Document:

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                                                                 EXHIBIT - 10.1

                           LOAN AND SECURITY AGREEMENT

                                      AMONG

                             SAMUELS JEWELERS, INC.,
                                  AS BORROWER,

                    THE FINANCIAL INSTITUTIONS NAMED HEREIN,
                                   AS LENDERS,

                                       AND

                          DDJ CAPITAL MANAGEMENT, LLC,
                                    AS AGENT

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                                TABLE OF CONTENTS

<Table>
<S>     <C>       <C>                                                                                           <C>
1.       DEFINITIONS AND CONSTRUCTION.............................................................................1
         1.1.     Definitions.....................................................................................1
         1.2.     Accounting Terms...............................................................................15
         1.3.     Code...........................................................................................15
         1.4.     Construction...................................................................................15
         1.5.     Schedules and Exhibits.........................................................................16

2.       LOAN AND TERMS OF PAYMENT...............................................................................16
         2.1.     Revolving Advances.............................................................................16
         2.2.     Payments.......................................................................................18
         2.3.     Overadvances...................................................................................19
         2.4.     Interest.......................................................................................19
         2.5.     Crediting Payments; Application of Collections.................................................19
         2.6.     Designated Account.............................................................................20
         2.7.     Collection of Accounts.........................................................................20
         2.8.     Maintenance of Loan Account; Statements of Obligations.........................................21
         2.9.     Other Compensation.............................................................................21
         2.10.    Taxes..........................................................................................22

3.       CONDITIONS; TERM OF AGREEMENT...........................................................................24
         3.1.     Conditions Precedent to the Initial Advance....................................................24
         3.2.     Conditions Precedent to all Advances...........................................................25
         3.3.     Term...........................................................................................26
         3.4.     Effect of Termination..........................................................................26
         3.5.     Voluntary Prepayments..........................................................................26

4.       CREATION OF SECURITY INTEREST...........................................................................26
         4.1.     Grant of Security Interest.....................................................................26
         4.2.     Negotiable Collateral..........................................................................26
         4.3.     Collection of Accounts, General Intangibles, and Negotiable Collateral.........................27
         4.4.     Delivery of Additional Documentation Required..................................................27
         4.5.     Power of Attorney..............................................................................27
         4.6.     Right to Inspect...............................................................................28

5.       REPRESENTATIONS AND WARRANTIES..........................................................................28
         5.1.     No Encumbrances................................................................................28
         5.2.     Eligible Inventory.............................................................................28
         5.3.     Equipment......................................................................................28
         5.4.     Location of Inventory and Equipment............................................................28
         5.5.     Inventory Records..............................................................................28
         5.6.     Location of Chief Executive Office; FEIN.......................................................29
         5.7.     Due Organization and Qualification; Subsidiaries...............................................29
         5.8.     Due Authorization; No Conflict.................................................................29
</Table>

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<Table>
<S>     <C>       <C>                                                                                           <C>
         5.9.     Litigation.....................................................................................30
         5.10.    No Material Adverse Change.....................................................................30
         5.11.    Solvency.......................................................................................30
         5.12.    Employee Benefits..............................................................................30
         5.13.    Environmental Condition........................................................................31

6.       AFFIRMATIVE COVENANTS...................................................................................31
         6.1.     Accounting System..............................................................................31
         6.2.     Collateral Reporting...........................................................................31
         6.3.     Financial Statements, Reports, Certificates....................................................31
         6.4.     Tax Returns....................................................................................33
         6.5.     Returns........................................................................................33
         6.6.     Title to Equipment.............................................................................33
         6.7.     Maintenance of Equipment.......................................................................33
         6.8.     Taxes..........................................................................................33
         6.9.     Insurance......................................................................................33
         6.10.    No Setoffs or Counterclaims....................................................................34
         6.11.    Location of Inventory and Equipment............................................................34
         6.12.    Compliance with Laws...........................................................................35
         6.13.    Employee Benefits..............................................................................35
         6.14.    Leases.........................................................................................35

7.       NEGATIVE COVENANTS......................................................................................36
         7.1.     Indebtedness...................................................................................36
         7.2.     Liens..........................................................................................36
         7.3.     Restrictions on Fundamental Changes............................................................36
         7.4.     Disposal of Assets.............................................................................37
         7.5.     Change Name....................................................................................37
         7.6.     Guarantee......................................................................................37
         7.7.     Nature of Business.............................................................................37
         7.8.     Prepayments and Amendments.....................................................................37
         7.9.     Change of Control..............................................................................37
         7.10.    Consignments...................................................................................37
         7.11.    Distributions..................................................................................37
         7.12.    Accounting Methods.............................................................................37
         7.13.    Investments....................................................................................38
         7.14.    Transactions with Affiliates...................................................................39
         7.15.    Suspension.....................................................................................39
         7.16.    Consigned Inventory............................................................................39
         7.17.    Change in Location of Chief Executive Office; Inventory and Equipment with Bailees.............39
         7.18.    No Prohibited Transactions Under ERISA.........................................................40
         7.19.    Financial Covenants. Fail to maintain:.........................................................40
         7.20.    Capital Expenditures...........................................................................40
         7.21.    Minimum EBITDA.................................................................................41
</Table>

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<Table>
<S>     <C>       <C>                                                                                           <C>
8.       EVENTS OF DEFAULT.......................................................................................41

9.       THE LENDER GROUP'S RIGHTS AND REMEDIES..................................................................43
         9.1.     Rights and Remedies............................................................................43
         9.2.     Remedies Cumulative............................................................................45

10.      TAXES AND EXPENSES......................................................................................45

11.      WAIVERS; INDEMNIFICATION................................................................................45
         11.1.    Demand; Protest; etc...........................................................................45
         11.2.    The Lender Group's Liability for Collateral....................................................45
         11.3.    Indemnification................................................................................46

12.      NOTICES.................................................................................................46

13.      CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER..............................................................47

14.      DESTRUCTION OF BORROWER'S DOCUMENTS.....................................................................48

15.      ASSIGNMENTS AND PARTICIPATIONS; SUCCESSORS..............................................................48
         15.1.    Assignments and Participations.................................................................48
         15.2.    Successors.....................................................................................51

16.      AMENDMENTS; WAIVERS.....................................................................................51
         16.1.    Amendments and Waivers.........................................................................51
         16.2.    No Waivers; Cumulative Remedies................................................................52

17.      AGENT; THE LENDER GROUP.................................................................................52
         17.1.    Appointment and Authorization of Agent.........................................................52
         17.2.    Delegation of Duties...........................................................................53
         17.3.    Liability of Agent-Related Persons.............................................................53
         17.4.    Reliance by Agent..............................................................................54
         17.5.    Notice of Default or Event of Default..........................................................54
         17.6.    Credit Decision................................................................................55
         17.7.    Costs and Expenses; Indemnification............................................................55
         17.8.    Successor Agent................................................................................56
         17.9.    Withholding Tax................................................................................56
         17.10.   Collateral Matters.............................................................................57
         17.11.   Restrictions on Actions by Lenders; Sharing of Payments........................................58
         17.12.   Agency for Perfection..........................................................................59
         17.13.   Payments by Agent to the Lenders...............................................................59
         17.14.   Concerning the Collateral and Related Loan Documents...........................................59
         17.15.   Field Audits and Examination Reports; Confidentiality; Disclaimers by Lenders; Other
                  Reports and Information........................................................................59
         17.16.   Several Obligations; No Liability..............................................................60

18.      GENERAL PROVISIONS......................................................................................61
         18.1.    Effectiveness..................................................................................61
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<Table>
<S>      <C>      <C>                                                                                           <C>
         18.2.    Section Headings...............................................................................61
         18.3.    Interpretation.................................................................................61
         18.4.    Severability of Provisions.....................................................................61
         18.5.    Counterparts; Facsimile Execution..............................................................61
         18.6.    Revival and Reinstatement of Obligations.......................................................61
         18.7.    Integration....................................................................................62
</Table>

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                             SCHEDULES AND EXHIBITS

<Table>
<S>                                         <C>
Schedule A-1                                Approved Vendors
Schedule C-1                                Commitments on Closing Date
Schedule E-1                                Eligible Inventory Locations
Schedule P-1                                Permitted Liens
Schedule 5.7                                Subsidiaries
Schedule 5.9                                Litigation
Schedule 5.12                               ERISA Benefit Plans
Schedule 5.13                               Environmental Condition
Schedule 6.12                               Location of Inventory and Equipment
Schedule 7.1                                Indebtedness
Schedule 7.4                                GOB Locations
Schedule 7.14                               Affiliates

Exhibit A-1                                 Form of Approved Vendor Collateral Access Agreement
Exhibit B-1                                 [Intentionally Omitted]
Exhibit C-1                                 Form of Compliance Certificate
Exhibit D-1                                 Form of Revolving Credit Note
Exhibit 7.16                                Form of Consignment Agreement
Exhibit 15.1                                Form of Assignment and Acceptance
</Table>

                                       v
<PAGE>

                                                                EXHIBIT - 10.1

                           LOAN AND SECURITY AGREEMENT

         THIS LOAN AND SECURITY AGREEMENT (this "Agreement"), is entered into as
of [October 1, 2001], among SAMUELS JEWELERS, INC., a Delaware corporation
("Borrower"), with its chief executive office located at 2914 Montopolis Drive,
Austin, Texas 78741, on the one hand, and the financial institutions listed on
the signature pages hereof (such financial institutions, together with their
respective successors and assigns, are referred to hereinafter each individually
as a "Lender" and collectively as the "Lenders"), and DDJ CAPITAL MANAGEMENT,
LLC, as Agent, on the other hand.

         The parties agree as follows:

         1. DEFINITIONS AND CONSTRUCTION.

               1.1. DEFINITIONS. As used in this Agreement, the following terms
shall have the following definitions:

               "Account Debtor" means any Person who is or who may become
obligated under, with respect to, or on account of, an Account.

               "Accounts" shall mean any "account," as such term is defined in
section 9-102 of the Code, now owned or hereafter acquired by Borrower and, in
any event, shall include, without limitation, all accounts, accounts receivable,
licenses, leases and lease receivables, including but not limited to rights to
rentals thereunder, the Borrower's reversionary interest in property leased
thereunder and any equity rights in leases sold to third parties, other
receivables, contract rights, chattel paper, instruments, documents, notes, and
other forms of obligations now owned or hereafter received or acquired by or
belonging or owing to Borrower whether arising out of goods sold or services
rendered by Borrower, including without limitation under installation
agreements, or from any other transaction, whether or not the same involves the
sale of goods or services by Borrower and all of Borrower's rights in, to and
under all purchase orders or receipts now owned or hereafter acquired by it for
goods or services, and all of Borrower's rights to any goods represented by any
of the foregoing (including, without limitation, unpaid seller's rights of
rescission, replevin, reclamation and stoppage in transit and rights to
returned, reclaimed or repossessed goods), and all moneys due or to become due
to Borrower under all contracts for the sale of goods or the performance of
services or both by Borrower (whether or not yet earned by performance on the
part of Borrower or in connection with any other transaction), and all security
agreements, leases and other contracts securing or otherwise relating to any of
the foregoing, now in existence or hereafter occurring, including, without
limitation, the right to receive the proceeds of said purchase orders and
contracts, and all collateral security and guarantees of any kind given by any
Person with respect to any of the foregoing.

               "Advances" has the meaning set forth in Section 2.l(a).

               "Affiliate" means, as applied to any Person, any other Person who
directly or indirectly controls, is controlled by, is under common control with
or is a director or officer of, such Person. For purposes of this definition,
"control" means the possession, directly or

<PAGE>

indirectly, of the power to vote 5% or more of the securities having ordinary
voting power for the election of directors or the direct or indirect power to
direct the management and policies of a Person, provided, however, that the
Borrower shall not be considered an Affiliate of the Agent or any Lenders for
the purposes of this Agreement.

               "Agent" means DDJ, solely in its capacity as agent for the
Lenders, and shall include any successor agent.

               "Agent-Related Persons" means Agent, together with its
Affiliates, and the officers, directors, members, employees, counsel, agents,
and attorneys-in-fact of Agent and such Affiliates.

               "Agreement" has the meaning set forth in the preamble hereto.

               "Approved Bank" means any bank whose short-term rating from
Moody's Investors Service, Inc. is at least P-2 or the equivalent thereof or
from Standard & Poor's Ratings Group is at least A-2 or the equivalent thereof.

               "Approved Vendor" means a Person in the business of jewelry
repair or manufacturing that has entered into a satisfactory Collateral Access
Agreement with Agent substantially in the form of Exhibit A-1, and that is
listed on Schedule A-1.

               "Assignee" has the meaning set forth in Section 15.1.

               "Assignment and Acceptance" has the meaning set forth in Section
15.1 (a) and shall be in the form of Exhibit 15.1.

               "Authorized Person" means any officer or other employee of
Borrower.

               "Availability" means, as of the date of determination, the result
(so long as such result is a positive number) of (a) the lesser of the Borrowing
Base or the Maximum Amount, less (b) the Revolving Facility Usage.

               "Average Unused Portion of Maximum Amount" means, as of any date
of determination, the Maximum Amount, less the average Daily Balance of Advances
that were outstanding during the immediately preceding month.

               "Bankruptcy Code" means the United States Bankruptcy Code (11 U.
S.C. Section 101 et seq.), as amended, and any successor statute.

               "Benefit Plan" means a "defined benefit plan" (as defined in
Section 3(35) of ERISA) for which Borrower, any Subsidiary of Borrower, or any
ERISA Affiliate has been an "employer" (as defined in Section 3(5) of ERISA)
within the past six years.

               "Borrower" has the meaning set forth in the preamble to this
Agreement.

               "Borrower's Books" means all of Borrower's books and records
including: ledgers; records indicating, summarizing, or evidencing Borrower's
properties or assets

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(including the Collateral) or liabilities; all information relating to
Borrower's business operations or financial condition; and all computer
programs, disk or tape files, printouts, runs, or other computer prepared
information.

               "Borrowing" means a borrowing hereunder consisting of Advances
made on the same day by the Lenders.

               "Borrowing Base" has the meaning set forth in Section 2.1(a).

               "Business Day" means any day that is not a Saturday, Sunday, or
other day on which national banks are authorized or required to close.

               "Change of Control" means any of the following: (a) any person or
group of persons (within the meaning of the Securities Exchange Act of 1934, as
amended) shall have acquired after the date hereof beneficial ownership (within
the meaning of Rule 13d-3 promulgated by the Securities and Exchange Commission
under the Securities Exchange act of 1934, as amended) of 30% or more of the
issued and outstanding shares of capital stock of Borrower having the right to
vote for the election of directors of Borrower under ordinary circumstances; or
(b) during any period of twelve consecutive calendar months, individuals who at
the beginning of such period constituted the board of directors of Borrower
(together with any new directors whose election by the board of directors of
Borrower or whose nomination for election by the stockholders of Borrower was
approved by a vote of at least two-thirds of the directors then still in office
who either were directors at the beginning of such period or whose elections or
nomination for election was previously so approved) cease for any reason other
than death or disability to constitute a majority of the directors then in
office.

               "Closing Date" means the date of the making of the initial
Advance.

               "Code" means the Massachusetts Uniform Commercial Code as the
same may, from time to time, be in effect in the Commonwealth of Massachusetts;
provided, however, in the event that, by reason of mandatory provisions of law,
any or all of the attachment, perfection or the Lenders' security interest in
any Collateral is governed by the Uniform Commercial Code as in effect in a
jurisdiction other than the Commonwealth of Massachusetts, the term "Code" shall
mean the Uniform Commercial Code as in effect in each other jurisdiction for
purposes of the provisions hereof relating to such attachment, perfection or
priority and for purposes of definitions related to such provisions.

               "Collateral" means each of the following:

                  (a)      the Accounts,

                  (b)      Borrower's Books,

                  (c)      the Equipment,

                  (d)      the General Intangibles,

                  (e)      Instruments,

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                  (f)      the Inventory,

                  (g)      the Investment Property,

                  (h)      the Negotiable Collateral,

               (i) any money, or other assets of Borrower that now or hereafter
come into the possession, custody, or control of the Lender Group, and

               (j) the proceeds and products, whether tangible or intangible, of
any of the foregoing, including proceeds of insurance covering any or all of the
Collateral, and any and all Accounts, Borrower's Books, Equipment, General
Intangibles, Inventory, Negotiable Collateral, money, deposit accounts, or other
tangible or intangible property resulting from the sale, exchange, collection,
or other disposition of any of the foregoing, or any portion thereof or interest
therein, and the proceeds thereof.

               "Collateral Access Agreement" means a landlord waiver, mortgagee
waiver, bailee letter, or acknowledgement agreement of any warehouseman,
processor, lessor, consignee, or other Person in possession of, having a Lien
upon, or having rights or interests in the Equipment or Inventory, in each case,
in form and substance satisfactory to Agent.

               "Collections" means all cash, checks, notes, instruments, and
other items of payment (including, insurance proceeds, proceeds of cash sales,
rental proceeds, and tax refunds).

               "Commitment" means, at any time with respect to a Lender, the
principal amount set forth beside such Lender's name under the heading
"Commitment" on Schedule C-1 or on the signature page of the Assignment and
Acceptance pursuant to which such Lender became a Lender hereunder in accordance
with the provisions of Section 15.1, as such Commitment may be adjusted from
time to time in accordance with the provisions of Section 15.1 and "Commitments"
means, collectively, the aggregate amount of the commitments of all of the
Lenders.

               "Compliance Certificate" means a certificate substantially in the
form of Exhibit C-1 and delivered by the chief accounting officer of Borrower to
Agent.

               "Cost" means, with respect to Inventory, Borrower's cost,
determined on a basis consistent with Borrower's current and historical
accounting practices.

               "Credit Sales Chattel Paper" means any chattel paper of Borrower
arising out of Borrower's in-house credit sales.

               "Daily Balance" means, with respect to each day during the term
of this Agreement, the amount of all Obligations owed at the end of such day.

               "DDJ" means DDJ Capital Management, LLC, a Massachusetts limited
liability company.

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               "deems itself insecure" means that the Person deems itself
insecure in accordance with the provisions of Section 1208 of the Code.

               "Default" means an event, condition, or default that, with the
giving of notice, the passage of time, or both, would be an Event of Default.

               "Deliverable Instruments" means any Negotiable Collateral in
which perfection of the security interest of the Agent for the benefit of the
Lender Group may be effected only by possession (other than any such Negotiable
Collateral evidencing a right to the payment of less than $50,000 for any
individual item and less than $250,000 in the aggregate for all such items at
any one time).

               "Designated Account" means that certain account of Borrower
maintained with Borrower's Designated Account Bank, or such other deposit
account of Borrower (located within the United States) which has been
designated, in writing and from time to time, by Borrower to Agent.

               "Designated Account Bank" means Wells Fargo Bank.

               "Dilution" means, in each case based upon the experience of the
immediately prior 6 months, the result of dividing the Dollar amount of (a) bad
debt write-downs, discounts, advertising, returns, promotions, credits, or other
dilution with respect to the Accounts, by (b) Borrower's Collections (excluding
extraordinary items) plus the Dollar amount of clause (a), as each of the
foregoing is determined by Agent's audit staff in its reasonable credit
judgment. "Dilution Reserve" means, as of any date of determination, an amount
sufficient to reduce the Lenders' advance rate against Eligible Accounts by one
percentage point for each percentage point by which Dilution is in excess of 5%.

               "Disbursement Letter" means an instructional letter executed and
delivered by Borrower to Agent regarding the extensions of credit to be made on
the Closing Date, the form and substance of which shall be satisfactory to
Agent.

               "Dollars or $" means United States dollars.

               "EBITDA" shall mean, for any applicable period, the sum for the
Borrower and its consolidated Subsidiaries, if any, (on a consolidated basis
without duplication in accordance with GAAP) of operating profit for such period
plus, to the extent deducted in determining operating profit, the sum of (x)
interest expense for such period, (y) taxes of such Borrower and its
consolidated Subsidiaries for such period and (z) all amounts attributable to
depreciation and amortization of the Borrower and its consolidated Subsidiaries
for such period.

               "Eligible In-Transit Inventory" means those items of Inventory
that do not qualify as Eligible Landed Inventory solely because they are not in
or in-transit between locations set forth on Schedule E-1 but: (a) such
Inventory is currently in-transit from a location not set forth on Schedule E-1
to a location set forth on Schedule E-1, (b) title to such Inventory has passed
to Borrower, (c) documents of title with respect to such Inventory, if any, have
been delivered to Agent or its agent, or the Lender Group's first priority
security interest in such Inventory has

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otherwise been perfected; and (d) such Inventory is insured against types of
loss, damage, hazards, and risks, and in amounts, satisfactory to Agent in
Agent's reasonable credit judgment in accordance with Agent's customary business
practices.

               "Eligible Inventory" means the Eligible In-Transit Inventory and
the Eligible Landed Inventory.

               "Eligible Landed Inventory" means Inventory consisting of
finished goods held for sale in the ordinary course of Borrower's business, that
are located at or in-transit between Borrower's premises identified on Schedule
E-1, that comply in all material respects with each and all of the
representations and warranties respecting Inventory made by Borrower to the
Lender Group in the Loan Documents, and that are and at all times continue to be
acceptable to the Agent in all respects in Agent's reasonable credit judgment in
accordance with Agent's customary business practices; provided, however, that
standards of eligibility may be fixed and revised from time to time by the Agent
in the Agent's reasonable credit judgment in accordance with Agent's customary
business practices. In determining the amount to be so included, Inventory shall
be valued at the lower of Cost or market on a basis consistent with Borrower's
current and historical accounting practices. An item of Inventory shall not be
included in Eligible Landed Inventory if:

                  (a) it is not owned solely by Borrower or Borrower does not
have good, valid, and marketable title thereto;

                  (b) it is not located at or in transit between one or more of
the locations set forth on Schedule E-1 or the location of an Approved Vendor;

                  (c) it is not located on property owned or leased by Borrower
or in a contract warehouse or with an Approved Vendor, in each case, subject to
a Collateral Access Agreement executed by the mortgagee, lessor, the
warehouseman, or other third party, as the case may be, and segregated or
otherwise separately identifiable from goods of others, if any, stored on the
premises, or Agent shall have instituted a reserve that is appropriate, in its
sole discretion, to protect the value of the Lender Group's access to and
security interest in any such Inventory;

                  (d) it is not subject to a valid and perfected first priority
(subject only to Permitted Liens respecting Indebtedness not yet due and
payable) security interest in favor of the Lender Group;

                  (e) to the extent it consists of goods returned or rejected by
Borrower's customers; and

                  (f) it is obsolete or slow moving or constitutes a restrictive
or custom item, raw materials, work-in-process, a component that is not part of
finished goods, spare parts, packaging and shipping materials, supplies used or
consumed in Borrower's business, Inventory subject to a Lien in favor of any
third Person, bill and hold goods, defective goods, "seconds," trade-ins,
repossessed goods, layaway goods, goods held for return to Borrower's vendors or
to be melted, or Inventory acquired on consignment.

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               "Eligible Transferee" means (a) a commercial bank organized under
the laws of the United States, or any state thereof, and having total assets in
excess of $5,000,000,000, or the asset based lending Lender Affiliate of such
bank, (b) a commercial bank organized under the laws of any other country which
is a member of the Organization for Economic Cooperation and Development or a
political subdivision of any such country, and having total assets in excess of
$5,000,000,000, or the asset based lending Lender Affiliate of such bank;
provided that such bank is acting through a branch or agency located in the
United States, (c) a finance company, insurance or other financial institution,
or fund that is engaged in making, purchasing, or otherwise investing in
commercial loans in the ordinary course of its business and having total assets
in excess of $500,000,000, (d) any Lender Affiliate (other than individuals) of
an existing Lender, and (e) any other Person approved by Agent and Borrowers.

               "Equipment" means all of Borrower's present and hereafter
acquired machinery, machine tools, motors, equipment, furniture, furnishings,
fixtures, vehicles (including motor vehicles and trailers), tools, parts, goods
(other than consumer goods, farm products, or Inventory), wherever located,
including, all attachments, accessories, accessions, replacements,
substitutions, additions, and improvements to any of the foregoing.

               "ERISA" means the Employee Retirement Income Security Act of
1974, 29 U.S.C. Sections 1000 et seq., amendments thereto, successor statutes,
and regulations or guidance promulgated thereunder.

               "ERISA Affiliate" means (a) any corporation subject to ERISA
whose employees are treated as employed by the same employer as the employees of
Borrower under IRC Section 414(b), (b) any trade or business subject to ERISA
whose employees are treated as employed by the same employer as the employees of
Borrower under IRC Section 414(c), (c) solely for purposes of Section 302 of
ERISA and Section 412 of the IRC, any organization subject to ERISA that is a
member of an affiliated service group of which Borrower is a member under IRC
Section 414(m), or (d) solely for purposes of Section 302 of ERISA and Section
412 of the IRC, any party subject to ERISA that is a party to an arrangement
with Borrower and whose employees are aggregated with the employees of Borrower
under IRC Section 414(o).

               "ERISA Event" means (a) a Reportable Event with respect to any
Benefit Plan or Multiemployer Plan, (b) the withdrawal of Borrower, any of its
Subsidiaries or ERISA Affiliates from a Benefit Plan during a plan year in which
it was a "substantial employer" (as defined in Section 4001(a)(2) of ERISA), (c)
the providing of notice of intent to terminate a Benefit Plan in a distress
termination (as described in Section 4041(c) of ERISA), (d) the institution by
the PBGC of proceedings to terminate a Benefit Plan or Multiemployer Plan, (e)
any event or condition (i) that provides a basis under Section 4042(a)(1), (2),
or (3) of ERISA for the termination of, or the appointment of a trustee to
administer, any Benefit Plan or Multiemployer Plan, or (ii) that may result in
termination of a Multiemployer Plan pursuant to Section 4041A of ERISA, (f) the
partial or complete withdrawal within the meaning of Sections 4203 and 4205 of
ERISA, of Borrower, any of its Subsidiaries or ERISA Affiliates from a
Multiemployer Plan, or (g) providing any security to any Plan under Section
401(a)(29) of the IRC by Borrower or its Subsidiaries or any of their ERISA
Affiliates.

               "Event of Default" has the meaning set forth in Section 8.

                                       7
<PAGE>

               "Existing Lender" means the lenders party to that certain Loan
and Security Agreement dated as of October 2, 1998 among the Borrower, the
financial institutions named therein, as Lenders and Foothill Capital
Corporation, as Agent, as amended and modified from time to time.

               "Funding Date" means the date on which a Borrowing occurs.

               "GAAP" means generally accepted accounting principles as in
effect from time to time in the United States, consistently applied.

               "General Intangibles" means all of Borrower's present and future
general intangibles and other personal property (including contract rights,
rights arising under common law, statutes, or regulations, choses or things in
action, goodwill, patents, trade names, trademarks, servicemarks, copyrights,
blueprints, drawings, purchase orders, customer lists, monies due or recoverable
from pension funds, route lists, rights to payment and other rights under any
royalty or licensing agreements, infringement claims, computer programs,
information contained on computer disks or tapes, literature, reports, catalogs,
deposit accounts, insurance premium rebates, tax refunds, and tax refund
claims), other than goods, Accounts, and Negotiable Collateral.

               "GOB Value" means, with respect to Inventory, the "going out of
business" or "net liquidation" value of such Inventory, expressed as a
percentage of such Inventory's Cost, as determined by one or one or more
appraisers acceptable to Agent and Borrower.

               "Governing Documents" means the certificate or articles of
incorporation, by-laws, or other organizational or governing documents of any
Person.

               "Governmental Authority" means any nation or government, any
state or other political subdivision thereof and any entity exercising
executive, legislative, judicial, regulatory or administrative functions of or
pertaining to government.

               "Hazardous Materials" means (a) substances that are defined or
listed in, or otherwise classified pursuant to, any applicable laws or
regulations as "hazardous substances," "hazardous materials," "hazardous
wastes," "toxic substances," or any other formulation intended to define, list,
or classify substances by reason of deleterious properties such as ignitability,
corrosivity, reactivity, carcinogenicity, reproductive toxicity, or "EP
toxicity" , (b) oil, petroleum, or petroleum derived substances, natural gas,
natural gas liquids, synthetic gas, drilling fluids, produced waters, and other
wastes associated with the exploration, development, or production of crude oil,
natural gas, or geothermal resources, (c) any flammable substances or explosives
or any radioactive materials, and (d) asbestos in any form or electrical
equipment that contains any oil or dielectric fluid containing levels of
polychlorinated biphenyls in excess of 50 parts per million.

               "Indebtedness" means: (a) all obligations of Borrower for
borrowed money (which would not include trade credit extended by vendors in the
ordinary course of business), (b) all obligations of Borrower evidenced by
bonds, debentures, notes, or other similar instruments and all reimbursement or
other obligations of Borrower in respect of letters of credit, bankers
acceptances, interest rate swaps, or other financial products, (c) all
capitalized

                                       8
<PAGE>

obligations of Borrower under capital leases, (d) all obligations or liabilities
of others secured by a Lien on any property or asset of Borrower, irrespective
of whether such obligation or liability is assumed, and (e) any obligation of
Borrower guaranteeing or intended to guarantee (whether guaranteed, endorsed,
co-made, discounted, or sold with recourse to Borrower) any indebtedness, lease,
dividend, letter of credit, or other obligation of any other Person.

               "Insolvency Proceeding" means any proceeding commenced by or
against any Person under any provision of the Bankruptcy Code or under any other
bankruptcy or insolvency law, assignments for the benefit of creditors, formal
or informal moratoria, compositions, extensions generally with creditors, or
proceedings seeking reorganization, arrangement, or other similar relief.

               "Instruments" means negotiable instruments or any other writings
that evidence a right to payment of a monetary investment (as that term is
defined in Section 9-102 of the Code).

               "Intangible Assets" means, with respect to any Person, that
portion of the book value of all of such Person's assets that would be treated
as intangibles under GAAP.

               "Intellectual Property Security Agreement" means that certain
Intellectual Property Security Agreement, of even date herewith, between
Borrower and Agent, on behalf of the Lender Group.

               "Inventory" means all present and future inventory in which
Borrower has any interest, including goods held for sale or lease or to be
furnished under a contract of service and all of Borrower's present and future
raw materials, work in process, finished goods, and packing and shipping
materials, wherever located.

               "Inventory Reserves" means reserves (determined from time to time
by Agent in its reasonable discretion) for (a) the estimated costs relating to
unpaid freight charges, warehousing or storage charges, taxes, duties, and other
similar unpaid costs associated with the acquisition of Eligible In-Transit
Inventory by Borrower, plus (b) the estimated reclamation claims of unpaid
sellers of Inventory sold to Borrower.

               "Investment Property" means all of Borrower's presently existing
and hereafter acquired or arising investment property (as that term is defined
in Section 9-102 of the Code).

               "IRC" means the Internal Revenue Code of 1986, as amended, and
the regulations thereunder.

               "Lender" and "Lenders" have the respective meanings set forth in
the preamble to this Agreement, and shall include any other Person made a party
to this Agreement in accordance with the provisions of Section 15.1.

               "Lender Affiliate" means, as applied to any member of the Lender
Group, any other Person directly or indirectly controlling, controlled by, or
under common control with, that member of the Lender Group. For purposes of this
definition, "control" as applied to any Person means the possession, directly or
indirectly, of the power to direct or cause the direction of the management and
policies of that Person, whether through the ownership of voting securities, by

                                       9
<PAGE>

contract, or otherwise, provided, however, that Borrower shall not be considered
a "Lender Affiliate" for the purposes of this Agreement.

               "Lender Group" means, individually and collectively, each of the
individual Lenders and Agent.

               "Lender Group Expenses" means all: costs or expenses (including
taxes, and insurance premiums) required to be paid by Borrower under any of the
Loan Documents that are paid or incurred by the Lender Group; fees or charges
paid or incurred by the Lender Group in connection with the Lender Group's
transactions with Borrower, including, fees or charges for photocopying,
notarization, couriers and messengers, telecommunication, public record searches
(including tax lien, litigation, and UCC searches and including searches with
the patent and trademark office, the copyright office, or the department of
motor vehicles), filing, recording, publication, appraisal (including the
periodic Collateral appraisals and tests described in Section 4.6); costs and
expenses incurred by Agent in the disbursement of funds to Borrower (by wire
transfer or otherwise); charges paid or incurred by Agent resulting from the
dishonor of checks; costs and expenses paid or incurred by Agent (including
reasonable attorneys' fees and expenses) to correct any default or enforce any
provision of the Loan Documents, or in gaining possession of, maintaining,
handling, preserving, storing, shipping, selling, preparing for sale, or
advertising to sell the Collateral, or any portion thereof, irrespective of
whether a sale is consummated; reasonable costs and expenses paid or incurred by
the Lender Group in examining Borrower's Books; costs and expenses (including
reasonable attorneys' fees and expenses) of third party claims or any other suit
paid or incurred by the Lender Group in enforcing or defending the Loan
Documents or in connection with the transactions contemplated by the Loan
Documents or the Lender Group's relationship with Borrower or any guarantor; and
the Lender Group's reasonable attorneys' fees and expenses incurred in advising,
structuring, drafting, reviewing, administering, amending, terminating,
enforcing, defending, or concerning the Loan Documents (including reasonable
attorneys' fees and expenses incurred in connection with a "workout," a
"restructuring," or an Insolvency Proceeding concerning Borrower or any
guarantor of the Obligations), irrespective of whether suit is brought. Prior to
the existence of an Event of Default, Borrower's liability for the fees and
expenses of counsel to the Lender Group shall be limited to reasonable
attorneys' fees and expenses of one lead law firm representing Agent and one
local counsel to Agent in each jurisdiction in which any tangible Collateral may
be located, or where Borrower may be incorporated or have its chief executive
office located. No costs or expenses of any Lender in respect of any appraisal
or other transaction shall constitute Lender Group Expenses to the extent
Section 4.6 otherwise expressly provides for the reimbursement of costs or
expenses of such type only for Agent, and no costs or expenses of any person in
respect of any appraisal or other transaction shall constitute Lender Group
Expenses in excess of any limit on the reimbursement of costs or expenses of
such type provided by Section 4.6.

               "Lien" means any interest in property securing an obligation owed
to, or a claim by, any Person other than the owner of the property, whether such
interest shall be based on the common law, statute, or contract, whether such
interest shall be recorded or perfected, and whether such interest shall be
contingent upon the occurrence of some future event or events or the existence
of some future circumstance or circumstances, including the lien or security
interest arising from a mortgage, deed of trust, encumbrance, pledge,
hypothecation, assignment, deposit arrangement, security agreement, adverse
claim or charge, conditional sale or trust receipt, or

                                       10
<PAGE>

from a lease, consignment, or bailment for security purposes and also including
reservations, exceptions, encroachments, easements, rights-of-way, covenants,
conditions, restrictions, leases, and other title exceptions and encumbrances
affecting Real Property.

