the Lenders in
respect of the Obligations, except for the Carve-Out Expenses having priority
over the Obligations to the extent set forth in the definition of Agreed
Administrative Expense Priorities;

               (iii)  At any time suffer to exist any Lien on the Collateral
having a priority equal or superior to the Lien in favor of the Lenders in
respect of the Collateral except for Permitted Priority Liens; and

               (iv)   At any time pay any administrative expense claims except
(A) Priority Professional Expenses and other payments pursuant to sub-clause (i)
of clause "first" of the definition of the term "Agreed Administrative Expense
           -----
Priorities", (B) any Obligations due and payable hereunder, (C) other
administrative expense claims incurred in the ordinary course of the business of
the Borrowers or their respective Chapter 11 Cases, and (D) payments of pre-
petition obligations permitted pursuant to Section 7.02(j) hereof, in each case
to the extent and having the order of priority set forth in the Agreed
Administrative Expense Priorities.

          (b)  Liens, Etc.  Create, incur, assume or suffer to exist, or permit
               -----------
any of their Restricted Subsidiaries to create, incur, assume or suffer to exist
any Lien upon or with respect to any of their properties, whether now owned or
hereafter acquired, to file or suffer to exist under the Uniform Commercial Code
or any similar law or statute of any jurisdiction, a financing statement (or the
equivalent thereof) that names any Loan Party or any of its Restricted
Subsidiaries as debtor, to sign or suffer to exist any security agreement
authorizing any secured party thereunder to file such financing statement (or
the equivalent thereof), to sell any of its property or assets subject to an
understanding or agreement, contingent or otherwise, to

                                      -56-
<PAGE>

repurchase such property or assets (including sales of accounts receivable) with
recourse to any Loan Party or any of its Restricted Subsidiaries or assign or
otherwise transfer, or permit any of its Restricted Subsidiaries to assign or
otherwise transfer, any account or other right to receive income; other than, as
to all of the above, Permitted Liens, provided, that no liens shall be permitted
                                      --------
on any assets included in the Borrowing Base.

          (c)  Indebtedness.  Create, incur, assume, guarantee or suffer to
               ------------
exist, or otherwise become or remain liable with respect to, or permit any of
their Restricted Subsidiaries to create, incur, assume, guarantee or suffer to
exist or otherwise become or remain liable with respect to, any Indebtedness
other than Permitted Indebtedness.

          (d)  Fundamental Changes; Dispositions.  Wind-up, liquidate or
               ---------------------------------
dissolve, or merge, consolidate or amalgamate with any Person, convey, sell,
lease or sublease, transfer or otherwise dispose of, whether in one transaction
or a series of related transactions, all or any part of their business, property
or assets, whether now owned or hereafter acquired, or (agree to do any of the
foregoing) or purchase or otherwise acquire, whether in one transaction or a
series of related transactions, all or substantially all of the assets of any
Person (or any division thereof) (or agree to do any of the foregoing), or
permit any of their Restricted Subsidiaries to do any of the foregoing;
provided, however, that
--------  -------

               (i)    (A) any Borrower may be merged into or may consolidate
with another Borrower, (B) any Guarantor may be merged into or may consolidate
with another Guarantor or (C) any wholly-owned Restricted Subsidiary of any Loan
Party (other than the Borrowers or the Guarantors) may be merged into another
such wholly-owned Restricted Subsidiary of such Loan Party, or may consolidate
with another such wholly-owned Restricted Subsidiary of such Loan Party, so long
as (w) no other provision of this Agreement would be violated thereby, (x) such
Loan Party gives the Agent at least 10 days' prior written notice of such merger
or consolidation, (y) no Default or Event of Default shall have occurred and be
continuing either before or after giving effect to such transaction, and (z) the
Lenders' rights in any Collateral, including, without limitation, the existence,
perfection and priority of any Lien thereon, are not adversely affected by such
merger or consolidation;

               (ii)   any of the Loan Parties and their Restricted Subsidiaries
may (A) sell Inventory in the ordinary course of business, (B) dispose of
obsolete or worn-out equipment in the ordinary course of business, and (C) sell
or otherwise dispose of other property or assets for cash in an aggregate amount
not less than the fair market value of such property or assets, provided, that,
                                                                --------
the consent of the Agent shall be required for any Disposition (other than the
Disposition of the CREC and SDX technology developed by Lernout & Hauspie USA,
Inc. (f/k/a Dragon Systems, Inc.) in connection with a joint venture with
Visteon Corporation if such Disposition occurs within 45 days of the Effective
Date) in which the Net Cash Proceeds exceed $250,000 (which consent to
Disposition will not be unreasonably withheld).

          (e)  Change in Type of Business.  Engage, or permit any of their
               --------------------------
Restricted Subsidiaries to engage in any business other than as permitted under
Section 6.01(l).

          (f)  Loans, Advances, Investments, Etc.  Make or commit or agree to
               ----------------------------------
make any loan, advance, guarantee of obligations, other extension of credit or
capital contributions to,

                                      -57-
<PAGE>

or hold or invest in or commit or agree to hold or invest in, or purchase or
otherwise acquire or commit or agree to purchase or otherwise acquire any shares
of the Capital Stock, bonds, notes, debentures or other securities of, or make
or commit or agree to make any other investment in, any other Person, or
purchase or own any futures contract or otherwise become liable for the purchase
or sale of currency or other commodities at a future date in the nature of a
futures contract, or permit any of their Restricted Subsidiaries to do any of
the foregoing, except for: (i) investments existing on the date hereof, but not
any increase in the amount thereof or any other modification of the terms
thereof, (ii) loans and advances made in the ordinary course of business by any
Loan Party to any other Loan Party or to any Restricted Subsidiary, the
beneficial owners of which are also Restricted Subsidiaries, (iii) loans and
advances made in the ordinary course of business by any Restricted Subsidiary to
any Loan Party or to any other Restricted Subsidiary, the beneficial owners of
which are also Restricted Subsidiaries, and (iv) Permitted Investments.

          (g) Lease Obligations.  Create, incur or suffer to exist, or permit
              -----------------
any of their Restricted Subsidiaries to create, incur or suffer to exist, any
obligations as lessee (i) for the payment of rent for any real or personal
property in connection with any sale and leaseback transaction, or (ii) for the
payment of rent for any real or personal property under leases or agreements to
lease other than (A) Capitalized Lease Obligations which would not cause the
aggregate amount of all obligations under Capitalized Leases entered into after
the Effective Date owing by the Loan Parties and their Restricted Subsidiaries
to exceed the amounts set forth in subsection (h) of this Section 7.02, and (B)
Operating Lease Obligations owing by the Loan Parties and their Restricted
Subsidiaries in an amount consistent with the Long Term Budget or otherwise
acceptable to the Agent.

          (h) Capital Expenditures.  Make or commit or agree to make, or permit
              --------------------
any of their Restricted Subsidiaries to make or commit or agree to make, any
Capital Expenditure (by purchase or Capitalized Lease) that would cause the
amount of Capital Expenditures made by the Loan Parties and their Restricted
Subsidiaries for any period to exceed the applicable line item amount set forth
in the Long Term Budget.

          (i) Restricted Payments.  (i) Declare or pay any dividend or other
              -------------------
distribution, direct or indirect, on account of any Capital Stock of any Loan
Party or any of its Subsidiaries, now or hereafter outstanding; provided,
                                                                --------
however, that Subsidiaries of a Loan Party may pay dividends or make
-------
distributions to such Loan Party and Unrestricted Subsidiaries may pay dividends
or make distributions to other Unrestricted Subsidiaries; (ii) make any
repurchase, redemption, retirement, defeasance, sinking fund or similar payment,
purchase or other acquisition for value, direct or indirect, of any Capital
Stock of any Loan Party or any direct or indirect parent of any Loan Party, now
or hereafter outstanding; (iii) make any payment to retire, or to obtain the
surrender of, any outstanding warrants, options or other rights for the purchase
or acquisition of shares of any class of Capital Stock of any Loan Party, now or
hereafter outstanding; (iv) return any shares of Capital Stock to any
shareholders or other equity holders of any Loan Party or any of its
Subsidiaries (except that Unrestricted Subsidiaries may return shares of Capital
Stock to other Unrestricted Subsidiaries), or make any other distribution of
property, assets, shares of Capital Stock, warrants, rights, options,
obligations or securities thereto as such; or (v) pay any management fees or any
other fees or expenses (including the reimbursement thereof by any Loan Party or
any of its Subsidiaries) pursuant to any management, consulting or

                                      -58-
<PAGE>

other services agreement to any of the shareholders or other equityholders of
any Loan Party or any of its Subsidiaries or other Affiliates, or to any other
Subsidiaries or Affiliates of any Loan Party.

          (j) Payments.   Make any payment of principal or interest or otherwise
              --------
on account of any Indebtedness or trade payable incurred prior to the Filing
Date, or permit any of their Restricted Subsidiaries to make any such payment,
provided that such payments may be made:  (i) to the holders of, or in respect
--------
of, wage, salary, commission or other compensation and employee benefit
obligations (including expense reimbursements) to employees and independent
contractors which arose prior to the Filing Date; (ii) to landlords in
connection with the assumption of unexpired leases under Section 365 of the
Bankruptcy Code in an aggregate amount acceptable to the Agent; (iii) to lessors
and non-debtor parties to executory contracts in connection with the assumption
of such leases and contracts under Section 365 of the Bankruptcy Code; (iv) in
respect of workers' compensation benefits and liability and property insurance
policies of the Borrowers in an aggregate amount acceptable to the Agent; (v)
with respect to payroll taxes, garnishment payments, sales taxes, "trust fund"
taxes, gift certificates, customer refunds, rebates and credits, warranties or
other trust fund disbursements in accordance with past practice of the
Borrowers; (vi) to the holders of Permitted Priority Liens, the proceeds of the
assets subject to such Permitted Priority Liens in connection with the sale of
such assets; (vii) in respect of the obligations required to be paid in order to
maintain the Concordat listed on Schedule 7.02(j)(A); and (viii) in respect of
the other obligations of the Borrowers listed on Schedule 7.02(j)(B); in each
case, after prior written notice of such payment has been given by the
Administrative Borrower to the Agent and subject to approval of the Bankruptcy
Court.

          (k) Transactions with Affiliates.  Enter into, renew, extend or be a
              ----------------------------
party to, or permit any of their Subsidiaries to enter into, renew, extend or be
a party to any transaction or series of related transactions (including, without
limitation, the purchase, sale, lease, transfer or exchange of property or
assets of any kind or the rendering of services of any kind) with any Affiliate,
except (i) in the ordinary course of business in a manner and to an extent
consistent with past practice and necessary or desirable for the prudent
operation of its business, for fair consideration and on terms no less favorable
to the Loan Parties or such Subsidiaries than would be obtainable in a
comparable arm's length transaction with a Person that is not an Affiliate
thereof, (ii) transactions among the Loan Parties and their Restricted
Subsidiaries, (iii) transactions among Restricted Subsidiaries, and (iv)
transactions among Unrestricted Subsidiaries.

          (l) Environmental.  Permit the use, handling, generation, storage,
              -------------
treatment, release or disposal of Hazardous Materials at any property owned or
leased by the Loan Parties or any of their Restricted Subsidiaries except in
compliance with Environmental Laws and so long as such use, handling,
generation, storage, treatment, release or disposal of Hazardous Materials does
not result in a Material Adverse Effect.

          (m) Multiemployer Plans.  Become or permit any ERISA Affiliate to
              -------------------
become obligated to contribute to any Multiemployer Plan, or assume or permit
any ERISA Affiliate to assume any obligation of any predecessor with respect to
any Multiemployer Plan.

                                      -59-
<PAGE>

          (n) Excess Cash.  Accumulate or maintain cash in bank accounts other
              -----------
than in Securities Accounts (in excess of checks outstanding against such
accounts and amounts necessary to meet minimum balance requirements), cash
equivalents or Permitted Investments in an aggregate amount in excess of (i)
$1,000,000 for a period of more than three (3) consecutive days or (ii)
$3,000,000 at any time.

                                 ARTICLE VIII

 MANAGEMENT, COLLECTION AND STATUS OF ACCOUNTS RECEIVABLE AND OTHER COLLATERAL

          SECTION 8.01.   Collection of Accounts Receivable; Management of
                          ------------------------------------------------
Collateral.
----------

          (a) Within 20 days of the Effective Date, the Borrowers shall assist
the Agent in (i) during the term of this Agreement, maintaining one or more
lockboxes in the name of the Agent (collectively, the "Lockboxes") with
                                                       ---------
financial institutions selected by the Borrowers and acceptable to the Agent in
its sole discretion (each being referred to as a "Lockbox Bank"), and (ii)
                                                  ------------
establishing, and during the term of this Agreement, maintaining accounts (each
a "Collection Account" and, collectively, the "Collection Accounts") in the name
   ------------------                          -------------------
of the Agent with each Lockbox Bank.  The Borrowers shall irrevocably instruct
each Account Debtor located within the United States (or with an applicable
office located within the United States), with respect to Accounts Receivable of
the Borrowers arising after the date 20 days after the Effective Date, to remit
all payments to be made by checks or other drafts to the Lockboxes and to remit
all payments to be made by wire transfer or by Automated Clearing House, Inc.
payments as directed by the Agent and shall instruct each Lockbox Bank to
deposit all amounts received in its Lockbox to the Collection Account at such
Lockbox Bank on the day received or, if such day is not a Business Day, on the
next succeeding Business Day.  Until the Agent has advised the Borrowers to the
contrary after the occurrence and during the continuance of an Event of Default,
the Borrowers may and will enforce, collect and receive all amounts owing on the
Accounts Receivable of the Borrowers for the Agent's benefit and on the Agent's
behalf, but at the Borrowers' expense; such privilege shall terminate, at the
election of the Agent, upon the occurrence and during the continuance of any
Event of Default.  All checks, drafts, notes, money orders, acceptances, cash
and other evidences of Indebtedness received directly by the Borrowers from any
Account Debtor, as proceeds from Accounts Receivable of the Borrowers, or as
proceeds of any other Collateral, shall be held by the Borrowers in trust for
the Agent and the Lenders and upon receipt be deposited by the Borrowers in
original form and no later than the next Business Day after receipt thereof into
a Collection Account.  The Borrowers shall not commingle such collections with
the Borrowers' own funds or the funds of any Subsidiaries or Affiliates of the
Borrowers or with the proceeds of any assets not included in the Collateral.
All funds received in the Collection Account shall be sent by wire transfer or
Automated Clearing House, Inc. payment to the Payment Office to be credited to
the Agent's Account for application at the end of each Business Day to reduce
the then principal balance of the Revolving Loans, conditional upon final
payment to the Agent.  No checks, drafts or other instrument received by the
Agent shall constitute final payment to the Agent unless and until such
instruments have actually been collected.

                                      -60-
<PAGE>

          (b) After the occurrence and during the continuance of an Event of
Default, the Agent may send a notice of assignment and/or notice of the Lenders'
security interest to any and all Account Debtors or third parties holding or
otherwise concerned with any of the Collateral, and thereafter the Agent shall
have the sole right to collect the Accounts Receivable and/or take possession of
the Collateral and the books and records relating thereto.  The Borrowers shall
not, without prior written consent of the Agent, grant any extension of time of
payment of any Account Receivable, compromise or settle any Account Receivable
for less than the full amount thereof, release, in whole or in part, any Person
or property liable for the payment thereof, or allow any credit or discount
whatsoever thereon, except, in the absence of a continuing Event of Default, in
the ordinary course of business of the Borrowers.

          (c) The Borrowers hereby appoint the Agent or its designee on behalf
of the Agent as the Borrowers' attorney-in-fact with power exercisable during
the continuance of any Event of Default to endorse the Borrowers' names upon any
notes, acceptances, checks, drafts, money orders or other evidences of payment
relating to the Accounts Receivable, to sign the Borrowers' names on any invoice
or bill of lading relating to any of the Accounts Receivables, drafts against
Account Debtors with respect to Accounts Receivable, assignments and
verifications of Accounts Receivable and notices to Account Debtors with respect
to Accounts Receivable, to send verification of Accounts Receivable, and, to
notify the Postal Service authorities to change the address for delivery of mail
addressed to the Borrowers to such address as the Agent may designate and to do
all other acts and things necessary to carry out this Agreement.  All acts of
said attorney or designee are hereby ratified and approved, and said attorney or
designee shall not be liable for any acts of omission or commission (other than
acts or omissions constituting gross negligence or willful misconduct), or for
any error of judgment or mistake of fact or law; this power being coupled with
an interest is irrevocable until all of the Loans and other Obligations under
the Loan Documents are paid in full and all of the Loan Documents are
terminated.

          (d) Nothing herein contained shall be construed to constitute the
Agent as agent of the Borrowers for any purpose whatsoever, and the Agent shall
not be responsible or liable for any shortage, discrepancy, damage, loss or
destruction of any part of the Collateral wherever the same may be located and
regardless of the cause thereof (other than from acts or omissions of the Agent
constituting gross negligence or willful misconduct as determined by a final
judgment of a court of competent jurisdiction).  The Agent shall not, under any
circumstance or in any event whatsoever, have any liability for any error or
omission or delay of any kind occurring in the settlement, collection or payment
of any of the Accounts Receivable or any instrument received in payment thereof
or for any damage resulting therefrom (other than acts or omissions of the Agent
constituting gross negligence or willful misconduct as determined by a final
judgment of a court of competent jurisdiction).  The Agent, by anything herein
or in any assignment or otherwise, does not assume any of the obligations under
any contract or agreement assigned to the Agent and shall not be responsible in
any way for the performance by the Borrowers of any of the terms and conditions
thereof.

          (e) If any Account Receivable includes a charge for any tax payable to
any Governmental Authority, the Agent is hereby authorized (but in no event
obligated) in its discretion to pay the amount thereof to the proper taxing
authority for the Borrowers' account and to charge the Borrowers therefor.  The
Borrowers shall notify the Agent if any Account

                                      -61-
<PAGE>

Receivable includes any taxes due to any such Governmental Authority and, in the
absence of such notice, the Agent shall have the right to retain the full
proceeds of such Account Receivable and shall not be liable for any taxes that
may be due by reason of the sale and delivery creating such Account Receivable.

          (f) Notwithstanding any other terms set forth in the Loan Documents,
the rights and remedies of the Agent and the Lenders herein provided, and the
obligations of the Borrowers set forth herein, are cumulative of, may be
exercised singly or concurrently with, and are not exclusive of, other rights,
remedies or obligations set forth in any other Loan Documents or as provided by
law.

          SECTION 8.02.   Accounts Receivable Documentation.  The Borrowers will
                          ---------------------------------
at such intervals as the Agent may require, execute and deliver confirmatory
written assignments of the Accounts Receivable to the Agent and furnish such
further schedules and/or information as the Agent may require relating to the
Accounts Receivable, including, without limitation, sales invoices or the
equivalent, credit memos issued, remittance advices, reports and copies of
deposit slips and copies of original shipping or delivery receipts for all
merchandise sold.  In addition, the Borrowers shall notify the Agent of any non-
compliance in respect of the representations, warranties and covenants contained
in Section 8.03.  The items to be provided under this Section 8.02 are to be in
form reasonably satisfactory to the Agent and are to be executed and delivered
to the Agent from time to time solely for its convenience in maintaining records
of the Collateral.  The Borrowers' failure to give any of such items to the
Agent shall not affect, terminate, modify or otherwise limit the Agent's Lien on
the Collateral.  The Borrowers shall not re-date any invoice or sale or make
sales on extended dating beyond that customary in the Borrowers' industry, and
shall not re-bill any Accounts Receivable without promptly disclosing the same
to the Agent and providing the Agent with copy of such re-billing, identifying
the same as such.  If the Borrowers become aware of anything materially
detrimental to any of the Borrowers' customers' credit, the Borrowers will
promptly advise the Agent thereof.

          SECTION 8.03.   Status of Accounts Receivable and Other Collateral.
                          --------------------------------------------------
With respect to Collateral of any Borrower at the time the Collateral becomes
subject to the Agent's Lien, each Borrower covenants, represents and warrants:
(a) such Borrower shall be the sole owner, free and clear of all Liens (except
for the Liens granted to the Agent for the benefit of the Lenders and Permitted
Liens), and fully authorized to sell, transfer, pledge and/or grant a security
interest in each and every item of said Collateral (subject to Permitted
Priority Liens); (b) each Account Receivable shall be a good and valid account
representing an undisputed bona fide indebtedness incurred or an amount
indisputably owed by the Account Debtor therein named, for a fixed sum as set
forth in the invoice relating thereto with respect to any absolute sale and
delivery upon the specified terms of goods sold or services rendered by such
Borrower; (c) no Account Receivable shall be subject to any defense, offset,
counterclaim, discount or allowance except as may be stated in the invoice
relating thereto, discounts and allowances as may be customary in such
Borrower's business and as otherwise disclosed to the Agent; (d) none of the
transactions underlying or giving rise to any Account Receivable shall violate
in any material respect any applicable state or federal laws or regulations, and
all documents relating thereto shall be legally sufficient under such laws or
regulations and shall be legally enforceable in accordance with their terms; (e)
no agreement under which any deduction or offset of any kind, other than normal
trade discounts, may be granted or shall have been made by such

                                      -62-
<PAGE>

Borrower at or before the time such Account Receivable is created (other than
those agreements delivered to the Agent at or before the time such Account
Receivable is included in the Borrowing Base); (f) all agreements, instruments
and other documents relating to any Account Receivable shall be true and correct
and in all material respects what they purport to be; (g) all signatures and
endorsements that appear on all material agreements, instruments and other
documents relating to any Account Receivable shall be genuine and all
signatories and endorsers shall have full capacity to contract; (h) such
Borrower shall maintain books and records pertaining to said Collateral in such
detail, form and scope as the Agent shall reasonably require consistent with
Section 7.01(e); (i) such Borrower shall immediately notify the Agent if any
accounts arise out of contracts with the United States or any department,
agency, or instrumentality thereof and will execute any instruments and take any
steps required by the Agent in order that all monies due or to become due under
any such contract shall be assigned to the Agent and notice thereof given to the
United States Government under the Federal Assignment of Claims Act, provided
                                                                     --------
that, prior to a Default or an Event of Default, this clause (i) shall apply
only to accounts included or to be included in the Borrowing Base; (j) such
Borrower will, immediately upon learning thereof, report to the Agent any
material loss or destruction of, or substantial damage to, any of the
Collateral, and any other matters affecting the value, enforceability or
collectibility of any of the Collateral; (k) if any amount payable under or in
connection with any Account Receivable is evidenced by a promissory note or
other instrument, such promissory note or instrument shall be immediately
pledged, endorsed, assigned and delivered to the Agent for the benefit of the
Lenders as additional Collateral, provided that, prior to a Default or an Event
                                  --------
of Default, this clause (k) shall apply only to Accounts Receivable included or
to be included in the Borrowing Base; (l) such Borrower shall not re-date any
invoice or sale or make sales on extended dating beyond that which is customary
in the ordinary course of its business and in the industry; (m) such Borrower
shall conduct a physical count of its Inventory at such intervals as the Agent
may request and such Borrower shall promptly supply the Agent with a copy of
such count accompanied by a report of the value (based on the lower of cost (on
a first in first out basis) and market value) of such Inventory; and (n) such
Borrower is not and shall not be entitled to represent to any Person that the
Agent or the Lenders may be obligated to such Person in connection with any
purchase or in any way whatsoever.

