Document:

<PAGE>

                                                               Exhibit 4.7

                        SETTLEMENT AND RELEASE AGREEMENT

     This SETTLEMENT AND RELEASE AGREEMENT (the "Agreement"), executed this 31st
day of May, 2001, is entered into by and among Constellation 3D, Inc., a
Delaware corporation (the "Company"), Sands Brothers & Co., Ltd., a Delaware
corporation ("Sands Brothers"), Sands Brothers Venture Capital, LLC, a New York
limited liability company ("Venture Capital") and Mark G. Hollo ("MGH", MGH,
Sands Brothers and Venture Capital, collectively the "Sands Parties").

                              W I T N E S S E T H
                              - - - - - - - - - -

     WHEREAS, pursuant to the terms of that certain Placement Agency Agreement
dated December 1, 1999, as amended on December 22, 1999, March 7, 2000, March
23, 2000, May 16, 2000, May 31, 2000, June 28, 2000, July 13, 2000 and August 2,
2000, and any other amendment or additional document executed on or before the
date of this agreement and as supplemented by that certain letter agreement
dated February 8, 2000, between the Company and Sands Brothers (collectively,
the "Placement Agency Agreement"), Sands Brothers was retained by the Company to
act as its placement agent and to perform, among other things, certain
investment banking and financial advisory services for the Company (the
"Relationship");

     WHEREAS, pursuant to the Relationship, Sands Brothers identified Venture
Capital as a qualified subscriber to engage in a financing transaction with the
Company (the "Venture Capital Financing"), which was consummated pursuant to
that certain Securities Purchase Agreement dated March 23, 2000, by and between
the Company and Venture Capital (the "Securities Purchase Agreement");

     WHEREAS, pursuant to the Securities Purchase Agreement, Venture Capital
purchased and the Company issued and sold a 10% Subordinated Convertible
Debenture dated March 24, 2000 (the "Debenture") in the principal amount of Four
Million ($4,000,000) Dollars with a maturity date of September 24, 2001;

     WHEREAS, Sands Brothers has claimed that pursuant to the Placement Agency
Agreement, and in connection with the Venture Capital Financing, Sands Brothers
or its designees are entitled to the issuance of (i) warrants to purchase
1,050,000 fully-paid and non-assessable shares of the common stock, $.001 par
value per share (the "Common Stock") of the Company, at an initial exercise
price of $3.67 per share of Common Stock (the "Initial Placement Agent
Warrants"), and (ii) additional warrants to purchase 2,400,000 fully-paid and
non-assessable shares of Common Stock, at an initial exercise price of $15.13
per share of Common Stock (the "Additional Placement Agent Warrants"), both as
evidenced by a certain Warrant Agreement dated December 1, 1999 between the
Company and Sands Brothers, as amended (the "Warrant Agreement");

     WHEREAS, disputes have arisen between the Company and the Sands Parties, a
result of
<PAGE>

which, among other things, is that the Company and the Sands Parties mutually
desire to terminate the Relationship;

     WHEREAS, the Company and the Sands Parties desire to settle fully and
finally any and all matters between them as of the Separation Date (as hereafter
defined), including, but not limited to, any issues or claims that may arise out
of the Relationship and/or any issues or claims that may arise out of the
Placement Agency Agreement, the Debenture, the Warrant Agreement, the Securities
Purchase Agreement and/or any other agreement or document by or between the
Company and any or all of the Sands Parties, all pursuant to the terms hereof;

     NOW, THEREFORE, in consideration of the mutual agreements and
understandings set forth herein, intending to be legally bound, the parties
hereto hereby agree as follows:

     Section 1.  Termination of the Relationship.
                 -------------------------------

     Subject to the terms and conditions herein, the Relationship between the
Company and Sands Brothers is hereby terminated as of the date herein (the
"Separation Date").

     Section 2.  Prepayment of Debenture.
                 -----------------------

          The Debenture issued to Venture Capital in the principal amount of
Four Million ($4,000,000) Dollars, shall remain in full force and effect,
provided, however, that the principal amount with accrued interest thereon shall
be paid in full in immediately available funds within one (1) business day after
the Company's receipt and closing on or after the date hereof, of equity and/or
debt financing, equal to or in excess of  $9 million (the "Final Payment Date"),
and upon such payment, the Debenture shall no longer be in force and effect and
shall be deemed paid in full and all rights and obligations thereunder shall
terminate.

     Section 3.  Settlement Terms.
                 ----------------

          a.     Of the Initial Placement Agent Warrants evidenced by
Certificate No. SB-1, (the "Original Warrant Certificate"), Sands Brothers shall
retain One Hundred Thousand (100,000) warrants (the "Retained Warrants") to
purchase, initially, at any time from December 1, 1999, until 5:30 p.m. New York
time on December 1, 2004, up to 100,000 fully-paid and non-assessable shares of
the common stock, $.001 par value per share (the "Common Stock") of the Company,
at an initial exercise price of $3.67 per share of Common Stock. The Retained
Warrants shall be evidenced by an amended warrant certificate (the "Retained
Warrant Certificate"), a form of which is attached as Exhibit A hereto, which
                                                      ---------
shall be issued upon, and only upon, the delivery by Sands Brothers to the
Company of the Original Warrant Certificate for cancellation by the Company.

          b.     Of the Additional Placement Agent Warrants evidenced by
Certificate No. SB-2 (the "Original Additional Warrant Certificate"), Sands
Brothers shall retain One Hundred Thousand (100,000) warrants (the "Additional
Retained Warrants" (the shares underlying the Retained Warrant and Additional
Retained Warrant are hereinafter collectively referred to as the "Retained
Warrant Shares") to purchase, initially, at any time from December 1, 1999,
until 5:30

                                       2
<PAGE>

p.m. New York time on December 1, 2004, up to 100,000 fully-paid and non-
assessable shares of Common Stock, at an initial exercise price of $11.00 per
share of Common Stock. The Additional Retained Warrants shall be evidenced by an
amended warrant certificate (the "Additional Retained Warrant Certificate"), a
form of which is attached as Exhibit B hereto, which shall be issued upon, and
                             -------------------------------------------------
only upon, the delivery by Sands Brothers to the Company of the Original
------------------------------------------------------------------------
Additional Warrant Certificate for cancellation by the Company.
---------------------------------------------------------------

          c.     The Company shall prepare and file, as soon as reasonably
practicable, a Registration Statement on Form S-3 to permit resale of the share
of Retained Warrant Shares, and the Company shall use its best reasonable
efforts to cause such Registration Statement to become effective as soon as
practicable after such filing (the "S-3 Filing"), but the Company shall not be
required to keep the Registration Statement effective after the second
anniversary of the date hereof.  If the Company at any time (other than with
respect to the S-3 Filing, so long as such Form S-3 is then currently effective)
from the date of this Agreement through the expiration of the term of the
Warrants, proposes to register any of its securities under the Securities Act
for sale to the public, whether for its own account or for the account of other
security holders or both (except with respect to registration statements on
Forms S-4, S-8 and any successor forms thereto), each such time it will give
written notice to such effect to all holders of the Retained Warrant Shares at
least 30 days prior to such filing.  Upon the written request of any such holder
received by the Company within 20 days after the giving of any such notice by
the Company to register any of the Retained Warrant Shares not (a) previously
sold pursuant to a registration statement or (b) sold or saleable under Rule
144k (such Retained Warrant Shares, the "Registrable Shares"), the Company will
cause the Registrable Shares as to which registration shall have been so
requested to be included in the securities to be covered by the registration
statement proposed to be filed by the Company, all to the extent required to
permit the sale or other disposition by the holder of such Registrable Shares so
registered.  Notwithstanding the foregoing, in the event that any registration
pursuant to this Section 3(c) shall be, in whole or in part, an underwritten
public offering of Common Stock, the number of Registrable Shares to be included
in such an underwriting may be reduced (pro rata among the requesting holders)
and its assigns and the other selling stockholders (based upon the number of
Registrable Shares requested to be registered by them) if and to the extent that
the managing underwriter shall be of the good faith opinion that such inclusion
would adversely affect the success of such an underwriting, provided, that then
the number of Registrable Shares of a holder to be included in such underwriting
shall be reduced on a pro rata basis, based on the number of Registrable Shares
held by such holder as a percentage of the total number of shares of Common
Stock held by all persons having "piggyback" registration rights, whether or not
pursuant to this Agreement, if any shares of Common Stock are to be included in
such underwriting for the account of any person other then the Company and its
assigns or requesting holders of Retained Warrant Shares.  Notwithstanding the
foregoing provisions, the Company may withdraw any registration statement
referred to in this Section 3(c) without thereby incurring any liability to the
holders of Retained Warrant Shares.

     Section 4.  Acknowledgement of Holding Period.
                 ---------------------------------

     The Company and the Sands Parties acknowledge that the Retained Warrant

                                       3
<PAGE>

Shares are not being delivered as settlement of threatened or actual litigation
proceedings, but rather, pursuant to the Placement Agency Agreement, Sands
Brothers was entitled to the Retained Warrant Shares as of March 30, 2000. The
Company and the Sands Parties represent that they will take this position in
connection with any public filing or for purposes of Rule 144 of the Securities
Act of 1933.

     Section 5.  Mutual Release. The Company and the Sands Parties shall provide
                 --------------
mutual general releases.

          a.     Release by the Company.
                 ----------------------

                 (i)   Except as provided below, as a material inducement to
enter into this Agreement, the Company shall execute and deliver to Sands
Brothers, Venture Capital and MGH, and their respective, parents, subsidiaries
and affiliates, together with all of their respective past and present
directors, managers, officers, partners, employees and attorneys, and each of
their predecessors, successors and assigns and any of the foregoing in their
capacity as a shareholder or agent of Sands Brothers, a full and general
Release, the form of which is attached as Exhibit C hereto, knowingly and
                                          ---------
voluntarily releasing and forever discharging the Sands Parties from any and all
claims, charges, complaints, promises, agreements, controversies, liens,
demands, causes of action, obligations, damages and liabilities of any nature
whatsoever, known or unknown, suspected or unsuspected, which against them the
Company or subsidiaries and affiliates, together with all of their respective
past and present directors, managers, officers, partners, employees and
attorneys, and each of their predecessors, successors and assigns, and any of
the foregoing in their capacity as a shareholder or agent of the Company ever
had, now have, or may hereafter claim to have against any of the Sands Parties
by reason of any matter, cause or thing whatsoever arising on or before the
Separation Date and whether or not previously asserted before any state or
federal court or before any state or federal agency or governmental entity (the
"Release"). The Release will include, without limitation, any rights or claims
relating in any way to the Relationship, or any other federal, state or local
law, regulation, ordinance or common law, or under any policy, agreement,
understanding or promise, whether written or oral, formal or informal, between
the Company and any of the Sands Parties.