               "Loan Account" has the meaning set forth in Section 2.8.

               "Loan Documents" means this Agreement, the Disbursement Letter,
the Lockbox Agreements, the Intellectual Property Security Agreement, any note
or notes executed by Borrower and payable to the Lender Group, and any other
agreement entered into, now or in the future, in connection with this Agreement.

               "Lockbox Account" shall mean a depositary account, established
pursuant to one of the Lockbox Agreements.

               "Lockbox Agreements" means those certain Lockbox Operating
Procedural Agreements and those certain Depository Account Agreements, in form
and substance satisfactory to Agent, each of which is among Borrower, Agent, and
one of the Lockbox Banks.

               "Lockbox Banks" means Wells Fargo Bank and/or Bank of New York.

               "Lockboxes" has the meaning set forth in Section 2.7.

               "Material Adverse Change" means (a) a material adverse change in
the business, prospects, operations, results of operations, assets, liabilities
or condition (financial or otherwise) of Borrower, (b) the material impairment
of Borrower's ability to perform its obligations under the Loan Documents to
which it is a party or of the Lender Group to enforce the Obligations or realize
upon the Collateral, (c) a material adverse effect on the value of the
Collateral or the amount that the Lender Group would be likely to receive (after
giving consideration to delays in payment and costs of enforcement) in the
liquidation of such Collateral, or (d) a material impairment of the priority of
the Lender Group's Liens with respect to the Collateral.

               "Maximum Amount" means $20,000,000 on and after the Closing Date.

               "Multiemployer Plan" means a "multiemployer plan" (as defined in
Section 4001(a)(3) of ERISA) to which Borrower, any of its Subsidiaries, or any
ERISA Affiliate has contributed, or was obligated to contribute, within the past
six years.

               "Musselman Purchase Agreement" means that certain Asset Purchase
Agreement dated as of December 15, 1999, between Wilkerson & Associates and
Borrower.

               "Musselman Put" means that certain obligation of Borrower to make
a payment to Wilkerson & Associates ("Wilkerson") or any successor or assign in
consideration of the "put" rights of Wilkerson set forth in Section 2.3 (a) of
the Musselman Purchase Agreement.

               "Negotiable Collateral" means all of Borrower's present and
future letters of credit, notes, drafts, instruments, Investment Property,
securities (including the shares of stock of Subsidiaries of Borrower),
documents, personal property leases (wherein Borrower is the lessor), and
chattel paper.

                                       11
<PAGE>

               "Obligations" means all loans, Advances, debts, principal,
interest (including any interest that, but for the provisions of the Bankruptcy
Code, would have accrued), premiums, liabilities (including all amounts charged
to Borrower's Loan Account pursuant hereto), obligations, fees, charges, costs,
or Lender Group Expenses (including any fees or expenses that, but for the
provisions of the Bankruptcy Code, would have accrued), lease payments,
guaranties, covenants, and duties owing by Borrower to the Lender Group of any
kind and description (pursuant to or evidenced by the Loan Documents
irrespective of whether for the payment of money), whether direct or indirect,
absolute or contingent, due or to become due, now existing or hereafter arising,
and further including all interest not paid when due and all Lender Group
Expenses that Borrower is required to pay or reimburse by the Loan Documents, by
law, or otherwise.

               "Originating Lender" has the meaning set forth in Section
15.1(e).

               "Overadvance" has the meaning set forth in Section 2.3.

               "Participant" has the meaning set forth in Section 15.1(e).

               "Pay-Off Letter" means a letter, in form and substance reasonably
satisfactory to Agent, from Existing Lender respecting the amount necessary to
repay in full all of the obligations of Borrower owing to Existing Lender and
obtain a termination or release of all of the Liens existing in favor of
Existing Lender in and to the properties or assets of Borrower.

               "PBGC" means the Pension Benefit Guaranty Corporation as defined
in Title IV of ERISA, or any successor thereto.

               "Permitted Accounts Sale" means a sale of all or substantially
all of the Accounts on terms, and subject to intercreditor or other agreements,
reasonably acceptable to Required Lenders.

               "Permitted Liens" means (a) Liens held by the Lender Group, (b)
Liens for unpaid taxes that either (i) are not yet due and payable or, (ii) are
the subject of Permitted Protests, (c) Liens set forth on Schedule P-1, (d) the
interests of lessors under operating leases and purchase money security
interests and Liens of lessors under capital leases to the extent that the
acquisition or lease of the underlying asset is permitted under Section 7.21 and
so long as the Lien only attaches to the asset purchased or acquired and only
secures the purchase price of the asset, (e) Liens arising by operation of law
in favor of warehousemen, landlords, carriers, mechanics, materialmen, laborers,
or suppliers, incurred in the ordinary course of business of Borrower and not in
connection with the borrowing of money, and which Liens either (i) are for sums
not yet due and payable, or (ii) are the subject of Permitted Protests, (f)
Liens arising from deposits made in connection with obtaining worker's
compensation or other unemployment insurance, (g) Liens or deposits to secure
performance of bids, tenders, or leases (to the extent permitted under this
Agreement), incurred in the ordinary course of business of Borrower and not in
connection with the borrowing of money, (h) Liens arising by reason of security
for surety or appeal bonds in the ordinary course of business of Borrower, (i)
Liens of or resulting from any judgment or award that would not cause a Material
Adverse Change and as to which the time for the appeal or petition for rehearing
of which has not yet expired, or in respect of which Borrower

                                       12
<PAGE>

is in good faith prosecuting an appeal or proceeding for a review, and in
respect of which a stay of execution pending such appeal or proceeding for
review has been secured, (j) with respect to any Real Property, easements,
rights of way, zoning and similar covenants and restrictions, and similar
encumbrances that customarily exist on properties of Persons engaged in similar
activities and similarly situated and that in any event do not materially
interfere with or impair the use or operation of the Collateral by Borrower or
the value of the Lender Group's Lien on the Collateral, or materially interfere
with the ordinary conduct of the business of Borrower; (k) licenses, leases, or
subleases granted to third Persons not materially interfering with the ordinary
course of business of Borrower, (l) Liens arising from precautionary Code (or
other similar recording or notice statutes) financing statement filings
regarding operating leases permitted pursuant to this Agreement, (m) any
interest or title of a lessor, sublessor, or licensor under any lease or license
agreement permitted by this Agreement, (n) Liens on the assets or property of
Borrower existing prior to the time such assets were acquired by Borrower and
not incurred as a result of (or in connection with or in anticipation of) such
acquisition; provided that such Liens do not extend to or cover any property or
assets of Borrower other than the property or assets so acquired, (o) Liens of a
banking institution encumbering deposits (including the right of set-off) held
by such banking institution incurred in the ordinary course of business and
which are within general parameters customary within the banking industry, and
(p) Liens renewing, extending, or refunding any Lien permitted by clause (c) or
(n) to the extent not securing Indebtedness of any greater amount and not
extending to any other property.

               "Permitted Protest" means the right of Borrower to protest any
Lien (other than any such Lien that secures the Obligations), tax (other than
payroll taxes or taxes that are the subject of a United States federal tax
lien), or rental payment, provided that (a) a reserve with respect to such
obligation is established on the books of Borrower in an amount that is
reasonably satisfactory to Agent, (b) any such protest is instituted and
diligently prosecuted by Borrower in good faith, and (c) Agent is satisfied
that, while any such protest is pending, there will be no impairment of the
enforceability, validity, or priority of any of the Liens of the Lender Group in
and to the Collateral.

               "Permitted Put Payment" means a payment by Borrower on account of
the Musselman Put in accordance with the terms set forth in the Musselman
Purchase Agreement, so long as at the time of such payment (a) no Event of
Default is currently in existence or would result from such payment, and (b)
after taking such payment into account Borrower would have (and would have had
at all times during the 30 days preceding such payment) Excess Availability of
not less than $5,000,000.

               "Permitted Rauch Notes Payments" means payments of regularly
scheduled interest under the Rauch Notes as provided under the terms of such
notes in effect on November 24, 1999, plus payments of principal pursuant to the
terms of such notes (including at the regularly scheduled maturity thereof) in
effect on November 24, 1999, so long as at the time of such payment (a) no Event
of Default is currently in existence, and (b) after taking such payment into
account Borrower would have (and would have had at all times during the 30 days
preceding such payment) Excess Availability of not less than $5,000,000.

               "Person" means and includes natural persons, corporations,
limited liability companies, limited partnerships, general partnerships, limited
liability partnerships, joint

                                       13
<PAGE>

ventures, trusts, land trusts, business trusts, or other organizations,
irrespective of whether they are legal entities, and governments and agencies
and political subdivisions thereof.

               "Plan" means any employee benefit plan, program, or arrangement
maintained or contributed to by Borrower or with respect to which it may incur
liability within the meaning of Section 3(3) of ERISA.

               "Pro-Rata Share" means, with respect to a Lender, a fraction
(expressed as a percentage), the numerator of which is the amount of such
Lender's Commitment and the denominator of which is the aggregate amount of the
Commitments.

               "Rauch Notes" means, collectively, those certain 3 promissory
notes, each dated as of November 24, 1999, by Borrower in favor of Harry S.
Cohen and Steven D. Singleton, in the aggregate outstanding principal amount of
$6,000,000.

               "Real Property" means any estates or interests in real property
now owned or hereafter acquired by Borrower.

               "Reportable Event" means any of the events described in Section
4043(c) of ERISA or the regulations thereunder other than a Reportable Event as
to which the provision of 30 days notice to the PBGC is waived under applicable
regulations.

               "Required Lenders" means, at any time, Agent together with such
other Lenders whose Pro Rata Shares together with Agent aggregate 50.1% or more
of the Commitments.

               "Requirement of Law" means, as to any Person: (a) (i) all
statutes and regulations and (ii) court orders and injunctions, arbitrators'
decisions, and/or similar rulings, in each instance by any Governmental
Authority or arbitrator applicable to or binding upon such Person or any of such
Person's property or to which such Person or any of such Person's property is
subject; and (b) that Person's organizational documents, by-laws and/or other
instruments which deal with corporate or similar governance, as applicable.

               "Retiree Health Plan" means an "employee welfare benefit plan"
within the meaning of Section 3(1) of ERISA that provides benefits to
individuals after termination of their employment, other than as required by
Section 601 of ERISA.

               "Revolving Credit Note" has the meaning set forth in Section
2.1(g) hereof.

               "Revolving Facility Usage" means, as of any date of
determination, the aggregate amount of Advances.

               "Solvent" means, with respect to any Person on a particular date,
that on such date (a) at fair valuations, all of the properties and assets of
such Person are greater than the sum of the debts, including contingent
liabilities, of such Person, (b) the present fair salable value of the
properties and assets of such Person is not less than the amount that will be
required to pay the probable liability of such Person on its debts as they
become absolute and matured, (c) such Person is able to realize upon its
properties and assets and pay its debts and other liabilities, contingent
obligations and other commitments as they mature in the normal course of
business,

                                       14
<PAGE>

(d) such Person does not intend to, and does not believe that it will, incur
debts beyond such Person's ability to pay as such debts mature, and (e) such
Person is not engaged in business or a transaction, and is not about to engage
in business or a transaction, for which such Person's properties and assets
would constitute unreasonably small capital after giving due consideration to
the prevailing practices in the industry in which such Person is engaged. In
computing the amount of contingent liabilities at any time, it is intended that
such liabilities will be computed at the amount that, in light of all the facts
and circumstances existing at such time, represents the amount that reasonably
can be expected to become an actual or matured liability.

               "Specified Deposit Account" means a deposit account of Borrower
that is (a) used in the ordinary course of Borrower's business for the deposit
of cash, checks, wire transfers and other items of payment; (b) not evidenced by
a certificate of deposit; (c) not used to hold Investment Property; (d) not a
Lockbox Account; and (e) identified to Agent in writing.

               "Subordinated Credit Facility" means that certain Loan Agreement
dated as of April 30, 2001 by and among the Borrower, the lenders party thereto
and DDJ, as agent for the subordinated lenders.

               "Subsidiary" of a Person means a corporation, partnership,
limited liability company, or other entity in which that Person directly or
indirectly owns or controls the shares of stock or other ownership interests
having ordinary voting power to elect a majority of the board of directors (or
appoint other comparable managers) of such corporation, partnership, limited
liability company, or other entity.

               "Tangible Net Worth" means, as of any date of determination, the
difference of (a) Borrower's total stockholder's equity, minus (b) the sum of:
(i) all Intangible Assets of Borrower, (ii) all of Borrower's prepaid expenses,
and (iii) all amounts due to Borrower from Affiliates other than any
consolidated Subsidiary.

               "Tax Loan Notes" means those certain promissory notes payable to
Borrower, in an aggregate principal amount of approximately $1,700,000,
evidencing loans made to Borrower's senior management in respect of certain tax
obligations.

               "Termination Date" has the meaning set forth in Section 3.3.

               "Voidable Transfer" has the meaning set forth in Section 18.6.

               1.2. ACCOUNTING TERMS. All accounting terms not specifically
defined herein shall be construed in accordance with GAAP. When used herein, the
term "financial statements" shall include the notes and schedules thereto.
Whenever the term "Borrower" is used in respect of a financial covenant or a
related definition, it shall be understood to mean Borrower on a consolidated
basis unless the context clearly requires otherwise.

               1.3. CODE. Any terms used in this Agreement that are defined in
the Code shall be construed and defined as set forth in the Code unless
otherwise defined herein.

               1.4. CONSTRUCTION. Unless the context of this Agreement clearly
requires otherwise, references to the plural include the singular, references to
the singular include the

                                       15
<PAGE>

plural, the term "including" is not limiting, and the term "or" has, except
where otherwise indicated, the inclusive meaning represented by the phrase
"and/or." The words "hereof," "herein," "hereby," "hereunder, " and similar
terms in this Agreement refer to this Agreement as a whole and not to any
particular provision of this Agreement. An Event of Default shall "continue" or
be "continuing" until such Event of Default has been waived in writing by the
Agent or the requisite members of the Lender Group. Section, subsection, clause,
schedule, and exhibit references are to this Agreement unless otherwise
specified. Any reference in this Agreement or in the Loan Documents to this
Agreement or any of the Loan Documents shall include all alterations,
amendments, changes, extensions, modifications, renewals, replacements,
substitutions, and supplements, thereto and thereof, as applicable. With respect
to any provision herein requiring any act, event or condition to be
"satisfactory" or "acceptable" to Agent, Agent shall act in good faith in
determining whether any such act, event or condition is so satisfactory or
acceptable.

               1.5. SCHEDULES AND EXHIBITS. All of the schedules and exhibits
attached to this Agreement shall be deemed incorporated herein by reference.

         2. LOAN AND TERMS OF PAYMENT.

               2.1. REVOLVING ADVANCES.

                  (a) Subject to the terms and conditions of this Agreement,
each Lender agrees to make advances ("Advances") to Borrower in an amount at any
one time outstanding not to exceed such Lender's Pro-Rata Share of an amount
equal to the lesser of (i) the Maximum Amount or (ii) the Borrowing Base. The
Pro-Rata Share of the Revolving Advances of any Lender shall not at any time
exceed such Lender's Commitment. The obligations of each Lender hereunder shall
be several and not joint. For purposes of this Agreement, "Borrowing Base", as
of any date of determination, shall mean the result of:

                           (x) 85% of the GOB Value of Eligible Inventory, less
                  the amount, if any, of the Inventory Reserves and reserves for
                  gift certificates outstanding and for shrinkage, minus

                           (y) the aggregate amount of reserves for (i) sales
                  taxes and ad valorem taxes, (ii) the amount of any Collections
                  that the Lender Group could be required to pay to consignors
                  of inventory where such consignors have not entered into an
                  acceptable intercreditor agreement with Agent, and (iii) other
                  reserves, if any, established by Agent under Sections 2.1(b)
                  and 10.

                  (b) Anything to the contrary in Section 2.1(a) above
notwithstanding, Agent may (i) create reserves against the Borrowing Base or
reduce its advance rates based upon Eligible Inventory without declaring an
Event of Default if it determines that there has occurred a Material Adverse
Change and (ii) establish and revise general criteria for Eligible Inventory
from time to time if Agent reasonably determines that there has been a
substantive change in the shrinkage, character, composition or mix, markdowns or
retail markons and markups inconsistent with prior period practice, industry
standards or current business plans. Agent may

                                       16
<PAGE>

in its discretion from time to time, upon three (3) days' prior notice to
Borrower establish reserves with respect to Eligible Inventory to the extent
that Agent reasonably determines that (A) the net liquidation value of the
Eligible Inventory, or any category thereof, has decreased, or (B) the nature of
the inventory has changed. In determining whether to establish reserves with
respect to Eligible Inventory, Agent may consider events, conditions,
contingencies or risks which are also considered in determining Eligible
Inventory.

                  (c) Amounts borrowed pursuant to this Section 2.1 may be
repaid and, subject to the terms and conditions of this Agreement, reborrowed at
any time during the term of this Agreement.

                  (d) Procedure for Borrowing. Each Borrowing shall be made upon
Borrower's irrevocable request therefor delivered to Agent (which notice must be
received by Agent no later than 12:00 noon (Eastern Time) three (3) Business
Days prior to the Funding Date) specifying (i) the amount of the Borrowing and
(ii) the requested Funding Date, which shall be a Business Day.

                  (e) Notation. The Agent shall record on its books the
principal amount of the Advances owing to each Lender and the interests therein
of each Lender, from time to time. In addition, each Lender is authorized, at
such Lender's option, to note the date and amount of each payment or prepayment
of principal of such Lender's Advances in its books and records, including
computer records, such books and records constituting rebuttably presumptive
evidence, absent manifest error, of the accuracy of the information contained
therein.

                  (f) Lenders' Failure to Perform. All Advances shall be made by
the Lenders simultaneously and in accordance with their Pro Rata Shares. It is
understood that (i) no Lender shall be responsible for any failure by any other
Lender to perform its obligation to make any Advances hereunder, nor shall any
Commitment of any Lender be increased or decreased as a result of any failure by
any other Lender to perform its obligation to make any Advances hereunder, and
(ii) no failure by any Lender to perform its obligation to make any Advances
hereunder shall excuse any other Lender from its obligation to make any Advances
hereunder.

                  (g) Revolving Credit Note. On the Closing Date, the Borrower
shall execute and deliver to each Lender a revolving credit note (each a
"Revolving Credit Note"), substantially in the form of Exhibit D-1, in the
principal amount of such Lender's Pro Rata Share, to evidence the Advances from
time to time made by such Lender to Borrower hereunder. Upon receipt of an
affidavit of an officer of the Lender as to the loss, theft, destruction or
mutilation of the Revolving Credit Note, the Borrower will issue, in lieu
thereof, a replacement note in the same principal amount thereof.

                  (h) Effect of Bankruptcy. If a case is commenced by or against
Borrower under the Bankruptcy Code, or other statute providing for debtor
relief, then, without the approval of Required Lenders, the Lender Group shall
not make additional loans or provide additional financial accommodations under
the Loan Documents to Borrower as debtor or debtor-in-possession, or to any
trustee for Borrower, nor consent to the use of cash collateral (provided that
the Loan Account shall continue to be charged, to the fullest extent permitted
by law, for accruing interest, fees, and Lender Group Expenses).

                                       17
<PAGE>

         2.2. PAYMENTS.

               (a) Payments by Borrower.

                  (i) All payments to be made by Borrower shall be made without
     set-off, recoupment, deduction, or counterclaim, except as otherwise
     required by law. Except as otherwise expressly provided herein, all
     payments by Borrower shall be made to Agent for the account of the Lenders,
     at Agent's address set forth in Section 12, and shall be made in
     immediately available funds, no later than 1:00 p.m. (Eastern time) on the
     date specified herein. Any payment received by Agent later than 1:00 p.m.
     (Eastern time), at the option of Agent, shall be deemed to have been
     received on the following Business Day and any applicable interest or fee
     shall continue to accrue until such following Business Day.

                  (ii) Whenever any payment is due on a day other than a
     Business Day, such payment shall be made on the following Business Day, and
     such extension of time shall in such case be included in the computation of
     interest or fees, as the case may be.

                  (iii) Unless Agent receives notice from Borrower prior to the
     date on which any payment is due to the Lenders that Borrower will not make
     such payment in full as and when required, Agent may assume that Borrower
     has made such payment in full to Agent on such date in immediately
     available funds and Agent may (but shall not be so required), in reliance
     upon such assumption, distribute to each Lender on such due date an amount
     equal to the amount then due such Lender. If and to the extent Borrower has
     not made such payment in full to Agent, each Lender shall repay to Agent on
     demand such amount distributed to such Lender, together with interest
     thereon for each day from the date such amount is distributed to such
     Lender until the date repaid.

                  (iv) It is agreed that upon making payment to Agent for the
     account of the Lenders, in accordance with this Section 2.2(a) in respect
     of any Obligation owing to any Lender or the Agent, Borrower shall be
     deemed to have paid such Obligation for all purposes and any interest
     thereon then accruing or to accrue shall cease to accrue, regardless of
     when, whether, and how payment and settlement amongst members of the Lender
     Group is effected.

               (b) Apportionment and Application of Payments. Aggregate
principal and interest payments shall be apportioned ratably among the Lenders
(according to the unpaid principal balance of the Advances to which such
payments relate held by each Lender) and payments of the fees (other than fees
designated for Agent's separate account) shall, as applicable, be apportioned
ratably among the Lenders. All payments shall be remitted to Agent and all such
payments not relating to principal or interest on specific Advances, or not
constituting payment of specific fees and all proceeds of Collateral received by
Agent, shall be applied, first, to pay any fees or expense reimbursements then
due to Agent from Borrower; second, to pay any fees or expense reimbursements
then due to the Lenders from Borrower; third, to pay interest due in respect of
all Advances; fourth, ratably to pay principal of the Advances; and fifth,
ratably to pay any other Obligations due to Agent or any Lender by

                                       18
<PAGE>

Borrower. Agent shall promptly distribute to each Lender, pursuant to the
applicable wire transfer instructions received from each Lender in writing, such
funds as it may be entitled to receive.

         2.3. OVERADVANCES. If, at any time or for any reason, the amount of
Obligations owed by Borrower to the Lender Group pursuant to Section 2.1 is
greater than either the Dollar or percentage limitations set forth in Section
2.1 (an "Overadvance"), Borrower shall pay to Agent on the next Business Day, in
cash, the amount of such excess to be used by Agent to reduce the Obligations.

         2.4. INTEREST

               (a) Interest Rate. Except as provided in Section 2.4(b), below,
all Obligations except for any Obligations (other than Advances) that have not
become due and payable in accordance with the provisions of the Loan Documents)
shall bear interest at a per annum rate of 12.0%. All interest and fees
chargeable under the Loan Documents shall be computed on the basis of a 360 day
year for the actual number of days elapsed.

               (b) Default Rate. Upon the occurrence and during the continuation
of an Event of Default, all Obligations shall bear interest on the Daily Balance
at a per annum rate equal to 3.0 percentage points above the applicable Interest
Rate.

               (c) Payments. Interest in respect of Advances payable hereunder
shall be due and payable, in arrears, on the first Business Day of each month
during the term hereof. Borrower hereby authorizes Agent, at its option, without
prior notice to Borrower, to charge such interest, all Lender Group Expenses (as
and when incurred), the charges, commissions, fees, the fees and charges
provided for in Section 2.8 (as and when accrued or incurred), and all payments
due under any Loan Document to the Loan Account, which amounts thereafter shall
accrue interest at the rate then applicable to Advances hereunder. Any interest
not paid when due shall be compounded and shall thereafter accrue interest at
the rate then applicable to Advances hereunder.

               (d) Intent to Limit Charges to Maximum Lawful Rate. In no event
shall the interest rate or rates payable under this Agreement, plus any other
amounts paid in connection herewith, exceed the highest rate permissible under
any law that a court of competent jurisdiction shall, in a final determination,
deem applicable. Borrower and the Lender Group, in executing and delivering this
Agreement, intend legally to agree upon the rate or rates of interest and manner
of payment stated within it; provided, however, that, anything contained herein
to the contrary notwithstanding, if said rate or rates of interest or manner of
payment exceeds the maximum allowable under applicable law, then, ipso facto as
of the date of this Agreement, Borrower is and shall be liable only for the
payment of such maximum as allowed by law, and payment received from Borrower in
excess of such legal maximum, whenever received, shall be applied to reduce the
principal balance of the Obligations to the extent of such excess.

         2.5. CREDITING PAYMENTS; APPLICATION OF COLLECTIONS. The receipt of any
Collections by Agent (whether from transfers to Agent by the Lockbox Banks
pursuant to the Lockbox Agreements or otherwise) immediately shall be applied
provisionally to reduce the

                                       19
<PAGE>

Obligations outstanding under Section 2.1, but shall not be considered a payment
on account of such Obligations unless such Collection item is a wire transfer of
immediately available federal funds and is made to the Agent's Account or unless
and until such Collection item is honored when presented for payment (it being
understood that any Advance provisionally reduced by provisional application of
any Collection item that is not a wire transfer of immediately available federal
funds to the Agent's Account shall nonetheless be deemed to have been repaid and
to be no longer outstanding unless and until such Collection item is not honored
when presented for payment). From and after the Closing Date, Agent shall be
entitled to charge Borrower for two Business Days of 'clearance' or 'float' at
the rate set forth in Section 2.4(a) or Section 2.4(b), as applicable, on all
Collections that are received by Agent (regardless of whether forwarded by the
Lockbox Banks to Agent, whether provisionally applied to reduce the Obligations
under Section 2.1, or otherwise). This across-the-board two Business Day
clearance or float charge on all Collections is acknowledged by the parties to
constitute an integral aspect of the pricing of the Lender Group's financing of
Borrower, and shall apply irrespective of the characterization of whether
receipts are owned by Borrower or Agent, and whether or not there are any
outstanding Advances, the effect of such clearance or float charge being the
equivalent of charging two Business Days of interest on such Collections. Should
any Collection item not be honored when presented for payment, then Borrower
shall be deemed not to have made such payment, and interest shall be
recalculated accordingly. Anything to the contrary contained herein
notwithstanding, any Collection item shall be deemed received by Agent only if
it is received into the Agent's Account on a Business Day on or before 1:00 p.m.
(Eastern time). If any Collection item is received into the Agent's Account on a
non-Business Day or after 1:00 p.m. (Eastern time) on a Business Day, it shall
be deemed to have been received by Agent as of the opening of business on the
immediately following Business Day.

         2.6. DESIGNATED ACCOUNT. Agent and the Lender Group are authorized to
make the Advances under this Agreement based upon telephonic or other
instructions received from anyone purporting to be an Authorized Person, or
without instructions if pursuant to Section 2.4(c). Borrower agrees to establish
and maintain the Designated Account with the Designated Account Bank for the
purpose of receiving the proceeds of the Advances requested by Borrower and made
by the Lender Group hereunder. Unless otherwise agreed by Agent and Borrower,
any Advance requested by Borrower and made by the Lender Group hereunder shall
be made to the Designated Account.

         2.7. COLLECTION OF ACCOUNTS. Borrower shall at all times maintain
lockboxes (the "Lockboxes") and, immediately after the Closing Date (if Borrower
has not already done so), shall instruct all Account Debtors with respect to the
Accounts, General Intangibles, and Negotiable Collateral of Borrower to remit
all Collections in respect thereof to such Lockboxes. Borrower, Agent, and the
Lockbox Banks shall enter into the Lockbox Agreements, each of which among other
things shall provide for the opening of a Lockbox Account for the deposit of
Collections at a Lockbox Bank. Borrower agrees that all Collections and other
amounts received by Borrower from any Account Debtor or any other source
immediately upon receipt shall be deposited into a Lockbox Account; provided,
however, that (a) until Agent, in its reasonable credit judgment, shall notify
Borrower to the contrary, Collections may be deposited by individual stores, in
the ordinary course of business, into a local depositary that is not a Lockbox
Bank and thereupon any collected funds from such deposited Collections shall be
wire transferred within one Business Day to a Lockbox Account, subject to
nonmaterial amounts

                                       20
<PAGE>

which may take longer to be transferred from the local depository accounts as a
result of data transmission errors; and (b) Borrower may retain $500 of cash in
each of its retail store locations. No Lockbox Agreement or arrangement
contemplated thereby shall be modified by Borrower without the prior written
consent of Agent. Upon the terms and subject to the conditions set forth in the
Lockbox Agreements, all amounts received and collected in each Lockbox Account
shall be wired each Business Day into another Lockbox or into an account (the
"Agent's Account") maintained by Agent at a depositary selected by Agent.

         2.8. MAINTENANCE OF LOAN ACCOUNT; STATEMENTS OF OBLIGATIONS. Agent
shall maintain an account on its books in the name of Borrower (the "Loan
Account") on which Borrower will be charged with all Advances made by the Lender
Group to Borrower or for Borrower's account, including, accrued interest, Lender
Group Expenses, and any other payment Obligations of Borrower. In accordance
with Section 2.5, the Loan Account will be credited with all payments received
by Agent from Borrower or for Borrower's account. Agent shall render statements
regarding the Loan Account to Borrower, including principal, interest, fees, and
including an itemization of all charges and expenses constituting the Lender
Group Expenses owing and of all expenses, charges, and costs provided for in
Section 2.9(c) and attaching detailed invoices in respect of any such material
charge, expense, or cost not otherwise set forth in detail on such statement,
and such statements shall be conclusively presumed to be correct and accurate
and constitute an account stated between Borrower and the Lender Group unless,
within 30 days after receipt thereof by Borrower, Borrower shall deliver to
Agent written objection thereto describing the error or errors contained in any
such statements.

         2.9. OTHER COMPENSATION. Borrower shall pay to Agent for the ratable
benefit of the Lender Group (except where otherwise indicated) the following
additional compensation:

               (a) Commitment Fee. On the Closing Date, the Borrower shall pay
to the Agent, a commitment fee equal to $100,000, which shall be fully earned as
of the Closing Date.

               (b) Additional Compensation. As additional compensation for the
Lenders, Borrower agrees to pay Agent, for the ratable benefit of such Lenders
(based on the amount of such Lender's unused Commitment), compensation for
Borrower's non-use of available funds in an amount equal to 0.375% per annum
times the Average Unused Portion of the Maximum Amount payable in arrears on the
first Business Day of each month during the term hereof; and

               (c) Reimbursement of Expenses. Borrower shall reimburse Agent for
the sole account of Agent out-of-pocket expenses for each appraisal of the
Collateral performed by personnel employed by Agent, including any appraisals or
testing provided for under Section 4.6; provided, however, that except during
such time as an Event of Default has occurred and is continuing such appraisals
shall not be conducted more frequently than quarterly, and the actual charges
paid or incurred by Agent if it elects to employ the services of one or more
third Persons (other than employees of a Lender) to perform such financial
analyses and examinations (i.e., audits) of Borrower or to appraise the
Collateral. Borrower shall pay and/or reimburse Agent for any costs or expenses
incurred by the Agent (or an agent of Agent) for the maintenance and
administration of the Lockbox Accounts or any other costs associated with
monitoring,

                                       21
<PAGE>

maintaining, or administering the Borrower's cash management system, including,
without limitation, the costs and expenses of the Bank of New York.

         2.10. TAXES.

               (a) Except as provided below in this Section 2.10, all payments
made by Borrower under this Agreement and any other Loan Documents shall be made
free and clear of, and without deduction or withholding for or on account of,
any present or future income, stamp or other taxes, levies, imposts, duties,
charges, fees, deductions, or withholdings, now or hereafter imposed, levied,
collected, withheld, or assessed by any Governmental Authority, excluding net
income taxes and franchise taxes imposed in lieu of net income taxes. If any
such non-excluded taxes, levies, imposts, duties, charges, fees, deductions or
withholdings ("Non-Excluded Taxes") are required to be withheld from any amounts
payable to any Lender hereunder or under any other Loan Documents, the amounts
so payable to or for the benefit of such Lender shall be increased to the extent
necessary to yield to such Lender (after payment of all Non-Excluded Taxes)
interest or any such other amounts payable hereunder at the rates or in the
amounts specified in this Agreement and any other Loan Documents, provided,
however, that Borrower shall be entitled to deduct and withhold any Non-Excluded
Taxes and shall not be required to increase any such amounts payable for the
benefit of any Lender if such Lender fails or is unable to comply with the
requirements of paragraph (b) of this Section 2.10. Whenever any Non-Excluded
Taxes are payable by Borrower, as promptly as possible thereafter Borrower shall
send to Agent a certified copy of an original official receipt received by
Borrower showing payment thereof. If Borrower fails to pay any Non-Excluded
Taxes when due to the appropriate taxing authority or fails to remit to the
Lender Group the required receipts or other required documentary evidence,
Borrower shall indemnify the Lender Group for any incremental taxes, interest or
penalties that may become payable by the Lender Group as a result of any such
failure. The agreements in this Section 2.10 shall survive the termination of
this Agreement and the payment of the Advances and all other amounts payable
hereunder.