          SECTION 8.04.   Collateral Custodian.   Upon the occurrence and during
                          --------------------
the continuance of any Default or Event of Default, the Agent may at any time
and from time to time employ and maintain on the premises of any Loan Party a
custodian selected by the Agent who shall have full authority to do all acts
necessary to protect the Agent's and the Lenders' interests.  Each Borrower
hereby agrees to, and to cause its Subsidiaries to, cooperate with any such
custodian and to do whatever the Agent may reasonably request to preserve the
Collateral.  All costs and expenses incurred by the Agent by reason of the
employment of the custodian shall be the responsibility of the Borrowers and
charged to the Loan Account.

                                      -63-
<PAGE>

                                  ARTICLE IX

                               EVENTS OF DEFAULT

          SECTION 9.01.   Events of Default.  If any of the following Events of
                          -----------------
Default shall occur and be continuing:

          (a) the Borrowers shall fail to pay any principal of or interest on
any Loan, any Agent Advance or any fee, indemnity or other amount payable under
this Agreement or any other Loan Document when due (whether by scheduled
maturity, required prepayment, acceleration, demand or otherwise);

          (b) any representation or warranty made or deemed made by or on behalf
of any Loan Party or by any officer of the foregoing under or in connection with
any Loan Document or under or in connection with any report, certificate, or
other document delivered to the Agent or the Lenders pursuant to any Loan
Document shall have been incorrect in any material respect when made or deemed
made;

          (c) any Loan Party shall fail to perform or comply with any covenant
or agreement contained in Article VII, or any Loan Party shall fail to perform
or comply with any covenant or agreement contained in Section 5 of any Security
Agreement to which it is a party, Section 6 of any Pledge Agreement to which it
is a party or Section 5 of any Mortgage to which it is a party;

          (d) any Loan Party shall fail to perform or comply with any other
term, covenant or agreement contained in any Loan Document to be performed or
observed by it and, except as set forth in subsections (a), (b) and (c) of this
Section 9.01, such failure, if capable of being remedied, shall remain
unremedied for 15 days after the earlier of the date a senior officer of any
Loan Party becomes aware of such failure and the date written notice of such
default shall have been given by the Agent to such Loan Party;

          (e) any Guarantor shall fail to pay any principal of or interest on
any of its Indebtedness (excluding Indebtedness evidenced by the Notes) in
excess of $250,000, or any interest or premium thereon, when due (whether by
scheduled maturity, required prepayment, acceleration, demand or otherwise) and
such failure shall continue after the applicable grace period, if any, specified
in the agreement or instrument relating to such Indebtedness, or any other
default under any agreement or instrument relating to any such Indebtedness, or
any other event, shall occur and shall continue after the applicable grace
period, if any, specified in such agreement or instrument, if the effect of such
default or event is to accelerate, or to permit the acceleration of, the
maturity of such Indebtedness; or any such Indebtedness shall be declared to be
due and payable, or required to be prepaid (other than by a regularly scheduled
required prepayment), redeemed, purchased or defeased or an offer to prepay,
redeem, purchase or defease such Indebtedness shall be required to be made, in
each case prior to the stated maturity thereof;

          (f) An order with respect to any of the Chapter 11 Cases shall be
entered by the Bankruptcy Court appointing, or any Borrower shall file an
application for an order with

                                      -64-
<PAGE>

respect to any Chapter 11 Case seeking the appointment of, (i) a trustee under
Section 1104, or (ii) an examiner with enlarged powers relating to the operation
of the business (powers beyond those set forth in Section 1106(a)(3) and (4) of
the Bankruptcy Code) under Section 1106(b) of the Bankruptcy Code;

          (g) An order with respect to any of the Chapter 11 Cases shall be
entered by the Bankruptcy Court converting such Chapter 11 Case to a chapter 7
case;

          (h) An order shall be entered by the Bankruptcy Court confirming a
plan of reorganization in any of the Chapter 11 Cases which does not contain a
provision for termination of the Revolving Credit Commitment and payment in full
in cash of all Obligations of the Borrowers hereunder and under the other Loan
Documents on or before the effective date of such plan or plans upon entry
thereof;

          (i) An order shall be entered by the Bankruptcy Court dismissing any
of the Chapter 11 Cases which does not contain a provision for termination of
the Revolving Credit Commitments, and payment in full in cash of all Obligations
of the Borrowers hereunder and under the other Loan Documents upon entry
thereof;

          (j) An order with respect to any of the Chapter 11 Cases shall be
entered by the Bankruptcy Court without the express prior written consent of the
Required Lenders, (i) to revoke, reverse, stay, modify, supplement or amend the
Final Bankruptcy Court Order or (ii) to permit any administrative expense or any
claim (now existing or hereafter arising, of any kind or nature whatsoever) to
have administrative priority as to the Borrowers equal or superior to the
priority of the Lender in respect of the Obligations, except for allowed
administrative expenses having priority over the Obligations to the extent set
forth in the Agreed Administrative Expense Priorities, or (iii) to grant or
permit the grant of a Lien on the Collateral other than a Permitted Priority
Lien;

          (k) an application for any of the orders described in clauses (f),
(g), (h), (i) or (j) above shall be made by a Person other than the Borrowers
and such application is not contested by the Borrowers in good faith and the
relief requested is granted in an order that is not stayed pending appeal;

          (l) an order shall be entered by the Bankruptcy Court that is not
stayed pending appeal granting relief from the automatic stay to any creditor of
any of the Borrowers with respect to any claim in an amount equal to or
exceeding $250,000 in the aggregate; provided, however, that it shall not be an
                                     --------  -------
Event of Default if relief from the automatic stay is granted (i) solely for the
purpose of allowing such creditor to determine the liquidated amount of its
claim against the Borrowers, or (ii) to permit the commencement of and/or
prosecution of a proceeding to collect against an insurance company;

          (m) (i) any Borrower shall attempt to invalidate, reduce or otherwise
impair the Liens or security interests of Agent and the Lenders, claims or
rights against such Person or to subject any Collateral to assessment pursuant
to Section 506(c) of the Bankruptcy Code, (ii) any Lien or security interest
created by this Agreement or the Final Bankruptcy Court Order shall, for any
reason, cease to be valid or (iii) any action is commenced by any Borrower which
contests the

                                      -65-
<PAGE>

validity, perfection or enforceability of any of the Liens and security
interests of Agent and the Lenders created by this Agreement or the Final
Bankruptcy Court Order;

          (n) INTENTIONALLY OMITTED;

          (o) any provision of any Loan Document shall at any time for any
reason (other than pursuant to the express terms thereof) cease to be valid and
binding on or enforceable against any Loan Party intended to be a party thereto,
or the validity or enforceability thereof shall be contested by any party
thereto, or a proceeding shall be commenced by any Loan Party or any
Governmental Authority having jurisdiction over any of them, seeking to
establish the invalidity or unenforceability thereof, or any Loan Party shall
deny in writing that it has any liability or obligation purported to be created
under any Loan Document;

          (p) any Security Agreement, any Pledge Agreement, any Mortgage or any
other security document, after delivery thereof pursuant hereto, shall for any
reason fail or cease to create a valid and perfected and, except to the extent
permitted by the terms hereof or thereof, first priority Lien in favor of the
Agent for the benefit of the Lenders on any Collateral purported to be covered
thereby;

          (q) one or more judgments or orders for the payment of money exceeding
$250,000 in the aggregate shall be rendered against any Guarantor and remain
unsatisfied and either (i) enforcement proceedings shall have been commenced by
any creditor upon any such judgment or order, or (ii) there shall be a period of
10 consecutive days after entry thereof during which a stay of enforcement of
any such judgment or order, by reason of a pending appeal or otherwise, shall
not be in effect; provided, however, that any such judgment or order shall not
                  --------  -------
give rise to an Event of Default under this subsection (q) if and for so long as
(A) the amount of such judgment or order is covered by a valid and binding
policy of insurance between the defendant and the insurer covering full payment
thereof and (B) such insurer has been notified, and has not disputed the claim
made for payment, of the amount of such judgment or order;

          (r) INTENTIONALLY OMITTED;

          (s) any Termination Event with respect to any Employee Plan shall have
occurred, and, 30 days after notice thereof shall have been given to any Loan
Party by the Agent, (i) such Termination Event (if correctable) shall not have
been corrected, and (ii) the then current value of such Employee Plan's vested
benefits exceeds the then current value of assets allocable to such benefits in
such Employee Plan by more than $250,000 (or, in the case of a Termination Event
involving liability under Section 409, 502(i), 502(l), 515, 4062, 4063, 4064,
4069, 4201, 4204 or 4212 of ERISA or Section 4971 or 4975 of the Code, the
liability is in excess of such amount);

          (t) a Change of Control shall have occurred;

          (u) an event or development occurs which has a Material Adverse Effect
which is not cured within 10 Business Days after notice thereof to the
Administrative Borrower by the Agent;

          (v) a Material Adverse Deviation shall have occurred; or

                                      -66-
<PAGE>

          (w) the determination of any Borrower, whether by vote of such
Person's board of directors or otherwise, to suspend the operation of such
Person's business in the ordinary course, liquidate all or substantially all of
such Person's assets, or employ an agent or other third party to conduct any so-
called "Going-Out-of-Business" sales, or the filing of a motion or other
application in the Chapter 11 Cases, seeking authority to do any of the
foregoing.

then, and in any such event, the Agent may, and shall at the request of the
Required Lenders, by notice to the Administrative Borrower, (i) terminate the
Revolving Credit Commitments, whereupon the Revolving Credit Commitments shall
terminate immediately, (ii) declare all Loans then outstanding to be due and
payable, whereupon the aggregate principal of such Loans, all accrued and unpaid
interest thereon, all fees and all other amounts payable under this Agreement
shall become due and payable immediately, without further order of, or
application to, the Bankruptcy Court, presentment, demand, protest or further
notice of any kind, all of which are hereby expressly waived by each Loan Party
and (iii) exercise any and all of its other rights and remedies under applicable
law (including, but not limited to, the Bankruptcy Code and the Uniform
Commercial Code), hereunder and under the other Loan Documents.  Notwithstanding
anything to the contrary contained in this Section 9.01 or in any other
provisions of this Agreement, the commencement of a Chapter 11 Case by any
Guarantor shall not constitute an Event of Default under this Agreement.

                                   ARTICLE X

                                     AGENT

          SECTION 10.01.   Appointment.  (a) Each Lender (and each subsequent
                           -----------
holder of any Note by its acceptance thereof) hereby irrevocably appoints and
authorizes the Agent to perform the duties of the Agent as set forth in this
Agreement including:  (i) to receive on behalf of each Lender any payment of
principal of or interest on the Notes outstanding hereunder and all other
amounts accrued hereunder for the account of the Lenders and paid to the Agent,
and, subject to Section 2.02 of this Agreement, to distribute promptly to each
Lender its Pro Rata Share of all payments so received (ii) to distribute to each
Lender copies of all material notices and agreements received by the Agent and
not required to be delivered to each Lender pursuant to the terms of this
Agreement, provided that the Agent shall not have any liability to the Lenders
for the Agent's inadvertent failure to distribute any such notices or agreements
to the Lenders and (iii) subject to Section 10.03 of this Agreement, to take
such action as the Agent deems appropriate on its behalf to administer the Loans
and the Loan Documents and to exercise such other powers delegated to the Agent
by the terms hereof or the Loan Documents (including, without limitation, the
power to give or to refuse to give notices, waivers, consents, approvals and
instructions and the power to make or to refuse to make determinations and
calculations) together with such powers as are reasonably incidental thereto to
carry out the purposes hereof and thereof.  As to any matters not expressly
provided for by this Agreement and the other Loan Documents (including, without
limitation, enforcement or collection of the Notes), the Agent shall not be
required to exercise any discretion or take any action, but shall be required to
act or to refrain from acting (and shall be fully protected in so acting or
refraining from acting) upon the instructions of the Required Lenders, and such
instructions of the Required Lenders shall be

                                      -67-
<PAGE>

binding upon all Lenders and all holders of Notes; provided, however, that the
                                                   --------  -------
Agent shall not be required to take any action which, in the reasonable opinion
of the Agent, exposes the Agent to liability or which is contrary to this
Agreement or any Loan Document or applicable law.

          (b) To facilitate the taking of actions with respect to the
Collateral, the funding of the Loans, the receipt of payments, the distribution
of funds to the Lenders, or any other matter in pursuance of the terms of this
Agreement and of the other Loan Documents, the Agent may, from time to time,
appoint one or more subagents (hereinafter, collectively, "Subagents").  Any
                                                           ---------
such Subagent, when acting within the scope of its subagency provided for
herein, shall have the rights and powers of the Agent as are set forth in the
document establishing such subagency, shall enjoy the full benefits and
protections of all provisions hereof applicable to the Agent, and shall be
subject to and responsible for the obligations and duties of the Agent hereunder
and under the other Loan Documents insofar as they pertain to the rights being
exercised by such Subagent.

          (c) The Agent hereby appoints each Subagent and each Lender as its
agent for the purpose of perfecting the Agent's Liens in assets which, in
accordance with the Uniform Commercial Code (as in effect in any applicable
jurisdiction) can be perfected only by possession or control.  Should any
Subagent or any Lender obtain possession or control of any such Collateral, such
Person shall notify the Agent thereof and, promptly upon the Agent's request
therefor, shall deliver, or cause the delivery, of such Collateral to the Agent
or in accordance with the Agent's instructions.

          (d) To the extent that the rights, powers, duties, responsibilities,
or obligations of the Agent have been delegated hereunder to a Subagent, the
Agent shall be relieved of any liability for any action or inaction of such
Subagent to the extent that the Agent shall have exercised reasonable care in
the selection of such Subagent.

          SECTION 10.02.   Nature of Duties.  The Agent shall have no duties or
                           ----------------
responsibilities except those expressly set forth in this Agreement or in the
Loan Documents.  The duties of the Agent shall be mechanical and administrative
in nature.  The Agent shall not have by reason of this Agreement or any Loan
Document a fiduciary relationship in respect of any Lender.  Nothing in this
Agreement or any of the Loan Documents, express or implied, is intended to or
shall be construed to impose upon the Agent any obligations in respect of this
Agreement or any of the Loan Documents except as expressly set forth herein or
therein.  Each Lender shall make its own independent investigation of the
financial condition and affairs of the Loan Parties in connection with the
making and the continuance of the Loans hereunder and shall make its own
appraisal of the creditworthiness of the Loan Parties and the value of the
Collateral, and the Agent shall have no duty or responsibility, either initially
or on a continuing basis, to provide any Lender with any credit or other
information with respect thereto, whether coming into its possession before the
initial Loan hereunder or at any time or times thereafter, provided, that, upon
                                                           --------  ----
the reasonable request of a Lender, the Agent shall provide to such Lender any
documents or reports delivered to the Agent by the Loan Parties pursuant to the
terms of this Agreement or any Loan Document.  If the Agent seeks the consent or
approval of the Required Lenders to the taking or refraining from taking any
action hereunder, the Agent shall send notice thereof to each Lender.  The Agent
shall promptly notify each Lender any time that the Required Lenders have
instructed the Agent to act or refrain from acting pursuant hereto.

                                      -68-
<PAGE>

          SECTION 10.03.   Rights, Exculpation, Etc.  The Agent and its
                           -------------------------
directors, officers, agents or employees shall not be liable for any action
taken or omitted to be taken by it under or in connection with this Agreement or
the other Loan Documents.  Without limiting the generality of the foregoing, the
Agent (i) may treat the payee of any Note as the holder thereof until the Agent
receives written notice of the assignment or transfer thereof, pursuant to
Section 11.07 hereof, signed by such payee and in form satisfactory to the
Agent; (ii) may consult with legal counsel (including, without limitation,
counsel to the Agent or counsel to the Loan Parties), independent public
accountants, and other experts selected by it and shall not be liable for any
action taken or omitted to be taken in good faith by it in accordance with the
advice of such counsel or experts; (iii) make no warranty or representation to
any Lender and shall not be responsible to any Lender for any statements,
certificates, warranties or representations made in or in connection with this
Agreement or the other Loan Documents; (iv) shall not have any duty to ascertain
or to inquire as to the performance or observance of any of the terms, covenants
or conditions of this Agreement or the other Loan Documents on the part of any
Person, the existence or possible existence of any Default or Event of Default,
or to inspect the Collateral or other property (including, without limitation,
the books and records) of any Person; (v) shall not be responsible to any Lender
for the due execution, legality, validity, enforceability, genuineness,
sufficiency or value of this Agreement or the other Loan Documents or any other
instrument or document furnished pursuant hereto or thereto; and (vi) shall not
be deemed to have made any representation or warranty regarding the existence,
value or collectability of the Collateral, the existence, priority or perfection
of the Agent's Lien thereon, or any certificate prepared by any Loan Party in
connection therewith, nor shall the Agent be responsible or liable to the
Lenders for any failure to monitor or maintain any portion of the Collateral.
The Agent shall not be liable for any apportionment or distribution of payments
made in good faith pursuant to Section 2.02(c), and if any such apportionment or
distribution is subsequently determined to have been made in error the sole
recourse of any Lender to whom payment was due but not made, shall be to recover
from other Lenders any payment in excess of the amount which they are determined
to be entitled.  The Agent may at any time request instructions from the Lenders
with respect to any actions or approvals which by the terms of this Agreement or
of any of the Loan Documents the Agent is permitted or required to take or to
grant, and if such instructions are promptly requested, the Agent shall be
absolutely entitled to refrain from taking any action or to withhold any
approval under any of the Loan Documents until it shall have received such
instructions from the Required Lenders.  Without limiting the foregoing, no
Lender shall have any right of action whatsoever against the Agent as a result
of the Agent acting or refraining from acting under this Agreement, the Notes or
any of the other Loan Documents in accordance with the instructions of the
Required Lenders.

          SECTION 10.04.   Reliance.  The Agent shall be entitled to rely upon
                           --------
any written notices, statements, certificates, orders or other documents or any
telephone message believed by it in good faith to be genuine and correct and to
have been signed, sent or made by the proper Person, and with respect to all
matters pertaining to this Agreement or any of the Loan Documents and its duties
hereunder or thereunder, upon advice of counsel selected by it.

          SECTION 10.05.   Indemnification.  To the extent that the Agent is not
                           ---------------
reimbursed and indemnified by any Loan Party, the Lenders will reimburse and
indemnify the Agent from and against any and all liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses, advances
or disbursements of any kind or nature whatsoever

                                      -69-
<PAGE>

which may be imposed on, incurred by, or asserted against the Agent in any way
relating to or arising out of this Agreement or any of the Loan Documents or any
action taken or omitted by the Agent under this Agreement or any of the Loan
Documents, in proportion to each Lender's Pro Rata Share, including, without
limitation, advances and disbursements made pursuant to Section 10.08; provided,
                                                                       --------
however, that no Lender shall be liable for any portion of such liabilities,
-------
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses, advances or disbursements for which there has been a final judicial
determination that such resulted from the Agent's gross negligence or willful
misconduct. The obligations of the Lenders under this Section 10.05 shall
survive the payment in full of the Revolving Loans and the termination of this
Agreement.

          SECTION 10.06.   Agent Individually.  With respect to its Pro Rata
                           ------------------
Share of the Total Commitment hereunder, the Loans made by it and the Notes
issued to or held by it, the Agent shall have and may exercise the same rights
and powers hereunder and is subject to the same obligations and liabilities as
and to the extent set forth herein for any other Lender or holder of a Note.
The terms "Lenders" or "Required Lenders" or any similar terms shall, unless the
context clearly otherwise indicates, include the Agent in its individual
capacity as a Lender or one of the Required Lenders.  The Agent and its
Affiliates may accept deposits from, lend money to, and generally engage in any
kind of banking, trust or other business with the Borrowers as if it were not
acting as an Agent pursuant hereto without any duty to account to the Lenders.

          SECTION 10.07.   Successor Agent.
                           ---------------

          (a) The Agent may resign from the performance of all its functions and
duties hereunder and under the other Loan Documents at any time by giving at
least thirty (30) Business Days' prior written notice to the Administrative
Borrower and each Lender.  Such resignation shall take effect upon the
acceptance by a successor Agent of appointment pursuant to clauses (b) and (c)
below or as otherwise provided below.

