Document:

<PAGE>

                                                                    EXHIBIT 10.7

                               CREDIT AGREEMENT

                                     among

                              ZANY BRAINY, INC.,

                     the Subsidiaries of Zany Brainy, Inc.
                        set forth on Schedule 1 hereto
                                 ("Borrowers")

                                      and

                           FIRST UNION NATIONAL BANK
                                   ("Bank")

                                 June 14, 1999
<PAGE>

                               TABLE OF CONTENTS
                               -----------------

<TABLE>
<CAPTION>
                                                                        Page
<S>                                                                     <C>
SECTION 1 - DEFINITIONS..................................................  1
      1.1.  Definitions..................................................  1
      1.2.  Accounting Principles........................................ 11

SECTION 2 - CREDIT FACILITY.............................................. 11
      2.1.  The Facility................................................. 11
      2.2.  Promissory Note.............................................. 12
      2.3.  Use of Proceeds.............................................. 12
      2.4.  Repayment.................................................... 12
      2.5.  Interest..................................................... 12
      2.6.  Advances..................................................... 15
      2.7.  Reduction and Termination of Commitment...................... 16
      2.8.  Prepayment................................................... 17
      2.9.  Payments..................................................... 17
     2.10.  Commitment Fee............................................... 17
     2.11.  Closing Fee.................................................. 18
     2.12.  Regulatory Changes in Capital Requirements................... 18

SECTION 2A - LETTERS OF CREDIT........................................... 19
     2A.1.  Availability of Credits...................................... 19
     2A.2.  Commitment Availability...................................... 20
     2A.3.  Approval and Issuance........................................ 20
     2A.4.  Obligations of the Borrower.................................. 20
     2A.5.  Collateral Security.......................................... 21
     2A.6.  General Terms of Credits..................................... 22

SECTION 3 - REPRESENTATIONS AND WARRANTIES............................... 23
      3.1.  Organization and Good Standing............................... 23
      3.2.  Power and Authority; Validity of Agreement................... 24
      3.3.  No Violation of Laws or Agreements........................... 24
      3.4.  Material Contracts........................................... 24
      3.5.  Compliance................................................... 24
      3.6.  Litigation................................................... 25
      3.7.  Title to Assets.............................................. 25
      3.8.  Accuracy of Information; Full Disclosure..................... 25
      3.9.  Taxes and Assessments........................................ 26
     3.10.  Indebtedness................................................. 26
     3.11.  Management Agreements........................................ 26
     3.12.  Investments; Capital Structure............................... 26
     3.13.  ERISA........................................................ 27
     3.14.  Fees and Commissions......................................... 27
</TABLE>

                                      -i-
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                                                                        ----
<S>                                                                     <C>
     3.15.  No Extension of Credit for Securities.......................  27
     3.16.  Hazardous Wastes, Substances and Petroleum Products.........  28
     3.17.  Solvency....................................................  28
     3.18.  Employee Controversies......................................  29
     3.19.  Year 2000 Compliance........................................  29
     3.20.  Intellectual Property.......................................  29
     3.21.  Foreign Assets Control Regulations..........................  29
     3.22.  Investment Company Act......................................  29
     3.23.  Public Utility Holding Company Act..........................  29

SECTION 4 - CONDITIONS..................................................  30
     4.1.   Effectiveness...............................................  30
     4.2.   Advances....................................................  31

SECTION 5 - AFFIRMATIVE COVENANTS.......................................  31
     5.1.   Existence and Good Standing.................................  31
     5.2.   Interim Financial Statements................................  32
     5.3.   Annual Financial Statements.................................  32
     5.4.   Compliance Certificate......................................  32
     5.5.   Borrowing Base Certificate..................................  32
     5.6.   Additional Information......................................  32
     5.7.   Books and Records...........................................  33
     5.8.   Insurance...................................................  33
     5.9.   Litigation; Event of Default................................  33
     5.10.  Taxes.......................................................  33
     5.11.  Costs and Expenses..........................................  33
     5.12.  Compliance; Notification....................................  33
     5.13.  ERISA.......................................................  34
     5.14.  Fixed Charge Coverage Ratio.................................  34
     5.15.  Leverage Ratio..............................................  35
     5.16.  Minimum Tangible Net Worth..................................  35
     5.17.  Borrowing Base..............................................  35
     5.18.  Management Changes..........................................  35
     5.19.  Transactions Among Affiliates...............................  35
     5.20.  Joinders....................................................  35
     5.21.  Year 2000 Compliance........................................  36
     5.22.  Conduct of Business.........................................  36
     5.23.  Zany.com Sublimit...........................................  36
     5.24.  Other Information...........................................  36

SECTION 6 - NEGATIVE COVENANTS..........................................  36
     6.1.  Indebtedness.................................................  37
</TABLE>

                                     -ii-
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<TABLE>
<CAPTION>
                                                                        Page
                                                                        ----
<S>                                                                     <C>
     6.2.  Guaranties.................................................... 37
     6.3.  Loans......................................................... 37
     6.4.  Liens and Encumbrances........................................ 37
     6.5.  Additional Negative Pledge.................................... 38
     6.6.  Restricted Payments........................................... 38
     6.7.  Transfer of Assets; Liquidation............................... 38
     6.8.  Acquisitions and Investments.................................. 38
     6.9.  Payments to Affiliates........................................ 39
     6.10. Use of Proceeds............................................... 39
     6.11. Maximum Capital Expenditures.................................. 39

SECTION 7 - RIGHT OF SET-OFF............................................. 39
     7.1.  Funds of Borrowers in Possession of Bank...................... 39
     7.2.  Right of Set-off.............................................. 39

SECTION 8 - DEFAULT...................................................... 40
     8.1.  Events of Default............................................. 40
     8.2.  Remedies...................................................... 41

SECTION 9 - MISCELLANEOUS................................................ 42
     9.1.  Indemnification and Release Provisions........................ 42
     9.2.  Participations and Assignments................................ 42
     9.3.  Binding and Governing Law..................................... 43
     9.4.  Survival...................................................... 43
     9.5.  No Waiver; Delay.............................................. 43
     9.6.  Modification.................................................. 43
     9.7.  Headings...................................................... 43
     9.8.  Notices....................................................... 43
     9.9.  Payment on Non-Business Days.................................. 45
     9.10. Time of Day................................................... 45
     9.11. Severability.................................................. 45
     9.12. Counterparts.................................................. 45
     9.13. Arbitration................................................... 45
     9.14. Consent to Jurisdiction and Service of Process................ 45
     9.15. WAIVER OF JURY TRIAL.......................................... 46
     9.16. ACKNOWLEDGMENTS............................................... 47
</TABLE>

                                     -iii
<PAGE>

                        LIST OF SCHEDULES AND EXHIBITS
                        ------------------------------

Schedule 1:    Borrowers

Schedule 2:    Existing Letters of Credit

Exhibit A:     Advance Request Form

Exhibit B:     Form of Note

Exhibit C:     Disclosure Pursuant to Representations and Warranties

Exhibit D:     Funding Costs and Loss of Earnings Calculation

Exhibit E:     Form of Compliance Certificate

Exhibit F:     Form of Borrowing Base Certificate

Exhibit G-1:   Form of Master L/C Agreement

Exhibit G-2:   Form of Electronic L/C Agreement

                                     -iv-
<PAGE>

                               CREDIT AGREEMENT
                               ----------------

          THIS CREDIT AGREEMENT (this "Agreement") is made the 14th day of June,
1999, by and among ZANY BRAINY, INC., a Pennsylvania corporation ("Zany Brainy")
and the Subsidiaries of Zany Brainy set forth on Schedule 1 attached hereto
(such Subsidiaries, together with Zany Brainy and Zany.com, if joined as
provided in Paragraph 5.20(b) below, each individually a "Borrower" and
individually and collectively, "Borrowers"); and FIRST UNION NATIONAL BANK, a
national banking association ("Bank").

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

          WHEREAS, Borrowers wish to borrow, on a joint and several basis, up to
Thirty Million Dollars ($30,000,000) from Bank on a revolving credit basis for
the refinancing of existing indebtedness, for the funding of permitted
acquisitions, for the general corporate purposes of Borrowers, including working
capital, and to provide for the issuance of letters of credit; and

          WHEREAS, Bank wishes to lend to Borrowers, on a joint and several
basis, up to Thirty Million Dollars ($30,000,000) on a revolving credit basis,
for such purposes, subject to the terms and conditions set forth herein.

          NOW, THEREFORE, in consideration of the foregoing premises and the
agreements hereinafter set forth, and intending to be legally bound, the parties
hereto hereby agree as follows:

                                   SECTION 1

                                  DEFINITIONS
                                  -----------

           1.1  Definitions.  When used in this Agreement, the following terms
                -----------
shall have the respective meanings set forth below.

           "Adjusted Libor Rate" means, for any Interest Period, as applied to a
            -------------------
Portion, the rate per annum (rounded upwards, if necessary to the next 1/100 of
1%) determined pursuant to the following formula:

           Adjusted Libor Rate =       Libor Rate
                                 --------------------------
                                  [1 - Reserve Percentage]

For purposes hereof, "Libor Rate" means, as applied to a Portion, the rate which
appears on the Telerate Page 3750 at approximately 9:00 a.m. Philadelphia time
two London Business Days prior to the commencement of such Interest Period for
the offering to leading banks in the London Interbank Market of deposits in
United States dollars ("Eurodollars") or, if such rate does not appear on the
Telerate page 3750, the rate which appears (or, if two or more such rates
appear, the average rounded up to the nearest 1/100 of 1% of the rates which
appear) on the Reuters Screen LIBO Page as of 9:00 a.m. Philadelphia time two
London Business Days prior to
<PAGE>

the commencement of the Interest Period, in either case for an amount
substantially equal to such Portion as to which Borrowers may elect the Adjusted
Libor Rate to be applicable with a maturity of comparable duration to the
Interest Period selected by Borrowers for such Portion, as may be adjusted from
time to time in accordance with Paragraph 2.5(e) hereof.

          "Advance" means a borrowing under the Commitment pursuant to Paragraph
           -------
2.6 hereof.

          "Advance Request Form" means the certificate in the form attached
           --------------------
hereto as Exhibit A to be delivered by Borrowers to Bank as a condition of each
Advance hereunder.

          "Affiliate" means as to any party:  (i) any person who or entity which
           ---------
directly or indirectly owns, controls or holds ten percent (10%) or more of the
outstanding beneficial interests in such party; (ii) any entity of which ten
percent (10%) or more of the outstanding beneficial interest is directly or
indirectly owned, controlled, or held by such party; (iii) any entity which
directly or indirectly is under common control with such party; (iv) any
director or general partner of such party or any Affiliate; or (v) any immediate
family member of any person who is an Affiliate.  For purposes of this
definition, "control" means the possession, directly or indirectly, of the power
to direct or cause the direction of the management and policies of an entity,
whether through the ownership of voting securities, by contract, or otherwise.

          "Agreement" means this Credit Agreement and all exhibits hereto, as
           ---------
each may be amended, modified, extended, consolidated or restated from time to
time.

          "Bank" means First Union National Bank, a national banking
           ----
association.

          "Base Rate" means the higher of (a) the Federal Funds Rate plus one
           ---------
half of one percent ( 1/2%) per annum or (b) the Prime Rate.

          "Base Rate Portion" means a Portion as to which Borrowers have elected
           -----------------
the rate of interest based on the Base Rate to be applicable.

          "Borrower" means individually, and "Borrowers" means individually and
           --------                           ---------
collectively, Zany Brainy and the direct and indirect Subsidiaries of Zany
Brainy listed on Schedule 1 attached hereto and Zany.com and any additional
Subsidiaries of Zany Brainy which may join in this Agreement pursuant to
Paragraph 5.20 hereof from time to time.

          "Borrowing Base" means as of any date of determination without
           --------------
duplication the sum of (i) fifty percent (50%) of Eligible Inventory and (ii)
fifty percent (50%) of the undrawn face amount of all outstanding documentary
Letters of Credit.

          "Borrowing Base Certificate" means a certificate in the form of
           --------------------------
Exhibit F attached hereto delivered by Borrowers to Bank pursuant to Paragraph
4.1 or 5.5 hereof.

          "Business Day" means any day not a Saturday, Sunday or a day on which
           ------------
banks are required or permitted to be closed under the laws of the Commonwealth
of Pennsylvania.

                                      -2-
<PAGE>

          "Capital Expenditures" means expenditures for any fixed assets or
           --------------------
improvements, replacements, substitutions or additions thereto, which have a
useful life of more than one (1) year, including direct or indirect acquisition
of such assets, provided that expenditures made pursuant to acquisition
transactions permitted by Section 6.8 hereof shall be excluded from the
calculation of Capital Expenditures.

          "Capital Leases" means capital leases and subleases, as defined in
           --------------
Statement 13 of the Financial Accounting Standards Board dated November 1976, as
amended and updated from time to time.

          "CERCLA" means the Comprehensive Environmental Response, Compensation,
           ------
and Liability Act of 1980, as amended by the Superfund Amendments and
Reauthorization Act of 1986, as amended from time to time, and all rules and
regulations promulgated in connection therewith.

          "Change of Control" means (i) if any person or group within the
           -----------------
meaning of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended
(the "1934 Act"), and the rules and regulations promulgated thereunder (other
than Robert A. Fox and Fourcar, B.V.), shall have beneficial ownership (within
the meaning of Rule 13d-3 of the 1934 Act), directly or indirectly, of
securities of Zany Brainy (or other securities convertible into such securities)
representing fifty percent (50%) of the combined voting power of all securities
of Zany Brainy entitled to vote in the election of directors (hereinafter called
a "Controlling Person"); or (ii) a majority of the Board of Directors of Zany
Brainy shall cease for any reason to consist of: (A) individuals who on the date
of this Agreement were serving as directors of Zany Brainy or (B) individuals
who subsequently become members of the Board if such individuals' nomination for
election or election to the Board is recommended or approved by a majority of
the Board of Directors of Zany Brainy.  For purposes of clause (i) above, a
person or group shall not be a Controlling Person if such person or group holds
voting power in good faith and not for the purpose of circumventing this
definition as an agent, bank, broker, nominee, trustee, or holder of revocable
proxies given in response to a solicitation pursuant to the 1934 Act, for one or
more beneficial owners who do not individually, or, if they are a group acting
in concert, as a group, have the voting power specified in clause (i) above.

          "Code" means the Internal Revenue Code of 1986, as amended from time
           ----
to time, and regulations with respect thereto in effect from time to time.

          "Commitment" means at any time the maximum aggregate principal amount
           ----------
up to which Bank has agreed to make Advances under Paragraph 2.1 hereof and/or
issue Letters of Credit under Section 2A hereof, being Thirty Million Dollars
($30,000,000) on the date of this Agreement.

          "Compliance Certificate" means a certificate in the form of Exhibit E
           ----------------------
attached hereto delivered by Borrowers to Bank pursuant to Paragraph 4.1 or 5.5
hereof.

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

                                      -3-
<PAGE>

          "EBITDAR" means, for any period, net income for such period as defined
           -------
in accordance with GAAP, plus interest expense, provisions for federal, state,
local and foreign income taxes, depreciation and amortization expense, Rents,
non-cash expense with respect to options or rights to acquire common stock of
Zany Brainy or any of its consolidated Subsidiaries as reflected on the
financial statements of Zany Brainy and its consolidated Subsidiaries, and non-
cash, non-recurring extraordinary items, in each case as defined in accordance
with GAAP and to the extent each has been deducted in determining net income.

          "Electronic L/C Agreement" means the Import Express Electronic Letter
           ------------------------
of Credit Service Agreement in the form of Exhibit G-2 attached hereto, to be
executed and delivered pursuant to Paragraph 4.1 hereof.

          "Eligible Inventory" means all finished goods inventory of Zany Brainy
           ------------------
and its consolidated Subsidiaries, at book value determined in accordance with
GAAP, net of any reserves and allowances required by GAAP, excluding, without
duplication:

          (a) any inventory located outside of the United States;

          (b) any inventory of a Subsidiary that is not a Borrower;

          (c) any inventory in the possession of a contract manufacturer, or in
the possession of a third party on consignment or pursuant to a sale on approval
or sale or return, or otherwise located at the place of business of a third
party at which such party deals in goods of that kind or under other
circumstances in which such third party or creditors of such third party may be
able to assert rights in the inventory;

          (d) any inventory represented by warehouse receipts or other documents
of title;

          (e) any inventory sold on lay-away or any similar arrangement valued
in the aggregate in excess of $25,000; and

          (f) any inventory that is damaged, obsolete, defective or otherwise
not salable in the ordinary course of business;

          "Environmental Control Statutes" means any federal, state, county,
           ------------------------------
regional or local laws governing the control, storage, removal, spill, release
or discharge of Hazardous Substances, including without limitation CERCLA, the
Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery
Act of 1976 and the Hazardous and Solid Waste Amendments of 1984, the Federal
Water Pollution Control Act, as amended by the Clean Water Act of 1976, the
Hazardous Materials Transportation Act, the Emergency Planning and Community
Right to Know Act of 1986, the National Environmental Policy Act of 1975, the
Oil Pollution Act of 1990, any similar or implementing state law, and in each
case including all amendments thereto and all rules and regulations promulgated
thereunder and permits issued in connection therewith.

                                      -4-
<PAGE>

          "EPA" means the United States Environmental Protection Agency, or any
           ---
successor thereto.

          "ERISA" means the Employee Retirement Income Security Act of 1974, all
           -----
amendments thereto and all rules and regulations in effect at any time
thereunder.

          "ERISA Affiliate" means, when used with respect to any Plan, ERISA,
           ---------------
the PBGC or a provision of the Code pertaining to employee benefit plans, any
person or entity that is a member of any group or organization within the
meaning of Code Sections 414(b), (c), (m) or (o) of which any Borrower is a
member.

          "Event of Default" means an event described in Paragraph 8.1 hereof.
           ----------------

          "Federal Funds Rate" means, for any day, the effective rate of
           ------------------
interest for such day, as announced from time to time by the Board of Governors
of the Federal Reserve System as shown in publication H.15 as the "Federal Funds
Rate."

          "Fixed Charge Coverage Ratio" means, as of any date of determination,
           ---------------------------
with respect to Zany Brainy and its consolidated Subsidiaries (other than
Zany.com), the ratio of (i) EBITDAR, for the most recent Rolling Period, to (ii)
the sum of interest expense and Rents, for the most recent Rolling Period, in
each case as determined in accordance with GAAP.

          "GAAP" means generally accepted accounting principles set forth in the
           ----
Opinions of the Accounting Principles Board of the American Institute of
Certified Public Accountants and in statements of the Financial Accounting
Standards Board, which are applicable in the circumstances as of the date in
question, subject to Paragraph 1.2 hereof; and such principles observed in a
current period shall be comparable in all material respects to those applied in
a preceding period, subject to Paragraph 1.2 hereof.

          "Hazardous Substance" means petroleum products and items defined in
           -------------------
the Environmental Control Statutes as "hazardous substances," "hazardous
wastes," "pollutants" or "contaminants" and any other toxic, reactive,
corrosive, carcinogenic, flammable or hazardous substance or other pollutant
regulated under any Environmental Control Statutes.

          "Indebtedness" of any person as of any date of determination means and
           ------------
includes all obligations of such person which, in accordance with GAAP, shall be
classified on a balance sheet of such person as liabilities of such person and
in any event shall include, without duplication, all (i) obligations of such
person for borrowed money or which have been incurred in connection with
acquisition of property or assets, (ii) obligations secured by any lien upon
property or assets owned by such person, notwithstanding that such person has
not assumed or become liable for the payment of such obligations, to the extent
of the fair market value of such property, (iii) obligations created or arising
under any conditional sale or other title retention agreement with respect to
property acquired by such person, notwithstanding the fact that the rights and
remedies of the seller, lender or lessor under such agreement in the event of
default are limited to repossession or sale of property, (iv) Capital Leases,
(v) guarantees and (vi) letters of credit and letter of credit reimbursement
obligations.