               (b) Any Lender, or any Participant or assignee of a Lender, that
is not incorporated under the laws of the United States of America or a state
thereof (any such Person, a "Foreign Lender") shall:

                    (i) (x) on or before the date of any payment by Borrower
     under this Agreement to such Foreign Lender, deliver to Borrower and Agent
     (A) two duly completed copies of United States Internal Revenue Service
     Form 1001 or 4224, or successor applicable form, as the case may be,
     certifying that it is entitled to receive payments under this Agreement
     without any deduction or withholding of any United States federal income
     taxes and (B) a duly completed Internal Revenue Service Form W-8 or W-9, or
     successor applicable form, as the case may be, certifying that it is
     entitled to an exemption from United States backup withholding tax;

                    (y) deliver to Borrower and Agent two further copies of any
     such form or certification on or before the date that any such form or
     certification expires or becomes obsolete and after the occurrence of any
     event requiring a change in the most recent form previously delivered by it
     to Borrower, and

                                       22
<PAGE>

                    (z) obtain such extensions of time for filing and complete
     such forms or certifications as may reasonably be requested by Borrower or
     Agent;

     or

               (ii) in the case of any such Foreign Lender that is not a "bank"
     within the meaning of Section 881(c)(3)(A) of the IRC and that does not
     comply with subparagraph (i) of this paragraph (b),

                    (x) represent to Borrower (for the benefit of Borrower and
     Agent) that it is not a bank within the meaning of Section 881(c)(3)(A) of
     the IRC,

                    (y) deliver to Borrower on or before the date of any payment
     by Borrower, with a copy to Agent: (1) a certificate stating that such
     Foreign Lender (A) is not a "bank" under Section 881(c)(3)(A) of the IRC,
     is not subject to regulatory or other legal requirements as a bank in any
     jurisdiction, and has not been treated as a bank for purposes of any tax,
     securities law, or other filing or submission made to any Governmental
     Authority, any application made to a rating agency or qualification for any
     exemption from tax, securities law or other legal requirements, (B) is not
     a 10-percent shareholder within the meaning of Section 881(c)(3)(B) of the
     IRC, and (C) is not a controlled foreign corporation receiving interest
     from a related person within the meaning of Section 881(c)(3)(C) of the IRC
     (any such certificate a "U.S. Tax Compliance Certificate"); and (2) two
     duly completed copies of Internal Revenue Service Form W-8, or successor
     applicable form, certifying to such Foreign Lender's legal entitlement at
     the date of such certificate to an exemption from U.S. withholding tax
     under the provisions of Section 881(c) of the IRC with respect to payments
     to be made under this Agreement (and to deliver to Borrower and Agent two
     further copies of Form W-8 on or before the date it expires or becomes
     obsolete and after the occurrence of any event requiring a change in the
     most recently provided form and, if necessary, obtain any extensions of
     time reasonably requested by Borrower or Agent for filing and completing
     such forms), and

                    (z) agree, to the extent legally entitled to do so, upon
     reasonable request by Borrower, to provide to Borrower (for the benefit of
     Borrower and Agent) such other forms as may be reasonably required in order
     to establish the legal entitlement of such Foreign Lender to an exemption
     from withholding with respect to payments under this Agreement;

               (c) Agent and each Foreign Lender shall, upon the reasonable
request by Borrower, deliver to Borrower or the applicable Governmental
Authority, as the case may be, any form or certificate required in order that
any payment by Borrower under this Agreement may be made free and clear of, and
without deduction or withholding for or on Non-Excluded Taxes (or to allow any
such deduction or withholding to be at a reduced rate) imposed on such payment
under the laws of any jurisdiction, provided that Agent or such Foreign Lender,
as the case may be, is legally entitled to complete, execute and deliver such
form or certificate and such completion, execution or submission would not
materially prejudice the legal position of Agent

                                       23
<PAGE>

or such Foreign Lender, as the case may be, unless in any such case any change
in treaty, law, or regulation has occurred after the date such Person becomes a
Foreign Lender hereunder which renders all such forms and certificates
inapplicable or which would prevent such Foreign Lender from duly completing and
delivering any such form or certificate with respect to it and such Foreign
Lender so advises Borrower and Agent. Each Person that shall, after the Closing
Date, become a Lender or a Participant shall, upon the effectiveness of the
related transfer, be required to provide all of the forms, certifications, and
statements required pursuant to this Section 2.10; provided, however, that in
the case of a Participant the obligations of such Participant pursuant to this
paragraph (b) shall be determined as if such Participant were an assignee except
that such Participant shall furnish all such required forms, certifications, and
statements to the Lender from which the participation is purchased.

         3. CONDITIONS; TERM OF AGREEMENT.

               3.1. CONDITIONS PRECEDENT TO THE INITIAL ADVANCE. The obligation
of the Lender Group to make the initial Advance is subject to the fulfillment,
to the satisfaction of Agent and its counsel, of each of the following
conditions on or before the Closing Date:

                  (a) the Closing Date shall occur on or before October 1, 2001;

                  (b) Agent shall have received each of the following documents,
duly executed, and each such document shall be in full force and effect:

                           (i) the Disbursement Letter;

                           (ii) the Pay-Off Letter, together with UCC statements
                  and other documentation evidencing the cancellation by
                  Existing Lender to Agent of all financing statements
                  evidencing its Liens in and to the properties and assets of
                  Borrower;

                           (iii) the Intellectual Property Security Agreement;
                  and

                           (iv) the Lockbox Agreements.

                  (c) Agent shall have received a certificate from the Secretary
of Borrower attesting to the resolutions of Borrower's Board of Directors
authorizing its execution, delivery, and performance of this Agreement and the
other Loan Documents to which Borrower is a party and authorizing specific
officers of Borrower to execute the same;

                  (d) Agent shall have received copies of Borrower's Governing
Documents, as amended, modified, or supplemented to the Closing Date, certified
by the Secretary of Borrower;

                  (e) Agent shall have received a certificate of status with
respect to Borrower, dated within 10 days of the Closing Date, such certificate
to be issued by the appropriate officer of the jurisdiction of organization of
Borrower, which certificate shall indicate that Borrower is in good standing in
such jurisdiction;

                                       24
<PAGE>

                  (f) Agent shall have received certificates of status with
respect to Borrower, each dated within 15 days of the Closing Date, such
certificates to be issued by the appropriate officer of the jurisdictions in
which its failure to be duly qualified or licensed would constitute a Material
Adverse Change, which certificates shall indicate that Borrower is in good
standing in such jurisdictions;

                  (g) Agent shall have received a certificate of insurance,
together with the endorsements thereto, as are required by Section 6.10, the
form and substance of which shall be satisfactory to Agent and its counsel;

                  (h) Agent shall have received duly executed certificates of
title with respect to that portion of the Collateral that is subject to
certificates of title;

                  (i) Agent shall have received such Collateral Access
Agreements from lessors (including the lessor of Borrower's distribution
facility located at 2914 Montopolis Drive, Austin, Texas), warehousemen,
bailees, Approved Vendors, and other third Persons as Agent may require;

                  (j) Agent shall have received an opinion of Borrower's counsel
in form and substance satisfactory to Agent in its sole discretion;

                  (k) Agent shall have received satisfactory evidence that all
tax returns required to be filed by Borrower have been timely filed and all
taxes upon Borrower or its properties, assets, income, and franchises (including
real property taxes and payroll taxes) have been paid prior to delinquency,
except for such taxes that are the subject of a Permitted Protest;

                  (l) Agent and its counsel shall have completed its review of
Borrower's consigned inventory arrangements, and be satisfied (which may require
an opinion letter from Borrower's counsel, instituting one or more reserves,
receipt of intercreditor agreements, or a combination of the foregoing) with
respect thereto;

                  (m) all other documents and legal matters in connection with
the transactions contemplated by this Agreement shall have been delivered,
executed, or recorded and shall be in form and substance reasonably satisfactory
to Agent and its counsel.

         3.2. CONDITIONS PRECEDENT TO ALL ADVANCES. The following shall be
conditions precedent to all Advances hereunder:

                  (a) the representations and warranties contained in this
Agreement and the other Loan Documents shall be true and correct in all material
respects on and as of the date of such extension of credit, as though made on
and as of such date (except to the extent that such representations and
warranties relate solely to an earlier date);

                  (b) no Default or Event of Default shall have occurred and be
continuing on the date of such extension of credit, nor shall either result from
the making thereof;

                                       25
<PAGE>

                  (c) no injunction, writ, restraining order, or other order of
any nature prohibiting, directly or indirectly, the extending of such credit
shall have been issued and remain in force by any Governmental Authority against
Borrower, the Lender Group or any of their Affiliates; and

                  (d) the amount of any requested Advance shall not exceed the
Availability at such time.

         3.3. TERM. This Agreement shall terminate on January 31, 2003 (the
"Termination Date").

         3.4. EFFECT OF TERMINATION. On the date of termination of this
Agreement, all Obligations immediately shall become due and payable without
notice or demand. No termination of this Agreement, however, shall relieve or
discharge Borrower of Borrower's duties, Obligations, or covenants hereunder,
and the Lender Group's continuing security interests in the Collateral shall
remain in effect until all Obligations have been fully and finally discharged
and the Lender Group's obligation to provide additional credit hereunder is
terminated.

         3.5. VOLUNTARY PREPAYMENTS. The Borrower may, upon not less than seven
(7) Business Days' notice to the Agent, prepay, without premium or penalty
thereon, the Obligations in full, in cash.

     4. CREATION OF SECURITY INTEREST.

         4.1. GRANT OF SECURITY INTEREST. Borrower hereby grants to Agent for
the benefit of the Lender Group a continuing security interest in all currently
existing and hereafter acquired or arising Collateral in order to secure prompt
repayment of any and all Obligations and in order to secure prompt performance
by Borrower of each of its covenants and duties under the Loan Documents. The
security interests of Agent for the benefit of the Lender Group in the
Collateral shall attach to all Collateral without further act on the part of the
Lender Group or Borrower. Anything contained in this Agreement or any other Loan
Document to the contrary notwithstanding, except for sales, leases, assignments,
transfers, or other dispositions permitted under Section 7.4, Borrower has no
authority, express or implied, to dispose of any item or portion of the
Collateral.

         4.2. NEGOTIABLE COLLATERAL. In the event that any Collateral, including
proceeds, is evidenced by or consists of a Deliverable Instrument not deposited
into a Lockbox Account, Borrower, immediately upon the request of Agent, shall
endorse and deliver physical possession of such Negotiable Collateral to Agent.
In the event that any Collateral, including proceeds, consists of Credit Sales
Chattel Paper, Borrower shall deliver all such Credit Sales Chattel Paper to
Agent, or to a third party reasonably acceptable to Agent, who has entered into
a Collateral Access Agreement reasonably acceptable to Agent and who will agree
to maintain physical possession of such Collateral. At any time that an Event of
Default has occurred and is continuing Borrower, immediately upon the request of
Agent, shall endorse and deliver physical possession of all Negotiable
Collateral, including Credit Sales Chattel Paper, to Agent.

                                       26
<PAGE>

         4.3. COLLECTION OF ACCOUNTS, GENERAL INTANGIBLES, AND NEGOTIABLE
COLLATERAL. At any time that an Event of Default has occurred and is continuing,
Agent or Agent's designee may (a) notify customers or Account Debtors of
Borrower that the Accounts, General Intangibles, or Negotiable Collateral have
been assigned to Agent for the benefit of the Lender Group or that Agent for the
benefit of the Lender Group has a security interest therein, and (b) collect the
Accounts, General Intangibles, and Negotiable Collateral directly and charge the
collection costs and expenses to the Loan Account. Borrower agrees that it will
hold in trust for the Lender Group, as the Lender Group's trustee, any
Collections that it receives and immediately will deliver said Collections to
Agent in their original form as received by Borrower.

         4.4. DELIVERY OF ADDITIONAL DOCUMENTATION REQUIRED. At any time upon
the request of Agent, Borrower shall execute and deliver to Agent all financing
statements, continuation financing statements, fixture filings, security
agreements, pledges, assignments, control agreements, endorsements of
certificates of title, applications for title, affidavits, reports, notices,
schedules of accounts, letters of authority, and all other documents that Agent
reasonably may request, in form satisfactory to Agent, to perfect and continue
perfected the Liens of the Lender Group in the Collateral, and in order to fully
consummate all of the transactions contemplated hereby and under the other the
Loan Documents; provided, however, that, unless an Event of Default has occurred
and is continuing, Borrower shall not be required (a) to execute any instrument
or document to perfect the security interest of the Lender Group in any
Specified Deposit Accounts or money; or (b) to deliver to Agent or the Lenders
physical possession of any Negotiable Collateral that is not a Deliverable
Instrument.

         4.5. POWER OF ATTORNEY. Borrower hereby irrevocably makes, constitutes,
and appoints Agent (and any of Agent's officers, employees, or agents designated
by Agent) as Borrower's true and lawful attorney, with power to (a) if Borrower
refuses to, or fails timely to execute and deliver any of the documents
described in Section 4.4, sign the name of Borrower on any of the documents
described in Section 4.4, (b) at any time that an Event of Default has occurred
and is continuing, sign Borrower's name on any invoice or bill of lading
relating to any Account, drafts against Account Debtors, schedules and
assignments of Accounts, verifications of Accounts, and notices to Account
Debtors, (c) send requests for verification of Accounts, (d) endorse Borrower's
name on any Collection item that may come into the Lender Group's possession,
(e) at any time that an Event of Default has occurred and is continuing, notify
the post office authorities to change the address for delivery of Borrower's
mail to an address designated by Agent, to receive and open all mail addressed
to Borrower, and to retain all mail relating to the Collateral and forward all
other mail to Borrower, (f) at any time that an Event of Default has occurred
and is continuing, make, settle, and adjust all claims under Borrower's policies
of insurance and make all determinations and decisions with respect to such
policies of insurance, and (g) at any time that an Event of Default has occurred
and is continuing, settle and adjust disputes and claims respecting the Accounts
directly with Account Debtors, for amounts and upon terms that Agent determines
to be reasonable, and Agent may cause to be executed and delivered any documents
and releases that Agent determines to be necessary. The appointment of Agent as
Borrower's attorney, and each and every one of Agent's rights and powers, being
coupled with an interest, is irrevocable until all of the Obligations have been
fully and finally repaid and performed and the Lender Group's obligation to
extend credit hereunder is terminated.

                                       27
<PAGE>

         4.6. RIGHT TO INSPECT. Agent (through any of its officers, members,
employees, or agents) and each Lender shall have the right, from time to time
hereafter during normal business hours upon notice or, if an Event of Default
has occurred or the Lender Group deems itself insecure, at any time, and in each
case without advance notice, and together with the officers, employees or agents
of any Lender who so elects, to inspect Borrower's Books and to check, test, and
appraise the Collateral in order to verify Borrower's financial condition or the
amount, quality, value, condition of, or any other matter relating to, the
Collateral and to discuss the affairs, finances and accounts of the Borrower,
with any of the Borrower's officers, directors or its independent accountants.
In addition, Agent shall arrange for: (i) appraisals of the Inventory to be
conducted, at Borrower's expense, by an independent appraiser mutually
acceptable to Agent and Borrower, not less than quarterly prior to an Event of
Default, and as frequently as Agent requires during the existence of an Event of
Default; and (ii) Inventory testing, at Borrower's expense, in conjunction with
Borrower's fiscal year end audits and periodic cycle counts during the fiscal
year of Borrower to be conducted by RGIS or Washington Inventory Services, or
another inventory testing firm mutually acceptable to Agent and Borrower. The
reports of such appraisals and tests shall be delivered to the Lender Group and
shall be acceptable to Agent in Agent's reasonable credit judgment in accordance
with Agent's customary practices.

     5. REPRESENTATIONS AND WARRANTIES.

     In order to induce the Lender Group to enter into this Agreement, Borrower
makes the following representations and warranties which shall be true, correct,
and complete in all respects as of the Closing Date, and at and as of the date
of the making of each Advance thereafter, as though made on and as of the date
of such Advance (except to the extent that such representations and warranties
relate solely to an earlier date) and such representations and warranties shall
survive the execution and delivery of this Agreement:

         5.1. NO ENCUMBRANCES. Borrower has good and indefeasible title to the
Collateral, free and clear of Liens except for Permitted Liens.

         5.2. ELIGIBLE INVENTORY. All Eligible Inventory is of good and
merchantable quality, free from material defects.

         5.3. EQUIPMENT. All of the Equipment is used or held for use in
Borrower's business and is fit for such purposes.

         5.4. LOCATION OF INVENTORY AND EQUIPMENT. The Inventory and Equipment
are not stored with a bailee, warehouseman, or similar party (without Agent's
prior written consent) and are located only at the locations identified on
Schedule 6.11 or otherwise permitted by Section 6.11.

         5.5. INVENTORY RECORDS. Borrower keeps correct and accurate records
itemizing and describing the kind, type, quality, and quantity of the Inventory,
and Borrower's Cost therefor.

                                       28
<PAGE>

         5.6. LOCATION OF CHIEF EXECUTIVE OFFICE; FEIN. The chief executive
office of Borrower is located at the address indicated in the preamble to this
Agreement and Borrower's FEIN is 95-3746316.

         5.7. DUE ORGANIZATION AND QUALIFICATION; SUBSIDIARIES.

               (a) Borrower is duly organized and existing and in good standing
under the laws of the jurisdiction of its incorporation and qualified and
licensed to do business in, and in good standing in, any state where the failure
to be so licensed or qualified reasonably could be expected to cause a Material
Adverse Change.

               (b) Set forth on Schedule 5.8, is a complete and accurate list of
Borrower's direct and indirect Subsidiaries, showing: (i) the jurisdiction of
their incorporation; (ii) the number of shares of each class of common and
preferred stock authorized for each of such Subsidiaries; and (iii) the number
and the percentage of the outstanding shares of each such class owned directly
or indirectly by Borrower. All of the outstanding capital stock of each such
Subsidiary has been validly issued and is fully paid and non-assessable.

               (c) Except as set forth on Schedule 5.8, no capital stock (or any
securities, instruments, warrants, options, purchase rights, conversion or
exchange rights, calls, commitments or claims of any character convertible into
or exercisable for capital stock) of any direct or indirect Subsidiary of
Borrower is subject to the issuance of any security, instrument, warrant,
option, purchase right, conversion or exchange right, call, commitment or claim
of any right, title, or interest therein or thereto.

         5.8. DUE AUTHORIZATION; NO CONFLICT.

               (a) The execution, delivery, and performance by Borrower of this
Agreement and the Loan Documents to which it is a party have been duly
authorized by all necessary corporate action.

               (b) The execution, delivery, and performance by Borrower of this
Agreement and the Loan Documents to which it is a party do not and will not (i)
violate any provision of federal, state, or local law or regulation (including
Regulations T, U, and X of the Federal Reserve Board) applicable to Borrower,
the Governing Documents of Borrower, or any order, judgment, or decree of any
court or other Governmental Authority binding on Borrower, (ii) conflict with,
result in a breach of, or constitute (with due notice or lapse of time or both)
a default under any material contractual obligation or material lease of
Borrower, (iii) result in or require the creation or imposition of any Lien of
any nature whatsoever upon any properties or assets of Borrower, other than
Permitted Liens, or (iv) require any approval of stockholders or any approval or
consent of any Person under any material contractual obligation of Borrower.

               (c) Other than the filing of appropriate financing statements and
fixture filings the execution, delivery, and performance by Borrower of this
Agreement and the Loan Documents to which Borrower is a party do not and will
not require any registration with, consent, or approval of, or notice to, or
other action with or by, any federal, state, foreign, or other Governmental
Authority or other Person.

                                       29
<PAGE>

               (d) This Agreement and the Loan Documents to which Borrower is a
party, and all other documents contemplated hereby and thereby, when executed
and delivered by Borrower will be the legally valid and binding obligations of
Borrower, enforceable against Borrower in accordance with their respective
terms, except as enforcement may be limited by equitable principles or by
bankruptcy, insolvency, reorganization, moratorium, or similar laws relating to
or limiting creditors' rights generally.

               (e) The Liens granted by Borrower to Agent (for the benefit of
the Lender Group) in and to its properties and assets pursuant to this Agreement
and the other Loan Documents are (i) validly created Liens in all the Collateral
and (ii) validly perfected and first priority Liens in all Collateral (except
for any Collateral constituting (1) Specified Deposit Accounts or money, and (2)
Negotiable Collateral that is not a Deliverable Instrument), subject only to
Permitted Liens.

         5.9. LITIGATION. There are no actions or proceedings pending by or
against Borrower before any court or administrative agency and Borrower does not
have knowledge or belief of any pending, threatened, or imminent litigation,
governmental investigations, or claims, complaints, actions, or prosecutions
involving Borrower or any guarantor of the Obligations, except for: (a) ongoing
collection matters in which Borrower is the plaintiff; (b) matters disclosed on
Schedule 5.9; and (c) matters arising after the date hereof that would not
reasonably be expected to cause a Material Adverse Change.

         5.10. NO MATERIAL ADVERSE CHANGE. All financial statements relating to
Borrower or any guarantor of the Obligations that have been delivered by
Borrower to the Lender Group have been prepared in accordance with GAAP (except,
in the case of unaudited financial statements, for the lack of footnotes and
being subject to year-end audit adjustments) and fairly present Borrower's (or
such guarantor's, as applicable) financial condition as of the date thereof and
Borrower's results of operations for the period then ended. There has not been a
Material Adverse Change with respect to Borrower (or such guarantor, as
applicable) since the date of the latest financial statements submitted to the
Lender Group on or before the Closing Date.

         5.11. SOLVENCY. Borrower is Solvent. No transfer of property is being
made by Borrower and no obligation is being incurred by Borrower in connection
with the transactions contemplated by this Agreement or the other Loan Documents
with the intent to hinder, delay, or defraud either present or future creditors
of Borrower.

         5.12. EMPLOYEE BENEFITS. None of Borrower, any of its Subsidiaries, or
any of their ERISA Affiliates maintains or contributes to any Benefit Plan,
other than those listed on Schedule 5.12. Borrower, each of its Subsidiaries and
each ERISA Affiliate have satisfied the minimum funding standards of ERISA and
the IRC with respect to each Benefit Plan to which it is obligated to
contribute. No ERISA Event has occurred nor has any other event occurred that
may result in an ERISA Event that reasonably could be expected to result in a
Material Adverse Change. None of Borrower or its Subsidiaries, any ERISA
Affiliate, or any fiduciary of any Plan is subject to any direct or indirect
liability with respect to any Plan under any applicable law, treaty, rule,
regulation, or agreement. None of Borrower or its Subsidiaries or any ERISA
Affiliate is required to provide security to any Plan under Section 401(a)(29)
of the IRC.

                                       30
<PAGE>

         5.13. ENVIRONMENTAL CONDITION. Other than as listed on Schedule 5.13,
and except for actions or omissions having costs to remediate of less than
$250,000 in the aggregate, (a) none of Borrower's properties or assets has ever
been used by Borrower or, to the best of Borrower's knowledge, by previous
owners or operators in the disposal of, or to produce, store, handle, treat,
release, or transport, any Hazardous Materials in any manner which violates any
law or regulation governing the use, storage, treatment, transportation,
manufacturing, handling, production, or disposal of Hazardous Materials; (b)
none of Borrower's properties or assets has ever been designated or identified
in any manner pursuant to any environmental protection statute as a Hazardous
Materials disposal site, or a candidate for closure pursuant to any
environmental protection statute; (c) no Lien arising under any environmental
protection statute has attached to any revenues or to any real or personal
property owned or operated by Borrower; and (d) Borrower has not received a
summons, citation, notice, or directive from the Environmental Protection Agency
or any other federal or state governmental agency concerning any action or
omission by Borrower resulting in the releasing or disposing of Hazardous
Materials into the environment.

     6. AFFIRMATIVE COVENANTS.

     Borrower covenants and agrees that, so long as any credit hereunder shall
be available and until full and final payment of the Obligations, Borrower shall
do all of the following:

         6.1. ACCOUNTING SYSTEM. Maintain a standard and modern system of
accounting that enables Borrower to produce financial statements in accordance
with GAAP, and maintain records pertaining to the Collateral that contain
information as from time to time may be requested by Agent. Borrower also shall
keep a modern inventory reporting system that shows all additions, sales,
claims, returns, and allowances with respect to the Inventory.

         6.2. COLLATERAL REPORTING. Provide Agent with the following documents
at the following times in form satisfactory to Agent: (a) on a weekly basis, a
calculation of the Borrowing Base as of such date, (b) on a monthly basis and,
in any event, by no later than the 15th day of each month during the term of
this Agreement, a detailed calculation of the Borrowing Base, together with a
reconciliation to the detailed calculation of the Borrowing Base previously
provided to Agent, (c) on a weekly basis, Inventory reports specifying
Borrower's Cost of its Inventory by category, and specifying all Inventory held
by Borrower on consignment or memorandum with additional detail identifying the
consignor and the value (by consignor) of all such Inventory, (d) upon request
of Agent, on each Business Day, notice of all returns, disputes, or claims, (e)
upon request, copies of invoices in connection with the Accounts, customer
statements, credit memos, remittance advices and reports, deposit slips,
shipping and delivery documents in connection with the Accounts and for
Inventory and Equipment acquired by Borrower, purchase orders and invoices, (f)
on a quarterly basis, a detailed list of Borrower's customers, (g) on a monthly
basis, a calculation of the Dilution for the prior month; and (h) such other
reports as to the Collateral or the financial condition of Borrower as Agent may
request from time to time.

         6.3. FINANCIAL STATEMENTS, REPORTS, CERTIFICATES. Deliver to Agent: (a)
as soon as available, but in any event within 45 days after the end of each
month during each of

                                       31
<PAGE>
Borrower's fiscal years, a company prepared balance sheet, income statement, and
statement of cash flow covering Borrower's operations during such period; and
(b) as soon as available, but in any event within 105 days after the end of each
of Borrower's fiscal years, financial statements of Borrower for each such
fiscal year, audited by independent certified public accountants reasonably
acceptable to Agent and certified, without any qualifications, by such
accountants to have been prepared in accordance with GAAP, together with a
certificate of such accountants stating that such accountants do not have
knowledge of the existence of any Default or Event of Default. Such audited
financial statements shall include a balance sheet, profit and loss statement,
and statement of cash flow and, if prepared, such accountants' letter to
management. If Borrower is a parent company of one or more Subsidiaries, then,
in addition to the financial statements referred to above, Borrower agrees to
deliver financial statements prepared on a consolidating basis so as to present
Borrower and each such Subsidiary separately, and on a consolidated basis.

     Together with the above, Borrower also shall deliver to Agent Borrower's
Form 10-Q Quarterly Reports, Form 10-K Annual Reports, and Form 8-K Current
Reports, and any other filings made by Borrower with the Securities and Exchange
Commission, if any, as soon as the same are filed, or any other information that
is provided by Borrower to its shareholders, and any other report reasonably
requested by Agent relating to the financial condition of Borrower.

     Each month, together with the financial statements provided pursuant to
Section 6.3(a), Borrower shall deliver to Agent a certificate signed by its
chief financial officer to the effect that: (i) all financial statements
delivered or caused to be delivered to Agent hereunder have been prepared in
accordance with GAAP (except, in the case of unaudited financial statements, for
the lack of footnotes and being subject to year-end audit adjustments) and
fairly present the financial condition of Borrower, (ii) the representations and
warranties of Borrower contained in this Agreement and the other Loan Documents
are true and correct in all material respects on and as of the date of such
certificate, as though made on and as of such date (except to the extent that
such representations and warranties relate solely to an earlier date), (iii) for
each month that also is the date on which a financial covenant in Section 7 is
to be tested, a Compliance Certificate demonstrating in reasonable detail
compliance at the end of such period with the applicable financial covenants
contained in Section 7, and (iv) on the date of delivery of such certificate to
Agent there does not exist any condition or event that constitutes a Default or
Event of Default (or, in the case of clauses (i), (ii), or (iii), to the extent
of any non-compliance, describing such non-compliance as to which he or she may
have knowledge and what action Borrower has taken, is taking, or proposes to
take with respect thereto).

     Borrower shall cooperate with Agent to arrange meetings among Agent,
Borrower, and Borrower's independent certified public accountants to discuss
whatever financial information concerning Borrower that Agent may request.
Except to the extent that Borrower determines in good faith that its
accountant/client privilege would reasonably be expected to be waived thereby as
a result, Borrower hereby irrevocably authorizes and directs all auditors,
accountants, or other third parties to deliver to Agent, at Borrower's expense,
if not provided by Borrower, copies of Borrower's financial statements, papers
related thereto, and other accounting records of any nature in their possession,
and to disclose to Agent any information they may have regarding Borrower's
business affairs and financial conditions.

                                       32
<PAGE>

         6.4. TAX RETURNS. Deliver to Agent copies of each of Borrower's future
federal income tax returns, and any amendments thereto, within 30 days of the
filing thereof with the Internal Revenue Service.

         6.5. RETURNS. Cause returns and allowances, if any, as between Borrower
and its Account Debtors to be on the same basis and in accordance with the usual
customary practices of Borrower, as they exist at the time of the execution and
delivery of this Agreement.

         6.6. TITLE TO EQUIPMENT. Upon Agent's request, Borrower immediately
shall deliver to Agent, properly endorsed, any and all evidences of ownership
of, certificates of title, or applications for title to any items of Equipment.

         6.7. MAINTENANCE OF EQUIPMENT. Maintain the Equipment in good operating
condition and repair (ordinary wear and tear excepted), and make all necessary
replacements thereto so that the value and operating efficiency thereof shall at
all times be maintained and preserved.

         6.8. TAXES. Cause all assessments and taxes, whether real, personal, or
otherwise, due or payable by, or imposed, levied, or assessed against Borrower
or any of its property to be paid in full, before delinquency or before the
expiration of any extension period, except to the extent that the validity of
such assessment or tax shall be the subject of a Permitted Protest. Borrower
shall make due and timely payment or deposit of all such federal, state, and
local taxes, assessments, or contributions required of it by law, and will
execute and deliver to Agent, on demand, appropriate certificates attesting to
the payment thereof or deposit with respect thereto. Borrower will make timely
payment or deposit of all tax payments and withholding taxes required of it by
applicable laws, including those laws concerning F.I.C.A., F.U.T.A., state
disability, and local, state, and federal income taxes, and will, upon request,
furnish Agent with proof satisfactory to Agent indicating that Borrower has made
such payments or deposits.

         6.9. INSURANCE.

               (a) At its expense, keep the Collateral insured against "loss or
damage by fire, theft, explosion, sprinklers, and all other hazards and risks",
and in such amounts, as are ordinarily insured against by other owners in
similar businesses. Borrower also shall maintain business interruption, public
liability, product liability, and property damage insurance relating to
Borrower's ownership and use of the Collateral, as well as insurance against
larceny, embezzlement, and criminal misappropriation.

               (b) All such policies of insurance shall be in such form, with
such companies, and in such amounts as may be reasonably satisfactory to Agent.
All insurance required herein shall be written by companies which are authorized
to do insurance business in the state in which Borrower shall have its chief
executive office. All hazard insurance and such other insurance as Agent shall
specify, shall contain an endorsement satisfactory to Agent, showing Agent (for
the ratable benefit of the Lenders) as sole loss payee thereof, and shall
contain a waiver of warranties. Every policy of insurance referred to in this
Section 6.9 shall contain an agreement by the insurer that it will not cancel
such policy except after 30 days prior

                                       33
<PAGE>

written notice to Agent (for the ratable benefit of the Lenders) and that any
loss payable thereunder shall be payable notwithstanding any act or negligence
of Borrower or the Lender Group which might, absent such agreement, result in a
forfeiture of all or a part of such insurance payment. Borrower shall deliver to
Agent certified copies of such policies of insurance and evidence of the payment
of all premiums therefor.

               (c) Original policies or certificates thereof satisfactory to
Agent evidencing such insurance shall be delivered to Agent at least 30 days
prior to the expiration of the existing or preceding policies. Borrower shall
give Agent prompt notice of any loss covered by such insurance, and Agent shall
have the right to adjust any loss. Agent shall have the exclusive right to
adjust all losses payable under any such insurance policies without any
liability to Borrower whatsoever in respect of such adjustments. Any monies
received as payment for any loss under any insurance policy including the
insurance policies mentioned above, shall be paid over to Agent (for the ratable
benefit of Lenders) to be applied at the option of Agent either to the
prepayment of the Obligations, in such order or manner as Agent may elect, or
shall be disbursed to Borrower under stage payment terms satisfactory to Agent
for application to the cost of repairs, replacements, or restorations. All
repairs, replacements, or restorations shall be effected with reasonable
promptness and shall be of a value at least equal to the value of the items or
property destroyed prior to such damage or destruction. Upon the occurrence of
an Event of Default, Agent shall have the right to apply all prepaid premiums to
the payment of the Obligations in such order or form as Agent shall determine.

               (d) Borrower shall not take out separate insurance concurrent in
form or contributing in the event of loss with that required to be maintained
under this Section 6.9, unless Agent is included thereon as named insured with
the loss payable to Agent (for the ratable benefit of Lenders) under an
endorsement satisfactory to Agent. Borrower immediately shall notify Agent
whenever such separate insurance is taken out, specifying the insurer thereunder
and full particulars as to the policies evidencing the same, and originals of
such policies immediately shall be provided to Agent.

         6.10. NO SETOFFS OR COUNTERCLAIMS. Make payments hereunder and under
the other Loan Documents by or on behalf of Borrower without setoff or
counterclaim and free and clear of, and without deduction or withholding for or
on account of, any federal, state, or local taxes except as specified in Section
17.10.

         6.11. LOCATION OF INVENTORY AND EQUIPMENT. Keep the Inventory and
Equipment only at or in transit between the locations identified on Schedule
6.11; provided, however, that: (a) Borrower may amend Schedule 6.11 so long as
such amendment occurs by written notice to Agent not less than 30 days prior to
the date on which the Inventory or Equipment is moved to such new location, so
long as such new location is within the continental United States, and so long
as, at the time of such written notification, Borrower provides any financing
statements or fixture filings necessary to perfect and continue perfected the
Lien of Agent (for the benefit of the Lender Group) in such assets and also
provides to Agent a Collateral Access Agreement with respect to such new
location; and (b) up to $1,000,000 in the aggregate at any one time of Inventory
consisting of loose stones and settings may be transported to and from, and
located at, Approved Vendors for purposes of appraisal and of creating finished
goods jewelry, and Inventory consisting of finished goods jewelry may be
transported to and

                                       34
<PAGE>
from, and located at, Approved Vendors for purposes of effecting repairs
thereon, in each case in the ordinary course of Borrower's business and, so long
as (i) Borrower notifies Agent on a weekly basis of the amount and location of
all such Inventory, (ii) Agent (for the benefit of the Lender Group) has a
perfected Lien in such Inventory (through financing statement filings,
possession of documents of title, or otherwise) at all times, and (iii) each
such Approved Vendor has entered into a Collateral Access Agreement satisfactory
to Agent.

         6.12. COMPLIANCE WITH LAWS. Comply with the requirements of all
applicable laws, rules, regulations, and orders of any Governmental Authority,
including the Fair Labor Standards Act and the Americans With Disabilities Act,
other than laws, rules, regulations, and orders the non-compliance with which,
individually or in the aggregate, would not have and could not reasonably be
expected to cause a Material Adverse Change.

         6.13. EMPLOYEE BENEFITS. Deliver to Agent: (i) promptly, and in any
event within 10 Business Days after Borrower or any of its Subsidiaries knows or
has reason to know that an ERISA Event has occurred that reasonably could be
expected to result in a Material Adverse Change, a written statement of the
chief financial officer of Borrower describing such ERISA Event and any action
that is being taking with respect thereto by Borrower, any such Subsidiary or
ERISA Affiliate, and any action taken or threatened by the IRS, Department of
Labor, or PBGC (Borrower or such Subsidiary, as applicable, being deemed to know
all facts known by the administrator of any Benefit Plan of which it is the plan
sponsor), (ii) promptly, and in any event within 3 Business Days after the
filing thereof with the IRS, a copy of each funding waiver request filed with
respect to any Benefit Plan and all communications received by Borrower, any of
its Subsidiaries or, to the knowledge of Borrower, any ERISA Affiliate with
respect to such request, and (iii) promptly, and in any event within 3 Business
Days after receipt by Borrower, any of its Subsidiaries or, to the knowledge of
Borrower, any ERISA Affiliate, of the PBGC's intention to terminate a Benefit
Plan or to have a trustee appointed to administer a Benefit Plan, copies of each
such notice.