          (b) Upon any such notice of resignation, the Required Lenders shall
appoint a successor Agent who, in the absence of a continuing Event of Default,
shall be reasonably satisfactory to the Borrowers.  Upon the acceptance of any
appointment as Agent hereunder by a successor Agent, such successor Agent shall
thereupon succeed to and become vested with all the rights, powers, privileges
and duties of the retiring Agent, and the retiring Agent shall be discharged
from its duties and obligations under this Agreement and the other Loan
Documents.  After the Agent's resignation hereunder as the Agent, the provisions
of this Article X shall inure to its benefit as to any actions taken or omitted
to be taken by it while it was Agent under this Agreement and the other Loan
Documents.

          (c) If a successor Agent shall not have been so appointed within said
thirty (30) Business Day period, the retiring Agent shall then appoint a
successor Agent who, if an Event of Default is not continuing, shall be
reasonably satisfactory to the Borrowers, who shall serve as Agent until such
time, if any, as the Required Lenders appoint a successor Agent as provided
above.

                                      -70-
<PAGE>

          SECTION 10.08.   Collateral Matters.
                           ------------------

          (a) The Agent may from time to time, make such disbursements and
advances ("Agent Advances") which the Agent, in its sole discretion, deems
           --------------
necessary or desirable to preserve or protect the Collateral or any portion
thereof, to enhance the likelihood or maximize the amount of repayment by the
Borrowers of the Loans and other Obligations or to pay any other amount
chargeable to the Borrowers pursuant to the terms of this Agreement, including,
without limitation, costs, fees and expenses as described in Section 11.04.  The
Agent Advances shall be repayable on demand and be secured by the Collateral.
The Agent Advances shall not constitute Revolving Loans but shall otherwise
constitute Obligations hereunder.  The Agent shall notify each Lender and the
Administrative Borrower in writing of each Agent Advance, which notice shall
include a description of the purpose of such Agent Advance.  Without limitation
to its obligations pursuant to Section 10.05, each Lender agrees that it shall
make available to the Agent, upon the Agent's demand, in Dollars in immediately
available funds, the amount equal to such Lender's Pro Rata Share of such Agent
Advance.  If such funds are not made available to the Agent by such Lender, the
Agent shall be entitled to recover such funds on demand from such Lender,
together with interest thereon, for each day from the date such payment was due
until the date such amount is paid to the Agent, at the Federal Funds Rate for
three Business Days and thereafter at the Reference Rate.

          (b) The Lenders hereby irrevocably authorize the Agent, at its option
and in its discretion, to release any Lien granted to or held by the Agent upon
any Collateral upon termination of the Total Revolving Credit Commitment and
payment and satisfaction of all Loans and all other Obligations which have
matured and which the Agent has been notified in writing are then due and
payable; or constituting property being sold or disposed of in the ordinary
course of any Loan Party's business and in compliance with the terms of this
Agreement and the other Loan Documents; or constituting property in which the
Loan Parties owned no interest at the time the Lien was granted or at any time
thereafter; or if approved, authorized or ratified in writing by the Lenders.
Upon request by the Agent at any time, the Lenders will confirm in writing the
Agent's authority to release particular types or items of Collateral pursuant to
this Section 10.08(b).

          (c) Without in any manner limiting the Agent's authority to act
without any specific or further authorization or consent by the Lenders (as set
forth in Section 10.08(b)), each Lender agrees to confirm in writing, upon
request by the Agent, the authority to release Collateral conferred upon the
Agent under Section 10.08(b).  Upon receipt by the Agent of confirmation from
the Lenders of its authority to release any particular item or types of
Collateral, and upon prior written request by any Loan Party, the Agent shall
(and is hereby irrevocably authorized by the Lenders to) execute such documents
as may be necessary to evidence the release of the Liens granted to the Agent
for the benefit of the Lenders upon such Collateral; provided, however, that (i)
                                                     --------  -------
the Agent shall not be required to execute any such document on terms which, in
the Agent's opinion, would expose the Agent to liability or create any
obligations or entail any consequence other than the release of such Liens
without recourse or warranty, and (ii) such release shall not in any manner
discharge, affect or impair the Obligations or any Lien upon (or obligations of
any Loan Party in respect of) all interests in the Collateral retained by any
Loan Party.

                                      -71-
<PAGE>

          (d) The Agent shall have no obligation whatsoever to any Lenders to
assure that the Collateral exists or is owned by the Loan Parties or is cared
for, protected or insured or has been encumbered or that the Lien granted to the
Agent pursuant to this Agreement has been properly or sufficiently or lawfully
created, perfected, protected or enforced or is entitled to any particular
priority, or to exercise at all or in any particular manner or under any duty of
care, disclosure or fidelity, or to continue exercising, any of the rights,
authorities and powers granted or available to the Agent in this Section 10.08
or in any of the Loan Documents, it being understood and agreed that in respect
of the Collateral, or any act, omission or event related thereto, the Agent may
act in any manner it may deem appropriate, in its sole discretion, given the
Agent's own interest in the Collateral as one of the Lenders and that the Agent
shall have no duty or liability whatsoever to any other Lender.

                                  ARTICLE XI

                                 MISCELLANEOUS

          SECTION 11.01.   Notices, Etc.  All notices and other communications
                           -------------
provided for hereunder shall be in writing and shall be mailed, telecopied or
delivered, if to any Loan Party, at the following address:

          if to the Administrative Borrower:

          Dictaphone Corporation
          3191 Broadbridge Avenue
          Stratford, Connecticut 06614
          Attention: George M. Carpenter

          Telephone:  203-381-7000
          Telecopier: 203-385-4796

          with a copy to:

          Milbank Tweed Hadley & McCoy
          One Chase Manhattan Plaza
          New York, New York 10005
          Attention: Allan S. Brilliant, Esq.

          Telephone:  212-530-5283
          Telecopier: 212-530-5219

          if to the Agent, to it at the following address:

          Ableco Finance LLC
          450 Park Avenue, 28th Floor
          New York, New York 10022
          Attention: Kevin P. Genda

                                      -72-
<PAGE>

          Telephone:  212-891-2117
          Telecopier: 212-891-1541

          with a copy to:

          Schulte Roth & Zabel LLP
          900 Third Avenue
          New York, New York 10022
          Attention: Frederic L. Ragucci, Esq.

          Telephone:  212-756-2000
          Telecopier: 212-593-5955

          or, as to each party, at such other address as shall be designated by
such party in a written notice to the other party complying as to delivery with
the terms of this Section 11.01.  All such notices and other communications
shall be effective, (i) if mailed, when received or three days after deposited
in the mails, whichever occurs first, (ii) if telecopied, when transmitted and
confirmation received, or (iii) if delivered, upon delivery, except that notices
to the Agent pursuant to Article II shall not be effective until received by the
Agent.

          (b) Nothing in this Agreement or in any other Loan Document shall be
construed to limit or affect the obligation of the Borrowers or any other Person
to serve upon the Lender in the manner prescribed by the Bankruptcy Code any
pleading or notice required to be given to the Lender pursuant to the Bankruptcy
Code.

          SECTION 11.02.   Amendments, Etc.  (a)  No amendment or waiver of any
                           ----------------
provision of this Agreement or any Revolving Credit Note, and no consent to any
departure by the Borrowers or any other Loan Party therefrom, shall in any event
be effective unless the same shall be in writing and signed by the Required
Lenders or by the Agent with the consent of the Required Lenders, and then such
waiver or consent shall be effective only in the specific instance and for the
specific purpose for which given provided, however, that no amendment, waiver or
                                 --------  -------
consent shall (i) increase the Revolving Credit Commitment or the Term Loan
Commitments of any Lender, reduce the principal of, or interest on, the Loans
payable to any Lender, reduce the amount of any fee payable for the account of
any Lender, or postpone or extend any date fixed for any payment of principal
of, or interest or fees on, the Loans payable to any Lender, in each case
without the written consent of any Lender affected thereby, (ii) increase the
Total Revolving Credit Commitment, the Total Term Loan A Commitment or the Total
Term Loan B Commitment, (iii) change the percentage of the Revolving Credit
Commitments, the Term Loan Commitments or of the aggregate unpaid principal
amount of the Notes that is required for the Lenders or any of them to take any
action hereunder, (iv) amend the definition of "Required Lenders" or "Pro Rata
Share", (v) release all or a substantial portion of the Collateral (except as
otherwise provided in this Agreement and the other Loan Documents), subordinate
any Lien granted in favor of the Agent for the benefit of the Lenders, or
release any Borrower or any Guarantor, (vi) modify, waive, release or
subordinate the super priority claim status of the Obligations (except as
permitted in this Agreement and the Loan Documents), or (vii) amend,

                                      -73-
<PAGE>

modify or waive this Section 11.02 of this Agreement, in each case, without the
written consent of each Lender. Notwithstanding the foregoing, no amendment,
waiver or consent shall, unless in writing and signed by the Agent, affect the
rights or duties of the Agent (but not in its capacity as a Lender) under this
Agreement or the other Loan Documents. The parties to this Agreement acknowledge
that all material amendments to this Agreement will require the consent of the
Bankruptcy Court.

          (b) The Agent and the Lenders have executed an agreement on the
Effective Date pursuant to which the Agent and the Lenders have agreed, among
other things, to certain voting arrangements relative to matters requiring the
approval of the Lenders.  The rights and duties of the Agent and the Lenders
with respect to such matters are subject to such agreement.

          SECTION 11.03.   No Waiver; Remedies, Etc.  No failure on the part of
                           -------------------------
the Agent or any Lender to exercise, and no delay in exercising, any right
hereunder or under any other Loan Document shall operate as a waiver thereof;
nor shall any single or partial exercise of any right under any Loan Document
preclude any other or further exercise thereof or the exercise of any other
right.  The rights and remedies of the Agent and the Lenders provided herein and
in the other Loan Documents are cumulative and are in addition to, and not
exclusive of, any rights or remedies provided by law.  The rights of the Agent
and the Lenders under any Loan Document against any party thereto are not
conditional or contingent on any attempt by the Agent and the Lenders to
exercise any of their rights under any other Loan Document against such party or
against any other Person.

          SECTION 11.04.   Expenses; Taxes; Attorneys' Fees.  The Borrowers will
                           --------------------------------
pay on demand, all costs and expenses incurred by or on behalf of the Agent and
any Lender on the Revolving Credit Facility Effective Date (and, in the case of
clauses (b) through (m) below, all Lenders), regardless of whether the
transactions contemplated hereby are consummated, including, without limitation,
reasonable fees, costs, client charges and expenses of counsel for the Agent
(and, in the case of clauses (b) through (m) below, the Lenders), accounting,
due diligence, periodic field audits, physical counts, valuations,
investigations, searches and filings, monitoring of assets, appraisals of
Collateral, environmental assessments, miscellaneous disbursements, examination,
travel, lodging and meals, arising from or relating to: (a) the negotiation,
preparation, execution, delivery, performance and administration of this
Agreement and the other Loan Documents, (including, without limitation, the
preparation of any additional Loan Documents, pursuant to Section 7.01(b) or the
review of any of the agreements, instruments and documents referred to in
Section 7.01(f)), (b) any requested amendments, waivers or consents to this
Agreement or the other Loan Documents whether or not such documents become
effective or are given, (c) the preservation and protection of any of the
Lenders' rights under this Agreement or the other Loan Documents, (d) the
defense of any claim or action asserted or brought against the Agent or the
Lenders by any Person that arises from or relates to this Agreement, any other
Loan Document, the Agent's or the Lenders' claims against the Borrowers and each
other Loan Party, or any and all matters in connection therewith, (e) the
commencement or defense of, or intervention in, any court proceeding arising
from or related to this Agreement or any other Loan Document, (f) the filing of
any petition, complaint, answer, motion or other pleading by the Agent or the
Lenders, or the taking of any action in respect of the Collateral or other
security, in connection with this Agreement or any other Loan Document, (g) the
protection, collection, lease, sale, taking possession of or liquidation of, any
Collateral or

                                      -74-
<PAGE>

other security in connection with this Agreement or any other Loan Document, (h)
any attempt to enforce any Lien or security interest in any Collateral or other
security in connection with this Agreement or any other Loan Document, (i) any
attempt to collect from the Borrowers or any other Loan Party, (j) the receipt
by the Agent or the Lenders of any advice from professionals with respect to any
of the foregoing, (k) all liabilities and costs arising from or in connection
with the past, present or future operations of the Borrowers and each other Loan
Party involving any damage to real or personal property or natural resources or
harm or injury alleged to have resulted from any Release of Hazardous Materials
on, upon or into such property, (l) any Environmental Liabilities and Costs
incurred in connection with the investigation, removal, cleanup and/or
remediation of any Hazardous Materials present or arising out of the operations
of any facility of any Borrower or any other Loan Party, or (m) any
Environmental Liabilities and Costs incurred in connection with any
Environmental Lien. Without limitation of the foregoing or any other provision
of any Loan Document: (x) the Borrowers agree to pay all stamp, document,
transfer, recording or filing taxes or fees and similar impositions now or
hereafter determined by the Agent or any Lender to be payable in connection with
this Agreement or any other Loan Document, and the Borrowers agree to save the
Agent and the Lenders harmless from and against any and all present or future
claims, liabilities or losses with respect to or resulting from any omission to
pay or delay in paying any such taxes, fees or impositions, (y) the Borrowers
agree to pay all broker fees that may become due in connection with the
transactions contemplated by this Agreement, and (z) if the Borrowers fail to
perform any covenant or agreement contained herein or in any other Loan
Document, the Agent may itself perform or cause performance of such covenant or
agreement, and the expenses of the Agent incurred in connection therewith shall
be reimbursed on demand by the Borrowers.

          SECTION 11.05.   Right of Set-off.  Upon the occurrence and during the
                           ----------------
continuance of any Event of Default, any Lender may, and is hereby authorized
to, at any time and from time to time, without notice to the Borrowers (any such
notice being expressly waived by the Borrowers) and to the fullest extent
permitted by law, set off and apply any and all deposits (general or special,
time or demand, provisional or final) at any time held and other indebtedness at
any time owing by such Lender to or for the credit or the account of the
Borrowers against any and all obligations of either now or hereafter existing
under any Loan Document, irrespective of whether or not such Lender shall have
made any demand hereunder or thereunder and although such obligations may be
contingent or unmatured.  Each Lender agrees to notify the Administrative
Borrower promptly after any such set-off and application made by such Lender
provided that the failure to give such notice shall not affect the validity of
such set-off and application.

          SECTION 11.06.   Severability.   Any provision of this Agreement,
                           ------------
which is prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining portions hereof or affecting
the validity or enforceability of such provision in any other jurisdiction.

          SECTION 11.07.   Assignments and Participations.
                           ------------------------------

          (a) This Agreement and the Revolving Credit Notes shall be binding
upon and inure to the benefit of the Borrowers and the other Loan Parties and
the Agent and each Lender and their respective successors and assigns
(including, except for the right to request Revolving

                                      -75-
<PAGE>

Loans, any trustee succeeding to the rights of the Borrowers pursuant to Chapter
11 of the Bankruptcy Code or pursuant to any conversion to a case under chapter
7 of the Bankruptcy Code); provided, however, that each of the Borrowers and the
                           --------
other Loan Parties may not assign or transfer any of their rights hereunder, or
under the Notes, without the prior written consent of each Lender and any such
assignment without the Lenders' prior written consent shall be null and void.

          (b)  Each Lender may, with the written consent of the Agent, assign to
one or more other lenders or other entities all or a portion of its rights
and/or obligations under this Agreement (including, without limitation, all or a
portion of its Revolving Credit Commitment, its Term Loan Commitments, the
Revolving Loans or Term Loans made by it and the Notes held by it); provided,
                                                                    --------
however, that (i) such lender or other entity is determined in good faith by the
-------
Agent to be a credit worthy lender or entity, (ii) such assignment is in an
amount which is at least $5,000,000 or a multiple of $1,000,000 in excess
thereof (or the remainder of such Lender's Commitment) (except such minimum
amount shall not apply to any Affiliate of a Lender or any fund or account
managed by a Lender) and (iii) the parties to each such assignment shall execute
and deliver to the Agent, for its acceptance, an Assignment and Acceptance,
together with any Note subject to such assignment, and such parties shall
deliver to the Agent a processing and recordation fee of $5,000 (except the
payment of such fee shall not be required if the assignee is an Affiliate of a
Lender or to any fund or account managed by a Lender).  Upon such execution,
delivery and acceptance, from and after the effective date specified in each
Assignment and Acceptance, which effective date shall be at least three Business
Days after the delivery thereof to the Agent (or such shorter period as shall be
agreed to by the Agent and the parties to such assignment), (A) the assignee
thereunder shall become a "Lender" hereunder and, in addition to the rights and
obligations hereunder held by it immediately prior to such effective date, have
the rights and obligations hereunder that have been assigned to it pursuant to
such Assignment and Acceptance and (B) the assigning Lender thereunder shall, to
the extent that rights and obligations hereunder have been assigned by it
pursuant to such Assignment and Acceptance, relinquish its rights and be
released from its obligations under this Agreement (and, in the case of an
Assignment and Acceptance covering all or the remaining portion of an assigning
Lender's rights and obligations under this Agreement, such Lender shall cease to
be a party hereto).

               (i)    By executing and delivering an Assignment and Acceptance,
the assigning Lender and the assignee thereunder confirm to and agree with each
other and the other parties hereto as follows: (A) other than as provided in
such Assignment and Acceptance, the assigning Lender makes no representation or
warranty and assumes no responsibility with respect to any statements,
warranties or representations made in or in connection with this Agreement or
any other Loan Document or the execution, legality, validity, enforceability,
genuineness, sufficiency or value of this Agreement or any other Loan Document
furnished pursuant hereto; (B) the assigning Lender makes no representation or
warranty and assumes no responsibility with respect to the financial condition
of the Loan Parties or any of their Subsidiaries or the performance or
observance by the Loan Parties of any of their obligations under this Agreement
or any other Loan Document furnished pursuant hereto; (C) such assignee confirms
that it has received a copy of this Agreement and the other Loan Documents,
together with such other documents and information it has deemed appropriate to
make its own credit analysis and decision to enter into such Assignment and
Acceptance; (D) such assignee will, independently and without reliance upon the
assigning Lender, the Agent or any Lender and

                                      -76-
<PAGE>

based on such documents and information as it shall deem appropriate at the
time, continue to make its own credit decisions in taking or not taking action
under this Agreement and the other Loan Documents; (E) such assignee appoints
and authorizes the Agent to take such action as Agent on its behalf and to
exercise such powers under this Agreement and the other Loan Documents as are
delegated to the Agent by the terms thereof, together with such powers as are
reasonably incidental thereto; and (F) such assignee agrees that it will perform
in accordance with their terms all of the obligations which by the terms of this
Agreement and the other Loan Documents are required to be performed by it as a
Lender.

               (ii)   The Borrowers authorize the Agent, and the Agent agrees,
to maintain, or cause to be maintained at the Payment Office, a copy of each
Assignment and Acceptance delivered to and accepted by it and a register for the
recordation of the names and addresses of the Lenders and the Commitments of,
and principal amount of the Loans owing to each Lender from time to time (the
"Register"). The entries in the Register shall be conclusive and binding for
 --------
all purposes, absent manifest error, and the Borrowers, the Agent and the
Lenders may treat each Person whose name is recorded in the Register as a Lender
hereunder for all purposes of this Agreement.  The Register shall be available
for inspection by the Administrative Borrower and any Lender at any reasonable
time and from time to time upon reasonable prior notice.

               (iii)  Upon its receipt of an Assignment and Acceptance executed
by an assigning Lender and an assignee, together with the Notes subject to such
assignment, the Agent shall, if the Agent consents to such assignment and if
such Assignment and Acceptance has been completed (i) accept such Assignment and
Acceptance, (ii) give prompt notice thereof to the Administrative Borrower
(except no such notice shall be required if the assignee is an Affiliate of the
assigning Lender or a fund or account managed by the assigning Lender), (iii)
record the information contained therein in the Register, and (iv) prepare and
distribute to each Lender and the Administrative Borrower a revised Schedule
1.01(B) hereto after giving effect to such assignment, which revised Schedule
1.01(B) shall replace the prior Schedule 1.01(B) and become part of this
Agreement (except no such revised Schedule 1.01(B) shall be distributed if the
assignee is an Affiliate of the assigning Lender or a fund or account managed by
the assigning Lender).

               (iv)   A Registered Loan (and the Registered Note, if any,
evidencing the same) may be assigned or sold in whole or in part only by
registration of such assignment or sale on the Register (and each Registered
Note shall expressly so provide). Any assignment or sale of all or part of such
Registered Loan (and the Registered Note, if any, evidencing the same) may be
effected only by registration of such assignment or sale on the Register,
together with the surrender of the Registered Note, if any, evidencing the same
duly endorsed by (or accompanied by a written instrument of assignment or sale
duly executed by) the holder of such Registered Note, whereupon, at the request
of the designated assignee(s) or transferee(s), one or more new Registered Notes
in the same aggregate principal amount shall be issued to the designated
assignee(s) or transferee(s). Prior to the registration of assignment or sale of
any Registered Loan (and the Registered Note, if any evidencing the same), the
Agent shall treat the Person in whose name such Registered Loan (and the
Registered Note, if any, evidencing the same) is registered as the owner thereof
for the purpose of receiving all payments thereon and for all other purposes,
notwithstanding notice to the contrary.

                                      -77-
<PAGE>

               (v)    In the event that any Lender sells participations in a
Registered Loan, such Lender shall maintain a register on which it enters the
name of all participants in the Registered Loans held by it (the "Participant
                                                                  -----------
Register"). A Registered Loan (and the Registered Note, if any, evidencing the
--------
same) may be participated in whole or in part only by registration of such
participation on the Participant Register (and each Registered Note shall
expressly so provide). Any participation of such Registered Loan (and the
Registered Note, if any, evidencing the same) may be effected only by the
registration of such participation on the Participant Register.