                 (ii)  Nothing herein shall be deemed to release any of the
Company's rights under this Agreement.

          b.     Release by Sands Brothers. Except as provided below, as a
                 -------------------------
material inducement to enter into this Agreement, Sands Brothers shall execute
and deliver to the Company a full and general Release, the form of which is
attached as Exhibit D hereto, on its behalf and that of its affiliates and its
            ---------
officers and directors, agents, employees, successors and assigns hereby
knowingly and voluntarily releasing and forever discharging the Company and its
agents, attorneys, employees, directors, officers, affiliates, subsidiary and
parent companies, successors, heirs, beneficiaries or assigns (the "Released
Parties") from any and all claims, charges, complaints, promises, agreements,
controversies, liens, demands, causes of action, obligations, damages and
liabilities of any nature whatsoever that it had, now has, or may hereafter
claim to have against the Released Parties, known or unknown and including
without limitation claims arising out of or relating in any way to the
Relationship, the Placement Agency Agreement, the Debenture, the Warrant
Agreement, the Securities Purchase Agreement and/or any other agreement by or
between the Company and any or all of the Sands Parties whether or not
previously asserted before any state

                                       4
<PAGE>

or federal court or before any state, federal or regulatory agency or
governmental entity. Nothing contained herein shall be deemed to release any of
Sands Brothers' rights under this Agreement or the Retained Warrant Certificate
or the Additional Retained Warrant Certificate.

          c.     Release by Venture Capital. Except as provided below, as a
                 --------------------------
material inducement to enter into this Agreement, Venture Capital shall execute
and deliver to the Company a full and general Release, the form of which is
attached as Exhibit E hereto, on its behalf and that of its affiliates and its
            ---------
officers and directors, agents, employees, successors and assigns hereby
knowingly and voluntarily releasing and forever discharging the Company and its
agents, attorneys, employees, directors, officers, affiliates, subsidiary and
parent companies, successors, heirs, beneficiaries or assigns (the "Released
Parties") from any and all claims, charges, complaints, promises, agreements,
controversies, liens, demands, causes of action, obligations, damages and
liabilities of any nature whatsoever that it had, now has, or may hereafter
claim to have against the Released Parties, known or unknown and including
without limitation claims arising out of or relating in any way to the
Relationship, the Placement Agency Agreement, the Debenture, the Warrant
Agreement, the Securities Purchase Agreement and/or any other agreement by or
between the Company and any or all of the Sands Parties whether or not
previously asserted before any state or federal court or before any state,
federal or regulatory agency or governmental entity; provided, however, that
such Release shall be delivered to Littman Krooks & Roth P.C. ("Littman Krooks")
and shall be held in escrow until the Debenture is paid in full. At such time as
the Debenture is paid in full pursuant to the terms thereof as of this
Agreement, Littman Krooks shall immediately release the Venture Capital Release
to the Company. If the Debenture is not paid in full by the Final Payment Date,
Littman Krooks shall return the Venture Capital Release to Venture Capital and
shall be rendered null and void, ab initio. Nothing contained herein shall be
deemed to release any of Venture Capital's rights under this Agreement.

          d.     Release by MGH. Except as provided below, as a material
                 --------------
inducement to enter into this Agreement, MGH shall execute and deliver to the
Company a full and general Release, the form of which is attached as Exhibit F
                                                                     ---------
hereto, on his behalf and that of his affiliates and its officers and directors,
agents and employees, his successors, heirs, beneficiaries or assigns, hereby
knowingly and voluntarily releasing and forever discharging the Company and its
agents, attorneys, employees, directors, officers, affiliates, subsidiary and
parent companies, successors, heirs, beneficiaries or assigns (the "Released
Parties") from any and all claims, charges, complaints, promises, agreements,
controversies, liens, demands, causes of action, obligations, damages and
liabilities of any nature whatsoever that it had, now has, or may hereafter
claim to have against the Released Parties, known or unknown, including without
limitation claims arising out of or relating in any way to the Relationship, the
Placement Agency Agreement, the Debenture, the Warrant Agreement, the Securities
Purchase Agreement and/or any other agreement by or between the Company and any
or all of the Sands Parties whether or not previously asserted before any state
or federal court or before any state, federal or regulatory agency or
governmental entity. Nothing contained herein shall be deemed to release any of
MGH's rights under this Agreement or the Retained Warrant Certificate or the
Additional Retained Warrant Certificate.

     Section 6.  Mutual Non-Disparagement.  The Company agrees that, except as
                 ------------------------
may be required by law, it will not make or publish any statement which is, or
may reasonably be considered

                                       5
<PAGE>

to be, disparaging of the Sands Parties or directors, officers or employees of
the businesses of the Sands Parties. The Sands Parties agree that they will not
make or publish any statement, which is, or may reasonably be considered to be,
disparaging of the Company or its directors, officers, and employees.

     Section 7.  Knowledge of Claims.  The Company represents and warrants that
                 --------------------
it has no knowledge of any third party which may assert any claim against the
Sands Parties, or any of the past or present officers or directors or any of the
forgoing acting in their capacities as such, with respect to the Relationship.

     Section 8.  Notice.  For purposes of this Agreement, notices and all other
                 ------
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid as follows:

          If to the Company:

          Constellation 3D, Inc.
          805 Third Avenue - 14th Floor
          New York, NY 10022
          Attn: Craig Weiner, Esq., General Counsel

          With a copy to:

          James Brandt, Esq.
          Jeff Tochner, Esq.
          Latham & Watkins
          885 Third Avenue
          New York, NY 10022

          If to Sands Brothers and MGH:

          90 Park Avenue, 39th Floor
          New York, NY 10016
          Attn: Steven B. Sands
          Fax:  (212) 697-8035

          With a copy to:

          Littman Krooks & Roth P.C.
          65 Third Avenue
          New York, NY 10017
          Attn: Mitchell C. Littman, Esq.
          Fax: (212) 490-2990

                                       6
<PAGE>

     or such other address as either party may have furnished to the other in
writing in accordance herewith, except that notices of change of address shall
be effective only upon receipt.

     Section 9.  Miscellaneous.
                 -------------

          a.     Enforcement; Governing Law; Jurisdiction. This Agreement shall
                 ----------------------------------------
be governed by and construed in accordance with the laws of the State of New
York without regard to its conflicts of law principles.

          b.     Headings. The section and paragraph headings contained in this
                 --------
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.

          c.     Counterparts. This Agreement may be executed in two or more
                 ------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.

          d.     Entire Agreement. This Agreement constitutes the entire
                 ----------------
agreement, and supersedes any and all prior agreements, and understandings, both
written and oral, between the parties hereto with respect to the subject matter
hereof except as otherwise provided herein.

          e.     Severability. If any term or other provision of this Agreement
                 ------------
is invalid, illegal or incapable of being enforced by any rule of law or public
policy, all other conditions and provisions of this Agreement shall nevertheless
remain in full force and effect.

          f.     Successors. This Agreement shall be binding upon and shall
                 ----------
inure to the benefit of each of the parties hereto, and their respective heirs,
legatees, executors, administrators, legal representatives, successors and
assigns. The provisions of Section 2(a) hereof are intended to be for the
benefit of, and shall be enforceable by, each Releasee and his, her or its,
heirs and representatives.

                                       7
<PAGE>

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

                              CONSTELLATION 3D, INC.

                              By: /s/ Ray Tellini
                                 -----------------------------------
                                      Ray Tellini, Vice - President

                              SANDS BROTHERS & CO. LTD.

                              By: /s/ Steven Sands
                                 -----------------------------------
                                      Steven Sands

                              SANDS BROTHERS VENTURE CAPITAL LLC

                              By: /s/ Steven Sands
                                 -----------------------------------
                                      Steven Sands

                              /s/ MARK G. HOLLO
                              --------------------------------------
                              MARK G. HOLLO

                                       8
<PAGE>

                                   EXHIBIT A
                     FORM OF RETAINED WARRANT CERTIFICATE

THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND
EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE PURSUANT TO AN
EXEMPTION FROM REGISTRATION UNDER REGULATION D PROMULGATED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT") OR OTHERWISE.  THIS WARRANT SHALL NOT
CONSTITUTE AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY THE SECURITIES
IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. THE
SECURITIES ARE "RESTRICTED" AND MAY NOT BE RESOLD OR TRANSFERRED EXCEPT AS
PERMITTED UNDER THE ACT PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM.

                         COMMON STOCK PURCHASE WARRANT

                          Number of Shares:  100,000

                            CONSTELLATION 3D, INC.
                            ----------------------

                          Void after December 1, 2004

1.    Issuance.  This Warrant is issued to Sands Brothers & Co., Ltd. by
      --------
Constellation 3D, Inc., a Delaware corporation (hereinafter with its successors
called the "Company").

2.    Purchase Price; Number of Shares.  Subject to the terms and conditions
      --------------------------------
hereinafter set forth, the registered holder of this Warrant (the "Holder"), is
entitled upon surrender of this Warrant with the subscription form annexed
hereto duly executed, at the office of the Company, at 805 Third Avenue - 14th
Floor, New York, NY 10022, or such other office as the Company shall notify the
Holder of in writing, to purchase from the Company at a price per share (the
"Purchase Price") of  $3.67, of up to 100,000 fully paid and nonassessable
shares of Common Stock, $ .00001 par value, of the Company (the "Common Stock").
Until such time as this Warrant is exercised in full or expires, the Purchase
Price and the securities issuable upon exercise of this Warrant are subject to
adjustment as hereinafter provided.

3.    Exercisability.  This Warrant will become exercisable upon the execution
      --------------
hereof by the Company.