               (a) Cause to be delivered to Agent, upon Agent's request, each of
the following: (i) a copy of each Plan (or, where any such plan is not in
writing, complete description thereof) (and if applicable, related trust
agreements or other funding instruments) and all amendments thereto, all written
interpretations thereof and written descriptions thereof that have been
distributed to employees or former employees of Borrower or its Subsidiaries;
(ii) the most recent determination letter issued by the IRS with respect to each
Benefit Plan; (iii) for the three most recent plan years, annual reports on Form
5500 Series required to be filed with any governmental agency for each Benefit
Plan; (iv) all actuarial reports prepared for the last three plan years for each
Benefit Plan; (v) a listing of all Multiemployer Plans, with the aggregate
amount of the most recent annual contributions required to be made by Borrower
or any ERISA Affiliate to each such plan and copies of the collective bargaining
agreements requiring such contributions; (vi) any information that has been
provided to Borrower or any ERISA Affiliate regarding withdrawal liability under
any Multiemployer Plan; and (vii) the aggregate amount of the most recent annual
payments made to former employees of Borrower or its Subsidiaries under any
Retiree Health Plan.

         6.14. LEASES. Pay when due all rents and other amounts payable under
any leases to which Borrower is a party or by which Borrower's properties and
assets are bound,

                                       35
<PAGE>

unless such payments are the subject of a Permitted Protest. To the extent that
Borrower fails timely to make payment of such rents and other amounts payable
when due under its leases, Agent shall be entitled, in its discretion, to
reserve an amount equal to such unpaid amounts against the Borrowing Base.

     7. NEGATIVE COVENANTS.

     Borrower covenants and agrees that, so long as any credit hereunder shall
be available and until full and final payment of the Obligations, Borrower will
not do any of the following:

         7.1. INDEBTEDNESS. Create, incur, assume, permit, guarantee, or
otherwise become or remain, directly or indirectly, liable with respect to any
Indebtedness, except:

               (a) Indebtedness evidenced by this Agreement or the Loan
Documents;

               (b) Indebtedness set forth on Schedule 7.1, including, without
limitation the Borrower's Indebtedness pursuant to the Subordinated Credit
Facility;

               (c) Indebtedness secured by Permitted Liens; and

               (d) refinancings, renewals, or extensions of Indebtedness
permitted under clauses (b) and (c) of this Section 7.1 (and continuance or
renewal of any Permitted Liens associated therewith) so long as: (i) the terms
and conditions of such refinancings, renewals, or extensions do not materially
impair the prospects of repayment of the Obligations by Borrower, (ii) the net
cash proceeds of such refinancings, renewals, or extensions do not result in an
increase in the aggregate principal amount of the Indebtedness so refinanced,
renewed, or extended, (iii) such refinancings, renewals, refundings, or
extensions do not result in a shortening of the average weighted maturity of the
Indebtedness so refinanced, renewed, or extended, and (iv) to the extent that
Indebtedness that is refinanced was subordinated in right of payment to the
Obligations, then the subordination terms and conditions of the refinancing
Indebtedness must be at least as favorable to the Lender Group as those
applicable to the refinanced Indebtedness.

         7.2. LIENS. Create, incur, assume, or permit to exist, directly or
indirectly, any Lien on or with respect to any of its property or assets, of any
kind, whether now owned or hereafter acquired, or any income or profits
therefrom, except for Permitted Liens (including Liens that are replacements of
Permitted Liens to the extent that the original Indebtedness is refinanced under
Section 7.1(d) and so long as the replacement Liens only encumber those assets
or property that secured the original Indebtedness).

         7.3. RESTRICTIONS ON FUNDAMENTAL CHANGES. Enter into any merger,
consolidation, reorganization, or recapitalization, or reclassify its capital
stock, or liquidate, wind up, or dissolve itself (or suffer any liquidation or
dissolution), or convey, sell, assign, lease, transfer, or otherwise dispose of,
in one transaction or a series of transactions, all or any substantial part of
its property or assets.

                                       36
<PAGE>

         7.4. DISPOSAL OF ASSETS. Other than the assets of the stores set forth
on Schedule 7.4, sell, lease, assign, transfer, or otherwise dispose of any of
Borrower's properties or assets other than (i) sales of Inventory to buyers in
the ordinary course of Borrower's business as currently conducted and (ii)
dispositions of Equipment that Borrower reasonably determines is obsolete, worn
out or no longer used or useful in Borrower's business.

         7.5. CHANGE NAME. Change Borrower's name, FEIN, corporate structure, or
identity, or unless Agent receives at least three Business Days advance written
notification, add any new fictitious name.

         7.6. GUARANTEE. Guarantee or otherwise become in any way liable with
respect to the obligations of any third Person except by endorsement of
instruments or items of payment for deposit to the account of Borrower or which
are transmitted or turned over to Agent.

         7.7. NATURE OF BUSINESS. Make any change in the principal nature of
Borrower's business.

         7.8. PREPAYMENTS AND AMENDMENTS. Except in connection with a
refinancing permitted by Section 7.1(d):

               (a) Prepay, redeem, retire, defease, purchase, or otherwise
acquire any Indebtedness owing to any third Person, other than the Obligations
in accordance with this Agreement, and

               (b) Directly or indirectly, amend, modify, alter, increase, or
change any of the terms or conditions of any agreement, instrument, document,
indenture, or other writing evidencing or concerning Indebtedness permitted
under Sections 7.1(b), (c), or (d).

         7.9. CHANGE OF CONTROL. Cause, permit, or suffer, directly or
indirectly, any Change of Control.

         7.10. CONSIGNMENTS. Consign any Inventory to third parties or sell any
Inventory on bill and hold, sale or return, sale on approval; or other
conditional terms of sale (other than Borrower's customary
credit/refund/exchange policies).

         7.11. DISTRIBUTIONS. Make any distribution or declare or pay any
dividends (in cash or other property, other than capital stock) on, or purchase,
acquire, redeem, or retire any of Borrower's capital stock, of any class,
whether now or hereafter outstanding.

         7.12. ACCOUNTING METHODS. Modify or change its method of accounting
(except in conformity with changes in GAAP) or enter into, modify, or terminate
any agreement currently existing, or at any time hereafter entered into, with
any third party accounting firm or service bureau for the preparation or storage
of Borrower's accounting records without said accounting firm or service bureau
agreeing to provide Agent information regarding the Collateral or Borrower's
financial condition. Borrower waives the right to assert a confidential
relationship, if any, it may have with any such accounting firm or service
bureau so preparing or storing Borrower's accounting records in connection with
any information requested by Agent pursuant

                                       37
<PAGE>

to or in accordance with this Agreement, and agrees that Agent may contact
directly any such accounting firm or service bureau in order to obtain such
information.

         7.13. INVESTMENTS. Directly or indirectly: (a) acquire, or incur any
liabilities (including contingent obligations) to acquire (i) the securities
(whether debt or equity) of, or other interests in, a Person, or (ii) all or
substantially all of the properties or assets of a Person; or (b) make, or incur
any liabilities (including contingent obligations) to make, any loans, advances,
capital contributions, or transfers of property to a Person except:

               (i) Borrower may acquire (or incur any liability (including any
     contingent obligation) to acquire):

                  (x) direct obligations of the United States or any of its
     agencies or obligations fully guaranteed by the United States, provided
     that such obligations mature within one year from the date acquired;

                  (y) certificates of deposit which mature within one year from
     the date of purchase and are issued by any Lender, any Approved Bank or any
     other commercial bank or trust company (A) organized under the laws of the
     United States or any of its states, (B) having consolidated capital,
     surplus and undivided profits aggregating at least $500,000,000 and (C)
     whose senior debt securities are rated "A" or better by Standard & Poor's
     Ratings Group or an equivalent rating from another nationally recognized
     credit rating agency;

                  (z) commercial paper given an "A-1" rating or better by
     Standard & Poor's Ratings Group or an equivalent rating by another
     nationally recognized credit rating agency and maturing not more than 270
     days from the date acquired;

               (ii) Borrower may create or acquire Accounts, if created or
     acquired in its ordinary course of business and payable or dischargeable in
     accordance with the customary trade terms of Borrower;

               (iii) Borrower may make (or incur any liability (including any
     contingent obligation) to make) loans and advances to employees for moving
     and travel expenses and other similar expenses and bridge loans for the
     purchase of homes, in each case incurred in the ordinary course of
     business, in an aggregate principal amount not to exceed $250,000 at any
     time outstanding (determined without respect to any write-down or write-off
     of any such loans or advances);

               (iv) Borrower may acquire (or incur any liability (including any
     contingent obligation) to acquire) investments (including debt obligations)
     received in connection with the bankruptcy or reorganization of suppliers
     and customers and in settlement of delinquent obligations of, and other
     disputes with, customers and suppliers arising in the ordinary course of
     business;

                                       38
<PAGE>

               (v) Borrower may make (or incur any liability (including any
     contingent obligation) to make) any transfer of property (not constituting
     an advance, loan, or capital contribution) otherwise permitted pursuant to
     Section 7.4;

               (vi) Borrower may acquire (or incur any liability (including any
     contingent obligation) to acquire) consideration received pursuant to
     conveyances, sales, leases, assignments, transfers, or other dispositions
     of assets to the extent such conveyances, sales, leases, assignments,
     transfers, or other dispositions are permitted pursuant to Section 7.4;

               (vii) Borrower may make (or incur any liability (including any
     contingent obligation) to make) additional investments, not otherwise
     permitted pursuant to this Section 7.13, which together with all such other
     investments of Borrower does not exceed $250,000 at one time outstanding;
     and

               (viii) Tax Loan Notes

provided, however, that Borrower's right, title and interest in any loan or
investment described in clauses (i), (iii), (iv), (vi), (vii) and (viii) shall
constitute Collateral hereunder and Agent's Lien therein, for the benefit of the
Lender Group, shall be perfected (except to the extent specified in clause (b)
of the proviso to Section 4.4).

         7.14. TRANSACTIONS WITH AFFILIATES. Directly or indirectly enter into
or permit to exist any material transaction with any Affiliate of Borrower
except for (a) transactions that are (i) in the ordinary course of Borrower's
business or fully disclosed to Agent, (ii) upon fair and reasonable terms, and
(iii) no less favorable to Borrower than would be obtained in an arm's length
transaction with a non-Affiliate (b) advances or loans to any Affiliate of
Borrower permitted by clause (vi) of Section 7.13; and (c) payment of directors'
fees or compensation (including fringe benefits) consistent with past practice
to any officer or director of Borrower, or as set forth in Schedule 7.14.

         7.15. SUSPENSION. Suspend or go out of a substantial portion of its
business.

         7.16. CONSIGNED INVENTORY. Acquire or possess Inventory on consignment
or "memorandum," or sell such Inventory, unless the consignor with respect
thereto has entered into a consignment agreement substantially in the form
attached hereto as Exhibit 7.16 and acceptable to Agent, waiving any liens or
claims to cash and cash proceeds arising out of the sale of such consigned
Inventory.

         7.17. CHANGE IN LOCATION OF CHIEF EXECUTIVE OFFICE; INVENTORY AND
EQUIPMENT WITH BAILEES. Relocate its chief executive office to a new location
without providing 30 days prior written notification thereof to Agent and so
long as, at the time of such written notification, Borrower provides any
financing statements or fixture filings necessary to perfect and continue
perfected the Lien of Agent (for the benefit of the Lender Group) and also
provides to Agent a Collateral Access Agreement with respect to such new
location. Except as specifically allowed by Section 6.11, the Inventory and
Equipment shall not at any time now or hereafter be stored with a bailee,
warehouseman, or similar party without Agent's prior written consent.

                                       39
<PAGE>

         7.18. NO PROHIBITED TRANSACTIONS UNDER ERISA.

               (a) engage, or permit any Subsidiary of Borrower to engage, in
any prohibited transaction which is reasonably likely to result in a civil
penalty or excise tax described in Sections 406 of ERISA or 4975 of the IRC for
which a statutory or class exemption is not available or a private exemption has
not been previously obtained from the Department of Labor;

               (b) permit to exist with respect to any Benefit Plan any
accumulated funding deficiency (as defined in Sections 302 of ERISA and 412 of
the IRC), whether or not waived;

               (c) fail, or permit any Subsidiary of Borrower to fail, to pay
timely required contributions or annual installments due with respect to any
waived funding deficiency to any Benefit Plan;

               (d) terminate, or permit any Subsidiary of Borrower to terminate,
any Benefit Plan where such event would result in any liability of Borrower, any
of its Subsidiaries or any ERISA Affiliate under Title N of ERISA;

               (e) fail, or permit any Subsidiary of Borrower to fail, to make
any required contribution or payment to any Multiemployer Plan;

               (f) fail, or permit any Subsidiary of Borrower to fail, to pay
any required installment or any other payment required under Section 412 of the
IRC on or before the due date for such installment or other payment;

               (g) amend, or permit any Subsidiary of Borrower to amend, a Plan
resulting in an increase in current liability for the plan year such that either
of Borrower, any Subsidiary of Borrower or any ERISA Affiliate is required to
provide security to such Plan under Section 401(a)(29) of the IRC; or

               (h) withdraw, or permit any Subsidiary of Borrower to withdraw,
from any Multiemployer Plan where such withdrawal is reasonably likely to result
in any liability of any such entity under Title IV of ERISA;

which, individually or in the aggregate, results in or reasonably would be
expected to result in a claim against or liability of Borrower, any of its
Subsidiaries or any ERISA Affiliate in excess of $100,000.

         7.19. FINANCIAL COVENANTS. FAIL TO MAINTAIN:. Tangible Net Worth.
Tangible Net Worth of at least $13,000,000 measured on a fiscal quarter-end
basis commencing with Borrower's fiscal quarter ending November ___, 2001.

         7.20. CAPITAL EXPENDITURES. Make capital expenditures in any fiscal
year in excess of the following amounts for the following Fiscal Years (each a
"Capital Budget"):

               (a) $1,100,000 in Borrower's Fiscal Year ending 2002; and

                                       40
<PAGE>

               (b) $747,000 in the aggregate for the period beginning June 1,
2001 through the Termination Date.

         7.21. MINIMUM EBITDA. The Borrower shall not permit EBITDA for each of
the periods ending on the dates set forth below to be less than the amount set
forth for such period.

<Table>
<Caption>
                   Period Ended                              Minimum EBITDA
                 -----------------                           --------------
<S>              <C>                                         <C>
                 December 31, 2001                                3,200,000
                 December 31, 2002                                5,400,000
</Table>

     8. EVENTS OF DEFAULT.

     Any one or more of the following events shall constitute an event of
default (each, an "Event of Default") under this Agreement:

               (a) If Borrower fails to pay when due and payable or when
declared due and payable, any portion of the Obligations (whether of principal,
interest fees and charges due the Lender Group or other amounts constituting
Obligations);

               (b) If Borrower fails to perform, keep, or observe: (a) any term,
provision, condition, covenant, or agreement contained in Sections 6.2, 6.3,
6.6, 6.11, 6.12, and such failure continues for a period of five days after the
date of such failure or neglect; (b) any term, provision, condition, covenant,
or agreement contained in Sections 6.4, 6.5, 6.7, or 6.8, and such failure
continues for a period of 15 days after the date of such failure or neglect; or
(c) any other term, provision, condition, covenant, or agreement contained in
this Agreement, in any of the other Loan Documents (other than any such term,
provision, condition, covenant, or agreement that is the subject of another
provision of this Article 8);

               (c) If there is a Material Adverse Change;

               (d) If any material portion of Borrower's properties or assets is
attached, seized, subjected to a writ or distress warrant, or is levied upon, or
comes into the possession of any third Person;

               (e) If an Insolvency Proceeding is commenced by Borrower;

               (f) If an Insolvency Proceeding is commenced against Borrower and
any of the following events occur: (a) Borrower consents to the institution of
the Insolvency Proceeding against it; (b) the petition commencing the Insolvency
Proceeding is not timely controverted; (c) the petition commencing the
Insolvency Proceeding is not dismissed within 60 calendar days of the date of
the filing thereof; provided, however, that, during the pendency of such period,
the Lender Group shall be relieved of its obligation to extend credit hereunder;
(d) an interim trustee is appointed to take possession of all or a substantial
portion of the properties or assets of, or to operate all or any substantial
portion of the business of, Borrower; or (e) an order for relief shall have been
issued or entered therein;

                                       41
<PAGE>

               (g) If Borrower is enjoined, restrained, or in any way prevented
by a court order from continuing to conduct all or any material part of its
business affairs;

               (h) If a notice of Lien, levy, or assessment is filed of record
with respect to any of Borrower's properties or assets by the United States
Government, or any department, agency, or instrumentality thereof, or by any
state, county, municipal, or governmental agency, or if any taxes or debts owing
at any time hereafter to any one or more of such entities becomes a Lien,
whether choate or otherwise, upon any of Borrower's properties or assets and the
same is not paid on the payment date thereof, provided, however, that no such
notice of Lien, levy, or assessment, and no such Lien, shall constitute an Event
of Default under this Section 8(h) to the extent that such Borrower is
diligently pursuing the cure thereof by appropriate means and that (a) the
aggregate amount in respect of all such Liens or notices under this provision is
less than $100,000; (b) such Lien, levy, or assessment is not a federal tax
lien; and (c) such Lien, levy, or assessment is satisfied within 30 days of the
date that it arose; provided, further, however, that Agent may establish a
reserve as provided under Section 10 during the pendency of such period;

               (i) If a judgment or other claim becomes a Lien or encumbrance
upon any material portion of Borrower's properties or assets; provided, however,
that no such Lien or encumbrance shall constitute an Event of Default under this
Section 8(i) to the extent that Borrower is diligently pursuing the cure thereof
by appropriate means and that (a) the aggregate amount of all judgments and
claims subject to such Liens or encumbrances does not exceed at any one time
$100,000; and (b) such Lien or encumbrance is satisfied or released within 30
days of the date thereof; provided further, however, that Agent may establish a
reserve as provided in Section 10 during the pendency of such period;

               (j) If there is a default in any material agreement to which
Borrower is a party with one or more third Persons and such default (a) occurs
at the final maturity of the obligations thereunder, or (b) results in a right
by such third Person(s), irrespective of whether exercised, to accelerate the
maturity of Borrower's obligations thereunder or any such Person has accelerated
any such obligations and the aggregate of such obligations so due at final
maturity or to become due upon acceleration under all such agreements in this
Section 8(j) exceeds $500,000 with respect to obligations on real property
leases; or $100,000 with respect to all other obligations.

               (k) If Borrower makes any payment on the Rauch Notes other than a
Permitted Rauch Notes Payment, if Borrower makes any payment in respect of the
Musselman Put other than a Permitted Put Payment, or if Borrower makes any
payment on account of Indebtedness that has been contractually subordinated in
right of payment to the payment of the Obligations, except to the extent such
payment is permitted by the terms of the subordination provisions applicable to
such Indebtedness;

               (l) If any material misstatement or material misrepresentation
exists now or hereafter in any warranty, representation, statement, or report
made to the Lender Group by Borrower or any officer, employee, agent, or
director of Borrower, or if any such warranty or representation is withdrawn; or

                                       42
<PAGE>

               (m) If the obligation of any guarantor under its guaranty or
other third Person under any Loan Document is limited or terminated by operation
of law or by the guarantor or other third Person thereunder, or any such
guarantor or other third Person becomes the subject of an Insolvency Proceeding.

     9. THE LENDER GROUP'S RIGHTS AND REMEDIES.

         9.1. RIGHTS AND REMEDIES. Upon the occurrence, and during the
continuation, of an Event of Default Agent may, pursuant to Sections 17.4 and
17.5, without notice of its election and without demand (unless otherwise
provided below), do any one or more of the following, all of which are
authorized by Borrower:

               (a) Upon concurrent written notice to Borrower, declare all
Obligations, whether evidenced by this Agreement, by any of the other Loan
Documents, or otherwise, immediately due and payable;

               (b) Cease advancing money or extending credit to or for the
benefit of Borrower under this Agreement, under any of the Loan Documents, or
under any other agreement between Borrower and the Lender Group;

               (c) Upon concurrent written notice to Borrower, terminate this
Agreement and any of the other Loan Documents as to any future liability or
obligation of the Lender Group, but without affecting the Lender Group's rights
and security interests in the Collateral and without affecting the Obligations;

               (d) Settle or adjust disputes and claims directly with Account
Debtors for amounts and upon terms which Agent considers advisable, and in such
cases, Agent will credit Borrower's Loan Account with only the net amounts
received by Agent in payment of such disputed Accounts after deducting all
Lender Group Expenses incurred or expended in connection therewith;

               (e) Cause Borrower to hold all returned Inventory in trust for
the Lender Group, segregate all returned Inventory from all other property of
Borrower or in Borrower's possession and conspicuously label said returned
Inventory as the property of the Lender Group;

               (f) Without notice to or demand upon Borrower or any guarantor,
make such payments and do such acts as Agent considers necessary or reasonable
to protect its security interests in the Collateral. Borrower agrees to assemble
the Collateral if Agent so requires, and to make the Collateral available to
Agent as Agent may designate. Borrower authorizes Agent to enter the premises
where the Collateral is located, to take and maintain possession of the
Collateral, or any part of it, and to pay, purchase, contest, or compromise any
encumbrance, charge, or Lien that in Agent's determination appears to conflict
with the Liens of Agent (for the benefit of the Group) in the Collateral and to
pay all expenses incurred in connection therewith. With respect to any of
Borrower's owned or leased premises, Borrower hereby grants Agent a license to
enter into possession of such premises and to occupy the same,

                                       43
<PAGE>

without charge, for up to 120 days in order to exercise any of the Lender
Group's rights or remedies provided herein, at law, in equity, or otherwise;

               (g) Without notice to Borrower (such notice being expressly
waived), and without constituting a retention of any collateral in satisfaction
of an obligation (within the meaning of Section 9-620 of the Code), set off and
apply to the Obligations any and all (i) balances and deposits of Borrower held
by the Lender Group (including any amounts received in the Lockbox Accounts), or
(ii) indebtedness at any time owing to or for the credit or the account of
Borrower held by the Lender Group;

               (h) Hold, as cash collateral, any and all balances and deposits
of Borrower held by the Lender Group, and any amounts received in the Lockbox
Accounts, to secure the full and final repayment of all of the Obligations;

               (i) Ship, reclaim, recover, store, finish, maintain, repair,
prepare for sale, advertise for sale, and sell (in the manner provided for
herein) the Collateral. Agent is hereby granted a license or other right to use,
without charge, Borrower's labels, patents, copyrights, rights of use of any
name, trade secrets, trade names, trademarks, service marks, and advertising
matter, or any property of a similar nature, as it pertains to the Collateral,
in completing production of, advertising for sale, and selling any Collateral
and Borrower's rights under all licenses and all franchise agreements shall
inure to the Lender Group's benefit;

               (j) Sell the Collateral at either a public or private sale, or
both, by way of one or more contracts or transactions, for cash or on terms, in
such manner and at such places (including Borrower's premises) as Agent
determines is commercially reasonable. It is not necessary that the Collateral
be present at any such sale;

               (k) Agent shall give notice of the disposition of the Collateral
as follows:

                        (A) Agent shall give Borrower and each holder of a
          security interest in the Collateral who has filed with Agent a written
          request for notice, a notice in writing of the time and place of
          public sale, or, if the sale is a private sale or some other
          disposition other than a public sale is to be made of the Collateral,
          then the time on or after which the private sale or other disposition
          is to be made;

                        (B) The notice shall be personally delivered or mailed,
          postage prepaid, to Borrower as provided in Section 12, at least 5
          days before the date fixed for the sale, or at least 5 days before the
          date on or after which the private sale or other disposition is to be
          made; no notice needs to be given prior to the disposition of any
          portion of the Collateral that is perishable or threatens to decline
          speedily in value or that is of a type customarily sold on a
          recognized market. Notice to Persons other than Borrower claiming an
          interest in the Collateral shall be sent to such addresses as they
          have furnished to Agent;

                        (C) If the sale is to be a public sale, Agent also shall
          give notice of the time and place by publishing a notice one time at
          least 5 days

                                       44
<PAGE>

         before the date of the sale in a newspaper of general circulation in
         the county in which the sale is to be held;

               (l) Agent may credit bid and purchase at any public sale; and

               (m) Any deficiency that exists after disposition of the
Collateral as provided above will be paid immediately by Borrower. Any excess
will be returned, without interest and subject to the rights of third Persons,
by Agent to Borrower.

         9.2. REMEDIES CUMULATIVE. The Lender Group's rights and remedies under
this Agreement, the Loan Documents, and all other agreements shall be
cumulative. The Lender Group shall have all other rights and remedies not
inconsistent herewith as provided under the Code, by law, or in equity. No
exercise by the Lender Group of one right or remedy shall be deemed an election,
and no waiver by the Lender Group of any Event of Default shall be deemed a
continuing waiver. No delay by the Lender Group shall constitute a waiver,
election, or acquiescence by it.

     10. TAXES AND EXPENSES.

     If Borrower fails to pay any monies (whether taxes, assessments, insurance
premiums, or, in the case of leased properties or assets, rents or other amounts
payable under such leases) due to third Persons, or fails to make any deposits
or furnish any required proof of payment or deposit, all as required under the
terms of this Agreement, then, to the extent that Agent determines that such
failure by Borrower could reasonably be expected to result in a Material Adverse
Change, in its discretion and without prior notice to Borrower, Agent may do any
or all of the following: (a) make payment of the same or any part thereof unless
such payment obligations are the subject of a Permitted Protest; (b) set up such
reserves in Borrower's Loan Account as Agent deems necessary to protect the
Lender Group from the exposure created by such failure; or (c) obtain and
maintain insurance policies of the type described in Section 6.9, and take any
action with respect to such policies as Agent deems prudent. Any such amounts
paid by Agent shall constitute Lender Group Expenses. Any such payments made by
Agent shall not constitute an agreement by the Lender Group to make similar
payments in the future or a waiver by the Lender Group of any Event of Default
under this Agreement. Agent need not inquire as to, or contest the validity of,
any such expense, tax, or Lien and the receipt of the usual official notice for
the payment thereof shall be conclusive evidence that the same was validly due
and owing unless any Borrower has notified Agent as to the existence of a
Permitted Protest with respect thereto.

     11. WAIVERS; INDEMNIFICATION.

         11.1. DEMAND; PROTEST; etc. Except as expressly provided in Section 9.1
or elsewhere herein, Borrower waives demand, protest, notice of protest, notice
of default or dishonor, notice of payment and nonpayment, and notice of
nonpayment at maturity.

         11.2. THE LENDER GROUP'S LIABILITY FOR COLLATERAL. So long as the
Lender Group complies with its obligations, if any, under Section 9-207 of the
Code, the Lender Group

                                       45
<PAGE>

shall not in any way or manner be liable or responsible for: (a) the safekeeping
of the Collateral; (b) any loss or damage thereto occurring or arising in any
manner or fashion from any cause; (c) any diminution in the value thereof; or
(d) any act or default of any carrier, warehouseman, bailee, forwarding agency,
or other Person. All risk of loss, damage, or destruction of the Collateral
shall be borne by Borrower.

         11.3. INDEMNIFICATION. Borrower shall pay, indemnify, defend, and hold
each Agent-Related Person, each Lender, each Participant, and each of their
respective officers, directors, employees, counsel, agents, and
attorneys-in-fact (each, an "Indemnified Person") harmless (to the fullest
extent permitted by law) from and against any and all claims, demands, suits,
actions, investigations, proceedings, and damages, and all reasonable attorneys'
fees and disbursements and other costs and expenses actually incurred in
connection therewith (as and when they are incurred and irrespective of whether
suit is brought), at any time asserted against, imposed upon, or incurred by any
of them in connection with or as a result of or related to the execution,
delivery, enforcement, performance, and administration of this Agreement and any
other Loan Documents or the transactions contemplated herein, and with respect
to any investigation, litigation, or proceeding related to this Agreement, any
other Loan Document, or the use of the proceeds of the credit provided hereunder
(irrespective of whether any Indemnified Person is a party thereto), or any act,
omission, event or circumstance in any manner related thereto (all the
foregoing, collectively, the "Indemnified Liabilities"). Borrower shall have no
obligation to any Indemnified Person under this Section 11.3 with respect to any
Indemnified Liability (i) that a court of competent jurisdiction finally
determines to have resulted from the gross negligence or willful misconduct of
such Indemnified Person or (ii) arising from the unexcused breach of any
commitment or legal obligation of such Indemnified Party to any person
(including Borrower). Each of the Agent, each Lender, and each Participant
agrees that in the event that any investigation, litigation, or proceeding is
asserted or threatened in writing or instituted against it or any other
Indemnified Party, or any remedial, removal, or response action is requested of
it or any of its officers, directors, agents, and employees, for which any
Indemnified Party may desire indemnity or defense under this Section 11.3, such
Indemnified Party shall use its best efforts to promptly notify Borrower in
writing that it desires such indemnity or defense; provided, however, that the
failure to timely provide such notification shall not impair the indemnification
rights of the Indemnified Persons hereunder. This provision shall survive the
termination of this Agreement and the repayment of the Obligations.

     12. NOTICES.

     Unless otherwise provided in this Agreement, all notices or demands by any
party relating to this Agreement or any other Loan Document shall be in writing
and (except for financial statements and other informational documents which may
be sent by first-class mail, postage prepaid) shall be personally delivered or
sent by registered or certified mail (postage prepaid, return receipt
requested), overnight courier, or facsimile to Borrower or to Agent, as the case
may be, at its address set forth below:

                                       46
<PAGE>

<Table>
<S>                                                  <C>
                If to Borrower:                      SAMUELS JEWELERS, INC.
                                                     Semicon Park, Bldg. 2
                                                     2914 Montopolis Drive
                                                     Austin, Texas 78741
                                                     Attn: President
                                                     Fax No. (512) 369-1515

                with copies to:                      WEIL, GOTSHAL & MANGES LLP
                                                     700 Louisiana, Suite 1600
                                                     Houston, Texas 77002
                                                     Attn: Charles E. Harrell, Esq.
                                                     Fax No. (713) 224-9511

                If to Agent or the                   DDJ CAPITAL MANAGEMENT, LLC
                Lender Group in case                 141 Linden Street
                of Agent:                            Wellesley, MA  02482
                                                     Attn: Wendy Landon
                                                     Fax No. 718.283.8555

                with copies to:                      GOODWIN PROCTER  LLP
                                                     Exchange Place
                                                     Boston, MA  02109
                                                     Attn: Jon D. Schneider, P.C.
                                                     Fax No. 617.523.1231
</Table>

     The parties hereto may change the address at which they are to receive
notices hereunder, by notice in writing in the foregoing manner given to the
other. All notices or demands sent in accordance with this Section 12, other
than notices by Agent in connection with Sections 9-611, 9-612, 9-613 or 9-621
of the Code, shall be deemed received on the earlier of the date of actual
receipt or 3 days after the deposit thereof in the mail. Borrower acknowledges
and agrees that notices sent by Agent in connection with Sections 9-611, 9-612,
9-613 or 9-621 of the Code shall be deemed sent when deposited in the mail or
personally delivered, or, where permitted by law, transmitted by facsimile or
other similar method set forth above.

     13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER.

     THE VALIDITY OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS (UNLESS
EXPRESSLY PROVIDED TO THE CONTRARY IN ANOTHER LOAN DOCUMENT), THE CONSTRUCTION,
INTERPRETATION, AND ENFORCEMENT HEREOF AND THEREOF, AND THE RIGHTS OF THE
PARTIES HERETO AND THERETO WITH RESPECT TO ALL MATTERS ARISING HEREUNDER OR
THEREUNDER OR RELATED HERETO OR THERETO SHALL BE DETERMINED UNDER, GOVERNED BY,
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF

                                       47
<PAGE>

THE COMMONWEALTH OF MASSACHUSETTS. THE PARTIES AGREE THAT ALL ACTIONS OR
PROCEEDINGS ARISING IN CONNECTION WITH THIS AGREEMENT AND THE OTHER LOAN
DOCUMENTS SHALL BE TRIED AND LITIGATED ONLY IN THE STATE AND FEDERAL COURTS
LOCATED IN THE COUNTY OF SUFFOLK, COMMONWEALTH OF MASSACHUSETTS OR, AT THE SOLE
OPTION OF THE LENDER GROUP, IN ANY OTHER COURT IN WHICH THE LENDER GROUP SHALL
INITIATE LEGAL OR EQUITABLE PROCEEDINGS AND WHICH HAS SUBJECT MATTER
JURISDICTION OVER THE MATTER IN CONTROVERSY. BORROWER AND EACH MEMBER OF THE
LENDER GROUP WAIVES, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, ANY RIGHT
EACH MAY HAVE TO ASSERT THE DOCTRINE OF FORUM NON CONVENIENS OR TO OBJECT TO
VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION
13. TO THE EXTENT PERMITTED BY LAW, BORROWER AND EACH MEMBER OF THE LENDER GROUP
HEREBY WAIVES THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF
ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE
TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS,
BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. BORROWER
AND EACH MEMBER OF THE LENDER GROUP REPRESENTS THAT IT HAS REVIEWED THIS WAIVER
AND EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING
CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF THIS
AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.

     14. DESTRUCTION OF BORROWER'S DOCUMENTS.

     All documents, schedules, invoices, agings, or other papers delivered to
Agent (other than any Negotiable Collateral) may be destroyed or otherwise
disposed of by Agent four (4) months after they are delivered to or received by
Agent, unless Borrower requests, in writing, the return of said documents,
schedules, or other papers and makes arrangements, at Borrower's expense, for
their return.