               (vi)   Any foreign Person who purchases or is assigned or
participates in any portion of such Registered Loan shall provide the Agent (in
the case of a purchase or assignment) or the Lender (in the case of a
participation) with a completed Internal Revenue Service Form W-8 (Certificate
of Foreign Status) or a substantially similar form for such purchaser,
participant or any other affiliate who is a holder of beneficial interests in
the Registered Loan.

          (c)  Each Lender may sell participations to one or more banks or other
entities in or to all or a portion of its rights and obligations under this
Agreement and the other Loan Documents (including, without limitation, all or a
portion of its Commitments, and the Loans made by it); provided, that, (i) such
                                                       --------  ----
Lender's obligations under this Agreement (including without limitation, its
Commitments hereunder) and the other Loan Documents shall remain unchanged; (ii)
such Lender shall remain solely responsible to the other parties hereto for the
performance of such obligations, and the Borrowers, the Agent and the other
Lenders shall continue to deal solely and directly with such Lender in
connection with such Lender's rights and obligations under this Agreement and
the other Loan Documents, and (iii) a participant shall not be entitled to
require such Lender to take or omit to take any action hereunder except (A)
action directly effecting an extension of the maturity dates or decrease in the
principal amount of the Loans, or (B) action directly effecting an extension of
the due dates or a decrease in the rate of interest payable on the Loans or the
fees payable under this Agreement, or (C) actions directly effecting a release
of all or a substantial portion of the Collateral or any Borrower or any
Guarantor (except as set forth in Section 10.08 of this Agreement or any Loan
Document).

          SECTION 11.08.   Counterparts.  This Agreement may be executed in any
                           ------------
number of counterparts and by different parties hereto in separate counterparts,
each of which shall be deemed to be an original, but all of which taken together
shall constitute one and the same agreement.

          SECTION 11.09.   GOVERNING LAW.  THIS AGREEMENT, THE NOTES AND THE
                           -------------
OTHER LOAN DOCUMENTS SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE
LAW OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED IN
THE STATE OF NEW YORK EXCEPT AS GOVERNED BY THE BANKRUPTCY CODE.

          SECTION 11.10.   WAIVER OF JURY TRIAL, ETC.  EACH LOAN PARTY, THE
                           --------------------------
AGENT AND THE LENDERS HEREBY WAIVE ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION,
PROCEEDING OR COUNTERCLAIM CONCERNING ANY RIGHTS UNDER THIS AGREEMENT, THE NOTES
OR OTHER LOAN DOCUMENTS, OR UNDER

                                      -78-
<PAGE>

ANY AMENDMENT, WAIVER, CONSENT, INSTRUMENT, DOCUMENT OR OTHER AGREEMENT
DELIVERED OR WHICH IN THE FUTURE MAY BE DELIVERED IN CONNECTION THEREWITH, OR
ARISING FROM ANY FINANCING RELATIONSHIP EXISTING IN CONNECTION WITH THIS
AGREEMENT, AND AGREE THAT ANY SUCH ACTION, PROCEEDINGS OR COUNTERCLAIM SHALL BE
TRIED BEFORE A COURT AND NOT BEFORE A JURY. EACH LOAN PARTY CERTIFIES THAT NO
OFFICER, REPRESENTATIVE, AGENT OR ATTORNEY OF THE AGENT OR ANY LENDER HAS
REPRESENTED, EXPRESSLY OR OTHERWISE, THAT THE AGENT OR ANY LENDER WOULD NOT, IN
THE EVENT OF ANY ACTION, PROCEEDING OR COUNTERCLAIM, SEEK TO ENFORCE THE
FOREGOING WAIVERS. EACH LOAN PARTY HEREBY ACKNOWLEDGES THAT THIS PROVISION IS A
MATERIAL INDUCEMENT FOR THE LENDERS ENTERING INTO THIS AGREEMENT.

          SECTION 11.11.   Consent by the Agent and Lenders.  Except as
                           --------------------------------
otherwise expressly set forth herein to the contrary, if the consent, approval,
satisfaction, determination, judgment, acceptance or similar action (an
"Action") of the Agent or any Lender shall be permitted or required pursuant to
 ------
any provision hereof or any provision of any other agreement to which the
Borrowers and any other Loan Party are parties and to which the Agent or any
Lender has succeeded thereto, such Action shall be required to be in writing and
may be withheld or denied by the Agent or such Lender, in its sole discretion,
with or without any reason, and without being subject to question or challenge
on the grounds that such Action was not taken in good faith.

          SECTION 11.12.   No Party Deemed Drafter.  Each of the parties hereto
                           -----------------------
agrees that no party hereto shall be deemed to be the drafter of this Agreement.

          SECTION 11.13.   Administrative Borrower.  Each Borrower hereby
                           -----------------------
irrevocably appoints Dictaphone as the borrowing agent and attorney-in-fact for
the Borrowers (the "Administrative Borrower") which appointment shall remain in
                    -----------------------
full force and effect unless and until the Agent shall have received prior
written notice signed by all of the Borrowers that such appointment has been
revoked and that another Borrower has been appointed Administrative Borrower.
Each Borrower hereby irrevocably appoints and authorizes the Administrative
Borrower (i) to provide the Agent with all notices with respect to Loans
obtained for the benefit of any Borrower and all other notices and instructions
under this Agreement and (ii) to take such action as the Administrative Borrower
deems appropriate on its behalf to obtain Loans and to exercise such other
powers as are reasonably incidental thereto to carry out the purposes of this
Agreement.  It is understood that the handling of the Loan Account and
Collateral of the Borrowers in a combined fashion, as more fully set forth
herein, is done solely as an accommodation to the Borrowers in order to utilize
the collective borrowing powers of the Borrowers in the most efficient and
economical manner and at their request, and that neither the Agent nor the
Lenders shall incur liability to the Borrowers as a result hereof.  Each of the
Borrowers expects to derive benefit, directly or indirectly, from the handling
of the Loan Account and the Collateral in a combined fashion since the
successful operation of each Borrower is dependent on the continued successful
performance of the integrated group.  To induce the Agent and the Lenders to do
so, and in consideration thereof, each of the Borrowers hereby jointly and
severally agrees to indemnify the Indemnitees (as hereinafter defined) and hold
the Indemnitees harmless against any and all liability, expense, loss or claim
of damage or

                                      -79-
<PAGE>

injury, made against such Indemnitee by any of the Borrowers or by any third
party whosoever, arising from or incurred by reason of (a) the handling of the
Loan Account and Collateral of the Borrowers as herein provided, (b) the Agent
and the Lenders relying on any instructions of the Administrative Borrower, or
(c) any other action taken by the Agent or any Lender hereunder or under the
other Loan Documents.

          SECTION 11.14.   Indemnification.  In addition to each Loan Party's
                           ---------------
other Obligations under this Agreement, each Loan Party agrees to, jointly and
severally, defend, protect, indemnify and hold harmless the Agent, each Lender
and all of their respective officers, directors, employees, attorneys,
consultants and agents (collectively called the "Indemnitees") from and against
                                                 -----------
any and all losses, damages, liabilities, obligations, penalties, fees,
reasonable costs and expenses (including, without limitation, reasonable
attorneys' fees, costs and expenses) incurred by such Indemnitees, whether prior
to or from and after the Effective Date, whether direct, indirect or
consequential, as a result of or arising from or relating to or in connection
with any of the following:  (i) the negotiation, preparation, execution or
performance or enforcement of this Agreement, any other Loan Document or of any
other document executed in connection with the transactions contemplated by this
Agreement, (ii) the Agent's or any Lender's furnishing of funds to the Borrowers
under this Agreement, including, without limitation, the management of any such
Loans, (iii) any matter relating to the financing transactions contemplated by
this Agreement or the other Loan Documents or by any document executed in
connection with the transactions contemplated by this Agreement or the other
Loan Documents, or (iv) any claim, litigation, investigation or proceeding
relating to any of the foregoing, whether or not any Indemnitee is a party
thereto (collectively, the "Indemnified Matters"); provided, however, that the
                            -------------------    --------  -------
Loan Parties shall not have any obligation to any Indemnitee under this Section
11.14 for any Indemnified Matter caused by the gross negligence or willful
misconduct of such Indemnitee, as determined by a final judgment of a court of
competent jurisdiction.  Such indemnification for all of the foregoing losses,
damages, fees, costs and expenses of the Indemnitees are chargeable against the
Loan Account.  To the extent that the undertaking to indemnify, pay and hold
harmless set forth in this Section 11.14 may be unenforceable because it is
violative of any law or public policy, each Loan Party shall, jointly and
severally, contribute the maximum portion which it is permitted to pay and
satisfy under applicable law, to the payment and satisfaction of all Indemnified
Matters incurred by the Indemnitees.  This Indemnity shall survive the repayment
of the Obligations and the discharge of the Liens granted under the Loan
Documents.

          SECTION 11.15.   Records.  The unpaid principal of and interest on the
                           -------
Notes, the interest rate or rates applicable to such unpaid principal and
interest, the duration of such applicability, the Commitments, and the accrued
and unpaid fees payable pursuant to Section 2.06 hereof, including, without
limitation, the Closing Fee, Loan Servicing Fee, the Administration Fee and the
Unused Line Fee, shall at all times be ascertained from the records of the
Agent, which shall be conclusive and binding absent manifest error.

          SECTION 11.16.   Binding Effect.  This Agreement shall become
                           --------------
effective when it shall have been executed by the Parent, the Borrowers, the
Agent and each Lender and when the conditions precedent set forth in Section
5.01 hereof have been satisfied or waived in writing by the Agent or the Term
Loans have been made, and thereafter shall be binding upon and inure to the
benefit of the Borrowers, the Agent and each Lender, and their respective
successors and assigns (including, except for the right to request Loans, any
trustee succeeding to the rights of

                                      -80-
<PAGE>

the Borrowers pursuant to chapter 11 of the Bankruptcy Code or pursuant to any
conversion to a case under chapter 7 of the Bankruptcy Code), except that the
Borrowers shall not have the right to assign their rights hereunder or any
interest herein without the prior written consent of each Lender, and any
assignment by any Lender shall be governed by Section 11.07 hereof.

          SECTION 11.17   Interest.  It is the intention of the parties hereto
                          --------
that the Agent and each Lender shall conform strictly to usury laws applicable
to it.  Accordingly, if the transactions contemplated hereby or by any other
Loan Document would be usurious as to the Agent or any Lender under laws
applicable to it (including the laws of the United States of America and the
State of New York or any other jurisdiction whose laws may be mandatorily
applicable to the Agents or such Lender notwithstanding the other provisions of
this Agreement), then, in that event, notwithstanding anything to the contrary
in this Agreement or any other Loan Document or any agreement entered into in
connection with or as security for the Obligations, it is agreed as follows:
(i) the aggregate of all consideration which constitutes interest under law
applicable to the Agent or any Lender that is contracted for, taken, reserved,
charged or received by the Agent or such Lender under this Agreement or any
other Loan Document or agreements or otherwise in connection with the
Obligations shall under no circumstances exceed the maximum amount allowed by
such applicable law, any excess shall be canceled automatically and if
theretofore paid shall be credited by the Agent or such Lender on the principal
amount of the Obligations (or, to the extent that the principal amount of the
Obligations shall have been or would thereby be paid in full, refunded by the
Agent or such Lender, as applicable, to the Borrowers); and (ii) in the event
that the maturity of the Obligations is accelerated by reason of any Event of
Default under this Agreement or otherwise, or in the event of any required or
permitted prepayment, then such consideration that constitutes interest under
law applicable to the Agent or any Lender may never include more than the
maximum amount allowed by such applicable law, and excess interest, if any,
provided for in this Agreement or otherwise shall be canceled automatically by
the Agent or such Lender, as applicable, as of the date of such acceleration or
prepayment and, if theretofore paid, shall be credited by the Agent or such
Lender, as applicable, on the principal amount of the Obligations (or, to the
extent that the principal amount of the Obligations shall have been or would
thereby be paid in full, refunded by the Agent or such Lender to the Borrowers).
All sums paid or agreed to be paid to the Agent or any Lender for the use,
forbearance or detention of sums due hereunder shall, to the extent permitted by
law applicable to the Agent or such Lender, be amortized, prorated, allocated
and spread throughout the full term of the Loans until payment in full so that
the rate or amount of interest on account of any Loans hereunder does not exceed
the maximum amount allowed by such applicable law.  If at anytime and from time
to time (i) the amount of interest payable to the Agent or any Lender on any
date shall be computed at the Highest Lawful Rate applicable to the Agent or
such Lender pursuant to this Section 11.17 and (ii) in respect of any subsequent
interest computation period the amount of interest otherwise payable to the
Agent or such Lender would be less than the amount of interest payable to the
Agent or such Lender computed at the Highest Lawful Rate applicable to the Agent
or such Lender, then the amount of interest payable to the Agent or such Lender
in respect of such subsequent interest computation period shall continue to be
computed at the Highest Lawful Rate applicable to the Agent or such Lender until
the total amount of interest payable to the Agent or such Lender shall equal the
total amount of interest which would have been payable to the Agent or such
Lender if the total amount of interest had been computed without giving effect
to this Section 11.17.

                                      -81-
<PAGE>

          SECTION 11.18   Agent as Party in Interest.  Each of the Borrowers
                          --------------------------
hereby stipulates and agrees that the Agent is and shall remain a party in
interest in the Chapter 11 Cases and shall have the right to participate, object
and be heard in any motion or proceeding in connection therewith.  Nothing in
this Agreement or any other Loan Document shall be deemed to be a waiver of any
of the Agents' rights or remedies under applicable law or documentation.
Without limitation of the foregoing, the Agent shall have the right to make any
motion or raise any objection it deems to be in its interest (specifically
including but not limited to objections to use of proceeds of the Loans, to
payment of professional fees and expenses or the amount thereof, to sales or
other transactions outside the ordinary course of business or to assumption or
rejection of any executory contract or lease), provided that the Agent will not
                                               --------
exercise such right if the action or inaction by the Borrowers which is the
subject of such motion or objection is expressly permitted by any covenant or
provision of this Agreement.

                                      -82-
<PAGE>

          IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their respective officers thereunto duly authorized, as of the
date first above written.

                                        BORROWERS:
                                        ---------

                                        LERNOUT & HAUSPIE SPEECH
                                        PRODUCTS N.V.

                                        By: /s/ Philippe Bodson
                                           ---------------------------
                                           Name:  Philippe Bodson
                                           Title: President

                                        By:
                                           ---------------------------
                                           Name:
                                           Title:

                                        DICTAPHONE CORPORATION

                                        By: /s/ Philippe Bodson
                                           ---------------------------
                                           Name:  Philippe Bodson
                                           Title: President

                                        L&H HOLDINGS USA, INC.

                                        By: /s/ Philippe Bodson
                                           ---------------------------
                                           Name:  Philippe Bodson
                                           Title: President

                   [AGENT AND LENDER SIGNATURE PAGES FOLLOW]
<PAGE>

                                        AGENT AND LENDER:
                                        ----------------

                                        ABLECO FINANCE LLC

                                        By: /s/ Kevin Genda
                                            ---------------------------------
                                            Name:  Kevin Genda
                                            Title: Senior Vice President

<PAGE>

                               Schedule 1.01(B)

                       Lenders and Lenders' Commitments
                       --------------------------------

<TABLE>
<CAPTION>
                                           Term Loan A
         Lender                            Commitment                  Percentage
---------------------------------------------------------------------------------------
<S>                                 <C>                                <C>
     Ableco Finance LLC                     $30,000,000                 100.00%

                                           Term Loan B
         Lender                            Commitment                  Percentage
---------------------------------------------------------------------------------------

     Ableco Finance LLC                     $10,000,000                 100.00%

         Lender                     Revolving Credit Commitment        Percentage
---------------------------------------------------------------------------------------

     Ableco Finance LLC                     $20,000,000                 100.00%
</TABLE><PAGE>

                                                                  EXHIBIT 4.1(A)

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

               D.R. HORTON, INC. AND THE GUARANTORS PARTY HERETO

                   9.375% Senior Subordinated Notes due 2011

                            ______________________

                         Second Supplemental Indenture

                          Dated as of March 12, 2001

                            ______________________

                   AMERICAN STOCK TRANSFER & TRUST COMPANY,

                                    Trustee

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

          SECOND SUPPLEMENTAL INDENTURE dated as of March 12, 2001
("Supplemental Indenture"), to the Indenture dated as of September 11, 2000 (as
  ----------------------
amended, modified or supplemented from time to time in accordance therewith, the
"Indenture"), by and among D.R. HORTON, INC., a Delaware corporation (the
 ---------
"Company"), each of the Guarantors (as defined herein) and AMERICAN STOCK
 -------
TRANSFER & TRUST COMPANY, as trustee (the "Trustee").
                                           -------

          Each party agrees as follows for the benefit of the other party and
for the equal and ratable benefit of the Holders of Notes (as defined herein):

          WHEREAS, the Company, the Guarantors and the Trustee have duly
authorized the execution and delivery of the Indenture to provide for the
issuance from time to time of senior subordinated debt securities (the
"Securities") to be issued in one or more series as in the Indenture provided;
 ----------

          WHEREAS, the Company and the Guarantors desire and have requested the
Trustee to join them in the execution and delivery of this Supplemental
Indenture in order to establish and provide for the issuance by the Company of a
series of Securities designated as its 9.375% Senior Subordinated Notes due 2011
in the aggregate principal amount of up to $250.0 million, substantially in the
form attached hereto as Exhibit A (the "Notes"), guaranteed by the Guarantors,
                                        -----
on the terms set forth herein;

          WHEREAS, Section 2.01 of the Indenture provides that a supplemental
indenture may be entered into by the Company, the Guarantors and the Trustee for
such purpose provided certain conditions are met;

          WHEREAS, the conditions set forth in the Indenture for the execution
and delivery of this Supplemental Indenture have been complied with; and

          WHEREAS, all things necessary to make this Supplemental Indenture a
valid agreement of the Company, the Guarantors and the Trustee, in accordance
with its terms, and a valid amendment of, and supplement to, the Indenture have
been done;

          NOW, THEREFORE:

          In consideration of the premises and the purchase and acceptance of
the Notes by the Holders thereof the Company and the Guarantors mutually
covenant and agree with the Trustee, for the equal and ratable benefit of the
Holders, that the Indenture is supplemented and amended, to the extent expressed
herein, as follows:
<PAGE>

                                      -2-

                                  ARTICLE ONE

                   Scope of Supplemental Indenture; General

          The changes, modifications and supplements to the Indenture effected
by this Supplemental Indenture shall be applicable only with respect to, and
govern the terms of, the Notes, which shall be limited in aggregate principal
amount to $250.0 million in one or more series, and shall not apply to any other
Securities that may be issued under the Indenture unless a supplemental
indenture with respect to such other Securities specifically incorporates such
changes, modifications and supplements. Pursuant to this Supplemental Indenture,
there is hereby created and designated a series of Securities under the
Indenture entitled "9.375% Senior Subordinated Notes due 2011." The Notes shall
be in the form of Exhibit A hereto. The Notes shall be guaranteed by the
                  ---------
Guarantors as provided in such form and the Indenture. If required, the Notes
may bear an appropriate legend regarding original issue discount for federal
income tax purposes.

          In the event that the Company shall issue and the Trustee shall
authenticate any Notes issued under this Supplemental Indenture subsequent to
the Issue Date (such Notes, "Additional Securities"), the Company shall use its
                             ---------------------
best efforts to obtain the same "CUSIP" number for such Notes as is printed on
the Notes outstanding at such time; provided, however, that if any series of
                                    --------  -------
Notes issued under this Supplemental Indenture subsequent to the Issue Date is
determined, pursuant to an Opinion of Counsel of the Company in a form
reasonably satisfactory to the Trustee, to be a different class of security than
the Notes outstanding at such time for federal income tax purposes, the Company
may obtain a "CUSIP" number for such Notes that is different than the "CUSIP"
number printed on the Notes then outstanding. Notwithstanding the foregoing, all
Notes issued under this Supplemental Indenture shall vote and consent together
on all matters as one class and no series of Notes will have the right to vote
or consent as a separate class on any matter.

          In the event that less than all of the Notes are to be redeemed at any
time pursuant to an optional redemption, selection of the Notes for redemption
will be made by the Trustee in compliance with the requirements of the principal
national securities exchange, if any, on which the Notes are listed or, if the
Notes are not then listed on a national security exchange, on a pro rata basis,
by lot or by such method as the Trustee shall deem fair and appropriate. In
addition, if a partial redemption is made pursuant to paragraph 5(b) of the
Notes, selection of the Notes or portions thereof for redemption shall be made
by the Trustee only on a pro rata basis or on as nearly a optional redemption
basis as is practicable (subject to the procedures of the Depository Trust
Company), unless that method is otherwise prohibited.
<PAGE>

                                      -3-

                                  ARTICLE TWO

                              Certain Definitions

          The following terms have the meanings set forth below in this
Supplemental Indenture. Capitalized terms used but not defined herein have the
meanings ascribed to such terms in the Indenture. To the extent terms defined
herein differ from the Indenture, the terms herein will govern.

          "Acquired Indebtedness" means (i) with respect to any Person that
           ---------------------
becomes a Restricted Subsidiary (or is merged into the Company or any Restricted
Subsidiary) after the Issue Date, Indebtedness of such Person or any of its
Subsidiaries existing at the time such Person becomes a Restricted Subsidiary
(or is merged into the Company or any Restricted Subsidiary) that was not
incurred in connection with, or in contemplation of, such Person becoming a
Restricted Subsidiary (or being merged into the Company or any Restricted
Subsidiary) and (ii) with respect to the Company or any Restricted Subsidiary,
any Indebtedness expressly assumed by the Company or any Restricted Subsidiary
in connection with the acquisition of any assets from another Person (other than
the Company or any Restricted Subsidiary), which Indebtedness was not incurred
by such other Person in connection with or in contemplation of such acquisition.
Indebtedness incurred in connection with or in contemplation of any transaction
described in clause (i) or (ii) of the preceding sentence shall be deemed to
have been incurred by the Company or a Restricted Subsidiary, as the case may
be, at the time such Person becomes a Restricted Subsidiary (or is merged into
the Company or any Restricted Subsidiary) in the case of clause (i) or at the
time of the acquisition of such assets in the case of clause (ii), but shall not
be deemed Acquired Indebtedness.

