Document:

<PAGE>   1
                                                                   EXHIBIT 10.2
                             IMPAC HOTELS II, L.L.C.
                            IMPAC HOTELS III, L.L.C.
                                c/o Lodgian, Inc.
                         Two Live Oak Center, Suite 700
                            3445 Peachtree Road, N.E.
                             Atlanta, Georgia 30326

                                [               ]

The Capital Company of America LLC
Two World Financial Center, Building B
New York, New York 10281

Gentlemen:

                  We refer to the Consolidated, Amended and Restated Loan
Agreement of even date herewith between The Capital Company of America LLC and
the undersigned (the "Loan Agreement"). Capitalized terms used herein without
definition shall have the meanings set forth in the Loan Agreement.

                  1.       In order to induce Lender to enter into the Loan
Agreement, Borrowers hereby agree to the following:

                           A.       Within 60 days of the date hereof, Borrowers
shall enter into Clearing Account Agreements and credit card sweep agreements
for each of the Properties, that satisfy the conditions of Section 3.1 of the
Loan Agreement, which Clearing Account Agreements and credit card sweep
agreements shall be substantially in the forms attached hereto, subject to
reasonable changes requested by the Clearing Banks and credit card companies, as
approved by Lender in its discretion based upon its then standard procedures.
Failure to comply with the foregoing shall (i) cause an automatic increase in
the Interest Rate by 350 basis points until such time that Borrowers have met
their obligations under this paragraph and (ii) at Lender's option, upon written
notice to Borrowers, shall constitute an Event of Default.

                           B.       Within 120 days of the date hereof,
Borrowers shall provide evidence to Lender that the default referred to in the
attached notice of default (relating to the Franchise Agreement at the Property
known as Holiday Inn Hotel in Cincinnati, Ohio) has been cured or is otherwise
being dealt with in a manner reasonably acceptable to Lender. Failure to comply
with the foregoing shall constitute an Event of Default.

                  2.       By signing in the space provided below, Lender hereby
agrees as follows:

                           A.       Lender hereby waives any and all Defaults
and Events of Default now, heretofore or hereafter existing under the Impac II
Loan Agreement, the Impac III Loan Agreement, the Loan Agreement and the other
Loan Documents by virtue of the failure to provide to Lender in a timely

<PAGE>   2

fashion with Lodgian's 1999 Form 10K, and Lodgian's Form 10Q's for the first two
fiscal quarters of 2000; provided, however that such waiver shall expire in the
event that either (i) Lodgian fails to deliver its unaudited quarterly financial
statements for the fiscal quarter ending March 31, 2000 by September 30, 2000
or (ii) Lodgian fails to deliver its unaudited financial statements for the
fiscal quarter ending June 30, 2000 by September 30, 2000.

                           B.       With respect to Section 6.3.2(ii) of the
Loan Agreement (and any corresponding provisions in the Impac II Loan Agreement
and the Impac III Loan Agreement), Lender hereby waives any Default or Event of
Default relating to the non-delivery by Borrowers of (i) their quarterly
financial statements for the second quarter of fiscal year 2000 and (ii) their
monthly financial statements for the month of July, 2000, provided, however,
that such waiver shall expire in the event that the foregoing are not delivered
on or before September 30, 2000.

                  [Remainder of page intentionally left blank]

                                       2
<PAGE>   3

                           C.       With respect to Borrowers' obligations set
forth in Paragraphs 1A and 1B above, Lender shall not declare a Default or Event
of Default relating thereto, provided, however, that Borrowers comply with their
obligations set forth therein within the time periods specified therein.

                                  Very truly yours,

                                  IMPAC HOTELS II, L.L.C., a Georgia limited
                                  liability company

                                  By: Impac SPE #2, Inc., a Georgia corporation,
                                      its sole managing member

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

                           IMPAC HOTELS III, L.L.C., a Georgia limited liability
                           company

                           By: Impac SPE #6, Inc., a Georgia corporation, its
                               sole managing member

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

Agreed and Accepted:

THE CAPITAL COMPANY OF AMERICA LLC

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

                                       3
<PAGE>   4

                       CONSOLIDATED, AMENDED AND RESTATED
                                 LOAN AGREEMENT

                           Dated as of [              ]

                                  by and among

                             IMPAC HOTELS II, L.L.C.
                                       and
                            IMPAC HOTELS III, L.L.C.
                                  as Borrowers

                                       and

                       THE CAPITAL COMPANY OF AMERICA LLC
                                    as Lender

<PAGE>   5

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                   PAGE
                                                                                                   ----

<S>    <C>                                                                                         <C>
1.     DEFINITIONS; PRINCIPALS OF CONSTRUCTION ..............................................        2
            1.1   Specific Definitions ......................................................        2
            1.2   Index of Other Definitions ................................................       10
            1.3   Principles of Construction ................................................       10

2.     GENERAL LOAN TERMS ...................................................................       11
            2.1   The Loan ..................................................................       11
            2.2   Interest; Monthly Payments ................................................       11
                       2.2.1    Generally ...................................................       11
                       2.2.2    Default Rate ................................................       11
                       2.2.3    Taxes .......................................................       11
                       2.2.4    Breakage Indemnity ..........................................       12
            2.3   Loan Repayment ............................................................       12
                       2.3.1    Repayment ...................................................       12
                       2.3.2    Mandatory Prepayments .......................................       12
                       2.3.3    Optional Prepayments ........................................       13
                       2.3.4    Adjustment of Allocated Loan Amounts ........................       13
            2.4   Release of Properties .....................................................       13
                       2.4.1    Release on Payment in Full ..................................       13
                       2.4.2    Sale of Properties ..........................................       13
            2.5   Payments and Computations .................................................       14
                       2.5.1    Making of Payments ..........................................       14
                       2.5.2    Computations ................................................       14
            2.6   ...........................................................................       14
       Extension Option .....................................................................       14

3.     CASH MANAGEMENT AND RESERVES .........................................................       15
            3.1   Cash Management Arrangements ..............................................       15
            3.2   Taxes and Insurance .......................................................       16
            3.3   Capital Expense and FF&E Reserves .........................................       16
            3.4   Ground Rent Reserves ......................................................       17
            3.5   Operating Expense Subaccount ..............................................       18
            3.6   Casualty/Condemnation Subaccount ..........................................       18
            3.7   Security Deposits .........................................................       18
            3.8   Grant of Security Interest; Application of Funds ..........................       18
            3.9   Property Cash Flow Allocation .............................................       19
</TABLE>

                                        i
<PAGE>   6

<TABLE>
<CAPTION>
                                                                                                   PAGE
                                                                                                   ----

<S>    <C>                                                                                         <C>
4.     REPRESENTATIONS AND WARRANTIES .......................................................       20
            4.1   Organization; Special Purpose .............................................       20
            4.2   Proceedings; Enforceability . .............................................       20
            4.3   No Conflicts ..............................................................       20
            4.4   Litigation ................................................................       21
            4.5   Agreements ................................................................       21
            4.6   Title .....................................................................       21
            4.7   No Bankruptcy Filing ......................................................       22
            4.8   Full and Accurate Disclosure ..............................................       22
            4.9   No Plan Assets ............................................................       22
            4.10  Compliance ................................................................       23
            4.11  Contracts .................................................................       23
            4.12  Federal Reserve Regulations; Investment Company Act .......................       23
            4.13  Utilities and Public Access ...............................................       23
            4.14  Physical Condition ........................................................       24
            4.15  Leases ....................................................................       24
            4.16  Fraudulent Transfer .......................................................       24
            4.17  Ownership of Borrower .....................................................       25
            4.18  Management Agreements .....................................................       25
            4.19  Hazardous Substances ......................................................       25
            4.20  Name; Principal Place of Business .........................................       26
            4.21  Other Debt ................................................................       26
            4.22  Franchise Agreements ......................................................       26
            4.23  Ground Lease ..............................................................       26

5.     COVENANTS ............................................................................       27
            5.1   Existence .................................................................       27
            5.2   Taxes .....................................................................       27
            5.3   Repairs; Maintenance and Compliance; Alterations ..........................       27
                       5.3.1    Repairs; Maintenance and Compliance .........................       27
                       5.3.2    Alterations .................................................       28
            5.4   Performance of Other Agreements ...........................................       28
            5.5   Cooperate in Legal Proceedings . ..........................................       28
            5.6   Further Assurances ........................................................       28
            5.7   Environmental Matters .....................................................       29
                       5.7.1    Hazardous Substances ........................................       29
                       5.7.2    Environmental Monitoring ....................................       29
            5.8   Title to the Properties ...................................................       31
            5.9   Leases ....................................................................       31
</TABLE>

                                       ii
<PAGE>   7

<TABLE>
<CAPTION>
                                                                                                   PAGE
                                                                                                   ----

<S>    <C>                                                                                         <C>
                       5.9.1 Generally ......................................................       31
                       5.9.2 Material Leases ................................................       31
                       5.9.3 Minor Leases ...................................................       32
                       5.9.4 Additional Covenants with respect to Leases ....................       32
            5.10  Estoppel Statement ........................................................       33
            5.11  Property Management .......................................................       33
                       5.11.1    Management Agreement .......................................       33
                       5.11.2    Termination of Manager .....................................       33
            5.12  Special Purpose Bankruptcy Remote Entity ..................................       34
            5.13  Assumption in Non-Consolidation Opinion ...................................       34
            5.14  Change In Business or Operation of Properties .............................       34
            5.15  Certain Prohibited Actions ................................................       34
            5.16  Prohibited Transfers ......................................................       35
            5.17  Expenses ..................................................................       35
            5.18  Indemnity .................................................................       36
            5.19  Franchise Agreements ......................................................       36

6.     NOTICES AND REPORTING ................................................................       37
            6.1   Notices ...................................................................       37
            6.2   Borrower Notices and Deliveries ...........................................       37
            6.3   Financial Reporting .......................................................       38
                       6.3.1    Bookkeeping .................................................       38
                       6.3.2    Financial Statements; Reports ...............................       38
                       6.3.3    Other Reports ...............................................       39
                       6.3.4    Annual Budget ...............................................       39
                       6.3.5    .............................................................       39

7.     INSURANCE; CASUALTY; AND CONDEMNATION ................................................       39
            7.1   Insurance .................................................................       39
                       7.1.1    Coverage ....................................................       39
                       7.1.2    Policies ....................................................       41
            7.2   Casualty ..................................................................       41
                       7.2.1    Notice; Restoration .........................................       41
                       7.2.2    Settlement of Proceeds ......................................       42
            7.3   Condemnation ..............................................................       42
                       7.3.1    Notice; Restoration .........................................       42
                       7.3.2    Collection of Award .........................................       42
            7.4   Application of Proceeds or Award ..........................................       43
                       7.4.1    Application to Restoration ..................................       43
</TABLE>

                                      iii
<PAGE>   8

<TABLE>
<CAPTION>
                                                                                                   PAGE
                                                                                                   ----

<S>    <C>                                                                                         <C>
                       7.4.2    Application to Debt .........................................       43
                       7.4.3    Procedure for Application to Restoration ....................       43

8.     DEFAULTS .............................................................................       44
            8.1   Events of Default .........................................................       44
            8.2   Remedies . ................................................................       46
                       8.2.1    Acceleration ................................................       46
                       8.2.2    Remedies Cumulative . .......................................       47
                       8.2.3    Severance ...................................................       47
                       8.2.4    Delay .......................................................       48
                       8.2.5    Lender's Right to Perform ...................................       48

9.     SPECIAL PROVISIONS ...................................................................       48
            9.1   Sale of Note and Secondary Market Transaction .............................       48
                       9.1.1    Cooperation .................................................       49
                       9.1.2    Use of Information ..........................................       49
                       9.1.3    Borrower Obligations Regarding Disclosure Documents and
                                Filings .....................................................       49
                       9.1.4    Indemnification Procedure ...................................       50
                       9.1.5    Contribution ................................................       51
                       9.1.6    Rating Surveillance .........................................       51
                       9.1.7    Severance Documentation .....................................       51

10.    MISCELLANEOUS ........................................................................       52
            10.1  Exculpation ...............................................................       52
            10.2  Brokers and Financial Advisors ............................................       53
            10.3  Retention of Servicer .....................................................       53
            10.4  Survival ..................................................................       53
            10.5  Lender's Discretion .......................................................       53
            10.6  Governing Law .............................................................       54
            10.7  Modification, Waiver in Writing ...........................................       55
            10.8  Trial by Jury .............................................................       55
            10.9  Headings/Exhibits .........................................................       56
            10.10 Severability ..............................................................       56
            10.11 Preferences ...............................................................       56
            10.12 Waiver of Notice ..........................................................       56
            10.13 Remedies of Borrower ......................................................       56
            10.14 Prior Agreements ..........................................................       57
            10.15 Offsets, Counterclaims and Defenses .......................................       57
</TABLE>

                                       iv
<PAGE>   9

<TABLE>
            <S>                                                                                     <C>
            10.16 Publicity .................................................................       57
            10.17 No Usury ..................................................................       57
            10.18 Conflict; Construction of Documents .......................................       58
            10.19 No Third Party Beneficiaries ..............................................       58
            10.20 Cross Default; Cross Collateralization ....................................       58
            10.21 Assignment ................................................................       58
            10.22 Joint and Several .........................................................       59
            10.23 Termination of Building Loan Agreements ...................................       59
            10.24 Reaffirmation .............................................................       59
            10.25 Counterparts ..............................................................       59
            10.26 Split Loan  ...............................................................       59
                       10.26.1    Generally .................................................       59
                       10.26.2    Additional Borrower .......................................       59
                       10.26.3    Documentation .............................................       60
                       10.26.4    Costs  ....................................................       60
</TABLE>

Schedule 1 - Index of Other Definitions
Schedule 2 - Impac II Notes
Schedule 3 - Impac III Notes
Schedule 4 - Allocated Loan Amounts
Schedule 5 - Form of Note
Schedule 6 - Location of Properties
Schedule 7 - Exceptions to Representations and Warranties
Schedule 8 - Organization of Borrower
Schedule 9 - Definition of Special Purpose Bankruptcy Remote Entity
Schedule 10 - List of Guarantees

                                       v
<PAGE>   10

                                 LOAN AGREEMENT

         CONSOLIDATED, AMENDED AND RESTATED LOAN AGREEMENT dated as of August
31, 2000 (as the same may be modified, supplemented, amended or otherwise
changed, this "AGREEMENT") by and among IMPAC HOTELS II, L.L.C. ("IMPAC II"), a
Georgia limited liability company and IMPAC HOTELS III, L.L.C. ("IMPAC III"), a
Georgia limited liability company (each of Impac II and Impac III, a "BORROWER"
and collectively together with their respective permitted successors and
assigns, "BORROWERS"), and THE CAPITAL COMPANY OF AMERICA LLC, a Delaware
limited liability company (together with its successors and assigns, "LENDER").

                                   RECITALS

A.       Impac II and Nomura Asset Capital Corporation ("NACC"), Lender's
         predecessor in interest, are parties to that certain Loan Agreement
         dated as of March 12, 1997, as amended (the "IMPAC II LOAN AGREEMENT"),
         which provides for secured mortgage loans (the "IMPAC II LOANS") in the
         aggregate amount of up to $163,500,000 to be advanced to Impac II for
         the purpose of financing a portion of the cost of acquiring,
         constructing, renovating and equipping the hotel properties identified
         therein. The Impac II Loans are evidenced by those certain promissory
         notes (the "IMPAC II NOTES") described on Schedule 2 attached hereto.

B.       Impac III and NACC are parties to that certain Loan Agreement dated as
         of October 29, 1997, as amended (the "IMPAC III LOAN AGREEMENT"), which
         provides for secured mortgage loans (the "IMPAC III LOANS") in the
         aggregate amount of up to $100,000,000 to be advanced to Impac III for
         the purpose of financing a portion of the cost of acquiring,
         constructing, renovating and equipping the hotel properties identified
         therein. The Impac III Loans are evidenced by those certain promissory
         notes (the "IMPAC III NOTES") described on Schedule 3 attached hereto.

C.       As of the date hereof, the aggregate outstanding principal balance of
         the Impac II Notes is $95,068,385.73 and the aggregate outstanding
         principal balance of the Impac III Notes is $13,583,269.65.

D.       Borrowers and Lender desire to consolidate (i) the indebtedness
         evidenced by the Impac II Notes and the Impac III Notes and (ii) the
         Impac II Loan Agreement and the Impac III Loan Agreement, and to amend
         and restate the terms and conditions of the Impac II Notes and the
         Impac III Notes, and the Impac II Loan Agreement and the Impac III Loan
         Agreement, in their entirety.

         NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Impac II Loan Agreement and the Impac III Loan Agreement are
hereby consolidated and amended and restated in their entirety as follows:

<PAGE>   11

1.       DEFINITIONS; PRINCIPALS OF CONSTRUCTION

         1.1      SPECIFIC DEFINITIONS. The following terms have the meanings
set forth below:

                  ADJUSTED NET OPERATING INCOME: for any period, the Adjusted
Rent for such period, less the sum of, without duplication, (a) Adjusted
Operating Expenses and (b) any deposits to (but not withdrawals from) any
reserves required under this Agreement.

                  ADJUSTED RENT: for any period, the actual Rents for such
period adjusted to reflect (a) the occupancy of any Property during such period
at the lesser of actual occupancy and 80% occupancy and (b) such other
adjustments to Rents (which may include, if necessary, the adjustment of
departmental profit to industry standards) as required by the Lender in its
reasonable discretion.

                  ADJUSTED OPERATING EXPENSES: for any period, the Operating
Expenses for all Properties for such period adjusted to reflect (a) minimum base
management fees of (i) 4.0% of Rents for each Property that is a "full-service
hotel" and (ii) 4.5% of Rents for such period for each Property that is a
"limited-service hotel", (b) royalty, reservation, marketing and other franchise
fees for such period at the greater of actual or 6.0% of room revenues for such
period, (c) deposits into the Capital Expense and FF&E Reserve Subaccount for
such period, and (d) such other adjustments to Operating Expenses (which may
include, if necessary, the adjustment of department profit to industry
standards) as required by the Lender in its reasonable discretion.

                  AFFILIATE: as to any Person, any other Person that, directly
or indirectly, is in Control of, is Controlled by or is under common Control
with such Person or is a director or officer of such Person or of an Affiliate
of such Person.

                  ALLOCATED LOAN AMOUNT: with respect to each Property, the
amount set forth with respect to such Property on Schedule 4, as the same may be
adjusted pursuant to Section 2.3.4.

                  APPROVED CAPITAL AND FF&E EXPENSES: the cost of furnishings,
fixtures and equipment and Capital Expenses incurred by a Borrower, which costs
and Capital Expenses shall either be (i) incurred to comply with requirements
imposed by a Governmental Authority or a franchisor under a Franchise Agreement,
(ii) included in the approved Capital Budget for the Property owned by such
Borrower for the current-calendar month or (iii) approved by Lender.

                  APPROVED OPERATING EXPENSES: during the continuance of an
Event of Default, operating expenses incurred by a Borrower which (i) are
included in the approved Operating Budget for the Property owned by such
Borrower for the current calendar month, (ii) are for real estate taxes,
insurance premiums, electric, gas, oil, water, sewer or other utility service to
such Property or (iii) have been approved by Lender.

                                       2
<PAGE>   12

                  BORROWER REPRESENTATIVE: the Impac II Borrower Representative
and/or the Impac III Borrower Representative, as applicable.

                  BUSINESS DAY: any day other than a Saturday, Sunday or any day
on which commercial banks in New York, New York are authorized or required to
close.

                  CAPITAL EXPENSES: expenses that are capital in nature or
required under GAAP to be capitalized.

                  CODE: the Internal Revenue Code of 1986, as amended and as it
may be further amended from time to time, any successor statutes thereto, and
applicable U.S. Department of Treasury regulations issued pursuant thereto in
temporary or final form.

                  CONTROL: with respect to any Person, either (i) ownership
directly or indirectly of 49% or more of all equity interests in such Person or
(ii) the possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, through the ownership
of voting securities, by contract or otherwise.

                  DEBT: the unpaid Principal, all interest accrued and unpaid
thereon and all other sums due to Lender in respect of the Loan or under any
Loan Document.

                  DEBT SERVICE: with respect to any particular period, the
scheduled Principal and interest payments due under the Note in such period.

                  DEBT SERVICE COVERAGE RATIO: as of any date, the ratio
calculated by Lender of (i) the Adjusted Net Operating Income for the 12-month
period ending with the most recently completed calendar month for which
financial statements have been delivered pursuant to Section 6.3.2(ii) to (ii)
the Debt Service with respect to such period. Whenever this Agreement requires
the calculation of the Debt Service Coverage Ratio with respect to an individual
Property or Properties, such Debt Service Coverage Ratio shall be calculated by
Lender based on the ratio of (a) the Adjusted Net Operating Income attributable
to such Property or Properties for the 12-month period ending with the most
recently completed calendar month for which financial statements have been
delivered pursuant to Section 6.3.2(ii) to (ii) such Property's or Properties'
proportionate share of the Debt Service with respect to such period which shall
be in the same proportion that the Allocated Loan Amount for such Property or
Properties bears to the Allocated Loan Amounts for all of the Properties.

                  DEFAULT: the occurrence of any event under any Loan Document
which, with the giving of notice or passage of time, or both, would be an Event
of Default.

                  DEFAULT RATE: a rate per annum equal to the lesser of (i) the
maximum rate permitted by applicable law, or (ii) 2% above the Interest Rate,
compounded monthly.

                                       3
<PAGE>   13

                  DEPOSIT BANK: LaSalle Bank, N.A., or such other bank or
depository selected by Lender in its discretion.

                  EMERGENCY EXPENDITURES: expenditures arising in the event of
an emergency arising out of a fire or other casualty at a Property, or other
events, circumstances or conditions which give rise to safety or life
threatening situations, to the extent such expenditures are necessary, in the
judgment of the Borrower or the Manager, to protect the safety or welfare of
guests and employees or to protect against further property damage to the
subject Property.

                  ERISA: the Employment Retirement Income Security Act of 1974,
as amended from time to time, and the rules and regulations promulgated
thereunder

                  ERISA AFFILIATE: all members of a controlled group of
corporations and all trades and business (whether or not incorporated) under
common control and all other entities which, together with Borrowers (or any
Borrower), are treated as a single employer under any or all of Section 414(b),
(c), (m) or (o) of the Code.

                  FRANCHISE AGREEMENT: with respect to each Property, a
franchise or license agreement between a Borrower and a nationally recognized
hotel chain (whether by direct agreement or by assignment or transfer), as the
same may from time to time be amended, supplemented or replaced with the consent
of the Lender.

                  GAAP: generally accepted accounting principles in the United
States of America as of the date of the applicable financial report.

                  GOVERNMENTAL AUTHORITY: any court, board, agency, commission,
office or authority of any nature whatsoever for any governmental unit (federal,
state, county, district, municipal, city or otherwise) now or hereafter in
existence.

                  GROUND LEASE: that certain Ground Sublease dated May 16, 1989
between Pizzagalli Investment Company, a Vermont general partnership (the
"SUBLESSOR") and Marriott Corporation, a Delaware corporation of Bethesda,
Maryland ("ORIGINAL SUBLESSEE") relating to a certain parcel of land located in
the Town of Colchester, County of Chittenden, State of Vermont (further
described in a Short Form Ground Sublease dated June 20, 1989, and recorded in
Town of Colchester, Vermont Land Records on June 20, 1989 at Volume 159 at page
9, as amended by First Amendment to Short Form Ground Sublease dated May 14,
1990 and recorded in the Town of Colchester, Vermont Land Records on May 18,
1990 in Volume 168 at page 189 which Ground Sublease was assigned by Assignment
of Sublease and Assumption of Obligations dated September 1, 1993, by Original
Sublessee to HMH Properties, Inc., a Delaware corporation and wholly owned
subsidiary of Original Sublessee ("SUCCESSOR SUBLESSEE") of record in Volume 231
at page 304 of the Town of Colchester, Vermont Land Records, as corrected by
Corrective Assignment of Sublease and Assumption of Obligations between Original

                                       4
<PAGE>   14

Sublessee and Successor Sublessee, dated April 27, 1995, of record in Volume 246
at page 228 of the Town of Colchester, Vermont Land Records, which Ground
Sublease Successor Sublessee thereafter assigned to MFI IV Partners, L.P., a
Delaware limited partnership (hereinafter "SUBLESSEE") by Assignment of Lessee's
Interest in Ground Sublease and Transfer of Leasehold Improvements dated April
28, 1995, on record in Volume 246 at page 235 of the Town of Colchester, Vermont
Land Records, which Ground Sublease was thereafter amended by "Second Amendment
to Ground Sublease", dated April 28, 1995 by and between Sublessor and
Sublessee.

                  GUARANTORS: Impac Hotel Group and Lodgian, collectively.

                  IMPAC II BORROWER REPRESENTATIVE: Impac SPE #2, Inc., a
Georgia corporation.

                  IMPAC III BORROWER REPRESENTATIVE: Impac SPE #6, Inc., a
Georgia corporation.

                  IMPAC HOTEL GROUP: IMPAC Hotel Group, L.L.C., a Georgia
limited liability company and wholly owned subsidiary of Lodgian.

                  INDEPENDENT DIRECTOR: an individual selected by each Borrower
and reasonably satisfactory to Lender who shall not have been at the time of
such individual's appointment as a director, does not thereafter become and
shall not have been at any time during the preceding five years (i) a
shareholder/partner/member of, or an officer, employee, consultant, agent or
advisor of, any Borrower or any of their respective shareholders, subsidiaries,
members or Affiliates, (ii) a director of any shareholder, subsidiary, member,
or Affiliate of any Borrower other than a Borrower Representative, (iii) a
customer of, or supplier to, any Borrower or any of its shareholders,
subsidiaries or Affiliates that derives more than 10% of its purchases or income
from its activities with any Borrower or any Affiliate of any Borrower, (iv) a
Person who Controls any such shareholder, supplier or customer, or (v) a member
of the immediate family (including a grandchild or sibling) of any such
shareholder/director/partner/member, officer, employee, supplier or customer or
of any other director of any Borrower Representative.

                  INTEREST PERIOD: (i) the period from the date hereof through
the first day thereafter that is the 10th day of a calendar month and (ii) each
period thereafter from the 11th day of each calendar month through the 10th day
of each calendar month; except that the Interest Period, if any, that would
otherwise commence before and end after the Maturity Date shall end on the
Maturity Date.

                  INTEREST RATE: for any Interest Period, the Spread plus LIBOR
for such Interest Period (or, when applicable pursuant to this Note or any other
Loan Document, the Default Rate).

                  LEASES: all leases and other agreements or arrangements
heretofore or hereafter entered into affecting the use, enjoyment or occupancy
of, or the conduct of any activity upon or in, a Property or the Improvements
relating thereto, including any guarantees, extensions, renewals, modifications
or

                                       5
<PAGE>   15

amendments thereof and all additional remainders, reversions and other rights
and estates appurtenant thereunder.

                  LEGAL REQUIREMENTS: statutes, laws, rules, orders,
regulations, ordinances, judgments, decrees and injunctions of Governmental
Authorities affecting any Borrower, any Loan Document or all or part of any
Property or the construction, ownership, use, alteration or operation thereof,
whether now or hereafter enacted and in force, and all permits, licenses and
authorizations and regulations relating thereto, and all covenants, agreements,
restrictions and encumbrances contained in any instrument, either of record or
known to any Borrower, at any time in force affecting all or part of any
Property.

                  LIBOR: with respect to any Interest Period, the rate per annum
which is equal to the 30 day U.S. Dollar London Interbank Offered Rate reported
from time to time by Telerate News Service (page 3750), at approximately 11:00
a.m., London time, on the related Determination Date. If such interest rate
shall cease to be available from Telerate News Service, LIBOR shall be
determined from such financial reporting service as Lender shall reasonably
determine and use with respect to its other loan facilities on which interest is
determined based on LIBOR. If two or more such rates appear on Telerate page
3750 or associated pages, the rate in respect of such Interest Period will be
the arithmetic mean of such offered rates, absent manifest error. For purposes
hereof, (i) "DETERMINATION DATE" shall mean, with respect to any Interest
Period, the date which is two Eurodollar Business Days prior to the commencement
of such Interest Period; and (ii) "EURODOLLAR BUSINESS DAY" shall mean any day
other than a Saturday, Sunday or other day on which banks in the City of London,
England are closed for interbank or foreign exchange transactions.

                  LIEN: any mortgage, deed of trust, deed to secure debt, lien
(statutory or otherwise), pledge, hypothecation, easement, restrictive covenant,
preference, assignment, security interest or any other encumbrance, charge or
restriction on transfer, on or affecting all or part of any Property or any
interest therein, or in any Borrower or Borrower Representative, including any
conditional sale or other title retention agreement, any financing lease having
substantially the same economic effect as any of the foregoing, the filing of
any financing statement, and mechanic's, materialmen's and other similar liens
and encumbrances.

                  LOAN DOCUMENTS: this Agreement and all other documents,
agreements and instruments now or hereafter evidencing, securing or delivered to
Lender in connection with the Loan, including the following, each of which is
dated as of the date hereof: (i) the Note or Notes in the form of Schedule 5
hereto made by Borrowers to Lender in the aggregate principal amount equal to
the Loan (the "NOTE"), (ii) each Amended and Restated Mortgage, Assignment of
Leases and Rents and Security Agreement made by a Borrower (or the Deed of Trust
or Deed to Secure Debt), Assignment of Leases and Rents and Security Agreement
made by a Borrower to a trustee or Lender, as the case may be) in favor of
Lender which covers each Property owned by such Borrower (collectively, the
"MORTGAGES"), (iii) each Assignment of Leases and Rents from a Borrower to
Lender, (iv) each Assignment of Agreements, Licenses, Permits and Contracts from
a Borrower to Lender, (v) each Clearing Account Agreement

                                       6
<PAGE>   16

(collectively, the "CLEARING ACCOUNT AGREEMENTS") among each Borrower, Lender,
Manager and the banks selected by Borrowers, (vi) the Deposit Account Agreements
(the "DEPOSIT ACCOUNT AGREEMENT") among Borrowers, Lender, Manager and the
Deposit Bank, (vii) each Environmental Indemnity Agreement executed by a
Borrower prior to the date hereof for the benefit of NACC or Lender
(collectively, the "ENVIRONMENTAL INDEMNITY AGREEMENTS") and (viii) each
guaranty listed on Schedule 10 (collectively, the "GUARANTEES"); as each of the
foregoing may be (and each of the foregoing defined terms shall refer to such
documents as they may be) amended, restated, replaced, supplemented or otherwise
modified from time to time.

                  LODGIAN: Lodgian, Inc., a Delaware corporation and the
ultimate parent company of Borrowers, the Borrower Representatives and Impac
Hotel Group.

                  MANAGEMENT AGREEMENT: each management agreement between a
Borrower and Manager, pursuant to which Manager is to manage each Property owned
by such Borrower, as same may be amended, restated, replaced, supplemented or
otherwise modified from time to time in accordance with Section 5.11.

                  MANAGER: IMPAC Hotel Management, L.L.C., or any successor,
assignee or replacement manager appointed by Borrower in accordance with Section
5.11.

                  MATERIAL ADVERSE EFFECT: a material adverse effect on (i) any
Borrower's ability to enter into or fulfill its material obligations under the
Loan Documents or to effect the transactions contemplated thereby or (ii) the
condition (financial or otherwise), business, assets, liabilities, management
financial position or results of operations of any Borrower, taken as a whole.

                  MATERIAL ALTERATION: any alteration (i) affecting structural
elements of a Property or (ii) that is non-structural and will not affect any
building system, the cost of which exceeds $50,000 and was not included in the
Capital Budget submitted pursuant to Section 6.3.4; provided, however, that in
no event shall alterations performed as part of a Restoration or to comply with
requirements imposed by (x) a Governmental Authority or (y) a franchisor under a
Franchise Agreement, constitute a Material Alteration.

                  MATERIAL LEASE: all Leases which individually or in the
aggregate with respect to the same tenant and its Affiliates (i) have a gross
annual rent of more than 2% of the total annual Rents for such Property or (ii)
demise 2,500 square feet or more of rentable area at any Property.

                  MATURITY DATE: the date on which the final payment of
principal of the Note becomes due and payable as therein provided, whether at
the Stated Maturity Date, by declaration of acceleration, or otherwise.

                  MINOR LEASE: any Lease that is not a Material Lease.

                                       7
<PAGE>   17

                  NET OPERATING INCOME: for any period, the actual Rents in such
period less the sum of, without duplication, (a) Operating Expenses and (b) any
deposits to (but not withdrawals from) any reserves required under this
Agreement.

                  OFFICER'S CERTIFICATE: a certificate delivered to Lender by a
Borrower which is signed by a senior executive officer of the applicable
Borrower Representative.

                  OPERATING EXPENSES: with regard to each Property, the
following expenses paid by any Borrower or Manager or the Lender or Servicer on
behalf of any Borrower: (i) royalty, reservation, marketing and other franchise
fees and commissions in connection with the operation of the Properties; (ii)
Capital Expenses including, without limitation, amounts required to be deposited
in the Capital Expense and FF&E Reserve Subaccount; (iii) management fees
pursuant to the Management Agreements(s); and (iv) any other fees and expenses
required in connection with the operation or management of the Properties.

                  PAYMENT DATE: the 11th day of each calendar month or, if such
day is not a Business Day, the first Business Day thereafter.

                  PERMITTED ENCUMBRANCES: (i) the Liens created by the Loan
Documents, (ii) all Liens and other matters disclosed in the title insurance
policies insuring the Liens of the Mortgages, (iii) Liens, if any, for Taxes or
other charges not yet due and payable and not delinquent, (iii) any workers',
mechanics' or other similar Liens on a Property provided that any such Lien is
bonded or discharged within 30 days after a Borrower first receives notice of
such Lien and (iv) such other title and survey exceptions as Lender has
heretofore approved or shall hereafter approve in writing in Lender's
discretion.

                  PERMITTED TRANSFERS: (i) a Lease entered into in accordance
with the Loan Documents, (ii) a Permitted Encumbrance, (iii) transfers of
publicly traded stock in Lodgian or (iv) provided that no Default or Event of
Default shall then exist, a Transfer of an interest in a Borrower other than the
membership interest held by a Borrower Representative, or a Transfer of an
interest in a Borrower Representative to any Person provided that (A) if the
Transfer occurs prior to a Secondary Market Transaction, such Transfer shall not
without the prior written consent of Lender cause the transferee (together with
its Affiliates) to acquire Control of any Borrower or Borrower Representative or
to increase its direct or indirect interest in any Borrower or Borrower
Representative to an amount which equals or exceeds 49%, and (B) if the Transfer
occurs after a Secondary Market Transaction, such Transfer shall not cause the
transferee (together with its Affiliates) to acquire Control of any Borrower or
Borrower Representative or to increase its direct or indirect interest in any
Borrower or Borrower Representative to an amount which equals or exceeds 49%
unless Borrowers, at their sole cost and expense, shall have first (1) delivered
(or caused to be delivered) to Lender, a Rating Comfort Letter, (2) delivered
(or caused to be delivered) to Lender and the applicable Rating Agencies, a
substantive non-consolidation opinion with respect to each Borrower and the
proposed transferee in form and substance satisfactory to Lender and the
applicable Rating Agencies and (3) reimbursed Lender for all reasonable
out-of-pocket expenses incurred by it in connection with such Transfer.

                                       8
<PAGE>   18

                  PERSON: any individual, corporation, partnership, limited
liability company, joint venture, estate, trust, unincorporated association, any
other person or entity, and any federal, state, county or municipal government
or any bureau, department or agency thereof and any fiduciary acting in such
capacity on behalf of any of the foregoing.

                  PLAN: (i) an employee benefit or other plan established or
maintained by a Borrower or any ERISA Affiliate or to which a Borrower or any
ERISA Affiliate makes or is obligated to make contributions and (ii) which is
covered by Title IV of ERISA or Section 302 of ERISA or Section 412 of the Code.

                  PROPERTIES: collectively, the parcels of real property and
Improvements thereon owned by the respective Borrowers and encumbered by the
Mortgages; together with all rights pertaining to such real property and
Improvements, and all other collateral for the Loan as more particularly
described in the Granting Clauses of the Mortgages and referred to therein as
the Mortgaged Property, the Deeded Property or the Trust Property. The location
of each Property is identified on Schedule 6.

                  RATING AGENCY: each of Standard & Poor's Ratings Services, a
division of The McGraw-Hill Companies, Inc. ("S&P"), Moody's Investors Service,
Inc. ("MOODY'S"), Duff & Phelps Credit Rating Co. and Fitch IBCA, Inc. or any
other nationally-recognized statistical rating organization to the extent any of
the foregoing have been engaged by Lender or its designee in connection with or
in anticipation of any Secondary Market Transaction.

                  RATING COMFORT LETTER: a letter issued by each of the
applicable Rating Agencies which confirms that the taking of the action
referenced to therein will not result in any qualification, withdrawal or
downgrading of any existing ratings of Securities created in a Secondary Market
Transaction.

                  RELEASE AMOUNT: with respect to any Property sold pursuant to
Section 2.4.2, 100% of the Allocated Loan Amount for such Property.

                  RENTS: all rents, rent equivalents, moneys payable as damages
(including payments by reason of the rejection of a Lease in a Bankruptcy
Proceeding) or in lieu of rent or rent equivalents, royalties (including all oil
and gas or other mineral royalties and bonuses), income, fees, receivables,
receipts, revenues, deposits (including security, utility and other deposits),
accounts, cash, issues, profits, charges for services rendered, and other
payment and consideration of whatever form or nature received by or paid to or
for the account of or benefit of a Borrower, Manager or any of their agents or
employees from any and all sources arising from or attributable to any Property
and the Improvements, including, without limitation, all revenues and credit
card receipts collected from guest rooms, restaurants, bars, meeting rooms,
banquet rooms and recreational facilities, parking charges, all receivables,
customer obligations, installment payment obligations and other obligations now
existing or hereafter arising or created out of the sale, lease, sublease,
license, concession or other grant of the right of the use and

                                       9
<PAGE>   19

occupancy of any Property or rendering of services by a Borrower and/or Manager
or any operator or manager of the hotels or the commercial space located in the
Improvements or acquired from others (including, without limitation, from the
rental of any office space, retail space, guest rooms or other space, halls,
stores, and offices, and deposits securing reservations of such space), license,
lease, sublease and concession fees and rentals, health club membership fees,
food and beverage wholesale and retail sales, service charges, vending machine
sales, and proceeds, if any, from business interruption or other loss of income
insurance.

                  SERVICER: a servicer selected by Lender to service the Loan.
The current Servicer is BNY Asset Solutions, LLC.

                  SPREAD: 2.75%; provided, however, if Borrower exercises the
extension option set forth in Section 2.6. then from and after the originally
scheduled Stated Maturity Date, the Spread shall automatically be increased to
4.25%.

                  STATE: as to any Property, the state in which such Property is
located.

                  STATED MATURITY DATE: September 11, 2002, as the same may be
extended pursuant to Section 2.6.

                  TAXES: all real estate and personal property taxes,
assessments, water rates or sewer rents, maintenance charges, impositions, vault
charges and license fees, now or hereafter levied or assessed or imposed against
all or part of the Properties.

                  TERM: the entire term of this Agreement, which shall expire
upon repayment in full of the Debt and full performance of each and every
obligation to be performed by Borrowers pursuant to the Loan Documents.

                  TRANSFER: any sale, conveyance, transfer, lease, assignment or
Lien, or the entry into any agreement to sell, convey, transfer, lease, assign
or create a Lien, whether by law or otherwise, of, on, in or affecting (i) all
or part of any Property (including any legal or beneficial direct or indirect
interest therein), (ii) any direct or indirect interest in any Borrower
(including any profit interest), or (iii) any direct or indirect interest in any
Borrower Representative.

                  UCC: the Uniform Commercial Code as in effect in the State or
the state in which any of the Cash Management Accounts are located, as the case
may be.

                  WELFARE PLAN: an employee welfare benefit plan, as defined in
Section 3(l) of ERISA.

                                       10
<PAGE>   20

         1.2      INDEX OF OTHER DEFINITIONS. An index of other terms which are
defined in this Agreement or in other Loan Documents is set forth on Schedule 1.

         1.3      PRINCIPLES OF CONSTRUCTION. Unless otherwise specified, (i)
all references to sections and schedules are to those in this Agreement, (ii)
the words "hereof," "herein" and "hereunder" and words of similar import refer
to this Agreement as a whole and not to any particular provision, (iii) all
definitions are equally applicable to the singular and plural forms of the terms
defined, (iv) the word "including" means "including but not limited to," and (v)
accounting terms not specifically defined herein shall be construed in
accordance with GAAP.

2.       GENERAL LOAN TERM

         2.1      THE LOAN. Borrowers represent to the Lender that (i) as of the
date hereof the aggregate outstanding principal balance of the Impac II Loan and
the Impac III Loan (collectively, the "LOAN") is $108,651,655.38 (the
"PRINCIPAL"), (ii) there exist no claims by any Borrower against Lender or any
prior holder of the Loan and (iii) there are no offsets or defenses by any
Borrower to the payment of any amounts required under the Loan Documents or
otherwise to enforcement by the holder of the Loan. Lender shall have no further
obligations to provide any additional financing to any Borrower and any amounts
of the Loan repaid may not be reborrowed. The Loan shall mature on the Stated
Maturity Date.

         2.2      INTEREST; MONTHLY PAYMENTS.

                  2.2.1    GENERALLY. From and after the date hereof, interest
on the unpaid Principal shall accrue at the Interest Rate and be payable as
hereinafter provided. On September 11, 2000 and each Payment Date thereafter
through and including the Maturity Date, Borrowers shall pay interest on the
unpaid Principal which has accrued through the last day of the Interest Period
immediately preceding such Payment Date. All accrued and unpaid interest shall
be due and payable on the Maturity Date.

                  2.2.2    DEFAULT RATE. After the occurrence and during the
continuance of an Event of Default, the entire unpaid Debt shall bear interest
at the Default Rate, and shall be payable upon demand from time to time, to the
extent permitted by applicable law.

                  2.2.3    TAXES. Any and all payments by Borrowers hereunder
and under the other Loan Documents shall be made free and clear of and without
deduction for any and all present or future taxes, levies, imposts, deductions,
charges or withholdings, and all liabilities with respect thereto, excluding
taxes imposed on Lender's income, and franchise taxes imposed on Lender by the
law or regulation of any Governmental Authority (all such non-excluded taxes,
levies, imposts, deductions, charges, withholdings and liabilities being
hereinafter referred to in this Section 2.2.3 as "APPLICABLE TAXES"). If any
Borrower shall be required by law to deduct any Applicable Taxes from or in
respect of any sum payable hereunder to Lender, the following shall apply: (i)
the sum payable shall be increased as may be necessary so that after making all
required deductions (including deductions applicable to additional sums payable
under this

                                       11

<PAGE>   21
Section 2.2.3), Lender receives an amount equal to the sum it would have
received had no such deductions been made, (ii) such Borrower shall make such
deductions and (iii) such Borrower shall pay the full amount deducted to the
relevant taxation authority or other authority in accordance with applicable
law. Payments pursuant to this Section 2.2.3 shall be made within twenty (20)
days after the date Lender makes written demand therefor.

                  2.2.4    BREAKAGE INDEMNITY. Borrowers shall indemnify Lender
against any loss or expense which Lender may actually sustain or incur in
liquidating or redeploying deposits from third parties acquired to effect or
maintain the Loan or any part thereof as a consequence of (i) any payment or
prepayment of the Loan or any portion thereof made on a date other than a
Payment Date and (ii) any default in payment or prepayment of the Principal or
any part thereof or interest accrued thereon, as and when due and payable (at
the date thereof or otherwise, and whether by acceleration or otherwise). Lender
shall deliver to Borrowers a statement for any such sums which it is entitled to
receive pursuant to this Section 2.2.4, which statement shall be binding and
conclusive absent manifest error.

         2.3      LOAN REPAYMENT.

                  2.3.1    REPAYMENT. Borrowers shall repay the entire
outstanding principal balance of the Note in full on the Maturity Date, together
with interest thereon to (but excluding) the date of repayment and any other
amounts due and owing under the Loan Documents. Except during the continuance of
an Event of Default, all proceeds of any repayment, including any prepayments of
the Loan, shall be applied by Lender as follows in the following order of
priority: First, accrued and unpaid interest at the Interest Rate; Second, to
Principal; and Third, to any other amounts then due and owing under the Loan
Documents. During the continuance of an Event of Default all proceeds of
repayment, including any payment or recovery on one or more of the Properties
(whether through foreclosure, deed-in-lieu of foreclosure, or otherwise) shall,
unless otherwise provided in the Loan Documents, be applied in such order and in
such manner as Lender shall elect in Lender's discretion.

                  2.3.2    MANDATORY PREPAYMENTS.

                           (a)      The Loan is subject to mandatory prepayment
in certain instances of Insured Casualty or Condemnation (each a
"CASUALTY/CONDEMNATION PREPAYMENT"), in the manner and to the extent set forth
in Section 7.4.2. Each Casualty/Condemnation Prepayment, after deducting
Lender's costs and expenses (including reasonable attorneys' fees and expenses)
in connection with the settlement or collection of the Proceeds or Award, shall
be made on a Payment Date and shall be applied in the same manner as repayments
under Section 2.3.1.

                           (b)      If, in Lender's reasonable judgment, an
event occurs that has a material adverse effect on Guarantors' ability to
fulfill its obligations under the Guarantees or the condition (financial or
otherwise) of Guarantors (a "GUARANTOR MATERIAL ADVERSE EVENT"), and such
Guarantor Material Adverse Event is not cured within ten (10) days after receipt
of written notice from Lender, then Borrowers

                                       12
<PAGE>   22
shall, within ten (10) days after the expiration of the foregoing 10-day period,
prepay a portion of the unpaid Principal in an amount equal to the then
aggregate amount of Principal then guaranteed by Guarantors under the
Guarantees. For purposes of the foregoing, an acceleration of the indebtedness
evidenced by that certain Credit Agreement dated as of July 23, 1999 among
Lodgian Financing Corp., Lodgian, Servico, Inc., Impac Hotel Group, Morgan
Stanley Senior Funding, Inc., Lehman Brothers Inc., Lehman Commercial Paper Inc.
and other lenders named therein shall be deemed to be a Guarantor Material
Adverse Event.

                  2.3.3    OPTIONAL PREPAYMENTS. Borrowers shall have the right
to prepay all or any portion of the Principal at any time provided that
Borrowers give Lender at least 5 Business Days prior written notice thereof;
provided, however if after the occurrence of a Secondary Market Transaction, any
such prepayment is not made on a Payment Date, Borrowers shall also pay interest
that would have accrued on such prepaid Principal to but not including the next
Payment Date.

                  2.3.4    ADJUSTMENT OF ALLOCATED LOAN AMOUNTS. Upon any
partial prepayment of Principal made pursuant to Sections 2.3.2 or 2.3.3 above
that is not the subject of a release pursuant to Section 2.4.2 below, the
Allocated Loan Amount for each Property shall be reduced pro-rata. Additionally,
upon any application of Proceeds and/or an Award to reduction of Principal
pursuant to Sections 2.3.2 and 7.4.2, the Allocated Loan Amount of the affected
Property shall be reduced by the same amount.

         2.4      RELEASE OF PROPERTIES.

                  2.4.1    RELEASE ON PAYMENT IN FULL. Lender shall, upon the
written request and at the expense of Borrowers, upon payment in full of the
Debt in accordance herewith, release or, if requested by Borrowers, assign to
Borrowers' designee (without any representation or warranty by and without any
recourse against Leader whatsoever), the Liens of the Loan Documents if not
theretofore released.

                  2.4.2    SALE OF PROPERTIES. Any Borrower may obtain the
release of a Property owned by it from the Lien of the Mortgage encumbering such
Property (and related Loan Documents) thereon upon a bona fide third-party sale
of such Property, provided each of the following conditions are satisfied:

                           (a)      The sale of such Property is pursuant to an
arms' length agreement to a third party not Affiliated with any Borrower, and in
which no Borrower and no Affiliate of any Borrower has any beneficial interest;

                           (b)      Borrowers shall (i) pay all accrued and
unpaid interest on the Principal being prepaid pursuant to clause (ii) of this
subsection (b) (including, if such prepayment occurs after the occurrence of a
Secondary Market Transaction, interest through the end of the Current Interest
Period, if such prepayment is not made on a Payment Date) and (ii) make a
prepayment of Principal in an amount which shall equal or exceed the Release
Amount;

                                       13
<PAGE>   23

                           (c)      Both immediately before such sale and
immediately thereafter, no Default or Event of Default shall be continuing;

                           (d)      Borrowers shall have given Lender at least
10 days' prior written notice of such sale, accompanied by a copy of the
applicable contract of sale and all related documents, and drafts of any
applicable release documents (which shall be subject to Lender's approval);

                           (e)      Borrowers shall have delivered to Lender a
copy of the final closing settlement statement for such sale when the same
becomes available (but in no event later than the day of the closing of such
sale);

                           (f)      Borrowers shall have paid to Lender all
reasonable, out-of-pocket costs and expenses (including reasonable attorneys'
fees) incurred by Lender in connection with such sale and the release of such
Property from the Lien of the Loan Documents;

                           (g)      Borrowers shall execute and deliver such
documents as Lender may reasonably request to confirm the continued validity of
the Loan Documents and the Liens thereof on the remaining Properties; and

                           (h)      after giving effect to such release, the
Debt Service Coverage Ratio for all of the Properties then remaining subject to
the Liens of the Mortgages shall be no less than 1.25:1; provided that if the
Debt Service Coverage Ratio would be less than 1.25:1, Borrowers may prepay a
portion of the unpaid Principal to a level such that, after giving effect to
such additional prepayment, the Debt Service Coverage Ratio of the unpaid
Principal is equal to or greater than 1.25:1.