                                      -5-
<PAGE>

          "Intangible Assets" means for Zany Brainy and its consolidated
           -----------------
Subsidiaries (other than Zany.com), all assets which would be classified in
accordance with GAAP as intangible assets, including without limitation, all
franchises, licenses, permits, patents, patent applications, copyrights,
trademarks, tradenames, goodwill, experimental or organization expenses and
other like intangibles, the cash surrender value and other like intangibles of
any life insurance policy, treasury stock and unamortized debt discount.

          "Interest Period" means, with respect to any Libor Portion, a period
           ---------------
of one (1), two (2), three (3) or six (6) months' duration, as Borrowers may
elect, during which the Adjusted Libor Rate is applicable; provided, however,
that (a) if any Interest Period would otherwise end on a day which shall not be
a London Business Day, such Interest Period shall be extended to the next
succeeding London Business Day, unless such London Business Day falls in another
calendar month, in which case such Interest Period shall end on the next
preceding London Business Day, subject to clause (c) below; (b) interest shall
accrue from and including the first day of each Interest Period to, but
excluding, the day on which any Interest Period expires; (c) with respect to an
Interest Period which begins on the last London Business Day of a calendar month
(or on a day for which there is no numerically corresponding day in the calendar
month at the end of such Interest Period), the Interest Period shall end on the
last London Business Day of a calendar month; and (d) Borrowers may not elect an
Interest Period that would extend past the Termination Date.

          "Lease" means a lease of real property to which any Borrower is a
           -----
party.

          "Letter of Credit" means individually, and "Letters of Credit" means
           ----------------                           -----------------
individually and collectively, the letter(s) of credit issued from time to time
by Bank pursuant to the terms and conditions of Section 2A hereof.

          "Leverage Ratio" means, as of any date of determination, with respect
           --------------
to Zany Brainy and its consolidated Subsidiaries (other than Zany.com), the
ratio of Total Funded Debt plus the face amount of all letters of credit issued
and outstanding for the benefit of Zany Brainy or any of its consolidated
Subsidiaries (other than Zany.com), each as of such date of determination, to
Total Capitalization as of such date of determination.

          "Libor Portion" means a Portion as to which Borrowers have elected the
           -------------
rate of interest based on the Adjusted Libor Rate to be applicable.

          "Loan" means the aggregate outstanding principal balance of
           ----
Indebtedness advanced and the undrawn face amount of all Letters of Credit
issued under the Commitment, and. without duplication, the amount of all
unreimbursed draws under Letters of Credit, together with interest accrued
thereon and fees and expenses incurred in connection with any of the foregoing.

          "Loan Documents" means this Agreement, the Note, the Master L/C
           --------------
Agreement, the Electronic L/C Agreement and the other documents and agreements
executed and delivered in connection with this Agreement.

                                      -6-
<PAGE>

          "Local Authorities" means individually and collectively the state and
           -----------------
local governmental authorities and administrative agencies which govern the
business, commercial activities or facilities owned or operated by any Company.

          "London Business Day" means any Business Day on which banks in London,
           -------------------
England are open for business.

          "Master L/C Agreement" means the Master Letter of Credit Agreement in
           --------------------
the form of Exhibit G-1 attached hereto, executed and delivered pursuant to
Paragraph 4.1 hereof.

          "Material Adverse Effect" means a material adverse effect on (i) the
           -----------------------
business, assets, prospects or financial condition of Zany Brainy and its
consolidated Subsidiaries taken as a whole or (ii) the ability of Zany Brainy,
or the Borrowers taken as a whole, to perform its or their respective
obligations under any Loan Document.

          "Net Proceeds" means, with respect to any Sale of Material Assets, the
           ------------
gross cash proceeds received by a Borrower from such sale, less the sum of (i)
all income taxes and other taxes assessed by a governmental authority as a
result of such sale and any other reasonable fees and expenses incurred in
connection therewith, (ii) the principal amount of, premium, if any, and
interest on Indebtedness secured by a Lien on the assets (or a portion thereof)
sold, which Indebtedness is required to be repaid in connection with such sale,
and (iii) with respect to any offering of capital stock or issuance of
Indebtedness, the gross cash proceeds received by the Borrower or any of its
Subsidiaries therefrom less all legal, underwriting and other reasonable fees
and expenses incurred in connection therewith.

          "Note" means the promissory note in the form of Exhibit B attached
           ----
hereto delivered by Borrowers to Bank, as may be amended, modified, extended,
consolidated or restated from time to time.

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

          "Permitted Acquisitions" means, after ten (10) Business Days prior
           ----------------------
written notice to Bank, an acquisition of the stock or assets of any entity the
business of which is engaged in a business directly related to a business of
Borrowers as set forth in Paragraph 5.24 hereof and which acquisitions, either
singly or in the aggregate after the date hereof, involve total consideration
(including contingent payments, and cash and non-cash consideration) of not more
than Five Million Dollars ($5,000,000), and such other acquisitions to which the
Bank shall consent in writing.

          "Permitted Investments" means:
           ---------------------

               (a) investments in commercial paper;

               (b) investments in direct obligations of the United States of
America or obligations of any agency thereof which are guaranteed by the United
States of America;

                                      -7-
<PAGE>

               (c) obligations issued or guaranteed by any State or political
subdivision thereof:

               (d) investments in certificates of deposit maturing within one
(1) year from the date of acquisition thereof issued by a bank or trust company
organized under the laws of the United States or any state thereof, having
capital, surplus and undivided profits aggregating at least $500,000,000 and the
long-term deposits of which are rated A1 or better by Moody's Investor Service,
Inc. or equivalent by Standard & Poor's Corporation;

               (e) investments in money market funds which invest solely in any
of the foregoing (a) through (d) above; and

               (f) repurchase agreements with a bank or trust company (including
Bank) or recognized securities dealer having capital and surplus in excess of
$500,000,000 for direct obligations issued or fully guaranteed by the United
States of America in which Borrower has a perfected first priority security
interest (subject to no other liens or encumbrances) and having, on the date of
purchase thereof, a fair market value of at least 100% of the amount of the
repurchase obligations;

               provided that the investments described in (a) - (c) above which
are: (i) rated "AA" (or the equivalent thereof) or better by Standard & Poor's
Corporation shall mature within three (3) years of the acquisition thereof; and
(ii) rated "A-1" (or the equivalent thereof) or better by Standard & Poor's
Corporation shall mature within one (1) year of the acquisition thereof.

          "Plan" means any employee pension benefit or employee welfare benefit
           ----
plan as defined in Sections 3(1) or (2) of ERISA maintained or sponsored by,
contributed to, or covering employees of any Borrower or any ERISA Affiliate.

          "Portion" means a portion of the Loan as to which a specific interest
           -------
rate and, in the case of a Libor Portion, an Interest Period, has been elected
by Borrower.

          "Prime Rate" means the rate of interest announced by Bank from time to
           ----------
time as its prime rate.

          "Regulation D" means Regulation D of the Board of Governors of the
           ------------
Federal Reserve System, comprising Part 204 of Title 12 Code of Federal
Regulations, as amended, and any successor thereto.

          "Release" means any spill, leak, emission, discharge or the pumping,
           -------
pouring, emptying, disposing, injecting, escaping, leaching or dumping of a
Hazardous Substance.

          "Rents" means all payments made to a landlord in connection with a
           -----
lease of real property, including without limitation, payments for rent,
utilities and taxes.

                                      -8-
<PAGE>

          "Reserve" means, for any day, that reserve (expressed as a decimal)
           -------
which is in effect (whether or not actually incurred) with respect to Bank on
such day, as prescribed by the Board of Governors of the Federal Reserve System
(or any successor or any other banking authority to which Bank is subject
including any board or governmental or administrative agency of the United
States or any other jurisdiction to which Bank is subject) for determining the
maximum reserve requirement (including without limitation any basic,
supplemental, marginal or emergency reserves) for Eurocurrency liabilities as
defined in Regulation D.

          "Reserve Percentage" means, for Bank on any day, that percentage
           ------------------
(expressed as a decimal) prescribed by the Board of Governors of the Federal
Reserve System (or any successor or any other banking authority to which Bank is
subject, including any board or governmental or administrative agency of the
United States or any other jurisdiction to which Bank is subject), for
determining the reserve requirement (including without limitation any basic,
supplemental, marginal or emergency reserves) for (i) deposits of United States
dollars or (ii) Eurocurrency liabilities as defined in Regulation D, in each
case used to fund a Libor Portion.  The Adjusted Libor Rate shall be adjusted on
and as of the effective day of any change in the Reserve Percentage.  Bank
hereby acknowledges that on the date of this Agreement the Reserve Percentage is
zero (0).

          "Restricted Payments" means:  redemptions, repurchases, and
           -------------------
distributions of any kind in respect of Zany Brainy's capital stock.

          "Rolling Period" means a period of four consecutive fiscal quarters
           --------------
for which income statements have been (or are required to have been) delivered
hereunder.

          "Subsidiary" means any corporation, partnership or other legal entity
           ----------
of which any Borrower, directly or indirectly (including as beneficiary of a
business trust), owns more than fifty percent (50%) of any class or classes of
securities or partnership interests, and any partnership in which a Borrower is
a general partner.  Unless otherwise specified, references to "Subsidiaries"
herein shall mean direct and indirect Subsidiaries of Zany Brainy.

          "Tangible Net Worth" means, as of the date of determination,
           ------------------
stockholders' equity of Zany Brainy and its consolidated Subsidiaries (other
than Zany.com), in accordance with GAAP, minus Intangible Assets.

          "Termination Date" means the earlier of (i) June 14, 2002, or (ii) the
           ----------------
date on which the Commitment is terminated pursuant to Paragraph 2.7 hereof.

          "Total Capitalization" means stockholders' equity of Zany Brainy and
           --------------------
its consolidated Subsidiaries (other than Zany.com) plus Total Funded Debt plus
the face amount of all letters of credit issued and outstanding for the benefit
of Zany Brainy or any of its consolidated Subsidiaries (other than Zany.com).

                                      -9-
<PAGE>

          "Total Funded Debt" means, as of the date of determination, the
           -----------------
aggregate principal amount of all Indebtedness of Zany Brainy and its
consolidated Subsidiaries (other than Zany.com) for:

                    (i)   borrowed money other than trade indebtedness incurred
in the normal and ordinary course of business for value received having a final
maturity of one year or more from the date of determination;

                    (ii)  installment purchases of real or personal property;

                    (iii) Capital Leases;

                    (iv)  all obligations under "synthetic" or similar leases;
and

                    (v)   guaranties of Total Funded Debt or any portion of
Total Funded Debt of others, without duplication.

          "Year 2000 Compliant" means, as to any computer system or application
           -------------------
or micro-processor dependent good or equipment, that it is designed and intended
to be used prior to, during and after the calendar year 2000 AD and that it will
operate as designed and intended during each such time period without error
relating to date data or date information, specifically including any error
relating to, or the product of, date data or date information that represents or
references different centuries or more than one century.

          "Zany Brainy" means Zany Brainy, Inc., a Pennsylvania corporation and
           -----------
a Borrower under this Agreement.

          "Zany.com" means the Internet subsidiary or joint venture to be formed
           --------
by Zany Brainy and to be added as a Borrower under this Agreement pursuant to
Paragraph 5.20 hereof.

          "Zany.com Sublimit" means the portion of the Commitment up to which
           -----------------
Bank has agreed to make loans to Zany.com, being One Million Dollars
($1,000,000) on the date hereof.

          1.2  Accounting Principles.  Except as otherwise provided herein,
               ---------------------
financial and accounting terms used in the foregoing definitions or elsewhere in
this Agreement, shall be defined in accordance with GAAP.  If Borrowers or Bank
determine that a change in GAAP from that in effect on the date hereof has
altered the treatment of certain financial data to its detriment under this
Agreement, such party may, by written notice to the other within thirty (30)
days after the effective date of such change in GAAP, require renegotiation of
the financial covenants affected by such change to modify such covenants as
necessary to equitably reflect such change in GAAP.  If Borrowers and Bank have
not agreed on revised covenants within thirty (30) days after the delivery of
such notice, then, for purposes of this Agreement, GAAP will mean generally
accepted accounting principles on the date just prior to the date on which the
change occurred that gave rise to the notice.

                                      -10-
<PAGE>

                                   SECTION 2

                                CREDIT FACILITY
                                ---------------

           2.1. The Facility.
                ------------

                    (a) Commitment.  From time to time prior to the Termination
                        ----------
Date, subject to the provisions below, Bank agrees to make Advances to
Borrowers, jointly and severally, which Borrowers may repay and reborrow prior
to the Termination Date, for purposes specified in Paragraph 2.3 hereof;
provided, however, that: (i) the aggregate outstanding principal amount of such
Advances shall not exceed at any time the lesser of the Commitment or the
Borrowing Base as from time to time in effect, (ii) the aggregate outstanding
principal amount of Advances made to Zany.com (including Letters of Credit
issued for the benefit of Zany.com) shall not exceed at any time the Zany.com
Sublimit, (iii) Zany.com shall be liable for principal of up to a limit of One
Million Dollars ($1,000,000) plus interest, expenses and fees, all relating to
Advances made to, and for reimbursement of amounts paid by Bank and fees and
expenses related to Letters of Credit issued for the benefit of, Zany.com, and
(iv) during the period from December 1 through January 31 of each fiscal year of
Borrowers, beginning with the fiscal year ending in January, 2000, for a period
of twenty (20) consecutive calendar days, Borrowers may not request, nor shall
there be outstanding, any Advances (but Borrowers may request the issuance of
Letters of Credit, and Letters of Credit may remain issued.)

                    (b) Joint and Several Obligation.  The obligations of
                        ----------------------------
Borrowers hereunder are and shall be joint and several, provided however, that
the obligations of Zany.com shall be as set forth in Paragraph 2.1(a) above.

                    (c) Authority of Zany Brainy.  Each of the Borrowers hereby
                        ------------------------
irrevocably authorizes and requests that Zany Brainy execute all Advance Request
Forms, make all elections as to interest rates and take any other actions
required or permitted of Borrowers under this Agreement, on its respective
behalf, in each case with the same force and effect as if such Borrower had
executed such Advance Request Form, made such election or taken such other
action itself.  All requests for Advances and the issuance of Letters of Credit
by or for the benefit of Zany.com shall also require the signature of Zany
Brainy.  Any request, application or other communication by Zany Brainy may be
relied on by Bank, and any communication by Bank shall be made to Zany Brainy,
and shall be binding on each Borrower, jointly and severally, as fully as if
such request, application or other communication were made directly by or to
each such Borrower.

           2.2. Promissory Note. The Indebtedness of the Borrowers to Bank under
                ---------------
the Loan will be evidenced by a Note executed by Borrowers in favor of Bank.
The original principal amount of the Note will be in the amount of the
Commitment; provided, however, that notwithstanding the face amount of such
Note, Borrowers' liability thereunder shall be limited at all times to the
actual Indebtedness, principal, interest, fees and expenses then outstanding to
Bank under the Loan.

                                      -11-
<PAGE>

          2.3. Use of Proceeds.  Funds advanced under the Loan shall be used
               ---------------
solely: (i) for the refinancing of existing Indebtedness of Borrowers; (ii) for
Permitted Acquisitions; (iii) for Borrowers' working capital needs and general
corporate purposes and (iv) for the reimbursement of draws under Letters of
Credit in accordance with Paragraph 2A.4 hereof.

          2.4. Repayment.  The aggregate outstanding principal balance under the
               ---------
Loan, together with all interest, fees and costs due hereunder, shall be due and
payable in full on the Termination Date.  Notwithstanding the immediately
preceding sentence, the aggregate outstanding balance of the Loan shall be due
and payable immediately upon acceleration of the Loan in accordance with
Paragraph 8.2 hereof.

          2.5. Interest.  Portions of the Loan shall bear interest on the
               --------
outstanding principal amount thereof in accordance with the following
provisions:

                    (a)  Interest on Loan.
                         ----------------

                         (i)  At the Borrowers' election in accordance with the
provisions of Paragraph 2.5(b) below, in the absence of an Event of Default
hereunder and prior to maturity or judgment, and subject to clause (ii) below,
any Portion of the Loan (which shall not include the undrawn face amount of
Letters of Credit, as to which the fees set forth in Paragraph 2A.4 shall be
applicable) shall bear interest at either of the following rates:

                              (A)  Base Rate.  The Base Rate.
                                   ---------

                              (B)  Adjusted Libor Rate.  The Adjusted Libor Rate
                                   -------------------
                    plus one and three-fourths percent (1 3/4%) per annum.

                         (ii) Notwithstanding the foregoing, upon the occurrence
and during the continuance of an Event of Default hereunder, including after
maturity and upon judgment, Borrowers hereby agree to pay to Bank interest on
the outstanding principal balance of the Loan at the rate of two percent (2%)
per annum in excess of the rate then available to and elected by the Borrowers
for each Portion then outstanding, and with respect to Portions bearing interest
based on the Adjusted Libor Rate, at the end of the applicable Interest Period
and thereafter, such Portions shall bear interest at the rate of two percent
(2%) per annum in excess of the Base Rate, such rate to change when and as the
Base Rate changes.

               (b) Procedure for Determining Interest Periods and Rates of
                   -------------------------------------------------------
Interest.
--------

                   (i) If Borrowers elect the rate based on the Base Rate to be
applicable to a Portion, Borrowers must notify Bank of such election in writing
prior to eleven o'clock (11:00) a.m. Philadelphia time one (1) Business Day
prior to the proposed application of such rate.  If Borrowers elect the rate
based on the Adjusted Libor Rate to be applicable to a Portion, Borrowers must
notify Bank of such election and the Interest Period selected prior to eleven
o'clock (11:00) a.m. Philadelphia time at least two (2) London Business Days
prior to the commencement of the proposed Interest Period.  If Borrowers do not
provide notice for the rate based on the Adjusted Libor Rate, then Borrowers
shall be deemed to have requested that the rate

                                      -12-
<PAGE>

based on the Base Rate shall apply to any Portion as to which the Interest
Period is expiring and to any new Advance of the Loan until Borrowers shall have
given proper notice of a change in or determination of the rate of interest in
accordance with this Paragraph 2.5(b).

               (ii)  Borrowers shall not elect more than five (5) different
Libor Portions to be applicable to the Loan at one time, and any Portion shall
be in an even multiple of One Hundred Thousand Dollars ($100,000).

          (c)  Payment and Calculation of Interest.  With respect to Libor
               -----------------------------------
Portions, interest shall be due and payable on the last day of each Interest
Period for each such Portion, and, in the case of a Libor Portion with an
Interest Period of six (6) months, on the ninetieth (90th) day after the
commencement of such Interest Period and on the last day of the Interest Period.
With respect to Base Rate Portions, interest shall be due and payable on the
last Business Day of each March, June, September and December commencing on the
first such date after the first Advance which bears interest at the Base Rate.
Interest shall be calculated in accordance with the provisions of Paragraph
2.5(a) hereof; all interest based on the Adjusted Libor Rate shall be calculated
on the basis of the actual number of days elapsed over a year of three hundred
sixty (360) days, and interest based on the Base Rate shall be calculated on the
basis of the actual number of days elapsed over a year of three hundred sixty-
five (365) or three hundred sixty-six (366) days, as applicable.

          (d)  Reserves.  If at any time when a Libor Portion is outstanding,
               --------
Bank (or a bank Affiliate of Bank) is subject to and incurs a Reserve, Borrowers
hereby agree to pay within five (5) Business Days of demand thereof from time to
time, as billed by Bank, such additional amount as is necessary to reimburse
Bank for its costs in maintaining such Reserve to the extent that such costs are
not reflected in the Reserve Percentage used to determine the Adjusted Libor
Rate.  Such amount shall be computed by taking into account the cost incurred by
Bank in maintaining such Reserve in an amount equal to the Portion on which such
Reserve is incurred, which computation shall be set forth in any such demand by
Bank.  The determination by Bank of such costs incurred and the allocation of
such costs among Borrowers and other customers which have similar arrangements
with Bank shall be prima facie evidence of the correctness of the fact and the
amount of such additional costs, if calculated in a manner consistent with
similar charges made by Bank to its other customers having similar arrangements
with Bank.  Upon notification to Borrowers of any payment required pursuant to
this Paragraph 2.5(d), Borrowers (A) shall make such payment in accordance with
the provisions hereof and (B) may repay the Portion of the Loan with respect to
which such payment is required, subject to the requirements of Paragraph 2.8 and
2.5(f) hereof.