4.    Payment of Purchase Price; Cashless Exercise.  Payment of the Purchase
      --------------------------------------------
Price of the shares shall be by certified check or cashier's check or by wire
transfer (of same day funds) to an account designated by the Company in an
amount equal to the Exercise Price multiplied by the number of shares being
purchased. Notwithstanding anything to the contrary contained in this Warrant,
this Warrant may be exercised at any time during the Exercise Period by
presentation and surrender of this Warrant to the Company at its principal
executive offices with a written notice of the holder's intention to effect a
cashless exercise (a "Cashless Exercise").  In the event of a Cashless Exercise,
in lieu of paying the Exercise Price in cash, the holder shall surrender this
Warrant for that number of shares of Common Stock determined by the Company in
good faith by multiplying the number

                                       9
<PAGE>

of Warrant Shares to which it would otherwise be entitled by a fraction, the
numerator of which shall be the difference, but not less than zero between the
then current Market Price per share of the Common Stock and the Exercise Price,
and the denominator of which shall be the then current Market Price per share of
Common Stock. "Market Price," as of any date, (i) means the average of the
               ------------
closing bid prices for the shares of Common Stock as reported on the Nasdaq
National Market by Bloomberg Financial Markets ("Bloomberg") for the five (5)
consecutive trading days immediately preceding such date, or (ii) if the Nasdaq
National Market is not the principal trading market for the shares of Common
Stock, the average of the closing bid prices reported by Bloomberg on the
principal trading market for the Common Stock during the same period, or, if
there is no bid price for such period, the last reported price reported by
Bloomberg for such period, or (iii) if the foregoing do not apply, the last
closing bid price of such security in the over-the-counter market on the pink
sheets or bulletin board for such security as reported by Bloomberg, or if no
closing bid price is so reported for such security, the last closing trade price
of such security as reported by Bloomberg, or (iv) if market value cannot be
calculated as of such date on any of the foregoing bases, the Market Price shall
be the average fair market value as reasonably determined by an investment
banking firm selected by the Company and reasonably acceptable to the holder,
with the costs of the appraisal to be borne by the Company. The manner of
determining the Market Price of the Common Stock set forth in the foregoing
definition shall apply with respect to any other security in respect of which a
determination as to market value must be made hereunder.

5.    Partial Exercise.  This Warrant may not be exercised in part.
      ----------------

6.    Issuance Date.  The person or persons in whose name or names any
      -------------
certificate representing shares of Common Stock is issued hereunder shall be
deemed to have become the holder of record of the shares represented thereby as
at the close of business on the date this Warrant is exercised with respect to
such shares, whether or not the transfer books of the Company shall be closed.
Until such time as this Warrant is exercised in whole or in part, the Holder
hereof shall have no rights as a shareholder of the Company.

7.    Expiration Date.  This Warrant shall expire at the close of business on
      ---------------
December 1, 2004, and shall be void thereafter.

8.    Reserved Shares; Valid Issuance.  The Company covenants that it will at
      -------------------------------
all times from and after the date hereof reserve and keep available such number
of its authorized shares of Common Stock, free from all preemptive or similar
rights therein, as will be sufficient to permit the exercise of this Warrant in
full.  The Company further covenants that such shares as may be issued pursuant
to the exercise of this Warrant will, upon issuance, be validly issued, fully
paid and nonassessable and free from all taxes, liens and charges with respect
to the issuance thereof.

9.    Dividends.  If after May 25, 2001 (the "Original Issue Date") the Company
      ---------
shall subdivide the Common Stock, by split-up or otherwise, or combine the
Common Stock, or issue additional shares of Common Stock in payment of a stock
dividend on the Common Stock, the number of shares issuable on the exercise of
this Warrant shall forthwith be proportionately increased in the case of a
subdivision or stock dividend, or proportionately decreased in the case of a
combination, and the Purchase Price shall forthwith be proportionately decreased
in the case of a subdivision or stock dividend, or proportionately increased in
the case of a combination.

                                       10
<PAGE>

10.   Fractional Shares.  In no event shall any fractional share of Common
      -----------------
Stock be issued upon any exercise of this Warrant.  If, upon exercise of this
Warrant, the Holder would, except as provided in this Section 12, be entitled to
receive a fractional share of Common Stock, then the Company shall make a cash
payment to the Holder equal to the quotient of (a) such fraction multiplied by
(b) the fair market value of a share of Common Stock as determined by the
Company's Board of Directors, in its sole discretion.

11.   Certificate of Adjustment.  Whenever the Purchase Price is adjusted, as
      -------------------------
herein provided, the Company shall promptly deliver to the Holder a certificate
either from the Company's President and its Treasurer or from a firm of
independent public accountants setting forth the Purchase Price after such
adjustment and setting forth a brief statement of the facts requiring such
adjustment.

12.   Notices of Record Date, Etc.  In the event of:
      ----------------------------

      a.    any taking by the Company of a record of the holders of any class of
      securities for the purpose of determining the holders thereof who are
      entitled to receive any dividend or other distribution, or any right to
      subscribe for, purchase or otherwise acquire any shares of stock of any
      class or any other securities or property, or to receive any other right,

      b.    any reclassification of the capital stock of the Company, capital
      reorganization of the Company, consolidation or merger involving the
      Company, or sale or conveyance of all or substantially all of its assets,
      or

      c.    any voluntary or involuntary dissolution, liquidation or winding-up
      of the Company,

then and in each such event the Company will mail or cause to be mailed to the
Holder a notice specifying (i) the date on which any such record is to be taken
for the purpose of such dividend, distribution or right, and stating the amount
and character of such dividend, distribution or right, or (ii) the date on which
any such reclassification, reorganization, consolidation, merger, sale or
conveyance, dissolution, liquidation or winding-up is to take place, and the
time, if any, is to be fixed, as of which the holders of record in respect of
such event are to be determined.  Such notice shall be mailed at least 20 days
prior to the date specified in such notice on which any such action is to be
taken.  Failure to give such notice, or any defect therein, shall not affect the
legality or validity of any dividend or distribution, or of any such
transaction.

13.   Amendment.  The terms of this Warrant may be amended, modified or waived
      ---------
only with the written consent of the Company and the holders of Warrants
representing at least two-thirds of the number of shares of Common Stock then
issuable upon the exercise of the Warrants.  No such amendment, modification or
waiver shall be effective as to this Warrant unless the terms of such amendment,
modification or waiver shall apply with the same force and effect to all of the
other Warrants then outstanding.

14.   Warrant Register; Transfers, Etc.
      ---------------------------------

                                       11
<PAGE>

      a.    The Company will maintain a register containing the names and
      addresses of the registered holders of the Warrants. The Holder may change
      its address as shown on the warrant register by written notice to the
      Company requesting such change. Any notice or written communication
      required or permitted to be given to the Holder may be given by certified
      mail or delivered to the Holder at its address as shown on the warrant
      register.

      b.    This Warrant may not be transferred or assigned in whole or in part
      without the prior written consent of the Company, and without compliance
      with all applicable federal and state securities laws by the transferor
      and the transferee. Subject to all of the restrictions of the prior
      sentence, title to this Warrant may be transferred by endorsement (by the
      Holder executing the Assignment form annexed hereto) and delivery in the
      same manner as a negotiable instrument transferable by endorsement and
      delivery. Upon surrender of this Warrant to the Company, together with the
      assignment hereof properly endorsed, for a permitted transfer of this
      Warrant as an entirety by the Holder, the Company shall issue a new
      warrant of the same denomination to the assignee. Upon surrender of this
      Warrant to the Company, together with the assignment hereof properly
      endorsed, by the Holder for transfer with respect to a portion of the
      shares of Common Stock purchasable hereunder, the Company shall issue a
      new warrant to the assignee, in such denomination as shall be requested by
      the Holder hereof, and shall issue to such Holder a new warrant covering
      the number of shares in respect of which this Warrant shall not have been
      transferred.

      c.    In case this Warrant shall be mutilated, lost, stolen or destroyed,
      the Company shall issue a new warrant of like tenor and denomination and
      deliver the same (i) in exchange and substitution for and upon surrender
      and cancellation of any mutilated Warrant, or (ii) in lieu of any Warrant
      lost, stolen or destroyed, upon receipt of evidence reasonably
      satisfactory to the Company of the loss, theft or destruction of such
      Warrant (including a reasonably detailed affidavit with respect to the
      circumstances of any loss, theft or destruction) and of indemnity
      reasonably satisfactory to the Company, provided, however, that so long as
      the original holder of this Warrant is the registered holder of this
      Warrant, no indemnity shall be required other than its written agreement
      to indemnify the Company against any loss arising from the issuance of
      such new warrant.

15.   No Impairment.  The Company will not, by amendment of its Articles of
      -------------
Incorporation or through any reclassification, capital reorganization,
consolidation, merger, sale or conveyance of assets, dissolution, liquidation,
issue or sale of securities or any other voluntary action, avoid or seek to
avoid the observance or performance of any of the terms of this Warrant, but
will at all times in good faith assist in the carrying out of all such terms and
in the taking of all such action as may be necessary or appropriate in order to
protect the rights of the Holder.

16.   Governing Law.  The provisions and terms of this Warrant shall be
      -------------
governed by and construed in accordance with the internal laws of the State of
New York.

17.   Successors and Assigns.  This Warrant shall be binding upon the
      ----------------------
Company's successors and assigns and shall inure to the benefit of the Holder's
successors, legal representatives and permitted assigns.

                                       12
<PAGE>

18.   Business Days.  If the last or appointed day for the taking of any action
      -------------
required or the expiration of any right granted herein shall be a Saturday or
Sunday or a legal holiday in the State of Delaware, then such action may be
taken or right may be exercised on the next succeeding day which is not a
Saturday or Sunday or such a legal holiday.

19.   Consolidation or Merger.  In case of any consolidation of the Company
      -----------------------
with, or merger of the Company into, any other corporation, or in case of any
sale or conveyance of all or substantially all of the assets of the Company at
any time during the Exercise Period, then as a condition of such consolidation,
merger or sale or conveyance, adequate provision will be made whereby the holder
of this Warrant will have the right to acquire and receive upon exercise of this
Warrant in lieu of the shares of Common Stock immediately theretofore acquirable
upon the exercise of this Warrant, such shares of stock, securities, cash or
assets as may be issued or payable with respect to or in exchange for the number
of shares of Common Stock immediately theretofore acquirable and receivable upon
exercise of this Warrant had such consolidation, merger, sale or conveyance not
taken place.  In any such case, the Company will make appropriate provision to
insure that the provisions of this Section 19 hereof will thereafter be
applicable as nearly as may be in relation to any shares of stock or securities
thereafter deliverable upon the exercise of this Warrant.