         2.5      PAYMENTS AND COMPUTATIONS.

                  2.5.1    MAKING OF PAYMENTS. Each payment by a Borrower or
Borrowers shall be made in funds settled through the New York Clearing House
Interbank Payments System or other funds immediately available to Lender by 2:00
p.m., New York City time, on the date such payment is due, to Lender by deposit
to such account as Lender may designate by written notice to Borrowers. Whenever
any such payment shall be stated to be due on a day that is not a Business Day,
such payment shall be made on the first Business Day thereafter. All such
payments shall be made irrespective of, and without any deduction, set-off or
counterclaim whatsoever and are payable without relief from valuation and
appraisement laws and with all costs and charges incurred in the collection or
enforcement thereof, including reasonable attorneys' fees and court costs.

                  2.5.2    COMPUTATIONS. Interest payable under the Loan
Documents shall be computed on the basis of the actual number of days elapsed
over a 360-day year.

                                       14
<PAGE>   24

         2.6      EXTENSION OPTION. On or before July 11, 2002, Borrowers may
notify Lender in writing that Borrowers desire to extend the Stated Maturity
Date to September 11, 2003. Upon receipt of such request to extend the Stated
Maturity Date, the Stated Maturity Date WILL automatically be extended to
September 11, 2003 upon the satisfaction of the following conditions (and upon
satisfaction of such conditions, Lender shall promptly confirm such extension to
Borrower in writing):

                  (a)      no Event of Default exists at the time such request
is made and on September 11, 2002;

                  (b)      Borrowers deliver to Lender an Officer's Certificate
confirming the accuracy of the information contained in clause (a) above;

                  (c)      on September 11, 2002 the Debt Service Coverage Ratio
for all the Properties, taken as a whole, is at least 1.25:1; provided that if
the Debt Service Coverage Ratio is less than 1.25:1, Borrowers may prepay a
portion of the unpaid Principal to a level such that, after giving effect to
such prepayment, the Debt Service Coverage Ratio of the unpaid Principal is
equal to or greater than 1.25:1; and

                  (d)      Borrowers pay an extension fee to Lender in an amount
equal to 1.00% of the unpaid Principal (after giving effect to any prepayment if
any, made pursuant to clause (c) above) not later than September 11, 2002.

                  If Borrowers are unable to satisfy all of the foregoing
conditions within the applicable time frames for each, Lender shall have no
obligation to extend the Stated Maturity Date hereunder.

3.       CASH MANAGEMENT AND RESERVES

         3.1      CASH MANAGEMENT ARRANGEMENTS. Borrowers shall cause all Rents
of tenants at each Property to be transmitted directly by such tenants, and all
Rents in the nature of sums payable by issuers of credit cards accepted at each
Property to be transmitted directly by such issuers, in each case into a trust
account (the "CLEARING ACCOUNT") maintained by the applicable Borrower at a
local bank selected by such Borrower (each, a "CLEARING BANK") as more fully
described in the Clearing Account Agreements. Without in any way limiting the
foregoing, all Rents received by any Borrower or Manager shall be deposited into
the applicable Clearing Account within one Business Day of receipt and Borrowers
shall direct all third parties from whom Borrower has or will have accounts
receivable (including credit card companies) to send their payments with respect
to each Property directly to the applicable Clearing Account. Funds deposited
into each Borrower's Clearing Account shall be swept by the applicable Clearing
Bank on a daily basis into an Eligible Account for such Borrower at the Deposit
Bank controlled by Lender (each, a "DEPOSIT ACCOUNT" and collectively, the
"DEPOSIT ACCOUNTS" and applied and disbursed in accordance with this Agreement.
Funds in the Deposit Accounts shall be invested at Lender's discretion only in
Permitted Investments. Lender will also establish subaccounts within each
Deposit

                                       15
<PAGE>   25

Account which shall at all times be Eligible Accounts (and may be ledger or book
entry accounts and not actual accounts) (such subaccounts are referred to herein
as "SUBACCOUNTS"). The Deposit Accounts and any Subaccounts will be under the
sole control and dominion of Lender, and no Borrower shall have a right of
withdrawal therefrom. Borrowers shall pay for all expenses of opening and
maintaining all of the above accounts.

         3.2      TAXES AND INSURANCE. Each Borrower shall pay to Lender on each
Payment Date (i) one-twelfth of the Taxes for such Borrower's Properties that
Lender reasonably estimates will be payable during the next 12 months in order
to accumulate with Lender sufficient funds to pay all such Taxes at least 30
days prior to their respective due dates and (ii) one-twelfth of the Insurance
Premiums that Lender estimates will be payable for the renewal of the coverage
afforded by the Policies upon the expiration thereof in order to accumulate with
Lender sufficient funds to pay all such Insurance Premiums at least 30 days
prior to the expiration of the Policies. Such amounts will be transferred by
Lender to a Subaccount in the applicable Deposit Account (the "TAX AND INSURANCE
SUBACCOUNT"). Provided that no Default or Event of Default has occurred and is
continuing, Lender will (a) apply funds in the Tax and Insurance Subaccount to
payments of Taxes and Insurance Premiums required to be made by Borrowers
pursuant to Sections 5.2 and 7.1, provided that Borrowers have promptly supplied
Lender with notices of all Taxes and Insurance Premiums due, or (b) reimburse
Borrowers for such amounts upon presentation of evidence of payment and an
Officer's Certificate in form and substance satisfactory to Lender; subject,
however, to Borrowers' right to contest Taxes in accordance with Section 5.2.
hi making any payment relating to Taxes and Insurance Premiums, Lender may do so
according to any bill, statement or estimate procured from the appropriate
public office (with respect to Taxes) or insurer or agent (with respect to
Insurance Premiums), without inquiry into the accuracy of such bill, statement
or estimate or into the validity of any tax, assessment, sale, forfeiture, tax
lien or title or claim thereof If Lender determines in its reasonable judgment
that the funds in the applicable Tax and Insurance Subaccount will be
insufficient to pay (or in excess of) the Taxes or Insurance Premiums next
coming due, Lender may increase (or decrease) the monthly contribution required
to be made by Borrowers to their respective Tax and Insurance Subaccounts.
Lender acknowledges and agrees that the Tax and Insurance Subaccounts are the
"Tax and Insurance Account" referred to in each of the Impac H Loan Agreement
and the Impac III Loan Agreement and, to the extent that a separate Subaccount
is established for the purposes of this Section 3.2, all funds in the "Tax and
Insurance Account" referred to in each of the Impac H Loan Agreement and the
Impac III Loan Agreement shall be transferred into the applicable new
Subaccount.

         3.3      CAPITAL EXPENSE AND FF&E RESERVES. Each Borrower shall pay to
Lender on each Payment Date an amount equal to 5% of the aggregate Rents from
its Properties for the second Rill preceding calendar month, as a reserve for
repairs and replacements. Lender will transfer such amount into a Subaccount in
the applicable Deposit Account (the "CAPITAL EXPENSE AND FF&E RESERVE
SUBACCOUNT"). Upon thirty (30) days' prior notice to Borrowers, Lender may
reassess the amount of the monthly payment required under this Section 3.4 from
time to time in its reasonable discretion (based upon its then current
underwriting standards). If the funds in the Capital Expense and FF&E Reserve
Subaccount shall exceed the amounts due for Approved Capital and FF&E Expenses
pursuant to the terms

                                       16
<PAGE>   26

hereof, Lender may return (or if no Default or Event of Default exists, shall
return) any excess to the applicable Borrower or, if future payments hereunder
are then required, credit such excess against such future payments. Provided
that no Default or Event of Default has occurred and is continuing, Lender shall
disburse funds held in the Capital Expense and FF&E Reserve Subaccount to the
applicable Borrower, within 10 days after the delivery by such Borrower to
Lender of a request therefor (but not more often than once per month unless the
request is related to an Emergency Expenditure), in increments of at least
$5,000 provided that (1) such disbursement is for an Approved Capital and FF&E
Expense or an Emergency Expenditure; (ii) Lender shall have (if it desires)
verified (by an inspection conducted at such Borrower's expense) performance of
the work associated with such Approved Capital and FF&E Expense; and (iii) the
request for disbursement is accompanied by (A) an Officer's Certificate
certifying (w) that such funds will be used to pay or reimburse Borrowers for
Approved Capital and FF&E Expenses or Emergency Expenditures and a description
thereof, (x) that, to the best knowledge of the applicable Borrower, there are
no accounts payable for Approved Capital and FF&E Expenses or Emergency
Expenditures with an unpaid balance of more than $25,000 individually, or
$100,000 in the aggregate, that are more than thirty (30) days past due and none
that are more than sixty (60) days past due (unless payment is being contested
in good faith in accordance with the terms hereof), except as otherwise stated
with an explanation therefor, (y) that the same has not been the subject of a
previous disbursement, and (z) that all previous disbursements have been used to
pay the previously identified Approved Capital and FF&E Expenses or Emergency
Expenditures, and (B) reasonably detailed documentation satisfactory to Lender
as to the amount, necessity and purpose therefor. Any such disbursement of more
than $10,000 to pay (rather than reimburse) Approved Capital and FF&E Expenses
may, at Lender's option, be made by joint check payable to Borrowers and the
payee on such Approved Capital and FF&E Expenses. Lender acknowledges and agrees
that the Capital Expense and FF&E Reserve Subaccount is the "Capital Expenditure
and FF&E Reserve Account" referred to in each of the Impac II Loan Agreement and
the Impac III Loan Agreement and, to the extent that a separate Subaccount is
established for the purposes of this Section 3.3, all funds in the "Capital
Expenditure and FF&E Reserve Account" referred to in each of the Impac II Loan
Agreement and the Impac III Loan Agreement shall be transferred into such new
Subaccounts for the respective Borrowers.

         3.4      GROUND RENT RESERVES. Prior to the date hereof, Impac III has
paid to Lender an amount equal to three (3) months of the ground rent due under
the Ground Lease, which sums have been transferred by Lender to a Subaccount
(the "GROUND RENT SUBACCOUNT"). From and after the date hereof, the Ground Rent
Subaccount shall be funded pursuant to Section 3.9 (subject, however, to the
provisions of Section 3.9(b), such that at all times, the amount deposited
therein shall equal the amount that Lender estimates will equal three (3) months
of the ground rent due under the Ground Lease (such payments, the "GROUND RENT
RESERVE INSTALLMENT"). Lender shall transfer each Ground Rent Reserve
Installment to the Ground Rent Subaccount. Within 30 days after the end of each
calendar year, the amount required to be held in the Ground Rent Subaccount
during the next succeeding calendar year shall be adjusted by Lender to ensure
that such amount is equal to the amount that Lender reasonably projects as the
average monthly ground rent to be paid during such calendar year, multiplied by
three (3). Any shortfall in such amount on the date such adjustment is provided
by Lender shall be funded into the Ground

                                       17

<PAGE>   27

Rent Subaccount from amounts that would otherwise be distributed to the Borrower
pursuant to clause (viii) of Section 3.9(a). Subject to the provisions of
Section 3.9(b), Lender shall pay directly any ground rent when due from amounts
available in the Ground Rent Subaccount. In making any payment of funds from the
Ground Rent Subaccount, Lender may do so according to any bill, statement or
estimate procured from the landlord under the Ground Lease, without inquiry into
the accuracy of such bill, statement or estimate or into the validity of any
claim by such landlord.

         3.5      OPERATING EXPENSE SUBACCOUNT. Upon the occurrence and during
the continuance of an Event of Default, a portion of the Rents received by each
Borrower shall be transferred into a Subaccount for that Borrower (the
"OPERATING EXPENSE SUBACCOUNTS" as provided in Section 3.9. Provided no Default
or Event of Default is continuing, Lender shall disburse funds held in the
Operating Expense Subaccounts, to the respective Borrowers, within 15 days after
delivery by the applicable Borrower to Lender of a request therefor (but not
more often than once per week), in increments of at least $ 1,000, provided (i)
such disbursement is for an Approved Operating Expense; and (ii) such
disbursement is accompanied by (A) an Officer's Certificate certifying (w) that
such funds will be used to pay Approved Operating Expenses and a description
thereof, (x) that all outstanding trade payables (other than those to be paid
from the requested disbursement or those constituting Permitted Indebtedness)
have been paid in full, (y) that the same has not been the subject of a previous
disbursement, and (z) that all previous disbursements have been or will be used
to pay the previously identified Approved Operating Expenses, and (B) reasonably
detailed documentation satisfactory to Lender as to the amount, necessity and
purpose therefor.

         3.6      CASUALTY/CONDEMNATION SUBACCOUNT. Borrowers shall pay, or
cause to be paid, to Lender all Proceeds or Awards due to any Casualty or
Condemnation to be transferred to a Subaccount for the applicable Borrower (the
"CASUALTY/CONDEMNATION SUBACCOUNT" in accordance with the provisions of Section
7. All amounts in the Casualty/Condemnation Subaccount shall disbursed in
accordance with the provisions of Section 7.

         3.7      SECURITY DEPOSITS. Each Borrower shall keep all security
deposits under Leases at a separately designated account under such Borrower's
control at the Clearing Bank so that the security deposits shall not be
commingled with any other funds of such Borrower (such account, the "SECURITY
DEPOSIT ACCOUNT"). Borrowers shall, upon Lender's request, if permitted by
applicable Legal Requirements, turn over to Lender the security deposits (and
any interest theretofore earned thereon) under Leases; to be held by Lender in a
separate Subaccount for each Borrower (the "SECURITY DEPOSIT SUBACCOUNT")
subject to the terms of the Leases. Security deposits held in the Security
Deposit Subaccount will be released by Lender upon notice from the applicable
Borrower together with such evidence as Lender may reasonably request that such
security deposit is required to be returned to a tenant pursuant to the terms of
a Lease or may be applied as Rent pursuant to the rights of such Borrower under
the applicable Lease. Any letter of credit or other instrument that any Borrower
receives in lieu of a cash security deposit under any Lease entered into after
the date hereof shall (i) be maintained in full force and effect in the full
amount unless replaced by a cash deposit as hereinabove described and (ii) if
permitted

                                       18
<PAGE>   28

pursuant to any Legal Requirements, name Lender as payee or mortgagee thereunder
(or at Lender's option, be fully assignable to Lender).

         3.8      GRANT OF SECURITY INTEREST: APPLICATION OF FUNDS. As security
for payment of the Debt and the performance by Borrowers of all other terms,
conditions and provisions of the Loan Documents, each Borrower hereby pledges
and assigns to Lender, and grants to Lender a security interest in all such
Borrower's right, title and interest in and to all Rents and in and to all
payments to or monies held in the Clearing Accounts, the Deposit Accounts, all
Subaccounts created pursuant to this Agreement (collectively, the "CASH
MANAGEMENT ACCOUNTS"). Each Borrower hereby grants to Lender a continuing
security interest in, and agrees to hold in trust for the benefit of Lender, all
Rents in its possession prior to the (i) payment of such Rents to Lender or (ii)
deposit of such Rents into the applicable Deposit Account. No Borrower shall,
without obtaining the prior written consent of Lender, further pledge, assign or
grant any security interest in any Cash Management Account, or permit any Lien
to attach thereto, or any levy to be made thereon, or any UCC-1 Financing
Statements, except those naming Lender as the secured party, to be filed with
respect thereto. This Agreement is, among other things, intended by the parties
to be a security agreement for purposes of the UCC. Upon the occurrence and
during the continuance of an Event of Default, Lender may apply any sums in any
Cash Management Account in any order and in any manner as Lender shall elect in
Lender's discretion without seeking the appointment of a receiver and without
adversely affecting the rights of Lender to foreclose the Lien of any Mortgage
or exercise its other rights under the Loan Documents. Cash Management Accounts
shall not constitute trust funds and may be commingled with other monies held by
Lender. All investment income, if any, derived from Permitted Investments in
any Cash Management Account shall be deposited in the applicable Cash Management
Account upon receipt and shall be held therein as additional collateral until
withdrawn pursuant to the terms of this Agreement

         3.9      PROPERTY CASH FLOW ALLOCATION.

                  (a)      Any Rents deposited into the Deposit Accounts during
the immediately preceding Interest Period shall be applied as follows in the
following order of priority: (1) First, (in the case of Impac III only) to make
payments into the Ground Rent Subaccount as required under Section 3.4; (ii)
Second, to make payments into the applicable Tax and Insurance Subaccount as
required under Section 3.2; (1) Third, to pay the monthly portion of the fees
charged by the Deposit Bank in accordance with the Deposit Account Agreements;
(iv) Fourth, to Lender to pay the interest due on such Payment Date (plus, if
applicable, interest at the Default Rate and all other amounts, other than those
described under other clauses of this Section 3.9(a), then due to Lender under
the Loan Documents); (v) Fifth, to make payments into the applicable Capital
Expense and FF&E Reserve Subaccount as required under Section 3.3; (vi) Sixth,
after the occurrence and during the continuance of an Event of Default, to make
payments for Approved Operating Expenses as required under Section 3.5; (vii)
Seventh, after the consummation of a Secondary Market Transaction, to pay the
pro rata portion of the expenses described in Section 9.1.7; and (viii) Lastly,
payments to the respective Borrowers of any excess amounts. Notwithstanding the
foregoing, provided that in any given Interest Period, all amounts referred to
in the foregoing clauses (i) - (vii) have

                                       19
<PAGE>   29

been paid, then the payments to Borrowers under the foregoing clause (viii)
shall be made on a weekly basis. To the extent that amounts available in the
Deposit Account of any Borrower is insufficient to provide for the payment of
such Borrower's ratable share of any Debt Service due on any Payment Date,
Lender may apply funds on hand in the other Borrower's Deposit Account for
purposes of making the applications specified in clause (iv) of this Section
3.9(a).

                  (b)      Notwithstanding the foregoing, until the earlier of
(i) the failure of Borrowers to make any required payment of ground rent under
any Ground Lease, or (ii) the occurrence of an Event of Default, no amounts will
be disbursed by Lender into the Ground Rent Subaccount pursuant to Section
3.9(a), and all payments of ground rent will be paid directly by Borrowers when
due (whether or not amounts disbursed to the Borrower pursuant to clause (vii)
of Section 3.9(a) are adequate to make such payments).

                  (c)      The failure of Borrowers to make all of the payments
required under clauses (i) through (vii) of Section 3.9(a) in full on each
Payment Date shall constitute an Event of Default under this Agreement

                  (d)      Notwithstanding anything to the contrary contained
in this Section 3.9, after the occurrence of a Default or an Event of Default,
Lender may apply all Rents deposited into the Deposit Accounts and other
proceeds of repayment in such order and in such manner as Lender shall elect,
and without regard for which Borrower generated such Rents.

4.       REPRESENTATIONS AND WARRANTIES

Borrowers represent and warrant to Lender as of the date hereof that except to
the extent (if any) disclosed on Schedule 7 with reference to a specific Section
of this Article 4:

         4.1      ORGANIZATION: SPECIAL PURPOSE. Each Borrower and Borrower
Representative has been duly organized and is validly existing and in good
standing under the laws of the state of its formation, with requisite power and
authority, and all material rights, licenses, permits and authorizations,
governmental or otherwise, necessary to own or, as applicable, lease, its
properties and to transact the business in which it is now engaged. Each
Borrower and Borrower Representative is duly qualified to do business and is in
good standing in each jurisdiction where it is required to be so qualified in
connection with its properties, business and operations. Each Borrower and
Borrower Representative is a Special Purpose Bankruptcy Remote Entity.

         4.2      PROCEEDINGS: ENFORCEABILITY. Each Borrower has taken all
necessary action to authorize the execution, delivery and performance of the
Loan Documents. The Loan Documents have been duly executed and delivered by each
Borrower that is a party to such Loan Documents and constitute legal, valid and
binding obligations of such Borrower enforceable against such Borrower in
accordance with their respective terms, subject to applicable bankruptcy,
insolvency and similar laws affecting rights of creditors

                                       20
<PAGE>   30

generally, and general principles of equity (whether applied in a proceeding of
law or equity), and Lender shall be entitled to the benefits of and security
provided for in the Loan Documents. The Loan Documents are not subject to, and
no Borrower has asserted, any right of rescission, set-off, counterclaim or
defense, including the defense of usury.

         4.3      NO CONFLICTS. The execution, delivery and performance of the
Loan Documents by Borrowers and the transactions contemplated hereby will not
conflict with or result in a breach of any of the terms or provisions of, or
constitute a default under, or result in the creation or imposition of any Lien
(other than pursuant to ~ the Loan Documents) upon any of the property of any
Borrower pursuant to the terms of, any agreement or instrument to which any
Borrower is a party or by which its property is subject, nor will such action
result in any violation of the provisions of any statute or any order, rule or
regulation of any Governmental Authority having jurisdiction over any Borrower
or any of its properties. No Borrower's rights under the Licenses, the Franchise
Agreements and the Management Agreements will be adversely affected by the
execution and delivery of the Loan Documents, any Borrower's performance
thereunder, the recordation of the Mortgages, or the exercise of any remedies by
Lender. Any consent, approval, authorization, order, registration or
qualification of or with any Governmental Authority required for the execution,
delivery and performance by any Borrower of the Loan Documents has been obtained
and is in full force and effect.

         4.4      LITIGATION. There are no actions, suits or other proceedings
at law or in equity by or before any Governmental Authority now pending or, to
Borrowers' knowledge, threatened against or affecting any Borrower, Borrower
Representative, the Manager or any Property, which, if adversely determined,
might materially adversely affect the condition (financial. or otherwise) or
business of any Borrower, Borrower Representative, Manager or the condition or
ownership of any Property.

         4.5      AGREEMENTS. No Borrower is a party to any agreement or
instrument, or subject to any restriction, which might materially and adversely
affect any Borrower or any Property, or any Borrower's business, properties,
operations or condition, financial or otherwise (assuming such Borrower performs
its obligations thereunder). No Borrower is in default in any material respect
in the performance, observance or fulfillment of any of the material
obligations, covenants or conditions contained in any Permitted Encumbrance or
any other agreement or instrument to which any Borrower is a party or by which
any Borrower or any Property is bound.

         4.6      TITLE. Borrowers have good and marketable title in fee to the
real property (and good and marketable leasehold title to the leasehold estate
created by the Ground Lease) and good title to the balance of the Properties,
free and clear of all Liens except the Permitted Encumbrances. All transfer
taxes, deed stamps, intangible taxes or other amounts in the nature of transfer
taxes required to be paid by any Person under applicable Legal Requirements in
connection with the transfer of each Property to a Borrower have been paid. The
Mortgages when properly recorded in the appropriate records, together with any
UCC Financing Statements required to be filed in connection therewith, will
create (i) a valid, perfected first priority lien on the Borrowers' interest (or
the leasehold interest with respect to the Property

                                       21
<PAGE>   31
affected by the Ground Lease) in the Properties and (valid and perfected first
priority security interests in and to, and perfected collateral assignments of,
all personalty (including the Leases) (to the extent that a security interest
can be perfected by the filing of a UCC Financing Statement), ii) all in
accordance with the terms thereof, in each case subject only to any applicable
Permitted Encumbrances. All mortgage, recording, stamp, intangible or other
similar taxes required to be paid by any Person under applicable Legal
Requirements in connection with the execution, delivery, recordation, filing,
registration, perfection or enforcement of any of the Loan Documents have been
paid. The Permitted Encumbrances do not materially adversely affect the value,
operation or use of any Property, or Borrowers' ability to repay the Loan. No
Condemnation or other proceeding has been commenced or, to Borrowers' best
knowledge, is contemplated with respect to all or part of any Property or for
the relocation of roadways providing access to any Property. There are no claims
for payment for work, labor or materials affecting any Property which are or may
become a Lien prior to, or of equal priority with, the Liens created by the Loan
Documents. There are no outstanding options to purchase or rights of first
refusal affecting all or any portion of any Property. To Borrowers' best
knowledge, the survey for each Property heretofore delivered to Lender by such
Borrower does not fail to reflect any material matter affecting such Property or
the title thereto. All of the Improvements included in determining the appraised
value of each Property he wholly within the boundaries and building restriction
lines of such Property, and no improvement on an adjoining property encroaches
upon such Property, and no easement or other encumbrance upon such Property
encroaches upon any of the Improvements, except those insured against by the
title insurance policy insuring the Liens of the Mortgages. Each parcel
comprising each Property is a separate tax lot and is not a portion of any other
tax lot that is not a part of such Property. There are no pending or proposed
special or other assessments for public improvements or otherwise affecting any
Property, or any contemplated improvements to any Property that may result in
such special or other assessments.

         4.7      NO BANKRUPTCY FILING. No Borrower is contemplating either the
filing of a petition by it under any state or federal bankruptcy or insolvency
law or the liquidation of all or a major portion of its property (a "BANKRUPTCY
PROCEEDING"), and Borrowers have no knowledge of any Person contemplating the
filing of any such petition against any Borrower. In addition, neither any
Borrower nor Borrower Representative nor any principal nor Affiliate of any
Borrower or Borrower Representative has been a party to, or the subject of a
Bankruptcy Proceeding for the past ten years.

         4.8      FULL AND ACCURATE DISCLOSURE. No statement of fact made by any
Borrower in any Loan Documents contains any untrue statement of a material fact
or omits to state any material fact necessary to make statements contained
therein not misleading. There is no material fact presently known to any
Borrower that has not been disclosed to Lender which adversely affects, or, as
far as any Borrower can foresee, might adversely affect, any Property or the
business, operations or condition (financial or otherwise) of any Borrower. All
financial data, including the statements of cash flow and income and operating
expense, that have been delivered to Lender in respect of Borrowers and the
Properties (i) fairly represent the financial condition of each Borrower and
each Property as of the date of such reports, and (ii) to the extent prepared by
an independent certified public accounting firm, have been prepared in
accordance with GAAP consistently applied throughout the periods covered, except
as disclosed therein

                                       22
<PAGE>   32

or otherwise disclosed in writing to Lender. No Borrower has any contingent
liabilities, liabilities for taxes, unusual forward or long-term commitments,
unrealized or anticipated losses from any unfavorable commitments or any
liabilities or obligations not expressly permitted by this Agreement. Since the
date of such financial statements, there has been no materially adverse change
in the financial condition, operations or business of any Borrower or any
Property from that set forth in said financial statements.

         4.9      NO PLAN ASSETS. No Borrower is an "employee benefit plan," as
defined in Section 3(3) of ERISA, subject to Title I of ERISA, and none of the
assets of any Borrower constitutes or will constitute "plan assets" of one or
more such plans within the meaning of 29 C.F.R. Section 2510.3-101.

         4.10     COMPLIANCE. Except as previously disclosed in writing by the
applicable Borrower to Lender (or NACC), each Borrower and each Property and the
use thereof comply in all material respects with all applicable Legal
Requirements (including with respect to parking and applicable zoning and land
use laws, regulations and ordinances). No Borrower is in default or violation of
any order, writ injunction, decree or demand of any Governmental Authority, the
violation of which might materially adversely affect the condition (financial or
otherwise) or business of any Borrower. Each Property is used exclusively as a
hotel and other appurtenant and related uses. Except as previously disclosed in
writing to Lender, in the event that all or any part of the Improvements at any
Property are destroyed or damaged, said Improvements can be legally
reconstructed to their condition prior to such damage or destruction, and
thereafter exist for the same use without violating any zoning or other
ordinances applicable thereto and without the necessity of obtaining any
variances or special permits. No legal proceedings are pending or, to the
knowledge of Borrowers, threatened challenging the zoning of any Property.
Neither the zoning nor any other right to construct, use or operate any Property
is in any way dependent upon or related to any property other than such
Property. All certifications, permits, licenses and approvals, including liquor
licenses, certificates of completion and occupancy permits required for the
legal use, occupancy and operation of the Properties (collectively, the
"LICENSES"), have been obtained and are in full force and effect. The use being
made of each Property is in conformity with the certificate of occupancy issued
for such Property and all other restrictions, covenants and conditions affecting
such Property.

         4.11     CONTRACTS. All service, maintenance or repair contracts
affecting any Property have been entered into at arms-length in the ordinary
course of the business of the Borrower which owns such Property and provide for
the payment of fees in amounts and upon terms comparable to existing market
rates.

         4.12     FEDERAL RESERVE REGULATIONS: INVESTMENT COMPANY ACT. No part
of the proceeds of the Loan will be used for the purpose of purchasing or
acquiring any "margin stock" within the meaning of Regulation U of the Board of
Governors of the Federal Reserve System or for any other purpose that would be
inconsistent with such Regulation U or any other regulation of such Board of
Governors, or for any purpose prohibited by applicable Legal Requirements or any
Loan Document. No Borrower is (i) an "investment company" or a company
"controlled" by an "investment company," within the meaning of the Investment
Company Act of 1940, as amended, (ii) a "holding company" or a "subsidiary
company" of a

                                       23
<PAGE>   33

"holding company" or an "affiliate" of either a "holding company" or a
"subsidiary company" within the meaning of the Public Utility Holding Company
Act of 1935, as amended; or (iii) subject to any other federal or state law or
regulation which purports to restrict or regulate its ability to borrow money.

         4.13     UTILITIES AND PUBLIC ACCESS. Each Property has rights of
access to public ways and, to Borrowers' best knowledge, is served by water,
sewer, sanitary sewer and storm drain facilities adequate to service it for its
intended uses. All public utilities necessary or convenient to the full use and
enjoyment of each Property are located in the public right-of-way abutting such
Property, and all such utilities are connected so as to serve such Property
without passing over other property absent a valid easement Ali roads necessary
for the use of each Property for its current purpose have been completed and
dedicated to public use and accepted by all Governmental Authorities.

         4.14     PHYSICAL CONDITION. Each Property, including all Improvements,
parking facilities, systems, Equipment and landscaping, are in good condition,
order and repair in all material respects (ordinary wear and tear excepted) and
in compliance under the applicable Franchise Agreements; there exists no
structural or other material defect or damages to any Property, whether latent
or otherwise. No Borrower has received notice from any insurance company or
bonding company of any defect or inadequacy in any Property, or any part
thereof, winch would adversely affect its insurability or cause the imposition
of extraordinary premiums or charges thereon or any termination of any policy of
insurance or bond. No portion of any Property is located in an area as
identified by the Federal Emergency Management Agency as an area having special
flood hazards.

         4.15     LEASES. Borrowers have delivered to Lender a true, correct and
complete rent roll for the Properties (the "RENT ROLL"), which includes all
commercial Leases affecting the Properties. Except as set forth on the Rent
Roil: (i) each commercial Lease is in full force and effect; (ii) the tenants
under the commercial Leases have accepted possession of and are in occupancy of
all of their respective demised premises, have commenced the payment of rent
under such Leases, and there are no offsets, claims or defenses to the
enforcement thereof; (iii) all rents due and payable under the commercial
Leases have been paid and no portion thereof has been paid for any period more
than 30 days in advance; (iv) the rent payable under each commercial Lease is
the amount of fixed rent set forth in the Rent Roll, and there is no claim or
basis for a claim by the tenant thereunder for an adjustment to the rent; (v) no
tenant has made any claim against the landlord under any commercial Lease which
remains outstanding, there are no defaults on the part of the landlord under any
commercial Lease, and no event has occurred which, with the giving of notice or
passage of time, or both, would constitute such a default; (vi) to Borrowers'
best knowledge, there is no present material default by the tenant under any
commercial Lease; (vii) all security deposits under Leases are as set forth on
the Rent Roll and are held consistent with Section 3.6; (viii) the applicable
Borrower is the sole owner of the entire lessor's interest in each Lease; (ix)
each Lease is the valid, binding and enforceable obligation of such Borrower and
the applicable tenant thereunder, (x) no Person has any possessory interest in,
or night to occupy, any Property except under the terms of the Lease; and (xi)
each Lease is subordinate to the Loan Documents, either pursuant to its terms or
pursuant to a subordination and attornment agreement. None of the Leases
contains any option to purchase or right of first refusal to

                                       24
<PAGE>   34

purchase any Property or any part thereof Neither the Leases nor the Rents have
been assigned or pledged except to Lender, and no other Person has any interest
therein except the tenants thereunder.

         4.16     FRAUDULENT TRANSFER. No Borrower has entered into the Loan or
any Loan Document with the actual intent to hinder, delay, or defraud any
creditor, and each Borrower has received reasonably equivalent value in exchange
for its obligations under the Loan Documents. Giving effect to the transactions
contemplated by the Loan Documents, the fair saleable value of Borrowers' assets
exceeds and will, immediately following the execution and delivery of the Loan
Documents, exceed Borrowers' total liabilities, including subordinated,
unliquidated, disputed or contingent liabilities, including the maximum amount
of its contingent liabilities or its debts as such debts become absolute and
matured. Each Borrower's assets do not and, immediately following the execution
and delivery of the Loan Documents will not, constitute unreasonably small
capital to carry out its business as conducted or as proposed to be conducted.
No Borrower intends to, and does not believe that it will incur debts and
liabilities (including contingent liabilities and other commitments) beyond its
ability to pay such debts as they mature (taking into account the timing and
amounts to be payable on or in respect of obligations of such Borrower).

         4.17     OWNERSHIP OF BORROWER. The sole managing member of Impac II is
the Impac: II Borrower Representative and the sole managing member of Impac III
is the Impac III Borrower Representative. Impac Hotel Group is the owner of all
of the issued and outstanding capital stock of each Borrower Representative, all
of which capital stock has been validly issued and fully paid and is
nonassessable. The only other member of Impac II is Impac Hotel Group and the
only other member of Impac III is Impac Holdings III, L.L.C., a Georgia limited
liability company, whose sole member is Impac Hotel Group. The stock of each
Borrower Representative and the membership interests in each Borrower are owned
free and clear of all Liens, warrants, options and rights to purchase. No
Borrower has any obligation to any Person to purchase, repurchase or issue any
ownership interest in it. The organizational chart attached hereto as Schedule 8
is complete and accurate and illustrates all Persons who have a direct or
indirect ownership interest in each Borrower.

         4.18     MANAGEMENT AGREEMENTS. Borrower has provided true and complete
copies of each Management Agreement to Lender (or to NACC). The Management
Agreements are in full force and effect. With respect to each Management
Agreement, there is no default, breach or violation existing thereunder, and no
event has occurred (other than payments due but not yet delinquent) that, with
the passage of time or the giving of notice, or both, would constitute a
default, breach or violation thereunder, by either party thereto.

         4.19     HAZARDOUS SUBSTANCES. Except as otherwise disclosed in the
environmental reports delivered by Borrowers to Lender (or NACC) with respect to
the Properties, (i) to Borrowers' best knowledge, no Property is in violation in
any material respect of any Legal Requirement pertaining to or imposing
liability or standards of conduct concerning environmental regulation,
contamination or clean-up, including the Comprehensive Environmental Response,
Compensation and Liability Act, the Resource Conservation and Recovery Act, the
Emergency Planning and Community Right-to-Know Act of 1986,

                                       25
<PAGE>   35

the Hazardous Substances Transportation Act, the Solid Waste Disposal Act, the
Clean Water Act, the Clean Air Act, the Toxic Substance Control Act, the Safe
Drinking Water Act, the Occupational Safety and Health Act, any state super-lien
and environmental clean-up statutes, any local law requiring related permits and
licenses and all amendments to and regulations in respect of the foregoing laws
(collectively, "ENVIRONMENTAL LAWS"); (ii) no Property is subject to any private
or governmental Lien or judicial or administrative notice or action or, to
Borrowers' best knowledge, inquiry, investigation or claim relating to hazardous
and/or toxic substances, or any other substances or materials which are listed
pursuant to or regulated by Environmental Laws (collectively, "HAZARDOUS
SUBSTANCES"); (iii) to the best of each Borrower's knowledge, no Hazardous
Substances are or have been (including the period prior to such Borrower's
acquisition of its Property), discharged, generated, treated, disposed of or
stored on, incorporated in, or removed or transported from any Property, except
to the extent commonly used in the day-to-day operation and/or maintenance of
such Property and in such case substantially in compliance with all
Environmental Laws; (iv) to the best of each Borrower's knowledge, no Hazardous
Substances are present in, on or under any nearby real property which could
migrate to or otherwise affect any Property; (v) to the best of each Borrower's
knowledge, no underground storage tanks exist on any Property and no Property
has ever been used as a landfill; and (vi) there have been no environmental
investigations, studies, audits, reviews or other analyses conducted by or on
behalf of any Borrower which have not been provided to Lender.

         4.20     NAME: PRINCIPAL PLACE OF BUSINESS. No Borrower uses or will
use any trade name or has done or will not do business under any name other than
its actual name set forth herein or the name of the hotel operated at each
Property. The principal place of business of each Borrower is its primary
address for notices as set forth in Section 6.1, and no Borrower has any other
place of business other than the Properties.

         4.21     OTHER DEBT. There is no indebtedness with respect to any
Property or any excess cash flow or any residual interest therein, whether
secured or unsecured, other than Permitted Encumbrances and Permitted
Indebtedness.

         4.22     FRANCHISE AGREEMENTS. Each of the Franchise Agreement is in
full force and effect, there is no default, breach or violation existing
thereunder by either party thereto, and no event has occurred (other than
payments due but not yet delinquent) that, with the passage of time or the
giving of notice, or both, would constitute a default, breach or violation by
either party thereunder.

         4.23     GROUND LEASE. The Ground Lease is in full force and effect and
has not been modified or amended without the prior written consent of Lender (or
NACC). There are no defaults under the Ground Lease and no event has occurred,
which with the passage of time, the giving of notice, or both, would constitute
a default under the Ground Lease. All rents, additional rents and other sums due
and payable under the Ground Lease have been paid in full. Neither Borrowers nor
the landlord under the Ground Lease has commenced any action or given or
received any notice for the purpose of terminating the Ground Lease.

                                       26
<PAGE>   36

All of the representations and warranties in this Article 4 and elsewhere in the
Loan Documents (i) shall survive for so long as any portion of the Debt remains
owing to Lender and (ii) shall be deemed to have been relied upon by Lender
notwithstanding any investigation heretofore or hereafter made by Lender or on
its behalf, provided, however, that Borrowers' liabilities set forth herein
relating to the breach of any of the representations, warranties and covenants
set forth in Section 4.19 shall survive in perpetuity.

5.       COVENANTS

Until the end of the Term, Borrowers hereby covenant and agree with Lender that:

         5.1      EXISTENCE. Each Borrower and Borrower Representative shall (i)
do or cause to be done all things necessary to preserve, renew and keep in full
force and effect its existence and material rights and franchises, (ii) continue
to engage in the line of business presently conducted by it (iii) obtain and
maintain all Licenses, and (iv) qualify to do business and remain in good
standing under the laws of each jurisdiction, in each case as and to the extent
required for the ownership, maintenance, management and operation of the
Property owned by it.

         5.2      TAXES. Subject to the further provisions of this Section
5.2, each Borrower shall pay all Taxes relating to its Properties as the same
become due and payable, and deliver to Lender receipts for payment or other
evidence satisfactory to Lender that the Taxes have been so paid no later than
30 days before they would be delinquent if not paid (provided, however, that
Borrowers need not pay such Taxes nor furnish such receipts for payment of Taxes
to the extent paid by Lender pursuant to Section 3.2). Each Borrower shall not
suffer and shall promptly cause to be paid and discharged any Lien against any
of its Properties other than Permitted Encumbrances, and shall promptly pay for
all utility services provided to any such Property. After prior notice to
Lender, any Borrower, at its own expense, may contest by appropriate legal
proceeding, timely initiated and conducted in good faith and with due diligence,
the amount or validity or application of any Taxes levied against it or its
Properties, provided that (i) no Default or Event of Default has occurred and is
continuing, (ii) such proceeding shall suspend the collection of the Taxes,
(iii) such proceeding shall not violate the provisions of any other instrument
to which any Borrower is subject, (iv) no part of or interest in any Property
will be in danger of being sold, forfeited, terminated, canceled or lost if such
Borrower pays the amount or satisfies the condition being contested, and such
Borrower would have the opportunity to so pay or satisfy if such Borrower fails
to prevail in the contest, (v) such Borrower shall have furnished such security
as may be required in the proceeding, or as may be requested by Lender, to
insure the payment of any such Taxes, together with all interest and penalties
thereon, which shall not exceed 125% of the Taxes and Other Charges being
contested, and (vi) such Borrower shall promptly upon final determination
thereof pay the amount of such Taxes, together with all costs, interest and
penalties. Lender may pay over any such security or part thereof held by Lender
to the claimant entitled thereto at any time when, in the judgment of Lender,
the entitlement of such claimant is established.

                                       27
<PAGE>   37

         5.3      REPAIRS, MAINTENANCE AND COMPLIANCE: ALTERATIONS.

                  5.3.1    REPAIRS: MAINTENANCE AND COMPLIANCE. Borrowers shall
at all times maintain, preserve and protect all franchises and trade names, and
Borrowers shall cause the Properties to be maintained in a good and safe
condition and repair and shall not remove, demolish or alter the Improvements or
Equipment (except for alterations performed in accordance with Section 5.3.2 and
normal replacement of equipment with Equipment of equivalent value and
functionality). Borrowers shall promptly comply with all Legal Requirements and
immediately cure properly any violation of a Legal Requirement. Borrowers shall
notify Lender in writing within three Business Days after any Borrower first
receives notice of any such non-compliance. Borrowers shall promptly repair,
replace or rebuild any part of any Property that becomes damaged, worn or
dilapidated and shall complete and pay for any Improvements at any time in the
process of construction or repair.

                  5.3.2    ALTERATIONS. Any Borrower may, without Lender's
consent, perform alterations to the Improvements and Equipment which (i) do not
constitute a Material Alteration, (ii) do not adversely affect any Borrower's
financial condition or the value or Net Operating Income of any Property and
(iii) are in the ordinary course of such Borrower's business. No Borrower shall
perform any Material Alteration with" Lender's prior written consent, which
consent shall not be unreasonably withheld, delayed or conditioned. Lender may,
as a condition to giving its consent to a Material Alteration, require that
Borrowers deliver to Lender security for payment of the cost of such Material
Alteration in an amount equal to 125% of the cost of the Material Alteration as
estimated by Lender. Upon substantial completion of the Material Alteration,
Borrowers shall provide evidence satisfactory to Lender that (i) the Material
Alteration was constructed in accordance with applicable Legal Requirements and
the applicable Franchise Agreement and substantially in accordance with plans
and specifications approved by Lender (which approval shall not be unreasonably
withheld, delayed or conditioned), (ii) all contractors, subcontractors,
materialmen and professionals who provided work, materials or services in
connection with the Material Alteration have been paid in full and have
delivered unconditional releases of hen and (iii) all material Licenses
necessary for the use, operation and occupancy of the Material Alteration (other
than those which depend on the performance of tenant improvement work) have been
issued. Borrowers shall reimburse Lender upon demand for all out-of-pocket costs
and expenses (including the reasonable fees of any architect, engineer or other
professional engaged by Lender) incurred by Lender in reviewing plans and
specifications or in making any determinations necessary to implement the
provisions of this Section 5.3.2.

         5.4      PERFORMANCE OF OTHER AGREEMENTS. Each Borrower shall observe
and perform each and every term to be observed or performed by such Borrower
pursuant to the terms of any agreement or instrument affecting or pertaining to
any Property to which it is a party or by which it is bound, including the Loan
Documents.

                                       28
<PAGE>   38

         5.5      COOPERATE IN LEGAL PROCEEDINGS. Borrowers shall cooperate
fully with Lender with respect to, and permit Lender, at its option and subject
to any restrictions imposed by applicable law, to participate in, any
proceedings before any Governmental Authority which may in any way affect the
rights of Lender under any Loan Document

         5.6      FURTHER ASSURANCES. Borrowers shall, at Borrowers' sole cost
and expense, (i) execute and deliver to Lender such documents, instruments,
certificates, assignments and other writings, and do such other acts necessary
or desirable, to evidence, preserve and/or protect the collateral at any time
securing or intended to secure the Debt and/or for the better and more effective
carrying out of the intents and purposes of the Loan Documents, as Lender may
reasonably require from time to time; and (ii) upon Lender's request therefor
given from time to time during the continuance of any Default or Event of
Default pay for (a) reports of UCC, federal tax lien, state tax lien, judgment
and pending litigation searches with respect to any Borrower and Borrower
Representative and (b) searches of title to one or more of the Properties, each
such search to be conducted by search firms reasonably designated by Lender in
each of the locations reasonably designated by Lender.

         5.7      ENVIRONMENTAL MATTERS.

                  5.7.1    HAZARDOUS SUBSTANCES. So long as one or more
Borrowers own or are in possession of one or more of the Properties, each such
Borrower shall (i) keep the Property owned or possessed by it free from
Hazardous Substances, except to the extent commonly used in the day-to-day
operation and/or maintenance of the Properties and in compliance with all
Environmental Laws, (ii) promptly notify Lender if such Borrower shall become
aware or shall receive actual notice that (A) any Hazardous Substance in excess
of quantities permitted under applicable law is on or near such Property, (B)
such Property is in violation of any Environmental Laws or (C) any condition on
or near such Property shall pose a threat to the health, safety or welfare of
humans and (iii) remove such Hazardous Substances and/or cure such violations
and/or remove such threats, as applicable, as required by law (or as shall be
required by Lender in the case of removal which is not required by law, but in
response to the opinion of a licensed hydrogeologist, licensed environmental
engineer or other qualified environmental consulting firm engaged by Lender
("LENDER'S CONSULTANT")), promptly after such Borrower becomes aware of same, at
Borrowers' sole expense. Nothing herein shall prevent such Borrower from
recovering such expenses from any other party that may be liable for such
removal or cure.

                  5.7.2    ENVIRONMENTAL MONITORING.

                  (a)      Borrowers shall give prompt written notice to Lender
of (i) any proceeding or inquiry by any party (including any Governmental
Authority) with respect to the presence of any Hazardous Substance in excess of
quantities permitted under applicable law on, under, from or about any Property,
(d) all claims made or threatened by any third party (including any Governmental
Authority) against any Borrower or any Property or any party occupying any
Property relating to any loss or injury resulting from any Hazardous Substance,
and (iii) any Borrower's discovery of any occurrence or condition on any real

                                       29
<PAGE>   39

property adjoining or in the vicinity of any property that could cause such
Property to be subject to any investigation or cleanup pursuant to any
Environmental Law. Borrowers shall permit Lender to Join and participate in, as
a parry if it so elects, any legal or administrative proceedings or other
actions initiated with respect to any Property in connection with any
Environmental Law or Hazardous Substance, and Borrowers shall pay all reasonable
attorneys' fees and disbursements incurred by Lender in connection therewith
(subject to such Borrower's right, if any, to recover such expenses from any
third-party (other than Lender)).

                  (b)      Upon Lender's request, at any time and from time to
time, Borrowers shall provide an inspection or audit of one or more Properties
designated by Lender prepared by a licensed hydrogeologist licensed
environmental engineer or qualified environmental consulting firm approved by
Lender assessing the presence or absence of Hazardous Substances on, in or,
subject to the rights of any third-party, near such Property or Properties, and
if Lender in its good faith judgment determines that reasonable cause exists for
the performance of such environmental inspection or audit, then the cost and
expense of such audit or inspection shall be paid by Borrowers. Such inspections
and audit may include soil borings and ground water monitoring. If Borrowers fad
to order any such inspection or audit within 30 days after such request, Lender
may order same, and Borrowers hereby grant to Lender and its employees and
agents access to the Properties and a license to undertake such inspection or
audit provided that such inspections and audit shall be conducted in a manner
calculated to minimize interference with the operation of any such Property.