          "Affiliate" means, when used with reference to a specified Person, any
           ---------
Person directly or indirectly controlling or controlled by or under direct or
indirect common control with the Person specified.

          "Asset Acquisition" means (i) an Investment by the Company or any
           -----------------
Restricted Subsidiary in any other Person if, as a result of such Investment,
such Person shall become a Restricted Subsidiary or shall be consolidated or
merged with or into the Company or any Restricted Subsidiary or (ii) the
acquisition by the Company or any Restricted Subsidiary of the assets of any
Person, which constitute all or substantially all of the assets or of an
operating unit or line of business of such Person or which is otherwise outside
the ordinary course of business.

          "Asset Disposition" means any sale, transfer, conveyance, lease or
           -----------------
other disposition (including, without limitation, by way of merger,
consolidation or sale and leaseback or sale of shares of Capital Stock in any
Subsidiary) (each, a "transaction") by the Company or any Restricted Subsidiary
                      -----------
to any Person of any Property having a fair market value in any transaction or
series of related transactions of at least $10.0 million. The term "Asset Dispo-
                                                                    ------------
<PAGE>

                                      -4-

sition" shall not include (i) a transaction between the Company and any
------
Restricted Subsidiary or a transaction between Restricted Subsidiaries, (ii) a
transaction in the ordinary course of business, including, without limitation,
sales (directly or indirectly), dedications and other donations to governmental
authorities, leases and sales and leasebacks of (A) homes, improved land and
unimproved land and (B) real estate (including related amenities and
improvements), (iii) a transaction involving the sale of Capital Stock of, or
the disposition of assets in, an Unrestricted Subsidiary, (iv) any exchange or
swap of assets of the Company or any Restricted Subsidiary for assets that (x)
are to be used by the Company or any Restricted Subsidiary in the ordinary
course of its Real Estate Business and (y) have a Fair Market Value not less
than the Fair Market Value of the assets exchanged or swapped, (v) any sale,
transfer, conveyance, lease or other disposition of assets and properties of the
Company that is governed by Section 3.08 hereof, or (vi) dispositions of
mortgage loans and related assets and mortgage-backed securities in the ordinary
course of a mortgage lending business.

          "Attributable Debt" means, with respect to any Capitalized Lease
           -----------------
Obligations, the capitalized amount thereof determined in accordance with GAAP.

          "Bankruptcy Law" means title 11 of the United States Code, as amended,
           --------------
or any similar federal or state law for the relief of debtors.

          "Capital Stock" means, with respect to any Person, any and all shares,
           -------------
interests, participations or other equivalents (however designated) of or in
such Person's capital stock or other equity interests, and options, rights or
warrants to purchase such capital stock or other equity interests, whether now
outstanding or issued after the Issue Date, including, without limitation, all
Disqualified Stock and Preferred Stock.

          "Capitalized Lease Obligations" of any Person means the obligations of
           -----------------------------
such Person to pay rent or other amounts under a lease that is required to be
capitalized for financial reporting purposes in accordance with GAAP, and the
amount of such obligations will be the capitalized amount thereof determined in
accordance with GAAP.

          "Cash Equivalents" means:  (a) U.S. dollars; (b) securities issued or
           ----------------
directly and fully guaranteed or insured by the U.S. government or any agency or
instrumentality thereof having maturities of one year or less from the date of
acquisition; (c) certificates of deposit and eurodollar time deposits with
maturities of one year or less from the date of acquisition, bankers'
acceptances with maturities not exceeding six months and overnight bank
deposits, in each case with any domestic commercial bank having capital and
surplus in excess of $500.0 million; (d) repurchase obligations with a term of
not more than seven days for underlying securities of the types described in
clauses (b) and (c) entered into with any financial institution meeting the
qualifications specified in clause (c) above; (e) commercial paper rated P-1, A-
1 or the equivalent thereof by Moody's Investors Service, Inc. or Standard &
Poor's Ratings Group, respectively, and in each case maturing within six months
after the date of ac-
<PAGE>

                                      -5-

quisition; and (f) investments in money market funds substantially all of the
assets of which consist of securities described in the foregoing clauses (a)
through (e).

          "Change of Control" means (i) any sale, lease or other transfer (in
           -----------------
one transaction or a series of transactions) of all or substantially all of the
consolidated assets of the Company and its Restricted Subsidiaries to any Person
(other than a Restricted Subsidiary); provided, however, that a transaction
                                      --------  -------
where the Holders of all classes of Common Equity of the Company immediately
prior to such transaction own, directly or indirectly, more than 50% of all
classes of Common Equity of such Person immediately after such transaction shall
not be a Change of Control; (ii) a "person" or "group" (within the meaning of
Section 13(d) of the Exchange Act (other than (x) the Company or (y) Donald R.
Horton, Terrill J. Horton, or their respective wives, children, grandchildren
and other descendants, or any trust or other entity formed or controlled by any
of such individuals)) becomes the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act) of Common Equity of the Company representing more than
50% of the voting power of the Common Equity of the Company; (iii) Continuing
Directors cease to constitute at least a majority of the Board of Directors of
the Company; or (iv) the stockholders of the Company approve any plan or
proposal for the liquidation or dissolution of the Company; provided, however,
                                                            --------  -------
that a liquidation or dissolution of the Company which is part of a transaction
that does not constitute a Change of Control under the proviso contained in
clause (i) above shall not constitute a Change of Control.

          "Common Equity" of any Person means Capital Stock of such Person that
           -------------
is generally entitled to (i) vote in the election of directors of such Person or
(ii) if such Person is not a corporation, vote or otherwise participate in the
selection of the governing body, partners, managers or others that will control
the management or policies of such Person.

          "Consolidated Adjusted Tangible Assets" of the Company as of any date
           -------------------------------------
means the Consolidated Tangible Assets of the Company and the Restricted
Subsidiaries at the end of the fiscal quarter immediately preceding the date
less any assets securing any Non-Recourse Indebtedness, as determined in
accordance with GAAP.

          "Consolidated Cash Flow Available for Fixed Charges" means, for any
           --------------------------------------------------
period, on a consolidated basis for the Company and the Restricted Subsidiaries,
Consolidated Net Income for such period plus (each to the extent deducted in
calculating such Consolidated Net Income and determined in accordance with GAAP)
(a) the sum for such period, without duplication, of (i) income taxes, (ii)
Consolidated Interest Expense, (iii) depreciation and amortization expenses and
other non-cash charges to earnings and (iv) interest and financing fees and
expenses which were previously capitalized and which are amortized to cost of
sales, minus (b) all other non-cash items (other than the receipt of notes
receivable) increasing such Consolidated Net Income.

          "Consolidated Fixed Charge Coverage Ratio"  means, with respect to any
           ----------------------------------------
determination date, the ratio of (x) Consolidated Cash Flow Available for Fixed
Charges for the
<PAGE>

                                      -6-

prior four full fiscal quarters (the "Four Quarter Period") for which financial
                                      -------------------
results have been reported immediately preceding the determination date (the
"Transaction Date"), to (y) the aggregate Consolidated Interest Incurred for the
 ----------------
Four Quarter Period. For purposes of this definition, "Consolidated Cash Flow
Available for Fixed Charges" and "Consolidated Interest Incurred" shall be
calculated after giving effect on a pro forma basis for the period of such
                                    --- -----
calculation to (i) the incurrence or the repayment, repurchase, defeasance or
other discharge or the assumption by another Person that is not an Affiliate
(collectively, "repayment") of any Indebtedness of the Company or any Restricted
                ---------
Subsidiary (and the application of the proceeds thereof) giving rise to the need
to make such calculation, and any incurrence or repayment of other Indebtedness
(and the application of the proceeds thereof), at any time on or after the first
day of the Four Quarter Period and on or prior to the Transaction Date, as if
such incurrence or repayment, as the case may be (and the application of the
proceeds thereof), occurred on the first day of the Four Quarter Period, except
that Indebtedness under revolving credit facilities shall be deemed to be the
average daily balance of such Indebtedness during the Four Quarter Period (as
reduced on such pro forma basis by the application of any proceeds of the
                --- -----
incurrence of Indebtedness giving rise to the need to make such calculation);
(ii) any Asset Disposition or Asset Acquisition (including, without limitation,
any Asset Acquisition giving rise to the need to make such calculation as a
result of the Company or any Restricted Subsidiary (including any Person that
becomes a Restricted Subsidiary as a result of any such Asset Acquisition)
incurring Acquired Indebtedness at any time on or after the first day of the
Four Quarter Period and on or prior to the Transaction Date), as if such Asset
Disposition or Asset Acquisition (including the incurrence or repayment of any
such Indebtedness) and the inclusion, notwithstanding clause (ii) of the
definition of "Consolidated Net Income," of any Consolidated Cash Flow Available
for Fixed Charges associated with such Asset Acquisition as if it occurred on
the first day of the Four Quarter Period; provided, however, that the
                                          --------  -------
Consolidated Cash Flow Available for Fixed Charges associated with any Asset
Acquisition shall not be included to the extent the net income so associated
would be excluded pursuant to the definition of "Consolidated Net Income," other
than clause (ii) thereof, as if it applied to the Person or assets involved
before they were acquired; and (iii) the Consolidated Cash Flow Available for
Fixed Charges and the Consolidated Interest Incurred attributable to
discontinued operations, as determined in accordance with GAAP, shall be
excluded. Furthermore, in calculating "Consolidated Cash Flow Available for
Fixed Charges" for purposes of determining the denominator (but not the
numerator) of this "Consolidated Fixed Charge Coverage Ratio," (1) interest on
Indebtedness in respect of which a pro forma calculation is required that is
                                   --- -----
determined on a fluctuating basis as of the Transaction Date (including
Indebtedness actually incurred on the Transaction Date) and which will continue
to be so determined thereafter shall be deemed to have accrued at a fixed rate
per annum equal to the rate of interest on such Indebtedness in effect on the
--- -----
Transaction Date; and (2) notwithstanding clause (1) above, interest on such
Indebtedness determined on a fluctuating basis, to the extent such interest is
covered by agreements relating to Interest Protection Agreements, shall be
deemed to accrue at the rate per annum resulting after giving effect to the
                             --- -----
operation of such agreements.
<PAGE>

                                      -7-

          "Consolidated Interest Expense" of the Company for any period means
           -----------------------------
the Interest Expense of the Company and the Restricted Subsidiaries for such
period, determined on a consolidated basis in accordance with GAAP.

          "Consolidated Interest Incurred" for any period means the Interest
           ------------------------------
Incurred of the Company and the Restricted Subsidiaries for such period,
determined on a consolidated basis in accordance with GAAP.

          "Consolidated Net Income" for any period means the aggregate net
           -----------------------
income (or loss) of the Company and its Subsidiaries for such period, determined
on a consolidated basis in accordance with GAAP; provided that there will be
                                                 --------
excluded from such net income (loss) (to the extent otherwise included therein),
without duplication: (i) the net income (or loss) of (x) any Unrestricted
Subsidiary (other than a Mortgage Subsidiary) or (y) any Person (other than a
Restricted Subsidiary) in which any Person other than the Company or any
Restricted Subsidiary has an ownership interest, except, in each case, to the
extent that any such income has actually been received by the Company or any
Restricted Subsidiary in the form of cash dividends or similar cash
distributions during such period, which dividends or distributions are not in
excess of the Company's or such Restricted Subsidiary's (as applicable) pro rata
share of such Unrestricted Subsidiary's or such other Person's net income earned
during such period, (ii) except to the extent includable in Consolidated Net
Income pursuant to the foregoing clause (i), the net income (or loss) of any
Person that accrued prior to the date that (a) such Person becomes a Restricted
Subsidiary or is merged with or into or consolidated with the Company or any of
its Restricted Subsidiaries (except, in the case of an Unrestricted Subsidiary
that is redesignated a Restricted Subsidiary during such period, to the extent
of its retained earnings from the beginning of such period to the date of such
redesignation) or (b) the assets of such Person are acquired by the Company or
any Restricted Subsidiary, (iii) the net income of any Restricted Subsidiary to
the extent that (but only so long as) the declaration or payment of dividends or
similar distributions by such Restricted Subsidiary of that income is not
permitted by operation of the terms of its charter or any agreement, instrument,
judgment, decree, order, statute, rule or governmental regulation applicable to
that Restricted Subsidiary during such period, (iv) the gains or losses,
together with any related provision for taxes, realized during such period by
the Company or any Restricted Subsidiary resulting from (a) the acquisition of
securities, or extinguishment of Indebtedness, of the Company or any Restricted
Subsidiary or (b) any Asset Disposition by the Company or any Restricted
Subsidiary, (v) any extraordinary gain or loss together with any related
provision for taxes, realized by the Company or any Restricted Subsidiary, and
(vi) any non-recurring expense recorded by the Company or any Restricted
Subsidiary in connection with a merger accounted for as a "pooling-of-interests"
transaction; provided, further, that for purposes of calculating Consolidated
             --------  -------
Net Income solely as it relates to clause (iii) of Section 3.04(a) hereof,
clause (iv)(b) above shall not be applicable.
<PAGE>

                                      -8-

          "Consolidated Net Worth" of any Person as of any date means the
           ----------------------
stockholders' equity (including any Preferred Stock that is classified as equity
under GAAP, other than Disqualified Stock) of such Person and its Restricted
Subsidiaries on a consolidated basis at the end of the fiscal quarter
immediately preceding such date, as determined in accordance with GAAP, less any
amount attributable to Unrestricted Subsidiaries.

          "Consolidated Tangible Assets" of the Company as of any date means the
           ----------------------------
total amount of assets of the Company and its Restricted Subsidiaries (less
applicable reserves) on a consolidated basis at the end of the fiscal quarter
immediately preceding such date, as determined in accordance with GAAP, less (1)
Intangible Assets and (2) appropriate adjustments on account of minority
interests of other Persons holding equity investments in Restricted
Subsidiaries.

          "Continuing Director" means a director who either was a member of the
           -------------------
Board of Directors of the Company on the date of the Indenture or who became a
director of the Company subsequent to such date and whose election, or
nomination for election by the Company's stockholders, was duly approved by a
majority of the Continuing Directors on the Board of Directors of the Company at
the time of such approval, either by a specific vote or by approval of the proxy
statement issued by the Company on behalf of the entire Board of Directors of
the Company in which such individual is named as nominee for director.

          "control", when used with respect to any Person, means the power to
           -------
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
               -----------       ----------
foregoing.

          "Credit Facilities" means, collectively, each of the credit facilities
           -----------------
and guidance lines of credit of the Company or one or more Restricted
Subsidiaries in existence on the date of this Supplemental Indenture and one or
more other facilities or guidance lines of credit among or between the Company
or one or more Restricted Subsidiaries and one or more lenders pursuant to which
the Company or any Restricted Subsidiary may incur indebtedness for working
capital and general corporate purposes (including acquisitions), as any such
facility or line of credit may be amended, restated, supplemented or otherwise
modified from time to time, and includes any agreement extending the maturity
of, increasing the amount of, or restructuring, all or any portion of the
Indebtedness under such facility or line of credit or any successor facilities
or lines of credit and includes any facility or line of credit with one or more
lenders refinancing or replacing all or any portion of the Indebtedness under
such facility or line of credit or any successor facility or line of credit.

          "Currency Agreement" of any Person means any foreign exchange
           ------------------
contract, currency swap agreement or other similar agreement or arrangement
designed to protect such Person or any of its Subsidiaries against fluctuations
in currency values.
<PAGE>

                                      -9-

          "Custodian" means any receiver, trustee, assignee, liquidator or
           ---------
similar official under any Bankruptcy Law.

          "Default" means any event, act or condition that is, or after notice
           -------
or the passage of time or both would be, an Event of Default.

          "Designation Amount" has the meaning provided in the definition of
           ------------------
Unrestricted Subsidiary.

          "Disqualified Stock" means any Capital Stock that, by its terms (or by
           ------------------
the terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, (i) matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable
at the option of the Holder thereof, in whole or in part, on or prior to the
final maturity date of the Notes or (ii) is convertible into or exchangeable or
exercisable for (whether at the option of the issuer or the Holder thereof) (a)
debt securities or (b) any Capital Stock referred to in (i) above, in each case,
at any time prior to the final maturity date of the Notes provided, however,
                                                          --------  -------
that any Capital Stock that would not constitute Disqualified Stock but for
provisions thereof giving Holders thereof (or the Holders of any security into
or for which such Capital Stock is convertible, exchangeable or exercisable) the
right to require the Company to repurchase or redeem such Capital Stock upon the
occurrence of a change in control occurring prior to the final maturity date of
the Notes shall not constitute Disqualified Stock if the change in control
provisions applicable to such Capital Stock are no more favorable to such
Holders than Section 3.01 hereof and such Capital Stock specifically provides
that the Company will not repurchase or redeem any such Capital Stock pursuant
to such provisions prior to the Company's repurchase of the Notes as are
required pursuant to Section 3.01 hereof.

          "Dollars" and "$" mean United States Dollars.
           -------       -

          "Fair Market Value" means, with respect to any asset, the price (after
           -----------------
taking into account any liabilities relating to such assets) that would be
negotiated in an arm's-length transaction for cash between a willing seller and
a willing and able buyer, neither of which is under any compulsion to complete
the transaction, as such price is determined in good faith by the Board of
Directors of the Company or a duly authorized committee thereof, as evidenced by
a resolution of such Board or committee.

          "GAAP" means generally accepted accounting principles set forth in the
           ----
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States, as in effect on the date of this Supplemental
Indenture.
<PAGE>

                                     -10-

          "Guarantors" means (i) initially, each of:
           ----------

     DRHI, Inc., a Delaware corporation;
     Meadows I, Ltd., a Delaware corporation;
     Meadows II, Ltd., a Delaware corporation;
     Meadows IX, Inc., a New Jersey corporation;
     Meadows X, Inc., a New Jersey corporation;
     D.R. Horton, Inc.-Minnesota, a Delaware corporation;
     D.R. Horton, Inc. - Greensboro, a Delaware corporation;
     D.R. Horton, Inc. - Birmingham, an Alabama corporation;
     D.R. Horton, Inc. - Chicago, a Delaware corporation;
     D.R. Horton, Inc. - San Diego, a Delaware corporation;
     D.R. Horton, Inc. - New Jersey, a Delaware corporation;
     D.R. Horton, Inc. - Torrey, a Delaware corporation;
     DRH Construction, Inc., a Delaware corporation;
     D.R. Horton, Inc. - Louisville, a Delaware corporation;
     D.R. Horton, Inc. - Denver, a Delaware corporation;
     D.R. Horton San Diego Holding Company, Inc., a California corporation;
     D.R. Horton Los Angeles Holding Company, Inc., a California corporation;
     SGS Communities at Grande Quay, L.L.C., a New Jersey limited liability
     company;
     D.R. Horton Management Company, Ltd., a Texas limited partnership;
     D.R. Horton-Texas, Ltd., a Texas limited partnership;
     D.R. Horton, Inc. - Sacramento, a California corporation;
     DRH Cambridge Homes, Inc., a California corporation;
     C. Richard Dobson Builders, Inc., a Virginia corporation;
     DRH Tucson Construction, Inc., a Delaware corporation;
     Continental Homes, Inc., a Delaware corporation;
     KDB Homes, Inc., a Delaware corporation;
     Continental Residential, Inc., a Delaware corporation;
     Continental Homes of Florida, Inc., a Florida corporation;
     CHI Construction Company, an Arizona corporation;
     CHTEX of Texas, Inc., a Delaware corporation;
     CH Investments of Texas, Inc., a Delaware corporation;
     Continental Homes of Texas, L.P., a Texas limited partnership;
     D.R. Horton, Inc. - Portland, a Delaware corporation;

and (ii) each of the Company's Subsidiaries which becomes a guarantor of the
Notes pursuant to the provisions of the Indenture.

          "Holder" means the Person in whose name a Note is registered in the
           ------
books of the Registrar for the Notes.
<PAGE>

                                     -11-

          "Indebtedness" of any Person means, without duplication, (i) any
           ------------
liability of such Person (a) for borrowed money or under any reimbursement
obligation relating to a letter of credit or other similar instruments (other
than standby letters of credit or similar instruments issued for the benefit of
or surety, performance, completion or payment bonds, earnest money notes or
similar purpose undertakings or indemnifications issued by, such Person in the
ordinary course of business), (b) evidenced by a bond, note, debenture or
similar instrument (including a purchase money obligation) given in connection
with the acquisition of any businesses, properties or assets of any kind or with
services incurred in connection with capital expenditures (other than any
obligation to pay a contingent purchase price which, as of the date of
incurrence thereof is not required to be recorded as a liability in accordance
with GAAP), or (c) in respect of Capitalized Lease Obligations (to the extent of
the Attributable Debt in respect thereof), (ii) any Indebtedness of others that
such Person has guaranteed to the extent of the guarantee, (iii) to the extent
not otherwise included, the obligations of such Person under Currency Agreements
or Interest Protection Agreements to the extent recorded as liabilities not
constituting Interest Incurred, net of amounts recorded as assets in respect of
such agreements, in accordance with GAAP, and (iv) all Indebtedness of others
secured by a Lien on any asset of such Person, whether or not such Indebtedness
is assumed by such Person; provided, that Indebtedness shall not include
                           --------
accounts payable, liabilities to trade creditors of such Person or other accrued
expenses arising in the ordinary course of business. The amount of Indebtedness
of any Person at any date shall be (a) the outstanding balance at such date of
all unconditional obligations as described above, net of any unamortized
discount to be accounted for as Interest Expense, in accordance with GAAP, (b)
the maximum liability of such Person for any contingent obligations under clause
(ii) above at such date, net of any unamortized discount to be accounted for as
Interest Expense in accordance with GAAP and (c) in the case of clause (iv)
above, the lesser of (1) the fair market value of any asset subject to a Lien
securing the Indebtedness of others on the date that the Lien attaches and (2)
the amount of the Indebtedness secured.