          (e)  Special Provisions Applicable to Adjusted Libor Rate.  The
               ----------------------------------------------------
following special provisions shall apply to the Adjusted Libor Rate:

               (i) Change of Adjusted Libor Rate.  The Adjusted Libor Rate may
                   -----------------------------
be automatically adjusted by Bank on a prospective basis to take into account
the additional or increased cost of maintaining any necessary reserves for
Eurodollar deposits or increased costs due to changes in applicable law or
regulation or the interpretation thereof occurring subsequent to the
commencement of the then applicable Interest Period, including but not limited
to changes

                                      -13-
<PAGE>

in tax laws (except changes of general applicability in corporate income tax
laws) and changes in the reserve requirements imposed by the Board of Governors
of the Federal Reserve System (or any successor), excluding the Reserve
Percentage and any Reserve which has resulted in a payment pursuant to
subparagraph (e) above, that increase the cost to Bank of funding the Loan or a
portion thereof bearing interest based on the Adjusted Libor Rate. Bank shall
give Borrowers notice of such a determination and adjustment, which
determination shall be prima facie evidence of the correctness of the fact and
the amount of such adjustment. Borrowers may, by notice to Bank, (A) request
Bank to furnish to Borrowers a statement setting forth the basis for adjusting
such Adjusted Libor Rate and the method for determining the amount of such
adjustment; and/or (B) repay the Portion of the Loan with respect to which such
adjustment is made, subject to the requirements of Paragraph 2.8 and 2.5(f)
hereof.

                    (ii)  Unavailability of Eurodollar Funds.  In the event that
                          ----------------------------------
Borrowers shall have requested the rate based on the Adjusted Libor Rate in
accordance with Paragraph 2.5(b) and Bank shall have reasonably determined that
Eurodollar deposits equal to the amount of the principal of the Portion and for
the Interest Period specified are unavailable, or that the rate based on the
Adjusted Libor Rate will not adequately and fairly reflect the cost of making or
maintaining the principal amount of the Portion specified by Borrowers during
the Interest Period specified, or that by reason of circumstances affecting
Eurodollar markets, adequate and reasonable means do not exist for ascertaining
the rate based on the Adjusted Libor Rate applicable to the specified Interest
Period, Bank shall give notice of such determination to Borrowers that the rate
based on the Adjusted Libor Rate is not available.  A determination by Bank
hereunder shall be prima facie evidence of the correctness of the fact and
amount of such additional costs or unavailability.  Upon such a determination,
(i) the obligation to advance or maintain Libor Portions shall be suspended
until Bank shall have notified Borrowers that such conditions shall have ceased
to exist, and (ii) the rate based on the Base Rate shall be applicable to all
Portions.

                    (iii) Illegality.  In the event that it becomes unlawful for
                          ----------
Bank (or Bank's bank Affiliate) to maintain Eurodollar liabilities sufficient to
fund any Portion of the Loan subject to the rate based on the Adjusted Libor
Rate, then Bank shall immediately notify Borrowers thereof and Bank's
obligations hereunder to advance or maintain Advances at the rate based on the
Adjusted Libor Rate shall be suspended until such time as Bank (or Bank's bank
Affiliate) may again cause the rate based on the Adjusted Libor Rate to be
applicable to any Portion of the outstanding principal balance of the Loan, and
any Portion shall then be subject to the rate based on the Base Rate.

               (f)  Funding Costs and Loss of Earnings.  In the event that
                    ----------------------------------
Borrowers shall have requested the Adjusted Libor Rate to be applicable to a
Portion to be advanced and Borrowers shall revoke the request for such Advance
or shall fail to meet the conditions to such Advance as set forth in Section
Four hereof, and in connection with any prepayment or repayment of a Libor
Portion made on other than the last day of the applicable Interest Period,
whether such prepayment or repayment is voluntary, mandatory, by demand,
acceleration or otherwise, Borrowers shall pay to Bank all reasonable funding
costs and loss of earnings which may arise in connection with such revocation of
request for or failure to meet the conditions to

                                      -14-
<PAGE>

such Advance or such prepayment or repayment, as calculated by Bank in
accordance with Exhibit D hereto.

           2.6. Advances.
                --------

                    (a)  Advance Request.  Borrowers shall give Bank written
                         ---------------
notice of each requested Advance under the Commitment, not later than eleven
o'clock (11:00) a.m. Philadelphia time, on the day of the proposed Advance in
the case of an Advance of a Base Rate Portion, and two (2) Business Days prior
to an Advance of a Libor Portion, specifying the date, amount and purpose
thereof. Such notice shall be in the form of the Advance Request Form attached
hereto as Exhibit A, shall be certified by the chief financial officer,
controller or assistant controller of Zany Brainy, and, in the case of Advances
to Zany.com, by the chief financial officer, controller or assistant controller
of Zany.com, and shall contain the following information and representations,
which shall be deemed affirmed and true and correct as of and upon receipt of
the date of and upon receipt of the requested Advance:

                         (i)   the aggregate amount of the requested Advance,
which shall be an even multiple of $100,000;

                         (ii)  the Borrower for whose benefit the Advance is
requested;

                         (iii) confirmation of compliance with Paragraphs 5.14
through 5.17 hereof as of the most recent date for which a Compliance
Certificate or Borrowing Base Certificate, as applicable, has been (or is
required to have been) delivered, and taking into account any Advances,
including the requested Advance, and payments since such date; and

                         (iv)  statements that the representations and
warranties set forth herein and in the other Loan Documents are true and correct
in all material respects as of the date thereof (or if such representation or
warranty is expressly stated to have been made as of a specific date, such
date), provided that the representations and warranties insofar as they refer to
the accuracy of matters set forth in Exhibit C may be amended (i) by the
Borrowers to reflect any transaction expressly permitted under Article 5 or 6
hereof or (ii) with the written consent of Bank; no Event of Default or Default
hereunder has occurred and is then continuing or will be caused by the requested
Advance; and there has been no Material Adverse Effect since the date of the
most-recently delivered audited financial statements pursuant to Paragraph 5.3
hereof; and no event or circumstance (or combination of events or circumstances)
has occurred which is reasonably likely to have a Material Adverse Effect.

               (b)  Procedures.  Upon receiving a request for an Advance in
                    ----------
accordance with subparagraph (a) above, subject to the satisfaction of the terms
and conditions hereof, Bank shall make the requested Advance available to
Borrowers by crediting such amount to Borrowers' deposit account with Bank as
designated by Zany Brainy from time to time not later than one o'clock (1:00)
p.m. on the day of the requested Advance.

               (c)  Requests Irrevocable.  Each request for an Advance pursuant
                    --------------------
to this Paragraph 2.6 shall be irrevocable and binding on Borrowers. In the case
of any Advance

                                      -15-
<PAGE>

bearing interest at the rate based upon the Adjusted Libor Rate, Borrowers shall
indemnify Bank against any loss, cost or expense incurred by Bank as a result of
not borrowing such funds on the requested Advance date, including as a result of
any failure to fulfill on or before the date specified in such request for an
Advance the applicable conditions set forth in Section Four hereof, including,
without limitation, any loss, cost or expense incurred by reason of the
liquidation or redeployment of deposits or other funds acquired by Bank to fund
the Advance to be made by Bank when such Advance, as a result of such failure,
is not made on such date, as calculated by Bank in accordance with Exhibit D
attached hereto.

           2.7. Reduction and Termination of Commitment.
                ---------------------------------------

                    (a) Borrowers.  Borrowers shall have the right at any time
                        ---------
and from time to time, upon three (3) Business Days' prior written notice to
Bank, to reduce the Commitment in increments of $1,000,000 or multiples thereof
without penalty or premium, provided that on the effective date of such
reduction Borrowers shall make a prepayment of the Loan in an amount, if any, by
which the aggregate outstanding principal balance of the Loan exceeds the amount
of the Commitment as then so reduced, together with accrued interest on the
amount so prepaid and any amounts due pursuant to Paragraph 2.5(f) hereof.

                    (b) Bank.  Bank shall have the right to terminate the
                        ----
Commitment at any time, in its discretion and upon notice to Borrowers, upon the
occurrence and during the continuation of any Event of Default hereunder (except
if an Event of Default described in Paragraph 8.1(i) shall occur with respect to
any Borrower, in which case termination of the Commitment shall occur
automatically without notice).

                    (c) Restoration Only With Consent.  Any termination or
                        -----------------------------
reduction of the Commitment pursuant to subparagraphs 2.7(a) and (b) hereof
shall be permanent, and such Commitment cannot thereafter be restored or
increased without the written consent of Bank.

           2.8. Prepayment.
                ----------

                    (a) Borrowers may repay all or any portion of the
outstanding principal balance under the Loan without premium or penalty,
provided that any such payment shall include all accrued interest on the amount
prepaid plus any amounts which may be due pursuant to Paragraph 2.5(f) hereof.

                    (b) If at any time the aggregate outstanding principal
balance of the Loan, including without duplication the undrawn amount of all
outstanding Letters of Credit, is in excess of the Borrowing Base, Borrowers
shall promptly make a prepayment of the Loan in accordance with subparagraph (a)
above in an amount sufficient to reduce the balance of the Loan, including
without duplication the undrawn amount of all outstanding Letters of Credit, to
an amount less than or equal to the Borrowing Base, together with interest on
the amount prepaid through the date of prepayment and any amounts owed pursuant
to Paragraph 2.5(f) hereof.

                    (c) If at any time the aggregate outstanding principal
balance of the Loans to Zany.com, including, without duplication, the undrawn
amount of all outstanding

                                      -16-
<PAGE>

Letters of Credit for the benefit of Zany.com, exceeds the Zany.com Sublimit,
Borrowers shall promptly make a prepayment of the Loan in accordance with
subparagraph (a) above in an amount sufficient to reduce the balance of the
Loans to and, without duplication, the undrawn amounts of Letters of Credit for
the benefit of Zany.com, to an amount less than or equal to the Zany.com
Sublimit, together with interest on the amount prepaid through the date of
prepayment and any amounts owed pursuant to Paragraph 2.5(f) hereof.

                (d) Mandatory prepayments made pursuant to Paragraph 2.8 hereof
shall not reduce the Commitment and may be reborrowed.

          2.9.  Payments.  All payments of principal, interest, fees and other
                --------
amounts due hereunder, including any prepayments thereof, shall be made by
Borrowers to Bank in immediately available funds before twelve o'clock (12:00)
noon, Philadelphia time, on any Business Day at the office of Bank at One South
Penn Square, Philadelphia, PA 19107. Borrowers hereby authorize Bank to charge
Borrowers' accounts with Bank for all payments of principal, interest and fees,
if not paid when due.

          2.10. Commitment Fee.  Borrowers shall pay to Bank a non-refundable
                --------------
commitment fee at the rate of one-fourth of one percent ( 1/4%) per annum on the
unborrowed portion of the Commitment from the date hereof through the
Termination Date, which fees shall be payable at the offices of Bank quarterly
in arrears on the last day of each March, June, September and December and on
the applicable Termination Date.  The commitment fee shall be calculated on the
basis of the actual number of days elapsed over a year of three hundred sixty
five (365) days.

          Borrowers and Bank hereby agree that for purposes of calculating the
commitment fee to be paid from time to time under this Paragraph 2.10, the
unborrowed portion of the Commitment (on which such fee is calculated) shall be
reduced by the amount available to be drawn under outstanding Letters of Credit.

          2.11. Closing Fee.  On the date of execution of this Agreement,
                -----------
Borrowers shall pay to Bank the unpaid balance of a total closing fee of Twenty-
Five Thousand Dollars ($25,000).

          2.12. Regulatory Changes in Capital Requirements.  If Bank shall have
                ------------------------------------------
determined that the adoption or the effectiveness after the date hereof of any
law, rule, regulation or guideline regarding capital adequacy, or any change in
any of the foregoing or in the interpretation or administration of any of the
foregoing by any governmental authority, central bank or comparable agency
charged with the interpretation or administration thereof, or compliance by Bank
(or any lending office of Bank) or Bank's holding company with any request or
directive regarding capital adequacy (whether or not having the force of law) of
any such authority, central bank or comparable agency which is generally
applicable to banks comparable to Bank, has or would have the effect of reducing
the rate of return on Bank's capital or on the capital of Bank's holding
company, as a consequence of this Agreement, the Commitment, Advances, Letters
of Credit or the Loan made by Bank pursuant hereto, to a level below that which
Bank or its holding company could have achieved but for such adoption,

                                      -17-
<PAGE>

change or compliance (taking into consideration Bank's policies and the policies
of Bank's holding company with respect to capital adequacy) by an amount deemed
by Bank to be material, then from time to time Borrowers shall pay to Bank such
additional amount or amounts as will compensate Bank or its holding company for
any such reduction suffered together with interest on each such amount from the
date due until payment in full thereof at the rate provided in Paragraph
2.5(a)(ii) hereof with respect to amounts not paid when due. Bank will notify
Borrowers of any event occurring after the date of this Agreement that will
entitle Bank to compensation pursuant to this Paragraph 2.12 as promptly as
practicable after it obtains knowledge thereof and determines to request such
compensation.

          A certificate of Bank setting forth such amount or amounts as shall be
necessary to compensate Bank or its holding company as specified above and
describing the calculation of such amount shall be delivered to Borrowers and
shall be conclusive absent manifest error, if calculated and charged in a manner
consistent with similar charges made by Bank to its other customers having
similar arrangements with Bank.  Borrowers shall pay Bank the amount shown as
due on any such certificate delivered by Bank within ten (10) days after its
receipt of the same.

          Failure on the part of Bank to demand compensation for increased costs
or reduction in amounts received or receivable or reductions in return on
capital with respect to any period shall not constitute a waiver of Bank's right
to demand compensation with respect to any other period except as otherwise
limited by the terms of this Paragraph 2.12.

                                  SECTION 2A

                               LETTERS OF CREDIT
                               -----------------

           2A.1.  Availability of Credits.
                  -----------------------

                  (a)  Terms of Letters of Credit.  Subject to the terms and
                       --------------------------
conditions set forth herein, Bank shall from time to time prior to the
Termination Date issue Letters of Credit for the account of one or more
Borrowers on the following terms and conditions:

                       (i)  at the time of issuance of the Letter of Credit, the
sum of the amount available to be drawn under such Letter of Credit and all
other Letters of Credit then outstanding hereunder plus any unreimbursed draws
under Letters of Credit, plus the outstanding principal balance of the Loan, all
without duplication, shall not exceed the lesser of the Commitment or the
Borrowing Base;

                       (ii) at the time of issuance of the Letter of Credit, if
such Letter of Credit is for the benefit of Zany.com, the sum of the amount
available to be drawn under such Letter of Credit and all other Letters of
Credit then outstanding hereunder for the benefit of Zany.com plus any
unreimbursed draws under Letters of Credit for the benefit of Zany.com, plus the
outstanding principal balance of Loans to Zany.com, all without duplication,
shall not exceed the Zany.com Sublimit.

                                      -18-
<PAGE>

                        (iii) the final expiration date of each Letter of Credit
shall be on or before the earlier of (i) one year, in the case of standby
Letters of Credit, and one hundred eighty (180) days, in the case of documentary
Letters of Credit, from the date of issuance thereof or (ii) the Termination
Date;

                        (iv)  there shall not exist at the time of issuance of
the Letter of Credit, or as a result thereof, any Default or Event of Default
hereunder; and

                        (v)   each Letter of Credit issued under this Section 2A
shall be utilized by a Borrower for legitimate purposes in the ordinary course
of its business.

          (b)   Extension of Letters of Credit.  Notwithstanding the provisions
                ------------------------------
of this Paragraph 2A.1 requiring that the final expiry of each Letter of Credit
be on or before the Termination Date, Bank hereby agrees that it may issue, upon
Borrowers' request if required by a proposed beneficiary, a Letter of Credit
which by its terms may be extended beyond the Termination Date. With respect to
any such Letter of Credit issued hereunder, Borrowers hereby agree that they
will deliver on or before the Termination Date cash collateral in an amount
equal to one hundred five percent (105%) of the outstanding undrawn amount of
each such Letter of Credit pursuant to Paragraph 2A.5 hereof.

          (c)   Letters of Credit issued by CoreStates/First Union. Reference is
                --------------------------------------------------
made to the letters of credit issued by CoreStates Bank, N.A., predecessor by
merger to Bank, or Bank, in its individual capacity, the face amount,
beneficiary and number of which are listed on Schedule 2 attached hereto (the
"Existing Letters of Credit").  The Borrowers and Bank hereby agree that as of
the date of this Agreement all such Existing Letters of Credit shall hereinafter
be Letters of Credit, as if originally issued hereunder and the Bank shall
participate in such Letters of Credit as provided herein, provided Borrowers
will not be obligated to pay any additional issuance fees in connection with
such Letters of Credit.

          2A.2. Commitment Availability.  The amount available under the
                -----------------------
Commitment as from time to time in effect shall be reduced by the amount
available to be drawn under all outstanding Letters of Credit and unreimbursed
amounts of any draws under Letters of Credit. The amount by which the
availability of the Commitment is so reduced shall not be available for Advances
under Paragraph 2.6 hereof, except Advances thereunder which are made to
reimburse Bank for draws under the Letters of Credit as permitted pursuant to
Paragraph 2A.3 hereof.

          2A.3. Approval and Issuance.
                ---------------------

                (a)  Whenever a Borrower desires that a Letter of Credit be
issued for its account, or that an outstanding Letter of Credit issued for its
account be amended, such Borrower shall give Bank: (i) in the case of a standby
Letter of Credit, written request therefor (or an electronic request pursuant to
procedures established between Borrowers and Bank) at least six (6) Business
Days prior to issuance and (ii) in the case of a documentary Letter of Credit,
written request therefor (or an electronic request pursuant to procedures
established between Borrowers and Bank) one (1) Business Day prior to issuance.

                                      -19-
<PAGE>

                (b) Letters of Credit and amendments thereto shall be requested,
processed and issued, and draws thereon shall be negotiated, processed and paid,
in accordance with and subject to the terms and procedures of the Master L/C
Agreement and the Electronic L/C Agreement entered into between Borrowers and
Bank.

                (c) It shall be a condition to the issuance of any Letter of
Credit that the conditions set forth in Paragraphs 2A.1(a) and 4.2 hereof shall
be satisfied.

          2A.4. Obligations of the Borrower.  Borrowers agree to pay to Bank in
                ---------------------------
connection with each Letter of Credit issued hereunder:

                (a) immediately upon the demand of Bank, the amount paid by Bank
with respect to such Letter of Credit;

                (b) immediately upon demand of Bank, the amount of any draft
presented purporting to be drawn under such Letter of Credit provided that the
draft and accompanying documents conform to the terms of the Letter of Credit
but subject to the terms of Paragraph 2A.6 and any other amounts paid thereunder
(it being understood that Bank is not required to make demand upon or proceed
against any other party or to resort to any Collateral before obtaining payment
from Borrowers);

                (c) quarterly in arrears on the last Business Day of each March,
June, September and December: (i) a fee calculated on the average outstanding
amount of all documentary Letters of Credit for such period at a rate per annum
equal to one percent (1%) and (ii) a fee calculated on the average outstanding
amount of all standby Letters of Credit for such period at a rate per annum
equal to one and three fourths percent (1 3/4%) per annum, together with any
Letter of Credit fees customarily charged by Bank;

                (d) interest on any Indebtedness outstanding with respect to
such Letter of Credit, whether for funds paid on drafts on such Letter of Credit
or otherwise (but such indebtedness shall not include undrawn balances of such
Letter of Credit issued hereunder) at the rate set forth in Paragraph
2.5(a)(i)(A) hereof from the date of payment by Bank (if not reimbursed by
Borrowers on the same day) to the date one (1) Business Day after notice to
Borrowers of such payment, and thereafter at the rate applicable to Portions
bearing interest based on the Base Rate under Paragraph 2.5(a)(ii) hereof;
interest under this subparagraph (d) shall be paid at the times and in the
manner set forth in Paragraph 2.5 hereof, and shall accrue on amounts paid on a
Letter of Credit (if not reimbursed by Borrowers on the same day) from the date
of payment by Bank, whether or not demand is made, until such amounts are
reimbursed by Borrowers whether before, at or after demand.