                  (c)      If any environmental site assessment report prepared
in connection with such inspection or audit recommends that an operations and
maintenance plan be implemented for any Hazardous Substance, whether such
Hazardous Substance existed prior to the ownership of the applicable Property by
any Borrower, or presently exists or is reasonably suspected of existing,
Borrowers shall cause such operations and maintenance plan to be prepared and
implemented at their expense upon request of Lender. If any investigation, site
monitoring, containment, cleanup, removal, restoration or other work of any kind
is reasonably necessary under an applicable Environmental Law ("REMEDIAL WORK"),
Borrowers shall commence all such Remedial Work within 30 days after written
demand by Lender and thereafter diligently prosecute to completion all such
Remedial Work within such period of time as may be required under applicable
law). All Remedial Work shall be performed by licensed contractors approved in
advance by Lender and under the supervision of a consulting engineer approved by
Lender. All costs of such Remedial Work shall be paid by the applicable
Borrower, including Lender's reasonable attorneys' fees paid out-of-pocket
disbursements incurred in connection with the monitoring or review of such
Remedial Work. If such Borrower does not timely commence and diligently
prosecute to completion the Remedial Work, Lender may (but shall not be
obligated to) cause such Remedial Work to be performed at such Borrower's
expense. Notwithstanding the foregoing, no Borrower shall be required to
commence such Remedial Work within the above specified time period: (x) if
prevented from doing so by any Governmental Authority, (y) if commencing such
Remedial Work within such time period would result in any Borrower or such
Remedial Work violating any Environmental Law, or (z) if such Borrower, at its
expense and after prior written notice to Lender, is contesting by appropriate
legal, administrative or other

                                       30
<PAGE>   40

proceedings, conducted in good faith and with due diligence, the need to
perform Remedial Work. Borrowers shall have the right to contest the need to
perform such Remedial Work, provided that, (1) 1 -rowers are permitted by the
applicable Environmental Laws to delay performance of the Remedial Work sending
such proceedings, (2) neither any Property nor any part thereof or interest
therein will be sold, forfeited or lost if a Borrower fails to promptly perform
the Remedial Work being contested, and if such Borrower fails to prevail in
contest such Borrower would thereafter have the opportunity to perform such
Remedial Work, (3) Lender would not, by virtue of such permitted contest be
exposed to any risk of any civil liability for which Borrowers have not
furnished additional security as provided in clause (4) below, or to any risk of
criminal liability, and neither any Property nor any interest therein would be
subject to the imposition of any Lien for which Borrowers have not furnished
additional security as provided in clause (4) below, as a result of the failure
to perform such Remedial Work and (4) Borrowers shall have furnished to Lender
additional security in respect of the Remedial Work being contested and the loss
or damage that may result from Borrowers' failure to prevail in such contest in
such amount as may be reasonably requested by Lender but in no event more than
one hundred twenty-five percent (125%) of the cost of such Remedial Work as
estimated by Lender or Lender's Consultant and any loss or damage that may
result from Borrowers' failure to prevail in such contest.

                  (d)      No Borrower shall install or permit to be installed
on any Property any underground storage tank.

         5.8      TITLE TO THE PROPERTIES. Borrowers will warrant and defend the
title to the Properties, and the validity and priority of all Liens granted or
otherwise given to Lender under the Loan Documents, subject only to Permitted
Encumbrances, against the claims of all Persons. Without Lender's prior written
consent, no Borrower, shall create, incur, assume, permit or suffer to exist any
Lien on all or any portion of any Property or any legal or beneficial ownership
interest in any Borrower, except Liens in favor of Lender and Permitted
Encumbrances, unless such Lien is bonded or discharged within 30 days after any
Borrower first receives notice of such Lien.

         5.9      LEASES.

                  5.9.1    GENERALLY. Upon request, Borrowers shall furnish
Lender with executed copies of all Leases then in effect. All renewals of Leases
and all proposed leases shall provide for rental rates and terms comparable to
existing local market rates for hotel properties similarly situated and shall be
arm's length transactions with bona fide,. independent third-party tenants.
Notwithstanding the foregoing, this Section 5.9.1 shall not apply to nightly
rentals of individual hotel rooms or suites (as opposed to room or suite rentals
on a bulk or commercial contract basis) at any Property in the ordinary course
of Borrowers' business.

                  5.9.2    MATERIAL LEASES. No Borrower shall enter into a
proposed Material Lease or a proposed renewal, extension or modification of an
existing Material Lease without the prior written consent of Lender, which
consent shall not, so long as no Event of Default is continuing, be unreasonably

                                       31
<PAGE>   41
withheld, delayed or conditioned. Prior to seeking Lender's consent to any
Material Lease, Borrowers shall deliver to Lender a copy of such Lease. Lender
shall approve or disapprove each lease for which Lender's approval is required
under this Agreement within 10 Business Days of the submission by Borrowers to
Lender of a written request for such approval, accompanied by a final copy of
the Lease. If requested by Borrowers, Lender will grant conditional approvals of
proposed Leases at any stage of the leasing process, from initial "term sheet"
through negotiated lease drafts, provided that Lender shall retain the right to
disapprove any such Lease if subsequent to any preliminary approval material
changes are made to the terms previously approved by Lender, or additional
material terms are added that had not previously been considered and approved by
Lender in connection with such Lease. Notwithstanding the foregoing, this
Section 5.9.2 shall not apply to nightly rentals of individual hotel rooms or
suites (as opposed to room or suite rentals on a bulk or commercial contract
basis) at any Property in the ordinary course of Borrowers' business.

         5.9.3    MINOR LEASES. Notwithstanding the provisions of Section 5.9.2
above, provided that no Event of Default is continuing, renewals, amendments and
modifications of existing Leases and proposed leases shall not be subject to the
prior approval of Lender provided (i) the Lease as amended or modified or the
renewal Lease is a Minor Lease and (ii) the Lease as amended or modified or the
renewal Lease or series of leases or proposed lease or series of leases: (a)
shall provide for net effective rental rates comparable to existing local market
rates for similar leases at similar properties, (b) shall provide for automatic
self-operative subordination to the Mortgages and, at Lender's option, (x)
attornment to Lender and (y) the unilateral right by Lender to subordinate the
Liens of the Mortgages to the Lease, and (c) shall not contain any option to
purchase, any right of first refusal to purchase, any right to terminate (except
in the event of the destruction or condemnation of substantially all of the
applicable Property), any requirement for a non-disturbance or recognition
agreement, or any other provision which might adversely affect the rights of
Lender under the Loan Documents in any material respect. Upon written request,
Borrowers shall deliver to Lender copies of all Leases which are entered into
pursuant to the preceding sentence together with Borrowers' certification that
it has satisfied all of the conditions of the preceding sentence within ten days
after the execution of the Lease. Notwithstanding the foregoing, this Section
5.9.3 shall not apply to nightly rentals of individual hotel rooms or suites (as
opposed to room or suite rentals on a bulk or commercial contract basis) at any
Property in the ordinary course of Borrowers' business.

         5.9.4    ADDITIONAL COVENANTS WITH RESPECT TO LEASES. Each Borrower(i)
shall observe and perform the material obligations imposed upon the lessor under
the Leases and shall not do or permit anything to impair the value of the
Material Leases as security for the Debt; (ii) shall promptly send copies to
Lender of all notices of default that such Borrower shall send or receive under
any Material Lease; (iii) shall enforce, in accordance with commercially
reasonable practices for properties similar to the applicable Property, the
terms, covenants and conditions in the Leases to be observed or performed by the
lessees, short of termination thereof; (iv) shall not collect any of the Rents
more than one month in advance (other than security deposits); (v) shall not
execute any other assignment of lessor's interest in the Leases or the Rents
(except as contemplated by the Loan Documents); (vi) shall not modify any Lease
in a manner inconsistent with the Loan Documents; (vii) shall not convey or
transfer or suffer or permit a

                                       32
<PAGE>   42

conveyance or transfer of any Property so as to effect a merger of the estates
and rights of, or a termination or diminution of the obligations of, lessees
under Leases; (viii) shall not consent to any assignment of or subletting under
any Material Lease unless required in accordance with its terms without the
prior consent of Lender, which, with respect to a subletting, may not, so long
as no Event of Default is continuing, be unreasonably withheld, delayed or
conditioned, and (ix) shall not cancel or terminate any Material Lease or accept
a surrender thereof without the prior consent of Lender, which consent shall
not, so long as no Event of Default is continuing, be unreasonably withheld,
delayed or conditioned.

         5.10     ESTOPPEL STATEMENT. After request by Lender, Borrowers shall
within ten (10) days furnish Lender with a statement addressed to Lender, its
successors and assigns, duly acknowledged and certified, setting forth (i) the
unpaid Principal, (ii) the Interest Rate, (iii) the date installments of
interest and/or Principal were last paid, (iv) any offsets or defenses to the
payment of the Debt, and (v) that the Loan Documents are valid, legal and
binding obligations and have not been modified or if modified, giving
particulars of such modification.

         5.11     PROPERTY MANAGEMENT.

                  5.11.1   MANAGEMENT AGREEMENT. Each Borrower shall (i) cause
the Properties owned by it to be managed pursuant to the applicable Management
Agreement; (ii) promptly perform and observe all of the covenants required to be
performed and observed by it under such Management Agreement and do all things
necessary to preserve and to keep unimpaired its rights thereunder; (iii)
promptly notify Lender of any default under such Management Agreement of which
it is aware; (iv) promptly deliver to Lender a copy of each financial statement,
business plan, capital expenditure plan, and property improvement plan and any
other notice, report and estimate received by such Borrower under its Management
Agreements; and (v) promptly enforce in a commercially reasonable manner the
performance and observance of all of the covenants required to be performed and
observed by Manager under such Management Agreement. Without Lender's prior
written consent, no Borrower shall (a) surrender, terminate, cancel, extend or
renew any Management Agreement or otherwise replace the Manager or enter into
any other management agreement (except pursuant to Section 5.11.2); (b) reduce
or consent to the reduction of the term of any Management Agreement; (c)
increase or consent to the increase of the amount of any charges under any
Management Agreement; (d) otherwise modify, change, supplement, alter or amend
in any material respect, or waive or release any of its rights and remedies
under, any Management Agreement; (e) suffer or permit the occurrence and
continuance of a default beyond any applicable cure period under any Management
Agreement (or any successor management agreement) if such default permits the
Manager to terminate such Management Agreement (or such successor management
agreement); or (f) suffer or permit the ownership, management or control of the
Manager to be transferred to a Person other than an Affiliate of a Borrower.

                  5.11.2   TERMINATION OF MANAGER. If (i) Borrowers fail to
maintain a Debt Service Coverage Ratio of at least 1.15:1 or (ii) an Event of
Default shall be continuing, or (iii) Manager is in default under any Management
Agreement, Borrowers shall, at the request of Lender, terminate the Management

                                       33
<PAGE>   43

Agreements and replace Manager with a replacement manager acceptable to Lender
in Lender's discretion and the applicable Rating Agencies on terms and
conditions satisfactory to Lender and any applicable Rating Agencies (it being
agreed that, subject to approval by any applicable Rating Agencies, Lender shall
not unreasonably withhold, delay or condition its consent with respect to any
replacement manager that is a nationally recognized management company of hotel
properties) unless, in the case of the event described in clause (i) only,
Borrowers shall prepay a portion of the unpaid Principal to a level such that
the Debt Service Coverage Ratio of the unpaid Principal is restored to a level
of not less than 1.40: 1. In making its decision to require the replacement of
the Manager pursuant to clause (i) above, Lender will consider general economic
conditions, relative performance of comparable properties and economic factors
beyond the control of the Manager such as force majeure, and shall not require
removal of the Manager if the reduction in such ratio to less than 1. 15:1 is
due primarily to an overall decline in the hospitality industry in the
particular markets (e.g., the effect of a natural disaster) in which the
Properties are located or is due to specific economic conditions affecting the
Properties and not within the Manager's control (e.g., the bankruptcy of a major
contract customer). Borrowers' failure to appoint an acceptable manager within
thirty (30) days after Lender's request of Borrowers to terminate the Management
Agreements shall constitute an immediate Event of Default. Borrowers may from
time to time appoint a successor manager to manage the Properties, which
successor manager and Management Agreement shall be approved in writing by
Lender in Lender's discretion and the applicable Rating Agencies.

         5.12     SPECIAL PURPOSE BANKRUPTCY REMOTE ENTITY. Each Borrower and
Borrower Representative shall at all times be a Special Purpose Bankruptcy
Remote Entity. A "Special Purpose Bankruptcy Remote Entity" shall have the
meaning set forth on Schedule 9 hereto. Lender acknowledges and agrees that the
existing Independent Directors of the Borrower Representatives, and the existing
organizational documents of each Borrower and Borrower Representative, are
acceptable to it.

         5.13     ASSUMPTION IN NON-CONSOLIDATION OPINION. Each Borrower and
Borrower Representative shall conduct their business so that the assumptions
(with respect to each Person) made in that certain substantive non-consolidation
opinion letter dated the date hereof delivered by Borrowers' counsel in
connection with the Loan, shall be true and correct in all material respects.

         5.14     CHANGE IN BUSINESS OR OPERATION OF PROPERTIES. Borrowers shall
not purchase or own any real property other than the Properties and shall not
enter into any line of business other than the ownership and operation of the
Properties, or make any material change in the scope or nature of their business
objectives, purposes or operations, or undertake or participate in activities
other than the continuance of its present business or otherwise cease to operate
the Properties as hotel properties or terminate such business for any reason
whatsoever (other than temporary cessation in connection with renovations to a
Property or upon the sale of such Properties pursuant to Section 2.4).

                                       34
<PAGE>   44

         5.15     CERTAIN PROHIBITED ACTIONS. No Borrower shall directly or
indirectly do any of the following: (i) change its principal place of business
or chief executive office without giving Lender notice thereof within 30 days;
(ii) make any change, amendment or modification to its organizational documents,
or otherwise take any action, which could result in such Borrower not being a
Special Purpose Bankruptcy Remote Entity; (iii) cancel or otherwise forgive or
release any claim or debt owed to such Borrower by any Person, except for
adequate consideration and in the ordinary course of such Borrower's business in
its reasonable judgment; (iv) create, incur or assume any indebtedness other
than the Debt and unsecured trade payables incurred in the ordinary course of
business relating to the ownership and operation of the Property owned by it
which do not exceed, at any time, a maximum amount of 3% of the original amount
of the Principal and are paid within sixty (60) days of the date incurred
(collectively, "PERMITTED INDEBTEDNESS") (V) Transfer any License required for
the operation of the Property owned by it, (other than in favor of Lender
pursuant to the Loan Documents); or (vi) maintain, sponsor, contribute to or
become OBLIGATED TO CONTRIBUTE to, or suffer or permit any ERISA Affiliate of
such Borrower to, maintain, sponsor, contribute to or become obligated to
contribute to, any Plan or any Welfare Plan or permit the assets of such
Borrower to become "plan assets," whether by operation of law or under
regulations promulgated under ERISA.

         5.16     PROHIBITED TRANSFERS. No Borrower shall directly or indirectly
make, suffer or permit the occurrence of any Transfer other than a Permitted
Transfer.

         5.17     EXPENSES Subject to the limitations contained in the last
sentence of Section 9.1.1 with respect to Secondary Market Transactions,
Borrowers shall reimburse Lender upon receipt of notice for all reasonable
documented out-of-pocket costs and expenses (including reasonable attorneys'
fees and disbursements) incurred by Lender in connection with the Loan,
including (i) the preparation, negotiation, execution and delivery of the Loan
Documents and the consummation of the transactions contemplated thereby and all
the costs of furnishing all opinions by counsel for Borrowers; (ii) Borrowers'
and Lender's ongoing performance under and compliance with the Loan Documents,
including confirming compliance with environmental and insurance requirements;
(iii) the negotiation, preparation, execution, delivery and administration of
any consents, amendments, waivers or other modifications of or under any Loan
Document and any other documents or matters requested by Lender; (iv) filing and
recording of any Loan Documents; (v) title insurance, surveys, inspections and
appraisals; (vi) the creation, perfection or protection of Lender's Liens in
the Properties and the Cash Management Accounts (including fees and expenses for
title and Hen searches, intangibles taxes, personal property taxes, mortgage
recording taxes, due diligence expenses, travel expenses, accounting firm fees,
costs of appraisals, environmental reports and Lender's Consultant, surveys and
engineering reports); (vii) enforcing or preserving any rights in response to
third party claims or the prosecuting or defending of any action or proceeding
or other litigation, in each case against, under or affecting one or more
Borrowers, the Loan Documents, one or more of the Properties, or any other
security given for the Loan; (viii) fees charged by Rating Agencies in
connection with the Loan or any modification thereof and (ix) enforcing any
obligations of or collecting any payments due from Borrowers under any Loan
Document or with respect to any Property or in connection with any refinancing
or restructuring of the Loan in the nature of a "work-out", or any insolvency or
bankruptcy

                                       35
<PAGE>   45

proceedings. Any costs and expenses due and payable to Lender hereunder which
are not paid by Borrowers within fifteen (15) days after demand may be paid from
any amounts in the Deposit Account, with notice thereof to any Borrower. The
obligations and liabilities of Borrowers under this Section 5.17 shall survive
the Term and the exercise by Lender of any of its rights or remedies under the
Loan Documents, including the acquisition of any Property by foreclosure or a
conveyance in lieu of foreclosure.

         5.18    INDEMNITY. Borrowers shall defend (with counsel satisfactory to
Lender), indemnify and hold harmless Lender and each of its Affiliates and their
respective successors and assigns, including the directors, officers, partners,
members, shareholders, participants, employees and agents of any of the
foregoing (including any Servicer) and each other Person, if any, who Controls
Lender, its Affiliates or any of the foregoing (each, an "INDEMNIFIED PARTY"),
from and against any and all liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, claims, costs, expenses and disbursements
of any kind or nature whatsoever (including the reasonable fees and
disbursements of counsel for an Indemnified Party in connection with any
investigative, administrative or judicial proceeding commenced or threatened,
whether or not Lender shall be designated a party thereto, court costs and costs
of appeal at all appellate levels, investigation and laboratory fees, consultant
fees and litigation expenses), that may be imposed on, incurred by, or asserted
against any Indemnified Party (collectively, the "INDEMNIFIED LIABILITIES") in
any manner, which may arise in connection with (i) any breach by any Borrower of
its obligations under, or any misrepresentation by any Borrower contained in,
any Loan Document; (ii) the use or intended use of the proceeds of the Loan;
(iii) any information provided by or on behalf of any Borrower; (iv) ownership
of any Mortgage, any Property or any interest therein, or receipt of any Rents;
(v) any accident, injury to or death of persons or loss of or damage to property
occurring in, on or about any Property or on the adjoining sidewalks, curbs,
adjacent property or adjacent parking areas, streets or ways; (vi) any use,
nonuse or condition in, on or about any Property or on adjoining sidewalks,
curbs, adjacent property or adjacent parking areas, streets or ways; (vii)
performance of any labor or services or the furnishing of any materials or other
property in respect of any Property; (viii) any failure of any Property to
comply with any Legal Requirement (excluding any Environmental Laws, which is
covered by the Environmental Indemnity Agreements); (ix) any claim by brokers,
finders or similar persons claiming to be entitled to a commission in connection
with any Lease or other transaction involving any Property or any part thereof,
or any liability asserted against Lender with respect thereto; and (x) the
claims of any lessee of any portion of any Property or any Person acting through
or under any lessee or otherwise arising under or as a consequence of any Lease;
provided, however, that Borrowers shall not have any obligation to any
Indemnified Party hereunder to the extent that it is finally judicially
determined that such Indemnified Liabilities arise from the gross negligence,
illegal acts, fraud or willful misconduct of such Indemnified Party. Any amounts
payable to any Indemnified Party by reason of the application of this paragraph
shall be payable on demand and, if not paid within 30 days of demand, shall bear
interest at the Default Rate from the date loss or damage is sustained by any
Indemnified Party until paid. The obligations and liabilities of Borrowers under
this Section 5.18 shall survive the Term and the exercise by Lender of any of
its rights or remedies under the Loan Documents, including the acquisition of
any Property by foreclosure or a conveyance in lieu of foreclosure.

                                       36
<PAGE>   46

         5.19     FRANCHISE AGREEMENTS. Each Borrower shall (i) cause the hotels
located on its Properties to be operated pursuant to the applicable Franchise
Agreement; (ii) promptly perform and observe all of the covenants required to be
performed and observed by it under the applicable Franchise Agreement and do all
things necessary to preserve and to keep unimpaired its material rights
thereunder; (iii) promptly notify Lender of any default under any Franchise
Agreement of which it is aware; (iv) promptly deliver to Lender a copy of each
financial statement, business plan, capital expenditures plan, notice, report
and estimate received by it under the Franchise Agreements; and (v) promptly
enforce in accordance with commercially reasonable practices the performance and
observance of all of the material covenants required to be performed and
observed by the franchisor under the Franchise Agreements. Without Lender's
prior consent, no Borrower shall (i) surrender, terminate or cancel any
Franchise Agreement; (ii) reduce or consent to the reduction of the term of any
Franchise Agreement; (iii) increase or consent to the increase of the amount of
any charges under any Franchise Agreement; (iv) otherwise modify, change,
supplement, alter or amend, or waive or release any of its rights and remedies
under, any Franchise Agreement or (v) suffer or permit the occurrence of
continuance a default beyond any applicable cure period under any Franchise
Agreement (or any successor franchise agreement) if such default permits the
franchisor to terminate or cancel such Franchise Agreement (or any successor
franchise agreement).

6.       NOTICES AND REPORTING.

         6.1      NOTICES. All notices, consents, approvals and requests
required or permitted hereunder or under any other Loan Document (a "NOTICE")
shall be given in writing and shall be effective for all purposes if either hand
delivered with receipt acknowledged, or by a nationally recognized overnight
delivery service (such as Federal Express), or by certified or registered United
States mail, return receipt requested, postage prepaid, or by facsimile and
confirmed by facsimile answer back, in each case addressed as follows (or to
such other address or Person as a party shall designate from time to time by
notice to the other party): If to Lender: The Capital Company of America LLC,
Two World Financial Center, Building B, New York, New York 10281; Attention:
Stephen Yankauer, Telecopier (212) 667-1333 with copies to: Kaye, Scholer,
Fierman, Hays & Handler, LLP, 425 Park Avenue, New York, New York 10022,
Attention: Stephen Gliatta, Telecopier: (212) 836-8689; if to Borrowers: c/o
Lodgian, Inc., Two Live Oak Center, Suite 700, 3445 Peachtree Road, N.E.,
Atlanta, Georgia 30326, Attention: Vice President-Legal Affairs, Telecopier:
(404) 365-4009, with a copy to: Powell, Goldstein, Frazer & Murphy LLP,
Sixteenth Floor, 191 Peachtree Street, N.E., Atlanta, Georgia 30303, Attention:
Robert Lewinson, Esq., Telecopier: (404) 572-6999. A notice shall be deemed to
have been given: in the case of hand delivery, at the time of delivery; in the
case of registered or certified mail, when delivered or the first attempted
delivery on a Business Day; in the case of overnight delivery, upon the first
attempted delivery on a Business Day; or in the case of a facsimile
transmission, upon confirmation of receipt by facsimile answer back.

                                       37
<PAGE>   47

         6.2      BORROWER NOTICES AND DELIVERIES. Borrowers shall (a) give
prompt written notice to Lender of: (i) any litigation, governmental proceedings
or claims or investigations pending or threatened in writing against any
Borrower or Borrower Representative which might materially adversely affect any
Borrower's or Borrower Representative's condition (financial or otherwise) or
business or any Property; (ii) any material adverse change in any Borrower's or
Borrower Representative's condition, financial or otherwise, or of the
occurrence of any Default or Event of Default of which any Borrower has
knowledge; and (b) furnish and provide to Lender; (i) any Securities and
Exchange Commission or other public filings (including all registration
statements, regular periodic reports, 10K's, 10Q's), if any, of any Borrower,
Borrower Representative, Manager, or any Affiliate of any of the foregoing
(including Lodgian and Impac Hotel Group) promptly upon their becoming
available, and commencing with the first quarter of 2001, shall cause such
filings to be filed when due, and (ii) all instruments, documents, boundary
surveys, footing or foundation surveys, certificates, plans and specifications,
appraisals, title and other insurance reports and agreements in Borrowers'
possession or control, reasonably requested, from time to time, by Lender with
respect to the Properties. In addition, after request by Lender (but no more
frequently than twice in any year), Borrowers shall use its commercially
reasonable best efforts to obtain and furnish to Lender within 30 days, tenant
estoppel certificates addressed to Lender, its successors and assigns from each
tenant under a Material Lease at each Property in form and substance reasonably
satisfactory to Lender.

         6.3      FINANCIAL REPORTING.

                  6.3.1    BOOKKEEPING. Each Borrower shall keep on a fiscal
year basis, in accordance with GAAP, proper and accurate books, records and
accounts reflecting all of the financial affairs of such Borrower and all items
of income and expense and any services, Equipment or furnishings provided in
connection with the operation of the Properties owned by such Borrower, whether
such income or expense is realized by such Borrower, Manager or any Affiliate of
such Borrower. Lender shall have the right from time to time during normal
business hours upon reasonable notice to examine such books, records and
accounts at the office of such Borrower or other Person maintaining them, and to
make such copies or extracts thereof as Lender shall desire. After an Event of
Default, Borrowers shall pay any costs incurred by Lender to examine such books,
records and accounts, as Lender shall determine to be necessary or appropriate
in the protection of Lender's interest; otherwise, such costs shall be borne by
Lender.

                  6.3.2    FINANCIAL STATEMENTS; REPORTS. Each Borrower shall
furnish to Lender the following:

                           (i)      not later than 90 days after the end of each
fiscal year, financial statements pertaining to each Borrower and to each
Property for such year, including statement of operations (profit and loss),
balance sheet and statement of cash flows, a calculation of Net Operating
Income, rent roll and occupancy statistics, and such other information or
reports as may be reasonably requested by Lender (or any Rating Agency),
prepared in accordance with GAAP, which upon the reasonable request of the
Lender, to be made at least 90 days prior to the end of the Borrowers' fiscal
year, shall be audited by a "Big Five" accounting firms or another accounting
firm reasonably acceptable to the Lender, provided,

                                       38
<PAGE>   48

however, that until the occurrence of a Secondary Market Transaction such
financial statements shall be provided on an unaudited basis within 45 days
after the end of the fiscal year.

                           (ii)     not later than 30 days after the end of each
month and 45 days after each fiscal quarter, unaudited financial statements
pertaining to each Borrower and each Property as of the end of each month and
fiscal quarter (including the same information described in clause (1)),
prepared in accordance with GAAP, (on an accrual basis with a cash
reconciliation of expenses) certified by an Officer's Certificate of a senior
executive of the applicable Borrower Representative that such statements fairly
reflect the financial condition and operations for relevant period of each
Borrower and each Property in accordance with GAAP, consistently applied.

                           (iii)    an Officer's Certificate to the Lender
within 45 days after the end of each fiscal year stating whether or not the
signer thereof knows of any Default or Event of Default.

                           (iv)     copies of all reports from the franchisors
of the Properties, Smith Travel Service, and any other organization (such as AAA
or Mobil) rating any of the Properties.

                  6.3.3    OTHER REPORTS. Each Borrower shall furnish to Lender,
within ten (10) business Days after request, such further detailed information
with respect to the operation of the Property owned by such Borrower and the
financial affairs of such Borrower, Borrower Representative or Manager as may be
reasonably requested by Lender or any applicable Rating Agency.

                  6.3.4    ANNUAL BUDGET. Each Borrower shall prepare and submit
(or shall cause Manager to prepare and submit) to Lender by December 1 of each
year (for approval by Lender after the occurrence and during the continuance of
an Event of Default (but otherwise for informational purposes only), which
approval shall not be unreasonably withheld, delayed or conditioned), a proposed
pro forma budget for each Property owned by such Borrower for the succeeding
calendar year (the "ANNUAL BUDGET"), and, promptly after preparation thereof,
any revisions to such Annual Budget. Lender's failure to approve or disapprove
any Annual Budget or revision within 30 days after Lender's receipt thereof
shall be deemed to constitute Lender's approval thereof. The Annual Budget shall
consist of (i) an operating expense budget (the "OPERATING BUDGET") showing, on
a month-by-month basis, in reasonable detail, each line item of such Borrower's
anticipated operating income and operating expenses (on a cash and accrual
basis), including amounts required to establish, maintain and/or increase any
monthly payments required hereunder, and (ii) a Capital Expense budget (the
"CAPITAL BUDGET") showing, on a month-by-month basis, in reasonable detail, each
line item of anticipated Capital Expenses.

                  6.3.5    HOTEL ACCOUNTING. All monthly and other operating
statements to be delivered by Borrowers hereunder shall be (and all accompanying
Officer's Certificates shall state that they have been) prepared based upon the
Uniform System of Accounts for Hotels, current edition.

                                       39
<PAGE>   49

7.       INSURANCE; CASUALTY; AND CONDEMNATION

         7.1      INSURANCE.

                  7.1.1    COVERAGE. Each Borrower, at its sole cost, for the
mutual benefit of each Borrower and Lender, shall obtain and maintain during the
Term the following policies of insurance with respect to the Property owned by
such Borrower:

                  (a)      Property insurance insuring against loss or damage by
standard, "all-risk" perils, which shall (i) be in an amount equal to the
greatest of (A) the then full replacement cost of such Property without
deduction for physical depreciation, (B) 125% of the Allocated Loan Amount for
such Property, and (C) such amount as is necessary so that the insurer would not
deem such Borrower a co-insurer under such policies, (ii) have deductibles no
greater than the lesser of $ 100,000 or 5% of Net Operating Income per
occurrence, (iii) be paid annually in advance and (iv) contain a "Replacement
Cost Endorsement" with a waiver of depreciation.

                  (b)      Flood insurance if any part of such Property is
located in an area identified by the Federal Emergency Management Agency as an
area having special flood hazards, in an amount at least equal to the lesser of:
(i) the greater of (A) the then full replacement cost of such Property without
deduction for physical depreciation and (B) 125% of the Allocated Loan amount
for such Property and (ii) the maximum limit of coverage available with respect
to such Property.

                  (c)      Commercial general public liability insurance,
including broad form property damage, blanket contractual and personal injuries
(including death resulting therefrom) coverages and containing minimum limits
per occurrence of $1,000,000 and $2,000,000 in the aggregate for any policy
year; together with at least $10,000,000 excess and/or umbrella liability
insurance for any and all claims, including all legal liability imposed upon
such Borrower and all court costs and attorneys' fees incurred in connection
with the ownership, operation and maintenance of such Property.

                  (d)      Rental loss and/or business interruption insurance in
an amount equal to the greater of (i) the estimated Rents for the next
succeeding 18-month period or (ii) the projected operating expenses, Capital
Expenses and Debt Service for such period. The amount of such insurance shall be
increased from time to time during the Term as and when the estimated or actual
Rents or operating expenses and Debt Service increase.

                  (e)      Insurance against loss or damage from (i) leakage of
sprinkler systems and (ii) explosion of steam boilers, air conditioning
equipment, high pressure piping, machinery and Equipment, pressure vessels or
similar apparatus now or hereafter installed in any of the Improvements (without
exclusion for explosions), in an amount at least equal to $2,000,000 or such
higher amount Lender may reasonably require at any time.

                                       40
<PAGE>   50

                  (f)      Worker's compensation insurance with respect to any
employees of such Borrower, as required by any Legal Requirement.

                  (g)      During any period of repair or restoration, builder's
"all-risk" insurance in an amount equal to not less than the full insurable
value of such Property, against such risks (including fire and extended coverage
and collapse of the Improvements to agreed limits) as Lender may request, in
form and substance acceptable to Lender.

                  (h)      Coverage to compensate for the cost of demolition and
the increased cost of construction in an amount satisfactory to Lender.

                  (i)      Such other insurance (including environmental
liability insurance, earthquake insurance and windstorm insurance) as may from
time to time be reasonably required by Lender in order to protect its interests.

                  7.1.2    POLICIES. All policies of insurance (the "POLICIES")
required pursuant to Section 7.1.1 shall (i) be issued by companies approved by
Lender and licensed to do business in the State, with a claims paying ability
rating of "AA" or better by S&P (and the equivalent by any other Rating Agency)
and a rating of A:VII or better in the current Best's Insurance Reports; (ii)
name Lender and its successors and/or assigns as their interest may appear as
the mortgagee (in the case of property insurance) or an additional insured (in
the case of liability insurance); (iii) contain (in the case of property
insurance) a Non-Contributory Standard Lender Clause and a Lender's Loss Payable
Endorsement, or their equivalents, naming Lender as the person to which all
payments made by such insurance company shall be paid; (iv) contain a waiver of
subrogation against Lender; (v) be collaterally assigned and the originals
thereof delivered to Lender, to the extent previously assigned and delivered to
Lender pursuant to the "Mortgages" (as defined in the Impac II Loan Agreement
and the Impac III Loan Agreement); (vi) contain such provisions as Lender deems
reasonably necessary or desirable to protect its interest, including
endorsements providing that neither any Borrower, Lender nor any other party
shall be a co-insurer under the Policies and that Lender shall receive at least
30 days' prior written notice of any modification, reduction or cancellation of
any of the Policies; and (vii) be satisfactory in form and substance to Lender
and approved by Lender as to amounts, form, risk coverage, deductibles, loss
payees and insureds. Borrowers shall pay the premiums for such Policies (the
"INSURANCE PREMIUMS") as the same become due and payable and furnish to Lender
evidence of the renewal of each of the Policies together with receipts for or
other evidence of the payment of the Insurance Premiums reasonably satisfactory
to Lender (provided, however, that Borrowers need not pay such Insurance
Premiums nor furnish such receipts for payment of Insurance Premiums to the
extent paid by Lender pursuant to Section 3.2). If Borrowers do not furnish such
evidence and receipts at least 5 days prior to the expiration of any expiring
Policy, then Lender may, but shall not be obligated to, procure such insurance
and pay the Insurance Premiums therefor, and Borrowers shall reimburse Lender
for the cost of such Insurance Premiums promptly on demand, with interest
accruing at the Default Rate. Within 30 days after request by Lender, Borrowers
shall deliver to Lender a certified copy of each Policy. Within 30 days after
request by Lender,

                                       41
<PAGE>   51

Borrowers shall obtain such increases in the amounts of coverage required
hereunder as may be reasonably requested by Lender, taking into consideration
changes in the value of money over time, changes in liability laws, changes in
prudent customs and practices, and the like.

         7.2      CASUALTY.

                  7.2.1    NOTICE; RESTORATION. If any Property is damaged or
destroyed, in whole or in part, by fire or other casualty (a "CASUALTY"),
Borrowers shall give prompt notice thereof to Lender. Following the occurrence
of a Casualty, Borrowers, regardless of whether insurance proceeds are
available, shall promptly proceed to restore, repair, replace or rebuild the
affected Property in accordance with Legal Requirements to be of at least equal
value and of substantially the same character as prior to such damage or
destruction.

                  7.2.2    SETTLEMENT OF PROCEEDS. If a Casualty covered by any
of the Policies (an "INSURED CASUALTY") occurs where the loss does not exceed 5%
of the Allocated Loan Amount of the affected Property, provided no Default or
Event of Default has occurred and is continuing, Borrowers may settle and adjust
any claim without the prior consent of Lender; provided such adjustment is
carried out in a competent and timely manner, and Borrowers are hereby
authorized to collect and receipt for the insurance proceeds (the "PROCEEDS").
In the event of an Insured Casualty where the loss equals or exceeds 5% of the
Allocated Loan Amount of the affected Property (a "SIGNIFICANT CASUALTY"),
Lender may, in its sole discretion, participate in the settlement and adjustment
of any claim with Borrower, and the Proceeds shall be due and payable solely to
Lender and held by Lender in the Casualty/Condemnation Subaccount and disbursed
in accordance herewith. If any Borrower or any party other than Lender is a
payee on any check representing Proceeds with respect to a Significant Casualty,
such Borrower shall immediately endorse, and cause all such third parties to
endorse, such check payable to the order of Lender. Each Borrower hereby
irrevocably appoints Lender as its attorney-in-fact, coupled with an interest,
to endorse such check payable to the order of Lender. The expenses incurred by
Lender in the settlement, adjustment and collection of the Proceeds shall become
part of the Debt and shall be reimbursed by Borrowers to Lender upon demand.

         7.3      CONDEMNATION.

                  7.3.1    NOTICE; RESTORATION. Borrowers shall promptly give
Lender notice of the actual or threatened commencement of any condemnation or
eminent domain proceeding affecting any Property (a "CONDEMNATION") and shall
deliver to Lender copies of any and all papers served in connection with such
Condemnation. Following the occurrence of a Condemnation, Borrowers, regardless
of whether an Award is available, shall promptly proceed to restore, repair,
replace or rebuild the affected Property in accordance with Legal Requirements
to the extent practicable to be of at least equal value and of substantially the
same character (and to have the same utility) as prior to such Condemnation.

                                       42
<PAGE>   52

                  7.3.2    COLLECTION OF AWARD. Lender is hereby irrevocably
appointed as each Borrower's attorney-in-fact, coupled with an interest, with
exclusive power to collect, receive and retain any award or payment in respect
of a Condemnation (an "AWARD") and to make any compromise, adjustment or
settlement in connection with such Condemnation. Notwithstanding any
Condemnation (or any transfer made in lieu of or in anticipation of such
Condemnation), Borrowers shall continue to pay the Debt at the time and in the
manner provided for in the Loan Documents, and the Debt shall not be reduced
unless and until any Award shall have been actually received and applied by
Lender to expenses of collecting the Award and to discharge of the Debt. Lender
shall not be limited to the interest paid on the Award by the condemning
authority but shall be entitled to receive out of the Award interest at the rate
or rates provided in the Note. If any Property is sold, through foreclosure or
otherwise, prior to the receipt by Lender of such Award, Lender shall have the
right, whether or not a deficiency judgment on the Note shall be recoverable or
shall have been sought, recovered or denied, to receive all or a portion of the
Award sufficient to pay the Debt. Borrowers shall cause any Award that is
payable to Borrower to be paid directly to Lender. Lender shall hold such Award
in the Casualty/Condemnation Subaccount and disburse such Award in accordance
with the terms hereof.

         7.4      APPLICATION OF PROCEEDS OR AWARD.

                  7.4.1    APPLICATION TO RESTORATION. If an Insured Casualty or
Condemnation occurs where (i) the loss is in an aggregate amount less than the
Allocated Loan Amount for the affected Property, (ii) in the reasonable judgment
of Lender, the affected Property can be restored within six months prior to the
Stated Maturity Date and prior to the expiration of the rental or business
interruption insurance with respect thereto, to the affected Property's
pre-existing condition and utility as existed immediately prior to such Insured
Casualty or Condemnation and to an economic unit not less valuable and not less
useful than the same was immediately prior to the Insured Casualty or
Condemnation, and after such restoration will adequately secure the Debt and
(iii) no Default or Event of Default shall have occurred and be then continuing,
then the Proceeds or the Award, as the case may be (after reimbursement of any
expenses incurred by Lender), shall be applied to reimburse Borrowers for the
cost of restoring, repairing, replacing or rebuilding the affected Property (the
"RESTORATION"), in the manner set forth herein. Borrowers shall commence and
diligently prosecute such Restoration. Notwithstanding the foregoing, in no
event shall Lender be obligated to apply the Proceeds or Award to reimburse any
Borrower for the cost of Restoration unless, in addition to satisfaction of the
foregoing conditions, both (x) Borrowers shall pay (and if required by Lender,
Borrowers shall deposit with Lender in advance) all costs of such Restoration in
excess of the net amount of the Proceeds or the Award made available pursuant to
the terms hereof; and (y) Lender shall have received evidence reasonably
satisfactory to it that during the period of the Restoration, the Rents for such
Property will be at least equal to the sum of the operating expenses and Debt
Service for such Property, as reasonably determined by Lender.

                  7.4.2    APPLICATION TO DEBT. Except as provided in Section
7.4.1, any Proceeds and/or Award may, at the option of Lender in its discretion,
be applied to the payment of (i) accrued but unpaid interest on the Note, (ii)
the unpaid Principal and (iii) other charges due under the Note and/or any of
the

                                       43
<PAGE>   53

other Loan Documents, or applied to reimburse Borrowers for the cost of any
Restoration, in the manner set forth in Section 7.4.3.

                  7.4.3    PROCEDURE FOR APPLICATION TO RESTORATION. If any
Borrower is entitled to reimbursement out of the Proceeds or an Award held by
Lender, such Proceeds or Award shall be disbursed from time to time from the
Casualty/Condemnation Subaccount upon Lender being furnished with (i) evidence
satisfactory to Lender of the estimated cost of completion of the Restoration,
(ii) a fixed price or guaranteed maximum cost construction contract for
Restoration satisfactory to Lender, (iii) prior to the commencement of
Restoration, all immediately available funds in addition to the Proceeds or
Award that in Lender's judgment are required to complete the proposed
Restoration, (iv) such architect's certificates, waivers of lien, contractor's
sworn statements, title insurance endorsements, bonds, plats of survey, permits,
approvals, licenses and such other documents and items as Lender may reasonably
require and approve in Lender's discretion, and (iv) all plans and
specifications for such Restoration, such plans and specifications to be
approved by Lender prior to commencement of any work. Lender may, at Borrowers'
expense, retain a consultant to review and approve all requests for
disbursements, which approval shall also be a condition precedent to any
disbursement. No payment made prior to the final completion of the Restoration
shall exceed 90% of the value of the work performed from time to time; funds
other than the Proceeds or Award shall be disbursed prior to disbursement of
such Proceeds or Award; and at all times, the undisbursed balance of such
Proceeds or Award remaining in the hands of Lender, together with funds
deposited for that purpose or irrevocably committed to the satisfaction of
Lender by or on behalf of Borrowers for that purpose, shall be at least
sufficient in the reasonable judgment of Lender to pay for the cost of
completion of the Restoration, free and clear of all Liens or claims for Lien.
Provided no Default or Event of Default then exists, any surplus that remains
out of the Proceeds held by Lender after payment of such costs of Restoration
shall be paid to the applicable Borrower. Any surplus that remains out of the
Award received by Lender after payment of such costs of Restoration shall, in
the discretion of Lender, be retained by Lender and applied to payment of the
Debt or returned to the applicable Borrower.

8.       DEFAULTS

         8.1      EVENTS OF DEFAULT. An "Event of Default" shall exist with
respect to the Loan if any of the following shall occur:

                  (a)      any portion of the Debt is not paid when due
(including any amount due under Section 2.3.2(b)) or any other amount under
Section 3.9(a)(i) through (vii) is not paid in full on each Payment Date (unless
sufficient funds are available in the relevant Subaccount on the applicable
date);

                  (b)      any of the Taxes are not paid when due (unless Lender
is paying such Taxes pursuant to Section 3.2), subject to Borrowers' right to
contest Taxes in accordance with Section 5.2;

                  (c)      the Policies are not kept in full force and effect,
or are not delivered to Lender upon request as herein provided;

                                       44
<PAGE>   54

                  (d)      a Transfer other than a Permitted Transfer occurs;

                  (e)      any representation or warranty made by any Borrower
or in any Loan Document, or in any report, certificate, financial statement or
other instrument, agreement or document furnished by any Borrower in connection
with any Loan Document, shall be false or misleading as of the date the
representation or warranty was made in any respect that may have a Material
Adverse Effect;

                  (f)      any Borrower or Borrower Representative shall make an
assignment for the benefit of creditors, or shall generally not be paying its
debts as they become due;

                  (g)      a receiver, liquidator or trustee shall be appointed
for any Borrower or Borrower Representative; or any Borrower or Borrower
Representative shall be adjudicated a bankrupt or insolvent; or any petition for
bankruptcy, reorganization or arrangement pursuant to federal bankruptcy law, or
any similar federal or state law, shall be filed by or against, consented to, or
acquiesced in by, any Borrower or Borrower Representative, as the case may be;
or any proceeding for the dissolution or liquidation of any Borrower or Borrower
Representative shall be instituted; provided, however, if such appointment,
adjudication, petition or proceeding was involuntary and not consented to by
such Borrower or any Borrower Representative, as the case may be, only upon the
same not being discharged, stayed or dismissed within 60 days;

                  (h)      any Borrower breaches any covenant contained in
Sections 5.11.1 (a) - (f), 5.12, 5.14 or 5.15;

                  (i)      except as expressly permitted hereunder, the actual
alteration, improvement, demolition or removal of all or any material portion of
any of the Improvements without the prior written consent of Lender;

                  (j)      an Event of Default as defined or described elsewhere
in this Agreement or in any other Loan Document occurs; or any other event shall
occur or condition shall exist, if the effect of such event or condition is to
accelerate or to permit Lender to accelerate the maturity of any portion of the
Debt;

                  (k)      any Borrower shall be in default under any term,
covenant or provision set forth herein or in any other Loan Document which
specifically contains a notice requirement or grace period and such notice has
been given and such grace and/or cure period has expired;

                  (l)      a default has occurred and continues beyond any
applicable cure period under any Franchise Agreement (or any successor franchise
agreement) if such default permits the franchisor to terminate or cancel such
Franchise Agreement (or any successor franchise agreement);

                                       45
<PAGE>   55

                  (m)      Borrowers shall fail to pay before the expiration of
any applicable notice and grace periods, any rent, additional rent or other
charge payable under the Ground Lease; or Borrowers shall default in the
observance or performance of any other term, covenant or condition of the Ground
Lease and such default is not cured prior to the expiration of any applicable
grace period provided therein; or any event shall occur that would cause the
Ground Lease to terminate without notice or action by the landlord thereunder or
would entitle such landlord to terminate the Ground Lease and the term thereof
by giving notice to a Borrower; or the leasehold estate created by the Ground
Lease shall be surrendered or the Ground Lease shall be terminated or canceled
for any reason or under any circumstance whatsoever; or any term of the Ground
Lease shall be modified or supplemented without Lender's consent;

                  (n)      any statement, representation or warranty set forth
in any of the Certificates as such term is defined in the substantive
non-consolidation opinion delivered by Borrower's counsel in connection with the
Loan, shall be untrue or incorrect on the date hereof or shall become untrue or
incorrect as of any date subsequent to the date when made and the circumstances
or facts causing such statement, representation or warranty to be untrue or
incorrect shall not have been changed, or caused to be changed by the applicable
Borrower within thirty (30) calendar days after notice thereof by Lender to
Borrower requiring the same to be remedied; provide, however, that it shall not
be an Event of Default if such circumstances or facts can be changed, but not
reasonably capable of being changed within such thirty (30) day period and the
applicable Borrower shall have commenced to change such circumstances or facts
within such thirty (30) day period and thereafter shall diligently pursue such
change to completion, but in no event later than ninety (90) days after the
date on which the applicable Borrower received such notice from Lender;

                  (o)      the ownership, operation or management, either
directly or indirectly, of any hotel, motel, inn, or other lodging facility by
Impac Hotel Group, Lodgian, any Affiliate of any Borrower or Impac Hotel Group
or Lodgian if, in Lender's reasonable discretion, the same is in direct
competition with any Property (i.e. such lodging facility is substantially
similar to such Property with respect to level of services provided, market
segment and price point) and as a result of such competition there will be a
material adverse effect on the financial performance of such Property, or
competitive with or is likely to have an adverse effect on room occupancy or
daily average rate for any Property; or

                  (p)      any Borrower shall continue to be in default under
any of the other terms, covenants or conditions of this Agreement or any other
Loan Document not otherwise specified in this Section 8.1, for ten days after
notice to Borrowers from Lender, in the case of any default which can be cured
by the payment of a sum of money, or for 30 days after notice from Lender in
the case of any other default; provided, however, that if such non-monetary
default is susceptible of cure but cannot reasonably be cured within such 30-day
period, and Borrowers shall have commenced to cure such default within such
30-day period and thereafter diligently and expeditiously proceeds to cure the
same, such 30-day period shall be extended for an additional period of time as
is reasonably necessary for Borrowers in the exercise of due diligence to cure
such default, such additional period not to exceed 90 days.

                                       46
<PAGE>   56

         8.2      REMEDIES.

                  8.2.1    ACCELERATION. Upon the occurrence of an Event of
Default (other than an Event of Default described in paragraph (f) or (g) of
Section 8.1) and at any time and from time to time thereafter, in addition to
any other rights or remedies available to it pursuant to the Loan Documents or
at law or in equity, Lender may take such action, without notice or demand, that
Lender deems advisable to protect and enforce its rights against any or all
Borrowers and in and to the Properties; including declaring the Debt to be
immediately due and payable (including unpaid interest), Default Rate interest
and any other amounts owing by Borrowers), without notice or demand; and upon
any Event of Default described in paragraph (f) or (g) of Section 8.1, the Debt
(including unpaid interest, Default Rate interest and any other amounts owing by
Borrowers) shall immediately and automatically become due and payable, without
notice or demand, and each Borrower hereby expressly waives any such notice or
demand, anything contained in any Loan Document to the contrary notwithstanding.

                  8.2.2    REMEDIES CUMULATIVE. Upon the occurrence of an Event
of Default, all or any one or more of the rights, powers, privileges and other
remedies available to Lender against Borrowers under the Loan Documents or at
law or in equity may be exercised by Lender at any time and from time to time,
whether or not all or any of the Debt shall be declared, or be automatically,
due and payable, and whether or not Lender shall have commenced any foreclosure
proceeding or other action for the enforcement of its rights and remedies under
any of the Loan Documents. Any such actions taken by Lender shall be cumulative
and concurrent and may be pursued independently, singly, successively, together
or otherwise, at such time and in such order as Lender may determine in its
discretion, to the fullest extent permitted by law, without impairing or
otherwise affecting the other rights and remedies of Lender permitted by law,
equity or contract or as set forth in the Loan Documents. Without limiting the
generality of the foregoing, each Borrower agrees that if an Event of Default is
continuing, (i) to the extent permitted by applicable law, Lender is not subject
to any "one action" or "election of remedies" law or rule, and (ii) all Liens
and other rights, remedies or privileges provided to Lender shall remain in full
force and effect until Lender has exhausted all of its remedies against the
Properties, the Mortgages have been foreclosed, the Properties have been sold
and/or otherwise realized upon in satisfaction of the Debt or the Debt has been
paid in full. To the extent permitted by applicable law, nothing contained in
any Loan Document shall be construed as requiring Lender to resort to any
particular Property or any portion of any Property for the satisfaction of any
of the Debt in preference or priority to any other portion, and Lender may seek
satisfaction out of all or less than all of the Properties or any part of any
Property, in its discretion.