          "Intangible Assets" of the Company means all unamortized debt discount
           -----------------
and expense, unamortized deferred charges, goodwill, patents, trademarks,
service marks, trade names, copyrights, write-ups of assets over their prior
carrying value (other than write-ups which occurred prior to the Issue Date and
other than, in connection with the acquisition of an asset, the write-up of the
value of such asset (within one year of its acquisition) to its fair market
value in accordance with GAAP) and all other items which would be treated as
intangibles on the consolidated balance sheet of the Company and the Restricted
Subsidiaries prepared in accordance with GAAP.

          "Interest Expense" of any Person for any period means, without
           ----------------
duplication, the aggregate amount of (i) interest which, in conformity with
GAAP, would be set opposite the caption "interest expense" or any like caption
on an income statement for such Person (including, without limitation, imputed
interest included in Capitalized Lease Obligations, all commissions, discounts
and other fees and charges owed with respect to letters of credit and
<PAGE>

                                     -12-

bankers' acceptance financing, the net costs (but reduced by net gains)
associated with Currency Agreements and Interest Protection Agreements,
amortization of other financing fees and expenses, the interest portion of any
deferred payment obligation, amortization of discount or premium, if any, and
all other noncash interest expense other than interest and other charges
amortized to cost of sales), and (ii) all interest actually paid by the Company
or a Restricted Subsidiary under any guarantee of Indebtedness (including,
without limitation, a guarantee of principal, interest or any combination
thereof) of any Person other than the Company or any Restricted Subsidiary
during such period; provided, that Interest Expense shall exclude any expense
                    --------
associated with the complete write-off of financing fees and expenses in
connection with the repayment of any Indebtedness.

          "Interest Incurred" of any Person for any period means, without
           -----------------
duplication, the aggregate amount of (i) Interest Expense and (ii) all
capitalized interest and amortized debt issuance costs.

          "Interest Protection Agreement" of any Person means any interest rate
           -----------------------------
swap agreement, interest rate collar agreement, option or futures contract or
other similar agreement or arrangement designed to protect such Person or any of
its Subsidiaries against fluctuations in interest rates with respect to
Indebtedness permitted to be incurred under this Supplemental Indenture.

          "Investment Grade" shall mean BBB- or higher by S&P or Baa3 or higher
           ----------------
by Moody's or the equivalent of such ratings by S&P or Moody's.

          "Investments" of any Person means (i) all investments by such Person
           -----------
in any other Person in the form of loans, advances or capital contributions,
(ii) all guarantees of Indebtedness or other obligations of any other Person by
such Person, (iii) all purchases (or other acquisitions for consideration) by
such Person of Indebtedness, Capital Stock or other securities of any other
Person and (iv) all other items that would be classified as investments in any
other Person (including, without limitation, purchases of assets outside the
ordinary course of business) on a balance sheet of such Person prepared in
accordance with GAAP.

          "Issue Date" means the first date on which the Notes are issued under
           ----------
this Supplemental Indenture.

          "Lien" means, with respect to any Property, any mortgage, lien,
           ----
pledge, charge, security interest or encumbrance of any kind in respect of such
Property. For purposes of this definition, a Person shall be deemed to own,
subject to a Lien, any Property which it has acquired or holds subject to the
interest of a vendor or lessor under any conditional sale agreement, capital
lease or other title retention agreement relating to such Property.

          "Marketable Securities" means (a) equity securities that are listed on
           ---------------------
the New York Stock Exchange, the American Stock Exchange or The Nasdaq National
Market and (b)
<PAGE>

                                     -13-

debt securities that are rated by a nationally recognized rating agency, listed
on the New York Stock Exchange or the American Stock Exchange or covered by at
least two reputable market makers.

          "Moody's" means Moody's Investors Service, Inc. or any successor to
           -------
its debt rating business.

          "Mortgage Subsidiary" means any Subsidiary of the Company
           -------------------
substantially all of whose operations consist of the mortgage lending business.

          "Net Cash Proceeds" means, with respect to an Asset Disposition, cash
           -----------------
payments received (including any cash payments received by way of deferred
payment of principal pursuant to a note or installment receivable or otherwise
(including any cash received upon sale or disposition of such note or
receivable), but only as and when received), excluding any other consideration
received in the form of assumption by the acquiring Person of Indebtedness or
other obligations relating to the Property disposed of in such Asset Disposition
or received in any other non-cash form unless and until such non-cash
consideration is converted into cash therefrom, in each case, net of all legal,
title and recording tax expenses, commissions and other fees and expenses
incurred, and all federal, state and local taxes required to be accrued as a
liability under GAAP as a consequence of such Asset Disposition, and in each
case net of a reasonable reserve for the after-tax cost of any indemnification
or other payments (fixed and contingent) attributable to the seller's
indemnities or other obligations to the purchaser undertaken by the Company or
any of its Restricted Subsidiaries in connection with such Asset Disposition,
and net of all payments made on any Indebtedness which is secured by or relates
to such Property, in accordance with the terms of any Lien or agreement upon or
with respect to such Property or which must by its terms or by applicable law be
repaid out of the proceeds from such Asset Disposition, and net of all
contractually required distributions and payments made to minority interest
holders in Restricted Subsidiaries or joint ventures as a result of such Asset
Disposition.

          "Non-Recourse Indebtedness" with respect to any Person means
           -------------------------
Indebtedness of such Person for which (i) the sole legal recourse for collection
of principal and interest on such Indebtedness is against the specific property
identified in the instruments evidencing or securing such Indebtedness and such
property was acquired with the proceeds of such Indebtedness or such
Indebtedness was incurred within 90 days after the acquisition of such property
and (ii) no other assets of such Person may be realized upon in collection of
principal or interest on such Indebtedness. Indebtedness which is otherwise Non-
Recourse Indebtedness will not lose its character as Non-Recourse Indebtedness
because there is recourse to the borrower, any guarantor or any other Person for
(i) environmental warranties and indemnities, or (ii) indemnities for and
liabilities arising from fraud, misrepresentation, misapplication or non-payment
of rents, profits, insurance and condemnation proceeds and other sums actually
<PAGE>

                                     -14-

received by the borrower from secured assets to be paid to the lender, waste and
mechanics' liens.

          "Permitted Indebtedness" means (i) Indebtedness under Credit
           ----------------------
Facilities which does not exceed $1.0 billion aggregate principal amount
outstanding at any one time; (ii) Indebtedness in respect of obligations of the
Company and its Subsidiaries to the trustees under indentures for debt
securities; (iii) intercompany debt obligations of the Company to any Restricted
Subsidiary and of any Restricted Subsidiary to the Company or any other
Restricted Subsidiary; provided, however, that any Indebtedness of any
                       --------  -------
Restricted Subsidiary or the Company owed to any Restricted Subsidiary that
ceases to be a Restricted Subsidiary shall be deemed to be incurred and shall be
treated as an incurrence for purposes of Section 3.02(a) at the time the
Restricted Subsidiary in question ceases to be a Restricted Subsidiary; (iv)
Indebtedness of the Company or any Restricted Subsidiary under any Currency
Agreements or Interest Protection Agreements in a notional amount no greater
than the payments due (at the time the related Currency Agreement or Interest
Protection Agreement is entered into) with respect to the Indebtedness or
currency being hedged; (v) Purchase Money Indebtedness; (vi) Capitalized Lease
Obligations; (vii) obligations for, pledge of assets in respect of, and
guaranties of, bond financings of political subdivisions or enterprises thereof
in the ordinary course of business; (viii) Indebtedness secured only by office
buildings owned or occupied by the Company or any Restricted Subsidiary, which
Indebtedness does not exceed $20.0 million aggregate principal amount
outstanding at any one time; (ix) Indebtedness under warehouse lines of credit,
repurchase agreements and Indebtedness secured by mortgage loans and related
assets of mortgage lending Subsidiaries in the ordinary course of a mortgage
lending business; and (x) Indebtedness of the Company or any Restricted
Subsidiary which, together with all other Indebtedness under this clause (x),
does not exceed $30 million aggregate principal amount outstanding at any one
time.

          "Permitted Investment" means (i) Cash Equivalents; (ii) any Investment
           --------------------
in the Company or any Restricted Subsidiary or any Person that becomes a
Restricted Subsidiary as a result of such Investment or that is consolidated or
merged with or into, or transfers all or substantially all of the assets of it
or an operating unit or line of business to, the Company or a Restricted
Subsidiary; (iii) any receivables, loans or other consideration taken by the
Company or any Restricted Subsidiary in connection with any asset sale otherwise
permitted by the Indenture; (iv) Investments received in connection with any
bankruptcy or reorganization proceeding, or as a result of foreclosure,
perfection or enforcement of any Lien or any judgment or settlement of any
Person in exchange for or satisfaction of Indebtedness or other obligations or
other property received from such Person, or for other liabilities or
obligations of such Person created, in accordance with the terms of the
Indenture; (v) Investments in Currency Agreements or Interest Protection
Agreements described in the definition of Permitted Indebtedness; (vi) any loan
or advance to an executive officer or director of the Company or any Restricted
Subsidiary made in the ordinary course of business; provided, however, that any
                                                    --------  -------
such loan or advance exceeding $1.0 million shall have been approved by the
Board of
<PAGE>

                                     -15-

Directors of the Company or a committee thereof consisting of disinterested
members; (vii) Investments in joint ventures in a Real Estate Business with
unaffiliated third parties in an aggregate amount at any time outstanding not to
exceed 10% of Consolidated Tangible Assets at such time; (viii) Investments in
interests in issuances of collateralized mortgage obligations, mortgages,
mortgage loan servicing or other mortgage related assets; and (ix) Investments
in an aggregate amount outstanding not to exceed $100.0 million.

          "Permitted Liens" means: (1)  Liens for taxes, assessments or
           ---------------
governmental or quasi-government charges or claims that (a) are not yet
delinquent, (b) are being contested in good faith by appropriate proceedings and
as to which appropriate reserves have been established or other provisions have
been made in accordance with GAAP, if required, or (c) encumber solely property
abandoned or in the process of being abandoned, (2) statutory Liens of landlords
and carriers', warehousemen's, mechanics', suppliers', materialmen's,
repairmen's or other Liens imposed by law and arising in the ordinary course of
business and with respect to amounts that, to the extent applicable, either (a)
are not yet delinquent or (b) are being contested in good faith by appropriate
proceedings and as to which appropriate reserves have been established or other
provisions have been made in accordance with GAAP, if required, (3) Liens (other
than any Lien imposed by the Employer Retirement Income Security Act of 1974, as
amended) incurred or deposits made in the ordinary course of business in
connection with workers' compensation, unemployment insurance and other types of
social security, (4) Liens incurred or deposits made to secure the performance
of tenders, bids, leases, statutory obligations, surety and appeal bonds,
development obligations, progress payments, government contacts, utility
services, developer's or other obligations to make on-site or off-site
improvements and other obligations of like nature (exclusive of obligations for
the payment of borrowed money but including the items referred to in the
parenthetical in clause (i)(a) of the definition of "Indebtedness"), in each
case incurred in the ordinary course of business of the Company and the
Restricted Subsidiaries, (5) attachment or judgment Liens not giving rise to a
Default or an Event of Default, (6) easements, dedications, assessment district
or similar liens in connection with municipal or special district financing,
rights-of-way, restrictions, reservations and other similar charges, burdens,
and other similar charges or encumbrances not materially interfering with the
ordinary course of business of the Company and the Restricted Subsidiaries, (7)
zoning restrictions, licenses, restrictions on the use of real property or minor
irregularities in title thereto, which do not materially impair the use of such
real property in the ordinary course of business of the Company and the
Restricted Subsidiaries, (8) Liens securing Indebtedness incurred pursuant to
clause (8) or (9) of the definition of Permitted Indebtedness, (9) Liens
securing Indebtedness of the Company or any Restricted Subsidiary permitted to
be incurred under the Indenture; provided, that the aggregate amount of all
                                 --------
consolidated Indebtedness of the Company and the Restricted Subsidiaries
(including, with respect to Capitalized Lease Obligations, the Attributable Debt
in respect thereof) secured by Liens (other than Non-Recourse Indebtedness and
Indebtedness incurred pursuant to clause (9) of the definition of Permitted
Indebtedness) shall not exceed 40% of Consolidated Adjusted Tangible Assets at
any one time outstanding (after giving effect to the
<PAGE>

                                     -16-

incurrence of such Indebtedness and the use of the proceeds thereof), (10) Liens
securing Non-Recourse Indebtedness of the Company or any Restricted Subsidiary;
provided, that such Liens apply only to the property financed out of the net
--------
proceeds of such Non-Recourse Indebtedness within 90 days after the incurrence
of such Non-Recourse Indebtedness, (11) Liens securing Purchase Money
Indebtedness; provided that such Liens apply only to the property acquired,
constructed or improved with the proceeds of such Purchase Money Indebtedness
within 90 days after the incurrence of such Purchase Money Indebtedness, (12)
Liens on property or assets of the Company or any Restricted Subsidiary securing
Indebtedness of the Company or any Restricted Subsidiary owing to the Company or
one or more Restricted Subsidiaries, (13) leases or subleases granted to others
not materially interfering with the ordinary course of business of the Company
and the Restricted Subsidiaries, (14) purchase money security interests
(including, without limitation, Capitalized Lease Obligations); provided, that
                                                                --------
such Liens apply only to the Property acquired and the related Indebtedness is
incurred within 90 days after the acquisition of such Property, (15)  any right
of first refusal, right of first offer, option, contract or other agreement to
sell an asset; provided, that such sale is not otherwise prohibited under the
               --------
Indenture, (16)  any right of a lender or lenders to which the Company or a
Restricted Subsidiary may be indebted to offset against, or appropriate and
apply to the payment of such, Indebtedness any and all balances, credits,
deposits, accounts or money of the Company or a Restricted Subsidiary with or
held by such lender or lenders or its Affiliates, (17)  any pledge or deposit of
cash or property in conjunction with obtaining surety, performance, completion
or payment bonds and letters of credit or other similar instruments or providing
earnest money obligations, escrows or similar purpose undertakings or
indemnifications in the ordinary course of business of the Company and its
Restricted Subsidiaries, (18)  Liens for homeowner and property owner
association developments and assessments, (19)  Liens securing Refinancing
Indebtedness; provided, that such Liens extend only to the assets securing the
              --------
Indebtedness being refinanced, (20)  Liens incurred in the ordinary course of
business as security for the obligations of the Company and its Restricted
Subsidiaries with respect to indemnification in respect of title insurance
providers, and (21)  Liens securing Senior Indebtedness and Liens securing
Guarantor Senior Indebtedness.

          "Person" means any individual, corporation, partnership, limited
           ------
liability company, joint venture, incorporated or unincorporated association,
joint stock company, trust, unincorporated organization or government or any
agency or political subdivision thereof.

          "Preferred Stock" of any Person means all Capital Stock of such Person
           ---------------
which has a preference in liquidation or with respect to the payment of
dividends.

          "Property" of any Person means all types of real, personal, tangible,
           --------
intangible or mixed property owned by such Person, whether or not included in
the most recent consolidated balance sheet of such Person and its Subsidiaries
under GAAP.
<PAGE>

                                     -17-

          "Public Equity Offering" means an underwritten public offering of
           ----------------------
Common Equity of the Company pursuant to an effective registration statement
filed under the Securities Act (excluding registration statements filed on Form
S-8 or any successor form).

          "Purchase Money Indebtedness" means Indebtedness of the Company or any
           ---------------------------
Restricted Subsidiary incurred for the purpose of financing all or any part of
the purchase price, or the cost of construction or improvement, of any property
to be used in the ordinary course of business by the Company and the Restricted
Subsidiaries; provided, however, that (i) the aggregate principal amount of such
              --------  -------
Indebtedness shall not exceed such purchase price or cost and (ii) such
Indebtedness shall be incurred no later than 90 days after the acquisition of
such property or completion of such construction or improvement.

          "Qualified Stock" means Capital Stock of the Company other than
           ---------------
Disqualified Stock.

          "Rating Agencies" shall mean (i) S&P and (ii) Moody's.
           ---------------

          "Real Estate Business" means homebuilding, housing construction, real
           --------------------
estate development or construction and related real estate activities, including
the provision of mortgage financing or title insurance.

          "Refinancing Indebtedness" means Indebtedness (to the extent not
           ------------------------
Permitted Indebtedness) that refunds, refinances or extends any Indebtedness of
the Company or any Restricted Subsidiary (to the extent not Permitted
Indebtedness) outstanding on the Issue Date or other Indebtedness (to the extent
not Permitted Indebtedness) permitted to be incurred by the Company or any
Restricted Subsidiary pursuant to the terms of the Indenture, but only to the
extent that (i) the Refinancing Indebtedness is subordinated to the Notes or the
Guarantees, as the case may be, to the same extent as the Indebtedness being
refunded, refinanced or extended, if at all, (ii) the Refinancing Indebtedness
is scheduled to mature either (a) no earlier than the Indebtedness being
refunded, refinanced or extended or (b) after the maturity date of the Notes,
(iii) the portion, if any, of the Refinancing Indebtedness that is scheduled to
mature on or prior to the maturity date of the Notes has a Weighted Average Life
to Maturity at the time such Refinancing Indebtedness is incurred that is equal
to or greater than the Weighted Average Life to Maturity of the portion of the
Indebtedness being refunded, refinanced or extended that is scheduled to mature
on or prior to the maturity date of the Notes, and (iv) such Refinancing
Indebtedness is in an aggregate principal amount that is equal to or less than
the aggregate principal amount then outstanding under the Indebtedness being
refunded, refinanced or extended.

          "Restricted Payment" means any of the following: (i) the declaration
           ------------------
or payment of any dividend or any other distribution on Capital Stock of the
Company or any Restricted Subsidiary or any payment made to the direct or
indirect holders (in their capacities as such) of Capital Stock of the Company
or any Restricted Subsidiary (other than (a) dividends
<PAGE>

                                     -18-

or distributions payable solely in Qualified Stock and (b) in the case of
Restricted Subsidiaries, dividends or distributions payable to the Company or to
a Restricted Subsidiary); (ii) the purchase, redemption or other acquisition or
retirement for value of any Capital Stock of the Company or any Restricted
Subsidiary (other than a payment made to the Company or any Restricted
Subsidiary); and (iii) any Investment (other than any Permitted Investment),
including any Investment in an Unrestricted Subsidiary (including by the
designation of a Subsidiary of the Company as an Unrestricted Subsidiary).

          "Restricted Subsidiary" means any Subsidiary of the Company which is
           ---------------------
not an Unrestricted Subsidiary.

          "S&P" means Standard and Poor's Ratings Group or any successor to its
           ---
debt rating business.

          "Significant Subsidiary" means any Subsidiary of the Company which
           ----------------------
would constitute a "significant subsidiary" as defined in Rule 1-02 of
Regulation S-X under the Securities Act and the Exchange Act.

          "Subsidiary" of any Person means any corporation or other entity of
           ----------
which a majority of the Capital Stock having ordinary voting power to elect a
majority of the Board of Directors or other persons performing similar functions
is at the time directly or indirectly owned or controlled by such Person.

          "Trustee" means the party named as such above until a successor
           -------
replaces such party in accordance with the applicable provisions of the
Indenture and thereafter means the successor serving hereunder.

          "Unrestricted Subsidiary" means any Subsidiary of the Company so
           -----------------------
designated by a resolution adopted by the Board of Directors of the Company or a
duly authorized committee thereof as provided below; provided that (a) the
                                                     --------
holders of Indebtedness thereof do not have direct or indirect recourse against
the Company or any Restricted Subsidiary, and neither the Company nor any
Restricted Subsidiary otherwise has liability for, any payment obligations in
respect of such Indebtedness (including any undertaking, agreement or instrument
evidencing such Indebtedness), except, (i) in each case, to the extent that the
amount thereof constitutes a Restricted Payment permitted by the Indenture, (ii)
in the case of Non-Recourse Indebtedness, to the extent such recourse or
liability is for the matters discussed in the last sentence of the definition of
"Non-Recourse Indebtedness," or (iii) to the extent such Indebtedness is a
guarantee by such Subsidiary of Indebtedness of the Company or a Restricted
Subsidiary and (b) no holder of any Indebtedness of such Subsidiary shall have a
right to declare a default on such Indebtedness or cause the payment thereof to
be accelerated or payable prior to its stated maturity as a result of a default
on any Indebtedness of the Company or any Restricted Subsidiary. Subject to the
foregoing, the Board of Directors of the Company or a duly authorized committee
thereof may designate any Subsidiary to be an Unrestricted Subsidiary;
<PAGE>

                                     -19-

provided, however, that (i) the net amount (the "Designation Amount") then
--------  -------                                ------------------
outstanding of all previous Investments by the Company and the Restricted
Subsidiaries in such Subsidiary will be deemed to be a Restricted Payment at the
time of such designation and will reduce the amount available for Restricted
Payments under Section 3.04 hereof, to the extent provided therein, (ii) the
Company must be permitted under Section 3.04 hereof to make the Restricted
Payment deemed to have been made pursuant to clause (i), and (iii) after giving
effect to such designation, no Default or Event of Default shall have occurred
or be continuing. In accordance with the foregoing, and not in limitation
thereof, Investments made by any Person in any Subsidiary of such Person prior
to such Person's merger with the Company or any Restricted Subsidiary (but not
in contemplation or anticipation of such merger) shall not be counted as an
Investment by the Company or such Restricted Subsidiary if such Subsidiary of
such Person is designated as an Unrestricted Subsidiary. The Board of Directors
of the Company or a duly authorized committee thereof may also redesignate an
Unrestricted Subsidiary to be a Restricted Subsidiary; provided, however, that
                                                       --------  -------
(i) the Indebtedness of such Unrestricted Subsidiary as of the date of such
redesignation could then be incurred under Section 3.02 hereof and (ii)
immediately after giving effect to such redesignation and the incurrence of any
such additional Indebtedness, the Company and the Restricted Subsidiaries could
incur $1.00 of additional Indebtedness under Section 3.02(a) hereof.  Any such
designation or redesignation by the Board of Directors of the Company or a
committee thereof will be evidenced to the Trustee by the filing with the
Trustee of a certified copy of the resolution of the Board of Directors of the
Company or a committee thereof giving effect to such designation or
redesignation and an Officers' Certificate certifying that such designation or
redesignation complied with the foregoing conditions and setting forth the
underlying calculations of such Officers' Certificate.  The designation of any
Person as an Unrestricted Subsidiary shall be deemed to include a designation of
all Subsidiaries of such Person as Unrestricted Subsidiaries; provided, however,
                                                              --------  -------
that the ownership of the general partnership interest (or a similar member's
interest in a limited liability company) by an Unrestricted Subsidiary shall not
cause a Subsidiary of the Company of which more than 95% of the equity interest
is held by the Company or one or more Restricted Subsidiaries to be deemed an
Unrestricted Subsidiary.