                (e) On or before the Termination Date, in the absence of a
Default or Event of Default at such time, and subject to the provisions of
Paragraph 2.6 hereof, Bank hereby agrees to advance funds to Borrowers under the
Loan to make the payments required under Paragraphs 2A.4(a) and (b) hereof. If
any payment by Bank of a draft drawn under a Letter of Credit is for any reason
(including without limitation the occurrence or continuation of a Default or
Event of Default hereunder) not reimbursed prior to or on the date of such
payment, the

                                      -20-
<PAGE>

amount of such payment shall thereupon be deemed for purposes hereof an Advance
under Paragraph 2.6 hereof.  Such reimbursement obligation shall be repayable,
prepayable, and otherwise subject to all the terms and conditions thereof as if
advanced by Bank pursuant to Paragraph 2.6 hereof (but without duplication).

           2A.5.  Collateral Security.
                  -------------------

                  (a) On the termination of the Commitment or the occurrence of
an Event of Default, Bank may require (and in the case of an Event of Default
occurring under Paragraph 8.1(i) it shall be required automatically) that
Borrowers deliver to Bank cash or U.S. Treasury Bills with maturities of not
more than 90 days from the date of delivery (discounted in accordance with
customary banking practice to present value to determine amount) in an amount
equal at all times to one hundred five percent (105%) of the outstanding undrawn
amount of all Letters of Credit, such cash or U.S. Treasury Bills and all
interest earned thereon to constitute cash collateral for all such Letters of
Credit. At such time as such collateral is required to be and has not been
deposited, Bank shall be entitled to liquidate such of the other collateral for
the Loan (if any) as is necessary or appropriate in its sole judgment so as to
create such cash collateral.

                  (b) Any cash collateral deposited under subparagraph (a)
above, and all interest earned thereon, shall be held by Bank and invested and
reinvested at the expense and the written direction of Borrowers, in U.S.
Treasury Bills with maturities of no more than ninety (90) days from the date of
investment.

           2A.6.  General Terms of Credits.  The following terms and conditions
                  ------------------------
apply with respect to each Letter of Credit notwithstanding anything to the
contrary contained herein:

                  (a) Borrowers assume all risks of the acts or omissions of the
beneficiary of each Letter of Credit with respect to the use of the Letter of
Credit or with respect to the beneficiary's obligations to Borrowers.  Neither
Bank nor any of its officers or directors shall be liable or responsible for,
and Borrowers hereby agree to indemnify and hold Bank harmless (except for the
issuer's gross negligence or willful misconduct) with respect to:  (i) the use
which may be made of the Letter of Credit or for any acts or omissions of the
beneficiary in connection therewith; (ii) the accuracy, truth, validity,
sufficiency or genuineness of documents, or of any endorsement thereon, even if
such documents should in fact prove to be in any or all respects false,
misleading, inaccurate, invalid, insufficient, fraudulent, or forged; (iii) the
payment by Bank against presentation of facially conforming documents; (iv) any
other circumstances whatsoever in making or failing to make payment under a
Letter of Credit; or (v) any inaccuracy, interruption, error or delay in
transmission or delivery of correspondence or documents by post, telegraph or
otherwise.  In furtherance and not in limitation of the foregoing, Bank may
accept documents that appear on their face to be in order, without
responsibility for further investigation, regardless of any notice or
information to the contrary.

                  (b) To the extent any failure to comply with the provisions of
this Paragraph 2A.5(b) would, either individually or in the aggregate, result in
a Material Adverse Effect, Borrowers agree to procure or to cause the
beneficiaries of each documentary Letter of

                                      -21-
<PAGE>

Credit to procure promptly any necessary import and export or other licenses for
the import or export or shipping of any goods referred to in or pursuant to a
Letter of Credit and to comply and to cause the beneficiaries to comply with all
foreign and domestic governmental regulations with respect to the shipment and
warehousing of such goods or otherwise relating to or affecting such Letter of
Credit, including governmental regulations pertaining to transactions involving
designated foreign countries or their nationals, and to furnish such
certificates in that respect as Bank may at any time reasonably require, and to
keep such goods adequately covered by insurance in amounts, with carriers and
for such risks as shall be customary in the industry and to cause Bank's
interest to be endorsed on such insurance and to furnish bank at its request
with reasonable evidence thereof. Should such insurance (or lack thereof) upon
said goods for any reason not be reasonably satisfactory to Bank, Bank may (but
is not obligated to) obtain, after notice, at Borrowers' expense, insurance
satisfactory to Bank.

          (c) In connection with each Letter of Credit, neither Bank nor any
correspondent shall be responsible for:  (i) the existence, character, quality,
quantity, condition, packing, value or delivery of the property purporting to be
represented by documents; (ii) any difference in character, quality, condition
or value of the property from that expressed in documents; (iii) the time,
place, manner or order in which shipment of the property is made; (iv) partial
or incomplete shipment referred to in such Letter of Credit; (v) the character,
adequacy or responsibility of any insurer, or any other risk connected with
insurance other than insurance procured by the Bank; (vi) any deviation from
instructions, delay, default or fraud by the beneficiary or anyone else in
connection with the property or the shipping thereof; (vii) the solvency,
responsibility or relationship to the property of any party issuing any
documents in connection with the property; (viii) delay in arrival or failure to
arrive of either the property or any of the documents relating thereto;  (ix)
delay in giving or failure to give notice of arrival or any other notice; (x)
any breach of contract between the Letter of Credit beneficiaries and Borrowers;
(xi) any laws, customs, and regulations which may be effective in any
jurisdiction where any negotiation and/or payment of such Letter of Credit
occurs; (xii) failure of documents (other than documents required by the terms
of the Letter of Credit) to accompany any draft at negotiation; or (xiii)
failure of any entity to note the amount of any document or draft on the reverse
of such Letter of Credit or to surrender or to take up such Letter of Credit or
to forward documents other than documents required by the terms of the Letter of
Credit.  In connection with each Letter of Credit, Bank shall not be responsible
for any error, neglect or default of any of their correspondents.  None of the
above shall affect, impair or prevent the vesting of any of the Bank's rights or
powers hereunder.  If a Letter of Credit provides that payment is to be made by
Bank's correspondent, neither Bank nor such correspondent shall be responsible
for the failure of any of the documents specified in such Letter of Credit to
come into the Bank's hands, or for any delay in connection therewith, and
Borrowers' obligation to make reimbursements shall not be affected by such
failure or delay in the receipt of any such documents.

          (d) Notwithstanding but without limiting the foregoing, with respect
to any Letter of Credit, Borrowers shall have a claim against Bank, and Bank
shall be liable to Borrowers, to the extent, but only to the extent, of any
direct, as opposed to indirect or consequential, damages suffered by Borrowers
caused by the Bank's willful misconduct or gross negligence.

                                      -22-
<PAGE>

                 (e) To the extent not inconsistent with this Agreement, the
Uniform Customs and Practices for Documentary Credits (1993 Revision),
International Chamber of Commerce Publication No. 500, are hereby made a part of
this Agreement with respect to obligations in connection with each Letter of
Credit.

                                   SECTION 3

                        REPRESENTATIONS AND WARRANTIES
                        ------------------------------

          Borrowers represent and warrant to Bank as follows:

          3.1  Organization and Good Standing.  Each Borrower is a corporation,
               ------------------------------
partnership or other legal entity as set forth on Exhibit C attached hereto,
duly formed and validly existing under the laws of its state of formation as set
forth on Exhibit C attached hereto, and each has the power and authority to
carry on its business as now conducted, is qualified to do business in all other
states in which the nature of its business or the ownership of its properties
requires such qualification, except where the failure to so qualify would not
cause a Material Adverse Effect.

          3.2  Power and Authority; Validity of Agreement.  Each Borrower has
               ------------------------------------------
the power and authority under applicable law and under its articles or
certificate of incorporation and bylaws or other organizational documents to
enter into and perform the Loan Documents to the extent that it is a party
thereto; and all actions necessary or appropriate for the execution and
performance by such Borrower of the Loan Documents have been taken, and, upon
their execution, the same will constitute the valid and binding obligations of
each Borrower to the extent it is a party thereto, enforceable in accordance
with their terms.

          3.3  No Violation of Laws or Agreements.  The making and performance
               ----------------------------------
of the Loan Documents by each Borrower will not violate any provisions of any
law or regulation, federal, state, local, or foreign or any Borrower's
respective articles or certificate of incorporation and bylaws or other
organizational documents, or result in any breach or violation of, or constitute
a default under, any agreement or instrument by which any Borrower or its
property may be bound.

          3.4  Material Contracts.  There exists no default by any Borrower
               ------------------
under any contracts material to the business(es) of each Borrower which default,
or defaults taken as a whole, is or are reasonably likely to have a Material
Adverse Effect.

           3.5 Compliance.
               ----------

                 (a) Each Borrower is in material compliance with all applicable
laws and regulations, federal, state, local or foreign (including without
limitation those administered by the Local Authorities);

                                      -23-
<PAGE>

               (b) Each Borrower possesses all the franchises, permits,
licenses, certificates of compliance and approval and grants of authority,
necessary or required in the conduct of its respective business(es) as of the
date hereof; and as of the date hereof all such franchises, permits, licenses,
certificates and grants are valid, binding, enforceable and subsisting without
any defaults thereunder or enforceable adverse limitations thereon and are not
subject to any proceedings or asserted claims opposing the issuance, development
or use thereof or contesting the validity thereof, except to the extent that the
failure to obtain or maintain any of the foregoing is not, either singly or in
the aggregate, reasonably likely to have a Material Adverse Effect;

               (c) No authorization, consent, approval, waiver, license or
formal exemptions from, nor any filing, declaration or registration with, any
court, governmental agency or regulatory authority (federal, state or local) or
non-governmental entity, under the terms of contracts or otherwise, is required
by any Borrower by reason of or in connection with such Borrower's execution and
performance of the Loan Documents, except those which have been obtained; and

               (d) Since January 31, 1997, to the best of each Borrower's
knowledge, no employee of any Borrower, or any supplier of any of them, has been
employed in violation of Section 6 or Section 7 of the Fair Labor Standards Act
(29 U.S.C. (S)201 et seq.) (the "FLSA"), or in violation of any regulation or
                  -- ---
order of the Secretary of Labor of the United States under Section 14 of the
FLSA, except to the extent that any such violation, either singly or in the
aggregate, is not reasonably likely to have a Material Adverse Effect.

          3.6  Litigation.  Except as set forth on Exhibit C attached hereto,
               ----------
there are no actions, suits, proceedings or claims which are pending or, to the
best knowledge of any member of Borrowers' senior management, threatened,
against any Borrower which, if adversely resolved, are reasonably likely to have
a Material Adverse Effect.

          3.7  Title to Assets.  Each Borrower has good and marketable title to,
               ---------------
or a valid leasehold interest in or a license to use, all of the properties and
assets material to the conduct of its business, free and clear of any liens and
encumbrances, except liens and encumbrances permitted pursuant to Paragraph 6.4
hereof and the liens and security interests identified on Exhibit C attached
hereto.  All such assets are materially covered by the insurance required under
Paragraph 5.8 hereof.

           3.8 Accuracy of Information; Full Disclosure.
               ----------------------------------------

               (a) Zany Brainy's annual consolidated financial statements for
the period ended January 30, 1999, a copy of which has been furnished to Bank,
have been prepared in accordance with GAAP and fairly present in all material
respects the financial condition of Zany Brainy and its consolidated
Subsidiaries as of the dates and for the periods covered and disclose all
liabilities of Zany Brainy and its consolidated Subsidiaries required to be
disclosed in accordance with GAAP, and there has been no material adverse change
in the financial condition or business of Zany Brainy and its consolidated
Subsidiaries taken as a whole from the date of such statements to the date
hereof.

                                      -24-
<PAGE>

                 (b) Upon its joinder to this Agreement, Zany.com's most
recently delivered financial statements a copy of which have been furnished to
Bank, have been prepared in accordance with GAAP and fairly present in all
material respects the financial condition of Zany.com and any consolidated
Subsidiaries of Zany.com as of the dates and for the periods covered and
disclose all liabilities of Zany.com and its consolidated Subsidiaries required
to be disclosed in accordance with GAAP, and there has been no material adverse
change in the financial condition or business of Zany.com and any consolidated
Subsidiaries of Zany.com taken as a whole from the date of such statements to
the date hereof.

                 (c) All financial statements and other documents furnished by
each Borrower to Bank pursuant to this Agreement and the other Loan Documents do
not and will not contain any untrue statement of material fact or omit to state
a material fact necessary in order to make the statements contained herein and
therein not misleading in light of the circumstances in which they were made.
There is no fact presently actually known to the Borrowers which has not been
disclosed to Bank in writing which materially and adversely affects the
business, operations or conditions (financial or otherwise) of the Borrowers.

           3.9  Taxes and Assessments.
                ---------------------

                 (a) Except as set forth on Exhibit C, each Borrower has duly
and timely filed all information and tax returns and reports with any federal,
state, or local governmental taxing authority, body or agency, except for any
such returns or reports as to which the consequences of any failure to file
would not cause an adverse effect to the Borrowers in an amount greater than Two
Hundred Fifty Thousand Dollars ($250,000). All taxes, including without
limitation income, gross receipts, sales, use, excise, withholding and any other
taxes, and any governmental charges, penalties, interest or fines with respect
thereto, due and payable by any Borrower, have been paid, withheld or reserved
for in accordance with GAAP or, to the extent they relate to periods on or prior
to the date of the financial statements referenced in Paragraphs 5.2 and 5.3
hereof, are reflected as a liability on the financial statements in accordance
with GAAP, except for such failures to pay, withhold or reserve for as do not
involve amounts in excess of Fifty Thousand Dollars ($50,000), including all
penalties, interest and fines with respect thereto.

                 (b) Each Borrower has properly withheld all amounts required by
law to be withheld for income taxes and unemployment taxes, including without
limitation, all amounts required with respect to social security and
unemployment compensation, relating to its employees, and has remitted such
withheld amounts in a timely manner to the appropriate taxing authority, agency
or body.

          3.10. Indebtedness.  No Borrower has any presently outstanding
                ------------
Indebtedness or obligations, including contingent obligations and obligations
under leases of property from others, except the Indebtedness and obligations
described in Exhibit C hereto or in Borrowers' financial statements which have
been furnished to Bank pursuant to Paragraph 3.8, 5.2 or 5.3 hereof, and
Indebtedness permitted pursuant to Paragraph 6.1 hereof.

                                      -25-
<PAGE>

        3.11.  Management Agreements.  Except as set forth on Exhibit C attached
               ---------------------
hereto, no Borrower is a party to any management or consulting agreements for
the provision of senior executive services to such Borrower other than
employment agreements.

        3.12.  Investments; Capital Structure.  Each direct and indirect
               ------------------------------
Subsidiary of Zany Brainy is identified on Exhibit C attached hereto, which
indicates the number of shares and classes of the capital stock or partnership
interests, as applicable, of each such Subsidiary and the ownership thereof.
All such shares are validly issued, fully paid and non-assessable, and the
issuance and sale thereof are in compliance with all applicable federal and
state securities and other applicable laws; and the shareholders' ownership of
such shares of each Subsidiary is free and clear of any liens or encumbrances or
other contractual restrictions.  All such partnership interests are validly
existing and the creation and sale thereof are in compliance with all applicable
federal and state securities and other applicable laws; and the partners'
ownership thereof is free and clear of any liens or encumbrances or other
contractual restrictions.  No Borrower has any other Subsidiaries or any
investments in or loans to any other individuals or business entities except for
loans and investments permitted pursuant to Paragraph 6.3 or 6.8 hereof and
identified on Exhibit C hereto.

        3.13.  ERISA.  Each Borrower and each ERISA Affiliate is in compliance
               -----
in all material respects with all applicable provisions of ERISA and the
regulations promulgated thereunder; and,

               (a) No Borrower nor any ERISA Affiliate maintains or contributes
to or has maintained or contributed to any multiemployer plan (as defined in
section 4001 of ERISA) under which any Borrower or any ERISA affiliate could
have any withdrawal liability which is reasonably likely to have a Material
Adverse Effect;

               (b) No Borrower nor any ERISA Affiliate sponsors or maintains any
Plan under which there is an accumulated funding deficiency within the meaning
of (S)412 of the Code, whether or not waived, which is reasonably likely to have
a Material Adverse Effect;

               (c) The aggregate liability for accrued benefits and other
ancillary benefits under each defined benefit pension Plan that is sponsored or
maintained by any Borrower or any ERISA Affiliate (determined on the basis of
the actuarial assumptions prescribed for valuing benefits under terminating
single-employer defined benefit plans under Title IV of ERISA) does not exceed
the aggregate fair market value of the assets under each such defined benefit
pension Plan by an amount which is reasonably likely to have a Material Adverse
Effect;

               (d) The aggregate liability of each Borrower and each ERISA
Affiliate arising out of or relating to a failure of any Plan to comply with the
provisions of ERISA or the Code, is not an amount which is reasonably likely to
have a Material Adverse Effect; and

               (e) There does not exist any unfunded liability (determined on
the basis of actuarial assumptions utilized by the actuary for the Plan in
preparing the most recent

                                      -26-
<PAGE>

Annual Report) of any Borrower or ERISA Affiliate under any Plan providing post-
retirement life or health benefits which is reasonably likely to have a Material
Adverse Effect.

        3.14.  Fees and Commissions.  No Borrower owes any brokers' or finders'
               --------------------
fees or commissions of any kind, or knows of any claim for any brokers' or
finders' fees or commissions, in connection with any Borrower's obtaining the
Commitment or the Loan or Letters of Credit from Bank, except those provided
herein.

        3.15.  No Extension of Credit for Securities.  No Borrower is now, nor
               -------------------------------------
at any time has it been engaged principally, or as one of its principal
activities, in the business of extending or arranging for the extension of
credit for the purpose of purchasing or carrying any margin stock or margin
securities within the meaning of the regulations of the Board of Governors of
the Federal Reserve System, nor will the proceeds of the Loan be used by any
Borrower, directly or indirectly, for such purposes except those permitted
hereunder.

        3.16.  Hazardous Wastes, Substances and Petroleum Products.
               ---------------------------------------------------

               (a) Each Borrower (i) has received all material permits and filed
all notifications required by the Environmental Control Statutes to carry on its
respective business(es); and (ii) is in compliance in all material respects with
all Environmental Control Statutes.

               (b) Each Borrower has given any written or oral notice to the EPA
or any state or local agency with regard to any actual or imminently threatened
Release of Hazardous Substances of which such Borrower has knowledge on
properties owned, leased or operated by such Borrower or used in connection with
the conduct of its business and operations as are required under any applicable
Environmental Control Statutes.

               (c) No Borrower has received written notice that it is
potentially responsible for clean-up, remediation, costs of clean-up or
remediation, fines or penalties with respect to any actual or imminently
threatened Release of Hazardous Substances pursuant to any Environmental Control
Statute.