                  8.2.3    SEVERANCE. In connection with the exercise of any
remedies by Lender after an Event of Default, Lender shall have the right from
time to time to sever the Note and the other Loan Documents into one or more
separate notes, mortgages and other security documents in such denominations and
priorities of payment and liens as Lender shall determine in its discretion for
purposes of evidencing and enforcing its rights and remedies. Each Borrower
shall execute and deliver to Lender from time to time, promptly after the
request of Lender, a severance agreement and such other documents as Lender
shall request in order to effect the severance described in the preceding
sentence, all in form and

                                       47
<PAGE>   57

substance reasonably satisfactory to Lender. Each Borrower hereby absolutely and
irrevocably appoints Lender as its true and lawful attorney, coupled with an
interest, in its name and stead to make and execute all documents necessary or
desirable to effect such severance, each Borrower ratifying all that such
attorney shall do by virtue thereof, provided that (i) except as to the loan
amount and the removal of any cross-collateralization provisions, such documents
shall be substantially identical to the Loan Documents and (ii) such
power-of-attorney will not be exercised by Lender unless a Borrower has failed
to execute and deliver such documents within five (5) Business Days after
written request by Lender.

                  8.2.4    DELAY. No delay or omission to exercise any remedy,
right or power accruing upon an Event of Default, or the granting of any
indulgence or compromise by Lender shall impair any such remedy, right or power
hereunder or be construed as a waiver thereof, but any such remedy, right or
power may be exercised from time to time and as often as may be deemed
expedient. A waiver of one Default or Event of Default shall not be construed to
be a waiver of any subsequent Default or Event of Default or to impair any
remedy, right or power consequent thereon. Notwithstanding any other provision
of this Agreement, Lender reserves the right to seek a deficiency judgment or
preserve a deficiency claim in connection with the foreclosure of any Mortgage
to the extent necessary to foreclose on all or less than all or less than all of
any portion of any Property, the Rents, the Cash Management Accounts or any
other collateral.

                  8.2.5    LENDER'S RIGHT TO PERFORM. If any Borrower fails to
perform any covenant or obligation contained herein and such failure shall
continue for a period of five Business Days after Borrowers' receipt of written
notice thereof from Lender, without in any way limiting Lender's right to
exercise any of its rights, powers or remedies as provided hereunder, or under
any of the other Loan Documents, Lender may, but shall have no obligation to,
perform, or cause performance of, such covenant or obligation, and all costs,
expenses, liabilities, penalties and fines of Lender incurred or paid in
connection therewith shall be payable by Borrowers to Lender upon demand and if
not paid shall be added to the Debt (and to the extent permitted under
applicable laws, secured by the Mortgage and other Loan Documents) and shall
bear interest thereafter at the Default Rate. Notwithstanding the foregoing,
Lender shall have no obligation to send notice to any Borrower of any such
failure.

9.       SPECIAL PROVISIONS

         9.1      SALE OF NOTE AND SECONDARY MARKET TRANSACTION.

                  9.1.1    COOPERATION. Borrowers shall, at the request of
Lender, in connection with one or more sales or assignments of the Note or
participations therein or securitizations of rated single or multi-class
securities (the "SECURITIES") secured by or evidencing ownership interests in
the Note and the Mortgages (each such sale, assignment, participation and/or
securitization, a "SECONDARY MARKET TRANSACTION"): (a) (i) provide such
financial and other information with respect to the Properties, Borrowers and
their Affiliates, Manager and any tenants of the Properties, (ii) provide
business plans and budgets relating to the Properties and (iii) perform or
permit or cause to be performed or permitted such

                                       48
<PAGE>   58

site inspection, appraisals, surveys, market studies, environmental reviews and
reports, engineering reports and other due diligence investigations of the
Properties, as may be reasonably requested from time to time by Lender or the
Rating Agencies or as may be necessary or appropriate in connection with a
Secondary Market Transaction or Exchange Act requirements (the items provided to
Lender pursuant to this paragraph (a) being called the "PROVIDED INFORMATION"),
together, if customary, with appropriate verification of and/or consents to the
Provided Information through letters of auditors or opinions of counsel of
independent attorneys acceptable to Lender and the Rating Agencies; (b) at
Borrowers' expense, cause counsel to render opinions as to non-consolidation and
any other opinion customary in securitization transactions with respect to the
Properties, Borrowers and their Affiliates, which counsel and opinions shall be
reasonably satisfactory to Lender and the Rating Agencies; (c) make such
representations and warranties as of the closing date of any Secondary Market
Transaction with respect to the Properties, Borrowers and the Loan Documents as
are customarily provided in such transactions and as may be reasonably requested
by Lender or the Rating Agencies and consistent with the facts covered by such
representations and warranties as they exist on the date thereof, including the
representations and warranties made in the Loan Documents; (d) provide current
certificates of good standing and qualification with respect to Borrowers and
each Borrower Representative from appropriate Governmental Authorities; and (e)
execute such amendments to the Loan Documents and Borrowers' organizational
documents, as may be requested by Lender or the Rating Agencies or otherwise to
effect a Secondary Market Transaction, provided that nothing contained in this
subsection (e) shall result in a material economic change in the transaction.
Borrowers shall pay, or reimburse Lender for, 50% of all reasonable third party
costs and expenses incurred by Lender in connection with a Secondary Market
Transaction; provided, however, that Borrower's costs, together with all other
costs incurred by Borrowers under this Section 9.1.1, shall not exceed 0.40% of
the outstanding Principal that is the subject of such Secondary Market
Transaction.

                  9.1.2    USE OF INFORMATION. Borrowers understand that all or
any portion of the Provided Information and the Required Records may be included
in disclosure documents in connection with a Secondary Market Transaction,
including a prospectus or private placement memorandum (each, a "DISCLOSURE
DOCUMENT") and may also be included in filings with the Securities and Exchange
Commission pursuant to the Securities Act of 1933, as amended (the "SECURITIES
ACT"), or the Securities and Exchange Act of 1934, as amended (the
"EXCHANGE ACT"), or provided or made available to investors or prospective
investors in the Securities, the Rating Agencies, and service providers or other
parties relating to the Secondary Market Transaction. If the Disclosure Document
is required to be revised, Borrowers shall (subject to the cap referred to in
the last sentence of Section 9.1.1) cooperate with Lender in updating the
Provided Information or Required Records for inclusion or summary in the
Disclosure Document or for other use reasonably required in connection with a
Secondary Market Transaction by providing all current information pertaining to
Borrowers, Manager and the Properties necessary to keep the Disclosure Document
accurate and complete in all material respects with respect to such matters.

                  9.1.3    BORROWER OBLIGATIONS REGARDING DISCLOSURE DOCUMENTS
AND FILINGS. In connection with a Disclosure Document, including with respect to
filings under the Exchange Act, Borrowers shall: (a) if requested by Lender,
certify in writing that Borrowers have carefully examined those

                                       49
<PAGE>   59

portions of such Disclosure Document, pertaining to Borrowers, the Properties,
Manager and the Loan, and that such portions do not contain any untrue statement
of a material fact or omit to state a material fact necessary in order to make
the statements made, in the light of the circumstances under which they were
made, not misleading; and (b) indemnify (in a separate instrument of indemnity,
if so requested by Lender) (i) any underwriter, syndicate member or placement
agent (collectively, the "UNDERWRITERS") retained by Lender or its issuing
company affiliate (the "ISSUER") in connection with a Secondary Market
Transaction, (ii) Lender and (iii) the Issuer that is named in the Disclosure
Document or registration statement relating to a Secondary Market Transaction
(the "REGISTRATION STATEMENT"), and each of the Issuer's directors, each of its
officers who have signed the Registration Statement and each person or entity
who controls the Issuer or the Lender within the meaning of Section 15 of the
Securities Act or Section 30 of the Exchange Act (collectively within (iii), the
"CCA GROUP"), and each of its directors and each person who controls each of the
Underwriters, within the meaning of Section 15 of the Securities Act AND SECTION
20 of the Exchange Act (collectively, the "UNDERWRITER GROUP") for any losses,
claims, damages or liabilities (the "LIABILITIES") TO which Lender, the CCA
Group or the Underwriter Group may become subject (including reimbursing all of
them for any legal or other expenses actually incurred in connection with
investigating or defending the Liabilities) insofar as the Liabilities arise out
of or are based upon any untrue statement or alleged untrue statement of any
material fact contained in any of the Provided Information or in any of the
applicable portions of such sections of the Disclosure Document applicable to
Borrowers, Manager, the Properties or the Loan, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated in the applicable portions of such sections or necessary in order
to make the statements in the applicable portions of such sections in light of
the circumstances under which they were made, not misleading; provided, however,
that Borrowers shall not be required to indemnify Lender for any Liabilities
relating to untrue statements or omissions which Borrowers identified to Lender
in writing at the time of Borrowers' examination of such Disclosure Document.

                  9.1.4    INDEMNIFICATION PROCEDURE. Promptly after receipt by
an indemnified party under Section 9.1.3 of notice of the commencement of any
action for which a claim for indemnification is to be made against Borrowers,
such indemnified party shall notify Borrowers in writing of such commencement,
but the omission to so notify Borrowers will not relieve Borrowers from any
liability that they may have to any indemnified party hereunder except to the
extent that failure to notify causes prejudice to Borrowers. If any action is
brought against any indemnified party, and it notifies Borrowers of the
commencement thereof, Borrowers will be entitled, jointly with any other
indemnifying party, to participate therein and, to the extent that it (or they)
may elect by written notice delivered to the indemnified party promptly after
receiving the aforesaid notice of commencement, to assume the defense thereof
with counsel satisfactory to such indemnified party in its reasonable
discretion. After notice from Borrowers to such indemnified party under this
Section 9.1.4, Borrowers shall not be responsible for any legal or other
expenses subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation; provided, however,
if the defendants in any such action include both Borrowers and an indemnified
party, and any indemnified party shall have reasonably concluded that there are
any legal defenses available to it and/or other indemnified parties that are
different from or additional to those available to Borrowers, then the
indemnified party or parties shall have the right to select separate

                                       50
<PAGE>   60

counsel to assert such legal defenses and to otherwise participate in the
defense of such action on behalf of such indemnified party or parties. Borrowers
shall not be liable for the expenses of more than one separate counsel unless
there are legal defenses available to it that are different from or additional
to those available to another indemnified party. Unless they shall have
reasonably concluded that there are defenses available to one or more
indemnified parties that are not available to others and have so informed
Borrowers in writing, the indemnified parties, as a group, shall only be
entitled to require Borrowers to pay the fees and expenses of one law firm.

                  9.1.5    CONTRIBUTION. In order to provide for just and
equitable contribution in circumstances in which the indemnity agreement
provided for in Section 9.1.3 is for any reason held to be unenforceable by an
indemnified party in respect of any Liabilities (or action in respect thereof)
referred to therein which would otherwise be indemnifiable under Section 9.1.3,
Borrowers shall contribute to the amount paid or payable by the indemnified
parry as a result of such Liabilities (or action in respect thereof); provided,
however, that no Person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any Person not guilty of such fraudulent misrepresentation. In
determining the amount of contribution to which the respective parties are
entitled, the following factors shall be considered: (i) the CCA Group's and
Borrowers' relative knowledge and access to information concerning the matter
with respect to which the claim was asserted; (ii) the opportunity to correct
and prevent any statement or omission; and (iii) any other equitable
considerations appropriate in the circumstances. Lender and Borrowers hereby
agree that it may not be equitable if the amount of such contribution were
determined by pro rata or per capita allocation.

                  9.1.6    RATING SURVEILLANCE. Lender will retain the Rating
Agencies to provide rating surveillance services on Securities. The pro rata
expenses of such surveillance will be paid for by Borrowers based on the
applicable percentage of such expenses determined by dividing the then
outstanding Principal by the then aggregate outstanding amount of the pool
created in the Secondary Market Transaction which includes the Loan.

                  9.1.7    SEVERANCE DOCUMENTATION. Within 10 days after request
by Lender, Borrowers shall execute and deliver such documentation as Lender may
reasonably request (including substitute or replacement notes and mortgages) to
effectuate a severance of the Loan into two loans (the "SEVERED LOANS"), one of
which may be subordinate to the other. The Severed Loans shall have an aggregate
principal amount equal to the then principal amount of the Loan, and shall, when
taken together, provide for a rate of interest, debt service payments and other
economic terms which are the same as the rate of interest, debt service payments
and other economic terms of the Loan, and shall, to greatest extent practicable,
have terms that are otherwise the same as those contained in the Loan Documents.
Borrowers shall (subject to the cap referred to in the last sentence of Section
9.1.1) cooperate with Lender in all respects to enable Lender to effect such
severance of the Loan, including, if requested by Lender, delivering to Lender
updated opinions and other documentation similar to that delivered by Borrowers
in connection with the closing of the Loan and assisting Lender in obtaining any
modifications or updates to

                                       51
<PAGE>   61
its title insurance (provided that Borrower shall have no obligation to incur
any additional title insurance premiums or other title charges in connection
therewith).

10.      MISCELLANEOUS

         10.1     EXCULPATION. Subject to the qualifications below, Lender shall
not enforce the liability and obligation of any Borrower to perform and observe
the obligations contained in the Loan Documents by any action or proceeding
wherein a money judgment shall be sought against such Borrower, except that
Lender may bring a foreclosure action, an action for specific performance or any
other appropriate action or proceeding to enable Lender to enforce and realize
upon its interest and rights under the Loan Documents, or in all or any of the
Properties, the Rents or any other collateral given to Lender pursuant to the
Loan Documents; provided, however, that except as specifically provided herein,
any judgment in any such action or proceeding shall be enforceable against a
Borrower only to the extent of such Borrower's interest in the Properties, in
the Rents and in any other collateral given to Lender, and Lender shall not sue
for, seek or demand any deficiency judgment against a Borrower in any such
action or proceeding under or by reason of or under or in connection with any
Loan Document. The provisions of this Section shall not however, (i) constitute
a waiver, release or impairment of any obligation evidenced or secured by any
Loan Document; (ii) impair the right of Lender to name one or more Borrowers as
a party defendant in any action or suit for foreclosure and sale under any
Mortgage; (iii) affect the validity or enforceability of any of the Loan
Documents or any guaranty made in connection with the Loan or any of the rights
and remedies of Lender thereunder, (iv) impair the right of Lender to obtain the
appointment of a receiver; (v) impair the enforcement of the Assignment of
Leases; (vi) constitute a prohibition against Lender to commence any other
appropriate action or proceeding in order for Lender to fully realize the
security granted by any Mortgage or to exercise its remedies against all or any
of the Properties; or (vii) constitute a waiver of the right of Lender to
enforce the liability and obligation of Borrowers, by money judgment or
otherwise, to the extent of any loss, damage, cost expense, liability, claim or
other obligation incurred by Lender (including attorneys' fees and costs
reasonably incurred) arising out of or in connection with the following: (a)
fraud or intentional misrepresentation by any Borrower or any guarantor in
connection with the Loan; (b) the breach of any representation, warranty,
covenant or indemnification in any Loan Document concerning Environmental Laws
or Hazardous Substances, including Sections 4.19 and 5.7 and in the
Environmental Indemnification Agreements; (c) physical waste or after an Event
of Default the removal or disposal of any portion of any Property; (d) the
misapplication or conversion by any Borrower of (x) any Proceeds paid by reason
of any Insured Casualty, (y) any Award received in connection with a
Condemnation, or (z) any Rents, refund of Taxes or amounts in any Subaccount
(including any distributions or payments to members/partners/shareholders of any
Borrower during a period which Lender did not receive the full amounts required
to be paid to Lender under the Loan Documents); (e) any security deposits
collected with respect to any Property which are not delivered to Lender upon a
foreclosure of any Mortgage or action in lieu thereof, except to the extent any
such security deposits were applied in accordance with the terms and conditions
of any of the Leases prior to the occurrence of the Event of Default that gave
rise to such foreclosure or action in lieu thereof; and (f) Borrowers'
indemnifications of Lender set forth in Section 9.1.3.

                                       52
<PAGE>   62

Notwithstanding anything to the contrary in this Agreement or any of the Loan
Documents, (A) Lender shall not be deemed to have waived any right which Lender
may have under Section 506(a), 506(b), 1111(b) or any other provisions of
the U.S. Bankruptcy Code to file a claim for the full amount of the Debt or to
require that all collateral shall continue to secure all of the Debt in
accordance with the Loan Documents, and (B) the Debt shall be fully recourse to
Borrower in the event that Borrower or any Person owning an interest (directly
or indirectly) in Borrower commences any action, suit, claim, arbitration,
governmental investigation or other proceeding (x) under any existing or future
law of any jurisdiction, domestic or foreign, relating to bankruptcy,
insolvency, reorganization or relief of debtors seeking to have an order for
relief entered with respect to Borrower, or seeking to adjudicate Borrower a
bankrupt or insolvent, or seeking reorganization, arrangement, adjustment,
winding-up, liquidation, dissolution, composition or other relief with respect
to Borrower or Borrower's debts, or (y) seeking appointment of a receiver,
trustee, custodian or other similar official for Borrower or for all or
substantially all of Borrower's assets.

         10.2     BROKERS AND FINANCIAL ADVISORS. Each Borrower hereby
represents that it has dealt with no financial advisors, brokers, underwriters,
placement agents, agents or finders in connection with the Loan. Borrowers shall
indemnify and hold Lender harmless from and against any and all claims,
liabilities, costs and expenses (including attorneys' fees, whether incurred in
connection with enforcing this indemnity or defending claims of third parties)
of any kind in any way relating to or arising from a claim by any Person that
such Person acted on behalf of Borrowers in connection with the transactions
contemplated herein. The provisions of this Section 10.2 shall survive the
expiration and termination of this Agreement and the repayment of the Debt.

         10.3     RETENTION OF SERVICER. Lender reserves the right to retain the
Servicer to act as its agent hereunder with such powers as are specifically
delegated to the Servicer by Lender, whether pursuant to the terms of this
Agreement, any pooling and servicing agreement or similar agreement entered into
as a result of a Secondary Market Transaction, the Deposit Account Agreement or
otherwise, together with such other powers as are reasonably incidental thereto.
Borrowers shall pay any reasonable fees and expenses of the Servicer in
connection with a release of any Property, assumption or modification of the
Loan, enforcement of the Loan Documents or any other action taken by Servicer
hereunder on behalf of Lender. Upon the retention of any Servicer, Lender shall
so notify Borrowers in writing.

         10.4     SURVIVAL. This Agreement and all covenants, agreements,
representations and warranties made herein and in the certificates delivered
pursuant hereto shall survive the making by Lender of the Loan and the execution
and delivery to Lender of the Note, and shall continue in full force and effect
so long as any of the Debt is unpaid or such longer period if expressly set
forth in this Agreement. All Borrowers' covenants and agreements in this
Agreement shall inure to the benefit of the respective legal representatives,
successors and assigns of Lender.

                                       53
<PAGE>   63

         10.5     LENDER'S DISCRETION. Whenever pursuant to this Agreement or
any other Loan Document, Lender exercises any right given to it to approve or
disapprove, or consent or withhold consent, or any arrangement or term is to be
satisfactory to Lender or is to be in Lender's discretion, the decision of
Lender to approve or disapprove, to consent or withhold consent or to decide
whether arrangements or terms are satisfactory or not satisfactory, or
acceptable or unacceptable or in Lender's discretion shall (except as is
otherwise specifically provided herein or in any other Loan Document) be in
the sole discretion of Lender and shall be final and conclusive.

         10.6     GOVERNING LAW.

                  (a)      THIS AGREEMENT WAS NEGOTIATED IN THE STATE OF NEW
YORK AND THE PROCEEDS OF THE NOTE DELIVERED PURSUANT HERETO WERE DISBURSED FROM
THE STATE OF NEW YORK, WHICH STATE THE PARTIES AGREE HAS A SUBSTANTIAL
RELATIONSHIP TO THE PARTIES AND TO THE UNDERLYING TRANSACTION EMBODIED HEREBY,
AND IN ALL RESPECTS, INCLUDING MATTERS OF CONSTRUCTION, VALIDITY AND
PERFORMANCE, THIS AGREEMENT AND THE OBLIGATIONS ARISING HEREUNDER SHALL BE
GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK
APPLICABLE TO CONTRACTS MADE AND PERFORMED IN SUCH STATE AND ANY APPLICABLE LAW
OF THE UNITED STATES OF AMERICA, EXCEPT THAT AT ALL TIMES THE PROVISIONS FOR THE
CREATION, PERFECTION, AND ENFORCEMENT OF THE LIENS CREATED PURSUANT TO THE LOAN
DOCUMENTS SHALL BE GOVERNED BY AND CONSTRUED ACCORDING TO THE LAW OF THE STATE
IN WHICH THE PROPERTY IS LOCATED, IT BEING UNDERSTOOD THAT, TO THE FULLEST
EXTENT PERMITTED BY THE LAW OF SUCH STATE, THE LAW OF THE STATE OF NEW YORK
SHALL GOVERN THE VALIDITY AND THE ENFORCEABILITY OF ALL LOAN DOCUMENTS AND THE
DEBT. TO THE FULLEST EXTENT PERMITTED BY LAW, EACH BORROWER HEREBY
UNCONDITIONALLY AND IRREVOCABLY WAIVES ANY CLAIM TO ASSERT THAT THE LAW OF ANY
OTHER JURISDICTION GOVERNS THIS AGREEMENT AND THE NOTE, AND THIS AGREEMENT AND
THE NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF NEW YORK PURSUANT TO ss. 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS
LAW.

                  (b)      ANY LEGAL SUIT, ACTION OR PROCEEDING AGAINST LENDER
OR ANY BORROWER ARISING OUT OF OR RELATING TO THIS AGREEMENT SHALL BE INSTITUTED
IN ANY FEDERAL OR STATE COURT IN NEW YORK COUNTY, NEW YORK AND EACH BORROWER
WAIVES ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE
OF ANY SUCH SUIT, ACTION OR PROCEEDING, AND EACH BORROWER HEREBY IRREVOCABLY
SUBMITS TO THE JURISDICTION OF ANY SUCH COURT IN ANY SUIT, ACTION OR PROCEEDING.
EACH BORROWER DOES HEREBY DESIGNATE AND APPOINT CT CORPORATION SYSTEM AT 155
WASHINGTON

                                       54
<PAGE>   64

AVENUE, SECOND FLOOR, ALBANY, NEW YORK, NEW YORK 12210, AS ITS AUTHORIZED AGENT
TO ACCEPT AND ACKNOWLEDGE ON ITS BEHALF SERVICE OF ANY AND ALL PROCESS WHICH MAY
BE SERVED IN ANY SUCH SUIT, ACTION OR PROCEEDING IN ANY FEDERAL OR STATE COURT
IN NEW YORK, NEW YORK, AND AGREES THAT SERVICE OF PROCESS UPON SAID AGENT AT
SAID ADDRESS AND WRITTEN NOTICE OF SAID SERVICE OF SUCH BORROWER MAILED OR
DELIVERED TO SUCH BORROWER IN THE MANNER PROVIDED HEREIN SHALL BE DEEMED IN
EVERY RESPECT EFFECTIVE SERVICE OF PROCESS UPON SUCH BORROWER (UNLESS LOCAL LAW
REQUIRES ANOTHER METHOD OF SERVICE), IN ANY SUCH SUIT, ACTION OR PROCEEDING IN
THE STATE OF NEW YORK. EACH BORROWER (i) SHALL GIVE PROMPT NOTICE TO LENDER OF
ANY CHANGED ADDRESS OF ITS AUTHORIZED AGENT HEREUNDER, (ii) MAY AT ANY TIME AND
FROM TIME TO TIME DESIGNATE A SUBSTITUTE AUTHORIZED AGENT WITH AN OFFICE IN
NEW YORK, NEW YORK (WHICH OFFICE SHALL BE DESIGNATED AS THE ADDRESS FOR SERVICE
OF PROCESS), AND (iii) SHALL PROMPTLY DESIGNATE SUCH A SUBSTITUTE IF ITS
AUTHORIZED AGENT CEASES TO HAVE AN OFFICE IN NEW YORK, NEW YORK OR IS DISSOLVED
WITHOUT LEAVING A SUCCESSOR.

         10.7     MODIFICATION, WAVER IN WRITING. No modification, amendment,
extension, discharge, termination or waiver of any provision of this Agreement
or of any other Loan Document, nor consent to any departure by any Borrower
therefrom, shall in any event be effective unless the same shall be in a writing
signed by the party against whom enforcement is sought, and then such waiver or
consent shall be effective only in the specific instance, and for the purpose,
for which given. Except as otherwise expressly provided herein, no notice to or
demand on any Borrower shall entitle any Borrower to any other or future notice
or demand in the same, similar or other circumstances. Neither any failure nor
any delay on the part of Lender in insisting upon strict performance of any
term, condition, covenant or agreement, or exercising any right, power, remedy
or privilege hereunder, or under any other Loan Document, shall operate as or
constitute a waiver thereof, nor shall a single or partial exercise thereof
preclude any other future exercise, or the exercise of any other right, power,
remedy or privilege. In particular, and not by way of limitation, by accepting
payment after the due date of any amount payable under any Loan Document, Lender
shall not be deemed to have waived any right either to require prompt payment
when due of all other amounts due under the Loan Documents, or to declare an
Event of Default for failure to effect prompt payment of any such other amount.

         10.8     TRIAL BY JURY. EACH BORROWER AND LENDER HEREBY AGREE NOT TO
ELECT A TRIAL BY JURY OF ANY ISSUE TRIABLE OF RIGHT BY JURY, AND WAIVE ANY RIGHT
TO TRIAL BY JURY FULLY TO THE EXTENT THAT ANY SUCH RIGHT SHALL NOW OR HEREAFTER
EXIST WITH REGARD TO THE LOAN DOCUMENTS, OR ANY CLAIM, COUNTERCLAIM OR OTHER
ACTION ARISING IN CONNECTION THEREWITH. THIS WAIVER OF RIGHT TO TRIAL BY JURY IS
GIVEN KNOWINGLY AND VOLUNTARILY BY EACH BORROWER AND LENDER, AND IS INTENDED TO
ENCOMPASS INDIVIDUALLY

                                       55
<PAGE>   65

EACH INSTANCE AND EACH ISSUE AS TO WHICH THE RIGHT TO A TRIAL BY JURY WOULD
OTHERWISE ACCRUE. EITHER PARTY IS HEREBY AUTHORIZED TO FILE A COPY OF THIS
PARAGRAPH IN ANY PROCEEDING AS CONCLUSIVE EVIDENCE OF THIS WAIVER BY THE OTHER.

         10.9.    HEADINGS/EXHIBITS. The Section headings in this Agreement are
included herein for convenience of reference only and shall not constitute a
part of this Agreement for any other purpose. The Schedules/Exhibits attached
hereto, are hereby incorporated by reference as a part of the Agreement with the
same force and effect as if set forth in the body hereof.

         10.10    SEVERABILITY. Wherever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement shall be prohibited by or
invalid under applicable law, such provision shall be ineffective to the extent
of such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Agreement.

         10.11    PREFERENCES. Upon the occurrence and continuance of an Event
of Default, Lender shall have the continuing and exclusive right to apply or
reverse and reapply any and all payments by Borrowers to any portion of the
Debt. To the extent Borrowers make a payment to Lender, or Lender receives
proceeds of any collateral, which is in whole or part subsequently invalidated,
declared to be fraudulent or preferential, set aside or required to be repaid to
a trustee, receiver or any other party under any bankruptcy law, state or
federal law, common law or equitable cause, then, to the extent of such payment
or proceeds received, the Debt or part thereof intended to be satisfied shall be
revived and continue in full force and effect, as if such payment or proceeds
had not been received by Lender. This provision shall survive the expiration or
termination of this Agreement and the repayment of the Debt.

        10.12    WAIVER OF NOTICE. No Borrower shall be entitled to any notices
of any nature whatsoever from Lender except with respect to matters for which
this Agreement or any other Loan Document specifically and expressly requires
the giving of notice by Lender to such Borrower and except with respect to
matters for which such Borrower is not, pursuant to applicable Legal
Requirements, permitted to waive the giving of notice. Each Borrower hereby
expressly waives the right to receive any notice from Lender with respect to any
matter for which no Loan Document specifically and expressly requires the giving
of notice by Lender to such Borrower.

         10.13    REMEDIES OF BORROWER. If a claim or adjudication is made that
Lender or any of its agents, including Servicer, has acted unreasonably or
unreasonably delayed acting in any case where by law or under any Loan Document,
Lender or any such agent, as the case may be, has an obligation to act
reasonably or promptly, Borrowers agree that neither Lender nor its agents,
including Servicer, shall be liable for any monetary damages, and Borrowers'
sole remedy shall be to commence an action seeking injunctive relief or
declaratory judgment. Any action or proceeding to determine whether Lender has
acted reasonably shall be determined by an action seeking declaratory judgment.
Each Borrower specifically

                                       56
<PAGE>   66

waives any claim against Lender and its agents, including Servicer, with respect
to actions taken by Lender or its agents on Borrowers' behalf.

         10.14    PRIOR AGREEMENTS. This Agreement and the other Loan Documents
contain the entire agreement of the parties hereto and thereto in respect of the
transactions contemplated hereby and thereby, and all prior agreements,
understandings and negotiations among or between such parties, whether oral or
written, are superseded by the terms of this Agreement and the other Loan
Documents.

         10.15    OFFSETS, COUNTERCLAIMS AND DEFENSES. Each Borrower hereby
waives the right to assert a counterclaim, other than a compulsory counterclaim,
in any action or proceeding brought against one or more Borrowers by Lender or
its agents, including Servicer, or otherwise offset any obligations to make
payments required under the Loan Documents. Any assignee of Lender's interest in
and to the Loan Documents shall take the same free and clear of all offsets,
counterclaims or defenses which one or more Borrowers may otherwise have against
any assignor of such documents, and no such offset, counterclaim or defense
shall be interposed or asserted by one or more Borrowers in any action or
proceeding brought by any such assignee upon such documents, and any such right
to interpose or assert any such offset, counterclaim or defense in any such
action or proceeding is hereby expressly waived by Borrowers.

         10.16    PUBLICITY. All news releases, publicity or advertising by any
Borrower or its Affiliates through any media intended to reach the general
public, which refers to the Loan Documents, the Loan, Lender or any member of
the CCA Group, a Loan purchaser, the Servicer or the trustee in a Secondary
Market Transaction, shall be subject to the prior written approval of Lender.
Lender shall have the right to issue any of the foregoing without any Borrower's
approval.

         10.17    NO USURY. Borrowers and Lender intend at all times to comply
with applicable state law or applicable United States federal law (to the extent
that it permits Lender to contract for, charge, take, reserve or receive a
greater amount of interest than under state law) and that this Section 10.17
shall control every other agreement in the Loan Documents. If the applicable law
(state or federal) is ever judicially interpreted so as to render usurious any
amount called for under the Note or any other Loan Document, or contracted for,
charged, taken, reserved or received with respect to the Debt, or if Lender's
exercise of the option to accelerate the maturity of the Loan or any prepayment
by Borrowers results in Borrowers having paid any interest in excess of that
permitted by applicable law, then it is Borrowers' and Lender's express intent
that all excess amounts theretofore collected by Lender shall be credited
against the unpaid Principal and all other Debt (or, if the Debt has been or
would thereby be paid in full, refunded to Borrowers), and the provisions of the
Loan Documents immediately be deemed reformed and the amounts thereafter
collectible thereunder reduced, without the necessity of the execution of any
new document, so as to comply with applicable law, but so as to permit the
recovery of the fullest amount otherwise called for thereunder. All sums paid or
agreed to be paid to Lender for the use, forbearance or detention of the Loan
shall, to the extent permitted by applicable law, be amortized, prorated,
allocated, and spread throughout the full stated term of the Loan until payment
in full so that the rate or amount of interest on account of the Debt does not
exceed the maximum lawful rate from time to time in effect and

                                       57
<PAGE>   67

applicable to the Debt for so long as the Debt is outstanding. Notwithstanding
anything to the contrary contained in any Loan Document it is not the intention
of Lender to accelerate the maturity of any interest that has not accrued at the
time of such acceleration or to collect unearned interest at the time of such
acceleration.

         10.18    CONFLICT; CONSTRUCTION OF DOCUMENTS. In the event of any
conflict between the provisions of this Agreement and any of the other Loan
Documents, the provisions of this Agreement shall control. The parties hereto
acknowledge that each is represented by separate counsel in connection with the
negotiation and drafting of the Loan Documents and that the Loan Documents shall
not be subject to the principle of construing their meaning against the party
that drafted them.

         10.19    NO THIRD PARTY BENEFICIARIES. Loan Documents are solely for
the benefit of Lender and Borrowers and nothing contained in any Loan Document
shall be deemed to confer upon anyone other than the Lender and Borrowers any
right to insist upon or to enforce the performance or observance of any of the
obligations contained therein.

         10.20    CROSS DEFAULT; CROSS COLLATERALIZATION. Borrowers acknowledge
that Lender has made the Loan to Borrowers upon the security of its collective
interest in the Properties and in reliance upon the aggregate of the Properties
taken together being of greater value as collateral security than the sum of the
Properties taken separately. Borrowers agree that the Mortgages are and will be
cross-collateralized and cross-defaulted with each other so that (i) an Event of
Default under any of the Mortgages shall constitute an Event of Default under
each of the other Mortgages which secure the Note; (ii) an Event of Default
under the Note or this Agreement shall constitute an Event of Default under each
Mortgage; and (iii) each Mortgage shall constitute security for the Note as if a
single blanket lien were placed on all of the Properties as security for the
Note. Borrowers covenant and agree that in the case of an Event of Default (i)
Lender shall have the right to pursue all of its rights and remedies in one
proceeding, or separately and independently in separate proceedings from time to
time, as Lender, in its sole and absolute discretion, shall determine from time
to time, (ii) Lender is not required to either marshall assets, sell the
Properties or any portion thereof in any inverse order of alienation, or be
subject to any "one action" or "election of remedies" law or rule, (iii) the
exercise by the Lender of any remedies against any one Property or portion
thereof will not impede the Lender from subsequently or simultaneously
exercising remedies against any other Property(ies), and (iv) all Liens and
other rights, remedies or privileges provided to Lender shall remain in full
force and effect until Lender has exhausted all of its remedies against the
Properties and all Properties have been foreclosed, sold and/or otherwise
realized upon in satisfaction of the Loan.

         10.21    ASSIGNMENT. The Loan, the Note, the Loan Documents and/or
Lender's rights, title, obligations and interests therein may be assigned by
Lender and any of its successors and assigns to any Person at any time in its
discretion, in whole or in part, whether by operation of law (pursuant to a
merger or other successor in interest) or otherwise. Upon such assignment, all
references to Lender in this Loan Agreement and in any Loan Document shall be
deemed to refer to such assignee or successor in interest and such assignee or
successor in interest shall thereafter stand in the place of Lender. No Borrower
may

                                       58
<PAGE>   68

assign its rights, title, interests or obligations under this Loan Agreement or
under any of the Loan Documents.

         10.22    JOINT AND SEVERAL. Each of the Borrowers shall be jointly and
severally liable for payment of the Debt and performance of all other
obligations of Borrowers (or any of them) under this Agreement or any other Loan
Document.

         10.23    TERMINATION OF BUILDING LOAN AGREEMENTS. Each of the Building
Loan Agreements (as defined in the Impac II Loan Agreement and the Impac III
Loan Agreement) is hereby terminated and of no further force and effect and no
Borrower shall have any further obligations or liabilities thereunder, except to
the extent such obligations or liabilities survive the termination of such
Building Loan Agreements, pursuant to the express terms thereof.

         10.24    REAFFIRMATION. Except as modified or terminated in connection
with the execution and delivery of this Agreement each Borrower hereby ratifies
and reaffirms the obligations, waivers, indemnities and covenants made under the
"Transaction Documents" (as defined in Impac II Loan Agreement and the Impac III
Loan Agreement) to which it is bound.

         10.25    COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which when so executed and delivered shall be an original,
but all of which shall together constitute one and the same instrument.

         10.26    SPLIT LOAN.

                  10.26.1  GENERALLY. At any time during the Term, the Loan
shall, at the option of Lender, be split into two or more separate loans (each,
a "SPLIT LOAN"), each of which will be evidenced by a separate note (each, a
"SPLIT NOTE") and secured by Mortgages on one or more of the Properties, as
designated by Lender (each such group of Properties being referred to herein as
a "SPLIT PROPERTY GROUP"). The aggregate amount of the Split Loan shall be in
the amount of the unpaid Principal as of the date that the Split Loan is
effectuated (the "SPLIT LOAN DATE") and shall be allocated among the individual
Split Loans based upon the relative Allocated Loan Amounts (as the same may be
adjusted by Lender based upon the Adjusted Net Operating Income of each of the
Properties included in the respective Split Property Groups for the 12 full
months next preceding the Split Loan Date). The Properties to be included in
each Split Property Group shall be subject to the mutual agreement of Borrowers
and Lender. It is the intent of the parties that the consummation of the Split
Property Groups, as contemplated herein, will not result in a change in
economics (i.e., change in total payment obligations under the Loan) to
Borrowers that would apply if the Split Property Group were not consummated.

                  10.26.2  ADDITIONAL BORROWER. On the Split Loan Date, each
Split Property Group (with the exception of one Split Property Group,
designated by Lender, which, unless requested by Borrowers to the contrary,
shall not be conveyed, and shall continue to be owned by Borrowers) shall be

                                       59
<PAGE>   69

conveyed to a separate newly organized limited liability company or corporation
(each, an "ADDITIONAL BORROWER") which is a Special Purpose Bankruptcy Remote
Entity, which has as its managing member (if applicable) a Special Purpose
Bankruptcy Remote Entity which is an Affiliate of Impac Hotel Group, and which
has as its only other member (or only shareholder) Impac Hotel Group.

                  10.26.3  DOCUMENTATION. To effect the Splitting of the Loan,
on the Split Loan Date, Borrowers and each Additional Borrower and Lender will
enter into such documentation as may be reasonably required by Lender, and
Borrowers and each Additional Borrower shall take such actions and deliver such
other documentation as Lender may reasonably require, including, without
limitation, (i) the execution and delivery of new Loan Agreements covering each
Split Loan, which shall be on substantially the same terms and conditions as the
Loan Agreement; (ii) the issuance of the Split Notes, each in the principal
amount of the applicable Split Loan (which Split Note shall be on the same terms
and conditions as the Note); (iii) the execution and delivery of modifications
of the Mortgages to provide that the Mortgages on each of the Properties in a
Split Property Group will secure the applicable Split Note; (iv) the execution
and delivery of new Assignments of Leases, Rents and Profits and other Loan
Documents in respect of each Split Loan; (v) the creation of new Subaccounts for
the Properties in each Split Pool Group (the "NEW ACCOUNTS") and the depositing
into such New Accounts amounts in the Subaccounts that are allocable to the
Properties in such Split Pool Group; (vi) the entering into of new Management
Agreements between Borrowers and the Additional Borrowers, as applicable, and
the Manager and new Subordination Agreements among Lender, Borrowers or the
Additional Borrowers, as applicable, and the Manager, each on substantially the
same terms and conditions as the existing Management Agreements and
Subordination Agreements; (vii) the execution and delivery of such new,
continuation and/or consolidated Uniform Commercial Code Financing Statements as
Lender may reasonably require; (viii) if applicable, the assignment of all
Franchise Agreements, Licenses, contracts and equipment leases, and other
property rights relating to the Properties in each Split Property Group to the
applicable Additional Borrower; (ix) the delivery to Lender of endorsements to
its title policies or new policies covering the Split Property Groups, insuring
the Mortgages on the Properties in each Split Property Group with the same prior
of lien as in the policies received in respect of the initial closing of the
same; with no other exceptions to title, and with such other endorsements as
Lender may reasonably request, and (x) the delivery of such other documents and
the taking of such other actions as Lender may reasonably require.

                  10.26.4  COSTS. Upon consummation of the pool splitting
transaction contemplated herein, then on the Split Loan Date, Lender shall
reimburse to Borrowers all incremental costs and expenses incurred by Borrowers
or any Additional Borrower, Impac Hotel Group, or Lodgian in connection with
consummating the Split Property Group transactions contemplated herein,
including; without limitation, the following:

                  (a)      The reasonable cost of formation of the Additional
Borrowers, and if applicable, their managing members (including, without
limitation, reasonable legal fees and expenses and filing fees);

                                       60
<PAGE>   70

                  (b)      Transfer taxes paid in connection with the transfer
of Split Property Groups to Additional Borrowers;

                  (c)      The cost of issuing the title policies and/or
endorsements referred to in Section 10.25.3 in excess of the cost of issuing the
same in respect of Borrowers only, had ownership of all of the Properties
remained in Borrowers; and

                  (d)      Rating Agency fees and expenses.

                  (Remainder of page intentionally left blank]

                                       61
<PAGE>   71

         IN WITNESS WHEREOF, the parties hereto have caused this Loan Agreement
to be duly executed by their duly authorized representatives, all as of the day
and year first above written.

                                IMPAC HOTELS II, L.L.C., a Georgia limited
                                liability company

                                By: Impac SPE #2, Inc., a Georgia corporation,
                                    its sole managing member

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

                                IMPAC HOTELS III, L.L.C., a Georgia limited
                                liability company

                                By: Impac SPE #6, Inc., a Georgia corporation,
                                    its sole managing member

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

                                THE CAPITAL COMPANY OF AMERICA LLC

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

<PAGE>   72

                                   SCHEDULE I

                           INDEX OF OTHER DEFINITIONS

"Annual Budget" - 6.3.4
"Applicable Taxes" - 2.2.3
"Award" - 7.3.2
"Bankruptcy Proceeding" - 4.7
"Capital Budget", - 6.3.4
"Capital Expense and FF&E Reserve Subaccount" - 3.3
"Cash Management Accounts" - 3.8
"Casualty" - 7.2.1
"Casualty/Condemnation Prepayment" - 2.3.2
"Casualty/Condemnation Subaccount" - 3.7
"CCA Group" - 9.1.3
"Clearing Account" - 3.1
"Clearing Bank" - 3.1
"Condemnation" - 7.3.1
"Deposit Account" - 3.1
"Disclosure Document" - 9.1.2
"Eligible Account" - Deposit Account Agreement
"Environmental Laws" - 4.19
"Equipment" - Mortgage
"Exchange Act" - 9.1.2
"Guarantor Material Adverse Event" - 2.3.2
"Hazardous Substances" - 4.19
"Improvements" - Mortgage
"Indemnified Liabilities" - 5.18
"Indemnified Party" - 5.18
"Insurance Premiums" - 7.1.2
"Insured Casualty"- 7.2.2
"Issuer" - 9.1.3
"Lender's Consultant" - 5.7.1
"Liabilities" - 9.1.3
"Licenses" - 4.10
"Loan" - 2.1
"Notice" - 6.1
"Operating Budget" - 6.3.4
"Operating Expense Subaccount" - 3.5
"Permitted Indebtedness" - 5.15

                                       1-1
<PAGE>   73

"Permitted Investments" - Deposit Account Agreement
"Policies" - 7.1.2
"Principal" - 2.1
"Proceeds" - 7.2.2
"Provided Information" - 9.1.1
"Registration Statement" - 9.1.3
"Remedial Work" - 5.7.2
"Rent Roll" - 4.15
"Required Records" - 6.3.6
"Restoration" - 7.4.1
"Secondary Market Transaction" - 9.1.1
"Securities" - 9.1.1
"Securities Act" - 9.1.2
"Security Deposit Account" - 3.7
"Security Deposit Subaccount" - 3.7
"Severed Loans" - 9.1.8
"Significant Casualty" - 7.2.2
"Special Purpose Bankruptcy Remote Entity - 5.12
"Subaccounts" - 3.1
"Tax and Insurance Subaccount" - 3.2
"Underwriter Group" - 9.1.3
"Underwriters" - 9.1.3

                                      1-2

<PAGE>   74

                                   SCHEDULE 2

                                 IMPAC II NOTES

1.       Amended Restated and Consolidated Secured Promissory Note dated May 9,
         1997 from Impac Hotels II, L.L.C. to Nomura Asset Capital Corporation
         in the principal amount of $6,489,309.07 (Clarksburg, WV).

2.       Amended Restated and Consolidated Secured Promissory Note dated May 9,
         1997 from Impac Hotels II, L.L.C. to Nomura Asset Capital Corporation
         in the principal amount of $4,257,083.66 (Morgantown, WV).

3.       Amended Restated and Consolidated Secured Promissory Note dated May 9,
         1997 from Impac Hotels II, L.L.C. to Nomura Asset Capital Corporation
         in the principal amount of $3,323,884.40 (Fairmont, WV).

4.       Amended Restated and Consolidated Secured Promissory Note dated May 9,
         1997 from Impac Hotels II, L.L.C. to Nomura Asset Capital Corporation
         in the principal amount of $2,918,487.35 (Florence, KY).

5.       Amended Restated and Consolidated Secured Promissory Note dated May 9,
         1997 from Impac Hotels II, L.L.C. to Nomura Asset Capital Corporation
         in the principal amount of $7,539,560.20 (Memphis, TN).

6.       Amended Restated and Consolidated Secured Promissory Note dated May 9,
         1997 from Impac Hotels L.L.C. to Nomura Asset Capital Corporation in
         the principal amount of $8,009,007.01 (Cincinnati, OH).

7.       Amended Restated and Consolidated Secured Promissory Note dated May 9,
         1997 from Impac Hotels II, L.L.C. to Nomura Asset Capital Corporation
         in the principal amount of $6,964,165.71 (Ft. Mitchell, KY).

8.       Amended Restated and Consolidated Secured Promissory Note dated May 9,
         1997 from Impac Hotels II, L.L.C. to Nomura Asset Capital Corporation
         in the principal amount of $4,651,284.95 (N. Miami, FL).

9.       Secured Promissory Note dated April 15, 1997 from Impac Hotels II,
         L.L.C. to Nomura Asset Capital Corporation in the principal amount of
         $2,122,303.00 (Hamburg, NY).

10.      Secured Promissory Note dated May 9, 1997 from Impac Hotels II, L.L.C.
         to Nomura Asset Capital Corporation in the principal amount of
         $1,821,295.85 (Hamburg, NY).

                                      2-1

<PAGE>   75

11.      Secured Promissory Note dated March 12, 1997 from Impac Hotels II,
         L.L.C. to Nomura Asset Capital Corporation in the principal amount of
         $2,128,901.99 (Syracuse, NY).

12.      Secured Promissory Note dated May 9, 1997 from Impac Hotels II, L.L.C.
         to Nomura Asset Capital Corporation in the principal amount of
         $1,006,788.10 (Syracuse, NY).

13.      Amended, Restated and Consolidated Secured Promissory Note dated
         December 3, 1997 from Impac Hotels II, L.L.C. to Nomura Asset Capital
         Corporation in the principal amount of $24,400,000 (Coconut Grove, FL).

14.      Secured Promissory Note dated July 31, 1997 from Impac Hotels II,
         L.L.C. to Nomura Asset Capital Corporation in the principal amount of
         $4,709,407.15 (Tulsa, OK).

15.      Secured Promissory Note dated November 19, 1997 from Impac Hotels II,
         L.L.C. to Nomura Asset Capital Corporation in the principal amount of
         $16,893,738.61 (Denver, CO).

                                      2-2

<PAGE>   76

                                   SCHEDULE 3

                                 IMPAC III NOTES

1.       Second Amended and Restated Secured Promissory Note dated December 16,
         1997 from Impac Hotels III, L.L.C. to Nomura Asset Capital Corporation
         in the principal amount of $2,877,009.22. (Augusta, GA)

2.       Amended and Restated Secured Promissory Note dated December 16, 1997
         from Impac Hotels III, L.L.C. to Nomura Asset Capital Corporation in
         the principal amount of $4,025,388.29. (Lafayette, LA)

3.       Second Amended and Restated Secured Promissory Note dated December 16,
         1997 from Impac Hotels III, L.L.C. to Nomura Asset Capital Corporation
         in the principal amount of $2,953,646.50. (Merrimack, NH)

4.       Second Amended and Restated Secured Promissory Note dated December 16,
         1997 from Impac Hotels III, L.L.C. to Nomura Asset Capital Corporation
         in the principal amount of $1,875,754.41. (Jackson, TN)

5.       Second Amended and Restated Secured Promissory Note dated December 16,
         1997 from Impac Hotels III, L.L.C. to Nomura Asset Capital Corporation
         in the principal amount of $2,620,319.34. (Colchester, VT)

                                       3-1

<PAGE>   77

                                   SCHEDULE 4

                             ALLOCATED LOAN AMOUNTS

<TABLE>
<CAPTION>
         IMPAC II

                          Property            Allocated Loan Amount
                         ----------           ---------------------
         <S>             <C>                  <C>
          1.             Bridgeport             $ 6,408,476.85
          2.             Cincinnati               7,935,966.55
          3.             Fairmont                 3,275,310.35
          4.             Florence                 2,863,392.63
          5.             Fort Mitchell            6,900,653.99
          6.             Hamburg                  3,762,331.28
          7.             Memphis                  7,211,835.58
          8.             Morgantown               4,188,364.95
          9.             Syracuse                 3,021,767.16
         10.             North Miami              4,137,219.04
         11.             Tulsa                    4,666,458.35
         12.             Aurora                  16,538,182.91
         13.             Mayfair                 24,158,426.10
</TABLE>

<TABLE>
<CAPTION>
         IMPAC III

                         Property             Allocated Loan Amount
                         --------             ---------------------
         <S>             <C>                  <C>
         14.             Augusta                  2,655,817.17
         15.             Burlington               2,327,072.95
         16.             Jackson                  1,753,958.50
         17.             Merrimack                2,646,311.11
         18.             Lafayette                4,200,109.92
</TABLE>

                                      4-1

<PAGE>   78

                                   SCHEDULE 5

                          FORM OF CONSOLIDATED, AMENDED
                          AND RESTATED PROMISSORY NOTE

$108,651,655.38                                                  August   , 2000

                                    RECITALS

A.       Impac Hotels II, L.L.C., a Georgia limited liability company ("IMPAC
         II") and Nomura Asset Capital Corporation ("NACC"), the predecessor in
         interest to The Capital Company of America LLC ("PAYEE"), are parties
         to that certain Loan Agreement dated as of March 12, 1997, as amended
         (the "IMPAC II LOAN AGREEMENT"), which provides for secured mortgage
         loans (the "IMPAC II LOANS") in the aggregate principal amount of up to
         $163,500,000 to be advanced to Impac II. The Impac II Loans are
         evidenced by those certain promissory notes (the "IMPAC II NOTES")
         described on Exhibit A attached hereto.