                                       13
<PAGE>

     IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by
its officers thereunto duly authorized:

Issued: New York, New York              Constellation 3D, Inc.
        May 25, 2001

                                        __________________
                                        By:

                                       14
<PAGE>

ASSIGNMENT

     For value received __________________ hereby sells, assigns and transfers
unto _____ ___________________ assigns and transfers unto ______________________
_____________________________________________________________________________
[Please print or typewrite name and address of Assignee]
_____________________________________________________________________________
the within Warrant, and does hereby irrevocably constitute and appoint
_________________ its attorney to transfer the within Warrant on the books of
the within named Company with full power of substitution on the premises.

Dated: __________________

In the presence of:

________________________

                                       15
<PAGE>

SUBSCRIPTION

To: ____________________              Date: ___________________

     The undersigned hereby subscribes for _______ shares of Common Stock
covered by this Warrant. The certificate(s) for such shares shall be issued in
the name of the undersigned or as otherwise indicated below:

                                      ________________________
                                      Signature

                                      ________________________
                                      Name for Registration

                                      ________________________
                                      Mailing Address

                                       16
<PAGE>

                                   EXHIBIT B
                    ADDITIONAL RETAINED WARRANT CERTIFICATE

THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND
EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE PURSUANT TO AN
EXEMPTION FROM REGISTRATION UNDER REGULATION D PROMULGATED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT") OR OTHERWISE.  THIS WARRANT SHALL NOT
CONSTITUTE AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY THE SECURITIES
IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. THE
SECURITIES ARE "RESTRICTED" AND MAY NOT BE RESOLD OR TRANSFERRED EXCEPT AS
PERMITTED UNDER THE ACT PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM.

                         COMMON STOCK PURCHASE WARRANT

                          Number of Shares:  100,000

                            CONSTELLATION 3D, INC.
                            ----------------------

                          Void after December 1, 2004

1.  Issuance.  This Warrant is issued to Sands Brothers & Co., Ltd. by
    --------
Constellation 3D, Inc., a Delaware corporation (hereinafter with its successors
called the "Company").

2.  Purchase Price; Number of Shares.  Subject to the terms and conditions
    --------------------------------
hereinafter set forth, the registered holder of this Warrant (the "Holder"), is
entitled upon surrender of this Warrant with the subscription form annexed
hereto duly executed, at the office of the Company, at 805 Third Avenue - 14/th/
Floor, New York, NY 10022, or such other office as the Company shall notify the
Holder of in writing, to purchase from the Company at a price per share (the
"Purchase Price") of  $11.00, of up to 100,000 fully paid and nonassessable
shares of Common Stock, $ .00001 par value, of the Company (the "Common Stock").
Until such time as this Warrant is exercised in full or expires, the Purchase
Price and the securities issuable upon exercise of this Warrant are subject to
adjustment as hereinafter provided.

3.  Exercisability.  This Warrant will become exercisable upon the execution
    --------------
hereof by the Company.

4.  Payment of Purchase Price; Cashless Exercise.  Payment of the Purchase Price
    --------------------------------------------
of the shares shall be by certified check or cashier's check or by wire transfer
(of same day funds) to an account designated by the Company in an amount equal
to the Exercise Price multiplied by the number of shares being purchased.
Notwithstanding anything to the contrary contained in this Warrant, this Warrant
may be exercised at any time during the Exercise Period by presentation and
surrender of this Warrant to the Company at its principal executive offices with
a written notice of the holder's intention to effect a cashless exercise (a
"Cashless Exercise").  In the event of a Cashless Exercise, in lieu of paying
the Exercise Price in cash, the holder shall surrender this Warrant for that
number of shares of Common Stock determined by the Company in good faith by
multiplying the number

                                      17
<PAGE>

of Warrant Shares to which it would otherwise be entitled by a fraction, the
numerator of which shall be the difference, but not less than zero between the
then current Market Price per share of the Common Stock and the Exercise Price,
and the denominator of which shall be the then current Market Price per share of
Common Stock. "Market Price," as of any date, (i) means the average of the
               ------------
closing bid prices for the shares of Common Stock as reported on the Nasdaq
National Market by Bloomberg Financial Markets ("Bloomberg") for the five (5)
consecutive trading days immediately preceding such date, or (ii) if the Nasdaq
National Market is not the principal trading market for the shares of Common
Stock, the average of the closing bid prices reported by Bloomberg on the
principal trading market for the Common Stock during the same period, or, if
there is no bid price for such period, the last reported price reported by
Bloomberg for such period, or (iii) if the foregoing do not apply, the last
closing bid price of such security in the over-the-counter market on the pink
sheets or bulletin board for such security as reported by Bloomberg, or if no
closing bid price is so reported for such security, the last closing trade price
of such security as reported by Bloomberg, or (iv) if market value cannot be
calculated as of such date on any of the foregoing bases, the Market Price shall
be the average fair market value as reasonably determined by an investment
banking firm selected by the Company and reasonably acceptable to the holder,
with the costs of the appraisal to be borne by the Company. The manner of
determining the Market Price of the Common Stock set forth in the foregoing
definition shall apply with respect to any other security in respect of which a
determination as to market value must be made hereunder.

5.  Partial Exercise.  This Warrant may not be exercised in part.
    ----------------

6.  Issuance Date.  The person or persons in whose name or names any certificate
    -------------
representing shares of Common Stock is issued hereunder shall be deemed to have
become the holder of record of the shares represented thereby as at the close of
business on the date this Warrant is exercised with respect to such shares,
whether or not the transfer books of the Company shall be closed.  Until such
time as this Warrant is exercised in whole or in part, the Holder hereof shall
have no rights as a shareholder of the Company.

7.  Expiration Date.  This Warrant shall expire at the close of business on
    ---------------
December 1, 2004, and shall be void thereafter.

8.  Reserved Shares; Valid Issuance.  The Company covenants that it will at all
    -------------------------------
times from and after the date hereof reserve and keep available such number of
its authorized shares of Common Stock, free from all preemptive or similar
rights therein, as will be sufficient to permit the exercise of this Warrant in
full.  The Company further covenants that such shares as may be issued pursuant
to the exercise of this Warrant will, upon issuance, be validly issued, fully
paid and nonassessable and free from all taxes, liens and charges with respect
to the issuance thereof.

9.  Dividends.  If after May 25, 2001 (the "Original Issue Date") the Company
    ---------
shall subdivide the Common Stock, by split-up or otherwise, or combine the
Common Stock, or issue additional shares of Common Stock in payment of a stock
dividend on the Common Stock, the number of shares issuable on the exercise of
this Warrant shall forthwith be proportionately increased in the case of a
subdivision or stock dividend, or proportionately decreased in the case of a
combination, and the Purchase Price shall forthwith be proportionately decreased
in the case of a subdivision or stock dividend, or proportionately increased in
the case of a combination.

                                       18
<PAGE>

10.  Fractional Shares.  In no event shall any fractional share of Common Stock
     -----------------
be issued upon any exercise of this Warrant.  If, upon exercise of this Warrant,
the Holder would, except as provided in this Section 12, be entitled to receive
a fractional share of Common Stock, then the Company shall make a cash payment
to the Holder equal to the quotient of (a) such fraction multiplied by (b) the
fair market value of a share of Common Stock as determined by the Company's
Board of Directors, in its sole discretion.

11.  Certificate of Adjustment.  Whenever the Purchase Price is adjusted, as
     -------------------------
herein provided, the Company shall promptly deliver to the Holder a certificate
either from the Company's President and its Treasurer or from a firm of
independent public accountants setting forth the Purchase Price after such
adjustment and setting forth a brief statement of the facts requiring such
adjustment.

12.  Notices of Record Date, Etc.  In the event of:
     ----------------------------

     c.   any taking by the Company of a record of the holders of any class of
     securities for the purpose of determining the holders thereof who are
     entitled to receive any dividend or other distribution, or any right to
     subscribe for, purchase or otherwise acquire any shares of stock of any
     class or any other securities or property, or to receive any other right,

     d.   any reclassification of the capital stock of the Company, capital
     reorganization of the Company, consolidation or merger involving the
     Company, or sale or conveyance of all or substantially all of its assets,
     or

     c.   any voluntary or involuntary dissolution, liquidation or winding-up of
     the Company,

then and in each such event the Company will mail or cause to be mailed to the
Holder a notice specifying (i) the date on which any such record is to be taken
for the purpose of such dividend, distribution or right, and stating the amount
and character of such dividend, distribution or right, or (ii) the date on which
any such reclassification, reorganization, consolidation, merger, sale or
conveyance, dissolution, liquidation or winding-up is to take place, and the
time, if any, is to be fixed, as of which the holders of record in respect of
such event are to be determined.  Such notice shall be mailed at least 20 days
prior to the date specified in such notice on which any such action is to be
taken.  Failure to give such notice, or any defect therein, shall not affect the
legality or validity of any dividend or distribution, or of any such
transaction.

13.  Amendment.  The terms of this Warrant may be amended, modified or waived
     ---------
only with the written consent of the Company and the holders of Warrants
representing at least two-thirds of the number of shares of Common Stock then
issuable upon the exercise of the Warrants.  No such amendment, modification or
waiver shall be effective as to this Warrant unless the terms of such amendment,
modification or waiver shall apply with the same force and effect to all of the
other Warrants then outstanding.

14.  Warrant Register; Transfers, Etc.
     ---------------------------------

                                       19
<PAGE>

     a.  The Company will maintain a register containing the names and addresses
     of the registered holders of the Warrants.  The Holder may change its
     address as shown on the warrant register by written notice to the Company
     requesting such change.  Any notice or written communication required or
     permitted to be given to the Holder may be given by certified mail or
     delivered to the Holder at its address as shown on the warrant register.

     b.  This Warrant may not be transferred or assigned in whole or in part
     without the prior written consent of the Company, and without compliance
     with all applicable federal and state securities laws by the transferor and
     the transferee.  Subject to all of the restrictions of the prior sentence,
     title to this Warrant may be transferred by endorsement (by the Holder
     executing the Assignment form annexed hereto) and delivery in the same
     manner as a negotiable instrument transferable by endorsement and delivery.
     Upon surrender of this Warrant to the Company, together with the assignment
     hereof properly endorsed, for a permitted transfer of this Warrant as an
     entirety by the Holder, the Company shall issue a new warrant of the same
     denomination to the assignee.  Upon surrender of this Warrant to the
     Company, together with the assignment hereof properly endorsed, by the
     Holder for transfer with respect to a portion of the shares of Common Stock
     purchasable hereunder, the Company shall issue a new warrant to the
     assignee, in such denomination as shall be requested by the Holder hereof,
     and shall issue to such Holder a new warrant covering the number of shares
     in respect of which this Warrant shall not have been transferred.

     c.  In case this Warrant shall be mutilated, lost, stolen or destroyed, the
     Company shall issue a new warrant of like tenor and denomination and
     deliver the same (i) in exchange and substitution for and upon surrender
     and cancellation of any mutilated Warrant, or (ii) in lieu of any Warrant
     lost, stolen or destroyed, upon receipt of evidence reasonably satisfactory
     to the Company of the loss, theft or destruction of such Warrant (including
     a reasonably detailed affidavit with respect to the circumstances of any
     loss, theft or destruction) and of indemnity reasonably satisfactory to the
     Company, provided, however, that so long as the original holder of this
     Warrant is the registered holder of this Warrant, no indemnity shall be
     required other than its written agreement to indemnify the Company against
     any loss arising from the issuance of such new warrant.