          "Weighted Average Life to Maturity" means, when applied to any
           ---------------------------------
Indebtedness or portion thereof at any date, the number of years obtained by
dividing (i) the sum of the products obtained by multiplying (a) the amount of
each then remaining installment, sinking fund, serial maturity or other required
payment of principal, including, without limitation, payment at final maturity,
in respect thereof, by (b) the number of years (calculated to the nearest one-
twelfth) that will elapse between such date and the making of such payment by
(ii) the sum of all such payments described in clause (i)(a) above.
<PAGE>

                                     -20-

                                 ARTICLE THREE

                                   Covenants

Section 3.01.  Repurchase of Notes upon Change of Control.
               ------------------------------------------

               (a)  In the event that there shall occur a Change of Control,
each Holder of Notes shall have the right, at such Holder's option, to require
the Company to purchase all or any part of such Holder's Notes on a date (the
"Repurchase Date") that is no later than 90 days after notice of the Change of
 ---------------
Control, at 101% of the principal amount thereof plus accrued interest to the
Repurchase Date.

               (b)  On or before the thirtieth day after any Change of Control,
the Company is obligated to mail, or cause to be mailed, to all Holders of
record of Notes a notice regarding the Change of Control and the repurchase
right. The notice shall state the Repurchase Date, the date by which the
repurchase right must be exercised, the price for the Notes and the procedure
which the Holder must follow to exercise such right. Substantially
simultaneously with mailing of the notice, the Company shall cause a copy of
such notice to be published in a newspaper of general circulation in the Borough
of Manhattan, The City of New York. To exercise such right, the Holder of such
Note must deliver at least ten days prior to the Repurchase Date written notice
to the Company (or an agent designated by the Company for such purpose) of the
Holder's exercise of such right, together with the Note with respect to which
the right is being exercised, duly endorsed for transfer; provided, however,
                                                          --------  -------
that if mandated by applicable law, a Holder may be permitted to deliver such
written notice nearer to the Repurchase Date than may be specified by the
Company.

               (c)  The Company will comply with applicable law, including
Section 14(e) of the Exchange Act and Rule 14e-1 thereunder, if applicable, if
the Company is required to give a notice of right of repurchase as a result of a
Change of Control.

Section 3.02.  Limitations on Indebtedness.
               ---------------------------

               (a)  Until the Notes are rated Investment Grade by both Rating
Agencies (after which time this Section 3.02 will no longer be in effect), the
Company will not, and will not cause or permit any Restricted Subsidiary,
directly or indirectly, to, create, incur, assume, become liable for or
guarantee the payment of (collectively, an "incurrence") any Indebtedness
                                            ----------
(including Acquired Indebtedness) unless, after giving effect thereto and the
application of the proceeds therefrom, the Consolidated Fixed Charge Coverage
Ratio on the date thereof would be at least 2.0 to 1.0.

               (b)  Notwithstanding the foregoing, this Section 3.02 will not
prevent the incurrence of: (i) Permitted Indebtedness, (ii) Refinancing
Indebtedness, (iii) Non-Recourse Indebtedness, (iv) any Guarantee of
Indebtedness of the Company represented by the Notes and
<PAGE>

                                     -21-

(v) any guarantee of Indebtedness incurred under Credit Facilities in compliance
with this Indenture.

               (c)  For purposes of determining compliance with this Section
3.02, in the event that an item of Indebtedness may be incurred through the
first paragraph of this covenant or by meeting the criteria of one or more of
the types of Indebtedness described in the second paragraph of this covenant (or
the definitions of the terms used therein), the Company, in its sole discretion,
(i) may classify such item of Indebtedness under and comply with either of such
paragraphs (or any of such definitions), as applicable, (ii) may classify and
divide such item of Indebtedness into more than one of such paragraphs (or
definitions), as applicable, and (iii) may elect to comply with such paragraphs
(or definitions), as applicable, in any order.

Section 3.03.  Limitation on Senior Subordinated Indebtedness.
               ----------------------------------------------

               The Company will not, and will not cause or permit any Guarantor
to, directly or indirectly, incur any Indebtedness that purports by its terms
(or by the terms of any agreement governing such Indebtedness) to rank senior in
right of payment to the Notes and subordinated in right of payment to any other
Indebtedness of the Company or of such Guarantor, as the case may be.

Section 3.04.  Limitation on Restricted Payments.
               ---------------------------------

               Until the Notes are rated Investment Grade by both Rating
Agencies (after which time this Section 3.04 will no longer be in effect)

               (a)  the Company will not, and will not cause or permit any
Restricted Subsidiary to, directly or indirectly, make any Restricted Payment
unless:

                (i) no Default or Event of Default shall have occurred and be
     continuing at the time of or immediately after giving effect to such
     Restricted Payment;

               (ii) immediately after giving effect to such Restricted Payment,
     the Company could incur at least $1.00 of Indebtedness pursuant to Section
     3.02(a); and

              (iii) immediately after giving effect to such Restricted Payment,
     the aggregate amount of all Restricted Payments (including the Fair Market
     Value of any non-cash Restricted Payment) declared or made after the Issue
     Date does not exceed the sum of (a) 50% of the Consolidated Net Income of
     the Company on a cumulative basis during the period (taken as one
     accounting period) from and including April 1, 1998 and ending on the last
     day of the Company's fiscal quarter immediately preceding the date of such
     Restricted Payment (or in the event such Consolidated Net Income shall be a
     deficit, minus 100% of such deficit), plus (b) 100% of the aggregate net
     cash pro-
<PAGE>

                                     -22-

     ceeds of and the fair market value of Property received by the Company from
     (1) any capital contribution to the Company after June 9, 1997 or any issue
     or sale after June 9, 1997 of Qualified Stock (other than to any Subsidiary
     of the Company) and (2) the issue or sale after June 9, 1997 of any
     Indebtedness or other securities of the Company convertible into or
     exercisable for Qualified Stock of the Company that have been so converted
     or exercised, as the case may be, plus (c) $86.0 million, which is equal to
     the aggregate principal amount of the Company's 6 7/8% Convertible
     Subordinated Notes due 2002 that were converted into the Company's Common
     Equity prior to the Issue Date, plus (d) in the case of the disposition or
     repayment of any Investment constituting a Restricted Payment made after
     June 9, 1997, an amount (to the extent not included in the calculation of
     the Consolidated Net Income referred to in (a)) equal to the lesser of (x)
     the return of capital with respect to such Investment (including by
     dividend, distribution or sale of Capital Stock) and (y) the amount of such
     Investment that was treated as a Restricted Payment, in either case, less
     the cost of the disposition or repayment of such Investment (to the extent
     not included in the calculation of the Consolidated Net Income referred to
     in (a)), plus (e) with respect to any Unrestricted Subsidiary that is
     redesignated as a Restricted Subsidiary after June 9, 1997 in accordance
     with the definition of Unrestricted Subsidiary (so long as the designation
     of such Subsidiary as an Unrestricted Subsidiary was treated as a
     Restricted Payment made after June 9, 1997 and only to the extent not
     included in the calculation of the Consolidated Net Income referred to in
     (a)), an amount equal to the lesser of (x) the proportionate interest of
     the Company or a Restricted Subsidiary in an amount equal to the excess of
     (I) the total assets of such Subsidiary, valued on an aggregate basis at
     the lesser of book value and Fair Market Value thereof, over (II) the total
     liabilities of such Subsidiary, determined in accordance with GAAP, and (y)
     the Designation Amount at the time of such Subsidiary's designation as an
     Unrestricted Subsidiary, plus (f) $50.0 million minus (g) the aggregate
     amount of all Restricted Payments (other than Restricted Payments referred
     to in clause (C) of (b) below) made after June 9, 1997 through the Issue
     Date.

               (b)  Clauses (ii) and (iii) of (a) above will not prohibit: (A)
the payment of any dividend within 60 days of its declaration if such dividend
could have been made on the date of its declaration without violation of the
provisions of this Indenture; (B) the repurchase, redemption or retirement of
any shares of Capital Stock of the Company in exchange for, or out of the net
proceeds of the substantially concurrent sale (other than to a Subsidiary of the
Company) of, other shares of Qualified Stock; and (C) the purchase, redemption
or other acquisition, cancellation or retirement for value of Capital Stock, or
options, warrants, equity appreciation rights or other rights to purchase or
acquire Capital Stock, of the Company or any Subsidiary held by officers or
employees or former officers or employees of the Company or any Subsidiary (or
their estates or beneficiaries under their estates) not to exceed $20 million in
the aggregate since the Issue Date; provided, however, that each Restricted
                                    --------  -------
Payment described in clauses (A) and (B) of this sentence shall be taken into
account for purposes of
<PAGE>

                                     -23-

computing the aggregate amount of all Restricted Payments pursuant to clause
(iii) of (a) above.

               (c)  For purposes of determining the aggregate and permitted
amounts of Restricted Payments made, the amount of any guarantee of any
Investment in any Person that was initially treated as a Restricted Payment and
which was subsequently terminated or expired, net of any amounts paid by the
Company or any Restricted Subsidiary in respect of such guarantee, shall be
deducted.

               (d)  In determining the "fair market value of Property" for
purposes of clause (iii) of the (a) above, Property other than cash, Cash
Equivalents and Marketable Securities shall be deemed to be equal in value to
the "equity value" of the Capital Stock or other securities issued in exchange
therefor. The "equity value" of such Capital Stock or other securities shall be
equal to (i) the number of shares of Common Equity issued in the transaction (or
issuable upon conversion or exercise of the Capital Stock or other securities
issued in the transaction) multiplied by the closing sale price of the Common
Equity on its principal market on the date of the transaction (less, in the case
of Capital Stock or other securities which require the payment of consideration
at the time of conversion or exercise, the aggregate consideration payable
thereupon) or (ii) if the Common Equity is not then traded on the New York Stock
Exchange, American Stock Exchange or Nasdaq National Market, or if the Capital
Stock or other securities issued in the transaction does not consist of Common
Equity (or Capital Stock or other securities convertible into or exercisable for
Common Equity), the value of such Capital Stock or other securities as
determined by a nationally recognized investment banking firm retained by the
Board of Directors of the Company.

Section 3.05.  Limitations on Transactions with Affiliates.
               --------------------------------------------

               Until the Notes are rated Investment Grade by both Rating
Agencies (after which time this Section 3.05 will no longer be in effect),

               (a)  the Company will not, and will not cause or permit any
     Restricted Subsidiary to, make any loan, advance, guarantee or capital
     contribution to, or for the benefit of, or sell, lease, transfer or
     otherwise dispose of any property or assets to, or for the benefit of, or
     purchase or lease any property or assets from, or enter into or amend any
     contract, agreement or understanding with, or for the benefit of, any
     Affiliate of the Company or any Affiliate of any of the Company's
     Subsidiaries or any holder of 10% or more of the Common Equity of the
     Company (including any Affiliates of such holders), in a single transaction
     or series of related transactions (each, an "Affiliate Transaction"),
                                                  ---------------------
     except for any Affiliate Transaction the terms of which are at least as
     favorable as the terms which could be obtained by the Company or such
     Restricted Subsidiary, as the case may be, in a comparable transaction made
     on an arm's length basis with Persons who are not such a holder, an
     Affiliate of such a holder or an Affiliate of the Company or any of the
     Company's Subsidiaries.
<PAGE>

                                     -24-

               (b)  In addition, the Company will not, and will not cause or
     permit any Restricted Subsidiary to, enter into an Affiliate Transaction
     unless (i) with respect to any such Affiliate Transaction involving or
     having a value of more than $10 million, the Company shall have (x)
     obtained the approval of a majority of the Board of Directors of the
     Company and (y) either obtained the approval of a majority of the Company's
     disinterested directors or obtained an opinion of a qualified independent
     financial advisor to the effect that such Affiliate Transaction is fair to
     the Company or such Restricted Subsidiary, as the case may be, from a
     financial point of view and (ii) with respect to any such Affiliate
     Transaction involving or having a value of more than $50.0 million, the
     Company shall have (x) obtained the approval of a majority of the Board of
     Directors of the Company and (y) delivered to the Trustee an opinion of a
     qualified independent financial advisor to the effect that such Affiliate
     Transaction is fair to the Company or such Restricted Subsidiary, as the
     case may be, from a financial point of view.

               (c)  Notwithstanding (a) and (b) above , an Affiliate Transaction
     will not include (i) any contract, agreement or understanding with, or for
     the benefit of, or plan for the benefit of employees of the Company or its
     Subsidiaries generally (in their capacities as such) that has been approved
     by the Board of Directors of the Company, (ii) Capital Stock issuances to
     directors, officers and employees of the Company or its Subsidiaries
     pursuant to plans approved by the stockholders of the Company, (iii) any
     Restricted Payment otherwise permitted under Section 3.04, (iv) any
     transaction between or among the Company and one or more Restricted
     Subsidiaries or between or among Restricted Subsidiaries (provided,
                                                               --------
     however, no such transaction shall involve any other Affiliate of the
     -------
     Company (other than an Unrestricted Subsidiary to the extent the applicable
     amount constitutes a Restricted Payment permitted by this Indenture)) and
     (v) any transaction between one or more Restricted Subsidiaries and one or
     more Unrestricted Subsidiaries where all of the payments to, or other
     benefits conferred upon, such Unrestricted Subsidiaries are substantially
     contemporaneously dividended, or otherwise distributed or transferred
     without charge, to the Company or a Restricted Subsidiary.

Section 3.06.  Limitations on Dispositions of Assets.
               -------------------------------------

               Until the Notes are rated Investment Grade by both Rating
Agencies (after which time this Section 3.06 will no longer be in effect), the
Company will not, and will not cause or permit any Restricted Subsidiary to,
make any Asset Disposition unless (x) the Company (or such Restricted
Subsidiary, as the case may be) receives consideration at the time of such Asset
Disposition at least equal to the Fair Market Value thereof, and (y) not less
than 70% of the consideration received by the Company (or such Restricted
Subsidiary, as the case may be) is in the form of cash, Cash Equivalents and
Marketable Securities. The amount of any Indebtedness (other than any
Indebtedness subordinated to the Notes) of the Company or
<PAGE>

                                     -25-

any Restricted Subsidiary that is actually assumed by the transferee in such
Asset Disposition shall be deemed to be consideration required by clause (y)
above for purposes of determining the percentage of such consideration received
by the Company or the Restricted Subsidiaries. The Net Cash Proceeds of an Asset
Disposition shall, within one year, at the Company's election, (a) be used by
the Company or a Restricted Subsidiary in the business of the construction and
sale of homes conducted by the Company and the Restricted Subsidiaries or any
other business of the Company or a Restricted Subsidiary existing at the time of
such Asset Disposition or (b) to the extent not so used, be applied to repay,
purchase or redeem Senior Indebtedness and/or Guarantor Senior Indebtedness or
(c) to the extent not used pursuant to clauses (a) and (b), be applied to make a
Net Cash Proceeds Offer for the Notes and, if the Company or a Restricted
Subsidiary elects or is required to do so, repay, purchase or redeem any other
Indebtedness that ranks pari passu with the Notes (on a pro rata basis if the
amount available for such repayment, purchase or redemption is less than the
aggregate amount of (i) the principal amount of the Notes tendered in such Net
Cash Proceeds Offer and (ii) the lesser of the principal amount, or accreted
value, of such other pari passu Indebtedness, plus, in each case accrued
interest to the date of repayment, purchase or redemption) at 100% of the
principal amount or accreted value thereof, as the case may be, plus accrued
interest to the date of repurchase or repayment. Notwithstanding the foregoing,
(A) the Company will not be required to apply such Net Cash Proceeds to the
repurchase of Notes in accordance with clause (b) or (c) of the preceding
sentence except to the extent that such Net Cash Proceeds, together with the
aggregate Net Cash Proceeds of prior Asset Dispositions (other than those so
used) which have not been applied in accordance with this provision and as to
which no prior Net Cash Proceeds Offer shall have been made, exceed 5% of
Consolidated Tangible Assets and (B) in connection with any Asset Disposition,
the Company and the Restricted Subsidiaries will not be required to comply with
the requirements of clause (y) of the first sentence of this Section 3.06 to the
extent that the aggregate non-cash consideration received in connection with
such Asset Disposition, together with the sum of all non-cash consideration
received in connection with all prior Asset Dispositions that has not yet been
converted into cash, does not exceed 5% of Consolidated Tangible Assets;
provided, however, that when any non-cash consideration is converted into cash,
--------  -------
such cash shall constitute Net Cash Proceeds and be subject to the preceding
sentence.

Section 3.07.  Limitations on Liens.
               --------------------

               The Company will not, and will not cause or permit any Restricted
Subsidiary to, create, incur, assume or suffer to exist any Liens, other than
Permitted Liens, on any of its Property, or on any shares of Capital Stock or
Indebtedness of any Restricted Subsidiary, unless contemporaneously therewith or
prior thereto all payments due under the Indenture and the Notes and/or the
Guarantees, as the case may be, are secured (i) in the case of an obligation
that ranks pari passu with the Notes or a Guarantee, on at least an equal and
ratable basis with the obligation so secured and (ii) in the case of an
obligation that is subordinated to the
<PAGE>

                                     -26-

Notes or a Guarantee, on a basis that is senior in priority to the Lien securing
such obligation, in each case, until such time as such obligation is no longer
secured by a Lien.

Section 3.08.  Limitations on Restrictions Affecting Restricted Subsidiaries.
               -------------------------------------------------------------

               The Company will not, and will not cause or permit any Restricted
Subsidiary to, create, assume or otherwise cause or suffer to exist or become
effective any consensual encumbrance or restriction (other than encumbrances or
restrictions imposed by law or by judicial or regulatory action or by provisions
of leases and other agreements that restrict the assignability thereof) on the
ability of any Restricted Subsidiary to (i) pay dividends or make any other
distributions on its Capital Stock or any other interest or participation in, or
measured by, its profits, owned by the Company or any other Restricted
Subsidiary, or pay interest on or principal of any Indebtedness owed to the
Company or any other Restricted Subsidiary, (ii) make loans or advances to the
Company or any other Restricted Subsidiary, or (iii) transfer any of its
properties or assets to the Company or any other Restricted Subsidiary, except
for (a) encumbrances or restrictions existing under or by reason of applicable
law, (b) covenants or restrictions contained in Indebtedness in effect on the
date of this Supplemental Indenture as such covenants or restrictions are in
effect on such date, (c) any restrictions or encumbrances arising under Acquired
Indebtedness; provided, that such encumbrance or restriction applies only to
              --------
either the assets that were subject to the restriction or encumbrance at the
time of the acquisition or the obligor on such Indebtedness and its
Subsidiaries, (d) any restrictions or encumbrances arising in connection with
Refinancing Indebtedness; provided, however, that any restrictions and
                          --------  -------
encumbrances of the type described in this clause (d) that arise under such
Refinancing Indebtedness shall not be materially more restrictive than those
under the agreement creating or evidencing the Indebtedness being refunded,
refinanced, replaced or extended, (e) any Permitted Lien, or any other agreement
restricting the sale or other disposition of property, securing Indebtedness
permitted by this Indenture if such Permitted Lien or agreement does not
expressly restrict the ability of a Subsidiary of the Company to pay dividends
or make or repay loans or advances prior to default thereunder, (f) reasonable
and customary borrowing base covenants set forth in agreements evidencing
Indebtedness otherwise permitted by this Indenture, (g) customary provisions
restricting subletting or assignment of any lease governing a leasehold interest
of the Company or any Restricted Subsidiary, and (h) any restriction with
respect to a Restricted Subsidiary imposed pursuant to an agreement entered into
for the sale or disposition of all or substantially all of the Capital Stock or
assets of such Restricted Subsidiary pending the closing of such sale or
disposition.