B.       Impac Hotels III, L.L.C., a Georgia limited liability company ("IMPAC
         III" and together with Impac II, collectively, "MAKER"), and NACC are
         parties to that certain Loan Agreement dated as of October 29, 1997, as
         amended (the "IMPAC III LOAN AGREEMENT" and together with Impac II Loan
         Agreement, collectively, the "ORIGINAL LOAN AGREEMENTS"), which
         provides for secured mortgage loans (the "IMPAC III LOANS") in the
         aggregate principal amount of up to $100,000,000 to be advanced to
         Impac III. The Impac III Loans are evidenced by those certain
         promissory notes (the "IMPAC III NOTES" and together with Impac II
         Notes, collectively, the "ORIGINAL NOTES") described on Exhibit B
         attached hereto.

C.       As of the date hereof, the aggregate outstanding principal balance of
         the Impac II Notes is $95,068,385.73 and the aggregate outstanding
         principal balance of the Impac III Notes is $13,583,269.65.

D.       Concurrently with the execution and delivery hereof, Maker and Payee
         are entering into a Consolidated, Amended and Restated Loan Agreement,
         which consolidates, amends and restates the terms and provisions of the
         Original Loan Agreements (as so consolidated, amended and restated, the
         "LOAN AGREEMENT").

E.       Maker has agreed to execute and deliver this Consolidated, Amended and
         Restated Promissory Note to, among other things, evidence the aggregate
         outstanding principal amount of the Original Notes and to reflect
         certain of the terms and conditions contained in the Loan Agreement.

                                       5-1
<PAGE>   79

F.       Maker and Payee now desire to consolidate the indebtedness evidenced by
         Original Notes and to amend and restate the terms and conditions
         contained therein in their entirety by the execution and delivery of
         this Consolidated, Amended and Restated Promissory Note (this "NOTE")
         on the date hereof.

         NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Original Notes are hereby
consolidated, amended and restated in their entirety as follows:

         FOR VALUE RECEIVED, IMPAC HOTELS, II, L.L.C., AND IMPAC HOTELS, III,
L.L.C., each a Georgia limited liability company having an address c/o Lodgian,
Inc., Two Live Oak Center, Suite 700, 3445 Peachtree Road, N.E., Atlanta,
Georgia 30326 (collectively, "MAKER"), promises to pay to the order of THE
CAPITAL COMPANY OF AMERICA LLC, a Delaware limited liability company, at its
principal place of business at Two World Financial Center, Building B, New York,
New York 10281 (together with its successors and assigns "PAYEE"), or at such
place as the holder hereof may from time to time designate in writing, the
principal sum of ONE HUNDRED EIGHT MILLION SIX HUNDRED FIFTY-ONE THOUSAND SIX
HUNDRED FIFTY-FIVE DOLLARS AND THIRTY-EIGHT CENTS ($108,651,655.38) (the
"PRINCIPAL"), in lawful money of the United States of America, with interest on
the unpaid principal balance from time to time outstanding at the Interest
Rate, in installments as follows:

         A.       On September 11, 1999 (which shall be the first Payment Date
hereunder) and each Payment Date thereafter through and including the Maturity
Date, Borrower shall pay interest, calculated at the Interest Rate, on the
unpaid principal balance of this Note which has accrued through the last day of
the Interest Period immediately preceding such Payment Date.

         B.       The balance of the principal sum of this Note together with
all accrued and unpaid interest thereon shall be due and payable on the Maturity
Date.

         1.       DEFINITIONS. Capitalized terms used but not otherwise defined
herein shall have the meanings given in that certain Consolidated, Amended and
Restated Loan Agreement (the "LOAN AGREEMENT") dated the date hereof between
Maker and Payee.

         2.       PAYMENTS AND COMPUTATIONS. Interest on the unpaid Principal
shall be computed on the basis of the actual number of days elapsed over a
360-day year. All amounts due under this Note shall be payable without setoff,
counterclaim or any other deduction whatsoever and are payable without relief
from valuation and appraisement laws and with all costs and charges incurred in
the collection or enforcement hereof, including, reasonable attorneys' fees and
court costs.

         3.       LOAN DOCUMENTS. This Note is evidence of that certain loan
made by Payee to Maker and is executed pursuant to the terms and conditions of
the Loan Agreement. This Note is secured by and

                                      5-2

<PAGE>   80

entitled to the benefits of, among other things, the Mortgages and the other
Loan Documents. Reference is made to the Loan Documents for a description of the
nature and extent of the security afforded thereby, the rights of the holder
hereof in respect of such security, the terms and conditions upon which this
Note is secured and the rights and duties of the holder of this Note. No
reference herein to and no provision of any other Loan Document shall alter or
impair the obligation of Maker, which is absolute and unconditional (except for
and subject to the exculpation provisions set forth in Section 10.1 of the Loan
Agreement), to pay the principal of and interest on this Note at the time and
place and at the rates and in the monies and funds described herein. All of the
agreements, conditions, covenants, provisions and stipulations contained in the
Loan Documents to be kept and performed by Maker are by this reference hereby
made part of this Note to the same extent and with the same force and effect as
if they were fully set forth in this Note, and Maker covenants and agrees to
keep and perform the same, or cause the same to be kept and performed, in
accordance with their terms.

         4.       LOAN REPAYMENT; PREPAYMENT. Maker shall have the right to
prepay all or any portion of the Principal before the Stated Maturity Date,
provided that Maker gives Payee at least 5 Business Days prior written notice
thereof. If, after the occurrence of a Secondary Market Transaction, any such
prepayment is not made on a Payment Date, Maker shall also pay interest that
would have accrued on such prepaid Principal to but not including the next
Payment Date. The principal balance of this Note is subject to mandatory
prepayment, without premium or penalty, in certain instances of Insured Casualty
or Condemnation, as more particularly set forth in Sections 2.3.2 and 7.4.2 of
the Loan Agreement. Except during the continuance of an Event of Default, all
proceeds of any repayment, including permitted prepayments, of Principal shall
be applied by Payee as follows in the following order of priority: First,
accrued and unpaid interest at the Interest Rate; Second, to Principal; and
Third, to any other amounts then due and owing under the Loan Documents. During
the continuance of an Event of Default, all proceeds of repayment, including any
payment or recovery on the Properties (whether through foreclosure, deed-in-lieu
of foreclosure, or otherwise) shall, unless otherwise provided in the Loan
Documents, be applied in such order and in such manner as Payee shall elect in
Payee's discretion.

         5.       DEFAULT RATE. After the occurrence and during the continuance
of an Event of Default, the entire unpaid Debt shall bear interest at the
Default Rate, and shall be payable upon demand from time to time, to the extent
permitted by applicable law.

         6.       AMENDMENTS. This Note may not be modified, amended, waived,
extended, changed, discharged or terminated orally or by any act or failure to
act on the part of Maker or Payee, but only by an agreement in writing signed by
the party against whom enforcement of any modification, amendment, waiver,
extension, change, discharge or termination is sought. Whenever used, the
singular number shall include the plural, the plural the singular, and the words
"PAYEE" and "MAKER" shall include their respective successors, assigns, heirs,
executors and administrators. If Maker consists of more than one person or
party, the obligations and liabilities of each such person or party shall be
joint and several.

         7.       WAIVER. Maker and all others who may become liable for the
payment of all or any part

                                       5-3
<PAGE>   81
of the Debt do hereby severally waive presentment and demand for payment, notice
of dishonor, protest, notice of protest, notice of nonpayment, notice of intent
to accelerate the maturity hereof and of acceleration. No release of any
security for the Debt or any person liable for payment of the Debt, no extension
of time for payment of this Note or any installment hereof, and no alteration,
amendment or waiver of any provision of the Loan Documents made by agreement
between Payee and any other person or party shall release, modify, amend, waive,
extend, change, discharge, terminate or affect the liability of Maker, and any
other person or party who may become liable under the Loan Documents, for the
payment of all or any part of the Debt.

         8.       EXCULPATION. It is expressly agreed that recourse against
Maker for failure to perform and observe its obligations contained in this Note
shall be limited as and to the extent provided in Section 10.1 of the Loan
Agreement.

         9.       NOTICES. All notices or other communications required or
permitted to be given pursuant hereto shall be given in the mariner specified in
the Loan Agreement directed to the parties at their respective addresses as
provided therein.

         10.      JOINT AND SEVERAL. Each Person constituting Maker hereunder
shall have joint and several liability for the obligations of Maker hereunder.

         11.      NO NOVATION. This Note represents a continuation of an
existing debt, subject to the amendment and restatement of certain terms, as set
forth herein. The Original Notes are consolidated and restated and superseded in
their entirety by this Note, but the indebtedness evidenced by the Original
Notes shall not be discharged or impaired by the execution and delivery of this
Note, and the execution and delivery of this Note is not intended to constitute
a novation of the Original Notes nor impair or modify the priority of any
security document executed in connection therewith.

         12.      GOVERNING LAW. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK (WITHOUT REGARD TO PRINCIPLES
OF CONFLICTS OF LAWS) AND THE APPLICABLE LAWS OF THE UNITED STATES OF AMERICA.

                  [Remainder of page intentionally left blank]

                                      5-4
<PAGE>   82

                                      5-5
<PAGE>   83

         12.      COUNTERPARTS. This Note may be executed in any number of
counterparts, each of which when so executed and delivered shall be an original,
but all of which shall together constitute one and the same instrument.

         IN WITNESS WHEREOF, the parties hereto have caused this Consolidated,
Amended and Restated Promissory Note to be duly executed by their duly
authorized representatives, all as of the day and year first above written.

                                     MAKER:

                                     IMPAC HOTELS II, L.L.C., a Georgia limited
                                     liability company

                                     By:  Impac SPE #2, Inc., a Georgia
                                          corporation, its sole managing member

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

                                     IMPAC HOTELS III, L.L.C., a Georgia limited
                                     liability company

                                     By:  Impac SPE #6, Inc., a Georgia
                                          corporation, its sole managing member

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

                                     PAYEE:

                                     THE CAPITAL COMPANY OF AMERICA LLC

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

                                      5-6
<PAGE>   84

                                   SCHEDULE 6

                             LOCATION OF PROPERTIES

                                      6-1
<PAGE>   85

                                   SCHEDULE 7

                  EXCEPTIONS TO REPRESENTATIONS AND WARRANTIES

                                      7-1
<PAGE>   86

                                   SCHEDULE 8

                            ORGANIZATION OF BORROWER

                                 (SEE ATTACHED)

                                      8-1
<PAGE>   87

                                   SCHEDULE 9

             DEFINITION OF SPECIAL PURPOSE BANKRUPTCY REMOTE ENTITY

A "SPECIAL PURPOSE BANKRUPTCY REMOTE ENTITY" means a corporation, limited
partnership or limited liability company which at all times since its formation
and at all times thereafter (i) was and win be organized solely for the purpose
of (A) owning one or more of the Properties or (B) acting as a general partner
of the limited partnership that owns one or more of the Properties or member of
the limited liability company that owns one or more of the Properties; (ii) has
not engaged and will not engage in any business unrelated to (A) the ownership,
leasing or operation of such Properties, (B) acting as general partner of the
limited partnership that owns, leases or operates such Properties or (C) acting
as a member of the limited liability company that owns, leases or operates such
Properties, as applicable; (iii) has not had and will not have any assets other
than those related to a Property or its partnership or member interest in the
limited partnership or limited liability company that owns, leases or operates
such Properties, as applicable; (iv) has not engaged, sought or consented to and
will not engage in, seek or consent to any dissolution, winding up, liquidation,
consolidation, merger, asset sale (except as expressly permitted by this
Agreement), transfer of partnership or membership interests or the like, or
amendment of its limited partnership agreement, articles of incorporation,
articles of organization, certificate of formation or operating agreement (as
applicable); (v) if such entity is a limited partnership, has and will have, as
its only general partners, Special Purpose Bankruptcy Remote Entities that are
corporations; (vi) if such entity is a corporation, has and will have at least
one Independent Director, and has not caused or allowed and will not cause or
allow the board of directors of such entity to take any action requiring the
unanimous affirmative vote of 100% of the members of its board of directors
unless all of the directors and all Independent Directors shall have
participated in such vote; (vii) if such entity is a limited liability company,
has and will have at least one member that has been and will be a Special
Purpose Bankruptcy Remote Entity that has been and will be a corporation and
such corporation is the managing member of such limited liability company;
(viii) if such entity is a limited liability company, has and will have articles
of organization, a certificate of formation and/or an operating agreement, as
applicable, providing that (A) such entity will dissolve only upon the
bankruptcy of the managing member, (B) the vote of a majority-in-interest of the
remaining members is sufficient to continue the life of the limited liability
company in the event of such bankruptcy of the managing member and (C) if the
vote of a majority-in-interest of the remaining members to continue the life of
the limited liability company following the bankruptcy of the managing member is
not obtained, the limited liability company may not liquidate a Property without
the consent of the applicable Rating Agencies for as long as the Loan is
outstanding; (ix) has not, and without the unanimous consent of all of its
partners, directors or members (including all Independent Directors), as
applicable, will not, with respect to itself or to any other entity in which it
has a direct or indirect legal or beneficial ownership interest (A) file a
bankruptcy, insolvency or reorganization petition or otherwise institute
insolvency proceedings or otherwise seek any relief under any laws relating to
the relief from debts or the protection of debtors generally, (B) seek or
consent to the appointment of a receiver, liquidator, assignee, trustee,
sequestrator, custodian or any similar official for such entity or for all or
any portion of such entity's properties, (C) make any assignment for the benefit
of such entity's creditors or (D) take any action that might cause such entity
to

                                      9-1
<PAGE>   88
become insolvent; (x) has remained and will remain solvent and has maintained
and will maintain adequate capital in light of its contemplated business
operations; (xi) has not failed and will not fail to correct any known
misunderstanding regarding the separate identity of such entity; (xii) has
maintained and will maintain its accounts, books and records separate from any
other Person; (xiii) has maintained and will maintain its books, records,
resolutions and agreements as official records; (xiv) has not commingled and
will not commingle its funds or assets with those of any other Person; (xv) has
held and will hold its assets in its own name; (xvi) has conducted and will
conduct its business in its name, (xvii) has maintained and will maintain its
financial statements, accounting records and other entity documents separate
from any other Person and in a manner that indicates the separate existence of
such entity from any other Person or entity; provided, that, it may be included
in any consolidated financial statement of any Affiliate in accordance with
applicable accounting principles; (xviii) has paid and will pay its own
liabilities, including the salaries of its own employees, out of its own funds
and assets; (xix) has observed and will observe all partnership, corporate or
limited liability company formalities, as applicable; (xx) has maintained and
will maintain an arm's-length relationship with its Affiliates; (xxi) (a) if
such entity owns, leases or operates a Property, has and will have no
indebtedness other than the Loan and unsecured trade payables in the ordinary
course of business relating to the ownership and operation of Property which (1)
are not more than sixty (60) days in arrears and (2) do not exceed, at any time,
a maximum amount of 3% of the original amount of the Principal, or (b) if such
entity acts as the general partner of a limited partnership which owns a
Property, has and will have no indebtedness other than unsecured trade payables
in the ordinary course of business relating to acting as general partner of the
limited partnership which owns a Property which (1) do not exceed, at any time,
$10,000 and (2) are not more than sixty (60) days in arrears, or (c) if such
entity acts as a managing member of a limited liability company which owns a
Property, has and will have no indebtedness other than unsecured trade payables
in the ordinary course of business relating to acting as a member of the limited
liability company which owns a property which (1) do not exceed, at any time,
$10,000 and (2) are not more than sixty (60) days in arrears; (xxii) has not and
will not assume or guarantee or become obligated for the debts of any other
Person or hold out its credit as being available to satisfy the obligations of
any other Person except for the Loan; (xxiii) has not and will not acquire
obligations or securities of its partners, members or shareholders; (xxiv) has
allocated and will allocate fairly and reasonably shared expenses, including
shared office space, and uses separate stationery, invoices and checks; (xxv)
except in connection with the Loan, has not pledged and will not pledge its
assets for the benefit of any other Person; (xxvi) has held itself out and
identified itself and will hold itself out and identify itself as a separate and
distinct entity under its own name and not as a division or part of any other
Person; (xxvii) has maintained and will maintain its assets in such a manner
that it will not be costly or difficult to segregate, ascertain or identify its
individual assets from those of any other Person; (xxviii) has not made and will
not make loans to any Person; (xxix) has not identified and will not identify
its partners, members or shareholders, or any Affiliate of any of them, as a
division or part of it; (xxx) has not entered into or been a party to, and win
not enter into or be a party to, any transaction with its partners, members,
shareholders or Affiliates except in the ordinary course of its business and on
terms which are intrinsically fair and are no less favorable to it than would be
obtained in a comparable arm's-length transaction with an unrelated third party;
(xxxi) in the case of any such entity which owns, leases or operates a Property,
has and will have no obligation to indemnify its partners, officers, directors
or members, as the case may be, or has such an obligation that is fully

                                      9-2
<PAGE>   89

subordinated to the Debt and will be deferred to the extent that such entity's
cash flow in excess of the amount required to pay the Debt is insufficient to
pay such obligation; and (xxxii) will consider the interests of its creditors in
connection with all corporate, partnership or limited liability actions, as
applicable.

                                      9-3
<PAGE>   90

                                   SCHEDULE 10

                                   GUARANTEES

1.       Amended and Restated Guaranty of Payment, dated May 9, 1997 (North
         Miami, Florida)

2.       Amended and Restated Guaranty of Payment, dated May 9, 1997 (Florence,
         Kentucky)

3.       Amended and Restated Guaranty of Payment, dated May 9, 1997 (Fort
         Mitchell, Kentucky)

4.       Amended and Restated Guaranty of Payment, dated May 9, 1997
         (Cincinnati, Ohio)

5.       Amended and Restated Guaranty of Payment, dated May 9, 1997 (Memphis,
         Tennessee)

6.       Amended and Restated Guaranty of Payment, dated December 3, 1997
         (Coconut Grove, Florida)

7.       Joinder, Assumption and Modification Agreement between Lodgian, Inc.
         and Capital Company of America LLC, dated December 11, 1988, as amended
         - Impac II

8.       Joinder, Assumption and Modification Agreement between Lodgian, Inc.
         and Capital Company of America LLC, dated December 11, 1988, as amended
         - Impac III

         As each of the foregoing were modified and reaffirmed pursuant to a
         Modification and Reaffirmation of Guaranty Agreement and Termination of
         Guaranty Agreement dated the date hereof.

                                      10-1<PAGE>   1

                                                                     EXHIBIT 1.4

                             NORTEL NETWORKS LIMITED

                                       AND

                       NORTEL NETWORKS CAPITAL CORPORATION

                                   as Issuers,

                             NORTEL NETWORKS LIMITED

                                  as Guarantor,

                                       AND

                                 CITIBANK, N. A.

                                   as Trustee

                       ----------------------------------

                                    INDENTURE

                          DATED AS OF DECEMBER 15, 2000

                       ----------------------------------

<PAGE>   2

                             NORTEL NETWORKS LIMITED
                       NORTEL NETWORKS CAPITAL CORPORATION
         RECONCILIATION AND TIE BETWEEN TRUST INDENTURE ACT OF 1939 AND
                    INDENTURE, DATED AS OF DECEMBER 15, 2000

<TABLE>
<CAPTION>

TRUST INDENTURE ACT SECTION                                               INDENTURE SECTION

<S>                                                                             <C>
         310(a)(1).......................................................       609
             (a)(2)......................................................       609
             (a)(3)......................................................       Not Applicable
             (a)(4)......................................................       Not Applicable
             (b).........................................................       609
             (c).........................................................       Not Applicable
         311(a)..........................................................       610
             (b).........................................................       610
         312(a)..........................................................       701
             (b).........................................................       701(b)
             (c).........................................................       701(c)
         313(a)..........................................................       702(a)
             (b).........................................................       702(a)
             (c).........................................................       702(a)
             (d).........................................................       702(b)
         314(a)..........................................................       703(b)
             (b).........................................................       Not Applicable
             (c)(1)......................................................       102
             (c)(2)......................................................       102
             (c)(3)......................................................       Not Applicable
             (d).........................................................       Not Applicable
             (e).........................................................       102
         315(a)..........................................................       601(b)
             (b).........................................................       605
             (c).........................................................       601(a)
             (d).........................................................       601(c)
             (d)(1)......................................................       601(b)
             (d)(2)......................................................       601(c)(2)
             (d)(3)......................................................       601(c)(3)
             (e).........................................................       511
         316(a)(1)(A)....................................................       506(a)(1)
             (a)(1)(B)...................................................       506(a)(2)
                                                                                503(a)
             (a)(2)......................................................       Not Applicable
             (b).........................................................       508
         317(a)(1).......................................................       509
             (a)(2)......................................................       510
             (b).........................................................       1003
         318(a)..........................................................       107
</TABLE>

----------
[FN]
Note: This reconciliation and tie shall not, for any purpose, be deemed to be a
part of the Indenture.
</FN>

                                      (i)
<PAGE>   3

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                             PAGE

<S>                                                                           <C>
PARTIES     ...................................................................1
RECITALS    ...................................................................1

</TABLE>

                                   ARTICLE ONE

             DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
<TABLE>

<S>                                                                           <C>
Section 101. Definitions.......................................................1

             (1)  "Act"........................................................1

             (2)  "Affiliate"..................................................1

             (3)  "Authorized Newspaper".......................................2

             (4)  "Authorized Officers"........................................2

             (5)  "Board of Directors".........................................2

             (6)  "Board Resolution"...........................................2

             (7)  "Business Day"...............................................2

             (8)  "Commission".................................................2

             (9)  "Components".................................................2

             (10) "Consolidated Net Tangible Assets"...........................3

             (11) "Conversion Date"............................................3

             (12) "Corporate Trust Office".....................................3

             (13) "corporation"................................................3

             (14) "Corporation"................................................3

             (15) "Corporation Debt Securities"................................3

             (16) "Debt Securities"............................................3

             (17) "Defaulted Interest".........................................3

             (18) "Depositary".................................................3

             (19) "Dollar" or "$"..............................................3

             (20) "Event of Default"...........................................3

             (21) "Exchange Act"...............................................4

             (22) "Exchange Rate"..............................................4

             (23) "Exchange Rate Officers' Certificate"........................4

             (24) "Finance Subsidiary".........................................5
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                                TABLE OF CONTENTS

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<CAPTION>
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<S>                                                                           <C>
             (25) "Foreign Currency"...........................................5

             (26) "Funded Debt"................................................5

             (27) "Global Security"............................................5

             (28) "Guarantee"..................................................5

             (29) "Guaranteed Debt Securities".................................5

             (30) "Guarantor"..................................................5

             (31) "Guarantor Request" and "Guarantor Order"....................5

             (32) "Holder".....................................................5

             (33) "Indenture"..................................................5

             (34) "interest"...................................................6

             (35) "Interest Payment Date"......................................6

             (36) "Issuer Request" and "Issuer Order"..........................6

             (37) "Issuer" and "Issuers".......................................6

             (38) "Lien".......................................................6

             (39) "Maturity"...................................................6

             (40) "Nortel Networks"............................................6

             (41) "Officers' Certificate"......................................6

             (42) "Opinion of Counsel".........................................6

             (43) "Original Issue Discount Security"...........................7

             (44) "Outstanding"................................................7

             (45) "Paying Agent"...............................................7

             (46) "Person".....................................................7

             (47) "Place of Payment"...........................................8

             (48) "Predecessor Security".......................................8

             (49) "Purchase Money Lien"........................................8

             (50) "Redemption Date"............................................8

             (51) "Redemption Price"...........................................8

             (52) "Regular Record Date"........................................8

             (53) "Responsible Officer"........................................8

             (54) "Restricted Subsidiary"......................................9

             (55) "Security Register" and "Security Registrar".................9

             (56) "Special Record Date"........................................9
</TABLE>
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                                TABLE OF CONTENTS

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<CAPTION>
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<S>                                                                          <C>
             (57) "Stated Maturity Date"......................................9

             (58) "Subsidiary"................................................9

             (59) "Trust Indenture Act".......................................9

             (60) "Trustee"...................................................9

Section 102. Compliance Certificates and Opinions.............................9

Section 103. Form of Documents Delivered to Trustee..........................10

Section 104. Acts of Holders.................................................10

Section 105. Notices, etc., to Trustee, Corporation, Finance Subsidiary and
             Guarantor.......................................................11

Section 106. Notice to Holders; Waiver.......................................12

Section 107. Conflict with Trust Indenture Act...............................12

Section 108. Effect of Headings and Table of Contents........................13

Section 109. Successors and Assigns..........................................13

Section 110. Separability Clause.............................................13

Section 111. Benefits of Indenture...........................................13

Section 112. Governing Law, etc..............................................13

Section 113. Legal Holidays..................................................14

                                   ARTICLE TWO

                               DEBT SECURITY FORMS

Section 201. Forms Generally.................................................14

Section 202. Forms of Debt Securities........................................15

Section 203. Guarantee by Guarantor; Form of Guarantee.......................15

Section 204. Form of Trustee's Certificate of Authentication.................17

                                  ARTICLE THREE

                               THE DEBT SECURITIES

Section 301. Amount Unlimited; Issuable in Series............................17

Section 302. Denominations...................................................20

Section 303. Execution, Authentication, Delivery and Dating..................20

Section 304. Temporary Debt Securities.......................................22

Section 305. Registration, Registration of Transfer and Exchange.............23

Section 306. Mutilated, Destroyed, Lost or Stolen Debt Securities............25

Section 307. Payment of Interest; Interest Rights Preserved..................25
</TABLE>
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                                TABLE OF CONTENTS

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Section 308. Persons Deemed Owners...........................................26

Section 309. Cancellation....................................................27

Section 310. Computation of Interest.........................................27

Section 311. Payment in Currencies...........................................27

Section 312. Judgments.......................................................30

Section 313. CUSIP Numbers...................................................30

                                  ARTICLE FOUR

                           SATISFACTION AND DISCHARGE

Section 401. Satisfaction and Discharge of Indenture.........................31

Section 402. Application of Trust Money......................................32

                                  ARTICLE FIVE

                              DEFAULTS AND REMEDIES

Section 501. Events of Default and Enforcement...............................32

Section 502. Waiver of Declaration...........................................34

Section 503. Waiver..........................................................34

Section 504. Other Remedies..................................................35

Section 505. Application of Money Collected..................................35

Section 506. Control by Holders..............................................35

Section 507. Limitation on Suits.............................................36

Section 508. Rights of Holders To Receive Payment............................36

Section 509. Collection Suit by Trustee......................................36

Section 510. Trustee May File Proofs of Claim................................36

Section 511. Undertaking for Costs...........................................36

Section 512. Delay or Omission Not Waiver....................................37

Section 513. Waiver of Stay or Extension Laws................................37

                                   ARTICLE SIX

                                   THE TRUSTEE

Section 601. Duties of Trustee...............................................37

Section 602. Rights of Trustee...............................................38

Section 603. Individual Rights of Trustee....................................39
</TABLE>

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                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
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Section 604. Trustee's Disclaimer............................................39

Section 605. Notice of Defaults..............................................39

Section 606. Compensation and Indemnity......................................39

Section 607. Replacement of Trustee..........................................40

Section 608. Successor Trustee by Merger, etc................................42

Section 609. Eligibility; Disqualification...................................42

Section 610. Preferential Collection of Claims Against the Issuers...........42

                                  ARTICLE SEVEN

          HOLDERS' LISTS AND REPORTS BY TRUSTEE, ISSUERS AND GUARANTOR

Section 701. Preservation of Information:  Communications to Holders.........43

Section 702. Reports by Trustee..............................................44

Section 703. Reports by Issuers and the Guarantor............................44

                                  ARTICLE EIGHT

               AMALGAMATION, MERGER, CONVEYANCE, TRANSFER OR LEASE

Section 801. Amalgamations and Mergers of Issuers or Guarantor and Conveyances
             Permitted Subject to Certain Conditions.........................45

Section 802. Rights and Duties of Successor Corporation......................45

Section 803. Officers' Certificate and Opinion of Counsel....................46

                                  ARTICLE NINE

                             SUPPLEMENTAL INDENTURES

Section 901.  Supplemental Indentures Without Consent of Holders.............46

Section 902.  Supplemental Indentures with Consent of Holders................47

Section 903.  Execution of Supplemental Indentures...........................49

Section 904.  Effect of Supplemental Indentures..............................49

Section 905.  Conformity with Trust Indenture Act............................49

Section 906.  Reference in Debt Securities to Supplemental Indentures........49

                                   ARTICLE TEN

                                    COVENANTS

Section 1001. Payment of Principal, Premium and Interest.....................50

Section 1002. Maintenance of Office or Agency................................50
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                                TABLE OF CONTENTS

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<CAPTION>
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Section 1003. Money for Debt Securities Payments to Be Held in Trust.........50

Section 1004. Negative Pledge................................................52

Section 1005. Compliance Certificate.........................................53

Section 1006. Waiver of Certain Covenants....................................53

                                 ARTICLE ELEVEN

                          REDEMPTION OF DEBT SECURITIES

Section 1101. Applicability of Article.......................................54

Section 1102. Election to Redeem; Notice to Trustee..........................54

Section 1103. Selection by Trustee of Debt Securities to Be Redeemed.........54

Section 1104. Notice of Redemption...........................................54

Section 1105. Deposit of Redemption Price....................................55

Section 1106. Debt Securities Payable on Redemption Date.....................55

Section 1107. Debt Security Redeemed in Part.................................55

                                 ARTICLE TWELVE

                                  SINKING FUNDS

Section 1201. Applicability of Article.......................................56

Section 1202. Satisfaction of Sinking Fund Payments with Debt Securities.....56

Section 1203. Redemption of Debt Securities for Sinking Fund.................56

                                ARTICLE THIRTEEN

                                   DEFEASANCE

Section 1301. Discharge by Deposit of Money or Debt Securities...............57

Section 1302. Defeasance of Certain Obligations..............................58

Section 1303. Application of Trust Money.....................................59

Section 1304. Repayment to the Corporation...................................59

                                ARTICLE FOURTEEN

                     MEETINGS OF HOLDERS OF DEBT SECURITIES

Section 1401. Purposes for Which Meetings May Be Called......................59

Section 1402. Call, Notice and Place of Meetings.............................59

Section 1403. Persons Entitled to Vote at Meetings...........................60

Section 1404. Quorum; Action.................................................60
</TABLE>

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<CAPTION>
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Section 1405. Determination of Voting Rights; Conduct and Adjournment
              of Meetings....................................................61

Section 1406. Counting Votes and Recording Action of Meetings................62

              SIGNATURE PAGE.................................................62

              EXHIBIT A ....................................................A-1
</TABLE>

                                     (viii)

<PAGE>   10

INDENTURE dated as of December 15, 2000 among Nortel Networks Limited (the
"Corporation"), a Canadian corporation having its principal place of business at
8200 Dixie Road, Suite 100, Brampton, Ontario, Canada L6T 5P6, Nortel Networks
Capital Corporation (the "Finance Subsidiary" and together with the Corporation
in its capacity as an Issuer of Debt Securities, the "Issuers" and each an
"Issuer"), a Delaware corporation having its principal place of business at
Nortel Networks Plaza, 200 Athens Way, Nashville, Tennessee, U.S.A., 37228-1397,
Nortel Networks Limited, in its capacity as guarantor of Debt Securities issued
by the Finance Subsidiary (the "Guarantor"), and Citibank, N.A., a national
banking association duly organized under the laws of the United States of
America (the "Trustee"), having its Corporate Trust Office at 111 Wall Street,
14th Floor, New York, New York, U.S.A. 10005, Attn: Citibank Agency & Trust
Services.

For and in consideration of the premises and the purchase of the Debt Securities
by the Holders thereof, it is mutually covenanted and agreed, for the equal and
proportionate benefit of all Holders of the Debt Securities or of a series
thereof, as follows.

                                  ARTICLE ONE

             DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION

SECTION 101.    DEFINITIONS.

For all purposes of this Indenture, except as otherwise expressly provided or
unless the context otherwise requires:

(A) the terms defined in this Article have the meanings assigned to them in this
Article, and include the plural as well as the singular;

(B) all other terms used herein that are defined in the Trust Indenture Act,
either directly or by reference therein, have the meanings assigned to them
therein;

(C) all accounting terms not otherwise defined herein have the meanings
assigned to them in accordance with United States generally accepted accounting
principles, and, except as otherwise herein expressly provided, the term
"generally accepted accounting principles" with respect to any computation
required or permitted hereunder shall mean such United States accounting
principles as are generally accepted at the date of such computation; and

(D) the words "herein", "hereof" and "hereunder" and other words of similar
import refer to this Indenture as a whole and not to any particular Article,
Section or other subdivision.

(1) "Act" when used with respect to any Holder has the meaning specified in
Section 104.

(2) "Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any specified Person means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise,
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.

<PAGE>   11

(3) "Authorized Newspaper" means a newspaper in an official language of the
country of publication or in the English language customarily published on each
Business Day, whether or not published on Saturdays, Sundays or holidays, and of
general circulation in the place in connection with which the term is used or in
the financial community of such place. Where successive publications are
required to be made in Authorized Newspapers, the successive publications may be
made in the same or in different newspapers in the same city meeting the
foregoing requirements and in each case on any Business Day.

(4) "Authorized Officers" means, with respect to, (i) Nortel Networks, as
Issuer, any two of the President and Chief Executive Officer, the Chief Legal
Officer, the Chief Financial Officer or any one of the aforesaid officers
together with any one of the Corporate Secretary, the Treasurer, any Assistant
Secretary or any Assistant Treasurer; (ii) Nortel Networks, as the Guarantor,
any two of the President and Chief Executive Officer, the Chief Operating
Officer, the Chief Financial Officer or any one of the aforesaid officers
together with any one of the Corporate Secretary, the Treasurer, any Assistant
Secretary or any Assistant Treasurer; and (iii) the Finance Subsidiary, any two
of the President, the Vice-President, Finance and Treasurer, any other
Vice-President, the Secretary, and any Assistant Secretary; provided, however,
that Nortel Networks or the Finance Subsidiary may, from time to time, designate
additional officers who would qualify as "Authorized Officers" pursuant to an
Officers' Certificate delivered to the Trustee.

(5) "Board of Directors" means, in respect of an Issuer or the Guarantor, the
board of directors, the executive committee or any other committee of that board
or any group of directors of that board, duly authorized to make a decision on
the matter in question.

(6) "Board Resolution" means a copy of a resolution certified by the Corporate
Secretary, the Secretary or an Assistant Secretary of an Issuer or the
Guarantor, as the case may be, to have been duly adopted by the Board of
Directors of such Issuer or the Guarantor, respectively, and to be in full force
and effect on the date of such certification.

(7) "Business Day", when used with respect to any Place of Payment, means any
Monday, Tuesday, Wednesday, Thursday or Friday that is not a day on which
banking institutions in that Place of Payment are authorized or obligated by law
to close.

(8) "Commission" means the Securities and Exchange Commission, as from time to
time constituted, created under the Exchange Act, or if at any time after the
execution of this instrument such Commission is not existing and performing the
duties now assigned to it under the Trust Indenture Act, then the body
performing such duties on such date.

(9) "Components", with respect to a composite currency, means the currency
amounts that are components of such composite currency on the Conversion Date.
If after such Conversion Date the official unit of any component currency is
altered by way of combination or subdivision, the number of units of such
currency shall be divided or multiplied in the same proportion to calculate the
Component. If after such Conversion Date two or more component currencies are
consolidated into a single currency, the amounts of those currencies as
Components shall be replaced by an amount in such single currency equal to the
sum of the amounts of such consolidated component currencies expressed in such
single currency, and such amount shall thereafter be a Component. If after such
Conversion Date any component currency shall be

                                       2
<PAGE>   12

divided into two or more currencies, the amount of such currency as a Component
shall be replaced by amounts of such two or more currencies, each of which shall
be equal to the amount of such former component currency divided by the number
of currencies into which such component currency was divided, and such amounts
shall thereafter be Components.

(10) "Consolidated Net Tangible Assets" means the total amount of assets after
deducting therefrom (i) all current liabilities, and (ii) all goodwill,
tradenames, trademarks, patents, unamortized debt discount and expense and other
like intangible assets, all as shown in the then most recent consolidated
balance sheet of Nortel Networks contained in (x) Nortel Networks' most recent
annual or quarterly report on Form 10-K or 10-Q, as applicable, as filed with
the Securities and Exchange Commission or (y) if Nortel Networks is no longer
subject to reporting requirements under the Exchange Act, Nortel Networks' most
recent annual or quarterly financial statements, certified by the Chief
Financial Officer of Nortel Networks.

(11) "Conversion Date", with respect to a composite currency, has the meaning
specified in Section 311(f).

(12) "Corporate Trust Office" means the principal corporate trust office of the
Trustee at which at any particular time its corporate trust business shall be
administered.

(13) "corporation" includes corporations, associations, companies and business
trusts.

(14) "Corporation" means the Person named as the "Corporation" in the first
paragraph of this Indenture until a successor corporation to such Person shall
have become such pursuant to the applicable provisions of this Indenture, and
thereafter "Corporation" shall mean such successor corporation.

(15) "Corporation Debt Securities" means Debt Securities issued by the
Corporation and authenticated and delivered under this Indenture.

(16) "Debt Securities" means Corporation Debt Securities and Guaranteed Debt
Securities.

(17) "Defaulted Interest" has the meaning specified in Section 307.

(18) "Depositary" means, with respect to the Debt Securities of any series
issuable or issued in whole or in part in the form of one or more Global
Securities, the Person designated as Depositary by the applicable Issuer
pursuant to Section 301 until a successor Depositary shall have become such
pursuant to the applicable provisions of this Indenture, and thereafter
"Depositary" shall mean or include each Person who is then a Depositary
hereunder, and if at any time there is more than one such Person, "Depositary"
as used with respect to the Debt Securities of any such series shall mean the
Depositary with respect to the Debt Securities of that series.

(19) "Dollar" or "$" means the currency of the United States of America which as
at the time of payment is legal tender for the payment of public and private
debts.

(20) "Event of Default" has the meaning specified in Section 501.

                                       3
<PAGE>   13

(21) "Exchange Act" means the Securities Exchange Act of 1934, as amended.

(22) "Exchange Rate" means: (i) with respect to a currency (other than a
composite currency) in which payment is to be made on Debt Securities
denominated in a composite currency, the exchange rate between such composite
currency and such currency reported by the agency or organization, if any,
designated pursuant to Section 301(b)(12), or if such exchange rate is not or
ceases to be so reported, then such exchange rate as shall be determined by the
Trustee using quotations from one or more major banks in The City of New York or
such other quotations as the Trustee shall deem appropriate, such banks being
satisfactory to the applicable Issuer, on the Regular or Special Record Date
with respect to such Interest Payment Date or date for payment of Defaulted
Interest or the fifteenth day immediately preceding the maturity of an
installment of principal, as the case may be; (ii) with respect to payments in
Dollars to be made on Debt Securities denominated in a Foreign Currency, the
noon buying rate for that currency for wire transfers quoted in The City of New
York on the Regular or Special Record Date with respect to such Interest Payment
Date or date for payment of Defaulted Interest or the fifteenth day immediately
preceding the maturity of an installment of principal, as the case may be, as
certified for customs purposes by the Federal Reserve Bank of New York; (iii)
with respect to payments in a Foreign Currency to be made on Debt Securities
denominated in Dollars or converted into Dollars pursuant to Section 311(f), the
noon Dollar buying rate for that currency for wire transfers quoted in The City
of New York on the Regular or Special Record Date with respect to such Interest
Payment Date or date for payment of Defaulted Interest or the fifteenth day
immediately preceding the maturity of an installment of principal, as the case
may be, as certified for customs purposes by the Federal Reserve Bank of New
York; and (iv) with respect to payments in a Foreign Currency to be made on Debt
Securities denominated in a different Foreign Currency, the exchange rate
between such Foreign Currencies determined in the manner specified pursuant to
Section 301(b)(15). Except in the situation contemplated in (i) above, if for
any reason such rates are not available with respect to one or more currencies
for which an Exchange Rate is required, the Trustee shall use such quotation of
the Federal Reserve Bank of New York as of the most recent available date, or
quotations from one or more major banks in The City of New York or in the
country of issue of the currency in question, or such other quotations as the
Trustee shall deem appropriate, such banks being satisfactory to the applicable
Issuer. Unless otherwise specified by the Trustee, if there is more than one
market for dealing in any currency by reason of foreign exchange regulations or
otherwise, the market to be used in respect of such currency shall be that upon
which a non-resident issuer of securities designated in such currency would
purchase such currency in order to make payments in respect of such securities.

(23) "Exchange Rate Officers' Certificate", with respect to any date for the
payment of principal of (and premium, if any) and interest on any series of Debt
Securities, means a certificate setting forth the applicable Exchange Rate or
Rates as of the Regular or Special Record Date with respect to such Interest
Payment Date, the date for payment of Defaulted Interest or the fifteenth day
immediately preceding the maturity of an installment of principal, as the case
may be, and the amounts payable in Dollars and Foreign Currencies in respect of
the principal of (and premium, if any) and interest on Debt Securities
denominated in any composite currency or any Foreign Currency, and signed by any
two of the Chief Executive Officer, the President, the Chief Operating Officer,
the Chief Financial Officer or any one of the aforesaid officers together with
any one of the Corporate Secretary, the

                                       4
<PAGE>   14

Secretary, the Controller, the Treasurer, any Assistant Secretary, any Assistant
Controller or any Assistant Treasurer of the applicable Issuer and delivered to
the Trustee.

(24) "Finance Subsidiary" means the Person named as the "Finance Subsidiary" in
the first paragraph of this Indenture until a successor corporation to such
Person shall have become such pursuant to the applicable provisions of this
Indenture, and thereafter "Finance Subsidiary" shall mean such successor
corporation.

(25) "Foreign Currency" means a currency issued by the government of any country
other than the United States of America.

(26) "Funded Debt" means any indebtedness for borrowed money, whether of Nortel
Networks or of a third person. For greater certainty, proceeds received in
respect of any factoring, securitization or similar transactions will not be
considered borrowed money.

(27) "Global Security" means a Debt Security evidencing all or part of a series
of Debt Securities, issued to the Depositary for such series in accordance with
Section 303 and bearing the legend prescribed in Section 303(c).

(28) "Guarantee" means the guarantee of the Guarantor as endorsed on each
Guaranteed Debt Security authenticated and delivered pursuant to this Indenture
and shall include the Guarantee set forth in Section 203 of this Indenture and
all other obligations and covenants of the Guarantor contained in this Indenture
and any Guaranteed Debt Securities.

(29) "Guaranteed Debt Securities" means Debt Securities issued by the Finance
Subsidiary and guaranteed by the Guarantor and authenticated and delivered under
this Indenture.

(30) "Guarantor" means the Person named as "Guarantor" in the first paragraph of
this Indenture until a successor corporation to such Guarantor shall have become
such pursuant to the applicable provisions of this Indenture, and thereafter
"Guarantor" shall mean such successor corporation.

(31) "Guarantor Request" and "Guarantor Order" mean, respectively, a written
request or order signed in the name of the Guarantor by any two of the Chief
Executive Officer, the President, the Chief Operating Officer, the Chief
Financial Officer or any one of the aforesaid officers together with any one of
the Corporate Secretary, the Secretary, the Controller, the Treasurer, any
Assistant Secretary, any Assistant Controller or any Assistant Treasurer of the
Guarantor and delivered to the Trustee.

(32) "Holder", with respect to a Debt Security, means the Person in whose name
such Debt Security is registered in the Security Register.

(33) "Indenture" means this instrument as originally executed or as it may from
time to time be supplemented, amended or restated by or pursuant to one or more
indentures supplemental hereto entered into pursuant to the applicable
provisions hereof and, unless the context otherwise requires, shall include the
terms of a particular series of Debt Securities established as contemplated by
Section 301.

                                       5
<PAGE>   15

(34) "interest", when used with respect to an Original Issue Discount
Security that by its terms bears stated interest only after Maturity, refers to
interest payable after Maturity.

(35) "Interest Payment Date", with respect to any Debt Security, means the
Stated Maturity Date of an installment of interest on such Debt Security.

(36) "Issuer Request" and "Issuer Order" mean, respectively, a written request
or order signed in the name of the applicable Issuer by any two of the Chief
Executive Officer, the President, the Chief Operating Officer, the Chief
Financial Officer or any one of the aforesaid officers together with any one of
the Corporate Secretary, the Secretary, the Controller, the Treasurer, any
Assistant Secretary, any Assistant Controller or any Assistant Treasurer of such
Issuer and delivered to the Trustee.

(37) "Issuer" and "Issuers" have the meanings assigned to such terms in the
first paragraph of this Indenture until a successor corporation to any such
Issuer shall have become such pursuant to the applicable provisions of this
Indenture, and thereafter, "Issuer" shall mean with respect to such Issuer, the
successor corporation to such Issuer.

(38) "Lien" means and includes any mortgage, hypothec, pledge, lien, security
interest, privilege, floating charge, conditional sale or other title retention
agreement or other similar encumbrance securing indebtedness for borrowed money.
For greater certainty, "Lien" does not include any such encumbrance covering
receivables or other assets an interest in which has been transferred to a third
party in a factoring, securitization or similar transaction that is accounted
for as a sale under generally accepted accounting principles.

(39) "Maturity", when used with respect to any Debt Security, means the date on
which the principal of such Debt Security becomes due and payable as therein or
herein provided, whether at the Stated Maturity Date or by declaration of
acceleration, call for redemption, repayment at the option of the Holder or
otherwise.

(40) "Nortel Networks" means Nortel Networks Limited, whether in its capacity as
Issuer or Guarantor, until a successor corporation to such corporation shall
have become such pursuant to the applicable provisions of this Indenture, and
thereafter, "Nortel Networks" shall mean the successor corporation to Nortel
Networks Limited.

(41) "Officers' Certificate" means a certificate signed by any two of the Chief
Executive Officer, the President, the Chief Operating Officer, the Chief
Financial Officer or any one of the aforesaid officers together with any one of
the Corporate Secretary, the Secretary, the Controller, the Treasurer, any
Assistant Secretary, any Assistant Controller or any Assistant Treasurer of the
applicable Issuer or the Guarantor, as the case may be, and delivered to the
Trustee.

(42) "Opinion of Counsel" means a written opinion of counsel, who may be counsel
to the applicable Issuer or the Guarantor or both, as the case may be, which
opinion shall be subject to assumptions and qualifications satisfactory to such
counsel.

(43) "Original Issue Discount Security" means any Debt Security that is issued
with "original issue discount" within the meaning of Section 1273(a) of the
United States Internal Revenue

                                       6
<PAGE>   16

Code of 1986 and the regulations thereunder and any other Debt Security
designated by the applicable Issuer as issued with original issue discount for
United States federal income tax purposes.

(44) "Outstanding" when used with respect to Debt Securities means, as of the
date of determination, all Debt Securities theretofore authenticated and
delivered under this Indenture, except:

     (i)   Debt Securities theretofore cancelled by the Trustee or delivered to
           the Trustee for cancellation;

     (ii)  Debt Securities for whose payment or redemption money in the
           necessary amount has been theretofore deposited with the Trustee or
           any Paying Agent (other than the applicable Issuer or the Guarantor)
           in trust or set aside and segregated in trust by the applicable
           Issuer or the Guarantor (if such Issuer or the Guarantor shall act as
           its own Paying Agent) for the Holders of such Debt Securities;
           provided, however, that if such Debt Securities are to be redeemed,
           notice of such redemption has been duly given pursuant to this
           Indenture or provision therefor satisfactory to the Trustee has been
           made; and

     (iii) Debt Securities that have been surrendered to the Trustee pursuant to
           Section 306 or in exchange for or in lieu of which other Debt
           Securities have been authenticated and delivered pursuant to this
           Indenture, other than any such Debt Securities in respect of which
           there shall have been presented to the Trustee proof that such Debt
           Securities are held by a bona fide purchaser in whose hands such Debt
           Securities are valid and binding obligations of the applicable
           Issuer;

provided, however, that in determining whether the Holders of the requisite
principal amount of Outstanding Debt Securities have taken any Act hereunder,
Debt Securities owned by the applicable Issuer or any other obligor upon the
Debt Securities or any Affiliate of such Issuer or of such other obligor shall
be disregarded and deemed not to be Outstanding; provided further that, in
determining whether the Trustee shall be protected in relying upon such Act,
only Debt Securities that a Responsible Officer of the Trustee knows to be so
owned shall be so disregarded; and provided further that Debt Securities so
owned that have been pledged in good faith may be regarded as Outstanding if the
pledgee establishes to the satisfaction of the Trustee the pledgee's right to
act with respect to such Debt Securities and that the pledgee is not the
applicable Issuer or any other obligor upon the Debt Securities or any Affiliate
of such Issuer or of such other obligor.