15.  No Impairment.  The Company will not, by amendment of its Articles of
     -------------
Incorporation or through any reclassification, capital reorganization,
consolidation, merger, sale or conveyance of assets, dissolution, liquidation,
issue or sale of securities or any other voluntary action, avoid or seek to
avoid the observance or performance of any of the terms of this Warrant, but
will at all times in good faith assist in the carrying out of all such terms and
in the taking of all such action as may be necessary or appropriate in order to
protect the rights of the Holder.

16.  Governing Law.  The provisions and terms of this Warrant shall be governed
     -------------
by and construed in accordance with the internal laws of the State of New York.

17.  Successors and Assigns.  This Warrant shall be binding upon the Company's
     ----------------------
successors and assigns and shall inure to the benefit of the Holder's
successors, legal representatives and permitted assigns.

                                       20
<PAGE>

18.  Business Days.  If the last or appointed day for the taking of any action
     -------------
required or the expiration of any right granted herein shall be a Saturday or
Sunday or a legal holiday in the State of Delaware, then such action may be
taken or right may be exercised on the next succeeding day which is not a
Saturday or Sunday or such a legal holiday.

19.  Consolidation or Merger.  In case of any consolidation of the Company with,
     -----------------------
or merger of the Company into, any other corporation, or in case of any sale or
conveyance of all or substantially all of the assets of the Company at any time
during the Exercise Period, then as a condition of such consolidation, merger or
sale or conveyance, adequate provision will be made whereby the holder of this
Warrant will have the right to acquire and receive upon exercise of this Warrant
in lieu of the shares of Common Stock immediately theretofore acquirable upon
the exercise of this Warrant, such shares of stock, securities, cash or assets
as may be issued or payable with respect to or in exchange for the number of
shares of Common Stock immediately theretofore acquirable and receivable upon
exercise of this Warrant had such consolidation, merger, sale or conveyance not
taken place. In any such case, the Company will make appropriate provision to
insure that the provisions of this Section 4 hereof will thereafter be
applicable as nearly as may be in relation to any shares of stock or securities
thereafter deliverable upon the exercise of this Warrant.

                                      21
<PAGE>

     IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by
its officers thereunto duly authorized.

Issued: New York, New York      Constellation 3D, Inc.
        May 25, 2001

                                __________________
                                By:

                                       22
<PAGE>

ASSIGNMENT

     For value received __________________ hereby sells, assigns and transfers
unto ________________________ assigns and transfers unto _______________________
________________________________________________________________________________
[Please print or typewrite name and address of Assignee]

________________________________________________________________________________
the within Warrant, and does hereby irrevocably constitute and appoint
_________________ its attorney to transfer the within Warrant on the books of
the within named Company with full power of substitution on the premises.

Dated: __________________

In the presence of:

________________________

                                       23
<PAGE>

SUBSCRIPTION

To: ____________________           Date: ___________________

     The undersigned hereby subscribes for _______ shares of Common Stock
covered by this Warrant. The certificate(s) for such shares shall be issued in
the name of the undersigned or as otherwise indicated below:

                                   ________________________
                                   Signature

                                   ________________________
                                   Name for Registration

                                   ________________________
                                   Mailing Address

                                       24
<PAGE>

                                   EXHIBIT C

                                    RELEASE

The undersigned, CONSTELLATION 3D, INC. ("Releasor" or the "Company"), knowingly
and voluntarily does hereby release and forever discharges SANDS BROTHERS & CO.,
LTD., MARK G. HOLLO, SANDS BROTHERS VENTURE CAPITAL LLC and its subsidiaries and
affiliates, together with all of their respective past and present directors,
managers, officers, partners, employees and attorneys, and each of their
predecessors, successors and assigns, and any of the foregoing in their capacity
as a shareholder or agent of Sands Brothers & Co., Ltd. (collectively,
"Releasees") from any and all claims, charges, complaints, promises, agreements,
controversies, liens, demands, causes of action, obligations, damages and
liabilities of any nature whatsoever, known or unknown, suspected or
unsuspected, which against them the Company or subsidiaries and affiliates,
together with all of their respective past and present directors, managers,
officers, partners, employees and attorneys, and each of their predecessors,
successors and assigns, and any of the foregoing in their capacity as a
shareholder or agent of the Company ever had, now have, or may hereafter claim
to have against any of the Releasees by reason of any matter, cause or thing
whatsoever arising on or before the Separation Date and whether or not
previously asserted before any state or federal court or before any state or
federal agency or governmental entity (the "Release").  The Release includes,
without limitation, any rights or claims relating in any way to the Relationship
(as defined in the Settlement and Release Agreement), or any other federal,
state or local law, regulation, ordinance or common law, or under any policy,
agreement, understanding or promise, whether written or oral, formal or
informal, between any of the Releasees, Sands Brothers & Co., Inc., Mark G.
Hollo and Sands Brothers Venture Capital LLC.

Date: May ______, 2001

                                         CONSTELLATION 3D, INC.

                                         By:___________________________
                                         Title:

                                       25
<PAGE>

                                   EXHIBIT D

                                    RELEASE

The undersigned, SANDS BROTHERS & CO., LTD ("Releasor" or the "Company"),
knowingly and voluntarily does hereby release and forever discharges
CONSTELLATION 3D, INC. and its subsidiaries and affiliates, together with all of
its respective past and present directors, managers, officers, partners,
employees and attorneys, and each of its predecessors, successors and assigns,
and any of the foregoing in their capacity as a shareholder or agent of
Constellation 3D, Inc. (collectively, "Releasees") from any and all claims,
charges, complaints, promises, agreements, controversies, liens, demands, causes
of action, obligations, damages and liabilities of any nature whatsoever, known
or unknown, suspected or unsuspected, which against them the Company or
subsidiaries and affiliates, together with all of their respective past and
present directors, managers, officers, partners, employees and attorneys, and
each of their predecessors, successors and assigns, and any of the foregoing in
their capacity as a shareholder or agent of the Company ever had, now have, or
may hereafter claim to have against any of the Releasees by reason of any
matter, cause or thing whatsoever arising on or before the Separation Date and
whether or not previously asserted before any state or federal court or before
any state or federal agency or governmental entity (the "Release").  The Release
includes, without limitation, any rights or claims relating in any way to the
Relationship (as defined in the Settlement and Release Agreement), or any other
federal, state or local law, regulation, ordinance or common law, or under any
policy, agreement, understanding or promise, whether written or oral, formal or
informal, between any of the Releasees, the Company, Mark G. Hollo and Sands
Brothers Venture Capital LLC.

Dated: May ________, 2001

                                             SANDS BROTHERS & CO., LTD.

                                             ________________________________
                                             By:
                                             Title:

                                       26
<PAGE>

                                   EXHIBIT E

                                    RELEASE

The undersigned, SANDS BROTHERS VENTURE CAPITAL LLC ("Releasor" or the
"Company"), knowingly and voluntarily does hereby release and forever discharges
CONSTELLATION 3D, INC. and its subsidiaries and affiliates, together with all of
its respective past and present directors, managers, officers, partners,
employees and attorneys, and each of its predecessors, successors and assigns,
and any of the foregoing in their capacity as a shareholder or agent of
Constellation 3D, Inc. (collectively, "Releasees") from any and all claims,
charges, complaints, promises, agreements, controversies, liens, demands, causes
of action, obligations, damages and liabilities of any nature whatsoever, known
or unknown, suspected or unsuspected, which against them the Company or
subsidiaries and affiliates, together with all of their respective past and
present directors, managers, officers, partners, employees and attorneys, and
each of their predecessors, successors and assigns, and any of the foregoing in
their capacity as a shareholder or agent of the Company ever had, now have, or
may hereafter claim to have against any of the Releasees by reason of any
matter, cause or thing whatsoever arising on or before the Separation Date and
whether or not previously asserted before any state or federal court or before
any state or federal agency or governmental entity (the "Release"). The Release
includes, without limitation, any rights or claims relating in any way to the
Relationship (as defined in the Settlement and Release Agreement), or any other
federal, state or local law, regulation, ordinance or common law, or under any
policy, agreement, understanding or promise, whether written or oral, formal or
informal, between any of the Releasees, the Company, Sands Brothers & Co., Ltd.
and Mark G. Hollo.

This Release shall be rendered null and void, ab initio, if that certain 10%
Subordinated Convertible Debenture dated March 24, 2000 (the "Debenture") in the
principal amount of Four Million ($4,000,000) Dollars issued to Sands Brothers
Venture Capital LLC is not paid in full, with accrued interest thereon, by the
earlier of the due date thereof, or one business day following the Company's
receipt of $9 million in debt or equity financing.