     15. ASSIGNMENTS AND PARTICIPATIONS; SUCCESSORS.

         15.1. ASSIGNMENTS AND PARTICIPATIONS.

               (a) Any Lender may, with the written consent of Agent, assign and
delegate to one or more Eligible Transferees (each an "Assignee") all, or any
ratable part, of the Obligations, the Commitments, and the other rights and
obligations of such Lender hereunder and under the other Loan Documents, in a
minimum Commitment amount (if such assignment is a partial assignment) of
$1,000,000; provided, however, that Borrower and Agent may continue to deal
solely and directly with such Lender in connection with the interest so assigned
to an Assignee until (i) written notice of such assignment, together with
payment instructions, addresses, and related information with respect to the
Assignee, shall have been given to Borrower and Agent by such Lender and the
Assignee; and (ii) such Lender and its Assignee

                                       48
<PAGE>

shall have delivered to Borrower and Agent a fully executed Assignment and
Acceptance ("Assignment and Acceptance") in the form of Exhibit 15.1. Anything
contained herein to the contrary notwithstanding, the consent of Agent shall not
be required (and payment of any fees shall not be required) if such assignment
is in connection with any merger, consolidation, sale, transfer, or other
disposition of all or any substantial portion of the business or loan portfolio
of such Lender.

               (b) From and after the date that Agent notifies the assignor
Lender that it has received a fully executed Assignment and Acceptance (i) the
Assignee thereunder shall be a party hereto and, to the extent that rights and
obligations hereunder have been assigned to it pursuant to such Assignment and
Acceptance, shall have the rights and obligations of a Lender under the Loan
Documents, and (ii) the assignor Lender shall, to the extent that rights and
obligations hereunder and under the other Loan Documents have been assigned by
it pursuant to such Assignment and Acceptance, relinquish its rights and be
released from its obligations under this Agreement (and in the case of an
Assignment and Acceptance covering all or the remaining portion of an assigning
Lender's rights and obligations under this Agreement and the other Loan
Documents, such Lender shall cease to be a party hereto and thereto).

               (c) By executing and delivering an Assignment and Acceptance, the
assigning Lender thereunder and the Assignee thereunder confirm to and agree
with each other and the other parties hereto as follows: (1) other than as
provided in such Assignment and Acceptance, such assigning Lender makes no
representation or warranty and assumes no responsibility with respect to any
statements, warranties, or representations made in or in connection with this
Agreement or the execution, legality, validity, enforceability, genuineness,
sufficiency, or value of this Agreement or any other Loan Document furnished
pursuant hereto; (2) such assigning Lender makes no representation or warranty
and assumes no responsibility with respect to the financial condition of
Borrower or any guarantor or the performance or observance by Borrower or any
guarantor of any of its obligations under this Agreement or any other Loan
Document furnished pursuant hereto; (3) such Assignee confirms that it has
received a copy of this Agreement, together with such other documents and
information as it has deemed appropriate to make its own credit analysis and
decision to enter into such Assignment and Acceptance; (4) such Assignee will,
independently and without reliance upon Agent, such assigning Lender, or any
other Lender, and based on such documents and information as it shall deem
appropriate at the time, continue to make its own credit decisions in taking or
not taking action under this Agreement; (5) such Assignee appoints and
authorizes Agent to take such action as agent on its behalf and to exercise such
powers under this Agreement as are delegated to Agent by the terms hereof,
together with such powers as are reasonably incidental thereto; and (6) such
Assignee agrees that it will perform in accordance with their terms all of the
obligations which by the terms of this Agreement are required to be performed by
it as a Lender.

               (d) Immediately upon the execution of the Assignment and
Acceptance, this Agreement shall be deemed to be amended to the extent, but only
to the extent, necessary to reflect the addition of the Assignee and the
resulting adjustment of the Commitments of the Assignor and Assignee arising
therefrom. The Commitment allocated to each Assignee shall reduce such
Commitment of the assigning Lender pro tanto.

                                       49
<PAGE>

               (e) Any Lender may at any time, with the written consent of
Agent, which consent shall not be unreasonably withheld, sell to one or more
Persons (a "Participant") participating interests in the Obligations, the
Commitment, and the other rights and interests of that Lender (the "Originating
Lender") hereunder and under the other Loan Documents; provided, however, that
(i) the Originating Lender's obligations under this Agreement shall remain
unchanged, (ii) the Originating Lender shall remain solely responsible for the
performance of such obligations, (iii) Borrowers and Agent shall continue to
deal solely and directly with the Originating Lender in connection with the
Originating Lender's rights and obligations under this Agreement and the other
Loan Documents, (iv) no Originating Lender shall transfer or grant any
participating interest under which the Participant has any right to consent to
any departure by Borrower or the Lender Group from any provision of this
Agreement or any Loan Documents, or to the exercising or refraining from
exercising of any powers or rights which any Lender may have under or in respect
of the Loan Documents (including, without limitation, the right to enforce the
Obligations hereunder), or to approve or prohibit any amendment to, or any
consent or waiver with respect to, this Agreement or any other Loan Document,
except to the extent such amendment to, or consent or waiver with respect to
this Agreement or of any other Loan Document would (A) extend the final maturity
date of the Obligations hereunder in which such Participant is participating;
(B) reduce the interest rate applicable to the Obligations hereunder in which
such Participant is participating; (C) release all or a material portion of the
Collateral (except to the extent expressly provided herein or in any of the Loan
Documents) supporting the Obligations hereunder in which such Participant is
participating; (D) postpone the payment of, or reduce the amount of, the
interest or fees payable hereunder in which such Participant is participating;
or (E) change the amount or due dates of scheduled principal repayments or
prepayments or premiums in respect of the Obligations hereunder in which such
Participant is participating; and (v) all amounts payable by Borrower hereunder
shall be determined as if such Originating Lender had not sold such
participation; except that, if amounts outstanding under this Agreement are due
and unpaid, or shall have been declared or shall have become due and payable
upon the occurrence of an Event of Default, each Participant shall be deemed to
have the right of set-off in respect of its participating interest in amounts
owing under this Agreement to the same extent as if the amount of its
participating interest were owing directly to it as a Lender under this
Agreement; provided, however, that no Participant may exercise any such right of
setoff without the notice to and consent of Agent. The rights of any Participant
shall only be derivative through the Originating Lender with whom such
Participant participates and no Participant shall have any direct rights as to
the other Lenders, Agent, Borrower, the Collections, the Collateral, or
otherwise in respect of the Advances or the Letters of Credit. No Participant
shall have the right to participate directly in the making of decisions by the
Lenders among themselves. The provisions of this Section 15.1(e) are solely for
the benefit of the Lender Group, and Borrower shall have no rights as a third
party beneficiary of any of such provisions and shall not have its rights or
obligations under any of the Loan Documents increased, decreased, or otherwise
affected by any participation.

               (f) In connection with any such assignment or participation or
proposed assignment or participation, a Lender may disclose to a third party all
documents and information which it now or hereafter may have relating to
Borrower or Borrower's business so long as such third party agrees in writing to
the provisions of Section 17.16(d) in respect thereof.

                                       50
<PAGE>

               (g) Notwithstanding any other provision in this Agreement, any
Lender may at any time create a security interest in, or pledge, all or any
portion of its rights under and interest in this Agreement in favor of any
Federal Reserve Bank in accordance with Regulation A of the FRB or U.S. Treasury
Regulation 31 CFR Section 203.14, and such Federal Reserve Bank may enforce such
pledge or security interest in any manner permitted under applicable law.

         15.2. SUCCESSORS. This Agreement shall bind and inure to the benefit of
the respective successors and assigns of each of the parties; provided, however,
that Borrower may not assign this Agreement or any rights or duties hereunder
without the Lenders' prior written consent and any prohibited assignment shall
be absolutely void. No consent to assignment by the Lenders shall release
Borrower from its Obligations. A Lender may assign this Agreement and its rights
and duties hereunder pursuant to Section 15.1 and, except as expressly required
pursuant to Section 15.1(a), no consent or approval by Borrower is required in
connection with any such assignment; provided, however, that no such assignment
shall be effective against Borrower until such Lender shall have notified
Borrower of the identity of the Assignee and the extent of the Assignee's
interest under this Agreement and in the Obligations.

     16. AMENDMENTS; WAIVERS.

         16.1. AMENDMENTS AND WAIVERS. No amendment or waiver of any provision
of this Agreement or any other Loan Document, and no consent with respect to any
departure by Borrower therefrom, shall be effective unless the same shall be in
writing and signed by the Required Lenders (or by Agent at the written request
of the Required Lenders) and Borrower and then any such waiver or consent shall
be effective only in the specific instance and for the specific purpose for
which given; provided, however, that no such waiver, amendment, or consent
shall, unless in writing and signed by all the Lenders and Borrower and
acknowledged by Agent, do any of the following:

               (a) increase or extend the Commitment of any Lender;

               (b) postpone or delay any date fixed by this Agreement or any
other Loan Document for any payment of principal, interest, fees, or other
amounts due to the Lenders (or any of them) hereunder or under any other Loan
Document;

               (c) reduce the principal of, or the rate of interest specified
herein on, any Loan, or any fees or other amounts payable hereunder or under any
other Loan Document;

               (d) change the percentage of the Commitments or of the aggregate
unpaid principal amount of the Advances which is required for the Lenders or any
of them to take any action hereunder;

               (e) increase the advance rate with respect to Advances (except
for the restoration of an advance rate after the prior reduction thereof), or
change Section 2.1(b);

               (f) amend this Section or any provision of the Agreement
providing for consent or other action by all Lenders;

                                       51
<PAGE>

               (g) release Collateral other than as permitted by Section 17.11;

               (h) change the definition of "Required Lenders";

               (i) release Borrower from any Obligation for the payment of
money; or

               (j) amend any of the provisions of Article 17;

and, provided further, that no amendment, waiver or consent shall, unless in
writing and signed by Agent, affect the rights or duties of Agent under this
Agreement or any other Loan Document. The foregoing notwithstanding, any
amendment, modification, waiver, consent, termination, or release of or with
respect to any provision of this Agreement or any other Loan Document that
relates only to the relationship of the Lender Group among themselves, and that
does not affect the rights or obligations of Borrower, shall not require consent
by or the agreement of Borrower.

         16.2. NO WAIVERS; CUMULATIVE REMEDIES. No failure by Agent or any
Lender to exercise any right, remedy, or option under this Agreement, any other
Loan Document, or any present or future supplement hereto or thereto, or in any
other agreement between or among Borrower and Agent and/or any Lender, or delay
by Agent or any Lender in exercising the same, will operate as a waiver thereof.
No waiver by Agent or any Lender will be effective unless it is in writing, and
then only to the extent specifically stated. No waiver by Agent or the Lenders
on any occasion shall affect or diminish Agent's and each Lender's rights
thereafter to require strict performance by Borrower of any provision of this
Agreement. Agent's and each Lender's rights under this Agreement and the other
Loan Documents will be cumulative and not exclusive of any other right or remedy
which Agent or any Lender may have.

     17. AGENT; THE LENDER GROUP.

         17.1. APPOINTMENT AND AUTHORIZATION OF AGENT. Each Lender hereby
designates and appoints DDJ as its Agent under this Agreement and the other Loan
Documents and each Lender hereby irrevocably authorizes Agent to take such
action on its behalf under the provisions of this Agreement and each other Loan
Document and to exercise such powers and perform such duties as are expressly
delegated to it by the terms of this Agreement or any other Loan Document,
together with such powers as are reasonably incidental thereto. Agent agrees to
act as such on the express conditions contained in this Article 17. The
provisions of this Article 17 are solely for the benefit of Agent and the
Lenders, and Borrower shall not have any rights as a third party beneficiary of,
or have any of Borrower's obligations or rights increased, decreased, or
otherwise affected by, any of the provisions contained in this Article 17;
provided, however, that the provisions of Sections 17.9. 17.10, 17.11, and
17.16(d) also shall be for the benefit of Borrower. Any provision to the
contrary contained elsewhere in this Agreement or in any other Loan Document
notwithstanding, Agent shall not have any duties or responsibilities, except
those expressly set forth herein, nor shall Agent have or be deemed to have any
fiduciary relationship with any Lender, and no implied covenants, functions,
responsibilities, duties, obligations, or liabilities shall be read into this
Agreement or any other Loan Document or otherwise exist against Agent. Except as
expressly otherwise provided in this Agreement, Agent shall have and may use its
sole discretion with respect to exercising or refraining from exercising

                                       52
<PAGE>

any discretionary rights or taking or refraining from taking any actions which
Agent is expressly entitled to take or assert under or pursuant to this
Agreement and the other Loan Documents, including making the determinations
contemplated by Section 2.1(b). Without limiting the generality of the
foregoing, or of any other provision of the Loan Documents that provides rights
or powers to Agent, Lenders agree that Agent shall have the right to exercise
the following powers as long as this Agreement remains in effect: (a) maintain,
in accordance with its customary business practices, ledgers and records
reflecting the status of the Advances, the Collateral, the Collections, and
related matters; (b) execute and/or file any and all financing or similar
statements or notices, amendments, renewals, supplements, documents,
instruments, proofs of claim for Lenders, notices and other written agreements
with respect to the Loan Documents; (c) exclusively receive, apply, and
distribute the Collections as provided in the Loan Documents; (d) open and
maintain such bank accounts as Agent deems necessary and appropriate in
accordance with the Loan Documents for the foregoing purposes with respect to
the Collateral and the Collections; (e) perform, exercise, and enforce any and
all other rights and remedies of the Lender Group with respect to Borrower, the
Advances, the Collateral, the Collections, or otherwise related to any of same
as provided in the Loan Documents; and (f) incur and pay such Lender Group
Expenses as Agent may deem necessary or appropriate for the performance and
fulfillment of its functions and powers pursuant to the Loan Documents.

         17.2. DELEGATION OF DUTIES. Except as otherwise provided in this
Section, Agent may execute any of its duties under this Agreement or any other
Loan Document by or through agents, employees, or attorneys-in-fact and shall be
entitled to advice of counsel concerning all matters pertaining to such duties.
Agent shall not be responsible for the negligence or misconduct of any agent or
attorney-in-fact that it selects as long as such selection was made in
compliance with this Section and without gross negligence or willful misconduct.
The foregoing notwithstanding, Agent shall not make any material delegation of
duties to subagents or non-employee delegees without the prior written consent
of Required Lenders (it being understood that routine delegation of such
administrative matters as filing financing statements, or conducting appraisals
or audits, is not viewed as a material delegation that requires prior Required
Lender approval).

         17.3. LIABILITY OF AGENT-RELATED PERSONS. None of the Agent-Related
Persons shall (i) be liable for any action taken or omitted to be taken by any
of them under or in connection with this Agreement or any other Loan Document or
the transactions contemplated hereby (except for its own gross negligence or
willful misconduct), or, (ii) be responsible in any manner to any of the Lenders
for any recital, statement, representation or warranty made by Borrower, or any
Subsidiary or Affiliate of Borrower, or any officer or director thereof,
contained in this Agreement or in any other Loan Document, or in any
certificate, report, statement, or other document referred to or provided for
in, or received by Agent under or in connection with, this Agreement or any
other Loan Document, or the validity, effectiveness, genuineness, enforceability
or sufficiency of this Agreement or any other Loan Document, or for any failure
of Borrowers or any other party to any Loan Document to perform its obligations
hereunder or thereunder. No Agent-Related Person shall be under any obligation
to any Lender to ascertain or to inquire as to the observance or performance of
any of the agreements contained in, or conditions of, this Agreement or any
other Loan Document, or to inspect the properties, books, or records of
Borrower, or any of Borrower's Subsidiaries or Affiliates.

                                       53
<PAGE>

         17.4. RELIANCE BY AGENT. Agent shall be entitled to rely, and shall be
fully protected in relying, upon any writing, resolution, notice, consent,
certificate, affidavit, letter, telegram, facsimile, telex, or telephone
message, statement or other document or conversation believed by it to be
genuine and correct and to have been signed, sent, or made by the proper Person
or Persons, and upon advice and statements of legal counsel (including counsel
to Borrower or counsel to any Lender), independent accountants, and other
experts selected by Agent. Agent shall be fully justified in failing or refusing
to take any action under this Agreement or any other Loan Document unless it
shall first receive such advice or concurrence of the Required Lenders or all
Lenders, as applicable, and until such instructions are received, Agent shall
act, or refrain from acting, as it deems advisable so long as it is not grossly
negligent or guilty of willful misconduct. If Agent so requests, it shall first
be indemnified to its reasonable satisfaction by Lenders against any and all
liability and expense which may be incurred by it by reason of taking or
continuing to take any such action. Agent shall in all cases be fully protected
in acting, or in refraining from acting, under this Agreement or any other Loan
Document in accordance with a request or consent of the Required Lenders or all
Lenders, as applicable, and such request and any action taken or failure to act
pursuant thereto shall be binding upon all of the Lenders.

         17.5. NOTICE OF DEFAULT OR EVENT OF DEFAULT. Agent shall not be deemed
to have knowledge or notice of the occurrence of any Default or Event of
Default, except with respect to defaults in the payment of principal, interest,
fees, and expenses required to be paid to Agent for the account of Agent or the
Lenders, except with respect to actual knowledge of the existence of an
Overadvance, and except with respect to Defaults and Events of Default of which
Agent has actual knowledge, unless Agent shall have received written notice from
a Lender or Borrower referring to this Agreement, describing such Default or
Event of Default, and stating that such notice is a "notice of default." Agent
promptly will notify the Lenders of its receipt of any such notice or of any
Event of Default of which Agent has, or is deemed to have, actual knowledge. If
any Lender obtains actual knowledge of any Event of Default, such Lender
promptly shall notify the other Lenders and Agent of such Event of Default. Each
Lender shall be solely responsible for giving any notices to its Participants,
if any. Subject to Section 17.4, Agent shall take such action with respect to
such Default or Event of Default as may be requested by the Required Lenders;
provided, however, that:

               (a) At all times, Agent may propose and, with the consent of
Required Lenders (which shall not be unreasonably withheld and which shall be
deemed to have been given by a Lender unless such Lender has notified Agent to
the contrary in writing within three days of notification of such proposed
actions by Agent) exercise, any remedies on behalf of the Lender Group; and

               (b) At all times, once Required Lenders or all Lenders, as the
case may be, have approved the exercise of a particular remedy or pursuit of a
course of action, Agent may, but shall not be obligated to, make all
administrative decisions in connection therewith or take all other actions
reasonably incidental thereto (for example, if the Required Lenders approve the
foreclosure of certain Collateral, Agent shall not be required to seek consent
for the administrative aspects of conducting such sale or handling of such
Collateral).

                                       54
<PAGE>

         17.6. CREDIT DECISION. Each Lender acknowledges that none of the
Agent-Related Persons has made any representation or warranty to it, and that no
act by Agent hereinafter taken, including any review of the affairs of Borrowers
and its Subsidiaries or Affiliates, shall be deemed to constitute any
representation or warranty by any Agent-Related Person to any Lender. Each
Lender represents to Agent that it has, independently and without reliance upon
any Agent-Related Person and based on such documents and information as it has
deemed appropriate, made its own appraisal of and investigation into the
business, prospects, operations, property, financial and other condition, and
creditworthiness of Borrower and any other Person (other than the Lender Group)
party to a Loan Document, and all applicable bank regulatory laws relating to
the transactions contemplated hereby, and made its own decision to enter into
this Agreement and to extend credit to Borrower. Each Lender also represents
that it will, independently and without reliance upon any Agent-Related Person
and based on such documents and information as it shall deem appropriate at the
time, continue to make its own credit analysis, appraisals, and decisions in
taking or not taking action under this Agreement and the other Loan Documents,
and to make such investigations as it deems necessary to inform itself as to the
business, prospects, operations, property, financial and other condition, and
creditworthiness of Borrower, and any other Person (other than the Lender Group)
party to a Loan Document. Except for notices, reports, and other documents
expressly herein required to be furnished to the Lenders by Agent, Agent shall
not have any duty or responsibility to provide any Lender with any credit or
other information concerning the business, prospects, operations, property,
financial and other condition, or creditworthiness of Borrower, and any other
Person party to a Loan Document that may come into the possession of any of the
Agent-Related Persons.

         17.7. COSTS AND EXPENSES; INDEMNIFICATION. Agent may incur and pay
Lender Group Expenses to the extent Agent deems reasonably necessary or
appropriate for the performance and fulfillment of its functions, powers, and
obligations pursuant to the Loan Documents, including without limiting the
generality of the foregoing, but subject to any requirements of the Loan
Documents that it obtain any applicable consents or engage in any required
consultation, court costs, reasonable attorneys' fees and expenses, costs of
collection by outside collection agencies and auctioneer fees and costs of
security guards or insurance premiums paid to maintain the Collateral, whether
or not Borrower is obligated to reimburse Agent or Lenders for such expenses
pursuant to the Loan Agreement or otherwise. Agent is authorized and directed to
deduct and retain sufficient amounts from Collections to reimburse Agent for
such out-of-pocket costs and expenses prior to the distribution of any amounts
to Lenders. In the event Agent is not reimbursed for such costs and expenses
from Collections, each Lender hereby agrees that it is and shall be obligated to
pay to or reimburse Agent for the amount of such Lender's Pro Rata Share
thereof. Whether or not the transactions contemplated hereby are consummated,
the Lenders shall indemnify upon demand the Agent-Related Persons (to the extent
not reimbursed by or on behalf of Borrower and without limiting the obligation
of Borrower to do so), according to their Pro Rata Shares, from and against any
and all Indemnified Liabilities; provided, however, that no Lender shall be
liable for the payment to the Agent-Related Persons of any portion of such
Indemnified Liabilities resulting solely from such Person's gross negligence,
bad faith, or willful misconduct. Without limitation of the foregoing, each
Lender shall reimburse Agent upon demand for its ratable share of any costs or
out-of-pocket expenses (including attorney fees and expenses) incurred by Agent
in connection with the preparation, execution, delivery, administration,
modification, amendment, or

                                       55
<PAGE>

enforcement (whether through negotiations, legal proceedings or otherwise) of,
or legal advice in respect of rights or responsibilities under, this Agreement,
any other Loan Document, or any document contemplated by or referred to herein,
to the extent that Agent is not reimbursed for such expenses by or on behalf of
Borrower. The undertaking in this Section 17.7 shall survive the payment of all
Obligations hereunder and the resignation or replacement of Agent.

         17.8. SUCCESSOR AGENT. Agent may resign as Agent following notice of
such resignation ("Notice") to the Lenders and Borrower, and effective upon the
appointment of and acceptance of such appointment by, a successor Agent. If
Agent resigns under this Agreement, the Required Lenders shall appoint any
Lender or Eligible Transferee as successor Agent for the Lenders. If no
successor Agent is appointed within 30 days of such retiring Agent's Notice,
Agent may appoint any Lender or Eligible Transferee as successor Agent, after
consulting with the Lenders and Borrower. In any such event, upon the acceptance
of its appointment as successor Agent hereunder, such successor Agent shall
succeed to all the rights, powers and duties of the retiring Agent and the term
"Agent" shall mean such successor Agent and the retiring Agent's appointment,
powers, and duties as Agent shall be terminated. After any retiring Agent's
resignation hereunder as Agent, the provisions of this Section 17 shall inure to
its benefit as to any actions taken or omitted to be taken by it while it was
Agent under this Agreement.

         17.9. WITHHOLDING TAX.

               (a) If any Lender is a "foreign corporation, partnership or
trust" within the meaning of the IRC and such Lender claims exemption from, or a
reduction of, U.S. withholding tax under Sections 1441 or 1442 of the IRC, such
Lender agrees with and in favor of Agent and Borrower, to deliver to Agent and
Borrower:

                    (i) if such Lender claims an exemption from, or a reduction
     of, withholding tax under a United States tax treaty, properly completed
     IRS Forms 1001 and W-8 before the payment of any interest in the first
     calendar year and before the payment of any interest in each third
     succeeding calendar year during which interest may be paid under this
     Agreement;

                    (ii) if such Lender claims that interest paid under this
     Agreement is exempt from United States withholding tax because it is
     effectively connected with a United States trade or business of such
     Lender, two properly completed and executed copies of IRS Form 4224 before
     the payment of any interest is due in the first taxable year of such Lender
     and in each succeeding taxable year of such Lender during which interest
     may be paid under this Agreement, and IRS Form W-9; and

                    (iii) such other form or forms as may be required under the
     IRC or other laws of the United States as a condition to exemption from, or
     reduction of, United States withholding tax.

Such Lender agrees to promptly notify Agent and Borrower of any change in
circumstances which would modify or render invalid any claimed exemption or
reduction.

               (b) If any Lender claims exemption from, or reduction of,
withholding tax under a United States tax treaty by providing IRS Form 1001 and
such Lender sells, assigns,

                                       56

<PAGE>

grants a participation in, or otherwise transfers all or part of the Obligations
of Borrower, such Lender agrees to notify Agent and Borrower of the percentage
amount in which it is no longer the beneficial owner of Obligations of Borrower
to such Lender. To the extent of such percentage amount, Agent and Borrower will
treat such Lender's IRS Form 1001 as no longer valid.

               (c) If any Lender claiming exemption from United States
withholding tax by filing IRS Form 4224 with Agent sells, assigns, grants a
participation in, or otherwise transfers all or part of the Obligations of
Borrower to such Lender, such Lender agrees to undertake sole responsibility for
complying with the withholding tax requirements imposed by Sections 1441 and
1442 of the IRC.

               (d) If any Lender is entitled to a reduction in the applicable
withholding tax, Agent may withhold from any interest payment to such Lender an
amount equivalent to the applicable withholding tax after taking into account
such reduction. If the forms or other documentation required by subsection (a)
of this Section are not delivered to Agent, then Agent may withhold from any
interest payment to such Lender not providing such forms or other documentation
an amount equivalent to the applicable withholding tax.

               (e) If the IRS or any other Governmental Authority of the United
States or other jurisdiction asserts a claim that Agent or Borrower did not
properly withhold tax from amounts paid to or for the account of any Lender
(because the appropriate form was not delivered, was not properly executed, or
because such Lender failed to notify Agent and Borrower of a change in
circumstances which rendered the exemption from, or reduction of, withholding
tax ineffective, or for any other reason) such Lender shall indemnify Agent and
Borrower fully for all amounts paid, directly or indirectly, by Agent or
Borrower as tax or otherwise, including penalties and interest, and including
any taxes imposed by any jurisdiction on the amounts payable to Agent or
Borrower under this Section, together with all costs and expenses (including
attorneys' fees and expenses). The obligation of the Lenders under this
subsection shall survive the payment of all Obligations and the resignation of
Agent.

     17.10. COLLATERAL MATTERS.

               (a) The Lenders hereby irrevocably authorize Agent, to release
any Lien on any Collateral (i) upon the termination of the Commitments and
payment and satisfaction in full by Borrower of all Obligations; and upon such
termination and payment Agent shall deliver to Borrower, at Borrower's sole cost
and expense, all UCC termination statements and any other documents necessary to
terminate the Loan Documents and release the Liens with respect to the
Collateral; (ii) constituting property being sold or disposed of if a release is
required or desirable in connection therewith and if Borrower certifies to Agent
that the sale or disposition is permitted under Section 7.4 of this Agreement or
the other Loan Documents (and Agent may rely conclusively on any such
certificate, without further inquiry); (iii) constituting property in which
Borrower owned no interest at the time the Lien was granted or at any time
thereafter; or (iv) constituting property leased to Borrower under a lease that
has expired or been terminated in a transaction permitted under this Agreement.
Except as provided above, Agent will not release any Lien on any Collateral
without the prior written authorization of the Lenders. Upon request by Agent or
Borrower at any time, the Lenders will confirm in

                                       57
<PAGE>

writing Agent's authority to release any such Liens on particular types or items
of Collateral pursuant to this Section 17.10; provided, however, that (i) Agent
shall not be required to execute any document necessary to evidence such release
on terms that, in Agent's opinion, would expose Agent to liability or create any
obligation or entail any consequence other than the release of such Lien without
recourse, representation, or warranty, and (ii) such release shall not in any
manner discharge, affect or impair the Obligations or any Liens (other than
those expressly being released), upon (or obligations of Borrower in respect of)
all interests retained by Borrower, including, the proceeds of any sale, all of
which shall continue to constitute part of the Collateral.

               (b) Agent shall have no obligation whatsoever to any of the
Lenders to assure that the Collateral exists or is owned by Borrower, is cared
for, protected, or insured or has been encumbered, or that the Liens of the
Agent (for the benefit of the Lender Group) have been properly or sufficiently
or lawfully created, perfected, protected, or enforced or are entitled to any
particular priority, or to exercise at all or in any particular manner or under
any duty of care, disclosure, or fidelity, or to continue exercising, any of the
rights, authorities and powers granted or available to Agent pursuant to any of
the Loan Documents, it being understood and agreed that in respect of the
Collateral, or any act, omission or event related thereto, subject to the terms
and conditions contained herein, Agent may act in any manner it may deem
appropriate, and Agent shall have no other duty or liability whatsoever to any
Lender as to any of the foregoing, except as otherwise provide herein.

         17.11. RESTRICTIONS ON ACTIONS BY LENDERS; SHARING OF PAYMENTS.

               (a) Each of the Lenders agrees that it shall not, without the
express consent of Agent, and that it shall, to the extent it is lawfully
entitled to do so, upon the request of Agent, set off against the Obligations
any amounts owing by such Lender to Borrower or any accounts of Borrower now or
hereafter maintained with such Lender. Each of the Lenders further agrees that
it shall not, unless specifically requested to do so by Agent, take or cause to
be taken any action, including the commencement of any legal or equitable
proceedings, to foreclose any Lien on, or otherwise enforce any security
interest in, any of the Collateral the purpose of which is, or could be, to give
such Lender any preference or priority against the other Lenders with respect to
the Collateral.

               (b) If, at any time or times any Lender shall receive (i) by
payment, foreclosure, setoff, or otherwise, any proceeds of Collateral or any
payments with respect to the Obligations of Borrower to such Lender arising
under, or relating to, this Agreement or the other Loan Documents, except for
any such proceeds or payments received by such Lender from Agent pursuant to the
terms of this Agreement, or (ii) payments from Agent in excess of such Lender's
Pro Rata Share of all such distributions by Agent, such Lender shall promptly
(1) turn the same over to Agent, in kind, and with such endorsements as may be
required to negotiate the same to Agent, or in same day funds, as applicable,
for the account of all of the Lenders and for application to the Obligations in
accordance with the applicable provisions of this Agreement, or (2) purchase,
without recourse or warranty, an undivided interest and participation in the
Obligations owed to the other Lenders so that such excess payment received shall
be applied ratably as among the Lenders in accordance with their Pro Rata
Shares; provided, however, that if all or part of such excess payment received
by the purchasing party is thereafter recovered from it, those purchases of
participations shall be rescinded in whole or in part, as applicable,

                                       58
<PAGE>

and the applicable portion of the purchase price paid therefor shall be returned
to such purchasing party, but without interest except to the extent that such
purchasing party is required to pay interest in connection with the recovery of
the excess payment.

         17.12. AGENCY FOR PERFECTION. Agent and each Lender hereby appoints
each other Lender as agent for the purpose of perfecting the Liens of the Lender
Group in assets which, in accordance with Division 9 of the UCC can be perfected
only by possession. Should any Lender obtain possession of any such Collateral,
such Lender shall notify Agent thereof, and, promptly upon Agent's request
therefor shall deliver such Collateral to Agent or in accordance with Agent's
instructions.

         17.13. PAYMENTS BY AGENT TO THE LENDERS. All payments to be made by
Agent to the Lenders shall be made by bank wire transfer or internal transfer of
immediately available funds pursuant to the instructions set forth on Schedule
C-1, or pursuant to such other wire transfer instructions as each party may
designate for itself by written notice to Agent. Concurrently with each such
payment, Agent shall identify whether such payment (or any portion thereof)
represents principal, premium or interest on revolving advances or otherwise.

         17.14. CONCERNING THE COLLATERAL AND RELATED LOAN DOCUMENTS. Each
member of the Lender Group authorizes and directs Agent to enter into this
Agreement and the other Loan Documents relating to the Collateral, for the
ratable benefit of the Lender Group. Each member of the Lender Group agrees that
any action taken by Agent, Required Lenders, or all Lenders, as applicable, in
accordance with the terms of this Agreement or the other Loan Documents relating
to the Collateral and the exercise by Agent, Required Lenders, or all Lenders,
as applicable, of their respective powers set forth therein or herein, together
with such other powers that are reasonably incidental thereto, shall be binding
upon all of the Lenders.

         17.15. FIELD AUDITS AND EXAMINATION REPORTS; CONFIDENTIALITY;
DISCLAIMERS BY LENDERS; OTHER REPORTS AND INFORMATION. By signing this
Agreement, each Lender:

               (a) is deemed to have requested that Agent furnish such Lender,
promptly after it becomes available, a copy of each field audit or examination
report (each a "Report" and collectively, "Reports") prepared by Agent, and
Agent shall so furnish each Lender with such Reports;

               (b) expressly agrees and acknowledges that Agent (i) does not
make any representation or warranty as to the accuracy of any Report, and (ii)
shall not be liable for any information contained in any Report;

               (c) expressly agrees and acknowledges that the Reports are not
comprehensive audits or examinations, that Agent or other party performing any
audit or examination will inspect only specific information regarding Borrower
and will rely significantly upon Borrower's books and records, as well as on
representations of Borrower's personnel;

               (d) agrees to keep all Reports and other material information
obtained by it pursuant to the requirements of this Agreement in accordance with
its reasonable customary procedures for handling confidential information; it
being understood and agreed by Borrower that in any event such Lender may make
disclosures (i) reasonably required by any bona fide

                                       59
<PAGE>

potential or actual Assignee, transferee, or Participant in connection with any
contemplated or actual assignment or transfer by such Lender of an interest
herein or any participation interest in such Lender's rights hereunder so long
as such third party agrees in writing to the provisions of this Section 17.15(d)
in respect thereof, (ii) of information that has become public by disclosures
made by Persons other than such Lender, its Affiliates, assignees, transferees,
or participants, or (iii) as required or requested by any court, governmental or
administrative agency, pursuant to any subpoena or other legal process, or by
any law, statute, regulation, or court order; provided, however, that, unless
prohibited by applicable law, statute, regulation, or court order, such Lender
shall notify Borrower of any request by any court, governmental or
administrative agency, or pursuant to any subpoena or other legal process for
disclosure of any such non-public material information concurrent with, or where
practicable, prior to the disclosure thereof; and

               (e) without limiting the generality of any other indemnification
provision contained in this Agreement, agrees: (i) to hold Agent and any such
other Lender preparing a Report harmless from any action the indemnifying Lender
may take or conclusion the indemnifying Lender may reach or draw from any Report
in connection with any loans or other credit accommodations that the
indemnifying Lender has made or may make to Borrower, or the indemnifying
Lender's participation in, or the indemnifying Lender's purchase of, a loan or
loans of Borrower; and (ii) to pay and protect, and indemnify, defend, and hold
Agent and any such other Lender preparing a Report harmless from and against,
the claims, actions, proceedings, damages, costs, expenses and other amounts
(including, attorney costs) incurred by Agent and any such other Lender
preparing a Report as the direct or indirect result of any third parties who
might obtain all or part of any Report through the indemnifying Lender.