        3.17.  Solvency.  To the best of each Borrower's knowledge, excluding
               --------
intercompany indebtedness, each Borrower other than Zany.com is and after
receipt and application of the first Advance under this Agreement will be,
solvent such that (i) the fair value of its assets (including without limitation
the fair salable value of the goodwill and other intangible property of such
Borrower) is greater than the total amount of its liabilities, including without
limitation, contingent liabilities, (ii) the present fair salable value of its
assets (including without limitation the fair salable value of the goodwill and
other intangible property of such Borrower) is not less than the amount that
will be required to pay the probable liability on their debts as they become
absolute and matured, and (iii) they are able to realize upon their assets and
pay their debts and other liabilities, contingent obligations and other
commitments as they mature in the normal course of business.  No Borrower
intends to, nor believes that it will, incur debts or liabilities beyond its
ability to pay as such debts and liabilities mature, and no Borrower is engaged
in a business or transaction, or about to engage in a business or transaction,
for which

                                      -27-
<PAGE>

its property would constitute unreasonably small capital after giving due
consideration to the prevailing practice and industry in which it is engaged.
For purposes of this Paragraph 3.17, in computing the amount of contingent
liabilities at any time, it is intended that such liabilities will be computed
at the amount which, in light of all the facts and circumstances existing at
such time, represents the amount that reasonably can be expected to become an
actual matured liability of the applicable Borrower.

          Each Borrower hereby agrees that to the extent a Borrower shall have
paid more than its proportionate share of any payment made hereunder, such
Borrower shall be entitled to seek and receive contribution from and against any
other Borrower which has not paid its proportionate share of such payment;
provided however such Borrower shall not seek any such contribution from any
other Borrower until the Loan has been paid in full in cash and the Commitment
of the Bank hereunder has been terminated. The provisions of this paragraph
shall in no respect limit the obligations and liabilities of any Borrower to
Bank, and each Borrower shall remain liable to Bank, jointly and severally, for
the full amount of Borrowers' obligations hereunder and under the other Loan
Documents.

          3.18.  Employee Controversies. There are no material controversies
                 ----------------------
pending or, to the knowledge of any Borrower, threatened or anticipated between
any Borrower and any of its respective employees, and there are no labor
disputes, grievances, arbitration proceedings or any strikes, work stoppages or
slowdowns pending, or to any Borrower's knowledge, threatened between any
Borrower and its respective employees and representatives, which in either event
or which is reasonably likely to have a Material Adverse Effect.

          3.19.  Year 2000 Compliance. Borrowers have conducted a comprehensive
                 --------------------
review and assessment of their computer systems and applications, micro-
processor based goods and equipment owned or used by them in their business, and
all products currently sold by them, and are making inquiry of their material
suppliers, vendors and customers, with respect to functionality before, during
and after the year 2000 (the "Year 2000 Problem"). Borrowers have prepared a
plan to ensure that all such systems, goods, equipment and products owned or
used by them and material to the conduct of their business will be Year 2000
Compliant in a timely manner, and have provided a copy of such plan to Bank.
Borrowers reasonably believe, based on the foregoing review, assessment and
inquiry that the Year 2000 Problem will not result in a Material Adverse Effect.

          3.20.  Intellectual Property. Each Borrower owns, or is licensed to
                 ---------------------
use, all trademarks, trade names, copyrights, patents and other intellectual
property material to its business, and the use thereof by Borrowers does not
infringe upon the rights of any other Person, except for any such infringements
that, individually or in the aggregate, are not reasonably likely to have a
Material Adverse Effect.

          3.21.  Foreign Assets Control Regulations. Neither the borrowing by
                 ----------------------------------
Borrowers nor their use of the proceeds thereof will violate the Foreign Assets
Control Regulations, the Foreign Funds Control Regulations, the Transactions
Control Regulations, the Cuban Assets Control Regulations, the Iranian
Transaction Regulations, or the Iraqi Sanctions Regulations of the United States
Treasury Department (31 C.F.R. Subtitle B, Chapter V, as amended).

                                      -28-
<PAGE>

          3.22.  Investment Company Act. No Borrower is directly or indirectly
                 ----------------------
controlled by or acting on behalf of any person which is an "investment company"
within the meaning of the Investment Company Act of 1940, as amended.

          3.23.  Public Utility Holding Company Act. No Borrower is a "public
                 ----------------------------------
utility holding company" within the meaning of the Public Utility Holding
Company Act of 1935, as amended (the "1935 Act"), nor does the execution,
delivery and performance of this Agreement or the Note require any filing,
authorization or consent under the 1935 Act.

                                   SECTION 4

                                  CONDITIONS
                                  ----------

          4.1.   Effectiveness. The effectiveness of this Agreement shall be
                 -------------
subject to Bank's receipt of the following documents and satisfaction of the
following conditions, each in form and substance satisfactory to Bank:

                    (a)  Promissory Note. The Note duly executed by Borrowers.
                         ---------------

                    (b)  Authorization Documents. A certificate of the secretary
                         -----------------------
of each Borrower attaching and certifying as to (i) the certificate or articles
of incorporation and bylaws of such Borrower; (ii) resolutions or other evidence
of authorization by the board of directors of such Borrower authorizing its
execution and full performance of this Agreement, the Note, the other Loan
Documents and all other documents and actions required hereunder; and (iii) an
incumbency certificate setting forth the name, title and specimen signature of
each officer of such Borrower who is authorized to execute the Loan Documents
and any requests or communications hereunder on behalf of such entity.

                    (c)  Good Standing. Certificates of good standing or the
                         -------------
equivalent for each Borrower in its state of formation.

                    (d)  Opinion(s) of Counsel. Opinion letter(s) from counsel
                         ---------------------
for the Borrowers as may be reasonably satisfactory to Bank.

                    (e)  Compliance and Borrowing Base Certificates. A completed
                         ------------------------------------------
Compliance Certificate in the form of Exhibit E attached hereto and a completed
Borrowing Base certificate in the form of Exhibit F attached hereto, calculated
as of the end of the most recent month or most recent fiscal quarter of
Borrowers, as applicable, for which such certificates would be required
hereunder.

                    (f)  Completion of IPO. A certificate from the chief
                         -----------------
financial officer of Zany Brainy stating that Zany Brainy has received at least
$35,000,000 of the proceeds of the initial public offering of 19% of shares of
common stock of Zany Brainy.

                                      -29-
<PAGE>

                    (g)  Payment of Fees. Payment of all fees required by
                         ---------------
Paragraphs 2.10 and 2.11 hereof.

                    (h)  Payoff Letter. A payoff letter from Congress Financial
                         -------------
Corp. together with executed UCC-3 termination statements and other documents
relating to the release liens.

                    (i)  L/C Agreements. The Master L/C Agreement in the form of
                         --------------
Exhibit G-1 attached hereto and the Electronic L/C Agreement in the form of
Exhibit G-2 attached hereto, each executed by Borrowers and Bank.

                    (j)  Initial Advance Request. A completed Advance Form
                         -----------------------
pursuant to Paragraph 2.6 hereof.

                    (k)  Insurance Certificates. Certificates of insurance with
                         ----------------------
respect to Borrowers' and the Subsidiaries' property, casualty and liability
insurance undertaking to furnish Bank with reasonable notice and opportunity to
cure any non-payment of premiums prior to termination of coverage.

                    (l)  Consents. Receipt of all required consents and
                         --------
approvals under applicable law or contract.

                    (m)  Lien Searches. UCC, tax, lien, and judgment searches
                         -------------
against Borrowers in those offices and jurisdictions as Bank shall reasonably
request.

                    (n)  Other Documents. Such additional documents as Bank
                         ---------------
reasonably may request.

          4.2. Advances. The obligation of Bank to make Advances under the
               --------
Commitment shall be subject to Borrowers' compliance with Paragraph 2.6 hereof
and it shall be a condition to Bank's obligation hereunder to make any such
Advance that (a) the representations and warranties set forth herein and in the
other Loan Documents shall be true and correct in all material respects as if
made on the date of such Advance, (b) no Event of Default or Default shall have
occurred and not have been waived on the date of such Advance or be caused by
such Advance, (c) all fees required pursuant to Paragraphs 2.10 and 2.11 hereof
have been paid as and when due, and (d) there shall have been no Material
Adverse Effect since the date of the audited financial statements of Zany Brainy
and its consolidated Subsidiaries most recently delivered pursuant to this
Agreement, and no event or circumstance (or combination of events or
circumstances) shall have occurred which is reasonably likely to have a Material
Adverse Effect.

                                      -30-
<PAGE>

                                   SECTION 5

                             AFFIRMATIVE COVENANTS
                             ---------------------

          Borrowers covenant and agree that so long as the Commitment of Bank to
Borrowers or any Indebtedness of Borrowers to Bank is outstanding, each of the
Borrowers will and will cause each Subsidiary to (and with respect to Paragraph
5.13, will cause each ERISA Affiliate to):

          5.1. Existence and Good Standing. Preserve and maintain (a) its
               ---------------------------
existence as a corporation, partnership or other legal entity, as specified in
Exhibit C attached hereto (provided, however, that Subsidiaries may merge with
and into Zany Brainy or other Subsidiaries), and its good standing in all states
in which the nature of its business or assets requires such qualification except
for such lapses in qualification which are not, either singly or in the
aggregate, reasonably likely to have a Material Adverse Effect; and (b) the
effectiveness and validity of all its franchises, licenses, permits,
certificates of compliance or grants of authority required in the conduct of its
business, except for such instances of ineffectiveness or invalidity as would
not, either singly or in the aggregate, have a Material Adverse Effect.

          5.2. Interim Financial Statements. Furnish to Bank within forty-five
               ----------------------------
(45) days of the end of each of the first three quarterly periods in each fiscal
year of Borrowers and Zany.com, if joined as provided in Paragraph 5.20(b)
hereof, unaudited quarterly consolidated financial statements, as applicable, in
form and substance as reasonably required by Bank, including (i) a consolidated
balance sheet, (ii) a consolidated statement of income, and (iii) a statement of
cash flows, prepared in accordance with GAAP consistently applied (except that
such interim statements need not contain footnotes and may be subject to year-
end adjustments).

          5.3. Annual Financial Statements. Furnish to Bank within ninety (90)
               ---------------------------
days after the close of each fiscal year audited consolidated annual financial
statements, including the information required under Paragraph 5.2 hereof, which
financial statements shall be prepared in accordance with GAAP and shall be
certified without qualification (except with respect to changes in GAAP as to
which Borrowers', or Zany.com's, if applicable, independent certified public
accountants have concurred) by any one of the "big five" accounting firms or an
independent certified public accounting firm reasonably satisfactory to Bank;
and cause Bank to be furnished, at the time of the completion of the annual
audit, with copies of any management letters prepared by such accountants and
with a certificate signed by such accountants to the effect that during the
course of such audit, such accountants have discovered no information which
would lead them to believe that Borrowers, either singly or in the aggregate,
are not in compliance with any covenant set forth herein.

          5.4. Compliance Certificate. At the time of delivery of quarterly and
               ----------------------
annual financial statements pursuant to Paragraph 5.2 and 5.3 hereof, deliver to
Bank a certificate in the form of Exhibit E attached hereto executed by the
chief financial officer or controller of Zany Brainy, showing the calculation of
the covenants set forth in Paragraph 5.14 through 5.16 hereof, and upon and
after the joinder of Zany.com pursuant to Paragraph 5.20 hereof, compliance with
the Zany.com Sublimit.

                                      -31-
<PAGE>

          5.5.  Borrowing Base Certificate. Within fifteen (15) days after the
                --------------------------
end of each month or upon request by Bank at any other time, furnish to Bank a
Borrowing Base Certificate in the form of Exhibit F attached hereto executed by
the chief financial officer or controller of Zany Brainy.

          5.6.  Additional Information. Deliver to Bank promptly upon
                ----------------------
transmission thereof copies of all financial statements, proxy statements,
notices and reports sent to shareholders of Borrowers and Zany.com, and copies
of any registration statements (without exhibits), filed with the Securities and
Exchange Commission (or any governmental body or agency succeeding to the
functions of the Securities and Exchange Commission), including without
limitation, Forms 10Q and Forms 10K, and copies of all auditors' annual
management letters delivered to Borrowers.

          5.7.  Books and Records. Keep and maintain adequate books and records
                -----------------
of account in accordance with GAAP and make or cause the same to be made
available to Bank or its agents or nominees at any reasonable time during normal
business hours upon reasonable notice for inspection and to make extracts
thereof and permit bank or its agents or nominees to discuss contents of same
with senior officers of Borrowers and also with outside auditors and accountants
of Borrowers.

          5.8.  Insurance. Keep and maintain all of their property and assets in
                ---------
good order and repair (and make such property available to Bank or its agents or
nominees at any reasonable time during normal business hours upon reasonable
notice for inspection) and keep such property and assets covered by insurance
with reputable and financially sound insurance companies against such hazards
and in such amounts as is customary in the industry, under policies requiring
the insurer to furnish reasonable notice to Bank and opportunity to cure any
non-payment of premiums prior to termination of coverage.

          5.9.  Litigation; Event of Default. Notify Bank in writing immediately
                ----------------------------
of: (i) the institution of any litigation, the commencement of any
administrative proceedings, the happening of any event or the assertion or
threat of any claim, to the extent that any of the foregoing could reasonably be
expected to have a Material Adverse Effect and (ii) the occurrence of any Event
of Default or Default hereunder.

          5.10. Taxes. Pay and discharge all taxes, assessments or other
                -----
governmental charges or levies imposed on it or any of its property or assets
prior to the date on which any material penalty for non-payment or late payment
is incurred, unless the same are currently being contested in good faith by
appropriate proceedings, diligently prosecuted and covered by appropriate
reserves maintained in accordance with GAAP.

          5.11. Costs and Expenses. Pay or reimburse Bank for all costs and
                ------------------
expenses (including but not limited to reasonable attorneys' fees and
disbursements) Bank may pay or incur in connection with the preparation and
review of this Agreement and all other documentation related thereto, and pay or
reimburse Bank for all costs, liabilities and expenses (including but not
limited to reasonable attorneys' fees and disbursements) associated with all
waivers, consents and amendments in connection therewith, and collection or
enforcement of the

                                      -32-
<PAGE>

Loan, including without limitation any fees and disbursements incurred in
defense of or to retain amounts of principal, interest or fees paid or in
connection with any audit or examination of the Borrowers. All obligations
provided for in this Paragraph 5.11 shall survive any termination of this
Agreement or the Commitment and the repayment of the Loan.

          5.12.  Compliance; Notification.
                 ------------------------

                 (a)   Comply in all material respects with all local, state and
federal laws and regulations applicable to its business (including the
Environmental Control Statutes), including without limitation all laws and
regulations of the Local Authorities, and with the provisions and requirements
of all franchises, permits, certificates of compliance, approval and need issued
by regulatory authorities and with other like grants of authority held by any
Borrower; and notify Bank immediately in detail of any actual or alleged failure
to comply with or perform, breach, violation or default under any such laws or
regulations or under the terms of any of such franchises, licenses or grants of
authority, or of the occurrence or existence of any facts or circumstances which
with the passage of time, the giving of notice or otherwise could create such a
breach, violation or default or could occasion the termination of any of such
franchises, licenses or grants of authority, to the extent that any of the
foregoing could reasonably be expected to have a Material Adverse Effect.

                 (b)   With respect to the Environmental Control Statutes,
promptly notify Bank when, in connection with the conduct of any Borrower's
business or operations, any person (including, without limitation, EPA or any
state or local agency) provides oral or written notification to any Borrower, or
any Borrower otherwise becomes aware, of a condition with regard to an actual or
imminently threatened Release of Hazardous Substances which could reasonably be
expected to have a Material Adverse Effect; and notify Bank in detail promptly
upon the receipt by a Borrower of an assertion of liability under the
Environmental Control Statutes, of any actual or alleged failure to comply with,
failure to perform, breach, violation or default under any such statutes or
regulations which could reasonably be expected to have a Material Adverse Effect
or of the occurrence or existence of any facts, events or circumstances which
with the passage of time, the giving of notice, or both, could create such a
failure to perform, breach, violation or default.

          5.13.  ERISA. (a) Comply in all material respects with the provisions
                 -----
of ERISA to the extent applicable to any Plan maintained for the employees of
any Borrower or any ERISA Affiliate; (b) do or cause to be done all such acts
and things that are required to maintain the qualified status of each Plan and
tax exempt status of each trust forming part of such Plan; (c) not incur any
material accumulated funding deficiency (within the meaning of ERISA and the
regulations promulgated thereunder), or any material liability to the PBGC (as
established by ERISA); (d) not permit any event to occur with respect to any
Plan sponsored by any Borrower or any ERISA Affiliate (i) as described in
Section 4042 of ERISA or (ii) which may result in the imposition of a lien on
its properties or assets; and (e) notify Bank in writing promptly after it has
come to the attention of senior management of any Borrower of the written
assertion or threat of any event described in Section 4042 of ERISA (relating to
the soundness of a Plan) (including any "reportable event" described in Section
4042(a)(3) of ERISA to the extent the notice requirement is not waived by the
PBGC) or the PBGC's ability to assert a material liability

                                      -33-
<PAGE>

against it or impose a lien on any Borrower's, or any ERISA Affiliate's
properties or assets; and (f) refrain from engaging in any prohibited
transactions or actions causing possible liability under Section 502 of ERISA.

          5.14. Fixed Charge Coverage Ratio. Maintain as of the last day of each
                ---------------------------
Rolling Period a Fixed Charge Coverage Ratio for Zany Brainy and its
consolidated Subsidiaries (other than Zany.com) of not less than the ratio set
forth below for the corresponding periods set forth below:

                 Period                               Minimum Ratio
                 ------                               -------------

      Date of Agreement through the
      third quarter of 1999                            1.10 to 1.0

      The fourth quarter of 1999
      through the third quarter of
      2000                                             1.25 to 1.0

      The fourth quarter of 2000 and
      the last day of each Rolling
      Period thereafter                                1.50 to 1.0

          5.15. Leverage Ratio. Maintain as of the last day of each fiscal
                --------------
quarter a Leverage Ratio for Zany Brainy and its consolidated Subsidiaries
(other than Zany.com) of not more than .40 to 1.0.

          5.16. Minimum Tangible Net Worth. Maintain as of the date of the
                --------------------------
initial Advance a Minimum Tangible Net Worth of Zany Brainy and its consolidated
Subsidiaries (other than Zany.com) of not less than Seventy Million Dollars
($70,000,000), and for each fiscal year of Borrowers' ending after January,
1999, maintain as of the last day of each fiscal year a Minimum Tangible Net
Worth of not less than the required Minimum Tangible Net Worth for such fiscal
year plus seventy-five percent (75%) of net income for Zany Brainy and its
consolidated Subsidiaries (other than Zany.com) for such fiscal year, without
deduction for losses.

          5.17. Borrowing Base. Maintain at all times the outstanding principal
                --------------
balance of the Loan plus, without duplication, the amount available to be drawn
under all outstanding Letters of Credit and the amount of any unreimbursed draws
for Letter of Credit, in an amount less than or equal to the Borrowing Base.

          5.18. Management Changes. Notify Bank in writing within ten (10)
                ------------------
Business Days after the death, disability, dismissal or voluntary resignation of
Zany Brainy senior executive officers.

          5.19. Transactions Among Affiliates. Cause all transactions between
                -----------------------------
and among it and its Affiliates, other than transactions among the Borrowers, to
be on an arms-length basis

                                      -34-
<PAGE>

and on such terms and conditions as are customary in the applicable industry
between and among unrelated entities.

          5.20. Joinders.
                --------

                 (a)   If any Subsidiary is formed or acquired, cause such
Subsidiary to become a Borrower hereunder by the execution of a joinder to this
Agreement and the Note, together with updates to the applicable disclosure
exhibits to reflect such Subsidiary (which disclosure shall be in form and
substance satisfactory to Bank) and deliver such other documents as Bank may
reasonably require in connection therewith, including without limitation
secretary's certificates, lien searches and opinions of counsel; and

                 (b)   not less than ten (10) Business Days prior to the request
for an Advance or issuance of a Letter of Credit by or for the benefit of
Zany.com, Zany.com shall become a Borrower hereunder by the execution of a
joinder to this Agreement and the Note, together with updates to the applicable
disclosure exhibits to reflect Zany.com matters (which disclosure shall be in
form and substance satisfactory to Bank) and shall deliver such other documents
as Bank may reasonably require in connection therewith, including without
limitation secretary's certificates, lien searches and opinions of counsel.