Dated: May ________, 2001

                                       SANDS BROTHERS VENTURE CAPITAL LLC

                                       ________________________________
                                       By:
                                       Title:

                                       27
<PAGE>

                                   EXHIBIT F

                                    RELEASE

The undersigned, Mark G. Hollo ("Releasor"), knowingly and voluntarily does
hereby release and forever discharges CONSTELLATION 3D, INC. and its
subsidiaries and affiliates, together with all of its respective past and
present directors, managers, officers, partners, employees and attorneys, and
each of its predecessors, successors and assigns, and any of the foregoing in
their capacity as a shareholder or agent of Constellation 3D, Inc.
(collectively, "Releasees") from any and all claims, charges, complaints,
promises, agreements, controversies, liens, demands, causes of action,
obligations, damages and liabilities of any nature whatsoever, known or unknown,
suspected or unsuspected, which against them he and each of his successors,
heirs, beneficiaries or assigns predecessors, successors and assigns ever had,
now have, or may hereafter claim to have against any of the Releasees by reason
of any matter, cause or thing whatsoever arising on or before the Separation
Date and whether or not previously asserted before any state or federal court or
before any state or federal agency or governmental entity (the "Release").  The
Release includes, without limitation, any rights or claims relating in any way
to the Relationship (as defined in the Settlement and Release Agreement), or any
other federal, state or local law, regulation, ordinance or common law, or under
any policy, agreement, understanding or promise, whether written or oral, formal
or informal, between any of the Releasees, the Company, Sands Brothers & Co.,
Ltd. and Mark G. Hollo.

Dated: May ________, 2001

                                              _______________________________
                                              MARK G. HOLLO

                                       28<PAGE>

                                                                 EXHIBIT 10.1.7

                                                            As of June 26, 2001

CONGRESS FINANCIAL CORPORATION (NORTHWEST)
c/o Congress Financial Corporation (Western)
251 South Lake Avenue
Pasadena, California 91101

         Re: Amendment No. 7 to Loan and Security Agreement and Waiver

Ladies and Gentlemen:

   CONGRESS FINANCIAL CORPORATION (NORTHWEST) ("Lender") and VALLEY MEDIA,
INC., a Delaware corporation ("Borrower"), have entered into certain financing
arrangements pursuant to the Loan and Security Agreement, dated as of May 21,
1998, by and between Lender and Borrower, as amended by Amendment No. 1 to
Loan Agreement, dated September 15, 1998, Amendment No. 2 to Loan Agreement,
dated as of November 30, 1998, Amendment No. 3 to Loan Agreement, dated as of
March 15, 1999, Amendment No. 4 to Loan and Security Agreement, dated June 25,
1999, Amendment No. 5 to Loan and Security Agreement, dated January 28, 2000,
and Amendment No. 6 to Loan and Security Agreement, dated February 23, 2000
(as amended, the "Loan Agreement") and all other Financing Agreements at any
time executed and/or delivered in connection therewith or related thereto. All
capitalized terms used herein shall have the meaning assigned thereto in the
Loan Agreement, unless otherwise defined herein.

   Borrower has requested that (a) Lender amend certain provisions of the Loan
Agreement to, inter alia, decrease the Maximum Credit, and (b) waive the Event
of Default that occurred if and to the extent Borrower failed to comply with
the Adjusted Net Worth covenant set forth in Section 9.13 of the Loan
Agreement for Borrower's fiscal year ended March 31, 2001 and Borrower's
April, 2001 and May, 2001 fiscal months, and Lender is willing to agree to the
foregoing, on and subject to the terms and conditions contained in this
Amendment No. 7 to Loan and Security Agreement and Waiver (this "Amendment").

   In consideration of the foregoing and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged by
the parties hereto, the parties hereto hereby agree as follows:

   1. Additional Definitions. As used herein, the following terms shall have
the meaning given below and Section 1 of the Loan Agreement is hereby amended
to include in addition, and not in limitation of, the following defined terms:

     (a) 1.2(a) "Adjusted EBITDA" shall mean as to any Person, with respect
  to any period, an amount equal to EBITDA plus (i) write-offs of tax loss
  accruals on Borrower's books as of March 31, 2001, in an aggregate amount
  not to exceed $9,000,000 during the period from and after the Amendment No.
  7 Closing Date through and including May 20, 2002, only if and to the
  extent that such write-offs have not previously been taken into account in
  Borrower's calculation of EBITDA with respect to such period, plus (ii)
  forgone tax loss accrual credits in an aggregate amount not to exceed
  $1,500,000 for any month of Borrower's fiscal year ending on or about March
  30, 2002, only if and to the extent that such forgone tax loss accrual
  credits have not previously been taken into account in Borrower's
  calculation of EBITDA with respect to such period, plus (iii) reserves and
  charges with respect to net income in connection with the complete or
  partial closing of any Inventory distribution center of Borrower, in an
  aggregate amount not to exceed $2,000,000 during the period from and after
  the Amendment No. 7 Closing Date through and including the last day of the
  second fiscal quarter of Borrower's 2002 fiscal year ending on or about
  September 30, 2001.

     (b) 1.2(b) "Amendment No. 7 Closing Date" shall mean the later to occur
  of (i) the date on which all conditions precedent set forth in paragraph 21
  of Amendment No.7 to Loan and Security Agreement and Waiver, dated as of
  June 26, 2001, executed between Lender and Borrower, have been satisfied in
  full, as determined by Lender, and (ii) June 28, 2001.

                                       1
<PAGE>

     (c) 1.11(a) "DNA Inventory" shall mean Inventory sold by Borrower
  through DNA.

     (d) 1.11(b) "EBITDA" shall mean, as to any Person, with respect to any
  period, an amount equal to: (i) the net income of such Person for such
  period determined in accordance with GAAP, plus (ii) depreciation,
  amortization and other non-cash charges (including, but not limited to,
  imputed interest and deferred compensation) for such period (to the extent
  deducted in the computation of net income of such Person), all in
  accordance with GAAP, plus (iii) Interest Expense (as defined below) for
  such period (to the extent deducted in the computation of net income of
  such Person), plus (iv) charges for Federal, State, local and foreign
  income taxes for such period (to the extent deducted in the computation of
  net income of such Person). For the purposes of this definition, "Interest
  Expense" shall mean, for any period, as to any Person, all of the following
  as determined in accordance with GAAP: total interest expense, whether paid
  or accrued (including the interest component of capital leases for such
  period), including, without limitation, all bank fees, commissions,
  discounts and other fees and charges owed with respect to letters of
  credit, banker's acceptances or similar instruments, but excluding (a)
  amortization of discount and amortization of deferred financing fees and
  closing costs, (b) interest paid in property other than cash and (c) any
  other interest expense not payable in cash.

     (e) 1.33(a) "Net Recovery Value" shall mean the net recovery Value of
  Inventory determined by Lender from time to time based upon an Inventory
  Appraisal delivered to Lender pursuant to Section 7.3 below.

     (f) 1.43(a) "Revolving Loans" shall mean the loans now or hereafter made
  by Lender to or for the benefit of Borrower on a revolving basis (involving
  advances, repayments and readvances) as set forth in Section 2.1 hereof.

     (g) 1.43(b) "VMI Inventory" shall mean Inventory of a type that Borrower
  has historically reported to Lender as being sold through the Valley Media
  division of Borrower and expressly excludes DNA Inventory and WDS
  Inventory.

     (h) 1.46 "WDS Inventory" shall mean Inventory accounted for by Borrower
  in its so-called "WDS System."

   2. Amendment to Definition of Adjusted Net Worth. Section 1.4 of the Loan
Agreement is hereby amended and restated in its entirety to read as follows:

     "1.4 "Adjusted Net Worth" shall mean as to any Person, at any time,
  using the average cost basis in accordance with GAAP (except as otherwise
  specifically set forth below), on a consolidated basis for such Person and
  its subsidiaries (if any), the amount equal to the sum of: (a) the
  difference between: (i) the aggregate net book value of all assets of such
  Person and its subsidiaries, calculating the book value of inventory for
  this purpose on an average cost basis, after deducting from such book
  values all appropriate reserves in accordance with GAAP (including all
  reserves for doubtful receivables, obsolescence, depreciation and
  amortization) and (ii) the aggregate amount of the indebtedness and other
  liabilities of such Person and its subsidiaries (including tax and other
  proper accruals), plus (b) Subordinated Debt (as defined in Section 9.9(e)
  hereof), provided that, for purposes of Section 9.14 hereof, the following
  amounts shall be added to the foregoing calculation of Adjusted Net Worth:
  (i) write-offs, in an aggregate amount not to exceed $15,000,000 during the
  period from and after March 31, 2001 through and including May 20, 2002,
  for (A) Accounts outstanding as of March 31, 2001 that are deemed
  uncollectible by Borrower as a result of the financial inability to pay of
  the account debtors liable in respect thereof, (B) impairment or decrease,
  as determined by Borrower, in value of assets and properties held by
  Borrower as of March 31, 2001, other than Accounts, and (C) supplemental
  reserves deemed necessary by Borrower for existing liabilities of Borrower
  that arose or were incurred on or before March 31, 2001, plus (ii) write-
  offs of tax loss accruals on Borrower's books as of March 31, 2001, in an
  aggregate amount not to exceed $9,000,000 during the period from and after
  June 1, 2001 through and including May 20, 2002, plus (iii) foregone tax
  loss accrual credits in an aggregate amount not to exceed $1,500,000 for
  any month of Borrower's fiscal year ending on or about March 30, 2002, plus
  (iv) reserves and charges with respect to net income in connection with the

                                       2
<PAGE>

  complete or partial closing of any Inventory distribution center of
  Borrower, in an aggregate amount not to exceed $2,000,000 during the period
  from and after June 1, 2001 through and including the last day of the
  second fiscal quarter of Borrower's 2002 fiscal year ending on or about
  September 30, 2001."

   3. Amendment to Definition of Availability Reserves. Section 1.5 of the
Loan Agreement is hereby amended and restated in its entirety to read as
follows:

     "1.5 "Availability Reserves" shall mean, as of any date of
  determination, such amounts as Lender may from time to time establish and
  revise in good faith reducing the amount of Revolving Loans and Letter of
  Credit Accommodations which would otherwise be available to Borrower under
  the lending formula(s) provided for herein: (a) to reflect events,
  conditions, contingencies or risks which, as determined by Lender in good
  faith, do or may affect either (i) the Collateral or any other property
  which is security for the Obligations or its value, (ii) the assets or
  business of Borrower or any Obligor or (iii) the security interests and
  other rights of Lender in the Collateral (including the enforceability,
  perfection and priority thereof), (b) to reflect Lender's good faith belief
  that any collateral report or financial information furnished by or on
  behalf of Borrower or any Obligor to Lender is or may have been incomplete,
  inaccurate or misleading in any material respect, (c) to reflect
  outstanding Letter of Credit Accommodations as provided in Section 2.2
  hereof, (d) in respect of any state of facts which Lender determines in
  good faith constitutes an Event of Default, or (e) to reflect credits
  granted by Borrower with respect to coop advertising allowance."