(45) "Paying Agent" means any Person authorized by the applicable Issuer to pay
the principal of (and premium, if any) or interest on any Debt Securities on
behalf of such Issuer.

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

(47) "Place of Payment" means: (i) when used with respect to the Debt Securities
of any series payable in Dollars, the Corporate Trust Office of the Trustee in
the Borough of Manhattan,

                                       7
<PAGE>   17

The City and State of New York; and, (ii) when used with respect to the Debt
Securities of any series payable in a Foreign Currency, the other place or
places, if any, where the principal of (and premium, if any) and interest on the
Debt Securities of that series are payable as specified as contemplated by
Section 301.

(48) "Predecessor Security" of any particular Debt Security means every previous
Debt Security evidencing all or a portion of the same debt as that evidenced by
such particular Debt Security; and, for the purposes of this definition, any
Debt Security authenticated and delivered under Section 306 in lieu of a lost,
destroyed or stolen Debt Security shall be deemed to evidence the same debt as
the lost, destroyed or stolen Debt Security.

(49) "Purchase Money Lien" means a mortgage or any other lien on property
existing at the time of acquisition thereof by Nortel Networks or a Restricted
Subsidiary; any mortgage or any other lien on any property acquired, constructed
or improved by Nortel Networks or a Restricted Subsidiary incurred after the
date of the issue of the Debt Securities which is created or assumed
contemporaneously with, or within 180 days after, such acquisition, or
completion of such construction or improvement, to secure or provide for the
payment of the purchase price thereof or the cost of construction or improvement
thereon incurred after the date of issuance of the Debt Securities (including
the cost of any underlying real property); provided, however, that in the case
of any such acquisition, construction or improvement, the Lien shall not apply
to any property previously owned by Nortel Networks or a Restricted Subsidiary,
other than, in the case of any such construction or improvement, any real
property, theretofore substantially unimproved for the purposes of Nortel
Networks or a Restricted Subsidiary, on which the property so constructed, or
the improvement, is located and other than any machinery or equipment installed
at any time so as to constitute immovable property or a fixture on the real
property on which the property so constructed, or the improvement, is located.

(50) "Redemption Date", when used with respect to any Debt Security to be
redeemed, means the date fixed for such redemption by or pursuant to this
Indenture.

(51) "Redemption Price", when used with respect to any Debt Security to be
redeemed, means the price at which it is to be redeemed pursuant to this
Indenture.

(52) "Regular Record Date" for the interest payable on any Interest Payment Date
on the Debt Securities of any series means the date specified for that purpose
as contemplated by Section 301.

(53) "Responsible Officer" when used with respect to the Trustee means any
vice-president (whether or not designated by a number or word or words added
before or after the title "vice-president"), the secretary, any assistant
secretary, the treasurer, any assistant treasurer, the cashier, any assistant
cashier, any trust officer or assistant trust officer, the controller or any
assistant controller or any other officer of the Trustee customarily performing
functions similar to those performed by any of the above designated officers and
also means, with respect to a particular corporate trust matter, any other
officer to whom such matter is referred because of his knowledge of and
familiarity with the particular subject.

                                       8
<PAGE>   18

(54) "Restricted Subsidiary" means Nortel Networks Inc. or, if and for so long
as the Finance Subsidiary has Outstanding Guaranteed Debt Securities, the
Finance Subsidiary.

(55) "Security Register" and "Security Registrar" have the respective meanings
specified in Section 305.

(56) "Special Record Date" for the payment of any Defaulted Interest means a
date fixed by the Trustee pursuant to Section 307.

(57) "Stated Maturity Date", when used with respect to any Debt Security or any
installment of interest thereon, means the date specified in such Debt Security
as the fixed date on which the principal of such Debt Security or such
installment of interest is due and payable.

(58) "Subsidiary" means , with respect to an Issuer or the Guarantor, a
corporation, a majority of the outstanding voting shares of which are owned,
directly or indirectly, by such Issuer or Guarantor or by one or more other
Subsidiaries of such Issuer or Guarantor, or by such Issuer or Guarantor and one
or more other Subsidiaries of such Issuer or Guarantor. For the purposes of this
definition, "voting shares" means shares having voting power for the election of
directors, whether at all times or only so long as no other shares have such
voting power by reason of any contingency.

(59) "Trust Indenture Act" means the Trust Indenture Act of 1939 as in force at
the date as of which this indenture was executed, except as provided in Sections
609, 703 and 905.

(60) "Trustee" means the Person named as the "Trustee" in the first paragraph of
this Indenture until a successor Trustee shall have become such pursuant to the
applicable provisions hereof, and thereafter "Trustee" shall mean or include
each Person who is then a Trustee hereunder, and if at any time there is more
than one such Person, "Trustee" as used with respect to the Debt Securities of
any series shall mean the Trustee with respect to Debt Securities of that
series.

SECTION 102.      COMPLIANCE CERTIFICATES AND OPINIONS.

(a) Upon any application or request by an Issuer or the Guarantor to the Trustee
to take any action under any provision of this Indenture, such Issuer or the
Guarantor, as the case may be, shall furnish to the Trustee an Officers'
Certificate and Opinion of Counsel stating that all conditions precedent, if
any, provided for in this Indenture related to the proposed action have been
complied with except that, in the case of any such application or request as to
which the furnishing of such documents is specifically required by any provision
of this Indenture related to such particular application or request, no
additional certificate or opinion need be furnished.

(b) Every Officers' Certificate or Opinion of Counsel with respect to compliance
with a condition or covenant provided for in this Indenture (other than the
certificate required by Section 1005) shall include: (1) a statement that each
individual signing such certificate or opinion has read such covenant or
condition and the definitions herein related thereto; (2) a brief statement as
to the nature and scope of the examination or investigation upon which the
statements or opinions contained in such certificate or opinion are based; (3) a
statement that, in the opinion of each such individual, he has made such
examination or investigation as is

                                       9
<PAGE>   19

reasonably necessary to enable him to make the statement or to express an
opinion whether such covenant or condition has been complied with; and (4) a
statement whether, in the opinion of each such individual, such condition or
covenant has been complied with.

SECTION 103.      FORM OF DOCUMENTS DELIVERED TO TRUSTEE.

(a) In any case where several matters are required to be certified by, or
covered by an opinion of, any specified Person, it is not necessary that all
such matters be certified by, or covered by the opinion of, only one such
Person, or that they be so certified or covered by only one document, but one
such Person may certify or give an opinion with respect to some matters and one
or more other such Persons as to other matters, and any such Person may certify
or give an opinion as to such matters in one or several documents.

(b) Any Officers' Certificate or Opinion of Counsel of an Issuer or the
Guarantor may be based, insofar as it relates to legal matters, upon a
certificate or opinion of, or representations by, counsel, unless such officer
knows, or in the exercise of reasonable care should know, that the certificate
or opinion or representations with respect to the matters upon which such
certificate or opinion is based is erroneous. Any such certificate or Opinion of
Counsel may be based, insofar as it relates to factual matters, upon a
certificate or opinion of, or representations by, an officer or officers of such
Issuer or the Guarantor, as the case may be, stating that the information with
respect to such factual matters is in the possession of such certifying entity
unless such counsel knows, or in the exercise of reasonable care should know,
that the certificate or opinion or representations with respect to such matters
is erroneous.

(c) Where any Person is required to make, give or execute two or more
applications, requests, consents, certificates, statements, opinions or other
instruments under this Indenture, they may, but need not, be consolidated and
form one instrument.

SECTION 104.      ACTS OF HOLDERS.

(a) Any request, demand, authorization, direction, notice, consent, waiver or
other action provided by this Indenture to be given or taken by Holders may be
embodied in and evidenced by one or more instruments of substantially similar
tenor signed by such Holders in person or by an agent duly appointed in writing.
Except as herein otherwise expressly provided, such action shall become
effective when such instrument or instruments are delivered to the Trustee and,
where it is hereby expressly required, to the Issuers and the Guarantor or any
of them. Such instrument or instruments (and the action embodied therein and
evidenced thereby) are herein sometimes referred to as the "Act" of the Holders
signing such instrument or instruments. Proof of execution of any such
instrument or of a writing appointing any such agent shall be sufficient for any
purpose of this Indenture and, subject to Section 601, conclusive in favor of
the Trustee, the Issuers and the Guarantor, if made in the manner provided in
this Section. The record of any meeting of Holders of Debt Securities shall be
proved in the manner provided in Section 1406.

(b) The fact and date of the execution by any Person of any such instrument or
writing may be proved by the affidavit of a witness of such execution or by a
certificate of a notary public or other officer authorized by law to take
acknowledgments of deeds, certifying that the individual signing such instrument
or writing acknowledged to him the execution thereof. Where such

                                       10
<PAGE>   20

execution is by a signer acting in a capacity, other than his individual
capacity, such certificate or affidavit shall also constitute sufficient proof
of his authority. The fact and date of the execution of any such instrument or
writing, or the authority of the Person executing the same, may also be proved
in any manner that the Trustee deems sufficient.

(c) The ownership of Debt Securities shall be proved by the Security Register.

(d) If an Issuer or the Guarantor shall solicit from the Holders of Debt
Securities of any series any Act, such Issuer or the Guarantor, as the case may
be, may, at its option, by Board Resolution, fix in advance a record date for
the determination of Holders of Debt Securities entitled to take such Act, but
such Issuer or the Guarantor, as the case may be, shall have no obligation to do
so. Any such record date shall be fixed at the discretion of such Issuer or the
Guarantor, as the case may be. If such a record date is fixed, such Act may be
sought or taken before or after the record date, but only the Holders of record
at the close of business on such record date shall be deemed to be Holders for
the purpose of determining whether Holders of the requisite proportion of Debt
Securities of such series Outstanding have authorized or agreed or consented to
such Act, and for that purpose the Debt Securities of such series Outstanding
shall be computed as of such record date.

(e) Any Act of the Holder of any Debt Security shall bind every future holder of
the same Debt Security and the Holder of every Debt Security issued upon the
registration of transfer thereof or in exchange therefor or in lieu thereof in
respect of anything done, suffered or omitted by the Trustee, the applicable
Issuer or the Guarantor in reliance thereon, whether or not notation of such
action is made upon such Debt Security.

(f) For purposes of determining the principal amount of Outstanding Debt
Securities of any series the Holders of which are required, requested or
permitted to take any Act under this Indenture: (1) each Original Issue Discount
Security shall be deemed to have an amount outstanding determined by the Trustee
that could be declared to be due and payable pursuant to the terms of such
Original Issue Discount Security as of the date such Act is delivered to the
Trustee and, where it is hereby expressly required, to the applicable Issuer or
the Guarantor; and (2) each Debt Security denominated in a Foreign Currency or
composite currency shall be deemed to have an amount outstanding determined by
the Trustee by converting the principal amount of such Debt Security in the
currency in which such Debt Security is denominated into Dollars at the Exchange
Rate as of the date such Act is delivered to the Trustee and, where it is hereby
expressly required, to the applicable Issuer or the Guarantor (or, if there is
no such rate on such date for the reasons specified in Section 311(d), such rate
on the date specified in such Section).

SECTION 105.      NOTICES, ETC., TO TRUSTEE, CORPORATION, FINANCE SUBSIDIARY AND
                  GUARANTOR.

Any Act of Holders or other document provided or permitted by this Indenture to
be made upon, given or furnished to, or filed with:

     (1)   the Trustee by any Holder, or by either Issuer or the Guarantor shall
           be sufficient for every purpose hereunder if made, given, furnished
           or filed in writing to or

                                       11
<PAGE>   21

           with the Trustee at its Corporate Trust Office, Attention: Citibank
           Agency and Trust Services, facsimile 212-657-3862, or such other
           facsimile number as may be provided by the Trustee from time to time,
           and shall be deemed to have been made at the time of delivery or
           facsimile transmission; provided that any delivery made or facsimile
           sent on a day other than a Business Day in New York, shall be deemed
           to be received on the next following Business Day in New York; or

     (2)   either Issuer or the Guarantor, by the Trustee or by any Holder shall
           be sufficient for every purpose hereunder (unless otherwise herein
           expressly provided) if in writing to such Issuer or the Guarantor, as
           the case may be, addressed to it at the address of its executive
           office specified in the first paragraph of this Indenture, Attention:
           Corporate Secretary, facsimile number (905) 863-8423, in the case of
           Nortel Networks; or Attention: Secretary, facsimile number (615)
           432-4067, in the case of Finance Subsidiary or at any other address
           previously furnished in writing to the Trustee by such Issuer or the
           Guarantor, as the case may be, and shall be deemed to have been made
           at the time of delivery or facsimile transmission; provided that any
           delivery made or facsimile sent on a day other than a Business Day in
           Toronto, Ontario in the case of Nortel Networks, or Nashville,
           Tennessee, in the case of Finance Subsidiary, shall be deemed to be
           received on the next following Business Day in the relevant place.

SECTION 106.      NOTICE TO HOLDERS; WAIVER.

(a) Except as otherwise expressly provided herein, where this Indenture provides
for notice to Holders of any event such notice shall be sufficiently given to
Holders if in writing and mailed, first-class postage prepaid, to each Holder
affected by such event, at his address as it appears in the Security Register,
not later than the latest date, and not earlier than the earliest date,
prescribed for the giving of such notice.

(b) If the regular mail service is suspended or for any other reason it shall be
impracticable to give notice to Holders by mail, then such notification to
Holders as shall be made with the approval of the Trustee shall constitute
sufficient notification for every purpose hereunder. In any case where notice to
Holders is given by mail, neither the failure to mail such notice, nor any
defect in any notice so mailed, to any particular Holder shall affect the
sufficiency of such notice with respect to other Holders.

(c) Where this Indenture provides for notice in any manner, such notice may be
waived in writing by the Person entitled to receive such notice, either before
or after the event, and such waiver shall be the equivalent of such notice.
Waivers of notice by Holders shall be filed with the Trustee, but such filing
shall not be a condition precedent to the validity of any action taken in
reliance upon such waiver.

(d) Any Act required or permitted under this Indenture shall be in the English
language.

SECTION 107.      CONFLICT WITH TRUST INDENTURE ACT.

If any provision of this Indenture limits, qualifies or conflicts with a
provision of the Trust Indenture Act that is required under the Trust Indenture
Act to be a part of and govern this

                                       12
<PAGE>   22

Indenture, the latter provision shall control. If any provision of this
Indenture modifies or excludes any provision of the Trust Indenture Act that may
be so modified or excluded, the latter provision shall be deemed to apply to
this Indenture as so modified or excluded, as the case may be.

SECTION 108.      EFFECT OF HEADINGS AND TABLE OF CONTENTS.

The Article and Section headings herein and the Table of Contents are for
convenience only and shall not affect the construction hereof.

SECTION 109.      SUCCESSORS AND ASSIGNS.

All covenants and agreements in this Indenture by each Issuer or the Guarantor
shall bind its successors and assigns, whether expressed or not.

SECTION 110.      SEPARABILITY CLAUSE.

If any provision in this Indenture or in the Debt Securities shall be invalid,
illegal or unenforceable, the validity, legality and enforceability of the
remaining provisions shall not in any way be affected or impaired thereby.

SECTION 111.      BENEFITS OF INDENTURE.

Nothing in this Indenture or in the Debt Securities, express or implied, shall
give to any Person, other than the parties hereto and their successors
hereunder, and any Paying Agent and the Holders, any benefit or any legal or
equitable right, remedy or claim under this Indenture.

SECTION 112.      GOVERNING LAW, ETC.

(a) This Indenture and the Debt Securities shall be governed by and construed in
accordance with the laws of the State of New York, but without giving effect to
applicable principles of conflicts of law to the extent that the application of
the law of another jurisdiction would be required thereby.

(b) Each of the Issuers and the Guarantor has appointed CT Corporation System
with offices at 111 Eighth Avenue, 13th Floor, New York, New York, 10011 as its
authorized agent (the "Authorized Agent") upon whom all writs, process and
summonses may be served in any suit, action or proceeding arising out of or
based upon this Indenture or the Debt Securities which may be instituted in any
state or federal court in The City of New York, New York. The Issuers and the
Guarantor hereby represent and warrant that the Authorized Agent has accepted
such appointment and has agreed to act as said agent for service of process, and
the Issuers and the Guarantor agree to take any and all action, including the
filing of any and all documents, that may be reasonably necessary to continue
each such appointment in full force and effect as aforesaid so long as the Debt
Securities remain outstanding. The Issuers and the Guarantor agree that the
appointment of the Authorized Agent shall be irrevocable so long as any of the
Notes remain outstanding or until the irrevocable appointment by the Issuers and
the Guarantor of a successor agent in The City of New York, New York as each of
their authorized agent for such purpose and the acceptance of such appointment
by such successor. Service of process upon the

                                       13
<PAGE>   23

Authorized Agent shall be deemed, in every respect, effective service of process
upon the Issuers and the Guarantors.

(c) Each of the Issuers and the Guarantor hereby:

    (1)    agrees that any suit, action or proceeding against it arising out of
           or relating to this Indenture or the Debt Securities, as the case may
           be, may be instituted in any federal or state court sitting in the
           City of New York,

    (2)    waives to the extent permitted by applicable law, any objection which
           it may now or hereafter have to the laying of venue of any such suit,
           action or proceeding, and any claim that any suit, action or
           proceeding in such a court has been brought in an inconvenient forum,

    (3)    irrevocably submits to the non-exclusive jurisdiction of such courts
           in any suit, action or proceeding, and

    (4)    agrees that service of process by mail to the addresses specified
           herein shall constitute personal service of such process on it in any
           such suit, action or proceeding.

SECTION 113.      LEGAL HOLIDAYS.

If any Interest Payment Date, Redemption Date or Stated Maturity Date of any
Debt Security shall not be a Business Day at any Place of Payment, then
(notwithstanding any other provision of this Indenture or of the Debt
Securities) payment of interest or principal (and premium, if any) need not be
made at such Place of Payment on such date, but may be made on the next
succeeding Business Day at such Place of Payment with the same force and effect
as if made on the Interest Payment Date, Redemption Date, or Stated Maturity
Date, and no interest shall accrue on such payment for the period from and after
such Interest Payment Date, Redemption Date or Stated Maturity Date, as the case
may be.

                                   ARTICLE TWO

                               DEBT SECURITY FORMS

SECTION 201.      FORMS GENERALLY.

(a) All Debt Securities, Guarantees, if any, and the Trustee's certificate of
authentication shall have such appropriate insertions, omissions, substitutions
and other variations as are required or permitted by this Indenture or by a
Board Resolution and as set forth in an Officers' Certificate or any indenture
supplemental hereto and may have such letters, numbers or other marks of
identification or designation and such legends or endorsements placed thereon as
the applicable Issuer or Guarantor, as the case may be, may deem appropriate and
as are not inconsistent with the provisions of this Indenture, or as may be
required to comply with any law or with any rule or regulation made pursuant
thereto or with any rule

                                       14
<PAGE>   24

or regulation of any securities exchange on which any of the Debt Securities may
be listed, or to conform to usage.

(b) The definitive Debt Securities and Guarantees, if any, shall be printed,
lithographed or engraved or produced by any combination of these methods on
steel engraved borders or may be produced in any other manner; provided that
such manner is permitted by the rules of any securities exchange on which the
Debt Securities may be listed or of any automated quotation system on which such
series may be quoted, all as determined by the officers executing such Debt
Securities, as conclusively evidenced by their execution of such Debt
Securities.

SECTION 202.      FORMS OF DEBT SECURITIES.

Debt Securities shall be in the forms approved by the officers executing such
Debt Securities, as conclusively evidenced by their execution of such Debt
Securities, having those terms approved by or pursuant to a Board Resolution and
set forth in an Officers' Certificate or one or more indentures supplemental
hereto which shall set forth the information required by Section 301. The Debt
Securities of each series shall be issuable in registered form without coupons
and may be in the form of one or more Global Securities in whole or in part.

SECTION 203.      GUARANTEE BY GUARANTOR; FORM OF GUARANTEE.

The Guarantor by its execution of this Indenture hereby agrees with each Holder
of a Guaranteed Debt Security of each series authenticated and delivered by the
Trustee and with the Trustee on behalf of each such Holder, to be
unconditionally bound by the terms and provisions of the Guarantees set forth
below and authorizes the Trustee to confirm such Guarantees to the Holder of
each such Guaranteed Debt Security by its execution and delivery of each such
Guaranteed Debt Security, with such Guarantees endorsed thereon, authenticated
and delivered by the Trustee.

Guarantees to be endorsed on the Guaranteed Debt Securities shall, subject to
Section 201, be in substantially the form set forth below:

                                    GUARANTEE

                                       OF

                             NORTEL NETWORKS LIMITED

For value received, Nortel Networks Limited, a corporation incorporated under
the laws of Canada, having its principal executive offices at 8200 Dixie Road,
Suite 100, Brampton, Ontario, Canada, L6T 5P6 (herein called the "Guarantor",
which term includes any successor Person under the Indenture referred to in the
Debt Security upon which this Guarantee is endorsed), hereby unconditionally and
irrevocably guarantees to the Holder of the Guaranteed Debt Security upon which
this Guarantee is endorsed and to the Trustee on behalf of each such Holder the
due and punctual payment of the principal of, premium, if any, and interest on
such Guaranteed Debt Security and the due and punctual payment of the sinking
fund or analogous payments referred to therein, if any, when and as the same
shall become due and payable, whether on the Stated Maturity Date, by
declaration of acceleration, call for redemption or otherwise, according to the

                                       15
<PAGE>   25

terms thereof and of the Indenture referred to therein. In case of the failure
of Nortel Networks Capital Corporation, a corporation organized under the laws
of Delaware (herein called the "Borrower", which term includes any successor
Person under such Indenture), punctually to make any such payment of principal,
premium, if any, or interest or any such sinking fund or analogous payment, the
Guarantor hereby agrees to cause any such payment to be made punctually when and
as the same shall become due and payable, whether on the Stated Maturity Date or
by declaration of acceleration, call for redemption or otherwise, and as if such
payment were made by the Borrower.

The Guarantor hereby agrees that its obligations hereunder shall be as if it
were principal debtor and not merely surety, and shall be absolute and
unconditional, irrespective of, and shall be unaffected by, any invalidity,
irregularity or unenforceability of such Guaranteed Debt Security or such
Indenture, any failure to enforce the provisions of such Guaranteed Debt
Security or such Indenture, or any waiver, modification or indulgence granted to
the Borrower with respect thereto, by the Holder of such Guaranteed Debt
Security or the Trustee or any other circumstance which may otherwise constitute
a legal or equitable discharge of a surety or guarantor; provided, however,
that, notwithstanding the foregoing, no such waiver, modification or indulgence
shall, without the consent of the Guarantor, increase the principal amount of
such Guaranteed Debt Security, or increase the interest rate thereon, or
increase any premium payable upon redemption thereof, or alter the Stated
Maturity Date thereof, or increase the principal amount of any Original Issue
Discount Security that would be due and payable upon a declaration of
acceleration of the maturity thereof pursuant to Article Five of such Indenture.
The Guarantor hereby waives diligence, presentment, demand of payment, filing of
claims with a court in the event of merger or bankruptcy of the Borrower, any
right to require a proceeding first against the Borrower, protest or notice with
respect to such Guaranteed Debt Security or the indebtedness evidenced thereby
or with respect to any sinking fund or analogous payment required under such
Debt Security and all demands whatsoever, and covenants that this Guarantee will
not be discharged except by payment in full of the principal of, premium, if
any, and interest on such Guaranteed Debt Security.

The Guarantor shall be subrogated to all rights of the Holder of such Guaranteed
Debt Security and the Trustee against the Borrower in respect of any amounts
paid to such Holder by the Guarantor pursuant to the provisions of this
Guarantee; provided, however, that the Guarantor shall not be entitled to
enforce, or to receive any payments arising out of or based upon such right of
subrogation until the principal of, premium, if any, and interest on all
Guaranteed Debt Securities of the same series issued under such Indenture shall
have been paid in full.

No reference herein to such Indenture and no provision of this Guarantee or of
such Indenture shall alter or impair the guarantees of the Guarantor, which are
absolute and unconditional, of the due and punctual payment of the principal of,
premium, if any, and interest on, and any sinking fund or analogous payments
with respect to, the Guaranteed Debt Security upon which this Guarantee is
endorsed.

This Guarantee shall not be valid or obligatory for any purpose until the
certificate of authentication of such Guaranteed Debt Security shall have been
manually executed by or on behalf of the Trustee under such Indenture.

                                       16
<PAGE>   26

All terms used in this Guarantee which are defined in such Indenture shall have
the meanings assigned to them in such Indenture.

This Guarantee shall be governed by and construed in accordance with the laws of
the State of New York.

Executed and dated the date on the face hereof.

                             NORTEL NETWORKS LIMITED

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

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

SECTION 204.      FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTICATION.

The form of the Trustee's certificate of authentication to be borne by the Debt
Securities shall be substantially as follows:

Dated:

                     TRUSTEE'S CERTIFICATE OF AUTHENTICATION

This is one of the Debt Securities issued under the within-mentioned Indenture.

                             [Name of Trustee]
                                                  as Trustee

                             By:
                                  ---------------------------------------------
                                            Authorized Signatory

                                 ARTICLE THREE

                               THE DEBT SECURITIES

SECTION 301.      AMOUNT UNLIMITED; ISSUABLE IN SERIES.

(a) The aggregate principal amount of Debt Securities that may be authenticated
and delivered under this Indenture is unlimited.

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(b) The Debt Securities may be issued in one or more series. Not all Debt
Securities of any one series need be issued at the same time, and, unless
otherwise provided, a series may be reopened for issuances of additional Debt
Securities of such series. There shall be established in or pursuant to a Board
Resolution of the applicable Issuer and set forth in an Officers' Certificate,
or established in one or more indentures supplemental hereto, prior to the
issuance of Debt Securities of any series:

     (1)   whether such Debt Securities are Corporation Debt Securities or
           Guaranteed Debt Securities;

     (2)   the title of the Debt Securities of the series (which shall
           distinguish the Debt Securities of the series from all other Debt
           Securities);

     (3)   the limit, if any, upon the aggregate principal amount of the Debt
           Securities of the series that may be authenticated and delivered
           under this Indenture (except for Debt Securities authenticated and
           delivered upon registration of transfer of, or in exchange for, or in
           lieu of, other Debt Securities of the series pursuant to Sections
           304, 305, 306, 906 or 1107);

     (4)   the date or dates on which the principal of the Debt Securities of
           the series is payable;

     (5)   the rate or rates or the method of determination thereof at which the
           Debt Securities of the series shall bear interest, if any, the date
           or dates from which such interest shall accrue, the Interest Payment
           Dates on which such interest shall be payable, and the Regular Record
           Dates for the interest payable on such Interest Payment Dates;

     (6)   the place or places where the principal of (and premium, if any) and
           interest on Debt Securities of the series shall be payable;

     (7)   the period or periods within which or the date or dates on which, if
           any, the price or prices at which and the terms and conditions upon
           which Debt Securities of the series may be repurchased or redeemed,
           in whole or in part, at the option of the applicable Issuer;

     (8)   the obligation, if any, of the applicable Issuer to redeem, repay or
           purchase Debt Securities of the series either pursuant to any sinking
           fund or analogous provisions or at the option of a Holder thereof and
           the period or periods within which, the price or prices at which and
           the terms and conditions upon which Debt Securities of the series
           shall be redeemed, repaid or purchased, in whole or in part, pursuant
           to such obligation;

     (9)   whether the Debt Securities of the series shall be issued in whole or
           in part in the form of one or more Global Securities and, in such
           case, the Depositary for such Global Security or Securities and the
           terms and conditions, if any, upon which interests in such Global
           Security or Securities may be exchanged in whole or in part for the
           individual Debt Securities represented thereby;

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     (10)  the denominations in which Debt Securities of the series shall be
           issuable;

     (11)  if other than the principal amount thereof, the portion of the
           principal amount of Debt Securities of the series that shall be
           payable upon declaration of acceleration of the Maturity thereof
           pursuant to Section 501;

     (12)  the currency or currencies of denominations of the Debt Securities of
           any series, which may be in Dollars, any Foreign Currency or any
           composite currency, and, if any such currency of denomination is a
           composite currency, the agency or organization, if any, responsible
           for overseeing such composite currency;

     (13)  the currency or currencies in which payment of the principal of (and
           premium, if any) and interest on the Debt Securities of the series
           will be made, and the currency or currencies, if any, in which
           payment of the principal of (and premium, if any) or the interest on
           Debt Securities of the series, at the election of each of the Holders
           thereof, may also be payable;

     (14)  if the amount of payments of principal of (and premium, if any) or
           interest on the Debt Securities of the series may be determined with
           reference to an index based on a currency or currencies other than
           that in which the Debt Securities of the series are denominated or
           designated to be payable, the manner in which such amounts shall be
           determined;

     (15)  if the payments of principal of (and premium, if any) or the interest
           on the Debt Securities of the series are to be made in a Foreign
           Currency, other than the Foreign Currency in which such Debt
           Securities are denominated, the manner in which the Exchange Rate
           with respect to such payments shall be determined;

     (16)  the terms, if any, upon which the Debt Securities of the series will
           be defeasible;

     (17)  any other terms of the series (which terms shall not be inconsistent
           with the provisions of this Indenture); and

     (18)  CUSIP numbers, if any.

(c) All Debt Securities of any one series shall be substantially identical
except as to denomination and except as may otherwise be provided in or pursuant
to such Board Resolution and set forth in such Officers' Certificate or in such
indenture or indentures supplemental hereto.

(d) If any of the terms of a series of Debt Securities are established by action
taken pursuant to a Board Resolution, a copy of an appropriate record of such
action shall be certified by the Corporate Secretary, the Secretary or an
Assistant Secretary of the applicable Issuer and delivered to the Trustee at or
prior to the delivery of the Officers' Certificate setting forth the terms of
the series.

(e) Debt Securities of any series which are repayable at the option of the
Holders shall be repaid in accordance with the terms of the Debt Securities of
such series.

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SECTION 302.      DENOMINATIONS.

Unless otherwise provided as contemplated by Section 301 with respect to any
series of Debt Securities and except as provided in Section 303, Debt Securities
will be issued in denominations, unless otherwise specified by the applicable
Issuer, of integral multiples of $1,000.

SECTION 303.      EXECUTION, AUTHENTICATION, DELIVERY AND DATING.

(a) The Debt Securities shall be executed on behalf of the applicable Issuer and
the Guarantor, if applicable, by the Authorized Officers of such Issuer or
Guarantor, as the case may be. The Debt Securities may but need not be under the
corporate seal of the applicable Issuer or Guarantor, as the case may be, or a
reproduction thereof (which reproduction shall for such purposes be deemed to be
the corporate seal of such Issuer or Guarantor, as the case may be). The
signature of any of these officers on the Debt Securities may be manual or
facsimile. Debt Securities bearing the manual or facsimile signatures of
individuals who were at any time the proper officers of the applicable Issuer
shall bind such Issuer or Guarantor, as the case may be, notwithstanding that
such individuals or any of them have ceased to hold such offices prior to the
authentication and delivery of such Debt Securities.

(b) At any time and from time to time after the execution and delivery of this
Indenture, the applicable Issuer may deliver Debt Securities of any series
executed by such Issuer and Guarantor, if applicable, to the Trustee for
authentication, together with an Issuer Order of such Issuer for the
authentication and delivery of such Debt Securities; whereupon the Trustee, in
accordance with such Issuer Order shall authenticate and deliver such Debt
Securities. The Trustee shall be entitled to receive, prior to the
authentication and delivery of such Debt Securities, the supplemental indenture
or the Board Resolution by or pursuant to which the terms of such Debt
Securities have been approved, an Officers' Certificate as to the absence of any
event that is, or after notice or lapse of time or both would become, an Event
of Default, and an Opinion or Opinions of Counsel of such Issuer and Guarantor,
if applicable, to the effect that:

     (1)   all instruments furnished by the applicable Issuer and the Guarantor
           (in the case of Guaranteed Debt Securities) to the Trustee in
           connection with the authentication and delivery of such Debt
           Securities conform to the requirements of this Indenture and
           constitute sufficient authority hereunder for the Trustee to
           authenticate and deliver such Debt Securities;

     (2)   the forms of such Debt Securities and Guarantees, if any, have been
           established in conformity with the provisions of this Indenture;

     (3)   the terms of such Debt Securities and Guarantees, if any, have been
           established in conformity with the provisions of this Indenture;

     (4)   in the event that the forms or terms of such Debt Securities and
           Guarantees, if any, have been established in a supplemental
           indenture, the execution and delivery of such supplemental indenture
           have been duly authorized by all necessary corporate action of the
           applicable Issuer and the Guarantor (in the case of Guaranteed Debt
           Securities), such supplemental indenture has been duly executed and
           delivered by such Issuer and Guarantor and, assuming due

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           authorization, execution and delivery by the Trustee, is a valid and
           binding obligation enforceable against such Issuer and Guarantor in
           accordance with its terms, subject to enforceability being limited by
           bankruptcy, insolvency, or other laws affecting the enforcement of
           creditors' rights generally, and equitable remedies, including the
           remedies of specific performance and injunction, being granted only
           in the discretion of a court of competent jurisdiction;

     (5)   the execution and delivery of such Debt Securities and Guarantees, if
           any, have been duly authorized by all necessary corporate action of
           the applicable Issuer and the Guarantor (in the case of Guaranteed
           Debt Securities) and such Debt Securities and Guarantees, if any,
           have been duly executed by such Issuer and Guarantor and, assuming
           due authentication by the Trustee and delivery by such Issuer and
           Guarantor, are valid and binding obligations of such Issuer and
           Guarantor enforceable against such Issuer and Guarantor in accordance
           with their terms, entitled to the benefit of the Indenture, subject
           to enforceability being limited by bankruptcy, insolvency, or other
           laws affecting the enforcement of creditors' rights generally, and
           equitable remedies, including the remedies of specific performance
           and injunction, being granted only in the discretion of a court of
           competent jurisdiction;

     (6)   the amount of Outstanding Debt Securities of such series, together
           with the amount of such Debt Securities, does not exceed any limit
           established under the terms of this Indenture on the amount of Debt
           Securities of such series that may be authenticated and delivered;
           and

     (7)   such other matters as the Trustee may reasonably request.

(c) If the applicable Issuer shall establish pursuant to Section 301 that the
Debt Securities of a series are to be issued in whole or in part in the form of
one or more Global Securities, then such Issuer and the Guarantor (in the case
of Guaranteed Debt Securities) shall execute and the Trustee shall authenticate
and deliver one or more Global Securities that shall: (1) represent an aggregate
amount equal to the aggregate principal amount of the Outstanding Debt
Securities of such series to be represented by one or more Global Securities;
(2) be registered in the name of the Depositary for such Global Security or
Securities or the nominee of such Depositary; (3) be held or be delivered by the
Trustee to such Depositary or pursuant to such Depositary's instruction; and (4)
bear a legend substantially to the following effect: "Unless and until it is
exchanged in whole or in part for the individual Debt Securities represented
hereby, this Global Security may not be transferred except as a whole by the
Depositary to a nominee of the Depositary or by a nominee of the Depositary to
the Depositary or another nominee of the Depositary or by the Depositary or any
such nominee to a successor Depositary or a nominee of such successor
Depositary."

(d) Each Depositary designated pursuant to Section 301 for a Global Security
must, at the time of its designation and at all times while it serves as such
Depositary, be a clearing agency registered under the Exchange Act and any other
applicable statute or regulation.

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(e) The Trustee shall not be required to authenticate any Debt Securities if the
issuance of such Debt Securities pursuant to this Indenture will adversely
affect the Trustee's own rights, duties or immunities under this Indenture.

(f) Each Debt Security shall be dated the date of its issue, except as otherwise
provided pursuant to Section 301 with respect to Debt Securities of such series.

(g) No Debt Security or Guarantee endorsed thereon, if any, shall be entitled to
any benefit under this Indenture or be valid or obligatory for any purpose
unless there appears on such Debt Security a certificate of authentication
substantially in the form provided for herein duly executed by the Trustee by
manual signature of one of its authorized officers, and such certificate upon
any Debt Security shall be conclusive evidence, and the only evidence, that such
Debt Security has been duly authenticated and delivered hereunder and is
entitled to the benefits of this Indenture.

SECTION 304.      TEMPORARY DEBT SECURITIES.

(a) Pending the preparation of definitive Debt Securities of any series, the
applicable Issuer may execute, and, upon receipt of an Issuer Order of such
Issuer, the Trustee shall authenticate and deliver, temporary Debt Securities
that are printed, lithographed, typewritten, mimeographed or otherwise produced,
in any authorized denomination, substantially of the tenor of the definitive
Debt Securities in lieu of which they are issued, in registered form and, in the
case of Guaranteed Debt Securities, having endorsed thereon a Guarantee executed
by the Guarantor substantially of the tenor of the definitive Guarantee, and in
all cases with such appropriate insertions, omissions, substitutions and other
variations as the officers of the Issuer and Guarantor, if applicable, executing
such Debt Securities and Guarantees, if any, may determine, as conclusively
evidenced by their execution of such Debt Securities. Any such temporary Debt
Securities may be in global form, representing all or a portion of the
Outstanding Debt Securities of such series. Every such temporary Debt Security
and Guarantee, if any, shall be executed by officers of the applicable Issuer
and Guarantor, if applicable, and shall be authenticated and delivered by the
Trustee upon the same terms and conditions and in substantially the same manner,
and with the same effect, as the definitive Debt Securities and Guarantee, if
any, in lieu of which it is issued.

(b) If temporary Debt Securities of any series are issued, the applicable Issuer
will cause definitive Debt Securities of such series to be prepared without
unreasonable delay. Upon surrender for cancellation of any one or more temporary
Debt Securities of any series, the applicable Issuer shall execute and the
Trustee shall authenticate and deliver in exchange therefor a like principal
amount of definitive Debt Securities of the same series of authorized
denominations and of like tenor and, in the case of Guaranteed Debt Securities,
having endorsed thereon a Guarantee executed by the Guarantor. Until so
exchanged, temporary Debt Securities of any series shall in all respects be
entitled to the same benefits under this Indenture as individual Debt Securities
of such series, except as otherwise specified as contemplated by Section 301
with respect to the payment of interest on Global Securities in temporary form.

(c) Upon any exchange of a portion of a temporary Global Security for a
definitive Global Security or for the individual Debt Securities represented
thereby pursuant to this Section 304 or Section 305, the temporary Global
Security shall be endorsed by the Trustee to reflect the

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reduction of the principal amount evidenced thereby, whereupon the principal
amount of such temporary Global Security shall be reduced for all purposes by
the amount so exchanged and endorsed.

SECTION 305.      REGISTRATION, REGISTRATION OF TRANSFER AND EXCHANGE.

(a) The Issuers each will maintain an office or agency at which shall be kept a
register (the "Security Registers") which, subject to such reasonable
regulations as it may prescribe, shall provide for the registration of Debt
Securities and of transfers of Debt Securities. Unless and until otherwise
determined by an Issuer, the Trustee shall act as such Issuer's agent as
Security Registrar and the Security Registers shall be kept at the office or
agency of the Trustee in the Borough of Manhattan, The City of New York. Such
Security Registers shall be in written form or in any other form capable of
being converted into written form within a reasonable period of time. At all
reasonable times, the Security Registers shall be open for inspection by the
Trustee.

(b) Upon surrender for registration of transfer of any Debt Security of any
series at the office or agency of the applicable Issuer maintained for such
purpose, such Issuer shall execute, and the Trustee shall authenticate and
deliver, in the name of the designated transferee or transferees, one or more
new Debt Securities of the same series of any authorized denomination or
denominations, of like tenor and aggregate principal amount and, in the case of
Guaranteed Debt Securities, having endorsed thereon a Guarantee executed by the
Guarantor. Every Debt Security presented or surrendered for registration of
transfer or for exchange shall (if so required by such Issuer, the Security
Registrar or the Trustee) be duly endorsed, or be accompanied by a written
instrument of transfer in form satisfactory to such Issuer, the Security
Registrar and the Trustee duly executed, by the Holder thereof or his attorney
duly authorized in writing.

(c) Notwithstanding any other provision of this Section, unless and until it is
exchanged in whole or in part for Debt Securities in definitive form, a Global
Security representing all or a portion of the Debt Securities of a series may
not be transferred except as a whole by the Depositary for such series to a
nominee of such Depositary or by a nominee of such Depositary to such Depositary
or another nominee of such Depositary or by such Depositary or any such nominee
to a successor Depositary for such series or a nominee of such successor
Depositary.

(d) At the option of the Holder, Debt Securities of any series (other than a
Global Security) may be exchanged for other Debt Securities of the same series
of any authorized denomination or denominations of a like aggregate principal
amount, upon surrender of the Debt Securities to be exchanged at such office or
agency.

(e) If at any time the Depositary for the Debt Securities of a series notifies
the applicable Issuer that it is unwilling or unable to continue as Depositary
for the Debt Securities of such series or if at any time the Depositary for the
Debt Securities of such series shall no longer be eligible under Section 303(d),
such Issuer shall appoint a successor Depositary with respect to the Debt
Securities of such series.

(f) The applicable Issuer may at any time and in its sole discretion determine
that individual Debt Securities of any series issued in the form of one or more
Global Securities shall no longer be represented by such Global Security or
Global Securities. In such event such Issuer will

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execute, and the Trustee, upon receipt of an Issuer Order for the authentication
and delivery of individual Debt Securities of such series, will authenticate and
deliver, individual Debt Securities of such series in an aggregate principal
amount equal to the principal amount of the Global Security or Securities
representing Debt Securities of such series (which, in the case of Guaranteed
Debt Securities, shall have endorsed thereon a Guarantee executed by the
Guarantor) in exchange for such Global Security or Global Securities.

(g) If specified by the applicable Issuer pursuant to Section 301 with respect
to a series of Debt Securities, the Depositary for such series of Debt
Securities may surrender a Global Security for such series of Debt Securities in
exchange in whole or in part for definitive Debt Securities of such series on
such terms as are acceptable to such Issuer and such Depositary. Thereupon, such
Issuer shall execute, and the Trustee shall authenticate and deliver, without
service charge: (1) to each Person specified by such Depositary a new definitive
Debt Security or Debt Securities of the same series (which, in the case of
Guaranteed Debt Securities, shall have endorsed thereon a Guarantee executed by
the Guarantor), of any authorized denomination as requested by such Person in
aggregate principal amount equal to and in exchange for such Person's beneficial
interest in the Global Security; and (2) to such Depositary a new Global
Security (which, in the case of Guaranteed Debt Securities, shall have endorsed
thereon a Guarantee executed by the Guarantor) in a denomination equal to the
difference, if any, between the principal amount of the surrendered Global
Security and the aggregate principal amount of definitive Debt Securities
delivered to Holders thereof.

(h) In any exchange provided for in Sections 305(f) or (g), the applicable
Issuer shall execute and the Trustee will authenticate and deliver Debt
Securities (which, in the case of Guaranteed Debt Securities, shall have
endorsed thereon a Guarantee executed by the Guarantor) in registered form in
authorized denominations.

(i) Upon the exchange of a Global Security for individual Debt Securities in
definitive form, such Global Security shall be cancelled by the Trustee.
Individual Debt Securities exchanged for portions of a Global Security pursuant
to this Section shall be registered in such names and in such authorized
denominations as the Depositary for such Global Security, pursuant to
instructions from its direct or indirect participants or otherwise, shall
instruct the Trustee. The Trustee shall deliver such Debt Securities to the
persons in whose names such Debt Securities are so registered.

(j) All Debt Securities executed for delivery upon any transfer or exchange of
Debt Securities shall be valid obligations of the applicable Issuer evidencing
the same debt, and entitled to the same benefits under this Indenture, as the
Debt Securities surrendered for such transfer or exchange. No service charge
shall be made for any registration of transfer or exchange of Debt Securities,
but the applicable Issuer may require payment of a sum sufficient to cover any
tax or other governmental charge that may be imposed in connection with any
transfer, registration of transfer or exchange of Debt Securities, other than
exchanges pursuant to Sections 304, 906 or 1107 not involving any transfer.

(k) The applicable Issuer shall not be required to: (1) execute for delivery,
register the transfer of or exchange of Debt Securities of any particular series
during a period beginning at the opening of business 15 days before the day of
the mailing of a notice of redemption of Debt Securities of

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such series selected for redemption under Section 1103 and ending at the close
of business on the day of such mailing; or (2) register the transfer of or
exchange of any Debt Security so selected for redemption in whole or in part,
except the unredeemed portion of any Debt Security being redeemed in part.

SECTION 306.      MUTILATED, DESTROYED, LOST OR STOLEN DEBT SECURITIES.

(a) If: (1) any mutilated Debt Security is surrendered to the Trustee; or (2)
the applicable Issuer, the Guarantor (in the case of a Guaranteed Debt Security)
and the Trustee receive evidence to their satisfaction of the destruction, loss
or theft of any Debt Security, and such Issuer, Guarantor and the Trustee
receive such security or indemnity satisfactory to them; then, in the absence of
notice to such Issuer, Guarantor or the Trustee that such Debt Security has been
acquired by a bona fide purchaser, such Issuer and Guarantor, as the case may
be, shall execute and upon its written request the Trustee shall authenticate
and deliver, in exchange for any such Security, a new Debt Security of like
tenor and principal amount and, in the case of Guaranteed Debt Securities,
having endorsed thereon a Guarantee executed by the Guarantor, in registered
form bearing a number not contemporaneously outstanding appertaining to such
destroyed, lost or stolen Debt Security.

(b) If any such mutilated, destroyed, lost or stolen Debt Security has become or
is about to become due and payable, the applicable Issuer or the Guarantor (in
the case of Guaranteed Debt Securities) in their discretion may, instead of
executing for delivery a new Debt Security, pay such Debt Security. Upon the
execution for delivery of any new Debt Security under this Section, such Issuer
or Guarantor may require the payment by the Holder of a sum sufficient to cover
any tax or other governmental charge that may be imposed in relation thereto and
any other expenses (including the fees and expenses of the Trustee) connected
therewith. The provisions of this Section are exclusive and shall preclude (to
the extent lawful) all other rights and remedies with respect to the replacement
or payment of mutilated, destroyed, lost or stolen Debt Securities.

(c) Every new Debt Security of any series and the Guarantee endorsed thereon, if
any, executed for delivery pursuant to this Section in lieu of any destroyed,
lost or stolen Debt Security shall constitute a contractual obligation of the
applicable Issuer and the Guarantor (in the case of Guaranteed Debt Securities),
to the same effect as such destroyed, lost or stolen Debt Security shall be at
any time enforceable by anyone, and any such new Debt Security and Guarantee, if
any, shall be entitled to all the benefits of this Indenture equally and
proportionately with any and all other Debt Securities of that series and the
Guarantee endorsed thereon, if any, duly issued hereunder.

SECTION 307.      PAYMENT OF INTEREST; INTEREST RIGHTS PRESERVED.

(a) Interest on any Debt Security that is payable on any Interest Payment Date
shall be paid to the Person in whose name that Debt Security (or one or more
Predecessor Securities) is registered at the close of business on the Regular
Record Date for such interest. At the option of the applicable Issuer payment of
interest on any Debt Security may be made by cheque mailed to the address of the
Person entitled thereto as such address shall appear in the Security Register or
by wire transfer to an account designated by such Person.

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(b) Any interest on any Debt Security of any series that is payable, but
is not punctually paid or duly provided for, on any Interest Payment Date
(herein called "Defaulted Interest") shall be paid in accordance with the
following provisions and not to the registered Holder on the relevant Regular
Record Date by virtue of his having been such Holder.

     (1)   The applicable Issuer may elect to make payment of any Defaulted
           Interest to the Persons in whose names the Debt Securities of such
           series (or their respective Predecessor Securities) are registered at
           the close of business on a Special Record Date for the payment of
           such Defaulted Interest, which shall be fixed in the following
           manner. Such Issuer shall notify the Trustee in writing of the amount
           of Defaulted Interest proposed to be paid on each Debt Security of
           such series and the date of the proposed payment, and at the same
           time such Issuer shall deposit with the Trustee an amount of money
           equal to the aggregate amount proposed to be paid in respect of such
           Defaulted Interest or shall make arrangements satisfactory to the
           Trustee for such deposit prior to the date of the proposed payment,
           such money when deposited to be held in trust for the benefit of the
           Persons entitled to such Defaulted Interest. Thereupon the Trustee
           shall fix a Special Record Date for the payment of such Defaulted
           Interest, which shall be not more than 15 days and not less than 10
           days prior to the date of the proposed payment and not less than 10
           days after the receipt by the Trustee of the notice of the proposed
           payment. The Trustee shall cause notice of the proposed payment of
           such Defaulted Interest and the Special Record Date therefor to be
           mailed, first-class postage prepaid, to each Holder of Debt
           Securities of such series at his address as it appears in the
           Security Register, not less than 10 days prior to such Special Record
           Date. Defaulted Interest shall be paid to the Persons in whose names
           the Debt Securities of such series (or their respective Predecessor
           Securities) are registered at the close of business on such Special
           Record Date and shall no longer be payable pursuant to the following
           Clause (2).