          5.21. Year 2000 Compliance. Take all action necessary to assure that
                --------------------
Borrowers' computer systems and applications, micro-processor based goods and
equipment owned or used by them in their business, and all products sold by them
will be Year 2000 Compliant in a timely manner; and use reasonable best efforts
to assure the Year 2000 Compliance of their material vendors and suppliers or to
assure that failures to be Year 2000 Compliant by such vendors and suppliers
will not have a Material Adverse Effect. Borrowers shall provide to Bank any
material updates or revisions to its plan for Year 2000 Compliance delivered
pursuant to Paragraph 3.19 and notice of any material increase in the estimated
costs to Borrowers of achieving Year 2000 Compliance in accordance with such
plan; and, at the request of Bank, Borrowers shall provide Bank assurances
acceptable to Bank regarding the Year 2000 Compliance and/or contingency plans
related thereto, of Borrowers and their material vendors and suppliers.

          5.22. Conduct of Business. Continue to conduct its business(es)
                -------------------
principally in retailing services.

          5.23. Zany.com Sublimit. Maintain at all times the outstanding
                -----------------
principal balance of Loans to Zany.com plus, without duplication, the amount
available to be drawn under all outstanding Letters of Credit for the benefit of
Zany.com and the amount of unreimbursed draws for Letters of Credit for the
benefit of Zany.com, in an amount less than or equal to the Zany.com Sublimit.

          5.24. Other Information. Provide Bank with any other documents and
                -----------------
information, financial or otherwise, reasonably requested by Bank from time to
time.

                                   SECTION 6

                                      -35-
<PAGE>

                              NEGATIVE COVENANTS
                              ------------------

          So long as any Commitment or any Indebtedness of Borrowers to Bank
remains outstanding hereunder, Borrowers covenant and agree that without Bank's
prior written consent, each Borrower will not, and will not permit any
Subsidiary to:

          6.1. Indebtedness. Borrow any monies or create any Indebtedness
               ------------
except: (i) borrowings from Bank hereunder; (ii) trade Indebtedness in the
normal and ordinary course of business for value received; (iii) Indebtedness
incurred to purchase or lease fixed or capital assets, provided, that the
aggregate original principal amount of such Indebtedness incurred in any fiscal
year shall not exceed in the aggregate Five Million Dollars ($5,000,000); (iv)
guaranties permitted pursuant to Paragraph 6.2 hereof; (v) Indebtedness due to
other Borrowers and Subsidiaries, provided however, that Indebtedness of
Zany.com to Zany Brainy, together with investments in Zany.com by Zany Brainy,
shall not exceed: (A) in any twelve (12) month period, Five Million Dollars
($5,000,000); and (B) in the aggregate, Ten Million Dollars ($10,000,000).

          6.2.  Guaranties. Guarantee or assume or agree to become liable in any
                ----------
way, either directly or indirectly, for any Indebtedness or liability of others,
whether or not contingent, except (i) to endorse checks or drafts in the
ordinary course of business and (ii) any Borrower may guaranty Indebtedness of
another Borrower which is permitted pursuant to Paragraph 6.1 hereof.

          6.3.  Loans. Make any loans or advances to others, other than: (i)
                -----
investments and advances permitted by Paragraph 6.8 hereof; (ii) loans or
advances to employees of Borrowers not to exceed in the aggregate $1,000,000;
(iii) loans by and among Borrowers and Subsidiaries, provided however, that
loans from Zany Brainy to Zany.com, together with investments in Zany.com by
Zany Brainy, shall not exceed: (A) in any twelve (12) month period, Five Million
Dollars ($5,000,000); and (B) in the aggregate, Ten Million Dollars.

          6.4.  Liens and Encumbrances. Create, permit or suffer the creation of
                ----------------------
any liens, security interests, or any other encumbrances on (including any
conditional sales arrangement with respect to) any of its property, real or
personal, except (i) liens arising in favor of sellers or lessors for
Indebtedness and obligations incurred to purchase or lease fixed or capital
assets permitted under Paragraph 6.1(iii) hereof, provided, however, that such
liens secure only the indebtedness and obligations created thereunder and are
limited to the assets purchased or leased pursuant thereto and the proceeds
thereof; (ii) mechanic's and workman's liens, liens for taxes, assessments or
other governmental charges, federal, state or local, which are then being
currently contested in good faith by appropriate proceedings and are covered by
appropriate reserves maintained in accordance with GAAP; (iii) pledges or
deposits to secure obligations under workmen's compensation, unemployment
insurance or social security laws or similar legislation; (iv) deposits to
secure performance or payment bonds, bids, tenders, contracts, leases,
franchises, or public and statutory obligations required in the ordinary course
of business; (v) deposits to secure surety, appeal or custom bonds required in
the ordinary course of business; (vi) deposits to secure Leases; (vii) sales on
lay-away or similar arrangements in the ordinary course of business; (viii)
liens existing on the date hereof and set forth on Exhibit C attached hereto;

                                      -36-
<PAGE>

(ix) notwithstanding anything to the contrary contained in any Loan Document,
each Borrower may enter into Leases which create security interests in or liens
on (A) such Borrower's interest in such Leases and (B) such Borrower's personal
property located within the underlying real property in favor of the landlord
and/or mortgagee of such underlying real property; (x) liens constituting
encumbrances in the nature of zoning restrictions, easements, rights of way and
rights of access and rights or restrictions of record on the use of real
property, which in the aggregate are not substantial in amount and which do not,
in any case, detract from the value of such property or impair these thereof in
the ordinary conduct of business and (xi) judgment or similar liens arising in
connection with court proceedings, provided that the execution or enforcement of
such liens is effectively stayed, the claims secured thereby are not in excess
of $1,000,000 and are being actively contested in good faith and by appropriate
proceedings and such reserve or appropriate provision, if any, as shall be
required by GAAP shall have been made therefor.

          6.5.  Additional Negative Pledge. Agree or covenant with or promise
                --------------------------
any person or entity other than Bank that it will not pledge its assets or
properties or otherwise grant any liens, security interests or encumbrances on
its property other than in favor of persons benefitting from a Lien permitted by
Section 6.4(i) and which negative pledge is limited to the assets subject to
such Lien.

          6.6.  Restricted Payments. Make any Restricted Payments.
                -------------------

          6.7.  Transfer of Assets; Liquidation.
                -------------------------------

                   (a)   Sell, lease, transfer or otherwise dispose of all or
substantially all of its assets, real or personal, other than: (i) to another
Borrower; (ii) in transactions in the normal and ordinary course of business for
value received; or (iii) a sale of assets no longer used or usable in the
business of such Borrower; or

                   (b)   Discontinue, liquidate, or change in any material
respect any substantial part of its operations or business(es).

          6.8.  Acquisitions and Investments. Purchase or otherwise
                ----------------------------
acquire (including without limitation by way of share exchange) any part or
amount of the capital stock, partnership interests, or assets of, or make any
investments in, any other firm or corporation, other than Permitted Investments;
or enter into any new business activities or ventures not reasonably related to
its present business; or merge or consolidate with or into any other firm or
corporation which is not a Borrower; or create any Subsidiary; provided, however
that in the absence of a Default or an Event of Default at such time and if such
transaction will not give rise to a Default or an Event of Default: (A)
Borrowers may create additional Subsidiaries, provided that (i) all of the
outstanding capital stock of such Subsidiary is owned by a Borrower or
wholly-owned Subsidiary, (ii) Borrowers provide to Bank, with a copy to its
counsel, not less than thirty (30) days prior written notice of the proposed
Subsidiary creation, indicating the purpose thereof and any supplemental
disclosure that will be required pursuant to the representations and warranties
set forth herein, (iii) Borrowers comply with the terms and conditions of
Paragraph 5.20 hereof, and (iv) taking into account any supplement or amendment
to Exhibit C hereto which is

                                      -37-
<PAGE>

acceptable to Bank, all of the representations and warranties set forth herein
are true and correct in all material respects prior to and following the
acquisition or creation of such Subsidiary; (B) Borrowers may make Permitted
Acquisitions; and (C) Zany Brainy may make investments in Zany.com which,
together will all loans and advances from Zany Brainy to Zany.com, shall not
exceed: (i) in any twelve month period, Five Million Dollars ($5,000,000), and
(ii) the aggregate, Ten Million Dollars ($10,000,000).

          6.9.  Payments to Affiliates. Pay any salaries, compensation,
                ----------------------
management fees, consulting fees, service fees, licensing fees, or other similar
payments to Affiliates of any Borrower (except other Borrowers) other than on
terms and conditions substantially as favorable to the Borrowers as would be
obtainable by it in a comparable arm's length transaction with a person other
than an Affiliate.

          6.10. Use of Proceeds. Except as permitted by Paragraph 6.6 hereof,
                ---------------
use any of the proceeds of the Loan, directly or indirectly, to purchase or
carry margin securities within the meaning of Regulation U of the Board of
Governors of the Federal Reserve System; or engage as its principal business in
the extension of credit for purchasing or carrying such securities.

          6.11. Maximum Capital Expenditures. Make Capital Expenditures in any
                ----------------------------
fiscal year in excess of Twenty-Five Million Dollars ($25,000,000). Amounts not
expended in any fiscal year may be expended in the following fiscal year.

                                   SECTION 7

                               RIGHT OF SET-OFF
                               ----------------

          7.1.  Funds of Borrowers in Possession of Bank. As security for the
                ----------------------------------------
payment of any and all of Borrowers' Indebtedness and obligations to Bank,
whether matured or unmatured, now existing or hereafter incurred or created
hereunder or otherwise, Borrowers hereby grant to Bank a security interest in
and lien upon all funds, balances or other property of any kind of the
Borrowers, or in which the Borrowers have an interest, limited to the interest
of the Borrowers therein, whether now or hereafter in the possession, custody or
control of Bank.

          7.2.  Right of Set-off. Bank is hereby authorized at any time and from
                ----------------
time to time, to set-off and apply any and all deposits (general or special,
time or demand, provisional or final) at any time held and other Indebtedness at
any time owing by Bank to or for the credit or the account of a Borrower against
any and all of the obligations of a Borrower now or hereafter existing under
this Agreement, the Note or any other Loan Document, irrespective of whether
Bank shall have made any demand under this Agreement, or the Note or such other
Loan Document and although such obligations may be unmatured and irrespective of
whether Bank is otherwise fully secured. Bank agrees promptly to notify the
applicable Borrower after any such set-off and application made by Bank;
provided, however, that the failure to give such notice shall not affect the
validity of such set-off and application. The rights of Bank under this Section
7 are in addition to other rights and remedies (including, without limitation,
other rights of set-off) which Bank may have.

                                      -38-
<PAGE>

                                   SECTION 8

                                    DEFAULT
                                    -------

          8.1.  Events of Default. Each of the following events shall be an
                -----------------
Event of Default hereunder:

                    (a)  If Borrowers shall fail to pay when due any installment
of principal or any interest, fees, costs, expenses or any other sum payable to
Bank hereunder and, in the case of interest or non-principal payments, such
failure shall remain unremedied for five (5) days after the date due; or

                    (b)  If any representation or warranty made herein or in any
other Loan Document or in connection herewith or therewith or in any statement,
certificate or other document furnished hereunder or thereunder is false or
misleading in any material respect when made; or

                    (c)  If any Borrower shall default (after expiration of any
applicable cure or grace periods) in the payment or performance of any
Indebtedness for borrowed money to another either singly or in the aggregate in
excess of Five Hundred Thousand Dollars ($500,000) whether now or hereafter
incurred, or shall default (after expiration of any applicable cure or grace
periods) in the payment or performance of any other Indebtedness or obligation
which is reasonably likely to result in an obligation in excess of Five Hundred
Thousand Dollars ($500,000); or

                    (d)  If there shall be a default in or failure to observe
the covenants set forth in Paragraphs 5.14 through 5.17 hereof or in Section 6
hereof; or

                    (e)  If any Borrower shall default in the performance of any
other agreement or covenant contained herein or in any other Loan Document
(other than as provided in subparagraphs (a), (b) or (d) above) or in any
document executed or delivered in connection herewith or therewith, and such
default shall continue uncured for thirty (30) days after notice thereof to
Borrowers given by Bank; or

                    (f)  If a Change of Control shall occur; or

                    (g)  If Zany Brainy ceases to own, directly or indirectly
100% of the outstanding capital stock of each Subsidiary other than Zany.com or

                    (h)  If custody or control of any substantial part of the
property of any Borrower or Subsidiary shall be assumed by any governmental
agency or any court of competent jurisdiction at the instance of any
governmental agency; if any license, franchise or agreement of a Borrower or
Subsidiary shall be suspended, revoked, not renewed or otherwise terminated, the
loss of which would reasonably be expected to have a Material Adverse Effect; or
if any governmental regulatory authority or judicial body shall make any other
final non-appealable determination the effect of which would have Material
Adverse Effect; or

                                      -39-
<PAGE>

                    (i)  If any Borrower or Subsidiary becomes insolvent,
bankrupt or generally fails to pay its debts as such debts become due; is
adjudicated insolvent or bankrupt; admits in writing its inability to pay its
debts; or shall suffer a custodian, receiver or trustee for it or substantially
all of its property to be appointed and if appointed without its consent, not be
discharged within sixty (60) days; makes a general assignment for the benefit of
creditors; or suffers proceedings under any law related to bankruptcy,
insolvency, liquidation or the reorganization, readjustment or the release of
debtors to be instituted against it and if contested by it not dismissed or
stayed within sixty (60) days; if proceedings under any law related to
bankruptcy, insolvency, liquidation, or the reorganization, readjustment or the
release of debtors is instituted or commenced by any Borrower or Subsidiary; if
any order for relief is entered relating to any of the foregoing proceedings; if
any Borrower or Subsidiary shall call a meeting of its creditors with a view to
arranging a composition or adjustment of its debts; or if any Borrower or
Subsidiary shall by any act or failure to act indicate its consent to, approval
of or acquiescence in any of the foregoing; or

                    (j)  any event or condition shall occur or exist with
respect to any activity or substance regulated under the Environmental Control
Statutes and as a result of such event or condition, Borrowers have incurred or
in the opinion of Borrowers are reasonably likely to incur liabilities that
exceed by Five Hundred Thousand Dollars ($500,000) or more the insurance
proceeds received or to be received in connection with such liability; or

                    (k)  if any judgment, writ, warrant or attachment or
execution or similar process which calls for payment or presents liability that
exceeds by Five Hundred Thousand Dollars ($500,000) or more the insurance
proceeds received or to be received in connection with such liability shall be
rendered, issued or levied against any Borrower or its respective property and
such process shall not be paid, waived, stayed, vacated, discharged, settled,
satisfied or fully bonded within sixty (60) days after its issuance or levy
unless such judgment is covered by insurance and the insurer has acknowledged
coverage in writing with respect thereto; or

                    (l)  the aggregate liability of one or more Plans has
increased after the date of this Agreement in an amount in excess of Five
Hundred Thousand Dollars ($500,000) due to any "reportable event" described in
Section 4043 of ERISA..

          8.2.  Remedies. Upon the happening of any Event of Default and at any
                --------
time thereafter, and by notice by Bank to Borrowers (except if an Event of
Default described in Paragraph 8.1(i) shall occur with respect to any Borrower,
in which case acceleration of the Loan and termination of the Commitment shall
occur automatically without notice), Bank may (i) terminate the Commitment, and
(ii) declare the entire unpaid balance, principal, interest, fees, and other
amounts of all Indebtedness of Borrowers to Bank, hereunder or otherwise, to be
immediately due and payable. Upon such declaration, Bank shall have the
immediate right to enforce or realize on any collateral security granted
therefor in any manner or order it deems expedient without regard to any
equitable principles of marshaling or otherwise. In addition to any rights
granted hereunder or in any of the Loan Documents delivered in connection
herewith, Bank shall have all the rights and remedies granted by any applicable
law, all of which shall be cumulative in nature.

                                      -40-
<PAGE>

                                   SECTION 9

                                 MISCELLANEOUS
                                 -------------

          9.1. Indemnification and Release Provisions.  Borrowers hereby agree
               --------------------------------------
to defend Bank and its directors, officers, agents, employees and counsel from,
and hold each of them harmless against, any and all losses, liabilities
(including without limitation settlement costs and amounts, transfer taxes,
documentary taxes, or assessments or charges made by any governmental
authority), claims, damages, interest judgments, costs, or expenses, including
without limitation reasonable fees and disbursements of counsel, incurred by any
of them arising out of claims by any third party relating to or in connection
with or by reason of this Agreement or any other Loan Document, the Commitment,
the issuance or negotiation of any Letters of Credit, or the making of the Loan,
other than those resulting primarily from any such party's own wilful misconduct
or gross negligence, including without limitation, any and all losses,
liabilities, claims, damages, interests, judgments, costs or expenses relating
to or arising under any Environmental Control Statute or the application of any
such Statute to any Borrower's properties or assets. Borrowers hereby release
Bank and its directors, officers, agents, employees and counsel from any and all
claims for loss, damages, costs or expenses caused or alleged to be caused by
any act or omission on the part of any of them other than those resulting
primarily from any such party's own wilful misconduct or gross negligence. All
obligations provided for in this Paragraph 9.1 shall survive any termination of
this Agreement or the Commitment and the repayment of the Loan.

          9.2. Participations and Assignments. Borrowers hereby acknowledge and
               ------------------------------
agree that Bank may at any time: (a) grant participations in all or any portion
the Commitment or the Loan or the Note or of its right, title and interest
therein or in or to this Agreement (collectively, "Participations") to any other
lending office or to any other bank, lending institution or other entity which
has the requisite sophistication to evaluate the merits and risks of investments
in Participations ("Participants"); provided, however, that: (i) all amounts
payable by Borrowers hereunder shall be determined as if Bank had not granted
such Participation; and (ii) any agreement pursuant to which Bank may grant a
Participation: (x) shall provide that Bank shall retain the sole right and
responsibility to enforce the obligations of Borrowers hereunder including,
without limitation, the right to approve any amendment, modification or waiver
of any provisions of this Agreement; (y) such participation agreement may
provide that Bank will not agree to any modification, amendment or waiver of
this Agreement without the consent of the Participant if such modification,
amendment or waiver would reduce the principal of or rate of interest on the
Loan or postpone the date fixed for any payment of principal of or interest on
the Loan; and (z) shall not relieve Bank from its obligations, which shall
remain absolute, to make Advances hereunder; and (b) assign all or any portion
of its rights under the Loan, including an assignment to a Federal Reserve Bank.
Borrowers may not assign or transfer their rights or obligations hereunder to
any other party, including by operation of law, without the express written
consent of Bank.

                                      -41-
<PAGE>

          9.3. Binding and Governing Law.  This Agreement and all documents
               -------------------------
executed hereunder shall be binding upon and shall inure to the benefit of the
parties hereto and their respective successors and assigns and, except as may be
required by mandatory provisions of applicable law, shall be governed as to
their validity, interpretation and effect by the laws of the Commonwealth of
Pennsylvania without reference to conflict of laws principles.

          9.4. Survival.  All agreements, representations, warranties and
               --------
covenants of Borrowers contained herein or in any documentation required
hereunder shall survive the execution of this Agreement and the making of the
Loan hereunder, and except for Paragraphs 5.11 and 9.1 which provide otherwise,
will continue in full force and effect as long as the Commitment or any Letter
of Credit remains in effect or any Indebtedness or other obligation of Borrowers
to Bank remains outstanding.