                                       3
<PAGE>

   4. Amendment to Definition of Eligible Inventory. Section 1.13 of the Loan
Agreement is hereby amended by deleting the word "and" at the end of
subsection (g) thereof, adding a semi-colon to the end of subsection (h)
thereof, and by adding the following new subsections (i) and (j) thereto:

     "(i) WDS Inventory having an aggregate cost (as defined below) in excess
  of ten (10%) percent of the aggregate cost of all Inventory (but the
  portion of WDS Inventory not in excess of such percentage may be deemed
  Eligible Inventory); and (j) VMI Inventory and DNA Inventory consisting of
  the product types and having average unit sales during the immediately
  preceding four (4) weeks described in the table set forth below, having an
  aggregate cost that exceeds the cost percentage limitation(s) applicable to
  and set forth opposite such Inventory in such table (but the portion of
  such VMI Inventory and such DNA Inventory that does not exceed the
  percentage limitations set forth below may be deemed Eligible Inventory):
<TABLE>

<CAPTION>
  I.VMI INVENTORY
-------------------------------------------------------------------------------
                   Unit Sales for
      Product      Four (4) Week                 Cost Percentage
        Type           Period                      Limitations
-------------------------------------------------------------------------------
  <C>              <C>            <S>
  ADVD             24 or less     (1) Inventory consisting of Product Types A,
  BCD              9 or less      B and C, respectively, having an aggregate
  CVHS             9 or less      cost (in the case of any such Product Type)
                                  that exceeds 15% of the aggregate cost of all
                                  VMI Inventory and (2) Inventory consisting of
                                  Product Types A, B, and C, collectively,
                                  having an aggregate cost (i.e., Inventory of
                                  all such Product Types, collectively) that
                                  exceeds 40% of the aggregate cost of all VMI
                                  Inventory.
-------------------------------------------------------------------------------
  DLP's            N/A            Product Types D through H, collectively,
  ECassettes       N/A            having an aggregate cost (i.e., Inventory of
  FLaser Discs     N/A            all such Product Types, collectively) that
  GOther           N/A            exceeds 7% of the aggregate cost of all VMI
  HAccessories     N/A            Inventory.
-------------------------------------------------------------------------------
  II.DNA INVENTORY
-------------------------------------------------------------------------------
  ACD              2 to 24,       (1) Inventory consisting of Product Types A
                   inclusive      and B, collectively, having an aggregate cost
                                  (i.e., Inventory of both such Product Types,
  BCD              Less than 2    collectively) that exceeds 15% of the
                                  aggregate cost of all Inventory (inclusive of
                                  DNA Inventory), (2) Inventory consisting of
                                  Product Type A having an aggregate cost that
                                  exceeds 35% of the aggregate cost of all DNA
                                  Inventory, and (3) Inventory consisting of
                                  Product Type B having an aggregate cost that
                                  exceeds 15% of the aggregate cost of all DNA
                                  Inventory.
-------------------------------------------------------------------------------
  CDVD             N/A            Inventory consisting of Products Types C, D,
  DLP              N/A            E and F, collectively, having an aggregate
  EVideo           N/A            cost (i.e., Inventory of all such Product
  Inventory        N/A            Types, collectively) that exceeds 10% of the
  FCassettes                      aggregate cost of all DNA Inventory.
</TABLE>

   For the purposes of this definition, "cost" shall mean cost computed using
the average cost method in accordance with GAAP."

   5. Amendment to Definition of Interest Rate. Section 1.26 of the Loan
Agreement is hereby amended and restated in its entirety as follows:

     "1.26 "Interest Rate" shall mean a rate of one and one-half (1.50%)
  percent per annum in excess of the Prime Rate; provided that,
  notwithstanding anything to the contrary contained herein, the Interest
  Rate shall mean the rate of three and one-half (3.50%) percent per annum in
  excess of the Prime Rate, at Lender's option, without notice, (A) for the
  period (1) from and after the date of termination or non-renewal hereof
  until Lender has received full and final payment of all obligations
  (notwithstanding entry of a judgment

                                       4
<PAGE>

  against Borrower) and (2) from and after the date of the occurrence of an
  Event of Default for so long as such Event of Default is continuing as
  determined by Lender, and (B) on the Revolving Loans at any time
  outstanding in excess of the amounts available to Borrower under Section 2
  (whether or not such excess(es) arise or are made with or without Lender's
  knowledge or consent and whether made before or after an Event of
  Default)."

   6. Decrease in Maximum Credit. Section 1.33 of the Loan Agreement is hereby
deleted in its entirety and the following is hereby substituted therefor:

     "1.33 "Maximum Credit" shall mean $175,000,000."

   7. Decrease in Inventory Advance Rate. Section 2.1(a)(ii) of the Loan
Agreement is hereby amended and restated in its entirety to read as follows:

     "(ii) subject to the provisions of Section 2.1(e) below, (A) during the
  period from and after the Amendment No. 7 Closing Date through and
  including August 31, 2001, the lesser of (1) fifty-five (55%) percent of
  the Value of Eligible Inventory consisting of finished goods and (2)
  ninety-one (91%) percent of the Net Recovery Value of Eligible Inventory
  and (B) from and after September 1, 2001, the lesser of (a) fifty (50%)
  percent of the Value of Eligible Inventory consisting of finished goods and
  (2) eighty-five (85%) percent of the Net Recovery Value of Eligible
  Inventory, less"

   8. Reduction in Inventory Sublimit. Section 2.1(e) of the Loan Agreement is
hereby amended and restated in its entirety as follows:

     "(e) Notwithstanding anything to the contrary contained in Section
  2.1(a)(ii) above, the maximum aggregate amount of Revolving Loans
  outstanding at any time made in respect of the Value of Eligible Inventory,
  shall not at any time exceed:

       (i) the lesser of (A) (1) $90,000,000 through and including October
    30, 2001, (2) $80,000,000 from and after October 31, 2001 through and
    including November 29, 2001, (3) $50,000,000 from and after November
    30, 2001 through and including December 30, 2001, and (4) $35,000,000
    from and after December 31, 2001, and (B) (1) at any time during the
    period ending September 30, 2001, sixty (60%) percent of the aggregate
    amount of Revolving Loans then outstanding and (2) at any time from and
    after October 1, 2001, fifty (50%) percent of the aggregate amount of
    Revolving Loans then outstanding;

       (ii) in respect of Eligible Inventory consisting of Video Inventory,
    the lesser of (x) $25,000,000 and (y) forty (40%) percent of the
    aggregate maximum amount of Revolving Loans that would then be
    available with respect to all Eligible Inventory, based on the lending
    formulas set forth in Section 2.1(a)(ii) above and the limitation set
    forth in the immediately preceding Section 2.1(e)(i); and

       (iii) $10,000,000 in respect of Eligible Inventory relating to DNA."

   9. Reduction in Letter of Credit Accommodations. The first sentence of
Section 2.2(d) of the Loan Agreement is hereby amended and restated in its
entirety as follows:

     "Except in Lender's discretion, the amount of all outstanding Letter of
  Credit Accommodations and all other commitments and obligations made or
  incurred by Lender in connection therewith shall not at any time exceed
  $15,000,000."

   10. Elimination of Capex Loans and Eurodollar Rate
Loans. (a) Notwithstanding anything to the contrary contained in the Loan
Agreement (including, without limitation, in Section 2.5 thereof), from and
after the Amendment No. 7 Closing Date, Borrower shall have no right to
request or receive any additional Capex Loans, and Lender shall have no
obligation to make any additional Capex Loans. Any Capex Loans that are
outstanding as of the Amendment No. 7 Closing Date shall be repaid by Borrower
in accordance with the existing terms and conditions of the Loan Agreement,
including, without limitation, Section 2.5 of the Loan Agreement.

                                       5
<PAGE>

   (b) Section 3.1 of the Loan Agreement is hereby amended by adding thereto a
new Section 3.1(f) as follows:

     "(f) Notwithstanding anything to the contrary contained in the Loan
  Agreement, (i) Borrower shall have no right to request or receive
  Eurodollar Rate Loans or continue any Eurodollar Rate Loans that are
  outstanding on the Amendment No. 7 Closing Date, upon the expiration of the
  Interest Period applicable thereto, and Lender shall have no obligation to
  make Eurodollar Rate Loans or continue Eurodollar Rate Loans upon the
  expiration of any Interest Period applicable thereto, and (ii) all
  Eurodollar Rate Loans that are outstanding on the Amendment No. 7 Closing
  Date shall continue to bear interest at the Interest Rate applicable to
  such Eurodollar Loans immediately prior to the Amendment No. 7 Closing Date
  until the expiration of the Interest Period applicable thereto and shall
  each be converted to a Prime Rate Loan upon the expiration of such Interest
  Period."

   11. Reduction in Basis for Calculation of Unused Line Fee. Section 3.4 of
the Loan Agreement is hereby deleted in its entirety and the following is
hereby substituted therefor:

     "3.4 Unused Line Fee. Borrower shall pay to Lender monthly, while this
  Agreement is in effect and for so long thereafter as any of the Obligations
  are outstanding, an unused line fee at a rate equal to three-eights ( 3/8%)
  percent per annum calculated upon the amount by which the Maximum Credit
  exceeds the average daily principal balance of the outstanding Revolving
  Loans and Letter of Credit Accommodations during the immediately preceding
  month (or part thereof) while this Agreement is in effect and for so long
  thereafter as any of the Obligations are outstanding, which fee shall be
  payable on the first (1st) day of each month in arrears."

   12. Amendment of Adjusted Net Worth. Section 9.14 of the Loan Agreement is
hereby amended and restated in its entirety to read as follows:

     "9.14 Adjusted Net Worth. Borrower shall, at all times, maintain
  Adjusted Net Worth of not less than the sum of (a) $34,000,000 plus (b) the
  aggregate amount of net proceeds received by Borrower in connection with
  any Equity Offerings permitted pursuant to Section 9.7 plus (c) the
  aggregate amount of net proceeds received by Borrower in connection with
  any Subordinated Debt hereafter incurred by Borrower that is permitted
  pursuant to, and as such term is defined in, Section 9.9."