Section 3.09.  Limitations on Mergers, Consolidations and Sales of Assets.
               ----------------------------------------------------------

               Neither the Company nor any Guarantor will consolidate or merge
with or into, or sell, lease, convey or otherwise dispose of all or
substantially all of its assets (including, without limitation, by way of
liquidation or dissolution), or assign any of its obligations under the Notes,
the Guarantees or this Indenture (as an entirety or substantially in one
transaction
<PAGE>

                                     -27-

or in a series of related transactions), to any Person (in each case other than
in a transaction in which the Company or a Restricted Subsidiary is the survivor
of a consolidation or merger, or the transferee in a sale, lease, conveyance or
other disposition) unless: (i) the Person formed by or surviving such
consolidation or merger (if other than the Company or the Guarantor, as the case
may be), or to which such sale, lease, conveyance or other disposition or
assignment will be made (collectively, the "Successor"), is a corporation or
                                            ---------
other legal entity organized and existing under the laws of the United States or
any state thereof or the District of Columbia, and the Successor assumes by
supplemental indenture in a form reasonably satisfactory to the Trustee all of
the obligations of the Company or the Guarantor, as the case may be, under the
Notes or a Guarantee, as the case may be, and the Indenture, (ii) immediately
after giving effect to such transaction, no Default or Event of Default has
occurred and is continuing, (iii) immediately after giving effect to such
transaction and the use of any net proceeds therefrom, on a pro forma basis, the
                                                            --- -----
Consolidated Net Worth of the Company or the Successor (in the case of a
transaction involving the Company), as the case may be, would be at least equal
to the Consolidated Net Worth of the Company immediately prior to such
transaction (exclusive of any adjustments to Consolidated Net Worth attributable
to transaction costs) less any amount treated as a Restricted Payment in
connection with such transaction in accordance with this Indenture and (iv)
unless prior to such transaction the Notes are rated Investment Grade by both
Rating Agencies (after which this clause (iv) shall not apply), immediately
after giving effect to such transaction, the Company could incur at least $1.00
of Indebtedness pursuant to Section 3.02(a). The foregoing provisions shall not
apply to (i) a transaction involving the sale or disposition of Capital Stock of
a Guarantor, or the consolidation or merger of a Guarantor, or the sale, lease,
conveyance or other disposition of all or substantially all of the assets of a
Guarantor, that in any such case results in such Guarantor being released from
its Guarantee pursuant to the Indenture or (ii) a transaction the purpose of
which is to change the state of incorporation of the Company or any Guarantor.

Section 3.10.  Reports to Holders of Notes.
               ----------------------------

               The Company will file with the Commission the annual reports and
the information, documents and other reports required to be filed pursuant to
Section 13 or 15(d) of the Exchange Act. The Company will file with the Trustee
and mail to each Holder of record of Notes such reports, information and
documents within 15 days after it files them with the Commission. In the event
that the Company is no longer subject to these periodic requirements of the
Exchange Act, it will nonetheless continue to file reports with the Commission
and the Trustee and mail such reports to each Holder of Notes as if it were
subject to such reporting requirements. Regardless of whether the Company is
required to furnish such reports to its stockholders pursuant to the Exchange
Act, the Company will cause its consolidated financial statements and a
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" written report, similar to those that would have been required to
appear in annual or quarterly reports, to be delivered to Holders of Notes.
<PAGE>

                                     -28-

                                 ARTICLE FOUR

                                 Miscellaneous

Section 4.01.  Governing Law.
               -------------

               The laws of the State of New York shall govern this Supplemental
Indenture, the Securities of each Series and the Guarantees without giving
effect to principles of conflicts of laws.

Section 4.02.  No Adverse Interpretation of Other Agreements.
               ---------------------------------------------

               This Supplemental Indenture may not be used to interpret another
indenture, loan or debt agreement of the Company or a Subsidiary.  Any such
indenture, loan or debt agreement may not be used to interpret this Supplemental
Indenture.

Section 4.03.  No Recourse Against Others.
               --------------------------

               All liability described in paragraph 13 of the Notes of any
director, officer, employee or stockholder, as such, of the Company is waived
and released.

Section 4.04.  Successors and Assigns.
               ----------------------

               All covenants and agreements of the Company and the Guarantors in
this Supplemental Indenture and the Notes shall bind its successors and assigns.
All agreements of the Trustee in this Supplemental Indenture shall bind its
successors and assigns.

Section 4.05.  Duplicate Originals.
               -------------------

               The parties may sign any number of copies of this Supplemental
Indenture. Each signed copy shall be an original, but all of them together
represent the same agreement.

Section 4.06.  Severability.
               ------------

               In case any one or more of the provisions contained in this
Supplemental Indenture or in the Notes shall for any reason be held to be
invalid, illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provisions of this Supplemental
Indenture or of the Notes.

                           [Signature Pages Follow]
<PAGE>

                                   SIGNATURES

          IN WITNESS WHEREOF, the parties have caused this Supplemental
Indenture to be duly executed, all as of the date first above written.

                                        D.R. HORTON, INC.

                                        By:_____________________________________
                                           Name: Donald R. Horton
                                           Title: Chairman of the Board
<PAGE>

                                      -2-

                                        GUARANTORS:

                                        DRHI, Inc.
                                        Meadows I, Ltd.
                                        Meadows IX, Inc.
                                        Meadows X, Inc.
                                        D.R. Horton, Inc. - Birmingham
                                        D.R. Horton, Inc. - Chicago
                                        D.R. Horton, Inc. - Denver
                                        D.R. Horton, Inc. - Greensboro
                                        D.R. Horton, Inc. - Louisville
                                        D.R. Horton, Inc. - Minnesota
                                        D.R. Horton, Inc. - New Jersey
                                        D.R. Horton, Inc. - Portland
                                        D.R. Horton, Inc. - Sacramento
                                        D.R. Horton, Inc. - San Diego
                                        D.R. Horton, Inc. - Torrey
                                        D.R. Horton San Diego Holding Company,
                                        Inc.
                                        D.R. Horton Los Angeles Holding Company,
                                        Inc.
                                        DRH Construction, Inc.
                                        DRH Cambridge Homes, Inc.
                                        C. Richard Dobson Builders, Inc.
                                        DRH Tucson Construction, Inc.
                                        Continental Homes, Inc.
                                        KDB Homes, Inc.
                                        Continental Residential, Inc.
                                        Continental Homes of Florida, Inc.
                                        CHI Construction Company
                                        CHTEX of Texas, Inc.

                                        By:_____________________________________
                                           Name:  Samuel R. Fuller
                                           Title: Treasurer
<PAGE>

                                      -3-

                                        SGS COMMUNITIES AT GRANDE QUAY,
                                        LLC
                                        By: Meadows IX, Inc., a member

                                        By:_____________________________________
                                           Name:  Samuel R. Fuller
                                           Title: Treasurer

                                        By:  Meadows X, Inc., a member

                                        By:_____________________________________
                                           Name:  Samuel R. Fuller
                                           Title: Treasurer

                                        D.R. HORTON MANAGEMENT COMPANY,
                                        LTD.
                                        D.R. HORTON-TEXAS, LTD.
                                        By: Meadows I, Ltd., its general partner

                                        By:_____________________________________
                                           Name:  Samuel R. Fuller
                                           Title: Treasurer

                                        CONTINENTAL HOMES OF TEXAS, L.P.
                                        By: CHTEX of Texas, Inc., its general
                                            partner

                                        By:_____________________________________
                                           Name:  Samuel R. Fuller
                                           Title: Treasurer
<PAGE>

                                      -4-

                                        MEADOWS II, LTD.
                                        CH INVESTMENTS OF TEXAS, INC.

                                        By:_____________________________________
                                           Name:  William Peck
                                           Title: President
<PAGE>

AMERICAN STOCK TRANSFER & TRUST
 COMPANY, as Trustee

By:_____________________________
   Name:
   Title:
<PAGE>

                                                                       Exhibit A
                                                                       ---------

     THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE
HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITORY OR A
NOMINEE OF A DEPOSITORY OR A SUCCESSOR DEPOSITORY. THIS SECURITY IS NOT
EXCHANGEABLE FOR SECURITIES REGISTERED IN THE NAME OF A PERSON OTHER THAN THE
DEPOSITORY OR ITS NOMINEE EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE
INDENTURE, AND NO TRANSFER OF THIS SECURITY (OTHER THAN A TRANSFER OF THIS
SECURITY AS A WHOLE BY THE DEPOSITORY TO A NOMINEE OF THE DEPOSITORY OR BY A
NOMINEE OF THE DEPOSITORY TO THE DEPOSITORY OR ANOTHER NOMINEE OF THE
DEPOSITORY) MAY BE REGISTERED EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN
THE INDENTURE.

     UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE ISSUER OR ITS
AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY CERTIFICATE
ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO
CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER
HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.

                                      A-1
<PAGE>

No.                                                                   CUSIP No.:

                               D.R. HORTON, INC.
                   9.375% Senior Subordinated Notes due 2011

     D.R. HORTON, INC., a corporation incorporated under the laws of the State
of Delaware, promises to pay to CEDE & CO. or its registered assigns, the
principal sum of Dollars on March 15, 2011.

          Interest Payment Dates: March 15 and September 15, commencing
          September 15, 2001

          Interest Record Dates:  March 1 and September 1

                                             Dated:

                                             D.R. HORTON, INC.

                                             [Seal]

                                             By:________________________________
                                                Name:
                                                Title:

                                             By:________________________________
                                                Name:
                                                Title:

                                      A-2
<PAGE>

American Stock Transfer & Trust Company,
as Trustee, certifies that this is one
of the Securities referred to in the
within mentioned Indenture.

Date:

By:_____________________________
       Authorized Signatory

                                      A-3
<PAGE>

                               D.R. HORTON, INC.

                   9.375% Senior Subordinated Notes due 2011
                              (the "Securities")

1.   Interest.
     --------

          D.R. HORTON, INC. (the "Company"), a Delaware corporation, promises to
pay interest on the principal amount of this Security at the rate per annum
shown above. The Company will pay interest semiannually on March 15 and
September 15 of each year, commencing September 15, 2001, until the principal is
paid or made available for payment. Interest on the Securities will accrue from
the most recent date to which interest has been paid or duly provided for or, if
no interest has been paid, from the date of original issuance, provided that, if
there is no existing default in the payment of interest, and if this Security is
authenticated between a record date referred to on the face hereof and the next
succeeding interest payment date, interest shall accrue from such interest
payment date. Interest will be computed on the basis of a 360-day year of twelve
30-day months.

2.   Method of Payment.
     -----------------

          The Company will pay interest on the Securities (except defaulted
interest, if any, which will be paid on such special payment date to Holders of
record on such special record date as may be fixed by the Company) to the
persons who are registered Holders of Securities at the close of business on the
March 1 and September 1 immediately preceding the interest payment date. Holders
must surrender Securities to a Paying Agent to collect principal payments. The
Company will pay principal and interest in money of the United States that at
the time of payment is legal tender for payment of public and private debts.

3.   Paying Agent and Registrar.
     --------------------------

          Initially, American Stock Transfer & Trust Company (the "Trustee")
will act as Paying Agent and Registrar. The Company may change or appoint any
Paying Agent, Registrar or co-Registrar without notice. The Company or any of
its Subsidiaries may act as Paying Agent, Registrar or co-Registrar.

4.   Indenture.
     ---------

          The Company issued the Securities under an Indenture dated as of
September 11, 2000 ("Indenture") among the Company, the Guarantors and the
Trustee, as supplemented by a Second Supplemental Indenture dated as of March
12, 2001. The terms of the Securities and the Guarantees include those stated in
the Indenture and those made part of the

                                      A-4
<PAGE>

Indenture by reference to the Trust Indenture Act of 1939 ("TIA") as in effect
on the date of the Indenture. The Securities and the Guarantees are subject to
all such terms, and Securityholders are referred to the Indenture and the Act
for a statement of them. Capitalized terms not defined herein have the meanings
given to those terms in the Indenture.

          The Company will furnish to any Securityholder upon written request
and without charge a copy of the Indenture and the applicable Authorizing
Resolution or supplemental indenture. Requests may be made to: D.R. Horton,
Inc., 1901 Ascension Blvd., Suite 100, Arlington, Texas 76006, Attention: Chief
Financial Officer.

5.   Optional Redemption.
     -------------------

          (a)  Except as set forth below, the Securities may not be redeemed
prior to March 15, 2006. At any time on or after March 15, 2006, the Company, at
its option, may redeem the Securities, in whole or in part, at the redemption
prices (expressed as percentages of principal amount) set forth below, together
with accrued and unpaid interest thereon, if any, to the redemption date, if
redeemed during the 12-month period beginning March 15 of the years indicated:

    Year                                                              Redemption
    ----
                                                                        Price
                                                                        -----

    2006......................................................        104.688%
    2007......................................................        103.125%
    2008......................................................        101.563%
    2009 and thereafter.......................................        100.000%

          (b)  At any time prior to March 15, 2004, the Company may redeem the
Securities with the net cash proceeds of one or Public Equity Offerings at a
redemption price equal to 109.375% of the principal amount of such Securities to
be redeemed, plus accrued and unpaid interest thereon, if any, to the date of
redemption; provided that at least 65% of the aggregate principal amount of
            --------
securities (excluding any Securities held by the Company or any of its
Affiliates) issued under the Indenture remains outstanding immediately after the
occurrence of such redemption.  Notice of redemption must be given within 60
days of the date of the closing of the relevant Public Equity Offering.

6.   Selection and Notice of Redemption
     ----------------------------------

          Notice of redemption will be mailed at least 30 days but not more than
60 days before the date of redemption to each Holder of Securities to be
redeemed at his registered

                                      A-6
<PAGE>

address. Securities in denominations larger than $1,000 may be redeemed in part.
On and after the redemption date, interest ceases to accrue on Securities or
portions of them called for redemption, provided that if the Company shall
default in the payment of such Security at the redemption price together with
accrued interest, interest shall continue to accrue at the rate borne by the
Securities.

7.   Denominations, Transfer, Exchange.
     ---------------------------------

          The Securities are in registered form only without coupons in
denominations of $1,000 and integral multiples thereof.  A Holder may transfer
or exchange Securities by presentation of such Securities to the Registrar or a
co-Registrar with a request to register the transfer or to exchange them for an
equal principal amount of Securities of other denominations.  The Registrar may
require a Holder, among other things, to furnish appropriate endorsements and
transfer documents and to pay any taxes and fees required by law or permitted by
the Indenture.  The Registrar need not transfer or exchange any Security
selected for redemption, except the unredeemed part thereof if the Security is
redeemed in part, or transfer or exchange any Securities for a period of 15 days
before a selection of Securities to be redeemed.

8.   Persons Deemed Owners.
     ---------------------

          The registered Holder of this Security shall be treated as the owner
of it for all purposes.

9.   Unclaimed Money.
     ---------------

          If money for the payment of principal or interest remains unclaimed
for two years, the Trustee or Paying Agent will pay the money back to the
Company at its request. After that, Holders entitled to the money must look to
the Company for payment unless an abandoned property law designates another
person.

10.  Amendment, Supplement, Waiver.
     -----------------------------

          Subject to certain exceptions, the Indenture, the Securities or the
Guarantees may be amended or supplemented with the consent (which may include
consents obtained in connection with a tender offer or exchange offer for
Securities) of the Holders of at least a majority in principal amount of the
outstanding Securities then outstanding and any existing default under, or
compliance with any provision of the Indenture relating to the Securities may be
waived (other than any continuing Default or Event of Default in the payment of
interest on or the principal of the Securities) with the consent (which may
include consents obtained in connection with a tender offer or exchange offer
for Securities) of the Holders of a majority
<PAGE>

in principal amount of the Securities then outstanding. Without the consent of
any Securityholder, the Company and the Trustee may amend or supplement the
Indenture, the Securities or the Guarantees to cure any ambiguity, defect or
inconsistency, to provide for uncertificated Securities in addition to or in
place of certificated Securities, to create a Series and establish its terms, to
remove a Guarantor which, in accordance with the terms of the Indenture, ceases
to be liable in respect of its Guarantee, or to make any other change, provided
such action does not adversely affect the rights of any Securityholder.

11.  Successor Corporation.
     ---------------------

          When a successor corporation assumes all the obligations of its
predecessor under the Securities and the Indenture, the predecessor corporation
will be released from those obligations.

12.  Trustee Dealings With Company.
     -----------------------------

          American Stock Transfer & Trust Company, the Trustee under the
Indenture, in its individual or any other capacity, may make loans to, accept
deposits from, and perform services for the Company or its affiliates, and may
otherwise deal with the Company or its affiliates, as if it were not Trustee.

13.  No Recourse Against Others.
     --------------------------

          A director, officer, employee or stockholder, as such, of the Company
shall not have any liability for any obligations of the Company under the
Securities or the Indenture or for any claim based on, in respect of or by
reason of, such obligations or their creation. Each Securityholder by accepting
a Security waives and releases all such liability. The waiver and release are
part of the consideration for the issue of the Securities.

14.  Discharge of Indenture.
     ----------------------

          The Indenture contains certain provisions pertaining to defeasance,
which provisions shall for all purposes have the same effect as if set forth
herein.

15.  Authentication.
     --------------

          This Security shall not be valid until the Trustee signs the
certificate of authentication on the other side of this Security.

                                      A-7
<PAGE>

16.  Abbreviations.
     -------------

          Customary abbreviations may be used in the name of a Securityholder or
an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the
entireties), JT TEN (= joint tenants with right of survivorship and not as
tenants in common), CUST (= custodian), and U/G/M/A (= Uniform Gifts to Minors
Act).

                                      A-8
<PAGE>

                                ASSIGNMENT FORM

          If you the Holder want to assign this Security, fill in the form
          below:

          I or we assign and transfer this Security to

________________________________________________________________________________

________________________________________________________________________________
              (Insert assignee's social security or tax ID number)

________________________________________________________________________________

________________________________________________________________________________

________________________________________________________________________________
             (Print or type assignee's name, address, and zip code)
                            ----------

and irrevocably appoint

________________________________________________________________________________
agent to transfer this Security on the books of the Company.  The agent may
substitute another to act for him.

________________________________________________________________________________

Date: ________________   Your signature:________________________________________
                         (Sign exactly as your name appears on the other side of
                         this Security)

Signature Guarantee:____________________________________________________________
     Signature must be guaranteed by participant in a recognized Signature
     Guarantee Medallion Program (or other signature guarantee program
     reasonably acceptable to the Trustee).
<PAGE>

             [FORM OF NOTATION ON SECURITY RELATING TO GUARANTEE]

                                   GUARANTEE

          The undersigned (the "Guarantors") have unconditionally guaranteed,
jointly and severally (such guarantee by each Guarantor being referred to herein
as the "Guarantee") (i) the due and punctual payment of the principal of and
interest on the Securities, whether at maturity, by acceleration or otherwise,
the due and punctual payment of interest on the overdue principal and interest,
if any, on the Securities, to the extent lawful, and the due and punctual
performance of all other obligations of the Company to the Holders or the
Trustee all in accordance with the terms set forth in Article Nine of the
Indenture and (ii) in case of any extension of time of payment or renewal of any
Securities or any of such other obligations, that the same will be promptly paid
in full when due or performed in accordance with the terms of the extension or
renewal, whether at stated maturity, by acceleration or otherwise.

          No past, present or future stockholder, officer, director, employee or
incorporator, as such, of any of the Guarantors shall have any liability under
the Guarantee by reason of such person's status as stockholder, officer,
director, employee or incorporator. Each Holder of a Security by accepting a
Security waives and releases all such liability. This waiver and release are
part of the consideration for the issuance of the Guarantees.

          Each Holder of a Security by accepting a Security agrees that any
Guarantor named below shall have no further liability with respect to its
Guarantee if such Guarantor otherwise ceases to be liable in respect of its
Guarantee in accordance with the terms of the Indenture.
<PAGE>

          The Guarantee shall not be valid or obligatory for any purpose until
the certificate of authentication on the Securities upon which the Guarantee is
noted shall have been executed by the Trustee under the Indenture by the manual
signature of one of its authorized officers.

                                        DRHI, Inc.
                                        Meadows I, Ltd.
                                        Meadows IX, Inc.
                                        Meadows X, Inc.
                                        D.R. Horton, Inc. - Birmingham
                                        D.R. Horton, Inc. - Chicago
                                        D.R. Horton, Inc. - Denver
                                        D.R. Horton, Inc. - Greensboro
                                        D.R. Horton, Inc. - Louisville
                                        D.R. Horton, Inc. - Minnesota
                                        D.R. Horton, Inc. - New Jersey
                                        D.R. Horton, Inc. - Portland
                                        D.R. Horton, Inc. - Sacramento
                                        D.R. Horton, Inc. - San Diego
                                        D.R. Horton, Inc. - Torrey
                                        D.R. Horton San Diego Holding Com-
                                        pany, Inc.
                                        D.R. Horton Los Angeles Holding Com-
                                        pany, Inc.
                                        DRH Construction, Inc.
                                        DRH Cambridge Homes, Inc.
                                        C. Richard Dobson Builders, Inc.
                                        DRH Tucson Construction, Inc.
                                        Continental Homes, Inc.
                                        KDB Homes, Inc.
                                        Continental Residential, Inc.
                                        Continental Homes of Florida, Inc.
                                        CHI Construction Company
                                        CHTEX of Texas, Inc.

                                        By:_____________________________________
                                           Name:
                                           Title:
<PAGE>

                                        SGS COMMUNITIES AT GRANDE QUAY,
                                        LLC
                                        By: Meadows IX, Inc., a member

                                        By:_____________________________________
                                           Name:
                                           Title:

                                        By: Meadows X, Inc., a member

                                        By:_____________________________________
                                           Name:
                                           Title:

                                        D.R. HORTON MANAGEMENT COMPANY,
                                        LTD.
                                        D.R. HORTON-TEXAS, LTD.
                                        By: Meadows I, Ltd., its general partner

                                        By:_____________________________________
                                           Name:
                                           Title:

                                        CONTINENTAL HOMES OF TEXAS, L.P.
                                        By: CHTEX of Texas, Inc., its general
                                            partner

                                        By:_____________________________________
                                           Name:
                                           Title:
<PAGE>

                                        MEADOWS II, LTD.
                                        CH INVESTMENTS OF TEXAS, INC.

                                        By:_____________________________________
                                           Name:
                                           Title:

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