In addition to the foregoing: (x) any Lender may from time to time request of
Agent in writing that Agent provide to such Lender a copy of any report or
document provided by Borrower to Agent, and, upon receipt of such request, Agent
shall provide a copy of same to such Lender promptly upon receipt thereof; (y)
to the extent that Agent is entitled, under any provision of the Loan Documents,
to request additional reports or information from Borrower, any Lender may, from
time to time, reasonably request Agent to exercise such right as specified in
such Lender's notice to Agent, whereupon Agent promptly shall request of
Borrower the additional reports or information specified by such Lender, and,
upon receipt thereof, Agent promptly shall provide a copy of same to such
Lender; and (z) any time that Agent renders to Borrower a statement regarding
the Loan Account, Agent shall send a copy of such statement to each Lender.

         17.16. SEVERAL OBLIGATIONS; NO LIABILITY. Notwithstanding that certain
of the Loan Documents now or hereafter may have been or will be executed only by
or in favor of Agent in its capacity as such, and not by or in favor of the
Lenders, any and all obligations on the part of Agent (if any) to make any
Advances shall constitute the several (and not joint) obligations of the
respective Lenders on a ratable basis, according to their respective
Commitments, to make an amount of such Advances not to exceed, in principal
amount, at any one time outstanding, the amount of their respective Commitments.
Nothing contained herein shall confer upon any Lender any interest in, or
subject any Lender to any liability for, or in respect of, the business, assets,
profits, losses, or liabilities of any other Lender. Each Lender shall be solely
responsible for notifying its Participants of any matters relating to the Loan
Documents to the extent any such notice may be required, and no Lender shall
have any obligation, duty, or liability to any Participant of any other Lender.
Except as provided in Section

                                       60
<PAGE>

17.7, no member of the Lender Group shall have any liability for the acts of any
other member of the Lender Group. No Lender shall be responsible to Borrower or
any other Person for any failure by any other Lender to fulfill its obligations
to make Advances, nor to advance for it or on its behalf in connection with its
Commitment, nor to take any other action on its behalf hereunder or in
connection with the financing contemplated herein.

     18. GENERAL PROVISIONS.

         18.1. EFFECTIVENESS. This Agreement shall be binding and deemed
effective when executed by Borrower and the Lender Group.

         18.2. SECTION HEADINGS. Headings and numbers have been set forth herein
for convenience only. Unless the contrary is compelled by the context,
everything contained in each section applies equally to this entire Agreement.

         18.3. INTERPRETATION. Neither this Agreement nor any uncertainty or
ambiguity herein shall be construed or resolved against the Lender Group or
Borrower, whether under any rule of construction or otherwise. On the contrary,
this Agreement has been reviewed by all parties and shall be construed and
interpreted according to the ordinary meaning of the words used so as to fairly
accomplish the purposes and intentions of all parties hereto.

         18.4. SEVERABILITY OF PROVISIONS. Each provision of this Agreement
shall be severable from every other provision of this Agreement for the purpose
of determining the legal enforceability of any specific provision.

         18.5. COUNTERPARTS; FACSIMILE EXECUTION. This Agreement may be executed
in any number of counterparts and by different parties on separate counterparts,
each of which, when executed and delivered, shall be deemed to be an original,
and all of which, when taken together, shall constitute but one and the same
Agreement. Delivery of an executed counterpart of this Agreement by facsimile
shall be equally as effective as delivery of an original executed counterpart of
this Agreement. Any party delivering an executed counterpart of this Agreement
by facsimile also shall deliver an original executed counterpart of this
Agreement but the failure to deliver an original executed counterpart shall not
affect the validity, enforceability, and binding effect of this Agreement.

         18.6. REVIVAL AND REINSTATEMENT OF OBLIGATIONS. If the incurrence or
payment of the Obligations by Borrower or any guarantor of the Obligations or
the transfer by any or all of such parties to the Lender Group of any property
of either or both of such parties should for any reason subsequently be declared
to be void or voidable under any state or federal law relating to creditors'
rights, including provisions of the Bankruptcy Code relating to fraudulent
conveyances, preferences, and other voidable or recoverable payments of money or
transfers of property (collectively, a "Voidable Transfer"), and if the Lender
Group is required to repay or restore, in whole or in part, any such Voidable
Transfer, or elects to do so upon the reasonable advice of its counsel, then, as
to any such Voidable Transfer, or the amount thereof that the Lender Group is
required or elects to repay or restore, and as to all reasonable costs,
expenses, and attorneys' fees of the Lender Group related thereto, the liability
of Borrower or such

                                       61
<PAGE>

guarantor automatically shall be revived, reinstated, and restored and shall
exist as though such Voidable Transfer had never been made.

         18.7. INTEGRATION. This Agreement, together with the other Loan
Documents, reflects the entire understanding of the parties with respect to the
transactions contemplated hereby and shall not be contradicted or qualified by
any other agreement, oral or written, before the date hereof.

                                       62
<PAGE>

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

                                           SAMUELS JEWELERS, INC.,
                                           a Delaware corporation

                                           By: /s/ Randy McCullough
                                              ---------------------------------

                                           Name:   Randy McCullough
                                                -------------------------------

                                           Title:  President and C.E.O.
                                                 ------------------------------

                                           DDJ CAPITAL MANAGEMENT, LLC, a
                                           Massachusetts limited liability
                                           company, as Agent

                                           By: /s/ David J. Breazzano
                                              ---------------------------------

                                           Name: David J. Breazzano
                                                -------------------------------

                                           Title: Member
                                                 ------------------------------

                                           B III CAPITAL PARTNERS, L.P.

                                           By:  DDJ Capital III, LLC,
                                                its General Partner
                                           By:  DDJ Capital Management, LLC,
                                                Manager

                                           By: /s/ David J. Breazzano
                                              ---------------------------------

                                           Name: David J. Breazzano
                                                -------------------------------

                                           Title: Member
                                                 ------------------------------

                                       63

<PAGE>

                                           B III-A CAPITAL PARTNERS, L.P.

                                           By:  GP III-A, LLC,
                                                its General Partner
                                           By:  DDJ Capital Management, LLC,
                                                Manager

                                           By: /s/ David J. Breazzano
                                              ---------------------------------

                                           Name: David J. Breazzano
                                                -------------------------------

                                           Title: Member
                                                 ------------------------------

                                       64<PAGE>
                                                                   EXHIBIT 10.22

[CONFIDENTIAL TREATMENT REQUESTED] /*/ INDICATES MATERIAL THAT HAS BEEN OMITTED
AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED
MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO
RULE 406 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.

                                                                  EXECUTION COPY

             SUBSCRIPTION, JOINT DEVELOPMENT AND OPERATING AGREEMENT

                              ELAN CORPORATION, PLC
         (ACTING THROUGH ITS DIVISION ELAN PHARMACEUTICAL TECHNOLOGIES)

                        ELAN PHARMA INTERNATIONAL LIMITED

                        ELAN INTERNATIONAL SERVICES, LTD.

                                       AND

                                 ACUSPHERE, INC.

                                       AND

                              ACUSPHERE NEWCO, LTD.

<PAGE>

                                      INDEX

CLAUSE 1  DEFINITIONS

CLAUSE 2  BUSINESS AND SELECTION OF COMPOUNDS

CLAUSE 3  REPRESENTATIONS AND WARRANTIES

CLAUSE 4  AUTHORIZATION AND CLOSING

CLAUSE 5  DIRECTORS; MANAGEMENT AND R&D COMMITTEES

CLAUSE 6  THE BUSINESS PLAN AND REVIEWS

CLAUSE 7  RESEARCH AND DEVELOPMENT

CLAUSE 8  COMMERCIALIZATION

CLAUSE 9  OWNERSHIP OF INTELLECTUAL PROPERTY RIGHTS/NONCOMPETITION

CLAUSE 10 INTELLECTUAL PROPERTY RIGHTS

CLAUSE 11 CROSS LICENSING/EXPLOITATION OF PRODUCTS OUTSIDE FIELD

CLAUSE 12 REGULATORY

CLAUSE 13 MANUFACTURING

CLAUSE 14 TECHNICAL SERVICES AND ASSISTANCE

CLAUSE 15 AUDITORS, BANKERS, ACCOUNTING REFERENCE DATE; SECRETARY

CLAUSE 16 TRANSFER OF SHARES; RIGHTS OF FIRST OFFER; TAG ALONG RIGHTS

CLAUSE 17 MATTERS REQUIRING SHAREHOLDERS' APPROVAL

CLAUSE 18 DISPUTES

CLAUSE 19 TERMINATION

CLAUSE 20 SHARE RIGHTS

<PAGE>

CLAUSE 21 CONFIDENTIALITY

CLAUSE 22 COSTS

CLAUSE 23 GENERAL

<PAGE>

THIS SUBSCRIPTION, JOINT DEVELOPMENT AND OPERATING AGREEMENT made this 30th day
of June, 2000

BETWEEN:

(1)      ELAN CORPORATION, PLC, a public limited company incorporated under the
         laws of Ireland, acting through its division ELAN PHARMACEUTICAL
         TECHNOLOGIES, and having its registered office at Lincoln House,
         Lincoln Place, Dublin 2, Ireland ("ELAN, PLC");

(2)      ELAN INTERNATIONAL SERVICES, LTD., a Bermuda exempted limited liability
         company incorporated under the laws of Bermuda, and having its
         registered office at Clarendon House, 2 Church St., Hamilton, Bermuda
         ("EIS");

(3)      ELAN PHARMA INTERNATIONAL LIMITED a private limited company
         incorporated under the laws of Ireland, and having its registered
         office at WIL House, Shannon Business Park, Shannon, County Clare,
         Ireland ("EPIL");

(4)      ACUSPHERE, INC. a corporation duly incorporated and validly existing
         under the laws of Delaware and having its principal place of business
         at 38 Sidney Street, Cambridge, MA 02139 United States of America
         ("ACUSPHERE"); and

(5)      ACUSPHERE NEWCO LIMITED a Bermuda exempted limited liability company
         incorporated under the laws of Bermuda, and having its registered
         office at Clarendon House, 2 Church St., Hamilton, Bermuda ("NEWCO").

RECITALS:

A.       Newco desires to issue and sell to the Shareholders (as defined below),
         and the Shareholders desire to purchase from Newco, for aggregate
         consideration of $15,000,000, apportioned between them as set forth
         herein, (i) 6,000 shares of Newco's common shares, par value $1.00 per
         share (the "COMMON SHARES") to Acusphere, and (ii) 6,000 shares of
         Newco's preferred shares, par value $1.00 per share (the "PREFERRED
         SHARES") allocated 3,612 shares to Acusphere and 2,388 shares to EIS.

B.       As of the Closing Date, Elan, plc and EPIL, have entered into a license
         agreement with Newco, and Acusphere has entered into a license
         agreement with Newco, in connection with the license to Newco of the
         Elan Intellectual Property and the Acusphere Intellectual Property,
         respectively (each as defined below).

C.       Elan, plc, EPIL and Acusphere have agreed to co-operate in the
         research, development and commercialization of the Products (as defined
         below) based on their respective technologies.

                                       1

<PAGE>

D.       Elan, plc, EPIL and Acusphere have agreed to enter into this Agreement
         for the purpose of recording the terms and conditions regulating their
         relationship with each other, with respect to the Licensed Technologies
         and with Newco.

NOW IT IS HEREBY AGREED AS FOLLOWS:

                                    CLAUSE 1

                                   DEFINITIONS

1.1      In this Agreement, the following terms shall, where not inconsistent
         with the context, have the following meanings respectively.

         "ACUSPHERE DIRECTORS" has the meaning set forth in Clause 5.

         "ACUSPHERE IMPROVEMENTS" has the meaning assigned thereto in the
         Acusphere License Agreement.

         "ACUSPHERE INTELLECTUAL PROPERTY" has the meaning assigned thereto in
         the Acusphere License Agreement.

         "ACUSPHERE JV" shall mean an entity that Acusphere and a third party
         (i) establish or has established, (ii) take shareholdings in or have a
         right to take shareholdings in, and (iii) grant certain licenses in and
         to certain intellectual property rights for the purpose of implementing
         a strategic alliance.

         "ACUSPHERE KNOW-HOW" has the meaning assigned thereto in the Acusphere
         License Agreement.

         "ACUSPHERE LICENSE" has the meaning assigned thereto in the Acusphere
         License Agreement.

         "ACUSPHERE LICENSE AGREEMENT" shall mean the license agreement between
         Acusphere and Newco, of even date herewith, attached hereto in
         Schedule 2.

         "ACUSPHERE PATENTS" has the meaning assigned thereto in the Acusphere
         License Agreement.

         "ACUSPHERE SECURITIES PURCHASE AGREEMENT" shall mean that certain
         securities purchase agreement, of even date herewith, by and between
         Acusphere and EIS.

                                       2

<PAGE>

         "AFFILIATE" of any Person (in the case of a legal entity) shall mean
         any other Person controlling, controlled or under the common control of
         such first Person, as the case may be, excluding an Elan JV and an
         Acusphere JV. For the purposes of this definition, "control" shall mean
         direct or indirect ownership of [CONFIDENTIAL TREATMENT REQUESTED] /*/
         or more of the stock or shares entitled to vote for the election of
         directors and "controlling" and "controlled" shall be construed
         accordingly. For purposes of this Agreement, Newco is not an Affiliate
         of Elan or EIS.

         "AGREEMENT" shall mean this agreement (which expression shall be deemed
         to include the Recitals and the Schedules hereto).

         "BOARD" shall mean the board of directors of Newco.

         "BUSINESS" shall mean the business operated by Newco, as described in
         Clause 2.1 and as more fully specified in the Business Plan.

         "BUSINESS PLAN" shall have the meaning set forth in Clause 6 below.

         "CHARTER" shall mean the Amended and Restated Certificate of
         Incorporation of Acusphere, in the form attached as an Exhibit to the
         Securities Purchase Agreement.

         "CLOSING DATE" shall mean the date upon which the Definitive Documents
         are executed and delivered by the Parties and the transactions effected
         thereby are closed.

         "COMMERCIALIZATION" shall mean the manufacture, have manufactured,
         promotion, distribution, import, use, market, offer for sale and sale
         of the Products in accordance with the terms of this Agreement.

         "COMMON SHARE EQUIVALENTS" shall mean any options, warrants, rights or
         any other securities convertible, exercisable or exchangeable, in whole
         or in part, for or into Common Shares.

         "COMPOUNDS" shall mean [CONFIDENTIAL TREATMENT REQUESTED]/*/ and such
         other active ingredients for the Products as may be nominated by the
         Management Committee in accordance with Clause 2 below.

         "CONVERTIBLE NOTE" shall mean that certain convertible promissory note,
         of even date herewith, by and between Acusphere and EIS.

         "DEFINITIVE DOCUMENTS" shall mean this Agreement, the Elan License
         Agreement, the Acusphere License Agreement, the Convertible Note, the
         Acusphere Securities Purchase Agreement, the Investors Rights
         Agreements, the Charter and associated documentation of even date
         herewith, by and between Acusphere, Elan, EIS and Newco, as applicable.

                                       3

<PAGE>
         "DIRECTORS" shall mean, at any time, the directors of Newco.

         "EIS DIRECTOR" has the meaning set forth in Clause 5.

         "ELAN" shall mean Elan, plc and EPIL.

         "ELAN IMPROVEMENTS" has the meaning assigned thereto in the Elan
         License Agreement.

         "ELAN INTELLECTUAL PROPERTY" has the meaning assigned thereto in the
         Elan License Agreement.

         "ELAN JV" has the meaning assigned thereto in the Elan License
         Agreement.

         "ELAN KNOW-HOW" has the meaning assigned thereto in the Elan License
         Agreement.

         "ELAN LICENSE" has the meaning assigned thereto in the Elan License
         Agreement.

         "ELAN LICENSE AGREEMENT" shall mean the license agreement between Elan
         and Newco, of even date herewith, attached hereto in Schedule 1.

         "ELAN PATENTS" has the meaning assigned thereto in the Elan License
         Agreement.

         "ENCUMBRANCE" shall mean any liens, charges, encumbrances, equities,
         claims, options, proxies, pledges, security interests, or other similar
         rights of any nature.

         "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
         amended.

         "EXCHANGE AGREEMENT" shall mean the Exchange Agreement of even date
         herewith between EIS and Acusphere.

         "EXCHANGE RIGHT" has the meaning assigned to such term in the Exchange
         Agreement in effect on the Closing Date.

         "FDA" shall mean the United States Food and Drug Administration or any
         other successor agency in the USA.

         "FIELD" shall mean delivery of a specified Compound by a specific Mode
         of Administration in a specific device to treat a specific medical
         condition, as set

                                       4

<PAGE>

         forth in Clause 2.3 below with respect to [CONFIDENTIAL TREATMENT
         REQUESTED] /*/ and as further determined by the unanimous vote of the
         Management Committee in accordance with Clause 2 hereof.

         "FINANCIAL YEAR" shall mean each year commencing on January 1 (or in
         the case of the first Financial Year, the Closing Date) and expiring on
         December 31 of each year.

         "FULLY DILUTED COMMON SHARES" shall mean all of the issued and
         outstanding Common Shares, assuming the conversion, exercise or
         exchange of all outstanding Common Share Equivalents.

         "INVESTORS RIGHTS AGREEMENT" shall mean the Amended and Restated
         Investors Rights Agreement, of even date herewith, among Acusphere, EIS
         and other investors in Acusphere.

         "LICENSE AGREEMENTS" shall mean the Elan License Agreement and the
         Acusphere License Agreement.

         "LICENSED TECHNOLOGIES" shall mean, collectively, the Elan Intellectual
         Property and the Acusphere Intellectual Property.

         "LICENSES" shall mean the Elan License and the Acusphere License.

         "MANAGEMENT COMMITTEE" shall have the meaning set forth in Clause 5.2
         hereof.

         "MODE OF ADMINISTRATION" shall mean administration via the pulmonary
         route (a) for local or systemic effect and (b) by immediate or
         controlled release.

         "NEWCO INTELLECTUAL PROPERTY" shall mean all rights to patents,
         know-how and other intellectual property arising out of the conduct of
         the Project by any person, including any technology acquired by Newco
         from a third party, that relates to the Products and which is not (in
         the case of the Compound) or which cannot be segregated into (nor does
         it constitute) Elan Intellectual Property or Acusphere Intellectual
         Property.

         "NEWCO BYE-LAWS" shall mean the Memorandum of Association and Bye-Laws
         of Newco Limited.

         "PARTICIPANT" shall mean Acusphere or Elan, as the case may be, and
         "PARTICIPANTS" shall mean both of the Participants together.

         "PARTY" shall mean Elan, Acusphere, or Newco, as the case may be, and
         "PARTIES" shall mean all such parties together.

                                       5

<PAGE>
         "PERSON" shall mean an individual, partnership, corporation, limited
         liability company, business trust, joint stock company, trust,
         unincorporated association, joint venture, governmental entity or
         authority or other entity of whatever nature.

         "PERMITTED TRANSFEREE" shall mean any Affiliate or subsidiary of Elan,
         EIS or Acusphere, to whom this Agreement may be assigned, in whole or
         in part, pursuant to the terms hereof or in the case of Elan and EIS, a
         special purpose financing entity created by Elan or EIS or their
         respective Affiliates.

         "PRODUCTS" shall mean formulations of the Compound(s) for use as a
         human therapeutic for a specified medical condition.

         "PROJECT" shall mean all activity as undertaken by or on behalf of
         Newco in order to develop the Products in accordance with the Business
         Plan.

         "R&D COMMITTEE" shall have the meaning set forth in Clause 5.2 hereof.

         "REGISTRATION RIGHTS AGREEMENTS" shall mean the Registration Rights
         Agreements of even date herewith relating to Newco and Acusphere,
         respectively.

         "REGULATORY APPLICATION" shall mean any regulatory application or any
         other application for marketing approval for a Product, which Newco
         will file in any country of the Territory, including any supplements or
         amendments thereto.

         "REGULATORY APPROVAL" shall mean the final approval to market a Product
         in any country of the Territory, and any other approval which is
         required to launch the Product in the normal course of business.

         "RHA" shall mean any relevant government health authority (or successor
         agency thereof) in any country of the Territory whose approval is
         necessary to market a Product in the relevant country of the Territory.

         "RESEARCH AND DEVELOPMENT PROGRAM" has the meaning set forth in Clause
         6.1.

         "RESEARCH AND DEVELOPMENT TERM" shall mean the research and development
         stage of the Business Plan, which stage shall be deemed terminated upon
         the first commercial launch of a Product by Newco.

         "SECURITIES ACT" shall mean the Securities Act of 1933, as amended.

         "SHARES" shall mean the shares of Common Shares and shares of Preferred
         Shares of Newco.

                                       6

<PAGE>
         "SHAREHOLDER" shall mean any of EIS, Acusphere, any Permitted
         Transferee or any other Person who subsequently becomes bound by this
         Agreement as a holder of the Shares, and "SHAREHOLDERS" shall mean all
         of the Shareholders together.

         "TECHNOLOGICAL COMPETITOR OF ELAN" shall have the meaning assigned
         thereto in the Elan License Agreement.

         "TERM" shall mean the term of this Agreement.

         "TERRITORY" shall mean all of the countries of the world.

         "UNITED STATES DOLLAR" and "US$" and "$" shall mean the lawful currency
         of the United States of America.

1.2      In addition, the following definitions have the meanings in the Clauses
         corresponding thereto, as set forth below.

         DEFINITION                                CLAUSE

         "AAA"                                      18.4
         "Closing"                                  4.3
         "Common Shares"                            Recital
         "Confidential Information"                 21.1
         "Co-sale Notice"                           16.4
         "Expert"                                   18.4
         "Management Committee"                     5.2.1
         "Notice of Exercise"                       16.3
         "Notice of Intention"                      16.3
         "Offered Shares"                           16.3
         "Offer Price"                              16.3
         "Preferred Shares"                         Recital
         "R&D Committee"                            5.2.2
         "Remaining Shareholders"                   16.4
         "Relevant Event"                           19.2
         "Selling Shareholder"                      16.3
         "Tag-Along Right"                          16.4
         "Transaction Proposal"                     16.3
         "Transfer"                                 16.1
         "Transferee Terms"                         16.4
         "Transferring Shareholder"                 16.4

1.3      Words importing the singular shall include the plural and vice versa.

                                       7

<PAGE>

1.4      Unless the context otherwise requires, reference to a recital, article,
         paragraph, provision, clause or schedule is to a recital, article,
         paragraph, provision, clause or schedule of or to this Agreement.

1.5      Reference to a statute or statutory provision includes a reference to
         it as from time to time amended, extended or re-enacted.

1.6      The headings in this Agreement are inserted for convenience only and do
         not affect its construction.

1.7      Unless the context or subject otherwise requires, references to words
         in one gender include references to the other genders.

1.8      Capitalized terms used but not defined herein shall have the meanings
         ascribed in the Definitive Documents, if defined therein.

                                    CLAUSE 2

                       BUSINESS AND SELECTION OF COMPOUNDS

2.1      The primary objective of the Agreement is to regulate the business of
         the development, testing, registration, manufacture, commercialization
         and licensing of Products in the Field in the Territory and to achieve
         the other objectives set out in this Agreement. The focus of the
         Business will be to develop the Products using the Elan Intellectual
         Property, the Acusphere Intellectual Property and the Newco
         Intellectual Property to agreed-upon specifications and timelines.

2.2      The central management and control of Newco shall be exercised in
         Bermuda and shall be vested in the Directors and such Persons as they
         may delegate the exercise of their powers in accordance with the Newco
         Bye-Laws. The Shareholders agree to conduct the Business in such a
         manner as to ensure that Newco is liable to taxation in Bermuda and not
         in any other jurisdiction. The Participants shall use their best
         endeavors to ensure that to the extent required the sole residence of
         Newco in Bermuda, that all meetings of the Directors are held in
         Bermuda or other jurisdictions outside the United States and generally
         to ensure that Newco is treated as resident for taxation purposes in
         Bermuda.

2.3      The Parties hereby nominate as a Compound [CONFIDENTIAL TREATMENT
         REQUESTED] /*/ for local effect and controlled release using a Mode of
         Administration (other than a [CONFIDENTIAL TREATMENT REQUESTED]/*/) to
         treat asthma [CONFIDENTIAL TREATMENT REQUESTED]/*/. Subject to Clauses
         2.4 and 2.5, the Management Committee shall, by unanimous agreement,
         nominate two other Compounds, in addition to [CONFIDENTIAL TREATMENT
         REQUESTED]/*/, for development as a

                                       8

<PAGE>

         Product in a specific device by a specific Mode of Administration to
         treat a specific medical condition having regard to the following
         criteria:

         2.3.1    development cost of each of the Compounds in such Field, as
                  estimated by the Management Committee;

         2.3.2    market potential of each of the Compounds in such Field, as
                  estimated by the Management Committee;

         2.3.3    results of regulatory and intellectual property due diligence
                  primarily focused on determining whether there are any
                  regulatory and third party intellectual property issues which
                  might impact the development and marketing of each of the
                  Compounds in such Field; and

         2.3.4    whether the nominated Compound is subject to contractual
                  obligations, existing at the date of nomination, of Elan or
                  Acusphere which would prevent the conduct of the research and
                  development program or from granting Newco the right to
                  Commercialize the nominated Compound or which may adversely
                  affect the scope and/or nature of the rights which could be
                  granted to Newco and thereby the potential commercial
                  viability of the nominated Compound.

         The Management Committee shall prioritize the research and development
         programs with respect to such additional Compounds. If the Management
         Committee unanimously determines that the research, development and
         Commercialization of a Product would require additional technology
         owned or licensed by Elan and/or Acusphere, as the case may be, then
         the Parties shall discuss in good faith in-licensing such additional
         technology, subject to among other things, third party contractual
         obligations. In such case, the Parties shall negotiate in good faith
         such amendments as are required to this Agreement.

2.4      The selection of the Compounds or any substitute Compounds shall be
         subject to, inter alia, the then existing contractual arrangements of
         Elan and Acusphere and such discussions as Elan or Acusphere are having
         with one or more third parties at the time of such selection.
         [CONFIDENTIAL TREATMENT REQUESTED]/*/ On the date of selection of a
         Compound by the Management Committee,

                  (a)      [CONFIDENTIAL TREATMENT REQUESTED]/*/; and

                  (b)      Acusphere shall confirm that the Acusphere
                           Intellectual Property as it relates to the selected
                           Compound is not subject to contractual obligations of
                           Acusphere to an unaffiliated third party; and

         provided, however, that if any such contractual obligation exists,
         Acusphere and/or

                                       9

<PAGE>

         Elan, as the case may be, shall prior to the date of selection of the
         Compound inform the other of the scope and extent of any such
         contractual obligation.

2.5      The Management Committee may determine, by unanimous agreement, that a
         Compound should be abandoned by Newco and accordingly deleted from the
         list of Compounds to be advanced in the Project where the results of
         the regulatory and intellectual property due diligence described in
         Clause 2.3.3 reveal regulatory or third party intellectual property
         issues which might materially impact the development and
         Commercialization of a Compound in the Field.

2.6      Should a Compound fail to meet agreed specifications, the Management
         Committee shall terminate the portion of the Project that relates to
         such Compound. The Parties shall review in good faith the possibility
         of developing one substitute compound, or in-licensing or acquiring the
         rights from one or more third parties to one substitute compound,
         unless Phase II (as such term is commonly used in connection with FDA
         applications) has been initiated with respect to the terminated
         Compound; provided that no more than one substituted compound is
         contemplated to be considered during the course of this Agreement.
         Alternatively, [CONFIDENTIAL TREATMENT REQUESTED]/*/. In either case,
         the Parties shall negotiate in good faith such amendments as are
         required to this Agreement, such as amending the provisions regulating
         non-competition.

                                    CLAUSE 3

                         REPRESENTATIONS AND WARRANTIES

3.1      REPRESENTATIONS AND WARRANTIES OF NEWCO: Newco hereby represents and
         warrants to each of the Shareholders as follows, as of the Closing
         Date:

         3.1.1    ORGANIZATION: Newco is an exempted company duly organized,
                  validly existing and in good standing under the laws of
                  Bermuda, and has all the requisite corporate power and
                  authority to own and lease its properties, to carry on its
                  business as presently conducted and as proposed to be
                  conducted.

         3.1.2    CAPITALIZATION: As of the Closing Date, the authorized capital
                  stock of Newco consists of 6,000 shares of Common Shares and
                  6,000 shares of Preferred Shares. Prior to the Closing Date,
                  no shares of capital stock of Newco have been issued.

         3.1.3    AUTHORIZATION: The execution, delivery and performance by
                  Newco of this Agreement, including the issuance of the Shares,
                  have been duly authorized by all requisite corporate actions;
                  this Agreement has been duly

                                       10

<PAGE>

                  executed and delivered by Newco and is the valid and binding
                  obligation of Newco, enforceable against it in accordance with
                  its terms except as limited by applicable bankruptcy,
                  insolvency, reorganization, moratorium and other laws of
                  general application affecting the enforcement of creditors'
                  rights generally, and except as enforcement of rights to
                  indemnity and contribution hereunder may be limited by United
                  States federal or state securities laws or principles of
                  public policy. The Shares, when issued as contemplated hereby,
                  will be validly issued and outstanding, fully paid and
                  non-assessable and not subject to pre-emptive or any other
                  similar rights of the Shareholders or others.

         3.1.4    NO CONFLICTS: The execution, delivery and performance by Newco
                  of this Agreement, the issuance, sale and delivery of the
                  Shares, and compliance with the provisions hereof by Newco,
                  will not:

                  (i)      violate any provision of applicable law, statute,
                           rule or regulation applicable to Newco or any ruling,
                           writ, injunction, order, judgment or decree of any
                           court, arbitrator, administrative agency or other
                           governmental body applicable to Newco or any of its
                           properties or assets;

                  (ii)     conflict with or result in any breach of any of the
                           terms, conditions or provisions of, or constitute
                           (with notice or lapse of time or both) a default (or
                           give rise to any right of termination, cancellation
                           or acceleration) under its charter or organizational
                           documents or any material contract to which Newco is
                           a party, except where such violation, conflict or
                           breach would not, individually or in the aggregate,
                           have a material adverse effect on Newco; or

                  (iii)    result in the creation of, any Encumbrance upon any
                           of the properties or assets of Newco.

         3.1.5    APPROVALS: As of the Closing Date, no permit, authorization,
                  consent or approval of or by, or any notification of or filing
                  with, any Person is required in connection with the execution,
                  delivery or performance of this Agreement by Newco. Newco has
                  full authority to conduct its business as contemplated in the
                  Business Plan and the Definitive Documents.

         3.1.6    DISCLOSURE: This Agreement does not contain any untrue
                  statement of a material fact or omit to state any material
                  fact necessary to make the statements contained herein not
                  misleading. Newco is not aware of any material contingency,
                  event or circumstance relating to its business or prospects,
                  which could have a material adverse effect thereon, in order
                  for the disclosure herein relating to Newco not to be
                  misleading in any material respect.

                                       11

<PAGE>
         3.1.7    NO BUSINESS; NO LIABILITIES: Newco has not conducted any
                  business or incurred any liabilities or obligations prior to
                  the Closing Date, except solely in connection with its
                  organization and formation.

3.2      REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS: Each of the
         Shareholders hereby severally represents and warrants to Newco as
         follows as of the Closing Date:

         3.2.1    ORGANIZATION: Such Shareholder is a corporation duly organized
                  and validly existing under the laws of its jurisdiction of
                  organization and has all the requisite corporate power and
                  authority to own and lease its respective properties, to carry
                  on its respective business as presently conducted and as
                  proposed to be conducted and to carry out the transactions
                  contemplated hereby.

         3.2.2    AUTHORITY: Such Shareholder has full legal right, power and
                  authority to enter into this Agreement and to perform its
                  obligations hereunder, which have been duly authorized by all
                  requisite corporate action. This Agreement is the valid and
                  binding obligation of such Shareholder, enforceable against it
                  in accordance with its terms except as limited by applicable
                  bankruptcy, insolvency, reorganization, moratorium and other
                  laws of general application affecting the enforcement of
                  creditors' rights generally, and except as enforcement of
                  rights to indemnity and contribution hereunder may be limited
                  by United States federal or state securities laws or
                  principles of public policy.

         3.2.3    NO CONFLICTS: The execution, delivery and performance by such
                  Shareholder of this Agreement, purchase of the Shares, and
                  compliance with the provisions hereof by such Shareholder will
                  not:

                  (i)      violate any provision of applicable law, statute,
                           rule or regulation known by and applicable to such
                           Shareholder or any ruling, writ, injunction, order,
                           judgment or decree of any court, arbitrator,
                           administrative agency or other governmental body
                           applicable to such Shareholder or any of its
                           properties or assets;

                  (ii)     conflict with or result in any breach of any of the
                           terms, conditions or provisions of, or constitute
                           (with notice or lapse of time or both) a default (or
                           give rise to any right of termination, cancellation
                           or acceleration) under the charter or organizational
                           documents of such Shareholder or any material
                           contract to which such Shareholder is a

                                       12

<PAGE>
                           party, except where such violation, conflict or
                           breach would not, individually or in the aggregate,
                           have a material adverse effect on such Shareholder;
                           or

                  (iii)    result in the creation of, any Encumbrance upon any
                           of the properties or assets of such Shareholder.

         3.2.4    APPROVALS: As of the Closing Date, no permit, authorization,
                  consent or approval of or by, or any notification of or filing
                  with, any Person is required in connection with the execution,
                  delivery or performance of this Agreement by such Shareholder.

         3.2.5    INVESTMENT REPRESENTATIONS: Such Shareholder is sophisticated
                  in transactions of this type and capable of evaluating the
                  merits and risks of its investment in Newco. Such Shareholder
                  has not been formed solely for the purpose of making this
                  investment and such Shareholder is acquiring the Common Shares
                  and Preferred Shares for investment for its own account, not
                  as a nominee or agent, and not with the view to, or for resale
                  in connection with, any distribution of any part thereof. Such
                  Shareholder understands that the Shares have not been
                  registered under the Securities Act or applicable state and
                  foreign securities laws by reason of a specific exemption from
                  the registration provisions of the Securities Act and
                  applicable state and foreign securities laws, the availability
                  of which depends upon, among other things, the bona fide
                  nature of the investment intent and the accuracy of such
                  Shareholders' representations as expressed herein. Such
                  Shareholder understands that no public market now exists for
                  any of the Shares and that there is no assurance that a public
                  market will ever exist for such Shares.