     (2)   The applicable Issuer may make payment of any Defaulted Interest on
           the Debt Securities of any series in any other lawful manner not
           inconsistent with the requirements of any securities exchange on
           which the Debt Securities may be listed, and upon such notice as may
           be required by such exchange, if, after notice given by such Issuer
           to the Trustee of the proposed payment pursuant to this clause, such
           manner of payment shall be deemed practicable by the Trustee.

(c) Subject to the foregoing provisions of this Section, each Debt Security
delivered under this Indenture upon registration of transfer of or in exchange
for or in lieu of any other Debt Security shall carry the rights to interest
accrued and unpaid, and to accrue, that were carried by such other Debt
Security.

SECTION 308.      PERSONS DEEMED OWNERS.

(a) Prior to due presentment of a Debt Security for registration of transfer,
the applicable Issuer, the Guarantor (in the case of Guaranteed Debt
Securities), the Trustee and any agent of any of the foregoing may treat the
Person in whose name such Debt Security is registered as the owner of such Debt
Security for the purpose of receiving payment of principal of (and premium, if
any)

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and, subject to Section 307, interest on such Debt Security and for all other
purposes whatsoever, whether or not such Debt Security be overdue, and none of
such Issuer, Guarantor, the Trustee or any agent of any of the foregoing shall
be affected by notice to the contrary.

(b) None of the applicable Issuer, the Guarantor (in the case of
Guaranteed Debt Securities), the Trustee, any Paying Agent or the Security
Registrar will have any responsibility or liability for any aspect of the
records related to or payments made on account of beneficial ownership interests
of a Global Security or for maintaining, supervising or reviewing any records
related to such beneficial ownership interests.

SECTION 309.      CANCELLATION.

Unless otherwise provided, all Debt Securities surrendered for payment,
redemption, registration of transfer or exchange shall, if surrendered to any
Person other than the Trustee, be delivered to the Trustee and shall be promptly
cancelled by it. The applicable Issuer or the Guarantor (in the case of
Guaranteed Debt Securities) may deliver to the Trustee for cancellation any Debt
Securities previously authenticated and delivered hereunder that such Issuer or
Guarantor may have acquired in any manner whatsoever, and all Debt Securities so
delivered shall be promptly cancelled by the Trustee. No Debt Securities shall
be authenticated in lieu of or in exchange for any Debt Securities cancelled as
provided in this Section, except as expressly permitted by this Indenture. All
cancelled Debt Securities held by the Trustee shall be disposed of in accordance
with the Trustee's policy of disposal or shall be returned to the applicable
Issuer upon Issuer Request of such Issuer; provided, however, that the Trustee
shall not be required to destroy cancelled Debt Securities.

SECTION 310.      COMPUTATION OF INTEREST.

Except as otherwise specified pursuant to Section 301 for Debt Securities of any
series, interest on the Debt Securities of each series shall be computed on the
basis of a 360-day year of twelve 30-day months. Solely for the purposes of
disclosure pursuant to the Interest Act (Canada) and without affecting the
calculation of interest on any Debt Securities, the yearly rate of interest for
any portion of an interest period of less than one year is the percent rate per
annum noted on any series of Debt Securities multiplied by the number of days in
the calendar year in which interest is paid divided by 360.

SECTION 311.      PAYMENT IN CURRENCIES.

(a) Payment of principal of (and premium, if any) and interest on the Debt
Securities of any series shall be made in the currency or currencies specified
pursuant to Section 301; provided that the Holder of a Debt Security of such
series may elect to receive such payment in any one of Dollars or any other
currency designated for such purpose pursuant to Section 301. A Holder may make
such election by delivering to the Trustee a written notice thereof,
substantially in the form attached hereto as Exhibit A or in such other form as
may be acceptable to the Trustee, not later than the close of business on the
Regular or Special Record Date immediately preceding the applicable Interest
Payment Date or date for payment of Defaulted Interest or the fifteenth day
immediately preceding the Maturity of an installment of principal, as the case
may be. Such election shall remain in effect with respect to such Holder until
such Holder delivers to the

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<PAGE>   37

Trustee a written notice substantially in the form attached hereto as Exhibit A
or in such other form as may be acceptable to the Trustee specifying a change in
the currency in which such payment is to be made; provided that any such notice
must be delivered to the Trustee not later than the close of business on the
Regular or Special Record Date immediately preceding the next Interest Payment
Date or date for payment of Defaulted Interest or the fifteenth day immediately
preceding the Maturity of an installment of principal, as the case may be, in
order to be effective for the payment to be made thereon; and provided further
that no such change in currency may be made with respect to payments to be made
on any Debt Security with respect to which notice of redemption has been given
by the applicable Issuer, pursuant to Article Eleven.

(b) Except as otherwise specified pursuant to Section 301, the Trustee shall
deliver to the applicable Issuer, not later than the eighth Business Day after
the Regular or Special Record Date with respect to an Interest Payment Date or
date for payment of Defaulted Interest or the fifteenth day immediately
preceding the Maturity of an installment of principal, as the case may be, with
respect to a series of Debt Securities, a written notice specifying, in the
currency or currencies in which the Debt Securities of such series are
denominated, the aggregate amount of the principal of (and premium, if any) and
interest on such Debt Securities to be paid on such payment date. If payments on
any such Debt Securities are designated to be made in a currency other than the
currency in which such Debt Securities are denominated or if at least one Holder
has made the election referred to in paragraph (a) above, then such written
notice shall also specify, in each currency in which payment is to be made
pursuant to paragraph (a), the amount of principal of (and premium, if any) and
interest on such series of Debt Securities to be paid in such currency on such
payment date.

(c) The applicable Issuer shall deliver, not later than the fourth Business Day
following each Regular or Special Record Date or the fifteenth day immediately
preceding the Maturity of an installment of principal, as the case may be, to
the Trustee an Exchange Rate Officers' Certificate in respect of the Dollar or
Foreign Currency payments to be made on such payment date. Except as otherwise
specified pursuant to Section 301, the amount receivable by Holders who have
elected payment in a currency other than the currency in which such Debt
Securities are denominated as provided in paragraph (a) above shall be
determined by such Issuer on the basis of the applicable Exchange Rate set forth
in the applicable Exchange Rate Officers' Certificate.

(d) Except as otherwise specified pursuant to Section 301, if the Foreign
Currency in which Debt Securities of a series is denominated ceases to be used
both by the government of the country which issued such currency and for the
settlement of transactions by banks, then with respect to each date for the
payment of principal of (and premium, if any) and interest on such Debt
Securities occurring after the final date on which the Foreign Currency was so
used, all payments with respect to such Debt Securities shall be made in
Dollars; provided that payment to a Holder of a Debt Security of such series
shall be made in a different Foreign Currency if that Holder has elected or
elects payment in such Foreign Currency as provided for by paragraph (a) above.
If payment is to be made in Dollars to the Holders of any such Debt Securities
pursuant to the provisions of the preceding sentence, then the amount to be paid
in Dollars on a payment date by the applicable Issuer to the Trustee and by the
Trustee or any Paying Agent to Holders shall be determined by the Trustee as of
the Regular or Special Record Date with respect to such Interest Payment Date or
date for payment of Defaulted Interest or the fifteenth day immediately

                                       28
<PAGE>   38

preceding the Maturity of an installment of principal, as the case may be, and
shall be equal to the sum obtained by converting the specified Foreign Currency
into Dollars at the Exchange Rate on the last Record Date on which such Foreign
Currency was so used in such capacity.

(e) If a Holder of a Debt Security denominated in a composite currency has
elected payment in a specified Foreign Currency as provided for by paragraph (a)
and such Foreign Currency ceases to be used both by the government of the
country which issued such currency and for the settlement of transactions by
banks, such Holder shall, subject to paragraph (f) below, receive payment in
such composite currency; provided that such payment to such Holder shall be made
in a different Foreign Currency or in Dollars if that Holder has elected or
elects payment in such Foreign Currency or in Dollars as provided for by
paragraph (a) above.

(f) Except as otherwise specified as contemplated by Section 301, if any
composite currency in which a Debt Security is denominated or payable ceases to
be used for the purposes for which it was established, then with respect to each
date for the payment of principal of (and premium, if any) and interest on Debt
Securities of a series denominated in such composite currency occurring after
the last date on which such composite currency was so used (the "Conversion
Date"), all payments with respect to such Debt Securities shall be made in
Dollars; provided that payment to a Holder of a Debt Security of such series
shall be made in a Foreign Currency if that Holder has elected or elects payment
in such Foreign Currency as provided for by paragraph (a) above.

(g) If payment with respect to Debt Securities of a series denominated in any
composite currency is to be made in Dollars pursuant to the provisions of
Section 311(f) then the amount to be paid in Dollars on a payment date by the
applicable Issuer to the Trustee and by the Trustee or any Paying Agent to
Holders shall be determined by the Trustee as of the Regular or Special Record
Date with respect to such Interest Payment Date or date for payment of Defaulted
Interest or the fifteenth day immediately preceding the Maturity of an
installment of principal, as the case may be, and shall be equal to the sum of
the amounts obtained by converting each Component of such composite currency
into Dollars at the Exchange Rate for such Component on such Record Date or
fifteenth day, as the case may be, multiplied by the number of units of such
composite currency that would have been so paid had such composite currency not
ceased to be so used. If payment is to be made in Foreign Currency to the
Holders of Debt Securities of such series pursuant to Section 311(f), then the
amount to be paid in such Foreign Currency on a payment date by the applicable
Issuer to the Trustee and by the Trustee or any Paying Agent to Holders shall be
determined by the Trustee as of the Regular or Special Record Date with respect
to such Interest Payment Date or date for payment of Defaulted Interest or the
fifteenth day immediately preceding the Maturity of an installment of principal,
as the case may be, and shall be determined by (1) converting each Component of
such composite currency into Dollars at the Exchange Rate for such Component on
such Record Date or fifteenth day, as the case may be, and (2) converting the
sum in Dollars so obtained into such Foreign Currency at the Exchange Rate for
such Foreign Currency on such Record Date or fifteenth day, as the case may be.

(h) All decisions and determinations of the Trustee regarding conversion of
Foreign Currency into Dollars pursuant to Sections 311(d) or 301 or the
conversion of any composite currency into Dollars or Foreign Currency pursuant
to Sections 311(d) and (f) above or as specified pursuant to Section 301 or the
Exchange Rate shall, in the absence of manifest error, be conclusive for all

                                       29
<PAGE>   39

purposes and irrevocably binding upon the applicable Issuer and all Holders of
the Debt Securities. If a Foreign Currency or composite currency in which
payment of Debt Securities of a series may be made ceases to be used both by the
government of the country which issued such currency and for the settlement of
transactions by banks, such Issuer, after learning thereof, will give notice
pursuant to Section 105 thereof to the Trustee immediately (and the Trustee
promptly thereafter will give notice to the Holders in the manner provided in
Section 106) specifying as the case may be the last date on which the Foreign
Currency was used for the payment of principal of (and premium, if any) or
interest on such Debt Securities, or the Conversion Date with respect to such
composite currency and the Components of such composite currency on such
Conversion Date. If any Component subsequently changes, such Issuer, after
learning thereof, will give notice to the Trustee similarly. The Trustee shall
be fully justified, protected and otherwise held harmless in relying and acting
upon the information so received by such Issuer and shall not otherwise have any
duty or obligation to determine or verify such information independently.

SECTION 312.      JUDGMENTS.

(a) Any payment in respect of principal of (and premium, if any) and interest
otherwise due on Debt Securities made in Canadian currency by Nortel Networks to
any Holder of Debt Securities (the "Payee") pursuant to a judgment or order of a
court or tribunal in Canada shall constitute a discharge of Nortel Networks only
to the extent of the amount of Dollars or Foreign Currency payable on such Debt
Securities (the "Purchased Amount") that the Payee, on the date of such payment
in Canadian currency, would be able to purchase with the amount so paid based on
the noon buying rate for Dollars or the Foreign Currency for wire transfers
quoted on the date of payment or, if such date if not a Business Day in Toronto,
Canada, on the next Business Day in Toronto, Canada. If the amount otherwise due
to the Payee (the "Amount Due") is greater or less than the Purchased Amount,
Nortel Networks shall indemnify and hold harmless the Payee to the extent that
the Amount Due exceeds the Purchased Amount and Nortel Networks may retain the
amount, if any, by which the Amount Due is less than the Purchased Amount. This
indemnity shall constitute a separate and independent obligation from the other
obligations contained in this Indenture and shall give rise to a separate and
independent cause of action and shall continue in full force and effect
notwithstanding any judgment or order for a liquidated sum in respect of amounts
due under the Debt Securities or any judgment or order.

SECTION 313.      CUSIP NUMBERS.

The Issuer in issuing the Debt Securities may use "CUSIP" numbers (if then
generally accepted in use), and if so, the Trustee shall use "CUSIP" numbers in
notices and redemption as a convenience to Holders; provided that any such
notice may state that no representation is made as to the correctness of such
numbers either as printed on the Debt Securities or as contained in any notice
of a redemption and that reliance may be placed only on the other identification
numbers printed on the Debt Securities, and any such redemption shall not be
affected by any defect in or omission of such numbers. The Issuer will promptly
notify the Trustee of any change in the "CUSIP" numbers.

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<PAGE>   40

                                  ARTICLE FOUR

                           SATISFACTION AND DISCHARGE

SECTION 401.      SATISFACTION AND DISCHARGE OF INDENTURE.

(a) This Indenture shall upon Issuer Request of an Issuer cease to be of further
effect as to such Issuer (except as to any surviving rights of registration of
transfer or exchange of Debt Securities provided for herein and rights to
receive payments of principal of (and premium, if any) and interest thereon) and
the Trustee, at the expense of such Issuer, shall execute proper instruments
provided to it acknowledging satisfaction and discharge of this Indenture with
respect to such Issuer and the Guarantor (in the case of Guaranteed Debt
Securities), when:

     (1)   either

           (i)  all Debt Securities theretofore issued by such Issuer and
                authenticated and delivered hereunder (other than: (x) Debt
                Securities that have been destroyed, lost or stolen and that
                have been replaced or paid as provided in Section 306; and (y)
                Debt Securities for whose payment money has theretofore been
                deposited in trust or segregated and held in trust by such
                Issuer and thereafter repaid to such Issuer or discharged from
                such trust, as provided in Section 1003) have been delivered to
                the Trustee for cancellation; or

           (ii) all such Debt Securities issued by such Issuer and authenticated
                and delivered hereunder and not theretofore delivered to the
                Trustee for cancellation:

                (x) have become due and payable;

                (y) will become due and payable at their Stated Maturity Date
                    within one year; or

                (z) are to be called for redemption within one year under
                    arrangements satisfactory to the Trustee for the giving of
                    notice by the Trustee in the name, and at the expense, of
                    such Issuer,

     and such Issuer, in the case of (ii)(x), (ii)(y) or (ii)(z) above, has
     irrevocably deposited or caused to be deposited with the Trustee as trust
     funds in trust an amount sufficient to pay and discharge the entire
     indebtedness on such Debt Securities for principal (and     premium, if
     any) and interest to the date of such deposit (in the case of Debt
     Securities that have become due and payable) or to the Stated Maturity Date
     or Redemption Date, as the case may be;

     (2)   such Issuer or the Guarantor (in the case of Guaranteed Debt
           Securities) has paid or caused to be paid all other sums payable
           hereunder by such Issuer or Guarantor, as the case may be; and

                                       31
<PAGE>   41

     (3)   such Issuer has delivered to the Trustee an Officers' Certificate and
           Opinion of Counsel each stating that all conditions precedent herein
           provided related to the satisfaction and discharge of this Indenture
           have been complied with.

(b) Notwithstanding the satisfaction and discharge of this Indenture, the
obligations of such Issuer to the Trustee under Section 606 and, if money shall
have been deposited with the Trustee pursuant to paragraph (a)(1)(ii) of this
Section, the obligations of the Trustee under Section 402 and Section 1003(e)
shall survive such satisfaction and discharge.

SECTION 402.      APPLICATION OF TRUST MONEY.

Subject to the provisions of Section 1003(e), all money deposited with the
Trustee pursuant to Section 401 shall be held in trust and applied by it, in
accordance with the provisions of the Debt Securities, the Guarantees (in the
case of Guaranteed Debt Securities) and this Indenture, to the payment, either
directly or through any Paying Agent (including either Issuer or the Guarantor,
acting as its own Paying Agent) as the Trustee may determine, to the Persons
entitled thereto, of the principal (and premium, if any) and interest for whose
payment such money has been deposited with the Trustee.

                                  ARTICLE FIVE

                              DEFAULTS AND REMEDIES

SECTION 501.      EVENTS OF DEFAULT AND ENFORCEMENT.

If and when any one or more of the following events (herein called an "Event of
Default") shall happen and be continuing with respect to the Debt Securities of
any series, namely:

     (1)   a default in payment of principal (and premium, if any) of any Debt
           Security of such series when due;

     (2)   a default in payment of interest on any Debt Security of such series
           when due and payable and the continuance of such default for 30 days;

     (3)   a default in the deposit of any sinking fund payment on any Debt
           Security of such series when due;

     (4)   a default in performing or observing any of the covenants, agreements
           or other obligations of the applicable Issuer or the Guarantor (in
           the case of Guaranteed Debt Securities), as described herein for 90
           days after written notice to such Issuer or Guarantor by the holders
           of not less than 25% in principal amount of Outstanding Debt
           Securities of such series requiring the same to be remedied;

     (5)   a decree, judgment, or order by a court having jurisdiction in the
           premises shall have been entered adjudging the applicable Issuer or
           the Guarantor (in the case of Guaranteed Debt Securities) a bankrupt
           or insolvent or approving as properly filed a petition seeking
           reorganization, readjustment, arrangement, composition or similar
           relief for the applicable Issuer or the Guarantor (in the case of
           Guaranteed

                                       32
<PAGE>   42

           Debt Securities) under any bankruptcy, insolvency or other
           similar applicable law and such decree, judgment or order of a court
           having jurisdiction in the premises for the appointment of a receiver
           or liquidator or trustee or assignee in bankruptcy or insolvency of
           such Issuer or Guarantor, as the case may be, of a substantial part
           of its property, or for the winding up or liquidation of its affairs,
           shall have remained in force for a period of 60 consecutive days; or
           any substantial part of the property of such Issuer or Guarantor
           shall be sequestered or attached and shall not be returned to the
           possession of such Issuer or Guarantor or released from such
           attachment whether by filing of a bond, or stay or otherwise within
           60 consecutive days thereafter;

     (6)   the applicable Issuer or the Guarantor (in the case of Guaranteed
           Debt Securities) shall institute proceedings to be adjudicated a
           voluntary bankrupt, or shall consent to the filing of a bankruptcy
           proceeding against it, or shall file a petition or answer or consent
           seeking reorganization, readjustment, arrangement, composition or
           similar relief under any bankruptcy, insolvency or other similar
           applicable law or such Issuer or Guarantor shall consent to the
           filing of any such petition, or shall consent to the appointment of a
           receiver or liquidator or trustee or assignee in bankruptcy or
           insolvency for it or of a substantial part of its property, or shall
           make an assignment for the benefit of creditors, or shall be unable,
           or admit in writing its inability, to pay its debts generally as they
           become due, or corporate action shall be taken by such Issuer or
           Guarantor in furtherance of any of the aforesaid actions;

     (7)   the occurrence of an event of default as defined in any evidence of
           indebtedness for borrowed money of the applicable Issuer or the
           Guarantor (in the case of Guaranteed Debt Securities), exceeding on
           its face $100,000,000 in principal amount, whether such indebtedness
           now exists or shall hereafter be created, which results in such
           indebtedness becoming or being declared due and payable prior to the
           date on which it would otherwise become due and payable and such
           acceleration shall not be rescinded or annulled within 10 days after
           written notice (i) specifying such default, (ii) requiring such
           defaulting entity to cause such acceleration to be rescinded or
           annulled, and (iii) stating that such notice is a "Notice of Default"
           thereunder, shall have been given to such defaulting entity by the
           Trustee or to such defaulting entity and the Trustee by the trustee
           under any such Lien, indenture or instrument, by the holder or
           holders of any such indebtedness or by the agent of any such holder
           or holders; or

     (8)   any other Event of Default provided with respect to the Debt
           Securities of that series;

     then, and in each and every such case, the Trustee or the Holders of not
     less than 25% in principal amount of the Outstanding Debt Securities of
     such series at such time may declare the principal of (and premium, if any)
     together with accrued interest on, all such Debt Securities of such series
     to be due and payable immediately, by a notice in writing to the applicable
     Issuer and the Guarantor (in the case of Guaranteed Debt Securities), and
     to the Trustee if given by the Holders, and upon any such declaration such
     principal

                                       33
<PAGE>   43

     amount, together with accrued interest thereon shall become immediately due
     and payable.

SECTION 502.      WAIVER OF DECLARATION.

At any time after such a declaration of acceleration with respect to the Debt
Securities of a series has been made and before a judgment or decree for payment
of the money due has been obtained by the Trustee as hereinafter provided, the
Holders of a majority in principal amount of Outstanding Debt Securities of such
series, by written notice to the applicable Issuer, the Guarantor (in the case
of Guaranteed Debt Securities) and the Trustee, may rescind and annul such
declaration and its consequences if:

     (1)   the applicable Issuer or the Guarantor (in the case of Guaranteed
           Debt Securities) has paid or deposited with the Trustee a sum
           sufficient to pay:

           (i)   all overdue interest on all the Debt Securities of such series;

           (ii)  the principal of any of the Debt Securities of such series
                 which have become due otherwise than by such declaration of
                 acceleration, and interest thereon at the rate or rates
                 prescribed therefor in such Debt Securities; and

           (iii) to the extent that payment of such interest is lawful and
                 applicable, interest upon overdue installments of interest at
                 the rate or rates prescribed therefor in such Debt Securities;
                 and

     (2)   all Events of Default with respect to the Debt Securities of such
           series, other than the non-payment of the principal of, and interest
           on, such Debt Securities which have become due solely by such
           declaration of acceleration, have been cured or waived in accordance
           with the provisions of the Indenture.

SECTION 503.      WAIVER.

(a) The Holders of not less than a majority in principal amount of the
Outstanding Debt Securities of any series may on behalf of the Holders of all
Debt Securities of any such series waive any past default hereunder with respect
to such series and its consequences, except a default:

     (1)   in the payment of the principal of (or premium, if any) or interest
           on any Debt Security of such series; or

     (2)   in respect of a covenant or provision hereof that under Article Nine
           cannot be modified or amended without the consent of the Holder of
           each Outstanding Debt Security of such series affected.

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<PAGE>   44

(b) Upon any such waiver, such default shall cease to exist, and any
Event of Default arising therefrom shall be deemed to have been cured, for every
purpose of this Indenture. No such waiver shall extend to any subsequent or
other default or impair any right consequent thereon.

SECTION 504.      OTHER REMEDIES.

(a) If an Event of Default occurs and is continuing, the Trustee may pursue any
available remedy to collect the payment of principal of (and premium, if any) or
interest on Debt Securities or to enforce the performance of any provision of
Debt Securities or this Indenture.

(b) The Trustee may maintain a proceeding even if it does not possess any Debt
Securities or does not produce any of them in the proceeding. A delay or
omission by the Trustee or any Holder in exercising any right or remedy accruing
upon an Event of Default shall not impair the right or remedy or constitute a
waiver of or acquiescence in the Event of Default. All remedies, except as
provided in Section 306, are cumulative to the extent permitted by law.

SECTION 505.      APPLICATION OF MONEY COLLECTED.

Any money collected by the Trustee pursuant to this Article shall be applied in
the following order, at the dates fixed by the Trustee and, in case of the
distribution of such money on account of principal of (and premium, if any) or
interest, upon presentation of Debt Securities and the notation thereon of the
payment if only partially paid and upon surrender thereof if fully paid:

FIRST:  To the payment of all amounts due the Trustee under Section 606;

SECOND: To the payment of the amounts then due and unpaid for principal of (and
premium, if any) and interest on Debt Securities, in respect of which or for the
benefit of which such money has been collected ratably, without preference or
priority of any kind, according to the amounts due and payable on such Debt
Securities for principal (and premium, if any) and interest, respectively. The
Holders of any Debt Securities denominated in a composite currency or a Foreign
Currency shall be entitled to receive a ratable portion of the amount determined
by the Trustee converting the principal amount Outstanding of such Debt
Securities and matured but unpaid interest on such Debt Securities in the
currency in which such Debt Securities are denominated into Dollars at the
Exchange Rate as of the date of declaration of acceleration of the Maturity of
the Debt Securities (or, if there is no such rate on such date for the reasons
specified in Section 311(d), such rate on the date specified in such Section);
and

THIRD:  To the applicable Issuer or, to the extent the Trustee collects any
amount pursuant to Section 203 hereof from the Guarantor, to the Guarantor.

SECTION 506.      CONTROL BY HOLDERS.

(a) The Holders of at least a majority in principal amount of the Outstanding
Debt Securities of any series, may:

     (1)   direct the time, method and place of conducting any proceeding for
           any remedy available to the Trustee or exercising any trust or power
           conferred on it with respect to the Debt Securities of such series;
           and

                                       35
<PAGE>   45

     (2)   take any other action authorized to be taken by or on behalf of the
           Holders of any specified aggregate principal amount of Debt
           Securities under any provisions of this Indenture or under applicable
           law.

(b) The Trustee may refuse, however, to follow any direction that conflicts with
law or this Indenture or is unduly prejudicial to the rights of other Holders.

SECTION 507.      LIMITATION ON SUITS.

(a) A Holder of Debt Securities may pursue a remedy with respect to this
Indenture directly himself only if: (1) the Holder gives to the Trustee notice
of a continuing Event of Default; (2) the Holders of at least 25% in principal
amount of all of the then Outstanding Debt Securities issued under the Indenture
(treated as a class) make a request in writing to the Trustee to pursue the
remedy; (3) such Holder or Holders indemnify the Trustee in form satisfactory to
it against any loss, liability, claim, damage or expense; (4) the Trustee does
not comply with the request within 60 days after receipt of such request and
indemnity; and (5) during such 60-day period the Holders of a majority in
principal amount of all of the Outstanding Debt Securities (treated as a class)
do not give the Trustee a direction inconsistent with the request.

(b) Holders may not use this Indenture to prejudice the rights of another Holder
or to obtain a preference or priority over another Holder.

SECTION 508.      RIGHTS OF HOLDERS TO RECEIVE PAYMENT.

Notwithstanding any other provision of this Indenture, the right of any Holder
to receive payment of principal of (and, premium, if any) and interest on Debt
Securities held by him, on or after the respective due dates expressed in the
Debt Securities (or, in the case of redemption, on the Redemption Date), or to
bring suit for the enforcement of any such payment on or after such respective
dates, shall not be impaired or affected without the consent of the Holder.

SECTION 509.      COLLECTION SUIT BY TRUSTEE.

If an Event of Default specified in Section 501(1), (2) or (3) occurs and is
continuing, the Trustee may recover judgment in its own name and as trustee of
an express trust against the applicable Issuer or the Guarantor (in the case of
Guaranteed Debt Securities) for the whole amount of principal (and premium, if
any) and interest remaining unpaid.

SECTION 510.      TRUSTEE MAY FILE PROOFS OF CLAIM.

The Trustee may file such proofs of claim and other papers or documents as may
be necessary or advisable in order to have the claims of the Trustee and the
Holders allowed in any judicial proceedings relative to the applicable Issuer or
the Guarantor (in the case of Guaranteed Debt Securities), its creditors or its
property.

SECTION 511.      UNDERTAKING FOR COSTS.

In any suit for the enforcement of any right or remedy under this Indenture or
in any suit against the Trustee for any action taken or omitted by it as
Trustee, a court in its discretion may require

                                       36
<PAGE>   46

the filing by any party litigant in the suit of an undertaking to pay the costs
of the suit, and the court in its discretion may assess reasonable costs,
including reasonable attorneys' fees and expenses, against any party litigant in
the suit, having due regard to the merits and good faith of the claims or
defenses made by the party litigant. This Section does not apply to a suit by
the Trustee, a suit by a Holder pursuant to Section 507, or a suit by any Holder
or group of Holders of more than 10% in principal amount of the Outstanding Debt
Securities.

SECTION 512.      DELAY OR OMISSION NOT WAIVER.

No delay or omission of the Trustee or of any Holder of any Debt Security to
exercise any right or remedy accruing upon any Event of Default shall impair any
such right or remedy or constitute a waiver of any such Event of Default or an
acquiescence therein. Every right and remedy given by this Article or by law to
the Trustee or to the Holders may be exercised from time to time, and as often
as may be deemed expedient, by the Trustee or by the Holders, as the case may
be.

SECTION 513.      WAIVER OF STAY OR EXTENSION LAWS.

The Issuers and the Guarantor each, severally and not jointly, covenants (to the
extent that it may lawfully do so) that it will not at any time insist upon, or
plead, or in any manner whatsoever claim or take the benefit or advantage of,
any stay or extension law wherever enacted, now or at any time hereafter in
force, that may affect the covenants or the performance of this Indenture; and
the Issuers and the Guarantor each, severally and not jointly (to the extent
that it may lawfully do so), hereby expressly waives all benefit or advantage of
any such law, and covenants that it will not hinder, delay or impede the
execution of any power herein granted to the Trustee, but will suffer and permit
the execution of every such power as though no such law had been enacted.

                                  ARTICLE SIX

                                  THE TRUSTEE

SECTION 601.      DUTIES OF TRUSTEE.

(a) If an Event of Default has occurred and is continuing, the Trustee shall
exercise such of the rights and powers vested in it by this Indenture, and use
the same degree of care and skill in their exercise, as a prudent person would
exercise or use under the circumstances in the conduct of his own affairs.

(b) Except during the continuance of an Event of Default:

     (1)   the Trustee need perform only those duties that are specifically set
           forth in this Indenture and no others shall be inferred or implied;
           and

     (2)   in the absence of bad faith on its part, the Trustee may conclusively
           rely, as to the truth of the statements and the correctness of the
           opinions expressed therein, upon certificates or opinions furnished
           to the Trustee and conforming to the requirements of this Indenture;
           however, the Trustee shall examine the certificates

                                       37
<PAGE>   47

           and opinions required to be delivered to it pursuant to the terms of
           this Indenture to determine whether or not they so conform.

(c) The Trustee may not be relieved from liability for its own negligent action,
its own negligent failure to act, or its own willful misconduct, except that:

     (1)   this paragraph does not limit the effect of paragraph (b) of this
           Section;

     (2)   the Trustee shall not be liable for any error of judgment made in
           good faith by a Responsible Officer, unless it is proved that the
           Trustee was negligent in ascertaining the pertinent facts;

     (3)   the Trustee shall not be liable with respect to any action it takes
           or omits to take in good faith in accordance with a direction
           received by it pursuant to Section 506; and

     (4)   no provision of the Indenture shall require the Trustee to expend or
           risk its own funds or otherwise incur any financial liability in the
           performance of any of its duties hereunder, or in the exercise of any
           of its rights or powers, if it shall have reasonable grounds for
           believing that repayment of such funds or adequate indemnity against
           such risk or liability is not reasonably assured to it.

(d) Every provision of this Indenture that in any way relates to the Trustee is
subject to the above paragraphs of this Section. The Trustee may refuse to
perform any duty or exercise any right or power under this Indenture (including
with respect to Section 506) unless it receives indemnity reasonably
satisfactory to it for actions taken under this Indenture. The Trustee shall not
be liable for interest on any money received by it except as the Trustee may
agree in writing with the applicable Issuer or the Guarantor. Money held in
trust by the Trustee need not be segregated from other funds except to the
extent required by law.

SECTION 602.      RIGHTS OF TRUSTEE.

The Trustee may rely on any document (whether in its original or facsimile form)
believed by it to be genuine and to have been signed or presented by the proper
person. The Trustee need not investigate any fact or matter stated in the
document, but the Trustee, in its discretion, may make such further inquiry or
investigation into such facts or matters as it may see fit, and, if the Trustee
shall determine to make such further inquiry or investigation, it shall be
entitled to examine the books, records and premises of the Issuer, personally or
by agent or attorney at the sole cost of the Issuer and shall incur no liability
or additional liability of any kind by reason of such inquiry or investigation.
Before the Trustee acts or refrains from acting, it may require an Officers'
Certificate or an Opinion of Counsel. The Trustee shall not be liable for any
action it takes or omits to take in good faith in reliance thereon. The Trustee
may act through agents or attorneys and shall not be responsible for the
misconduct or negligence of any agent or attorney appointed with due care. The
Trustee shall not be liable for any action it takes or omits to take in good
faith, except as otherwise provided in this Indenture, which it reasonably
believes to be authorized or within its rights or powers. The Trustee may
consult with counsel of its selection and the advice of such counsel or any
Opinion of Counsel shall be full and complete

                                       38
<PAGE>   48

authorization and protection in respect of any action taken, suffered or omitted
by it hereunder in good faith and in reliance thereon.

SECTION 603.      INDIVIDUAL RIGHTS OF TRUSTEE.

The Trustee in its individual or any other capacity may become the owner or
pledgee of Debt Securities and may otherwise deal with the Issuers or the
Guarantor with the same rights it would have if it were not Trustee. Any agent
of the Trustee may do the same with like rights. However, the Trustee is at all
times subject to Sections 609 and 610.

SECTION 604.      TRUSTEE'S DISCLAIMER.

The Trustee makes no representation as to the validity or adequacy of Debt
Securities, it shall not be accountable for the applicable Issuer's use of the
proceeds from Debt Securities, and it shall not be responsible for any statement
in Debt Securities other than its certificate of authentication.

SECTION 605.      NOTICE OF DEFAULTS.

(a) If an Event of Default with respect to a series of Debt Securities occurs
and is continuing, the Trustee shall mail to Holders of Debt Securities of such
series a notice of the Event of Default within 90 days after it occurs. Except
in the case of an Event of Default resulting from nonpayment on any Debt
Securities, the Trustee may withhold the notice if and so long as a committee of
its Responsible Officers in good faith determines that withholding the notice is
in the interests of the Holders of Debt Securities.

(b) The Trustee shall not be deemed to have notice of any Default or Event of
Default unless a Responsible Officer of the Trustee has knowledge thereof or
unless written notice of any event which is in fact such a default is received
by the Trustee at the Corporate Trust Office of the Trustee, and such notice
references the Securities and this Indenture.

SECTION 606.      COMPENSATION AND INDEMNITY.

(a) The Issuers shall pay to the Trustee from time to time compensation for its
services as agreed separately by the Issuers and the Trustee. The Trustee's
compensation shall not be limited by any law on compensation of a trustee of an
express trust.

(b) The Issuers, severally and jointly, shall fully indemnify the Trustee and
any predecessor Trustee and their agents for, and to hold them harmless against,
any and all loss, damage, claims, liability or expense (including reasonable
attorneys' fees and expenses) arising out of or in connection with the
acceptance or administration of the trust or trusts hereunder, including the
costs and expenses of defending itself against any claim or liability in
connection with the exercise or performance of any of its powers or duties
hereunder, except to the extent that such loss, damage, claim, liability or
expense is caused by its own negligence or bad faith or, with respect to
indemnification of an agent hereunder, the negligence or bad faith of such
agent. The Trustee shall notify the applicable Issuer promptly of any claim for
which it may seek indemnity.

                                       39
<PAGE>   49

The applicable Issuer shall defend the claim and the Trustee shall cooperate in
the defense. The applicable Issuer need not pay for any settlement made without
its consent.

(c) Except as otherwise expressly provided herein, the Issuers agree to
reimburse the Trustee upon its request for all reasonable and documented
expenses, disbursements and advances incurred or made by the Trustee in
accordance with any provision of this Indenture (including the reasonable and
documented compensation, expenses and disbursements of its agents and counsel),
except any such expense, disbursement or advance as may be attributable to its
negligence or bad faith or, with respect to documented compensation, expenses
and disbursements of an agent or attorney, the negligence or bad faith of such
agent or attorney; and

(d) To secure the Issuers' respective payment obligations in this Section, the
Trustee shall have a lien prior to Debt Securities on all money or property held
or collected by the Trustee, except that held in trust to pay principal and
interest on Debt Securities.

When the Trustee incurs expenses or renders services in connection with an Event
of Default specified in Section 501(5) or Section 501(6), the reasonable and
documented expenses (including the reasonable and documented charges and
expenses of its counsel) and compensation for the services are intended to
constitute expenses of administration under any applicable Federal or state
bankruptcy, insolvency or other similar law.

The provisions of this Section shall survive the termination of this Indenture
and the resignation or removal of the Trustee.

SECTION 607.      REPLACEMENT OF TRUSTEE.

(a) A resignation or removal of the Trustee and appointment of a successor
Trustee for the Debt Securities of any series shall become effective only upon
the successor Trustee's acceptance of appointment as provided in this Section.

(b) The Trustee may resign at any time with respect to Debt Securities of one or
more series by giving written notice thereof to the applicable Issuer and the
Guarantor (in the case of Guaranteed Debt Securities). If an instrument of
acceptance by a successor Trustee shall not have been delivered to the Trustee
within 30 days after the giving of such notice of resignation, the resigning
Trustee may at the expense of the Issuers petition any court of competent
jurisdiction for the appointment of a successor Trustee to the Trustee and to
such Issuer and Guarantor. The Holders of at least a majority in principal
amount of then Outstanding Debt Securities of such series may remove the Trustee
by so notifying the Trustee, such Issuer and Guarantor if: (1) the Trustee fails
to comply with Section 609; (2) the Trustee is adjudged a bankrupt or an
insolvent; (3) a receiver or public officer takes charge of the Trustee or its
property; or (4) the Trustee becomes incapable of acting; in addition, in any
such case, (i) such Issuer by a Board Resolution thereof may remove the Trustee
with respect to all Debt Securities, or (ii) any Holder who has been a bona fide
Holder of a Debt Security of any series for at least six months may, on behalf
of himself and all others similarly situated, petition any court of competent
jurisdiction for the removal of the Trustee for the Debt Securities of such
series and the appointment of a successor Trustee.

                                       40
<PAGE>   50

(c) If the Trustee resigns or is removed or if a vacancy exists in the office of
Trustee for any reason with respect to the Debt Securities of one or more
series, the applicable Issuer shall promptly appoint a successor Trustee or
Trustees with respect to the Debt Securities of that or those series (it being
understood that any such successor Trustee may be appointed with respect to the
Debt Securities of one or more or all of such series and that at any time there
shall be only one Trustee with respect to the Debt Securities of any particular
series) and shall comply with the applicable requirements of this Section 607.
Within one year after the successor Trustee takes office, the Holders of a
majority in principal amount of Outstanding Debt Securities of any series may
appoint a successor Trustee to replace the successor Trustee appointed by such
Issuer with respect to the Debt Securities of such series. If a successor
Trustee does not take office within 60 days after the retiring Trustee resigns
or is removed, the retiring Trustee, such Issuer or the Holders of at least 10%
in principal amount of the Debt Securities of any series may petition any court
of competent jurisdiction for the appointment of a successor Trustee with
respect to the Debt Securities of such series.

(d) If the Trustee fails to comply with Section 609, any Holder of Debt
Securities may petition any court of competent jurisdiction for the removal of
the Trustee and the appointment of a successor Trustee.

(e) The applicable Issuer shall give notice of each resignation and each removal
of the Trustee with respect to Debt Securities of any series and each
appointment of a successor Trustee with respect to Debt Securities of any series
in the manner provided in Section 106. Each notice shall include the name of the
successor Trustee with respect to Debt Securities of such series and the address
of its Corporate Trust Office.

(f) In the case of an appointment hereunder of a successor Trustee with respect
to all Debt Securities, every such successor Trustee so appointed shall execute,
acknowledge and deliver to the Issuers and to the Guarantor and to the retiring
Trustee an instrument accepting such appointment, and thereupon the resignation
or removal of the retiring Trustee shall become effective and such successor
Trustee, without any further act, deed or conveyance, shall become vested with
all the rights, powers, trusts and duties of the retiring Trustee; but, on
request of either Issuer or the Guarantor or the successor Trustee, such
retiring Trustee shall, upon payment of its charges, execute and deliver an
instrument transferring to such successor Trustee all the rights, powers and
trusts of the retiring Trustee, and shall duly assign, transfer and deliver to
such successor Trustee all property and money held by such retiring Trustee
hereunder.

(g) In case of the appointment hereunder of a successor Trustee with respect to
Debt Securities of one or more (but not all) series, the applicable Issuer, the
Guarantor (in the case of Guaranteed Debt Securities), the retiring Trustee upon
payment of its charges and each successor Trustee with respect to Debt
Securities of one or more series shall execute and deliver an indenture
supplemental hereto wherein each successor Trustee shall accept such appointment
and which: (1) shall contain such provisions as shall be necessary or desirable
to transfer and confirm to, and to vest in, each successor Trustee all the
rights, powers, trusts and duties of the retiring Trustee with respect to Debt
Securities of that or those series to which the appointment of such successor
Trustee relates; (2) if the retiring Trustee is not retiring with respect to all
Debt Securities, shall contain such provisions as shall be deemed necessary or
desirable to confirm that all the rights, powers, trusts and duties of the
retiring Trustee with respect to Debt Securities of that or those

                                       41
<PAGE>   51

series as to which the retiring Trustee is not retiring shall continue to be
vested in the retiring Trustee; and (3) shall add to or change any of the
provisions of this Indenture as shall be necessary to provide for or facilitate
the administration of the trusts hereunder by more than one Trustee, it being
understood that nothing herein or in such supplemental indenture shall
constitute such Trustees co-trustees of the same trust and that each such
Trustee shall be trustee of a trust or trusts hereunder separate and apart from
any trust or trusts hereunder administered by any other such Trustee; and upon
the execution and delivery of such supplemental indenture the resignation or
removal of the retiring Trustee shall become effective to the extent provided
therein and each such successor Trustee, without any further act, deed or
conveyance, shall become vested with all the rights, powers, trusts and duties
of the retiring Trustee with respect to the Debt Securities of that or those
series to which the appointment of such successor Trustee relates; but, on
request of the applicable Issuer, the Guarantor (in the case of Guaranteed Debt
Securities) or any successor Trustee, such retiring Trustee shall duly assign,
transfer and deliver to such successor Trustee all property and money held by
such retiring Trustee hereunder with respect to the Debt Securities of that or
those series to which the appointment of such successor Trustee relates.

(h) Upon request of any such successor Trustee, the Issuers and the Guarantor
shall execute any and all instruments for more fully and certainly vesting in
and confirming to such successor Trustee all such rights, powers and trusts
referred to in paragraph (f) or (g) of this Section, as the case may be.

(i) No successor Trustee shall accept its appointment unless at the time of such
acceptance such successor Trustee shall be qualified and eligible under this
Article.

SECTION 608.      SUCCESSOR TRUSTEE BY MERGER, ETC.

If the Trustee consolidates, merges or converts into, or transfers all or
substantially all of its corporate trust business to, another corporation, the
successor corporation without any further act shall be the successor Trustee,
provided that prior written notice thereof is given to the Issuers and the
Guarantor and such successor corporation is acceptable to the Issuers and the
Guarantor.

SECTION 609.      ELIGIBILITY; DISQUALIFICATION.

This Indenture shall always have a Trustee who satisfies the requirements of
Section 310(a)(1) of the Trust Indenture Act. The Trustee shall always have a
combined capital and surplus of at least $5 million, calculated as permitted by
Section 310(a)(2) of the Trust Indenture Act. The Trustee is subject to Section
310(b) of the Trust Indenture Act, including the optional provision permitted by
the second sentence of Section 310(b)(9) of the Trust Indenture Act.

SECTION 610.      PREFERENTIAL COLLECTION OF CLAIMS AGAINST THE ISSUERS.

The Trustee is subject to Section 311(a) of the Trust Indenture Act, except with
respect to any creditor relationship listed in Section 311(b) of the Trust
Indenture Act. A Trustee who has resigned or been removed is subject to Section
311(a) of the Trust Indenture Act to the extent indicated.

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<PAGE>   52

                                 ARTICLE SEVEN

          HOLDERS' LISTS AND REPORTS BY TRUSTEE, ISSUERS AND GUARANTOR

SECTION 701.      PRESERVATION OF INFORMATION: COMMUNICATIONS TO HOLDERS.

(a) The Trustee shall preserve, in as current a form as is reasonably
practicable, the names and addresses of Holders of Debt Securities received by
the Trustee in its capacity as Security Registrar, if so acting.

(b) If three or more Holders of a series of Debt Securities (hereinafter
referred to as "applicants") apply in writing to the Trustee, and furnish to the
Trustee reasonable proof that each such applicant has owned a Debt Security for
a period of at least six months immediately preceding the date of such
application, and such application states that the applicants desire to
communicate with other Holders of Debt Securities of a particular series (in
which case the applicants must hold Debt Securities of such series) or with all
Holders of Debt Securities with respect to their rights under this Indenture or
under the Debt Securities and is accompanied by a copy of the form of proxy or
other communication which such applicants propose to transmit, then the Trustee
shall, within five Business Days after the receipt of such application, at its
election, either:

     (1)   afford such applicants access to the information preserved at the
           time by the Trustee in accordance with Section 701(a); or

     (2)   inform such applicants as to the approximate number of Holders of
           Debt Securities of such series or of all Debt Securities, as the case
           may be, whose names and addresses appear in the information preserved
           at the time by the Trustee in accordance with Section 701(a), and as
           to the approximate cost of mailing to such Holders the form of proxy
           or other communication, if any, specified in such application.

If the Trustee shall elect not to afford such applicants access to such
information, the Trustee shall, upon the written request of such applicants,
mail to each Holder whose name and address appear in the information preserved
at the time by the Trustee in accordance with Section 701(a), a copy of the form
of proxy or other communication that is specified in such request, with
reasonable promptness after a tender to the Trustee of the material to be mailed
and of payment, or provision for the payment, of the reasonable expenses of
mailing, unless within five days after such tender, the Trustee shall mail to
such applicants and file with the Commission, together with a copy of the
material to be mailed, a written statement to the effect that, in the opinion of
the Trustee, such mailing would be contrary to the best interests of the Holders
or would be in violation of applicable law. Such written statement shall specify
the basis of such opinion. If the Commission, after opportunity for a hearing
upon the objections specified in the written statement so filed, shall enter an
order refusing to sustain any of such objections or if, after the entry of an
order sustaining one or more of such objections, the Commission shall find,
after notice and opportunity for hearing, that all the objections so sustained
have been met and shall enter an order so declaring, the Trustee shall mail
copies of such material to all such Holders with reasonable promptness after the
entry of such order and the renewal of such tender,

                                       43
<PAGE>   53

otherwise the Trustee shall be relieved of any obligation or duty to such
applicants respecting their application.

(c) Every Holder of Debt Securities, by receiving and holding the same, agrees
with the applicable Issuer, the Guarantor (in the case of Guaranteed Debt
Securities) and the Trustee that none of such Issuer, Guarantor and the Trustee
shall be held accountable by reason of the disclosure of any such information as
to the names and addresses of the Holders in accordance with Section 701(b),
regardless of the source from which such information was derived, and that the
Trustee shall not be held accountable by reason of mailing any material pursuant
to a request made under Section 701(b).

SECTION 702.      REPORTS BY TRUSTEE.

(a) Within 60 days after May 15 of each year following the date of this
Indenture, the Trustee shall mail to Holders a brief report dated as of such
reporting date that complies with Section 313(a) of the Trust Indenture Act. The
Trustee shall also comply with Sections 313(b)(2) and 313(c) of the Trust
Indenture Act.

(b) A copy of each report at the time of its mailing to Holders shall be filed
with the Commission and each stock exchange on which Debt Securities of any
series are listed.

SECTION 703.      REPORTS BY ISSUERS AND THE GUARANTOR.

(a) The applicable Issuer and the Guarantor (in the case of Guaranteed Debt
Securities) will:

     (1)   file with the Trustee, within 15 days after the applicable Issuer or
           the Guarantor (in the case of Guaranteed Debt Securities) is required
           to file the same with the Commission, copies of the annual reports
           and of the information, documents and other reports (or copies of
           such portions of any of the foregoing as the Commission may from time
           to time by rules and regulations prescribe) which such Issuer or
           Guarantor may be required to file with the Commission pursuant to
           Section 13 or Section 15(d) of the Securities Exchange Act of 1934;
           or, if such Issuer or Guarantor is not required to file information,
           documents or reports pursuant to either of these Sections, then in
           the case of Debt Securities which are not Guaranteed Debt Securities,
           the Issuer, and in the case of Guaranteed Debt Securities, the
           Guarantor will file with the Trustee and the Commission, in
           accordance with rules and regulations prescribed from time to time by
           the Commission, such of the supplementary and periodic information,
           documents and reports that may be required pursuant to Section 13 of
           the Securities Exchange Act of 1934 in respect of a security listed
           and registered on a national securities exchange as may be prescribed
           from time to time in such rules and regulations;

     (2)   file with the Trustee and the Commission, in accordance with rules
           and regulations prescribed from time to time by the Commission, such
           additional information, documents and reports with respect to
           compliance thereby with the conditions and covenants of this
           Indenture as may be required from time to time by such rules and
           regulations; and

                                       44
<PAGE>   54

     (3)   notify the Trustee when Debt Securities of any series are listed on
           any stock exchange.