          9.5. No Waiver; Delay.  If Bank shall waive any power, right or remedy
               ----------------
arising hereunder or under any applicable law, such waiver shall not be deemed
to be a waiver upon the later occurrence or recurrence of any of said events
with respect to Bank.  No delay by Bank in the exercise of any power, right or
remedy shall, under any circumstances, constitute or be deemed to be a waiver,
express or implied, of the same and no course of dealing between the parties
hereto shall constitute a waiver of Bank's powers, rights or remedies.  The
remedies herein provided are cumulative and not exclusive of any remedies
provided by law.

          9.6. Modification; Waiver.  Except as otherwise provided in this
               --------------------
Agreement, no modification or amendment hereof, or waiver or consent hereunder,
shall be effective unless made in a writing signed by appropriate officers of
the parties hereto.

          9.7. Headings.  The various headings in this Agreement are inserted
               --------
for convenience only and shall not affect the meaning or interpretation of this
Agreement or any provision hereof.

          9.8. Notices.  Any notice, request or consent required hereunder or in
               -------
connection herewith shall be deemed satisfactorily given when received if in
writing and delivered by hand, mailed (registered or certified mail) or sent by
facsimile transmission (with confirmation of transmission) to Bank or to any
Borrower at the respective addresses or telecopier numbers set forth below, or
to any party at such other addresses or telecopier numbers as may be given by
any party to the others in writing:

          If to any Borrower:

          Zany Brainy, Inc.
          2520 Renaissance Boulevard
          King of Prussia, PA 19406
          Attention: Howard B. Cates, III
          Telecopier: 610-896-3684

          with a copy to:

                                      -42-
<PAGE>

          Zany Brainy Legal Department
          2520 Renaissance Boulevard
          King of Prussia, PA 19406
          Attention: Dan Kaufman, Esq.
          Telecopier: 610-896-3684

          and:

          Morgan, Lewis & Bockius, LLP
          1701 Market Street
          Philadelphia, PA 19103
          Attention: Michael J. Pedrick, Esq.
          Telecopier: 215-963-5299

          if to Bank:

          First Union National Bank
          One South Penn Square
          PA 4819
          Philadelphia, PA 19107-7618
          Attention: Irene Rosen Marks
          Telecopier: 215-973-7671

          with a copy to:

          Pepper Hamilton LLP
          3000 Two Logan Square
          18th & Arch Streets
          Philadelphia, PA 19103-2799
          Attention: Lisa D. Kabnick, Esq.
          Telecopier: 215-981-4750

Failure to provide a copy of any notice or other communication to counsel as
provided above shall not affect the validity or effect of such notice or other
communication.

          9.9.  Payment on Non-Business Days.  Whenever any payment to be made
                ----------------------------
hereunder shall be stated to be due on a day other than a Business Day, such
payment may be made on the next succeeding Business Day, provided however that
such extension of time shall be included in the computation of interest due in
conjunction with such payment or other fees due hereunder, as the case may be.

          9.10. Time of Day.  All time of day restrictions imposed herein shall
                -----------
be calculated using Bank's local time.

          9.11. Severability.  If any provision of this Agreement or the
                ------------
application thereof to any person or circumstance shall be invalid or
unenforceable to any extent, the remainder of

                                      -43-
<PAGE>

this Agreement and the application of such provisions to other persons or
circumstances shall not be affected thereby and shall be enforced to the
greatest extent permitted by law.

          9.12. Counterparts.  This Agreement may be executed in any number of
                ------------
counterparts with the same effect as if all the signatures on such counterparts
appeared on one document, and each such counterpart shall be deemed to be an
original.

          9.13. Arbitration.  Upon demand of any party hereto, whether made
                -----------
before or after institution of any judicial proceeding, any dispute, claim or
controversy arising out of, connected with or relating to this Agreement or any
other Loan Document ("Disputes") between or among parties to this Agreement
shall be resolved by binding arbitration as provided herein. Institution of a
judicial proceeding by a party does not waive the right of that party to demand
arbitration hereunder.  Disputes may include, without limitation, tort claims,
counterclaims, disputes as to whether a matter is subject to arbitration, claims
brought as class actions, claims arising from Loan Documents executed in the
future, or claims arising out of or connected with the transaction reflected by
this Agreement.

          Arbitration shall be conducted under and governed by the Commercial
Financial Disputes Arbitration Rules (the "Arbitration Rules") of the American
Arbitration Association (the "AAA") and Title 9 of the U.S. Code. All
arbitration hearings shall be conducted in the city in which the office of Bank
first stated above is located. The expedited procedures set forth in Rule 53,
et seq. of the Arbitration Rules shall be applicable to claims of less than
-- ---
$1,000,000. All applicable statutes of limitation shall apply to any Dispute.  A
judgment upon the award may be entered in any court having jurisdiction.  The
panel from which all arbitrators are selected shall be comprised of licensed
attorneys.  The single arbitrator selected for expedited procedure shall be a
retired judge from the highest court of general jurisdiction, state or federal,
of the state where the hearing will be conducted or if such person is not
available to serve, the single arbitrator may be a licensed attorney.

          9.14. Consent to Jurisdiction and Service of Process.  Each Borrower
                ----------------------------------------------
irrevocably appoints each officer of Zany Brainy as its attorney upon whom may
be served any notice, process or pleading in any action or proceeding against it
arising out of or in connection with this Agreement, the Note, any other Loan
Document or any Letter of Credit; each Borrower hereby consents that any action
or proceeding against it be commenced and maintained in any court within the
Commonwealth of Pennsylvania or in the United States District Court for the
Eastern District of Pennsylvania by service of process on any officer of Zany
Brainy; and each Borrower agrees that the courts of the Commonwealth of
Pennsylvania and the United States District Court for the Eastern District of
Pennsylvania shall have jurisdiction with respect to the subject matter hereof
and the person of each Borrower.

Notwithstanding the foregoing, Bank, in its absolute discretion, may also
initiate proceedings in the courts of any other jurisdiction in which any
Borrower may be found or in which any of its properties may be located.

          9.15. WAIVER OF JURY TRIAL.  EACH OF THE PARTIES HERETO HEREBY
                --------------------
KNOWINGLY, VOLUNTARILY, AND INTENTIONALLY WAIVES ANY

                                      -44-
<PAGE>

RIGHTS IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON
OR ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR THE NOTE, OR
ANY OTHER LOAN DOCUMENT OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS
(WHETHER ORAL OR WRITTEN) OR ACTIONS OF BANK. THIS PROVISION IS A MATERIAL
INDUCEMENT FOR BANK'S ENTERING INTO THIS AGREEMENT.

                                      -45-
<PAGE>

          9.16. ACKNOWLEDGMENTS.  EACH BORROWER ACKNOWLEDGES THAT IT HAS HAD THE
                ---------------
ASSISTANCE OF COUNSEL IN THE REVIEW AND EXECUTION OF THIS AGREEMENT AND,
SPECIFICALLY, PARAGRAPH 9.14 HEREOF, AND FURTHER ACKNOWLEDGES THAT THE MEANING
AND EFFECT OF THE FOREGOING WAIVER OF JURY TRIAL HAVE BEEN FULLY EXPLAINED TO
SUCH BORROWER BY SUCH COUNSEL.

          IN WITNESS WHEREOF, the undersigned, by their duly authorized
officers, as applicable, have executed this Agreement the day and year first
above written.

ATTEST:                                  ZANY BRAINY, INC.

By:  _______________________             By:  ___________________________
     Name:                                    Name:
     Title:                                   Title:

ATTEST:                                  CHILDREN'S PRODUCTS, INC.

By:  _______________________             By:  ___________________________
     Name:                                    Name:
     Title:                                   Title:

ATTEST:                                  CHILDREN'S DEVELOPMENT INC.

By:  _______________________             By:  ___________________________
     Name:                                    Name:
     Title:                                   Title:

ATTEST:                                  CHILDREN'S DISTRIBUTION, L.L.C.

By:  _______________________             By:  ___________________________
     Name:                                    Name:
     Title:                                   Title:

                                         FIRST UNION NATIONAL BANK

                                         By:  ___________________________
                                              Name:
                                              Title:

                                      -46-
<PAGE>

                      AMENDMENT NO. 1 TO CREDIT AGREEMENT

          THIS AMENDMENT NO. 1 TO CREDIT AGREEMENT (this "Amendment No. 1") is
made this 7th day of March, 2000 by and among ZANY BRAINY, INC., a Pennsylvania
corporation ("Zany Brainy"), the Subsidiaries of Zany Brainy signatory hereto
(individually and collectively, together with Zany Brainy, the "Borrowers") and
FIRST UNION NATIONAL BANK, a national banking association ("Bank").

                                  BACKGROUND
                                  ----------

          Borrowers and Bank entered into a Credit Agreement dated June 14, 1999
(as amended hereby and as may be further amended from time to time, the "Credit
Agreement"). Sections 6.1, 6.3 and 6.8 of the Credit Agreement prohibit Zany
Brainy from making loans to or investments in Zany.com in excess of Five Million
Dollars ($5,000,000) in any twelve month period or in excess of Ten Million
Dollars ($10,000,000) in the aggregate. In October of 1999, Zany Brainy invested
Five Million Dollars in Zany.com. Zany Brainy has informed Bank that it wishes
to invest up to an additional Seven Million Dollars ($7,000,000) to Zany.com
during the first quarter of 2000. In order to permit such additional investment,
Borrowers and Bank have agreed to make certain amendments to the Credit
Agreement as set forth herein and subject to the terms and conditions hereof.

          In consideration of the foregoing and the premises and the agreements
hereinafter set forth, and intending to be legally bound hereby, the parties
hereto agree as follows:

          1.   Definitions
               -----------

               a.   General Rule.  Unless otherwise defined herein, terms used
                    ------------
herein which are defined in the Credit Agreement shall have the meanings
assigned to them in the Credit Agreement.

               b.   Additional Definitions.  The following definitions are
                    ----------------------
hereby added to Section 1 of the Credit Agreement to read in their entirety as
follows:

               "Amendment No. 1" means the Amendment No. 1 to and Consent under
                ---------------
          Credit Agreement by and among Borrowers and Bank dated March 7, 2000.

               "Amendment No. 1 Effective Date" means the date on which the
                ------------------------------
          conditions set forth in Paragraph 5 of Amendment No. 1 have been
          satisfied.
<PAGE>

          2.   Amendment to Sections 6.1 (Indebtedness) and 6.3 (Loans) of the
               ---------------------------------------------------------------
Credit Agreement.  Sections 6.1 and 6.3 of the Credit Agreement are each amended
----------------
so as to strike the words in the proviso of each section reading: ":(A) in any
twelve (12) month period, Five Million Dollars ($5,000,000); and (B) in the
aggregate, Ten Million Dollars ($10,000,000)"and to replace such words with: ",
in the aggregate, Twelve Million Dollars ($12,000,000)."

          3.   Amendment to Section 6.8(C) (Acquisitions and Investments) of the
               -----------------------------------------------------------------
Credit Agreement.  Sections 6.8(C) of the Credit Agreement is amended so as to
----------------
strike the words reading: ":(i) in any twelve (12) month period, Five Million
Dollars ($5,000,000), and (ii) the aggregate, Ten Million Dollars ($10,000,000)"
and replace such words with: ", in the aggregate, Twelve Million Dollars
($12,000,000)."

          4.   Representations and Warranties.  Borrowers hereby represent and
               ------------------------------
warrant to Bank as follows:

               a.   Representations.  The representations and warranties set
                    ---------------
forth in Section 3 of the Credit Agreement are true and correct in all material
respects as of the date hereof; there is no Event of Default or Default under
the Credit Agreement, as amended hereby; and there has been no material adverse
change in the financial condition or business of any Borrower from the date on
which Borrower last delivered financial statements to Bank.

               b.   Power and Authority.  Each Borrower has the power and
                    -------------------
authority under the laws of its state of incorporation and under its articles or
certificate of incorporation and bylaws or other formation documents to enter
into and perform this Amendment No. 1 and the other documents and agreements
required hereunder (collectively, the "Amendment Documents"); all actions
(corporate or otherwise) necessary or appropriate for the execution and
performance by each Borrower of the Amendment Documents have been taken; and the
Amendment Documents and the Credit Agreement, as amended, each constitute the
valid and binding obligations of each Borrower, enforceable in accordance with
their respective terms.

               c.   No Violations of Law or Agreements.  The making and
                    ----------------------------------
performance of the Amendment Documents by each Borrower will not (i) violate any
provisions of any law or regulation, federal, state or local, or the articles or
certificate of incorporation or bylaws or other formation documents of any
Borrower or (ii) result in any breach or violation of, or constitute a default
or require the obtaining of any consent under, any agreement or instrument by
which any Borrower or its property may be bound.

          5.   Conditions to Effectiveness of Amendment. This Amendment No. 1
               ----------------------------------------
shall be effective upon Bank's receipt of the following documents, each in form
and substance satisfactory to Bank:

               a.   Amendment No. 1.  This Amendment No. 1 duly executed by
                    ---------------
Borrowers and Bank.
<PAGE>

               b.   Other Documents.  Such additional documents as Bank may
                    ---------------
reasonably request.

          6.   Affirmations.  Each Borrower hereby: (i) affirms all the
               ------------
provisions of the Credit Agreement, as amended by this Amendment No. 1, and (ii)
agrees that the terms and conditions of the Credit Agreement, as amended by this
Amendment No. 1, shall continue in full force and effect as supplemented and
amended hereby.

          7.   Miscellaneous.
               -------------

               a.   Each Borrower agrees to pay or reimburse Bank for all
reasonable fees and expenses (including without limitation reasonable fees and
expenses of counsel) incurred by Bank in connection with the preparation,
execution and delivery of this Amendment No. 1.

               b.   This Amendment No. 1 shall be governed by and construed in
accordance with the laws of the Commonwealth of Pennsylvania, without regard to
conflicts of law or choice of law principles.

               c.   All terms and provisions of this Amendment No. 1 shall be
for the benefit of and be binding upon and enforceable by the respective
successors and assigns of the parties hereto.

               d.   This Amendment No. 1 may be executed in any number of
counterparts with the same effect as if all the signatures on such counterparts
appeared on one document and each such counterpart shall be deemed an original.

               e.   Except as expressly set forth herein, neither the execution,
delivery or performance of this Amendment No. 1, any consent or waiver set forth
herein, nor anything
<PAGE>

contained herein shall be construed as or shall operate as a consent to or
waiver of any provision of, or any right, power or remedy of Bank under the
Credit Agreement and the agreements and documents executed in connection
therewith.

          IN WITNESS WHEREOF, the undersigned have executed this Amendment No. 1
the day and year first above written.

                                         BORROWERS:

ATTEST:                                  ZANY BRAINY, INC.

By:  _______________________             By:  ________________________
     Name:                                    Name:
     Title:                                   Title:

ATTEST:                                  CHILDREN'S PRODUCTS, INC.

By:  _______________________             By:  ________________________
     Name:                                    Name:
     Title:                                   Title:

ATTEST:                                  CHILDREN'S DEVELOPMENT INC.

By:  _______________________             By:  ________________________
     Name:                                    Name:
     Title:                                   Title:

                             [EXECUTIONS CONTINUED]
<PAGE>

ATTEST:                                  CHILDREN'S DISTRIBUTION, L.L.C.

By:  _________________________           By:  _______________________
     Name:                                    Name:
     Title:                                   Title:

                                         BANK:

                                         FIRST UNION NATIONAL BANK

                                         By:  ___________________________
                                              Name:
                                              Title:<PAGE>

                                                                    EXHIBIT 10.8
================================================================================

                             AMENDED AND RESTATED

                           LIMITED LIABILITY COMPANY

                                   AGREEMENT

                                      OF

                                ZB HOLDINGS LLC

                     a Delaware Limited Liability Company

                          Dated as of March 20, 2000

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

                      LIMITED LIABILITY COMPANY AGREEMENT

                                      OF

                                ZB HOLDINGS LLC

          THIS LIMITED LIABILITY COMPANY AGREEMENT OF ZB HOLDINGS LLC (the
"Agreement") is made and entered into as of the 20/th/ day of March, 2000 (the
 ---------
"Effective Date"), by and between Online Retail Partners Inc., a Delaware
 --------------
corporation f/k/a Online Retail Partners LLC, a Delaware limited liability
company ("ONRP"), Zany Brainy, Inc., a Pennsylvania corporation ("Retail
          ----                                                    ------
Sponsor"), (Retail Sponsor together with ONRP, the "Members", with each being
-------                                             -------
referred to, individually, as a "Member"), for the purpose of setting forth the
                                 ------
rights and obligations of the Members of ZB Holdings LLC (the "Company"), a
                                                               -------
limited liability company formed under the Delaware Limited Liability Company
Act, 6 Del. C. (S) 18-101 et seq., as amended from time to time, (the "Act").
                                                                       ---

                                   RECITALS
                                   --------

          WHEREAS, Zany Brainy.com, a Delaware limited liability company
("ZB.com") was formed by Zany Brainy on September 7, 1999; and
  ------

          WHEREAS, Zany Brainy, ONRP, ONRP Services LLC, a Delaware limited
liability company and a wholly-owned Subsidiary of ONRP ("ONRPS"), the Company,
                                                          -----
and ZB.com entered into a series of Operating Agreements, and ONRP, Zany Brainy
and the Company entered into the ZB Holdings Limited Liability Company Agreement
(the "Original Holdings Operating Agreement") to form a joint venture for the
      -------------------------------------
purpose of operating an e-commerce site on the World Wide Web, all effective as
of October 20, 1999. The establishment of the joint venture shall be referred to
herein as the "Transaction"; and

          WHEREAS, as part of the Transaction, all interests in ZB.com were
transferred to the Company, pursuant to a Contribution and Interest Purchase
Agreement dated as of October 20, 1999 ("Original Contribution Agreement"); and
                                         -------------------------------

          WHEREAS, pursuant to the Original Contribution Agreement, the Company
also (i) received $5 million in cash from each of Zany Brainy and ONRP
(collectively, the "Funds"), (ii) received certain assets (the "Assets") of Zany
                    -----                                       ------
Brainy as set forth in Section 1 of Schedule 1.1(b) thereto, and (iii) assumed
certain rights (the "Rights") and liabilities (the "Liabilities") from Zany
                     ------                         -----------
Brainy as set forth in Schedule 1.1(d) thereto; and

          WHEREAS, the Company, entered into an Interim Limited Liability
Operating Agreement dated as of November 11, 1999 ("Interim Agreement") which
                                                    -----------------
set forth the preliminary rights, obligations and duties of members of ZB.com;
and

          WHEREAS, pursuant to the Interim Agreement, the Company also assigned
and transferred to the ZB.com, and ZB.com accepted, all of the Funds, Assets
(including all
<PAGE>

intellectual property rights appurtenant thereto), Rights and Liabilities
received by the Company under the Original Contribution Agreement; and

          WHEREAS, ONRP contributed an additional $10 million to the Company in
exchange for additional Interests in the Company on November 15, 1999 as part of
the Follow-On Subscription (as defined in the Original Holdings Operating
Agreement) which funds were contributed to ZB.com; and

          WHEREAS, the Members declared a ten-for-one split of the Membership
Interests in the Company on March 17, 2000; and

          WHEREAS, the Members desire to Amended and Restate the Original
Operating Agreement as set forth herein.

          NOW, THEREFORE, in consideration of the agreements and obligations set
forth herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Members hereby agree as
follows:

                                   ARTICLE 1
                                   ---------
                            ORGANIZATIONAL MATTERS
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1.1  Formation. The Company was formed under the Act for the purposes and upon
the terms and conditions hereinafter set forth. The rights and liabilities of
the Members of the Company shall be as provided in the Act, except as otherwise
expressly provided herein. In the event of any inconsistency between any terms
and conditions contained in this Agreement and any non-mandatory provisions of
the Act, the terms and conditions contained in this Agreement shall govern.