                                    CLAUSE 4

                            AUTHORIZATION AND CLOSING

4.1      Newco has authorized the issuance to (i) EIS of 2,388 shares of
         Preferred Shares and (ii) Acusphere of 6,000 shares of Common Shares
         and 3,612 shares of Preferred Shares, issuable as provided in Clause
         4.3 hereof.

4.2      Acusphere and EIS hereby subscribe for the number of Shares set forth
         in Clause 4.1 and shall pay to Newco in consideration therefor, by wire
         transfer of immediately available funds (to a bank account established
         by Newco in connection with Completion) the subscription amounts each
         as provided in Clause 4.4.1.

                                       13

<PAGE>

4.3      The closing (the "CLOSING") shall take place at the offices of Cahill
         Gordon & Reindel, 80 Pine Street, New York, New York 10005 on the
         Closing Date or such other places if any, as the Parties may agree and
         shall occur contemporaneously with the closing under the Acusphere
         Securities Purchase Agreement.

4.4      At the Closing, each of the Shareholders shall take or (to the extent
         within its powers) cause to be taken the following steps at directors
         and shareholder meetings of Newco, or such other meetings or locations,
         as appropriate:

         4.4.1    Newco shall issue and sell to EIS, and EIS shall purchase from
                  Newco, upon the terms and subject to the conditions set forth
                  herein, 2,388 shares of Preferred Shares for an aggregate
                  purchase price of $2,985,000;

                  Newco shall issue and sell to Acusphere, and Acusphere shall
                  purchase from Newco, upon the terms and conditions set forth
                  herein, (i) 6,000 shares of Common Shares for an aggregate
                  purchase price of $4,515,000 and (ii) 3,612 shares of
                  Preferred Shares for an aggregate purchase price of
                  $7,500,000;

         4.4.2    the Parties shall execute and deliver to each other, as
                  applicable, certificates in respect of the Common Shares and
                  Preferred Shares described above and any other certificates,
                  resolutions or documents which the Parties shall reasonably
                  require;

         4.4.3.   the adoption by Newco of Newco Bye-Laws;

         4.4.4.   the appointment of Kevin Insley, Sherri Oberg, Howard
                  Bernstein, Steven Delaney, Stephen J. Rossiter, and Dawn
                  Griffiths as Directors of Newco;

         4.4.5.   the resignation of all directors and the secretary of Newco
                  holding office prior to the execution of this Agreement and
                  delivery of written confirmation under seal by each Person so
                  resigning that he has no claim or right of action against
                  Newco and that Newco is not in any way obligated or indebted
                  to him; and

         4.4.6.   the transfer to Newco of the share register.

4.5      EXEMPTION FROM REGISTRATION:

         The Shares will be issued under an exemption or exemptions from
         registration under the Securities Act. Accordingly, the certificates
         evidencing the Shares shall, upon issuance, contain the following
         legend:

                                       14

<PAGE>

         THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
         SECURITIES ACT OF 1933, AS AMENDED, OR ANY SECURITIES LAWS OF A STATE
         OR OTHER JURISDICTION AND MAY NOT UNDER ANY CIRCUMSTANCES BE SOLD,
         TRANSFERRED, OR OTHERWISE DISPOSED OF (OTHER THAN TO AN AFFILIATE OF
         THE ORIGINAL HOLDER OR AS OTHERWISE PERMITTED IN THE AGREEMENT PURSUANT
         TO WHICH THEY WERE ISSUED) EXCEPT PURSUANT TO (I) AN EFFECTIVE
         REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND ANY APPLICABLE
         STATE SECURITIES OR BLUE SKY LAWS, OR (II) TO THE EXTENT APPLICABLE,
         RULE 144 UNDER THE SECURITIES ACT (OR ANY SIMILAR RULE UNDER THE
         SECURITIES ACT RELATING TO THE DISPOSITION OF SECURITIES) TOGETHER WITH
         AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION THAT
         REGISTRATION IS NOT REQUIRED UNDER SUCH ACT OR APPLICABLE STATE
         SECURITIES LAWS.

4.6.     Newco shall use reasonable efforts to file any documents that require
         filing with the Registrar of Companies in Bermuda within the prescribed
         time limits. EIS and Acusphere shall provide all reasonable
         co-operation to Newco in relation to the matters set forth in this
         Clause 4.6.

4.7.     In the event that EIS exercises the Exchange Right, Newco shall,
         immediately upon such exercise, take all necessary steps to ensure that
         EIS is duly and validly issued and has full legal right, title and
         interest in and to the shares of Preferred Shares covered thereby.

                                    CLAUSE 5

                    DIRECTORS; MANAGEMENT AND R&D COMMITTEES

5.1.     DIRECTORS:

         5.1.1    Prior to the exercise of the Exchange Right, the Board shall
                  be composed of five Directors.

                  Acusphere shall have the right to nominate four directors of
                  Newco, ("ACUSPHERE DIRECTORS") and EIS shall have the right to
                  nominate one Director of Newco ("EIS DIRECTOR") which
                  Director, save as further provided herein, shall only be
                  entitled to 15% of the votes of the Board.

                                       15

<PAGE>
                  In the event that the Exchange Right is exercised by EIS
                  within (2) years following the Closing Date, the EIS Director
                  shall only be entitled to 15% of the votes of the Board until
                  the expiry of (2) years from the Closing Date.

                  In the event that the Exchange Right is exercised by EIS at
                  any time after years following the Closing Date or upon the
                  expiry of (2) years following the Closing Date where the
                  Exchange Right has been exercised by EIS within two (2) years
                  following the Closing Date, each of Acusphere, and EIS shall
                  cause the Board to be reconfigured so that an equal number of
                  Directors are designated by EIS and Acusphere and that each of
                  the Directors has equal voting power.

         5.1.2    If EIS removes the EIS Director, or Acusphere removes any of
                  the Acusphere Directors, EIS or Acusphere, as the case may be,
                  shall indemnify the other Shareholder against any claim by
                  such removed Director arising from such removal.

         5.1.3    The Directors shall meet not less than three times in each
                  Financial Year and all Board meetings shall be held in
                  Bermuda.

         5.1.4    At any such meeting, the presence of the EIS Director and at
                  least three of the Acusphere Directors shall be required to
                  constitute a quorum and, subject to Clause 17 hereof, the
                  affirmative vote of a majority of the Directors present at a
                  meeting at which such a quorum is present shall constitute an
                  action of the Directors. In the event of any meeting being
                  inquorate, the meeting shall be adjourned for a period of
                  seven days. A notice shall be sent to the EIS Director and the
                  Acusphere Directors specifying the date, time and place where
                  such adjourned meeting is to be held and reconvened.

         5.1.5    On the Closing Date, Acusphere may appoint one of the
                  Acusphere Directors to be the chairman of Newco. Such chairman
                  of Newco shall hold office until:

                  (i)      the first meeting of the Board following the exercise
                           by EIS of the Exchange Right, where the Exchange
                           Right has been exercised by EIS after two years
                           following the Closing Date; or

                  (ii)     the first meeting of the Board following the expiry
                           of (2) years following the Closing Date where the
                           Exchange Right has been exercised by EIS within 2
                           years following the Closing Date

                  (in each case the "CHAIRMAN STATUS BOARD MEETING").

                                       16

<PAGE>

                  After the Chairman Status Board Meeting, each of EIS and
                  Acusphere, beginning with EIS at the Chairman Status Board
                  Meeting, shall have the right, exercisable alternatively, of
                  nominating one Director to be chairman of Newco for a term of
                  one year.

                  If the chairman is unable to attend any meeting of the Board
                  held prior to the Chairman Status Board Meeting, the Acusphere
                  Directors shall be entitled to appoint another Acusphere
                  Director to act as chairman in his place at the meeting.

                  If the chairman of Newco is unable to attend any meeting of
                  the Board held after the Chairman Status Board Meeting, the
                  Directors shall be entitled to appoint another Director to act
                  as chairman of Newco in his place at the meeting.

         5.1.6    In case of an equality of votes at a meeting of the Board, the
                  chairman of Newco shall not be entitled to a second or casting
                  vote. In the event of continued deadlock, the Board shall
                  resolve the deadlock pursuant to the provisions set forth in
                  Clause 18.

5.2      MANAGEMENT AND R&D COMMITTEES:

                  5.2.1 Newco's board of directors shall appoint a management
                  committee (the "MANAGEMENT COMMITTEE") to consist initially of
                  four members, two of whom shall be nominated by Elan and two
                  of whom shall be nominated by Acusphere, and each of whom
                  shall be entitled to one vote, whether or not present at any
                  Management Committee meeting. Decisions of the Management
                  Committee shall require approval of at least one Elan nominee
                  on the Management Committee and one Acusphere nominee on the
                  Management Committee.

                  Each of Elan and Acusphere shall be entitled to remove any of
                  their nominees to the Management Committee and appoint a
                  replacement in place of any nominees so removed. The number of
                  members of the Management Committee may be altered if agreed
                  to by a majority of the directors of Newco; provided that,
                  each of Elan and Acusphere shall be entitled to appoint an
                  equal number of members to the Management Committee. The
                  Management Committee shall be responsible for, inter alia,
                  devising, implementing and reviewing strategy for the Project.

                  5.2.2    The Management Committee shall appoint a research and
                           development committee (the "R&D COMMITTEE"), which
                           shall initially be comprised of four members, two of
                           whom shall be nominated by Elan and two of whom

                                       17

<PAGE>

                           shall be nominated by Acusphere, and each of whom
                           shall have one vote, whether or not present at an R&D
                           Committee meeting during which research and
                           development issues are discussed. Decisions of the
                           R&D Committee shall require approval of at least one
                           Elan nominee on the R&D Committee and one Acusphere
                           nominee on the R&D Committee.

                           Each of Elan and Acusphere shall be entitled to
                           remove any of their nominees to the R&D Committee and
                           appoint a replacement in place of any nominees so
                           removed. The number of members of the R&D Committee
                           may be altered if agreed to by a majority of the
                           directors of Newco provided that each of Elan and
                           Acusphere shall be entitled to appoint an equal
                           number of members to the R&D Committee.

                  5.2.3    The R&D Committee shall be responsible for:

                           (a)      designing the Research and Development
                                    Program for consideration by the Management
                                    Committee;

                           (b)      if deemed advisable, establishing a joint
                                    Project team consisting of an equal number
                                    of team members from Elan and Acusphere,
                                    including one Project leader from each of
                                    Elan and Acusphere; and

                           (c)      implementing the Research and Development
                                    Program as approved by the Management
                                    Committee.

                  5.2.4    In the event of any dispute amongst the R&D
                           Committee, the R&D Committee shall refer such dispute
                           to the Management Committee whose decision on the
                           dispute shall be binding on the R&D Committee.

                           If the Management Committee cannot resolve the
                           matter, the dispute will be referred to a designated
                           senior officer of each of Elan and Acusphere, and
                           thereafter, in the event of continued deadlock,
                           pursuant to the deadlock provisions to be set forth
                           in Clause 18. This process shall also apply to any
                           dispute within the Management Committee.

                                    CLAUSE 6

                          THE BUSINESS PLAN AND REVIEWS

6.1      The Directors shall meet together as soon as reasonably practicable
         after the Closing Date and shall agree upon and approve the Business
         Plan for the current Financial Year within 180 days of the Closing
         Date. The Business Plan shall contain, among other things, a research
         and development program (the "RESEARCH AND DEVELOPMENT PROGRAM") which
         shall include to the extent practicable, the

                                       18

<PAGE>

         research and development objectives, desired Product specifications,
         clinical indications, preliminary clinical trial designs (Phase I/II),
         development timelines, budgeted costs and the relative responsibilities
         of Acusphere and Elan as it relates to the implementation of the
         Research and Development Program.

6.2.     The Business Plan shall be subject to ongoing review by the Directors
         and the approval of the EIS Director and the Acusphere Directors on a
         quarterly basis.

6.3.     Neither Participant shall be obliged to provide subsequent funding to
         Newco in the absence of quarterly approval of the Business Plan and a
         determination by each Participant, in its sole discretion
         (notwithstanding Clause 17.2 below), that Development Funding (as such
         term is defined in the Securities Purchase Agreement) shall be provided
         for the development of the Products in accordance with the terms of the
         Securities Purchase Agreement.

                                    CLAUSE 7

                          RESEARCH AND DEVELOPMENT WORK

7.1      Subject to the provisions of Clause 6.3, Acusphere and Elan shall
         provide at their respective discretion such research and development
         services as is requested by Newco and as articulated in the Business
         Plan. Newco shall pay Acusphere and Elan for any research and
         development work carried out by them on behalf of Newco [CONFIDENTIAL
         TREATMENT REQUESTED]/*/ during the Research and Development Program
         developed by the R&D Committee and approved by the Management
         Committee, subject to the proper vouching of research and development
         work and expenses. An invoice shall be issued to Newco by Acusphere or
         Elan, as applicable, [CONFIDENTIAL TREATMENT REQUESTED]/*/ following
         the [CONFIDENTIAL TREATMENT REQUESTED]/*/ in which work was performed.
         The payments by Newco to Acusphere or Elan in carrying out such
         research and development work shall be calculated by reference to the
         fully allocated costs thereof incurred by Acusphere and Elan calculated
         in accordance with generally accepted accounting principles
         consistently applied plus [CONFIDENTIAL TREATMENT REQUESTED]/*/, or
         [CONFIDENTIAL TREATMENT REQUESTED]/*/ FTE rate agreed to by the
         unanimous vote of the Management Committee. Research and development
         activities that are outsourced to third party providers shall be
         charged to Newco at fully burdened actual costs.

7.2      Elan and Acusphere shall permit Newco or its duly authorized
         representative on reasonable notice and at any reasonable time during
         normal business hours to have access to inspect and audit the accounts
         and records of Elan or Acusphere and any other book, record, voucher,
         receipt or invoice relating to the calculation or the

                                       19

<PAGE>
         cost of the Research and Development Program and to the accuracy of the
         reports which accompanied them. Any such inspection of Elan's or
         Acusphere's records, as the case may be, shall be at the expense of
         Newco, except that if such inspection reveals an overpayment in the
         amount paid to Elan or Acusphere, as the case may be, for the Research
         and Development Program hereunder in any Financial Year of 5% or more
         of the amount due to Elan or Acusphere, as the case may be, then the
         expense of such inspection shall be borne solely by Elan or Acusphere,
         as the case may be, instead of by Newco. Any surplus over the sum
         properly payable by Newco to Elan or Acusphere, as the case may be,
         shall be paid promptly by Elan or Acusphere, as the case may be, to
         Newco. If such inspection reveals a deficit in the amount of the sum
         properly payable to Elan or Acusphere, as the case may be, by Newco,
         Newco shall pay the deficit to Elan or Acusphere, as the case may be.

                                    CLAUSE 8

                                COMMERCIALIZATION

8.1      Newco shall diligently pursue the research, development, prosecution
         and Commercialization of the Products as provided in the Business Plan.

         At such time as Newco notifies Elan in writing that Newco in good faith
         intends to Commercialize a Product (other than to manufacture or have
         manufactured the Product which is the subject of Clause 13 below),
         Elan, plc or any Affiliate of Elan shall have a first option to
         negotiate the terms of any agreement for the Commercialization of such
         Product (the "ELAN OPTION PRODUCT"), which option shall be exercised
         within [CONFIDENTIAL TREATMENT REQUESTED/*/ of Elan's receipt of such
         written notification from Newco (the "ELAN/NEWCO OPTION"). If Elan
         elects to enter into such negotiations, the Participants shall
         negotiate in good faith the terms of an applicable agreement that would
         grant Elan such Commercialization rights.

         If, despite good faith negotiations, Elan, plc or the relevant
         Affiliate and Newco do not reach agreement within [CONFIDENTIAL
         TREATMENT REQUESTED]/*/ from Elan's exercise of the Elan/Newco Option
         (the "PERIOD OF NEGOTIATION"), then Newco shall be free to enter into
         negotiations with a third party (other than a Technological Competitor
         Of Elan) to agree terms upon which such third party would Commercialize
         the relevant Product in the Territory, which terms when taken as a
         whole, are not more favorable to the third party than the principal
         terms of the last written proposal offered by Newco to Elan, plc or the
         relevant Affiliate or by Elan, plc or the relevant Affiliate to Newco,
         as the case may be. The definitive agreement between Newco and such
         third party to Commercialize the relevant Product in the Territory
         shall be subject to the written approval of the

                                       20

<PAGE>
         Participants, which approval shall not to be unreasonably withheld or
         delayed, and which approval shall be further subject to the last
         paragraph of this Clause 8.1.

         Acusphere, acting on behalf of Newco, shall have the right to initiate
         negotiations with a third party (other than a Technological Competitor
         Of Elan) during the Period of Negotiation but Newco may not enter into
         an agreement for Commercialization until such Period of Negotiation has
         terminated.

         If (i) the Product that is the subject of such Elan/Newco Option
         relates to a therapeutic area in which Elan, plc and/or its Affiliates
         have a marketing or sales presence and (ii) Newco has not entered into
         an agreement with a third party within [CONFIDENTIAL TREATMENT
         REQUESTED]/*/ from the expiration of the Period of Negotiation, then
         the Elan/Newco Option shall be deemed to have re-commenced upon the
         same terms as set forth herein but with a [CONFIDENTIAL TREATMENT
         REQUESTED]/*/ option period as opposed to the initial [CONFIDENTIAL
         TREATMENT REQUESTED]/*/ Period of Negotiation.

         Newco and the Acusphere Directors and EIS Director shall use their
         respective good faith and reasonable business judgement in the best
         interest of Newco when negotiating, agreeing and approving terms for
         the Commercialization of the Products.

                                    CLAUSE 9

            OWNERSHIP OF INTELLECTUAL PROPERTY RIGHTS/NON-COMPETITION

9.1.     The Parties acknowledge and agree to be bound by the provisions of
         Clause 3 of the Elan License Agreement and Clause 3 of the Acusphere
         License Agreement which set forth the agreement between the parties
         thereto in relation to the ownership of the Elan Intellectual Property,
         the Acusphere Intellectual Property and the Newco Intellectual property
         respectively.

9.2      The Parties acknowledge and agree to be bound by the provisions of
         Clause 4 of the Elan License Agreement and the provisions of Clause 4
         of the Acusphere License Agreement which set forth the agreement
         between the parties thereto in relation to the non-competition
         obligations of Elan and Acusphere, respectively.

                                    CLAUSE 10

                          INTELLECTUAL PROPERTY RIGHTS

10.1     Elan, [CONFIDENTIAL TREATMENT REQUESTED]/*/ sole discretion
         [CONFIDENTIAL TREATMENT REQUESTED]/*/ (i) secure the grant of any
         patent applications within the Elan Patents that relate to the Field;
         (ii) file and

                                       21

<PAGE>
         prosecute patent applications on patentable inventions and discoveries
         within the Elan Improvements that relate to the Field; (iii) defend all
         such applications against third party oppositions; and (iv) maintain in
         force any issued letters patent within the Elan Patents that relate to
         the Field (including any letters patent that may issue covering any
         such Elan Improvements that relate to the Field). Elan shall have the
         right in its sole discretion to control such filing, prosecution,
         defense and maintenance provided that Newco and Acusphere at their
         request shall be provided with copies of all documents relating to such
         filing, prosecution, defense and maintenance in sufficient time to
         review such documents and comment thereon prior to filing.

10.2     Acusphere, [CONFIDENTIAL TREATMENT REQUESTED]/*/ and sole discretion,
         [CONFIDENTIAL TREATMENT REQUESTED]/*/ (i) secure the grant of any
         patent applications within the Acusphere Patents that relate to the
         Field; (ii) file and prosecute patent applications on patentable
         inventions and discoveries within the Acusphere Improvements that
         relate to the Field; (iii) defend all such applications against third
         party oppositions; and (iv) maintain in force any issued letters patent
         within the Acusphere Patents that relate to the Field (including any
         letters patent that may issue covering any such Acusphere Improvements
         that relate to the Field). Acusphere shall have the right in its sole
         discretion to control such filing, prosecution, defense and maintenance
         provided that Elan and Newco at their request shall be provided with
         copies of all documents relating to such filing, prosecution, defense
         and maintenance in sufficient time to review such documents and comment
         thereon prior to filing.

10.3     In the event that Elan does not intend to file for patent protection on
         patentable inventions or discoveries within the Elan Intellectual
         Property that relates to the Field in one or more countries in the
         Territory after providing written notice to Newco and Acusphere, Newco
         shall have the option [CONFIDENTIAL TREATMENT REQUESTED]/*/, upon the
         prior written approval of Elan which approval shall not be unreasonably
         withheld, to request Elan to file and prosecute such patent
         application(s) jointly on behalf of Newco and Acusphere. Upon such
         written request from Newco, Elan shall be responsible for preparing and
         prosecuting and otherwise seeking patent protection for such Elan
         Intellectual Property described in this Clause 10.3. Any such Elan
         Intellectual Property shall be owned by Elan but Elan shall grant to
         Newco a royalty free exclusive license to such Elan Intellectual
         Property in the Field. The Parties shall have the right to remove their
         confidential information from any such patent application.

10.4     In the event that Acusphere does not intend to file for patent
         protection on patentable inventions or discoveries within the Acusphere
         Intellectual Property that relates to the Field in one or more
         countries in the Territory after providing written notice to Newco and
         Elan, Newco shall have the option [CONFIDENTIAL TREATMENT
         REQUESTED]/*/, upon the prior written approval of Acusphere

                                       22

<PAGE>

         which approval shall not be unreasonably withheld, to request Acusphere
         to file and prosecute such patent application(s) jointly on behalf of
         Newco and Elan. Upon such written request from Newco, Acusphere shall
         be responsible for preparing and prosecuting and otherwise seeking
         patent protection for such Acusphere Intellectual Property described in
         this Clause 10.4. Any such Acusphere Intellectual Property shall be
         owned by Acusphere but Acusphere shall grant a royalty free exclusive
         license to Newco to such Acusphere Intellectual Property in the Field.
         The Parties shall have the right to remove their confidential
         information from any such patent application.

10.5     Newco [CONFIDENTIAL TREATMENT REQUESTED]/*/ shall have the right but
         shall not be obligated (i) to file and prosecute patent applications on
         patentable inventions and discoveries within the Newco Intellectual
         Property; (ii) to defend all such applications against third party
         oppositions; and (iii) to maintain in force any issued letters patent
         within the Newco Patents (including any patents that issue on
         patentable inventions and discoveries within the Newco Intellectual
         Property). Newco shall have the right to control such filing,
         prosecution, defense and maintenance provided that the other Parties
         shall be provided with copies of all documents relating to such filing,
         prosecution, defense, and maintenance in sufficient time to review such
         documents and comment thereon prior to filing. The Parties shall have
         the right to remove their confidential information from any such patent
         application.

10.6     In the event that Newco informs both Elan and Acusphere that it does
         not intend to file an application on the Newco Intellectual Property in
         or outside the Field, Elan shall have the right to file and prosecute
         such patent applications on inventions that Elan invents solely or
         which relate predominantly to the Elan Intellectual Property, and
         Acusphere shall have the right to file and prosecute such patent
         applications on inventions which Acusphere invents solely or which
         relate predominantly to the Acusphere Intellectual Property, and Elan
         and Acusphere agree to negotiate in good faith on the course of action
         to be taken with respect to Newco inventions that relate to both the
         Elan and Acusphere Intellectual Property. The Parties shall have the
         right to remove their confidential information from any such patent
         application.

10.7     The Parties shall promptly inform each other in writing of any actual
         or alleged unauthorized use of any Elan Intellectual Property, the
         Acusphere Intellectual Property or the Newco Intellectual Property by a
         third party of which it becomes aware and provide the others with any
         available evidence of such unauthorized use.

10.8     At its option, as the case may be, Elan or Acusphere shall have the
         first option to enforce [CONFIDENTIAL TREATMENT REQUESTED]/*/ for its
         own benefit any unauthorized use of its respective Intellectual
         Property (the Elan Intellectual

                                       23

<PAGE>

         Property or the Acusphere Intellectual Property as the case may be) in
         the Field. At the enforcing party's request, the other Parties shall
         cooperate with such action. Should Elan or Acusphere decide not to
         enforce the Elan Intellectual Property or the Acusphere Intellectual
         Property respectively, against such unauthorized use in the Field,
         within a reasonable period but in any event within twenty (20) days
         after receiving written notice of such actual or alleged unauthorized
         use, Newco may in its discretion initiate such proceedings in its own
         name, [CONFIDENTIAL TREATMENT REQUESTED]/*/ for its own benefit, and at
         such Party's request, Elan and Acusphere shall cooperate with such
         action. Any recovery remaining after the deduction by Newco
         [CONFIDENTIAL TREATMENT REQUESTED]/*/ shall belong to Newco.
         Alternatively, the Parties may agree to institute such proceedings in
         their joint names and shall reach agreement as to the proportion in
         which they shall share the proceeds of any such proceedings
         [CONFIDENTIAL TREATMENT REQUESTED]/*/.

10.9     Newco shall have the first right but not the obligation to bring suit
         or otherwise take action against any unauthorized use of the Newco
         Intellectual Property. If any such alleged use occurs that gives rise
         to a cause of action both inside and outside the Field, Newco, in
         consultation with the other Parties, shall determine the course of
         action to be taken. In the event that Newco takes such action, Newco
         shall do so [CONFIDENTIAL TREATMENT REQUESTED]/*/ and all damages and
         monetary award recovered in or with respect to such action shall be the
         property of Newco. Newco shall keep Elan and Acusphere informed of any
         action in a timely manner so as to enable Acusphere and Elan to provide
         input in any such action and Newco shall reasonably take into
         consideration any such input. At Newco's request, the Parties shall
         cooperate with any such action [CONFIDENTIAL TREATMENT REQUESTED]/*/.

10.10    In the event that Newco does not bring suit or otherwise take action
         against any unauthorized use of the Newco Intellectual Property (i) if
         only one Participant determines to pursue such suit or take such action
         [CONFIDENTIAL TREATMENT REQUESTED]/*/, it shall be entitled to all
         damages and monetary award recovered in or with respect to such action
         [CONFIDENTIAL TREATMENT REQUESTED]/*/. At the Participant's request,
         Newco shall cooperate with any such action [CONFIDENTIAL TREATMENT
         REQUESTED]/*/.

10.11    In the event that a claim or proceeding is brought against Newco by a
         third party alleging that the sale, distribution or use of a Product in
         the Territory constitutes the unauthorized use of the intellectual
         property rights of such Party, Newco shall promptly advise the other
         Parties of such threat or suit.

10.12    Save in respect of claims by Newco against either Party or by a third
         party against Newco where there has been a breach of representation or
         warranty under Clause 7

                                       24

<PAGE>
         of either of the License Agreements by Elan or Acusphere, as the case
         may be, Newco shall indemnify, defend and hold harmless Elan or
         Acusphere, as the case may be, against all actions, losses, claims,
         demands, damages, costs and liabilities (including reasonable attorneys
         fees) relating directly or indirectly to all such claims or proceedings
         referred to in Clause 10.11, provided that Elan or Acusphere, as the
         case may be, shall not acknowledge to the third party or to any other
         person or entity the validity of any claims of such a third party, and
         shall not compromise or settle any claim or proceedings relating
         thereto without the prior written consent to Newco, not to be
         unreasonably withheld or delayed. [CONFIDENTIAL TREATMENT
         REQUESTED]/*/.

                                    CLAUSE 11

           CROSS LICENSING/EXPLOITATION OF PRODUCTS OUTSIDE THE FIELD

11.1     Solely for the purpose of and insofar as is necessary, in each case,
         for Elan to conduct research and development work on behalf of Newco,
         Newco hereby grants to Elan a non-exclusive, worldwide, royalty-free,
         fully paid-up license for the term of the Licenses:

         11.1.1   to use the Newco Intellectual Property in the Field, and

         11.1.2   subject to the terms and conditions of the Acusphere License,
                  a sublicense to use the Acusphere Intellectual Property in the
                  Field.

11.2     Solely for the purpose of and insofar as is necessary, in each case,
         for Acusphere to conduct research and development work on behalf of
         Newco, Newco hereby grants to Acusphere a non-exclusive, worldwide,
         royalty-free, fully paid-up license for the term of the Licenses:

         11.2.1   to use the Newco Intellectual Property in the Field, and

         11.2.2   subject to the terms and conditions of the Elan License, a
                  sublicense to use the Elan Intellectual Property in the Field.

11.3     Elan and Acusphere, as the case may be, shall be entitled to exploit
         the Newco Intellectual Property outside the Field subject to the
         Parties negotiating a license agreement in good faith (including all
         material provisions thereof, including as to whether the license should
         be exclusive or non-exclusive), pursuant to which Newco will grant Elan
         or Acusphere, as the case may be, a license under the Newco
         Intellectual Property outside the Field. The financial terms of the
         said license agreement shall have regard, inter alia, to:

                                       25

<PAGE>

         11.3.1   the amount of monies expended by Newco in developing the Newco
                  Intellectual Property;

         11.3.2   the materiality of the contribution of the Newco Intellectual
                  Property by comparison to the further research and development
                  work to be conducted, and of the Elan Intellectual Property
                  and the Acusphere Intellectual Property; and

         11.3.3   the financial return likely to be earned by Elan or Acusphere,
                  as the case may be, from the proposed exploitation outside the
                  Field; and

         11.3.4   the impact of the proposed exploitation of the Newco
                  Intellectual Property outside the Field on the exploitation of
                  the Newco Intellectual Property within the Field.

                                    CLAUSE 12

                                   REGULATORY

12.1     Newco shall keep the other Parties promptly and fully advised of
         Newco's regulatory activities, progress and procedures. Newco shall
         inform the other Parties of any dealings it shall have with an RHA, and
         shall furnish the other Parties with copies of all correspondence
         relating to the Products. The Parties shall collaborate to obtain any
         required Regulatory Approval of the RHA to market the Products.

12.2     Newco shall, at its own cost, file, prosecute and maintain any and all
         Regulatory Applications for the Products in the Territory in accordance
         with the Business Plan.

12.3     Subject to Clauses 12.5 and 12.6, any and all Regulatory Approvals
         obtained hereunder for any Product shall remain the property of Newco,
         provided that Newco shall allow Elan and Acusphere access thereto to
         enable Elan and Acusphere to fulfill their respective obligations and
         exercise their respective rights under this Agreement. Newco shall
         maintain such Regulatory Approvals at its own cost.

12.4     It is hereby acknowledged that there are inherent uncertainties
         involved in the registration of pharmaceutical products with the RHA's
         insofar as obtaining approval is concerned and such uncertainties form
         part of the business risk involved in undertaking the form of
         commercial collaboration as set forth in this Agreement.

                                       26

<PAGE>
12.5     All regulatory approvals and the DMF (Drug Master File) relating to
         [CONFIDENTIAL TREATMENT REQUESTED]/*/ shall be processed by and be the
         property of Elan and at all times held in Elan's sole name. Elan will
         authorize Newco to reference Elan's DMF, as described herein, with the
         FDA to the extent necessary for Newco's regulatory purposes.

12.6     All regulatory approvals and the DMF (Drug Master File) relating to
         [CONFIDENTIAL TREATMENT REQUESTED]/*/ shall be processed by and be the
         property of Acusphere and at all times held in Acusphere's sole name.
         Acusphere will authorize Newco to reference Acusphere's DMF, as
         described herein, with the FDA to the extent necessary for Newco's
         regulatory purposes.

                                    CLAUSE 13

                                  MANUFACTURING

13.1     Subject to Clause 13.2, Newco shall be responsible for manufacturing,
         or having manufactured, all quantities of Products required for the
         development and Commercialization of Products for use in the Field.

13.2     Notwithstanding the provisions of Clause 13.1, it is the expectation of
         the Parties that Newco shall enter into a supply agreement with Elan or
         Acusphere or a third party (other than a Technological Competitor of
         Elan), as the case may be, to allow for the commercial production of
         the Products on behalf of Newco, provided however, that Elan shall have
         the first right to manufacture and supply, and/or subcontract the
         manufacture and supply, of [CONFIDENTIAL TREATMENT REQUESTED]/*/ which
         are incorporated in the Products. In determining which of Elan or
         Acusphere or a third party shall provide such services, the Management
         Committee shall, in good faith, consider the respective infrastructure
         and experience of Elan, Acusphere and the relevant third parties.

13.3     The terms of the said supply agreements shall be on normal commercial
         terms, and shall be negotiated in good faith by the Parties thereto.

                                    CLAUSE 14

                        TECHNICAL SERVICES AND ASSISTANCE

14.1     Whenever commercially and technically feasible, Newco shall contract
         with Acusphere or Elan, as the case may be, to perform such other
         services as Newco may require, other than those specifically dealt with
         hereunder or in the License Agreements. In determining which Party
         should provide such services, the Management Committee shall take into
         account the respective infrastructure, capabilities and experience of
         Elan and Acusphere. There shall be no obligation upon either of
         Acusphere or Elan to perform such services.

                                       27

<PAGE>
14.2     Newco shall, if the Participants so agree, conclude an administrative
         support agreement with Elan and/or Acusphere on such terms as the
         Parties thereto shall in good faith negotiate. Such service agreement
         shall include, among other things, a right of Newco or its duly
         authorized representative on reasonable notice and at any reasonable
         time during normal business hours to have access to inspect and audit
         the books and records of Elan or Acusphere, as applicable, relating to
         such administrative services provided on behalf of Newco. Any such
         inspection of Elan's or Acusphere's records, as the case may be, shall
         be [CONFIDENTIAL TREATMENT REQUESTED]/*/. The administrative services
         shall include one or more of the following administrative services as
         requested by Newco:

         14.2.1   accounting, financial and other services;

         14.2.2   tax services;

         14.2.3   insurance services;

         14.2.4   human resources services;

         14.2.5   legal and company secretarial services;

         14.2.6   patent and related intellectual property services; and

         14.2.7   all such other services consistent with and of the same type
                  as those services to be provided pursuant to this Agreement,
                  as may be required.

         The foregoing list of services shall not be deemed exhaustive and may
         be changed from time to time upon written request by Newco.

14.3.    The Parties agree that each Party shall effect and maintain
         comprehensive general liability insurance in respect of all clinical
         trials and other activities performed by them on behalf of Newco. The
         Participants and Newco shall ensure that the industry standard
         insurance policies shall be in place for all activities to be carried
         out by Newco.

14.4     If Elan or Acusphere so requires, Acusphere or Elan, as the case may
         be, shall receive, at times and for periods mutually acceptable to the
         Parties, employees of the other Party (such employees to be acceptable
         to the receiving Party in the matter of qualification and competence)
         for instruction in respect of the Elan Intellectual Property or the
         Acusphere Intellectual Property, as the case may be, as necessary to
         further the Project.