(b) Delivery of such reports, information and documents to the Trustee is for
informational purposes only and the Trustee's receipt of such shall not
constitute constructive notice of any information contained therein or
determinable from information contained therein, including the Issuer's
compliance with any of its covenants hereunder (as to which the Trustee is
entitled to rely exclusively on Officers' Certificates).

(c) The Issuers and the Guarantor shall also comply with the provisions of
Section 314(a) of the Trust Indenture Act.

                                 ARTICLE EIGHT

               AMALGAMATION, MERGER, CONVEYANCE, TRANSFER OR LEASE

SECTION 801.      AMALGAMATIONS AND MERGERS OF ISSUERS OR GUARANTOR AND
CONVEYANCES PERMITTED SUBJECT TO CERTAIN CONDITIONS.

So long as any Debt Security of a particular series remains Outstanding, neither
the applicable Issuer nor the Guarantor (if Guaranteed Debt Securities remain
Outstanding) will amalgamate or merge with any other corporation or enter into
any reorganization or arrangement or effect any conveyance, transfer or lease of
all or substantially all of the assets of it and its Subsidiaries, taken as a
whole, unless in any such case:

     (1)   either (a) such Issuer or Guarantor shall be the surviving
           corporation or one of the continuing corporations, or (b) the
           successor corporation (or the Person that leases or that acquires by
           conveyance or transfer all or substantially all of the assets of such
           Issuer or Guarantor and its Subsidiaries, taken as a whole) shall
           expressly assume the due and punctual payment of the principal of
           (and premium, if any) and interest on all Outstanding Debt Securities
           issued hereunder, according to their tenor, and the due and punctual
           performance and observance of all of the covenants and conditions of
           this Indenture to be performed by such Issuer or Guarantor by
           supplemental indenture pursuant to Article Nine satisfactory to the
           Trustee, executed and delivered to the Trustee by such corporation;
           and

     (2)   such Issuer or the Guarantor, as the case may be, or the successor
           corporation shall not, immediately thereafter be in default under
           this Indenture or the Debt Securities.

SECTION 802.      RIGHTS AND DUTIES OF SUCCESSOR CORPORATION.

(a) In case of any such amalgamation, merger, reorganization, arrangement,
conveyance, transfer or lease and upon any such assumption by the successor
corporation, such successor corporation shall agree to be bound by the terms of
this Indenture as principal obligor or guarantor in place of either Issuer or
the Guarantor (in the case of Guaranteed Debt Securities) with the same effect
as if it had been named herein as such Issuer or Guarantor. Such successor
corporation thereupon may cause to be signed, and may issue either in its own
name or in the name of such Issuer or

                                       45
<PAGE>   55

Guarantor, as the case may be, any or all of Debt Securities of any series
issuable and, in the case of Guaranteed Debt Securities, the Guarantee endorsed
thereon, hereunder which theretofore shall not have been signed by such Issuer
or Guarantor, and delivered to the Trustee. All Debt Securities so issued and
Guarantees endorsed thereon shall in all respects have the same legal rank and
benefit under this Indenture as Debt Securities and Guarantees theretofore or
thereafter issued or endorsed in accordance with the terms of this Indenture as
though all of such Debt Securities and Guarantees had been issued or endorsed at
the date of the execution hereof.

(b) In the case of any such amalgamation, merger, reorganization, arrangement,
conveyance, transfer or lease, such changes in phraseology and form (but not in
substance) may be made in Debt Securities and, in the case of Guaranteed Debt
Securities, the Guarantee endorsed thereon, thereafter to be issued as may be
appropriate.

SECTION 803.      OFFICERS' CERTIFICATE AND OPINION OF COUNSEL.

The Trustee shall receive an Officers' Certificate and an Opinion of Counsel as
conclusive evidence that any such amalgamation, merger, reorganization,
arrangement, conveyance, transfer or lease, and any such assumption, comply with
the provisions of this Article Eight.

                                  ARTICLE NINE

                             SUPPLEMENTAL INDENTURES

SECTION 901.      SUPPLEMENTAL INDENTURES WITHOUT CONSENT OF HOLDERS.

Without the consent of any Holders, the Issuers and the Guarantor, when
authorized by a Board Resolution, and the Trustee, at any time and from time to
time, may enter into one or more indentures supplemental hereto, in form
satisfactory to the Trustee, for any of the following purposes:

(1) to evidence the succession of another corporation to an Issuer or the
Guarantor, and the assumption by such successor of the covenants of such Issuer
or the Guarantor herein and in the Debt Securities;

(2) to add to the covenants of an Issuer or the Guarantor, as the case may be,
for the benefit of the Holders of all or any series of Debt Securities (and, if
such covenants are to be for the benefit of less than all series of Debt
Securities, stating that such covenants are expressly being included solely for
the benefit of such series), or to surrender any right or power herein conferred
upon such Issuer or the Guarantor;

(3) to add any additional Events of Default (and, if such Events of Default are
to be applicable to less than all series of Debt Securities, stating that such
Events of Default are expressly being included solely to be applicable to such
series); provided, however, that in respect of any such additional Events of
Default such supplemental indenture may provide for a particular grace period
after default (which period may be shorter or longer than that allowed in the
case of other defaults) or may provide for an immediate enforcement upon such
default or may limit the remedies available to the Trustee upon such default or
may limit the right of the Holders of a

                                       46
<PAGE>   56

majority in aggregate principal amount of the series of Debt Securities to which
such additional Events of Default apply to waive such default;

(4) to change or eliminate any restrictions on the payment of principal (or
premium, if any) of Debt Securities, provided that any such action shall not
adversely affect the interests of the Holders of Debt Securities of any series
in any material respect;

(5) to change or eliminate any of the provisions of this Indenture, provided
that any such change or elimination shall become effective only when there is no
Outstanding Debt Security of any series created prior to the execution of such
supplemental indenture that is entitled to the benefit of such provision;

(6) to establish the form or terms of Debt Securities of any series as permitted
by Sections 201 and 301;

(7) to evidence and provide for the acceptance of appointment hereunder by a
successor Trustee with respect to the Debt Securities of one or more series and
to add to or change any of the provisions of this Indenture as shall be
necessary to provide for or facilitate the administration of the trusts
hereunder by more than one Trustee;

(8) to add guarantees to the Debt Securities or to secure the Debt Securities;

(9) to add a guarantee by any Person of an Issuer's obligations under this
Indenture and the Guaranteed Debt Securities to the same extent that the
Guarantor has guaranteed such Issuer's obligations under this Indenture and the
Guaranteed Debt Securities;

(10) to supplement any of the provisions of the Indenture to such extent as
shall be necessary to permit or facilitate the defeasance and discharge of any
series of Debt Securities pursuant to Sections 401, 1301 or 1302; provided that
any such action shall not adversely affect the interests of the Holders of Debt
Securities of such series or any other series of Debt Securities in any material
respect; or

(11) to cure any ambiguity, to correct or supplement any provision herein that
may be defective or inconsistent with any other provision herein, or to make any
other provisions with respect to matters or questions arising under this
Indenture that shall not be inconsistent with any provisions of this Indenture,
provided such other provisions shall not adversely affect the interests of the
Holders of Debt Securities of any series in any material respect.

SECTION 902.      SUPPLEMENTAL INDENTURES WITH CONSENT OF HOLDERS.

(a) With the consent of the Holders of not less than a majority in principal
amount of the Outstanding Debt Securities affected by such supplemental
indenture, by Act of said Holders delivered to the Issuers, the Guarantor and
the Trustee, the Issuers and the Guarantor, when authorized by a Board
Resolution, and the Trustee may enter into an indenture or indentures
supplemental hereto for the purpose of adding any provisions to or changing in
any manner or eliminating any of the provisions of this Indenture or of
modifying in any manner the rights of the Holders under this Indenture of such
Debt Securities; provided, however, that no such

                                       47
<PAGE>   57

supplemental indenture shall, without the consent of the Holder of each
Outstanding Debt Security affected thereby:

     (1)   change the Stated Maturity Date of the principal of, or any
           installment of interest on, any Debt Security, or reduce the
           principal amount thereof or the interest thereon or any premium
           payable upon redemption thereof, or reduce the amount of the
           principal of an Original Issue Discount Security that would be due
           and payable upon a declaration of acceleration of the Maturity
           thereof pursuant to Section 501, or change any Place of Payment, or
           change the currency in which any Debt Security or interest thereon is
           payable, or impair the right to institute suit for the enforcement of
           any such payment on or after the Stated Maturity Date thereof (or, in
           the case of redemption, on or after the Redemption Date);

     (2)   reduce the percentage in principal amount of the Outstanding Debt
           Securities of any series, the consent of whose Holders is required
           for any such supplemental indenture, or the consent of whose Holders
           is required for any waiver (of compliance with certain provisions of
           this Indenture or certain defaults hereunder and their consequences)
           provided for in this Indenture, or reduce the requirements of Section
           1404 for quorum or voting;

     (3)   modify any of the provisions of this Section, Section 503 or Section
           1006, except to increase any such percentage or to provide that
           certain other provisions of this Indenture cannot be modified or
           waived without the consent of the Holder of each Outstanding Debt
           Security affected thereby; provided, however, that this clause shall
           not be deemed to require the consent of any Holder with respect to
           changes in the references to "the Trustee" and concomitant changes in
           this Section and Section 1006, or the deletion of this proviso, in
           accordance with the requirements of Section 901(7); or

     (4)   change in any manner adverse to the interests of the Holders of any
           Outstanding Debt Securities the terms and conditions of the
           obligations of the Guarantor (in the case of Guaranteed Debt
           Securities) in respect of the due and punctual payment of the
           principal (or, if the context so requires, lesser amount in the case
           of Original Issue Discount Securities) thereof (and premium, if any,
           thereon) and interest thereon or any additional amounts or any
           sinking fund or analogous payments provided in respect thereof.

(b) It shall not be necessary for any Act of Holders under this Section to
approve the particular form of any proposed supplemental indenture, but it shall
be sufficient if such Act shall approve the substance thereof.

(c) A supplemental indenture that changes or eliminates any covenant or other
provisions of this Indenture that has expressly been included solely for the
benefit of one or more particular series of Debt Securities, or that modifies
the rights of the Holders of Debt Securities of such series with respect to such
covenant or other provision, shall be deemed not to affect the rights under this
Indenture of the Holders of Debt Securities of any other series.

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<PAGE>   58

SECTION 903.      EXECUTION OF SUPPLEMENTAL INDENTURES.

In executing, or accepting the additional trusts created by, any supplemental
indenture permitted by this Article or the modifications thereby of the trusts
created by this Indenture, the Trustee shall be entitled to receive, and,
subject to Section 601, shall be fully protected in relying upon, Opinions of
Counsel stating that the execution of such supplemental indenture is authorized
or permitted by this Indenture, is not inconsistent herewith, is a valid and
binding obligation of the Issuers and the Guarantor (in the case of Guaranteed
Debt Securities), enforceable in accordance with its terms, subject to
enforceability being limited by bankruptcy, insolvency or other laws affecting
the enforcement of creditor's rights generally and equitable remedies including
the remedies of specific performance and injunction being granted only in the
discretion of a court of competent jurisdiction and, in connection with a
supplemental indenture executed pursuant to Section 901, that the Trustee is
authorized to execute and deliver such supplemental indenture without the
consent of the Holders and, in connection with a supplemental indenture executed
pursuant to Section 902, that the requisite consents of the Holders have been
validly obtained in accordance with Section 902 hereof. The Trustee may, but
shall not be obligated to, enter into any such supplemental indenture that
affects the Trustee's own rights, duties or immunities under this Indenture or
otherwise.

SECTION 904.      EFFECT OF SUPPLEMENTAL INDENTURES.

Upon the execution of any supplemental indenture under this Article, this
Indenture shall be modified in accordance therewith, and such supplemental
indenture shall form a part of this Indenture for all purposes; and every Holder
of Debt Securities theretofore or thereafter authenticated and delivered under
this Indenture shall be bound by the supplemental indenture.

SECTION 905.      CONFORMITY WITH TRUST INDENTURE ACT.

Every supplemental indenture executed pursuant to this Article shall conform to
the requirements of the Trust Indenture Act as then in effect.

SECTION 906.      REFERENCE IN DEBT SECURITIES TO SUPPLEMENTAL INDENTURES.

Debt Securities of any series authenticated and delivered after the execution of
any supplemental indenture pursuant to this Article may, and shall if required
by the Trustee, bear a notation in form approved by the Trustee as to any matter
provided for in such supplemental indenture. If the applicable Issuer or the
Guarantor (in the case of Guaranteed Debt Securities) shall so determine, new
Debt Securities of any series and any Guarantees endorsed thereon so modified as
to conform, in the opinion of the Trustee and the Board of Directors, to any
such supplemental indenture may be prepared and executed by such Issuer and
Guarantor and authenticated and delivered by the Trustee in exchange for
Outstanding Debt Securities of such series.

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                                  ARTICLE TEN

                                    COVENANTS

SECTION 1001.     PAYMENT OF PRINCIPAL, PREMIUM AND INTEREST.

The applicable Issuer covenants and agrees for the benefit of each particular
series of Debt Securities that it will duly and punctually pay the principal of
(and premium, if any) and interest on the Debt Securities in accordance with
their terms and this Indenture. Principal (and premium, if any) or interest
payable with respect to any Debt Securities shall be considered paid on the date
due if the Paying Agent, or such Issuer if it acts as its own Paying Agent,
holds on that date money sufficient to pay all principal (and premium, if any)
and interest then due.

SECTION 1002.     MAINTENANCE OF OFFICE OR AGENCY.

(a) The applicable Issuer will maintain in each Place of Payment for any series
of Debt Securities issued thereby an office or agency where Debt Securities of
such series may be presented or surrendered for payment, where Debt Securities
of such series may be surrendered for registration of transfer or exchange and
where notices and demands to or upon such Issuer in respect of the Debt
Securities of such series and this Indenture may be served; and the Guarantor
will maintain in The City of New York an office or agency where notices and
demands to or upon the Guarantor in respect of Guaranteed Debt Securities of any
series and this Indenture may be served. The applicable Issuer and the Guarantor
(in the case of Guaranteed Debt Securities) will give prompt written notice to
the Trustee of the location, and any change in the location of, any such office
or agency. If at any time either Issuer or the Guarantor shall fail to maintain
any such required office or agency or shall fail to furnish the Trustee with the
address thereof, such presentations, surrenders, notices and demands may be made
or served at the Corporate Trust Office of the Trustee and the Issuers and the
Guarantor each hereby appoints the Trustee its agent to receive all such
presentations, surrenders, notices and demands.

(b) An Issuer may also from time to time designate one or more other offices or
agencies (in or outside of such Place of Payment) where the Debt Securities of
one or more series may be presented or surrendered for any or all of such
purposes, and may from time to time rescind such designations; provided,
however, that no such designation or rescission shall in any manner relieve such
Issuer of its obligation to maintain an office or agency in each Place of
Payment for any series of Debt Securities, for such purposes. Such Issuer will
give prompt written notice to the Trustee of any such designation and any change
in the location of any such other office or agency.

SECTION 1003.     MONEY FOR DEBT SECURITIES PAYMENTS TO BE HELD IN TRUST.

(a) If an Issuer or the Guarantor (in the case of Guaranteed Debt Securities)
shall at any time act as its own Paying Agent with respect to any series of Debt
Securities, it will, on or before each due date of the principal of (and
premium, if any) or interest on any of the Debt Securities of such series,
segregate and hold in trust for the benefit of the Persons entitled thereto a
sum sufficient to pay the principal (and premium, if any) or interest so
becoming due until such sums

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<PAGE>   60

shall be paid to such Persons or otherwise disposed of as herein provided, and
will promptly notify the Trustee of its action or failure so to act.

(b) Whenever an Issuer shall have one or more Paying Agents with respect to any
series of Debt Securities, it will, prior to each due date of the principal of
(and premium, if any) or interest on any Debt Securities of such series, deposit
with a Paying Agent a sum sufficient to pay the principal (and premium, if any)
or interest so becoming due, such sum to be held in trust for the benefit of the
Persons entitled to such principal, premium or interest, and (unless such Paying
Agent is the Trustee) such Issuer will promptly notify the Trustee of its action
or failure so to act.

(c) The applicable Issuer will cause each Paying Agent with respect to any
series of Debt Securities, other than the Trustee, to execute and deliver to the
Trustee an instrument in which such Paying Agent shall agree with the Trustee,
subject to the provisions of this Section, that such Paying Agent will:

     (1)   hold all sums held by it for the payment of the principal of (and
           premium, if any) or interest on Debt Securities of such series in
           trust for the benefit of the Persons entitled thereto until such sums
           shall be paid to such Persons or otherwise disposed of as herein
           provided;

     (2)   give the Trustee notice of any default by such Issuer or Guarantor
           (or any other obligor upon the Debt Securities of such series or
           Guarantees endorsed thereon (in the case of Guaranteed Debt
           Securities)) in the making of any payment of principal of (and
           premium, if any) or interest on the Debt Securities of such series or
           Guarantees endorsed thereon (in the case of Guaranteed Debt
           Securities); and

     (3)   at any time during the continuance of any such default, upon the
           written request of the Trustee, forthwith pay to the Trustee all sums
           so held in trust by such Paying Agent.

(d) The applicable Issuer may at any time, for the purpose of obtaining the
satisfaction and discharge of this Indenture or for any other purpose, pay, or
by Issuer Order of such Issuer direct any Paying Agent to pay, to the Trustee
all sums held in trust by such Issuer or such Paying Agent, such sums to be held
by the Trustee upon the same trusts as those upon which such sums were held by
such Issuer or such Paying Agent; and, upon such payment by any Paying Agent to
the Trustee, such Paying Agent shall be released from all further liability with
respect to such money.

(e) Any money deposited with the Trustee or any Paying Agent, or then held by
the applicable Issuer or the Guarantor (in the case of Guaranteed Debt
Securities), in trust for the payment of the principal of (and premium, if any)
or interest on any Debt Security of any series and remaining unclaimed for two
years after such principal (and premium, if any) or interest has become due and
payable shall be paid to such Issuer or Guarantor on Issuer Request of such
Issuer or Guarantor Request, as the case may be, or (if then held by such Issuer
or Guarantor) shall be discharged from such trust; and the Holder of such Debt
Security shall thereafter, as an unsecured general creditor, look only to such
Issuer or Guarantor, as the case may be, for payment thereof, and all liability
of the Trustee or such Paying Agent with respect to such trust

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<PAGE>   61

money, and all liability of such Issuer or Guarantor, as the case may be, as
trustee thereof, shall thereupon cease; provided, however, that the Trustee or
such Paying Agent, before being required to make any such repayment, may at the
expense of such Issuer or Guarantor, as the case may be, cause to be published
once, in an Authorized Newspaper of general circulation in the Borough of
Manhattan, The City of New York, and each Place of Payment or mailed to each
such Holder, or both, notice that such money remains unclaimed and that, after a
date specified therein, which shall not be less than 30 days from the date of
such publication or mailing, any unclaimed balance of such money then remaining
will be repaid to such Issuer or Guarantor, as the case may be.

SECTION 1004.     NEGATIVE PLEDGE.

(a) Subject to the following exceptions, Nortel Networks will not, and will not
permit the Restricted Subsidiaries, as long as any Debt Securities remain
outstanding, to issue, assume or guarantee any Funded Debt secured by, and will
not secure any Funded Debt by, a Lien upon any property of Nortel Networks or a
Restricted Subsidiary (whether now owned or hereafter acquired) without in any
such case effectively providing concurrently therewith that the Debt Securities
then Outstanding shall be secured equally and ratably with such Funded Debt;
provided, however, that the foregoing restrictions shall not apply to Funded
Debt secured by:

     (1)   Purchase Money Liens;

     (2)   Liens on property of a Person existing at the time such Person is
           liquidated or merged into, or amalgamated or consolidated with,
           Nortel Networks or a Restricted Subsidiary or at the time of a sale,
           lease or other disposition to Nortel Networks or a Restricted
           Subsidiary of the properties of a Person as, or substantially as, an
           entirety;

     (3)   Liens to secure indebtedness of any Restricted Subsidiary to Nortel
           Networks or to another Restricted Subsidiary or to secure
           indebtedness of Nortel Networks to any Restricted Subsidiary;

     (4)   Liens in favour of the United States of America or any State thereof,
           Canada or any Province or territory thereof, or any department,
           agency or instrumentality or political subdivision thereof, or in
           favor of any other country or political subdivision, to secure
           partial, progress, advance or other payments pursuant to any contract
           or statute or to secure any indebtedness incurred or guaranteed for
           the purpose of financing or refinancing all or any part of the
           purchase price of the property, shares of capital stock or
           indebtedness subject to such Liens, or the cost of constructing or
           improving the property subject to such Liens (including, without
           limitation, Liens incurred in connection with pollution control,
           industrial revenue or similar financings);

     (5)   any Lien created by or resulting from litigation or other proceeding
           against, or upon property of, Nortel Networks or any Restricted
           Subsidiary, or any Lien for workmen's compensation awards or similar
           awards, so long as the finality of such judgment or award is being
           contested and execution thereon is stayed or such

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<PAGE>   62

          Lien relates to a final unappealable judgment which is satisfied
          within 30 days of such judgment or any Lien incurred by Nortel
          Networks or any Restricted Subsidiary for the purpose of obtaining a
          stay or discharge in the course of any litigation or other proceeding;
          and

     (6)   any extension, renewal or replacement (or successive extensions,
           renewals or replacements) in whole or in part of any Lien existing at
           the date of this Indenture or any Lien referred to in the foregoing
           clauses (1) through (5), inclusive, provided, however, that the
           principal amount of the Funded Debt secured thereby shall not exceed
           the principal amount of the Funded Debt so secured at the time of
           such extension, renewal or replacement, and that such extension,
           renewal or replacement shall be limited to all or a part of the
           property (plus improvements and construction on such property) or
           indebtedness that was subject to the Lien so extended, renewed or
           replaced.

(b) Notwithstanding the foregoing, Nortel Networks or any Restricted Subsidiary
may issue, assume or guarantee Funded Debt secured by a Lien upon any property
of Nortel Networks or such Restricted Subsidiary that would otherwise be subject
to the foregoing restrictions, and may carry out any other transactions which
would otherwise be subject to the foregoing restrictions, provided the aggregate
amount at any time outstanding of all such Funded Debt would not, after giving
effect thereto, exceed 15% of the Corporation's Consolidated Net Tangible
Assets.

SECTION 1005.     COMPLIANCE CERTIFICATE.

Each of the Issuers and the Guarantor shall deliver an Officers' Certificate to
the Trustee within 120 days after the end of each fiscal year thereof stating
whether the signers know of any Event of Default that occurred during the fiscal
year. If an Event of Default shall have occurred, the applicable certificate
shall describe the nature of the Event of Default and its current status. The
certificate shall be in a form in compliance with the Trust Indenture Act.

SECTION 1006.     WAIVER OF CERTAIN COVENANTS.

The applicable Issuer and the Guarantor (in the case of Guaranteed Debt
Securities) may omit in any particular instance to comply with any covenant or
condition set forth in Sections 1004 and 1005, with respect to the Debt
Securities of any series if, before the time for such compliance, the Holders of
a majority in principal amount of the Outstanding Debt Securities of such series
shall, by Act of such Holders, either waive such compliance in such instance or
generally waive compliance with such covenant or condition, but no such waiver
shall extend to or affect such covenant or condition except to the extent so
expressly waived, and, until such waiver shall become effective, the obligations
of such Issuer and Guarantor and the duties of the Trustee in respect of any
such covenant or condition shall remain in full force and effect.

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                                 ARTICLE ELEVEN

                          REDEMPTION OF DEBT SECURITIES

SECTION 1101.     APPLICABILITY OF ARTICLE.

Debt Securities of any series that are redeemable before their Stated Maturity
Date shall be redeemable in accordance with their terms and (except as otherwise
specified pursuant to Section 301 for Debt Securities of any series) in
accordance with this Article.

SECTION 1102.     ELECTION TO REDEEM; NOTICE TO TRUSTEE.

If the applicable Issuer elects to redeem less than all of the Debt Securities
of any series, such Issuer shall, at least 45 days prior to the Redemption Date
fixed by such Issuer (unless a shorter notice shall be satisfactory to the
Trustee), notify the Trustee of such Redemption Date and of the principal amount
of Debt Securities of any series to be redeemed.

SECTION 1103.     SELECTION BY TRUSTEE OF DEBT SECURITIES TO BE REDEEMED.

(a) Except as otherwise specified pursuant to Section 301 for Debt Securities of
any series, if less than all the Debt Securities of any series are to be
redeemed, the particular Debt Securities to be redeemed shall be selected not
more than 45 days prior to the Redemption Date by the Trustee from the
Outstanding Debt Securities of such series not previously called for redemption,
by such method as the Trustee shall deem fair and appropriate and which may
provide for the selection for redemption of portions (equal to the minimum
authorized denomination for Debt Securities of such series or any integral
multiple thereof that is also an authorized denomination, but in no event shall
such portion be less than $1,000) of the principal amount of Debt Securities (if
issued in more than one authorized denomination) of such series of a
denomination larger than the minimum authorized denomination for Debt Securities
of such series.

(b) The Trustee shall promptly notify the applicable Issuer and the Guarantor
(in the case of Guaranteed Debt Securities) in writing of the Debt Securities
selected for redemption and, in the case of any Debt Securities selected for
partial redemption, the principal amount thereof to be redeemed.

(c) For all purposes of this Indenture, unless the context otherwise requires,
all provisions related to the redemption of Debt Securities shall relate, in the
case of any Debt Security redeemed or to be redeemed only in part, to the
portion of the principal amount of such Debt Security that has been or is to be
redeemed.

SECTION 1104.     NOTICE OF REDEMPTION.

(a) Notice of redemption shall be given in the manner provided in Section 106
not less than 30 or more than 45 days prior to the Redemption Date, to each
Holder of Debt Securities to be redeemed.

(b) All notices of redemption shall state: (1) the Redemption Date; (2) the
Redemption Price; (3) if less than all Outstanding Debt Securities of any series
are to be redeemed, the

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identification (and, in the case of partial redemption, the principal amounts)
of the particular Debt Securities to be redeemed; (4) that on the Redemption
Date, the Redemption Price will become due and payable upon each such Debt
Security to be redeemed, and that interest thereon shall cease to accrue on and
after said date; (5) the Place or Places of Payment where such Debt Securities
are to be surrendered for payment of the Redemption Price; and (6) that the
redemption is for a sinking fund, if such is the case.

(c) Notice of redemption of Debt Securities to be redeemed at the election of
the applicable Issuer shall be given by such Issuer or, at such Issuer's
request, by the Trustee in the name and at the expense of such Issuer.

SECTION 1105.     DEPOSIT OF REDEMPTION PRICE.

On or prior to any Redemption Date, the applicable Issuer shall deposit with the
Trustee or with a Paying Agent (or, if such Issuer is acting as its own Paying
Agent, segregate and hold in trust as provided in Section 1003) an amount of
money sufficient to pay the Redemption Price of, and (except if the Redemption
Date shall be an Interest Payment Date) accrued interest on, all the Debt
Securities or portions thereof that are to be redeemed on that date; provided,
however, that any funds deposited on the Redemption Date shall be deposited by
the Issuer no later than 12:00 p.m., New York City time on such Redemption Date.

SECTION 1106.     DEBT SECURITIES PAYABLE ON REDEMPTION DATE.

(a) Notice of redemption having been given as aforesaid, the Debt Securities so
to be redeemed shall, on the Redemption Date, become due and payable at the
Redemption Price specified in such notice. From and after such date (unless the
applicable Issuer shall default in the payment of the Redemption Price and
accrued interest) such Debt Securities shall cease to bear interest. Upon
surrender of any such Debt Security for redemption in accordance with the
notice, such Debt Security shall be paid by such Issuer at the Redemption Price,
together with accrued interest to the Redemption Date; provided however, that
installments of interest on Debt Securities whose Stated Maturity Date is on or
prior to the Redemption Date shall be payable to the Holders of such Debt
Securities, or one or more Predecessor Securities, registered as such on the
relevant Record Dates according to their terms and the provisions of Section
307.

(b) If any Debt Security called for redemption shall not be so paid upon
surrender thereof for redemption, the principal (and premium, if any) shall,
until paid, bear interest from the Redemption Date at the rate prescribed
therefor in the Debt Security.

SECTION 1107.     DEBT SECURITY REDEEMED IN PART.

Any Debt Security that is to be redeemed only in part shall be surrendered at a
Place of Payment therefor (with, if the applicable Issuer, the Security
Registrar or the Trustee so requires, due endorsement by, or a written
instrument of transfer in form satisfactory to such Issuer, the Security
Registrar and the Trustee duly executed by, the Holder thereof or his attorney
duly authorized in writing), and such Issuer shall execute, and the Trustee
shall authenticate and deliver to the Holder of such Debt Security without
service charge, a new Debt Security or Debt Securities of the same series, each
(in the case of Guaranteed Debt Securities) having endorsed thereon the
Guarantee executed by the Guarantor, of any authorized denomination as requested

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<PAGE>   65

by such Holder in aggregate principal amount equal to and in exchange for the
unredeemed portion of the principal of the Debt Security so surrendered; except
that if a Global Security is so surrendered, such Issuer shall execute, and the
Trustee shall authenticate and deliver to the Depositary for such Global
Security, without service charge, a new Global Security, each (in the case of
Guaranteed Debt Securities) having endorsed thereon the Guarantee executed by
the Guarantor, in a denomination equal to and in exchange for the unredeemed
portion of the principal of the Global Security so surrendered.

                                 ARTICLE TWELVE

                                  SINKING FUNDS

SECTION 1201.     APPLICABILITY OF ARTICLE.

The provisions of this Article shall be applicable to any sinking fund for the
retirement of Debt Securities of a series except as otherwise specified pursuant
to Section 301 for Debt Securities of such series. The minimum amount of any
sinking fund payment provided for by the terms of Debt Securities of any series
is herein referred to as a "mandatory sinking fund payment", and any payment in
excess of such minimum amount provided for by the terms of Debt Securities of
any series is herein referred to as an "optional sinking fund payment". If
provided for by the terms of Debt Securities of any series, the amount of any
sinking fund payment may be subject to reduction as provided in Section 1202.
Each sinking fund payment shall be applied to the redemption of Debt Securities
of any series as provided for by the terms of such Debt Securities.

SECTION 1202.     SATISFACTION OF SINKING FUND PAYMENTS WITH DEBT SECURITIES.

The applicable Issuer or the Guarantor (in the case of Guaranteed Debt
Securities) may deliver Outstanding Debt Securities of a series (other than any
previously called for redemption) and may apply as a credit Debt Securities of a
series that have been redeemed either at the election of such Issuer pursuant to
the terms of such Debt Securities or through the application of permitted
optional sinking fund payments pursuant to the terms of such Debt Securities, in
each case, in satisfaction of all or any part of any sinking fund payment with
respect to such Debt Securities of such series required to be made pursuant to,
and as provided for by, their terms; provided that such Debt Securities have not
been previously so credited. Such Debt Securities shall be received and credited
for such purpose by the Trustee at the Redemption Price specified in such Debt
Securities for redemption through operation of the sinking fund and the amount
of such sinking fund payment shall be reduced accordingly.

SECTION 1203.     REDEMPTION OF DEBT SECURITIES FOR SINKING FUND.

Not less than 60 days prior to each sinking fund payment date for any series of
Debt Securities (unless a shorter period shall be satisfactory to the Trustee),
the applicable Issuer will deliver to the Trustee an Officers' Certificate of
such entity specifying the amount of the next sinking fund payment for that
series pursuant to the terms of that series, the portion thereof, if any, that
is to be satisfied by payment of cash, the portion thereof, if any, that is to
be satisfied by delivering and crediting Debt Securities of that series pursuant
to Section 1202 and the basis for any such credit and, prior to or concurrently
with the delivery of such Officers' Certificate, will also

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<PAGE>   66

deliver to the Trustee any Debt Securities to be so credited and not theretofore
delivered to the Trustee. Not less than 45 days (unless a shorter period shall
be satisfactory to the Trustee) before each such sinking fund payment date the
Trustee shall select the Debt Securities to be redeemed upon such sinking fund
payment date in the manner specified in Section 1103 and cause notice of the
redemption thereof to be given in the name of and at the expense of such Issuer
in the manner provided in Section 1104. Such notice having been duly given, the
redemption of such Debt Securities shall be made upon the terms and in the
manner stated in Sections 1105, 1106 and 1107.

                                ARTICLE THIRTEEN

                                   DEFEASANCE

SECTION 1301.     DISCHARGE BY DEPOSIT OF MONEY OR DEBT SECURITIES.

(a) This Section 1301 shall be applicable to Debt Securities of a series if so
provided pursuant to Section 301. All obligations, covenants and agreements of
the applicable Issuer and the Guarantor (in the case of Guaranteed Debt
Securities) under this Indenture with respect to Debt Securities of a particular
series or for the benefit of the Holders thereof (except as to any surviving
rights of registration of transfer or exchange of Debt Securities or herein
expressly provided for) shall cease, terminate and be discharged if:

     (1)   the applicable Issuer or the Guarantor (in the case of Guaranteed
           Debt Securities) has, at least 91 days prior thereto, irrevocably
           deposited with the Trustee, as specific security pledged for, and
           dedicated solely to, the due payment and ultimate satisfaction of its
           obligations under the Indenture with respect to the Debt Securities
           of the series affected,

           (i)   funds in the currency, currencies or currency units in which
                 the Debt Securities are payable, and/or

           (ii)  an amount of direct obligations of, or obligations the payment
                 of principal of and interest, if any, on are fully guaranteed
                 by, the government that issued the currency or currencies in
                 which Debt Securities of such series are payable, and that are
                 not subject to prepayment, redemption or call,

     as will together with the predetermined and certain income to accrue
     thereon without consideration of any reinvestment thereof, be sufficient
     (in the case of such obligations, through the payment of interest and
     principal thereunder) to pay (A) the principal of (and premium, if any) and
     interest on the Outstanding Debt Securities of the particular series on the
     Stated Maturity Date of such principal or interest or of any installment
     thereof, and (B) any mandatory prepayments or analogous payments applicable
     to such Debt Securities on the day on which such payments are due and
     payable in accordance with the terms of this Indenture and such Debt
     Securities;

     (2)   the applicable Issuer and the Guarantor (in the case of Guaranteed
           Debt Securities) shall have received an Opinion of Counsel to the
           effect that Holders of such Debt Securities will not recognize
           income, gain or loss for United States

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<PAGE>   67

           federal income tax purposes as a result of such deposit and
           defeasance in respect of such Issuer's and Guarantor's obligations
           and will be subject to United States federal income tax as if such
           deposit and defeasance had not occurred;

     (3)   the applicable Issuer and the Guarantor (in the case of Guaranteed
           Debt Securities) shall have received an Opinion of Counsel to the
           effect that the Holders of the Debt Securities affected will not
           recognize income (whether taxable to them by deduction or withholding
           by the applicable Issuer or the Guarantor or otherwise), gain or loss
           for Canadian federal income tax purposes as a result of such deposit
           and defeasance in respect of such Issuer's and Guarantor's
           obligations and will be subject to Canadian federal income tax as if
           such deposit and defeasance had not occurred;

     (4)   such deposit will not result in a breach or violation of, or
           constitute a default under, this Indenture or any other material
           agreement or instrument to which the applicable Issuer or the
           Guarantor (in the case of Guaranteed Debt Obligations) is a party or
           by which it is bound;

     (5)   no Event of Default with respect to the Debt Securities of such
           series or event that, with notice or lapse of time, would become an
           Event of Default shall have occurred and be continuing on the date of
           such deposit;

     (6)   if such Debt Securities are listed on the New York Stock Exchange,
           the applicable Issuer shall have delivered to the Trustee an Opinion
           of Counsel to the effect that such deposit and defeasance will not
           cause such Debt Securities to be delisted; and

     (7)   the applicable Issuer or the Guarantor, as the case may be, shall
           have delivered to the Trustee an Officers' Certificate and an Opinion
           of Counsel, each stating compliance with all conditions precedent to
           the defeasance contemplated by Section 1301 or Section 1302.

(b) Notwithstanding any defeasance under this Indenture with respect to such
series of Debt Securities, the obligation of the applicable Issuer to indemnify
and compensate the Trustee under this Indenture and the obligations of the
Trustee under Sections 1003 and 1303 shall survive with respect to such series
of Debt Securities.

SECTION 1302.     DEFEASANCE OF CERTAIN OBLIGATIONS.

Nortel Networks and any Restricted Subsidiary may omit to comply with the terms,
provisions and conditions set forth in Section 1004 and any such omission shall
not be an Event of Default, with respect to any series of Debt Securities,
provided the following conditions have been satisfied:

     (1)   the conditions set forth in clauses (1) to (7), inclusive of Section
           1301(a); and

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     (2)   such deposit shall not cause the Trustee with respect to such series
           of Debt Securities to have a conflicting interest, within the meaning
           of this Indenture, and for purposes of the Trust Indenture Act with
           respect to such Debt Securities.

SECTION 1303.     APPLICATION OF TRUST MONEY.

All money deposited with the Trustee pursuant to Sections 1301 and 1302 shall be
held in trust and applied by it, in accordance with the provisions of the Debt
Securities and this Indenture and any applicable direction of the applicable
Issuer or the Guarantor (in the case of Guaranteed Debt Securities) to the
payment, either directly or through any Paying Agent (including such Issuer or
Guarantor acting as its own Paying Agent), as the Trustee may determine, to the
persons entitled thereto, of the principal (and premium, if any) and interest
for whose payment such money has been deposited with the Trustee.

SECTION 1304.     REPAYMENT TO THE CORPORATION.

(a) The Trustee and any Paying Agent shall promptly pay to the applicable
Issuer or the Guarantor (in the case of Guaranteed Debt Securities) upon Issuer
Request of such Issuer or Guarantor Request, as the case may be, any money or
governmental obligations not required for the payment of the principal of (and
premium, if any) and interest on Debt Securities of any series for which
currency or government obligations have been deposited pursuant to Section 1301
or Section 1302 held by them at any time.

(b) The Trustee and any Paying Agent shall pay to the applicable Issuer or the
Guarantor (in the case of Guaranteed Debt Securities) upon Issuer Request of
such Issuer or Guarantor Request, as the case may be, any money held by them for
the payment of principal (and premium, if any) and interest that remains
unclaimed for two years after the Maturity of the Debt Securities for which a
deposit has been made pursuant to Section 1301 or Section 1302. After such
payment to such Issuer or Guarantor, as the case may be, the Holders of Debt
Securities of such series shall thereafter, as unsecured general creditors, look
only to such Issuer or Guarantor, as the case may be, for payment thereof.

                                ARTICLE FOURTEEN

                     MEETINGS OF HOLDERS OF DEBT SECURITIES

SECTION 1401.     PURPOSES FOR WHICH MEETINGS MAY BE CALLED.

A meeting of Holders of Debt Securities of such series may be called at any time
and from time to time pursuant to this Article to make, give or take any Act
provided by this Indenture to be made, given or taken by Holders of Debt
Securities of such series.

SECTION 1402.     CALL, NOTICE AND PLACE OF MEETINGS.

(a) The Trustee may at any time call a meeting of Holders of Debt Securities of
any series for any purpose specified in Section 1401, to be held at such time
and at such place in the Borough of Manhattan, The City of New York. Notice of
every meeting of Holders of Debt Securities of any series, setting forth the
time and place of such meeting and in general terms the action

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proposed to be taken at such meeting, shall be given, in the manner provided in
Section 106, not less than 21 or more than 50 days prior to the date fixed for
the meeting.

(b) If at any time an Issuer or the Guarantor (in the case of Guaranteed Debt
Securities), pursuant to a Board Resolution, or the Holders of at least 10% in
principal amount of the Outstanding Debt Securities of any series shall have
requested the Trustee to call a meeting of the Holders of Debt Securities of
such series for any purpose specified in Section 1401, by written request
setting forth in reasonable detail the action proposed to be taken at the
meeting, and the Trustee shall not have made the first publication of the notice
of such meeting within 21 days after receipt of such request or shall not
thereafter proceed to cause the meeting to be held as provided herein, then such
Issuer or Guarantor or the Holders of Debt Securities of such series in the
amount above specified, as the case may be, may determine the time and the place
in the Borough of Manhattan, The City of New York for such meeting and may call
such meeting for such purposes by giving notice thereof as provided in paragraph
(a) of this Section.

SECTION 1403.     PERSONS ENTITLED TO VOTE AT MEETINGS.

To be entitled to vote at any meeting of Holders of Debt Securities of any
series, a Person shall be: (1) a Holder of one or more Outstanding Debt
Securities of such series; or (2) a Person appointed by an instrument in writing
as proxy for a Holder or Holders of one or more Outstanding Debt Securities of
such series by such Holder or Holders. The only Persons who shall be entitled to
be present or to speak at any meeting of Holders of Debt Securities of any
series shall be the Persons entitled to vote at such meeting and their counsel,
any representatives of the Trustee and its counsel and any representatives of
the applicable Issuer and the Guarantor (in the case of Guaranteed Debt
Securities) and its or their counsel.

SECTION 1404.     QUORUM; ACTION.

(a) The Persons entitled to vote a majority in principal amount of Outstanding
Debt Securities of a series shall constitute a quorum for a meeting of Holders
of Debt Securities of such series. In the absence of a quorum within 30 minutes
of the time appointed for any such meeting, the meeting shall, if convened at
the request of Holders of Debt Securities of such series, be dissolved. In the
absence of a quorum in any other case the meeting may be adjourned for a period
of not less than 10 days as determined by the chairman of the meeting prior to
the adjournment of such meeting. In the absence of a quorum at any such
adjourned meeting, such adjourned meeting may be further adjourned for a period
of not less than 10 days as determined by the chairman of the meeting prior to
the adjournment of such adjourned meeting. Notice of the reconvening of any
adjourned meeting shall be given as provided in paragraph 1402(a), except that
such notice need be given only once not less than five days prior to the date on
which the meeting is scheduled to be reconvened.

(b) Except as limited by the proviso to Section 902, any resolution presented to
a meeting or adjourned meeting duly reconvened at which a quorum is present as
aforesaid may be adopted only by the affirmative vote of the Holders of a
majority in principal amount of Outstanding Debt Securities of that series;
provided, however, that, except as limited by the proviso to Section 902, any
resolution with respect to any Act that this Indenture expressly provides may be
made, given or taken by the Holders of a specified percentage, which is less
than a majority, in

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principal amount of Outstanding Debt Securities of a series may be adopted at a
meeting or an adjourned meeting duly reconvened and at which a quorum is present
as aforesaid by the affirmative vote of the Holders of such specified percentage
in principal amount of Outstanding Debt Securities of that series.

(c) Any resolution passed or decision taken at any meeting of Holders of Debt
Securities of any series duly held in accordance with this Section will be
binding on all Holders of Debt Securities of such series, whether or not present
or represented at the meeting.

SECTION 1405.     DETERMINATION OF VOTING RIGHTS; CONDUCT AND ADJOURNMENT OF
MEETINGS.

(a) Notwithstanding any other provisions of this Indenture, the Trustee may make
such reasonable regulations as it may deem advisable for any meeting of Holders
of Debt Securities of such series in regard to proof of the holding of Debt
Securities of such series and of the appointment of proxies and in regard to the
appointment and duties of inspectors of votes, the submission and examination of
proxies, certificates and other evidence of the right to vote, and such other
matters concerning the conduct of the meeting as it shall deem appropriate.
Except as otherwise permitted or required by any such regulations, the holding
of Debt Securities shall be proved in the manner specified in Section 104 and
the appointment of any proxy shall be proved in the manner specified in Section
104. Such regulations may provide that written instruments appointing proxies,
regular on their face, may be presumed valid and genuine without the proof
specified in Section 104 or other proof.

(b) The Trustee shall, by an instrument in writing, appoint a temporary chairman
of the meeting, unless the meeting shall have been called by the applicable
Issuer, the Guarantor (in the case of Guaranteed Debt Securities) or by Holders
of Debt Securities as provided in Section 1402(b), in which case such Issuer,
Guarantor or the Holders of Debt Securities of the series calling the meeting,
as the case may be, shall in like manner appoint a temporary chairman. A
permanent chairman and a permanent secretary of the meeting shall be elected by
vote of the Persons entitled to vote a majority in principal amount of
Outstanding Debt Securities of such series represented at the meeting.

(c) At any meeting each Holder of a Debt Security of such series or proxy shall
be entitled to one vote for each $1,000 principal amount (or the equivalent in
any composite currency or a Foreign Currency at the date of issue) of Debt
Securities of such series held or represented by him; provided, however, that no
vote shall be cast or counted at any meeting in respect of any Debt Security
challenged as not Outstanding and ruled by the chairman of the meeting to be not
Outstanding. The chairman of the meeting shall have no right to vote, except as
a Holder of a Debt Security of such series or proxy.

(d) Any meeting of Holders of Debt Securities of any series duly called pursuant
to Section 1402 at which a quorum is present may be adjourned from time to time
by Persons entitled to vote a majority in principal amount of Outstanding Debt
Securities of such series represented at the meeting; and the meeting may be
held as so adjourned without further notice.

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SECTION 1406.     COUNTING VOTES AND RECORDING ACTION OF MEETINGS.

(a) The vote upon any resolution submitted to any meeting of Holders of Debt
Securities of any series shall be by written ballots on which shall be inscribed
the signatures of the Holders of Debt Securities of such series or of their
representatives by proxy and the principal amounts and serial numbers of
Outstanding Debt Securities of such series held or represented by them. The
permanent chairman of the meeting shall appoint two inspectors of votes who
shall count all votes cast at the meeting for or against any resolution and who
shall make and file with the secretary of the meeting their verified written
reports in triplicate of all votes cast at the meeting. A record, at least in
triplicate, of the proceedings of each meeting of Holders of Debt Securities of
any series shall be prepared by the secretary of the meeting and there shall be
attached to said record the original reports of the inspectors of votes on any
vote by ballot taken thereat and affidavits by one or more persons having
knowledge of the facts setting forth a copy of the notice of the meeting and
showing that said notice was given as provided in Section 1402 and, if
applicable, Section 1404. Each copy shall be signed and verified by the
affidavits of the permanent chairman and secretary of the meeting and one such
copy shall be delivered to the applicable Issuer and the Guarantor (in the case
of Guaranteed Debt Securities) and another to the Trustee to be preserved by the
Trustee, the latter to have attached thereto the ballots voted at the meeting.
Any record so signed and verified shall be conclusive evidence of the matters
therein stated.

                             *        *        *

         This instrument may be executed in any number of counterparts, each of
which so executed shall be deemed to be an original, but all such counterparts
shall together constitute but one and the same instrument.

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         IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be
duly executed, and their respective corporate seals to be hereunto affixed, all
as of the day and year first above written.

                                       CITIBANK, N.A., as Trustee

                                       Per: /s/ John J. Byrnes
                                            __________________________________
                                            Title: Vice President

                                       NORTEL NETWORKS LIMITED, as Issuer

                                       Per: /s/ Frank A. Dunn
                                            __________________________________
                                            Title:  Chief Financial Officer

                                       Per: /s/ Deborah J. Noble
                                            __________________________________
                                            Title:  Corporate Secretary

                                       NORTEL NETWORKS CAPITAL
                                         CORPORATION, as Issuer

                                       Per: /s/ William R. Kerr
                                            __________________________________
                                            Title:  President

                                       Per: /s/ Mary M. Cross
                                            __________________________________
                                            Title:  Secretary

                                       NORTEL NETWORKS LIMITED,
                                       as Guarantor

                                       Per: /s/ Frank A. Dunn
                                            __________________________________
                                            Title:  Chief Financial Officer

                                       Per: /s/ Deborah J. Noble
                                            __________________________________
                                            Title:  Corporate Secretary

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                                    EXHIBIT A

                     FORM OF ELECTION TO RECEIVE PAYMENTS IN
                     [DOLLARS OR OTHER APPLICABLE CURRENCY]
                           OR TO RESCIND SUCH ELECTION

         The undersigned, registered owner of certificate number R-           ,
representing [name of series of Debt Securities] (the "Debt Securities") in an
aggregate principal amount of                , hereby

[ ]      elects to receive all payments in respect of the Debt Securities
         in [Dollars or other applicable currency], it being understood that
         such election shall take effect as provided in the Debt Securities and,
         subject to the terms and conditions set forth in the indenture under
         which the Debt Securities were issued, shall remain in effect until it
         is rescinded by the undersigned or until such certificate is
         transferred.

[ ]      rescinds the election previously submitted by the undersigned to
         receive all payments in respect of the Debt Securities in [Dollars or
         other applicable currency], it being understood that such rescission
         shall take effect as provided in Debt Securities.

                                    -----------------------------------------
                                                (Name of Owner)

                                    ----------------------------------------
                                              (Signature of Owner)

                                       64

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