   13. Field Examination Costs. Section 9.15(g) of the Loan Agreement is
hereby amended and restated in its entirety to read as follows, effective as
of June 1, 2001:

     "(g) all out-of-pocket expenses and costs heretofore and from time to
  time hereafter incurred by Lender during the course of periodic field
  examinations of the Collateral and Borrower's operations, plus a per diem
  charge at Lender's then prevailing rate per person per day for Lender's
  examiners in the field and office (which rate is currently $750 per person
  per day for such examiners);"

                                       6
<PAGE>

   14. Minimum Cumulative Adjusted EBITDA Covenant. Section 9 of the Loan
Agreement is hereby amended by adding thereto the following new Section 9.17:

     "9.17 Minimum Cumulative Adjusted EBITDA. Borrower shall maintain
  Adjusted EBITDA, measured at the end of each month on a cumulative fiscal
  year-to-date basis, of not less than the amount set forth in the following
  table for each such month:

<TABLE>
<CAPTION>
                                                            Minimum Cumulative
                   Month                                     Adjusted EBITDA
                     ---------------------------------------------------------
              <S>                                           <C>
              June, 2001                                       $(2,200,000)
                     ---------------------------------------------------------
              July, 2001                                        (1,500,000)
                     ---------------------------------------------------------
              August, 2001                                         126,000
                     ---------------------------------------------------------
              September, 2001                                    1,800,000
                     ---------------------------------------------------------
              October, 2001                                      4,000,000
                     ---------------------------------------------------------
              November, 2001                                     9,400,000
                     ---------------------------------------------------------
              December, 2001                                    15,000,000
                     ---------------------------------------------------------
              January, 2002                                     14,600,000
                     ---------------------------------------------------------
              February, 2002                                    14,300,000
                     ---------------------------------------------------------
              March, 2002                                       14,600,000"
</TABLE>

   15. Retention of Consultant. Section 9 of the Loan Agreement is hereby
amended by adding thereto a new Section 9.18, as follows:

     "9.18 Retention of Consultant. If Borrower fails for any two (2)
  consecutive months to maintain cumulative Adjusted EBITDA in an amount
  equal to One Hundred Ten (110%) percent of the cumulative Adjusted EBITDA
  that Borrower is required to maintain pursuant to Section 9.18, then
  Borrower shall retain, promptly after the occurrence thereof, a
  professional crisis management or turnaround consulting firm, acceptable to
  Lender ("Consultant"), for the purpose of, among other things, assisting
  Borrower in the preparation and implementation of a restructuring plan for
  Borrower's business operations. Borrower agrees that it shall authorize and
  direct Consultant to share with Lender all books, records, projections,
  financial information, reports and other information relating to the
  Collateral, or the financial condition or operations of the Borrower's
  business. Borrower agrees to provide Consultant with complete access to all
  of Borrower's books and records, all of Borrower's premises and Borrower's
  management and employees as and when deemed necessary by Consultant. If
  Lender, in its sole discretion, determines that Consultant is not providing
  Lender with the information or access to Borrowers books and records, as
  requested by Lender, Borrower hereby consents, at the request of Lender, to
  terminate Consultant as Borrowers Consultant and to the retention of
  Consultant by Lender. Borrower hereby irrevocably authorizes and agrees
  that Lender may charge to any account of Borrower maintained by Lender any
  and all fees and expenses incurred by Lender in connection with services
  rendered by Consultant to Lender."

   16. Additional Collateral Reporting. Section 7.1(c) of the Loan Agreement
is hereby amended by adding thereto the following new Section 7.1(c)(iv):

     "and (iv) a report by category of the number of units of Inventory sold
  each week during the immediately preceding four (4) weeks in substantially
  the same format as set forth in Section 10 of the March, 2001 Inventory
  Appraisal performed by Ozer Valuation Services LLC;"

   17. Inventory Appraisals. Section 7.3(d) of the Loan Agreement is hereby
amended and restated in its entirety to read as follows:

     "(d) at Lender's request, Borrower shall, at its expense on no more than
  three (3) occasions in any twelve month period, and at Lender's own expense
  on the fourth and all subsequent occasions during such

                                       7
<PAGE>

  period, deliver or cause to be delivered to Lender written reports or
  appraisals as to the Inventory in form, scope and methodology acceptable to
  Lender performed by Ozer Valuation Services, LLC or another appraiser
  acceptable to Lender, addressed to Lender or upon which Lender is expressly
  permitted to rely (the "Inventory Appraisal"), provided, that, from and
  after the occurrence and during the continuance of an Event of Default, all
  Inventory Appraisals requested by Lender shall be delivered at Borrower's
  sole cost and expense;"

   18. Waiver. Borrower has previously delivered to Lender Borrower's
unaudited financial statements for its fiscal year ended March 31, 2001 (the
"Unaudited 2001 Fiscal Year Statements"). Borrower has informed Lender that
(a) in the preparation of its audited financial statements for its fiscal year
ended March 31, 2001 (the "Audited 2001 Fiscal Year Statements"), Borrower may
be required to make certain adjustments to the Unaudited 2001 Fiscal Year
Statements, in order to more accurately reflect Borrower's then current
financial position, which adjustments have not been finally determined as of
the date of this Amendment, and (b) after giving effect to such adjustments,
as finally determined, the Audited 2001 Fiscal Year Statements, as well as
Borrower's internally prepared monthly financial statements to be delivered to
Lender pursuant to Section 9.6(a) of the Loan Agreement for the months of
April and May, 2001, may reflect that Borrower failed to comply with the
Adjusted Net Worth covenant set forth in Section 9.14 of the Loan Agreement
(such non-compliance, the "Covenant Default"). Borrower has requested that
Lender waive any Covenant Default that may have occurred with respect to
Borrower's fiscal year ended March 31, 2001 and with respect to the months of
April and May, 2001, and Lender hereby waives the Covenant Default, provided
however, that nothing contained herein shall be deemed or constitute a waiver
of any other Event of Default that now exists or may hereafter arise,
including, without limitation, any Event of Default that occurs as a result of
Borrower's non-compliance with Section 9.14 from and after the Amendment No. 7
Closing Date.

   19. Representations, Warranties and Covenants. In addition to the
continuing representations, warranties and covenants heretofore made by
Borrower to Lender pursuant to the Loan Agreement and the other Financing
Agreements, Borrower hereby represents, warrants and covenants with and to
Lender as follows (which representations, warranties and covenants are
continuing and shall survive the execution and delivery of this Amendment and
shall be incorporated into and made a part of the Financing Agreements):

     (a) No Event of Default exists on the date of this Amendment (after
  giving effect to the amendments to the Loan Agreement and the waiver of the
  Covenant Default made by this Amendment); and

     (b) This Amendment has been duly executed and delivered by Borrower and
  is in full force and effect as of the date hereof, and the agreements and
  obligations of Borrower contained herein constitute its legal, valid and
  binding obligations enforceable against Borrower in accordance with their
  respective terms.

   20. Amendment and Waiver Fee. In consideration of the amendments to the
financing arrangements and the waiver of the Covenant Default as set forth
herein, Borrower shall pay to Lender or Lender, at its option, may charge the
account(s) of Borrower maintained by Lender an amendment and waiver fee in the
amount of $605,937.50, which fee is fully earned and payable as of the date
hereof and shall constitute part of the Obligations; except that, if on or
before December 20, 2001, Borrower terminates the Loan Agreement and all other
Financing Agreements and pays in full to Lender all Obligations then owing to
Lender (including, without limitation, the early termination fee payable to
Lender pursuant to Section 12.1 of the Loan Agreement), then Lender shall
credit against the Obligations then due and payable to Lender an amount equal
to 50% of such fee, i.e., $302,968.75.

   21. Conditions Precedent. This Amendment shall not become effective unless
all of the following conditions precedent have been satisfied in full, as
determined by Lender:

     (a) The receipt by Lender of an original of this Amendment, duly
  authorized, executed and delivered by Borrower;

                                       8
<PAGE>

     (b) Lender shall have received projections, in form and substance
  satisfactory to Lender evidencing that, after giving effect to the
  amendments to the Loan Agreement provided for in this Amendment, Borrower
  will (i) have sufficient Loan availability under the Loan Agreement to
  operate its business in the ordinary course, as presently conducted,
  through and including the Renewal Date, and (ii) remain in full compliance
  with its covenants and agreements set forth in the Loan Agreement through
  and including the Renewal Date, including, without limitation, its
  covenants set forth in Section 9.14 and 9.17 of the Loan Agreement; and

     (c) as of the date of this Amendment, after giving effect to the waiver
  of the Covenant Default set forth herein, no Event of Default shall have
  occurred and be continuing and no event shall have occurred or a condition
  be existing and continuing which, with notice or passage of time or both,
  would constitute an Event of Default.

   22. Effect of this Amendment. Except as modified pursuant hereto, no other
changes or modifications to the Loan Agreement and the other Financing
Agreements are intended or implied and in all other respects the Loan
Agreement and the other Financing Agreements are hereby specifically ratified,
restated and confirmed by all parties hereto as of the effective date hereof.
To the extent of any conflict between the terms of this Amendment and the Loan
Agreement or any of the other Financing Agreements, the terms of this
Amendment shall control. The Loan Agreement and this Amendment shall be read
and construed as one agreement.

   23. Further Assurances. At Lender's request, Borrower shall execute and
deliver such additional documents and take such additional actions as Lender
reasonably requests to effectuate the provisions and purposes of this
Amendment and to protect and/or maintain perfection of Lender's security
interests in and liens upon the Collateral.

   24. Governing Law. The validity, interpretation and enforcement of this
Amendment in any dispute arising out of the relationship between the parties
hereto, whether in contract, tort, equity or otherwise shall be governed by
the internal laws of the State of California (without giving effect to
principles of conflicts of law).

   25. Binding Effect. This Amendment shall be binding upon and enure to the
benefit of each of the parties hereto and their respective successors and
assigns.

   26. Counterparts. This Amendment may be executed in any number of
counterparts, but all of such counterparts when executed shall together
constitute one and the same Agreement. In making proof of this Amendment, it
shall not be necessary to produce or account for more than one counterpart
thereof signed by each of the parties hereto.

                                          Very truly yours,

                                          VALLEY MEDIA, INC.

                                                   /s/ Donald E. Rose
                                          By: ________________________________
                                             Title: Treasurer and VP of
                                              Finance

AGREED:

CONGRESS FINANCIAL CORPORATION
 (NORTHWEST)

         /s/ Paul F. Dodwell
By: ________________________________
  Title: Vice President

                                       9

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00027-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00027-of-00352.parquet"}]]