                                       28

<PAGE>

14.5     The employees received by Elan or Acusphere, as the case may be, shall
         be subject to obligations of confidentiality no less stringent than
         those set out in Clause 21 and such employees shall observe the rules,
         regulations and systems adopted by the Party receiving the said
         employees for its own employees or visitors.

                                    CLAUSE 15

             AUDITORS, BANKERS, ACCOUNTING REFERENCE DATE; SECRETARY

15.1     Unless otherwise agreed by the Participants and save as may be provided
         to the contrary herein:

         15.1.1   the auditors of Newco shall be KMPG Peat Marwick of Vallis
                  Building, Hamilton, Bermuda;

         15.1.2   the Participants shall have the right of access for each
                  Participant's authorized auditors (reasonably acceptable to
                  the other Participant and subject to the confidentiality
                  undertakings hereunder) to audit the books and records of
                  Newco during regular business hours and upon reasonable prior
                  written notice;

         15.1.3   the bankers of Newco shall be Bank of Bermuda or such other
                  bank as may be mutually agreed from time to time;

         15.1.4   the accounting reference date of Newco shall be December 31st
                  in each Financial Year; and

         15.1.5   the secretary of Newco shall be I.S. Outerbridge or such other
                  Person as may be appointed by the Directors from time to time.

                                    CLAUSE 16

                              TRANSFERS OF SHARES;
                     RIGHT OF FIRST OFFER; TAG ALONG RIGHTS

GENERAL:

16.1.    Until such time as the Common Shares shall be registered pursuant to
         the Exchange Act and be publicly traded in an established securities
         market, no Shareholder shall, directly or indirectly, sell or otherwise
         transfer (each, a "TRANSFER") any Shares held by it except in as
         expressly permitted by and accordance with the terms of this Agreement.
         Newco shall not, and shall not permit any transfer agent or registrar
         for any Shares to, transfer upon the books of

                                       29

<PAGE>

         Newco any Shares from any Shareholder to any transferee, in any manner,
         except in accordance with this Agreement, and any purported transfer
         not in compliance with this Agreement shall be void.

         During the Research and Development Term, no Shareholder shall,
         directly or indirectly, sell or otherwise Transfer any of its legal
         and/or beneficial interest in the Shares held by it to any other
         Person. After completion of the Research and Development Term, a
         Shareholder may Transfer Shares provided such Shareholder complies with
         the provisions of Clauses 16.2, 16.3 and 16.4.

         Notwithstanding anything contained herein to the contrary, at all
         times, EIS and/or Acusphere shall have the right to Transfer any Shares
         to a Permitted Transferee of such Party, provided, however, that such
         Transfer does not result in adverse tax consequences for any other
         Parties and that such Permitted Transferee to which such legal and/or
         beneficial interest in the Shares have been transferred shall agree to
         be expressly subject to and bound by all the limitations and provisions
         which are embodied in this Agreement.

16.2     No Shareholder shall, except with the prior written consent of the
         other Shareholder, create or permit to subsist any Encumbrance in all
         or any of the Shares held by it (other than by a Transfer of such
         Shares in accordance with the provisions of this Agreement).

16.3     RIGHTS OF FIRST OFFER:

         If at any time after the end of the Research and Development Term a
         Shareholder shall desire to Transfer any Shares owned by it (a "SELLING
         SHAREHOLDER"), in any transaction or series of related transactions
         other than a Transfer to a Permitted Transferee, then such Selling
         Shareholder shall deliver prior written notice of its desire to
         Transfer (a "NOTICE OF INTENTION") (i) to Newco and (ii) to the
         Shareholders who are not the Selling Shareholder (and any transferee
         thereof permitted hereunder, if any), as applicable, setting forth such
         Selling Shareholder's desire to make such Transfer, the number of
         Shares proposed to be transferred (the "OFFERED SHARES") and the
         proposed form of transaction (the "TRANSACTION PROPOSAL"), together
         with any available documentation relating thereto, if any, and the
         price at which such Selling Shareholder proposes to Transfer the
         Offered Shares (the "OFFER PRICE"). The "Right of First Offer" provided
         for in this Clause 16 shall be subject to any "Tag Along Right"
         benefiting a Shareholder which may be provided for by Clause 16.4,
         subject to the exceptions set forth therein.

         Upon receipt of the Notice of Intention, the Shareholders who are not
         the Selling Shareholder shall have the right to purchase at the Offer
         Price the Offered Shares, exercisable by the delivery of notice to the
         Selling Shareholder (the "NOTICE OF EXERCISE"), with a copy to Newco,
         within 10 business days from the date of receipt

                                       30

<PAGE>

         of the Notice of Intention. If no such Notice of Exercise has been
         delivered by the Shareholders who are not the Selling Shareholder
         within such 10-business day period, or such Notice of Exercise does not
         relate to all of the Offered Shares covered by the Notice of Intention,
         then the Selling Shareholder shall be entitled to Transfer all of the
         Offered Shares to the intended transferee. In the event that all of the
         Offered Shares are not purchased by the non-selling Shareholders, the
         Selling Shareholder shall sell the available Offered Shares within 30
         days after the delivery of such Notice of Intention on terms no more
         favorable to a third party than those presented to the non-selling
         Shareholders. If such sale does not occur, the Offered Shares shall
         again be subject to the Right of First Offer set forth in Clause 16.3.

         In the event that any of the Shareholders who are not the Selling
         Shareholder exercises their right to purchase all of the Offered Shares
         (in accordance with this Clause 16), then the Selling Shareholder shall
         sell all of the Offered Shares to such Shareholder(s), in the amounts
         set forth in the Notice of Intention, after not less than 10 business
         days and not more than 25 business days from the date of the delivery
         of the Notice of Exercise. In the event that more than one of the
         Shareholders who are not the Selling Shareholders wish to purchase the
         Offered Shares, the Offered Shares shall be allocated to such
         Shareholders on the basis of their pro rata equity interests in Newco.

         The rights and obligations of each of the Shareholders pursuant to the
         Right of First Offer provided herein shall terminate upon the date that
         the Common Shares is registered under Section 12(b) or 12(g) of the
         Exchange Act.

         At the closing of the purchase of all of the Offered Shares by the
         Shareholders who are not the Selling Shareholder (scheduled in
         accordance with Clause 16), the Selling Shareholder shall deliver
         certificates evidencing the Offered Shares being sold, duly endorsed,
         or accompanied by written instruments of transfer in form reasonably
         satisfactory to the Shareholders who are not the Selling Shareholder,
         duly executed by the Selling Shareholder, free and clear of any adverse
         claims, against payment of the purchase price therefor in cash, and
         such other customary documents as shall be necessary in connection
         therewith.

16.4     TAG ALONG RIGHTS:

         Subject to Clause 16.3, a Shareholder (the "TRANSFERRING SHAREHOLDER")
         shall not Transfer (either directly or indirectly), in any one
         transaction or series of related transactions, to any Person or group
         of Persons, any Shares, unless the terms and conditions of such
         Transfer shall include an offer to the other Shareholders (the
         "REMAINING SHAREHOLDERS"), to sell Shares at the same price and on the
         same terms and conditions as the Transferring Shareholder has agreed to
         sell its Shares (the "TAG ALONG Right").

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<PAGE>

         In the event a Transferring Shareholder proposes to Transfer any Shares
         in a transaction subject to this Clause 16.4, it shall notify, or cause
         to be notified, the Remaining Shareholders in writing of each such
         proposed Transfer. Such notice shall set forth: (i) the name of the
         transferee and the amount of Shares proposed to be transferred, (ii)
         the proposed amount and form of consideration and terms and conditions
         of payment offered by the transferee (the "TRANSFEREE TERMS") and (iii)
         that the transferee has been informed of the Tag Along Right provided
         for in this Clause 16, if such right is applicable, and the total
         number of Shares the transferee has agreed to purchase from the
         Shareholders in accordance with the terms hereof.

         The Tag Along Right may be exercised by each of the Remaining
         Shareholders by delivery of a written notice to the Transferring
         Shareholder (the "CO-SALE NOTICE") within 10 business days following
         receipt of the notice specified in the preceding subsection. The
         Co-sale Notice shall state the number of Shares owned by such Remaining
         Shareholder which the Remaining Shareholder wishes to include in such
         Transfer; provided, however, that without the written consent of the
         Transferring Shareholder, the amount of such securities belonging to
         the Remaining Shareholder included in such Transfer may not be greater
         than such Remaining Shareholder's percentage beneficial ownership of
         Common Share Equivalents multiplied by the total number of shares of
         Common Share Equivalents to be sold by both the Transferring
         Shareholder and all Remaining Shareholders. Upon receipt of a Co-sale
         Notice, the Transferring Shareholder shall be obligated to transfer at
         least the entire number of Shares set forth in the Co-sale Notice to
         the transferee on the Transferee Terms; provided, however, that the
         Transferring Shareholder shall not consummate the purchase and sale of
         any Shares hereunder if the transferee does not purchase all such
         Shares specified in all Co-sale Notices. If no Co-sale Notice has been
         delivered to the Transferring Shareholder prior to the expiration of
         the 10 business day period referred to above and if the provisions of
         this Section have been complied with in all respects, the Transferring
         Shareholder shall have the right for a 45 day calendar day period to
         Transfer Shares to the transferee on the Transferee Terms without
         further notice to any other party, but after such 45-day period, no
         such Transfer may be made without again giving notice to the Remaining
         Shareholders of the proposed Transfer and complying with the
         requirements of this Clause 16.

         At the closing of any Transfer of Shares subject to this Clause 16, the
         Transferring Shareholder, and the Remaining Shareholder, in the event
         such Tag Along Right is exercised, shall deliver certificates
         evidencing such securities as have been Transferred by each, duly
         endorsed, or accompanied by written instruments of transfer in form
         reasonably satisfactory to the transferee, free and clear of any
         adverse claim, against payment of the purchase price therefor.

                                       32

<PAGE>

         Notwithstanding the foregoing, this Clause 16 shall not apply to any
         sale of Common Shares pursuant to an effective registration statement
         under the Securities Act in a bona fide public offering.

                                    CLAUSE 17

                    MATTERS REQUIRING SHAREHOLDERS' APPROVAL

17.1     In consideration of Acusphere and Elan agreeing to enter into the
         License Agreements, the Parties hereby agree that Newco shall not
         without the prior approval of the EIS Director and the Acusphere
         Directors:

         17.1.1.  make a material Newco determination outside the ordinary
                  course of business, including, among other things,
                  acquisitions or dispositions of intellectual property and
                  licenses or sublicenses as they relate to the Licensed
                  Technologies, enter into joint ventures and similar
                  arrangements as they relate to the Licensed Technologies;

         17.1.2.  issue any unissued Shares or unissued Common Share
                  Equivalents, or create or issue any new shares (including a
                  split of the Shares) or Common Share Equivalents, except as
                  expressly permitted by the Newco Bye-Laws;

         17.1.3.  alter any rights attaching to any class of share in the
                  capital of Newco or alter the Newco Bye-Laws;

         17.1.4.  consolidate, sub-divide or convert any of Newco's share
                  capital or in any way alter the rights attaching thereto;

         17.1.5.  dispose of all or substantially all of the assets of Newco;

         17.1.6.  do or permit or suffer to be done any act or thing whereby
                  Newco may be wound up (whether voluntarily or compulsorily),
                  save as otherwise expressly provided for in this Agreement;

         17.1.7.  enter into any contract or transaction except in the ordinary
                  and proper course of the Business on arm's length terms;

         17.1.8.  subject to Clause 23.13, assign, license or sub-license any of
                  the Elan Intellectual Property, Acusphere Intellectual
                  Property, Newco Intellectual Property, except in connection
                  with a commercialization agreement or manufacturing agreement
                  adopted in accordance with the provisions of the Agreement;

                                       33

<PAGE>

         17.1.9.  amend or vary the terms of the Acusphere License Agreement or
                  the Elan License Agreement;

         17.1.10  permit a person other than Newco to own a regulatory approval
                  relating to the Product(s);

         17.1.11  amend or vary the Business Plan or the Newco budget as they
                  relate to the Licensed Technologies;

         17.1.12  alter the number of Directors

         17.1.13  change the domicile of Newco from, or discontinue Newco out
                  of, Bermuda;

         17.1.14  register any Shares of Newco for public trading with any
                  governmental authority for public trading in any securities
                  market; and

         17.1.15  declare or pay any dividend or make any distribution, directly
                  or indirectly, with respect to its capital stock; or issue,
                  sell, exchange, deliver, redeem, purchase or otherwise acquire
                  or dispose of any shares of its capital stock or other
                  securities.

17.2     [CONFIDENTIAL TREATMENT REQUESTED]/*/

                                    CLAUSE 18

                                    DISPUTES

18.1     Should any dispute or difference arise between Elan and Acusphere, or
         between Elan or Acusphere and Newco or among the Newco Directors or
         Management Committee such that a majority or (if required) unanimous
         decision cannot be made, during the period that this Agreement is in
         force, then any Party may forthwith give notice to the other Parties
         that it wishes such dispute or difference to be referred to a
         designated senior officer of each of Elan and Acusphere.

18.2     In any event of a notice being served in accordance with Clause 18.1,
         each of the Participants shall within 14 days of the service of such
         notice prepare and circulate to the designated senior officer of each
         of Elan and Acusphere a memorandum or

                                       34

<PAGE>
         other form of statement setting out its position on the matter in
         dispute and its reasons for adopting that position. Each memorandum or
         statement shall be considered by the designated senior officers of each
         of Elan and Acusphere who shall endeavor to resolve the dispute using
         good faith and diligent efforts. If designated senior officers of each
         of Elan and Acusphere agree upon a resolution or disposition of the
         matter, they shall each sign a statement which sets out the terms of
         their agreement. The Participants agree that they shall exercise the
         voting rights and other powers available to them in relation to Newco
         to procure that the agreed terms are fully and promptly carried into
         effect.

18.3     In the event the designated senior officers of each of Elan and
         Acusphere are unable to resolve a dispute or difference when it is
         referred to them under Clause 18.1, within sixty (60) days, the
         following procedures shall apply:

         18.3.1   If the dispute relates to (i) the interpretation of this
                  Agreement or any other Definitive Document or the compliance
                  of the Parties with their legal obligations thereunder, (ii)
                  the interpretation or application of law, or (iii) the
                  ownership of any intellectual property, then the provisions of
                  Clause 23.8 shall govern.

         18.3.2   If the dispute does not relate to the matters described in
                  Clause 18.3.1, then the provisions of Clause 18.4 shall
                  govern.

18.4     The designated senior officers of each of Elan and Acusphere shall, if
         they are unable to resolve a dispute or difference when it is referred
         to them under Clause 18.1, within sixty (60) days of such referral,
         refer the matter to an independent expert in pharmaceutical product
         development and marketing (including clinical development and
         regulatory affairs) jointly selected by the designated senior officers
         of each of Elan and Acusphere (the "EXPERT").

         In the event the designated senior officers of each of Elan and
         Acusphere cannot agree upon the designation of the Expert, the
         Participants shall request the American Arbitration Association
         ("AAA"), sitting in the City of New York to select the Expert. In each
         case, the Expert shall be selected having regard to his suitability to
         determine the particular dispute or difference on which the Expert is
         being requested to determine. Unless otherwise agreed between the
         designated senior officers of each of Elan and Acusphere, the following
         rules shall apply to the appointment of the Expert. The fees of the AAA
         and the Expert shall be shared equally by the Participants. The Expert
         shall be entitled to inspect and examine all documentation and any
         other material which the Expert may consider to be relevant to the
         dispute. The Expert shall afford each Party a reasonable opportunity
         (in writing or orally) of stating reasons in support of such
         contentions as each Party may wish to make relative to the matters
         under consideration. The Expert shall give notice in writing of his
         determination to the Parties within such time as may

                                       35

<PAGE>

         be stipulated in his terms of appointment or in the absence of such
         stipulation as soon as practicable but in any event within four weeks
         from the reference of the dispute or difference to him.

18.5     Any determination by the Expert of a dispute or difference shall not be
         binding on the Parties.

                                    CLAUSE 19

                                   TERMINATION

19.1     This Agreement shall govern the operation and existence of Newco until

         19.1.1   terminated by written agreement of all Parties hereto; or

         19.1.2   otherwise terminated in accordance with this Clause 19.

19.2     For the purpose of this Clause 19, a "RELEVANT EVENT" is committed or
         suffered by a Participant if:

         19.2.1   it commits a breach of its material obligations under this
                  Agreement or the applicable License Agreement and fails to
                  cure it within 60 days of being specifically required in
                  writing to do so by the other Participant; provided, however,
                  that if the breaching Participant has proposed a course of
                  action to cure the breach and is acting in good faith to cure
                  same but has not cured the breach by the 60th day, such period
                  shall be extended by such period as is reasonably necessary to
                  permit the breach to be cured, provided that such period shall
                  not be extended by more than 90 days, unless otherwise agreed
                  in writing by the Participants; or

         19.2.2   a distress, execution, sequestration or other process is
                  levied or enforced upon or sued out against a material part of
                  its property which is not discharged or challenged within 30
                  days; or

         19.2.3   it is unable to pay its debts in the normal course of
                  business; or

         19.2.4   it ceases wholly or substantially to carry on its business,
                  otherwise than for the purpose of a reconstruction or
                  amalgamation, without the prior written consent of the other
                  Participant (such consent not to be unreasonably withheld); or

         19.2.5   the appointment of a liquidator, receiver, administrator,
                  examiner, trustee or similar officer of such Participant or
                  over all or substantially all of its

                                       36

<PAGE>

                  assets under the law of any applicable jurisdiction, including
                  without limitation, the United States of America, Bermuda or
                  Ireland; or

         19.2.6   an application or petition for bankruptcy, corporate
                  re-organization, composition, administration, examination,
                  arrangement or any other procedure similar to any of the
                  foregoing under the law of any applicable jurisdiction,
                  including without limitation, the United States of America,
                  Bermuda or Ireland, is filed, and is not discharged within 60
                  days, or a Participant applies for or consents to the
                  appointment of a receiver, administrator, examiner or similar
                  officer of it or of all or a material part of its assets,
                  rights or revenues or the assets and/or the business of a
                  Participant are for any reason seized, confiscated or
                  condemned.

19.3     If either Participant commits or suffers a Relevant Event, the other
         Participant shall have in addition to all other legal and equitable
         rights and remedies hereunder, the right to terminate this Agreement
         upon 30 days' written notice.

19.4     In the event of a termination of the Elan License Agreement and/or the
         Acusphere License Agreement, both parties will negotiate in good faith
         to determine whether this Agreement should be terminated and if so,
         which provisions should survive termination.

19.5     The provisions of Clauses 1 (Definitions), 3 (Representations), 9
         (Ownership of Intellectual Property), 10.11 and 10.12 (Intellectual
         Property Rights), 11.3, 12.3, 12.5, 12.6 (Regulatory Approval), 16
         (Transfer Restrictions), 17 (Shareholders' Veto Rights), 18 (Disputes),
         19 (Termination), 20 (Share Rights), 21 (Confidentiality), 22.2 (Costs)
         and 23 (General) shall survive the termination of this Agreement under
         this Clause 19; all other terms and provisions of this Agreement shall
         cease to have effect and be null and void upon the termination of this
         Agreement.

                                    CLAUSE 20

                                  SHARE RIGHTS

The provisions regulating the rights and obligations attaching to the Common
Shares and the Preferred Shares are set out in the Newco Bye-laws.

                                    CLAUSE 21

                                 CONFIDENTIALITY

21.1     The Parties and/or Newco acknowledge and agree that it may be
         necessary, from time to time, to disclose to each other confidential
         and/or proprietary information,

                                       37

<PAGE>
         including without limitation, inventions, works of authorship, trade
         secrets, specifications, designs, data, know-how and other information,
         relating to the Field, the Products, present or future products, the
         Newco Intellectual Property, the Elan Intellectual Property or the
         Acusphere Intellectual Property, as the case may be, methods,
         compounds, research projects, work in process, services, sales
         suppliers, customers, employees and/or business of the disclosing
         Party, whether in oral, written, graphic or electronic form
         (collectively "CONFIDENTIAL INFORMATION").

21.2     Any Confidential Information revealed by a Party to another Party shall
         be maintained as confidential and shall be used by the receiving Party
         exclusively for the purposes of fulfilling the receiving Party's rights
         and obligations under this Agreement, and for no other purpose.
         Confidential Information shall not include:

         21.2.1   information that is generally available to the public;

         21.2.2   information that is made public by the disclosing Party;

         21.2.3   information that is independently developed by the receiving
                  Party, as evidenced by such Party's records, without the aid,
                  application or use of the disclosing Party's Confidential
                  Information;

         21.2.4   information that is published or otherwise becomes part of the
                  public domain without any disclosure by the receiving Party,
                  or on the part of the receiving Party's directors, officers,
                  agents, representatives or employees;

         21.2.5   information that becomes available to the receiving Party on a
                  non-confidential basis, whether directly or indirectly, from a
                  source other than the disclosing Party, which source did not
                  acquire this information on a confidential basis; or

         21.2.6   information which was already in the possession of the
                  receiving Party at the time of receiving such information, as
                  evidenced by its records, provided such information was not
                  previously provided to the receiving party from a source which
                  was under an obligation to keep such information confidential;
                  or

         21.2.7   information that is the subject of a written permission to
                  disclose, without restriction or limitation, by the disclosing
                  Party.

21.3     The receiving Party will be entitled to disclose Confidential
         Information which the receiving Party is required to disclose pursuant
         to:

                                       38

<PAGE>
         21.3.1   a valid order of a court or other governmental body or any
                  political subdivision thereof or as otherwise required by law,
                  rule or regulation; or; or

         21.3.2   any other requirement of law;

                  provided, however, that if the receiving Party becomes legally
                  required to disclose any Confidential Information, the
                  receiving Party shall give the disclosing Party prompt notice
                  of such fact so that the disclosing Party may obtain a
                  protective order or confidential treatment or other
                  appropriate remedy concerning any such disclosure. The
                  receiving Party shall fully co-operate with the disclosing
                  Party in connection with the disclosing Party's efforts to
                  obtain any such order or other remedy. If any such order or
                  other remedy does not fully preclude disclosure, the receiving
                  Party shall make such disclosure only to the extent that such
                  disclosure is legally required.

21.4     Each Party agrees to disclose Confidential Information of another Party
         only to those employees, representatives and agents requiring knowledge
         thereof in connection with their duties directly related to the
         fulfilling of the Party's obligations under this Agreement, so long as
         such persons are under an obligation of confidentiality no less
         stringent than as set forth herein. Each Party further agrees to inform
         all such employees, representatives and agents of the confidentiality
         terms and provisions of this Agreement and their duties hereunder and
         to obtain their consent hereto as a condition of receiving Confidential
         Information. Each Party agrees that it will exercise the same degree of
         care and protection to preserve the proprietary and confidential nature
         of the Confidential Information disclosed by a Party, as the receiving
         Party would exercise to preserve its own Confidential Information. Each
         Party agrees that it will, upon request of another Party, return all
         documents and any copies thereof containing Confidential Information
         belonging to or disclosed by such other Party (except to the extent
         such Confidential Information is required to exercise a Party's rights
         under this Agreement or License Agreements). Each Party shall promptly
         notify the other Parties upon discovery of any unauthorized use or
         disclosure of the other Parties' Confidential Information.

21.5     Notwithstanding the above, each Party may use or disclose Confidential
         Information disclosed to it by another Party to the extent such use or
         disclosure is reasonably necessary in filing or prosecuting patent
         applications, prosecuting or defending litigation, complying with
         patent applications, prosecuting or defending litigation, complying
         with applicable governmental regulations or otherwise submitting
         information to tax or other governmental authorities, conducting
         clinical trials, or granting a permitted sub-license or otherwise
         exercising its rights hereunder; provided, that if a Party is required
         to make any such disclosure of the other Party's Confidential
         Information, other than pursuant to a confidentiality

                                       39

<PAGE>

         agreement, such Party shall inform the third party recipient of the
         terms and provisions of this Agreement and their duties hereunder and
         shall obtain their consent hereto as a condition of releasing to the
         third party recipient the Confidential Information.

21.6     Any breach of this Clause 21 by any employee, representative or agent
         of a Party is considered a breach by the Party itself.

21.7     The provisions relating to confidentiality in this Clause 21 shall
         remain in effect during the Term and for a period of seven years
         following the termination of this Agreement.

21.8     The Parties agree that the obligations of this Clause 21 are necessary
         and reasonable in order to protect the Parties' respective businesses,
         and each Party expressly agrees that monetary damages would be
         inadequate to compensate a Party for any breach by the other Party of
         its covenants and agreements set forth herein. Accordingly, the Parties
         agree and acknowledge that any such violation or threatened violation
         will cause irreparable injury to a Party and that, in addition to any
         other remedies that may be available, in law or in equity or otherwise,
         any Party shall be entitled to obtain injunctive relief against the
         threatened breach of the provisions of this Clause 21, or a
         continuation of any such breach by the other Party, specific
         performance and other equitable relief to redress such breach together
         with its damages and reasonable counsel fees and expenses to enforce
         its rights hereunder, without the necessity of proving actual or
         express damages.

                                    CLAUSE 22

                                      COSTS

22.1     Each Shareholder shall bear its own legal and other costs incurred in
         relation to preparing and concluding this Agreement and the Definitive
         Documents.

22.2     All other costs, legal fees, registration fees and other expenses
         relating to the incorporation of Newco, shall be borne by Newco.

                                    CLAUSE 23

                                     GENERAL

23.1     GOOD FAITH:

         Each of the Parties hereto undertakes with the others to do all things
         reasonably within its power that are necessary or desirable to give
         effect to the spirit and intent of this Agreement.

                                       40

<PAGE>

23.2     FURTHER ASSURANCE:

         At the request of any of the Parties, the other Party or Parties shall
         (and shall use reasonable efforts to procure that any other necessary
         parties shall) execute and perform all such documents, acts and things
         as may reasonably be required subsequent to the signing of this
         Agreement for assuring to or vesting in the requesting Party the full
         benefit of the terms hereof.

23.3     NO REPRESENTATION:

         Each of the Parties hereto hereby acknowledges that in entering into
         this Agreement it has not relied on any representation or warranty
         except as expressly set forth herein or in any document referred to
         herein.

23.4     FORCE MAJEURE:

         Neither Party to this Agreement shall be liable for delay in the
         performance of any of its obligations hereunder if such delay is caused
         by or results from causes beyond its reasonable control, including
         without limitation, acts of God, fires, strikes, acts of war (whether
         war be declared or not), insurrections, riots, civil commotions,
         strikes, lockouts or other labor disturbances or intervention of any
         relevant government authority, but any such delay or failure shall be
         remedied by such Party as soon as practicable.

23.5     RELATIONSHIP OF THE PARTIES:

         Nothing contained in this Agreement is intended or is to be construed
         to constitute Elan/EIS and Acusphere as partners, or Elan/EIS as an
         employee or agent of Acusphere, or Acusphere as an employee or agent of
         Elan/EIS.

         No Party hereto shall have any express or implied right or authority to
         assume or create any obligations on behalf of or in the name of another
         Party or to bind another Party to any contract, agreement or
         undertaking with any third party.

23.6     COUNTERPARTS:

         This Agreement may be executed in any number of counterparts, each of
         which when so executed shall be deemed to be an original and all of
         which when taken together shall constitute this Agreement.

                                       41

<PAGE>

23.7     NOTICES:

         Any notice to be given under this Agreement shall be sent in writing by
         registered or recorded delivery post or reputable overnight courier
         such as Federal Express or telecopied to:

         Elan at:

         Lincoln House, Lincoln Place
         Dublin 2, Ireland
         Attention:        Vice President & General Counsel
                           Elan Pharmaceutical Technologies,
                           a division of Elan Corporation, plc

         Telephone:        353-1-709-4000
         Fax:              353-1-709-4124

         and

         Elan International Services, Ltd.
         102 St. James Court
         Flatts, Smiths FL04
         Bermuda
         Attention:        President

         Telephone:        441-292-9169
         Fax:              441-292-2224

         Acusphere at:
         38 Sidney Street
         Cambridge, MA 02139-4169
         Attn: Chief Executive Officer

         Telephone         617-577-8800
         Fax:              617-577-0233

         with a copy to:

         Lawrence S. Wittenberg
         Testa, Hurwitz & Thibeault, LLP
         123 High Street
         Boston, Massachusetts 02110

         Telephone:        617-248-7000
         Fax:              617-248-7100

                                       42

<PAGE>

         Newco at:

         Clarendon House,
         2 Church St.,
         Hamilton,
         Bermuda
         Attention:        Secretary
         Telephone:        441 292 9169
         Fax:              441 292 2224

         with a copy to EIS if the notice is served by Acusphere and a copy to
         Acusphere if a notice is served by EIS or Elan,

         or to such other address(es) as may from time to time be notified by
         any Party to the others hereunder.

         Any notice sent by mail shall be deemed to have been delivered within
         three Business Days after dispatch or delivery to the relevant courier
         and any notice sent by telecopy shall be deemed to have been delivered
         upon confirmation of receipt. Notices of change of address shall be
         effective upon receipt. Notices by telecopy shall also be sent by
         another method permitted hereunder.

23.8     GOVERNING LAW; [CONFIDENTIAL TREATMENT REQUESTED]/*/

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

         23.8.2   In the event that a dispute regarding the matters described in
                  Clause 18.3.1 is not resolved pursuant to the provisions of
                  Clause 18.1, the Parties agree to consider other dispute
                  resolution mechanisms including mediation.

         23.8.3   In the event that the Parties fail to agree on a mutually
                  acceptable dispute resolution mechanism under Clause 23.8.2,
                  or in the event that the dispute is not resolved pursuant to
                  any dispute resolution mechanism agreed by the Parties under
                  Clause 23.8.2 within 6 months, the dispute shall be finally
                  settled by the courts of competent jurisdiction. For the
                  purposes of this Agreement the parties submit to the
                  [CONFIDENTIAL TREATMENT REQUESTED]/*/ jurisdiction of the
                  courts of the State of New York.

23.9     SEVERABILITY:

         If any provision in this Agreement is agreed by the Parties to be,
         deemed to be or becomes invalid, illegal, void or unenforceable under
         any law that is applicable

                                       43

<PAGE>
         hereto, such provision will be deemed amended to conform to applicable
         laws so as to be valid and enforceable or, if it cannot be so amended
         without materially altering the intention of the Parties, it will be
         deleted, with effect from the date of such agreement or such earlier
         date as the Parties may agree, and the validity, legality and
         enforceability of the remaining provisions of this Agreement shall not
         be impaired or affected in any way.

23.10    AMENDMENTS:

         No amendment, modification or addition hereto shall be effective or
         binding on any Party unless set forth in writing and executed by a duly
         authorized representative of all Parties.

23.11    WAIVER:

         No waiver of any right under this Agreement shall be deemed effective
         unless contained in a written document signed by the Party charged with
         such waiver, and no waiver of any breach or failure to perform shall be
         deemed to be a waiver of any future breach or failure to perform or of
         any other right arising under this Agreement.

23.12    ASSIGNMENT:

         None of the Parties shall be permitted to assign its rights or
         obligations hereunder without the prior written consent of the other
         Parties except as follows:

         23.12.1   Elan, EIS and/or Acusphere shall have the right to assign
                   their rights and obligations hereunder to their Affiliates
                   provided, however, that such assignment does not result in
                   adverse tax consequences for any other Parties.

         23.12.2   Elan and EIS shall have the right to assign their rights and
                   obligations hereunder to a special purpose financing or
                   similar entity established by Elan or EIS.

23.13    ASSIGNMENT OF NEWCO INTELLECTUAL PROPERTY:

         Upon one month's prior notice in writing from Elan to Newco and
         Acusphere, Newco shall assign the Newco Intellectual Property from
         Newco to a wholly-owned subsidiary of Newco to be incorporated in
         Ireland, which company shall be newly incorporated by Elan to
         facilitate such assignment.

                                       44

<PAGE>
23.14    WHOLE AGREEMENT/NO EFFECT ON OTHER AGREEMENTS:

         This Agreement (including the Schedules attached hereto) and the
         Definitive Documents set forth all of the agreements and understandings
         between the Parties with respect to the subject matter hereof, and
         supersedes and terminates all prior agreements and understandings
         between the Parties with respect to the subject matter hereof. There
         are no agreements or understandings with respect to the subject matter
         hereof, either oral or written, between the Parties other than as set
         forth in this Agreement and the Definitive Documents.

         In the event of any ambiguity or conflict arising between the terms of
         this Agreement and those of the Newco Bye-Laws the terms of this
         Agreement shall prevail, except with respect to the rights and
         obligations attaching to the Common Shares and the Preferred Shares in
         which respect the Newco Bye-Laws shall prevail.

                                       45

<PAGE>

         No provision of this Agreement shall be construed so as to negate,
         modify or affect in any way the provisions of any other agreement
         between any of the Parties unless specifically referred to, and solely
         to the extent provided herein. In the event of a conflict between the
         provisions of this Agreement and the provisions of the License
         Agreements, the terms of this Agreement shall prevail unless this
         Agreement specifically provide otherwise.

23.15    SUCCESSORS:

         This Agreement shall be binding upon and inure to the benefit of the
         Parties hereto, their successors and permitted assigns.

                                       46

<PAGE>

IN WITNESS WHEREOF, the Parties hereto have executed this Agreement on the day
first set forth above.

                                    SIGNED

                                    BY: /s/ illegible signature
                                        ---------------------------------------
                                    for and on behalf of
                                    ELAN CORPORATION, PLC
                                    (acting through its division
                                    Elan Pharmaceutical Technologies)

                                    SIGNED

                                    BY: /s/ illegible signature
                                        ---------------------------------------
                                    for and on behalf of
                                    ELAN PHARMA INTERNATIONAL LIMITED

                                    SIGNED

                                    BY: /s/ illegible signature
                                        ---------------------------------------
                                    for and on behalf of
                                    ELAN INTERNATIONAL SERVICES, LTD.

                                    SIGNED

                                    BY: /s/ Sherri Oberg
                                        ---------------------------------------
                                    for and on behalf of
                                    ACUSPHERE, INC.

                                    SIGNED

                                    BY: /s/ illegible signature
                                        ---------------------------------------
                                    for and on behalf of
                                    ACUSPHERE NEWCO, LTD.

                                       47

<PAGE>

                                   SCHEDULE 1

                             ELAN LICENSE AGREEMENT

                                       48

<PAGE>

                                   SCHEDULE 2

                           ACUSPHERE LICENSE AGREEMENT

                                       49

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