1.2  Name. The name of the Company formed hereby shall be ZB Holdings LLC. The
Company may also conduct business at the same time under one or more fictitious
names if the Board determines that such is in the best interests of the Company.
The Board may change the name of the Company, from time to time, in accordance
with applicable law.

1.3  Principal Place of Business; Other Places of Business. The principal place
of business of the Company will initially be located at 47 East 11/th/ Street,
10/th/ Floor, New York, New York 10003, or such other place within or outside
the State of Delaware as the Board may from time to time designate. The Company
may maintain offices and places of business at such other place or places within
or outside the State of Delaware as the Board deems advisable.

1.4  Business Purpose. The Company is formed for the object and purpose of, and
the nature of the business to be conducted and promoted by the Company is,
engaging in any lawful business, purpose or activity for which limited liability
companies may be formed under the Act and engaging in any and all activities
necessary, convenient, desirable or incidental to the foregoing, including,
without limitation, developing and operating an Internet commerce website (the
"Site") offering its customers comprehensive content, leading product assortment
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in its category and related value-added online services. It is the objective of
the Members that the Site be ready for initial testing by October 15, 1999 and
become fully operational by November 1, 1999.

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1.5  Certificate of Formation; Filings. A Certificate of Formation of the
Company (the "Certificate") was executed and filed in the office of the Delaware
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Secretary of State as required by the Act on October 4, 1999. Amendments to the
Certificate may be executed and filed from time to time in a form prescribed by
the Act as authorized by the Board, provided that if any such amendments alter
the rights and obligations of the parties herein, the approval of a Majority in
Interest will be required. The Board shall also cause to be made, on behalf of
the Company, such additional filings and recordings as the Board shall deem
necessary or advisable.

1.6  Fictitious Business Name Statements. Following the execution of this
Agreement, fictitious business name statements shall be filed and published when
and if the Board determines it necessary. Any such statement shall be renewed as
required by applicable law, unless the Board determines otherwise.

1.7  Designated Agent for Service of Process. The Company shall continuously
maintain a registered office and a designated and duly qualified agent for
service of process on the Company in the State of Delaware.

1.8  Term. The term of the Company commenced on the date that the Certificate
was filed with the Office of the Delaware Secretary of State, and shall continue
until the Company is dissolved pursuant to this Agreement. The existence of the
Company as a separate legal entity shall continue until cancellation of the
Certificate in the manner required by the Act.

1.9  Title to Company Property. All property owned by the Company, whether real
or personal, tangible or intangible, shall be deemed to be owned by the Company,
and no Member individually shall have any interest in such property. Title to
all such property may be held in the name of the Company or a designee, which
designee may be a Member or its Affiliate.

1.10 Membership Interests Uncertificated. The interests of the Members of the
Company shall not be certificated.

                                   ARTICLE 2
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                                  DEFINITIONS
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          Capitalized words and phrases used and not otherwise defined elsewhere
in this Agreement shall have the following meanings:

2.1  "Act" is defined in the Preamble.

2.2  "Additional Members" means those Persons admitted to the Company as Members
of the Company pursuant to Paragraph 3.4 of the Agreement.

2.3  "Additional ROFR Membership Interests" is defined in Paragraph 7.2.2 of
this Agreement.

2.4  "Adjusted Capital Account Deficit" means, with respect to any Member, the
deficit balance, if any, in such Member's Capital Account as of the end of the
relevant fiscal year, after giving effect to the following adjustments:

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     2.4.1  Add to such Capital Account the following items:

            (a)  The amount, if any, that such Member is obligated to contribute
to the Company upon liquidation of such Member's Membership Interest, pursuant
to the terms of this Agreement; and

            (b)  The amount that such Member is obligated to restore or is
deemed to be obligated to restore pursuant to Regulations Section 1.704-
1(b)(2)(ii)(c) or the penultimate sentence of each of Regulations Sections
1.704-2(g)(1) and 1.704-2(i)(5); and

     2.4.2  Subtract from such Capital Account such Member's share of the items
described in Regulations Sections 1.704-1(b)(2)(ii)(d)(4), (5) and (6).

The foregoing definition of Adjusted Capital Account Deficit is intended to
comply with the provisions of Regulations Section 1.704-1(b)(2)(ii)(d) and shall
be interpreted consistently therewith.

2.5  "Affected Membership Interests" is defined in Paragraph 7.2.1 of this
Agreement.

2.6  "Affiliate" means, with reference to a specified Person: (a) a Person that,
directly or indirectly, through one or more intermediaries, controls, is
controlled by, or is under common control with, the specified Person, (b) any
Person that is a director, executive officer, general partner, manager or
trustee of, or serves in a similar capacity with respect to, the specified
Person, or for which the specified Person is a director, executive officer,
general partner, manager or trustee, or serves in a similar capacity, or (c) any
member of the Immediate Family of the specified Person. For the purposes of this
definition, "control" (including, with correlative meanings, the terms
"controlled by" and "under common control with") as used with respect to any
Person, shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management or policies of such Person,
whether through the ownership of voting securities, by agreement or otherwise;
provided, however, that a Person which owns less than twenty percent (20%) of
the outstanding equity interests of a specified Person shall not be deemed to be
an Affiliate of the specified Person solely by reason of such equity ownership.

2.7  "Agreement" is defined in the Preamble.

2.8  "Assignee" means any Person (a) to whom a Member (or assignee thereof)
Transfers all or any part of its interest in the Company, and (b) which has not
been admitted to the Company as a Substitute Member pursuant to Paragraph 7.7 of
this Agreement.

2.9  "Board" shall mean the board of managers of the Company. The Board shall be
composed of seven members, including (a) the Chief Executive Officer of the
Company, (b) three individuals designated by ONRP and (c) three individuals
designated by Retail Sponsor. To the extent that ZB.com or any other Subsidiary
of the Company has a board of managers, such Subsidiary's board of managers
shall be composed of the same individuals as the Board. Each member of the Board
(i) shall be a natural person who need not be resident of the State of Delaware
and (ii) is hereby designated as a "manager" of the Company within the meaning
of the Act.

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2.10 "Capital Account" means the Capital Account maintained for each Member on
the Company's books and records in accordance with the following provisions:

     2.10.1  To each Member's Capital Account there shall be added (a) such
Member's Capital Contributions, (b) such Member's allocable share of Net Profits
and any items in the nature of income or gain that are specially allocated to
such Member pursuant to Article 5 hereof or other provisions of this Agreement,
and (c) the amount of any Company liabilities assumed by such Member or which
are secured by any Company Assets distributed to such Member.

     2.10.2  From each Member's Capital Account there shall be subtracted (a)
the amount of (i) cash and (ii) the Gross Asset Value of any Company Assets
(other than cash) distributed to such Member (other than any payment of
principal and/or interest to such Member pursuant to the terms of a loan made by
the Member to the Company) pursuant to any provision of this Agreement, (b) such
Member's allocable share of Net Losses and any other items in the nature of
expenses or losses that are specially allocated to such Member pursuant to
Article 5 or other provisions of this Agreement, and (c) liabilities of such
Member assumed by the Company or which are secured by any property contributed
by such Member to the Company.

     2.10.3  In the event any interest in the Company is transferred in
accordance with the terms of this Agreement, the transferee shall succeed to the
Capital Account of the transferor to the extent it relates to the transferred
interest.

     2.10.4  In determining the amount of any liability for purposes of
Paragraphs 2.10.1 and 2.10.2 hereof, there shall be taken into account Code
Section 752(c) and any other applicable provisions of the Code and Regulations.

     2.10.5  The foregoing provisions and the other provisions of this Agreement
relating to the maintenance of Capital Accounts are intended to comply with
Regulations Sections 1.704-1(b) and 1.704-2 and shall be interpreted and applied
in a manner consistent with such Regulations. In the event that the Board shall,
upon the advice of counsel, determine that it is necessary to modify the manner
in which the Capital Accounts, or any additions or subtractions thereto, are
computed in order to comply with such Regulations, the Board may make such
modification, provided that it will not have a material effect on the amounts
distributable to any Member pursuant to Article 9 hereof upon the dissolution of
the Company. The Board shall also, upon the advice of counsel, make (a) any
adjustments that are necessary in cases as to which guidance under Regulations
Section 1.704-1(b)(2)(iv) is lacking to maintain equality between the Capital
Accounts of the Members and the amount of Company capital reflected on the
Company's balance sheet, as computed for book purposes, in accordance with
Regulations Section 1.704-1(b)(2)(iv)(q), and (b) any appropriate modifications
in the event that unanticipated events might otherwise cause this Agreement not
to comply with Regulations Sections 1.704-1(b) and 1.704-2.

2.11 "Capital Contribution Agreement" means the Contribution and Interest
Purchase Agreement, dated as of October 15, 1999, by and among the Retail
Sponsor, ONRP and the Company.

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2.12 "Capital Contributions" means, with respect to any Member, the total amount
of cash and the initial Gross Asset Value of property (other than cash)
contributed to the capital of the Company by such Member, whether as an initial
Capital Contribution or as an additional Capital Contribution.

2.13 "Cash Available for Distribution" means, with respect to any fiscal year,
all Company cash receipts (excluding the proceeds from any Terminating Capital
Transaction), after deducting payments for Operating Cash Expenses, payments
required to be made in connection with any loan to the Company or any other loan
secured by a lien on any Company Assets, capital expenditures and any other
amounts set aside for the restoration, increase or creation of reasonable
Reserves.

2.14 "Certificate" means the Certificate of Formation of the Company filed under
the Act in the Office of the Delaware Secretary of State for the purpose of
forming the Company as a Delaware limited liability company, and any duly
authorized, executed and filed amendments or restatements thereof.

2.16 "Code" means the Internal Revenue Code of 1986, as amended from time to
time (or any corresponding provisions of succeeding law).

2.17 "Common Interest" means the Voting Common Interests and the Non-Voting
Common Interests.

2.18 "Company" is defined in the Preamble.

2.19 "Company Minimum Gain" has the meaning set forth in Regulations Sections
1.704-2(b)(2) and 1.704-2(d)(1) for the phrase "partnership minimum gain."

2.20 "Company Assets" means all direct and indirect interests in real and
personal property owned by the Company from time to time, and shall include both
tangible and intangible property (including cash).

2.21 "Confidential Information" means all non-public information, including,
without limitation, data, customer lists or other customer-specific or marketing
information, customer buying patterns, algorithms, know-how, ideas and all
business, technical, pricing, cost and financial information, provided to the
other party and any other information marked or disclosed as being confidential
information that is obtained by the other party. Without limitation of the
foregoing, this Agreement and the Operating Agreements shall be deemed to be
Confidential Information.

2.22 "Conversion Corporation" is defined in Paragraph 8.3.2.

2.23 "Converting Subsidiary" is defined in Paragraph 8.3.1.

2.24 "Corporate Conversion" is defined in Paragraph 8.3.2.

2.25 "Cutoff Date" is defined in Paragraph 7.2.3.

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2.26 "Depreciation" means, for each fiscal year or other period, an amount equal
to the federal income tax depreciation, amortization or other cost recovery
deduction allowable with respect to an asset for such year or other period,
except that if the Gross Asset Value of an asset differs from its adjusted basis
for federal income tax purposes at the beginning of such year or other period,
Depreciation shall be an amount that bears the same ratio to such beginning
Gross Asset Value as the federal income tax depreciation, amortization or other
cost recovery deduction for such year or other period bears to such beginning
adjusted tax basis; provided, however, that (a) if the federal income tax
depreciation, amortization or other cost recovery deduction for such year or
other period is zero, Depreciation shall be determined with reference to such
beginning Gross Asset Value using any reasonable method selected by the Board
and (b) for any asset with respect to which the Company uses the "remedial
allocation method" under Regulations Section 1.704-3(d), Depreciation shall be
determined in accordance with Regulations Section 1.704-3(d)(2).

2.27 "Director" means a manager of the Company who is a member of the Board.

2.28 "Economic Interest" means a Person's right to share in the Net Profits, Net
Losses, or similar items of, and to receive distributions from, the Company, but
does not include any other rights of a Member including, without limitation, the
right to vote or to participate in the management of the Company, or, except as
specifically provided in this Agreement or required under the Act, any right to
information concerning the business and affairs of the Company.

2.29 "Effective Date" is defined in the Preamble.

2.30 "Gross Asset Value" means, with respect to any asset, the asset's adjusted
basis for federal income tax purposes, except as follows:

     2.30.1 The initial Gross Asset Value of any asset contributed by a Member
to the Company shall be the gross fair market value of such asset set forth in
Exhibit A.

     2.30.2 The Gross Asset Values of all Company Assets immediately prior to
the occurrence of any event described in subparagraph (a), subparagraph (b),
subparagraph (c) or subparagraph (d) hereof shall be adjusted to equal their
respective gross fair market values, as determined by the Board using such
reasonable method of valuation as it may adopt, as of the following times:

            (a)  the acquisition of an additional interest in the Company (other
than in connection with the execution of this Agreement) by a new or existing
Member in exchange for more than a de minimis Capital Contribution, if the Board
reasonably determines that such adjustment is necessary or appropriate to
reflect the relative Economic Interests of the Members in the Company;

            (b)  the distribution by the Company to a Member of more than a de
minimis amount of Company Assets as consideration for an interest in the
Company, if the Board reasonably determines that such adjustment is necessary or
appropriate to reflect the relative Economic Interests of the Members in the
Company;

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               (c)  the liquidation of the Company within the meaning of
Regulations Section 1.704-1(b)(2)(ii)(g); and

               (d)  at such other times as the Board shall reasonably determine
necessary or advisable in order to comply with Regulations Sections 1.704-1(b)
and 1.704-2.

       2.30.3  The Gross Asset Value of any Company Asset distributed to a
Member shall be the gross fair market value of such asset on the date of
distribution as determined by the Board.

       2.30.4  The Gross Asset Values of Company Assets shall be increased (or
decreased) to reflect any adjustments to the adjusted basis of such assets
pursuant to Code Section 734(b) or Code Section 743(b), but only to the extent
that such adjustments are taken into account in determining Capital Accounts
pursuant to Regulations Section 1.704-1(b)(2)(iv)(m); provided, however, that
Gross Asset Values shall not be adjusted pursuant to this Paragraph 2.30.4 to
the extent that the Board reasonably determines that an adjustment pursuant to
Paragraph 2.30.2 above is necessary or appropriate in connection with a
transaction that would otherwise result in an adjustment pursuant to this
Paragraph 2.30.4.

       2.30.5  If the Gross Asset Value of a Company Asset has been determined
or adjusted pursuant to Paragraph 2.30.1, Paragraph 2.30.2 or Paragraph 2.30.4
hereof, such Gross Asset Value shall thereafter be adjusted by the Depreciation
taken into account with respect to such Company Asset for purposes of computing
Net Profits and Net Losses.

2.31   "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended.

2.32   "Immediate Family" means, and is limited to, an individual Member's
current spouse, parents, parents-in-law, grandparents, children, siblings, and
grandchildren, or a trust or estate all of the beneficiaries of which consist
of, or an entity controlled by, such Member or any of the foregoing individuals.

2.33   "Incapacity" means the entry of an order of incompetence or of insanity,
or the death, dissolution, bankruptcy (as defined in the Act) or termination
(other than by merger or consolidation) of any Person.

2.34   "Indemnitee" is defined in Paragraph 6.6.1.

2.35   "Initial Assets" is defined in Paragraph 3.1.

2.36   "IPO" means any underwritten public offering of equity securities.

2.37   "Issuer" is defined in Paragraph 8.4.1.

2.38   "Issuer Securities" is defined in Paragraph 8.4.1.

2.39   "Liquidator" is defined in Paragraph 9.5.1.

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2.40   "Majority in Interest" means Members holding a majority of the aggregate
of the Voting Common Interests and Voting Preferred Interests held by all
Members of the Company.

2.41   "Maximum Allowed Exchange" is defined in Paragraph 8.4.3.

2.42   "Member" means each of ONRP and Retail Sponsor and includes any Person
admitted as an Additional Member or a Substitute Member pursuant to the
provisions of this Agreement, in such Person's capacity as a member of the
Company, and "Members" means two (2) or more of such Persons when acting in
their capacity as members of the Company. For purposes of the Act, the Members
shall constitute one (1) class or group of members.

2.43   "Member Minimum Gain" means an amount, with respect to each Member
Nonrecourse Debt, equal to the Company Minimum Gain that would result if such
Member Nonrecourse Debt were treated as a Nonrecourse Liability, determined in
accordance with Regulations Section 1.704-2(i) with respect to "partner
non-recourse debt minimum gain."

2.44   "Member Nonrecourse Debt" has the meaning set forth in Regulations
Section 1.704-2(b)(4) for the phrase "partner nonrecourse debt."

2.45   "Member Nonrecourse Deductions" has the meaning set forth in Regulations
Section 1.704-2(i) for the phrase "partner nonrecourse deductions."

2.46   "Membership Interest" means the Common Interests and the Preferred
Interests and refers to the interest of a Member in the Company at any
particular time, including, without limitation, the Member's Economic Interest,
any and all rights to participate in the Company's affairs and the rights to any
and all benefits to which a Member may be entitled as provided in this
Agreement, together with the obligations of such Member to comply with all of
the terms and provisions of this Agreement. The initial Membership Interests of
the Members are set forth in Exhibit A.

2.47   "Membership Interest Transfer" means any Transfer of Membership
Interests, other than a Permitted Transfer.

2.48   "Net Profits" or "Net Losses" means, for each fiscal year or other
period, an amount equal to the Company's taxable income or loss for such year or
period determined in accordance with Code Section 703(a) (for this purpose, all
items of income, gain, loss or deduction required to be stated separately
pursuant to Code Section 703(a)(1) shall be included in taxable income or loss),
with the following adjustments:

       2.48.1  Any income of the Company that is exempt from federal income tax
and not otherwise taken into account in computing Net Profits or Net Losses
pursuant to this Paragraph 2.46 shall be added to such taxable income or loss;

       2.48.2  Any expenditure of the Company described in Code Section
705(a)(2)(B) or treated as a Code Section 705(a)(2)(B) expenditure pursuant to
Regulations Section 1.704-1(b)(2)(iv)(i), and not otherwise taken into account
in computing Net Profits or Net Losses pursuant to this Paragraph 2.48, shall be
subtracted from such taxable income or loss;

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       2.48.3  Gain or loss resulting from any disposition of Company Assets
where such gain or loss is recognized for federal income tax purposes shall be
computed by reference to the Gross Asset Value of the Company Assets disposed
of, notwithstanding that the adjusted tax basis of such Company Assets differs
from its Gross Asset Value;

       2.48.4  In lieu of the depreciation, amortization and other cost recovery
deductions taken into account in computing such taxable income or loss, there
shall be taken into account Depreciation for such fiscal year or other periods;

       2.48.5  To the extent an adjustment to the adjusted tax basis of any
asset included in Company Assets pursuant to Code Section 734(b) or Code Section
743(b) is required pursuant to Regulations Section 1.704-1(b)(2)(iv)(m)(4) to be
taken into account in determining Capital Accounts as a result of a distribution
other than in liquidation of a Member's Membership Interest, the amount of such
adjustment shall be treated as an item of gain (if the adjustment increases the
basis of the asset) or loss (if the adjustment decreases the basis of the asset)
from the disposition of the asset and shall be taken into account for the
purposes of computing Net Profits and Net Losses;

       2.48.6  If the Gross Asset Value of any Company Asset is adjusted in
accordance with Paragraph 2.30.2 or Paragraph 2.30.3 of this Agreement, the
amount of such adjustment shall be taken into account in the taxable year of
such adjustment as gain or loss from the disposition of such asset for purposes
of computing Net Profits or Net Losses; and

       2.48.7  Notwithstanding any other provision of this Paragraph 2.48, any
items that are specially allocated pursuant to Paragraph 5.2 or Paragraph 5.3.2
hereof shall not be taken into account in computing Net Profits or Net Losses.

2.49   "Nonrecourse Deductions" has the meaning set forth in Regulations
Sections 1.704-2(b)(1) and 1.704-2(c).

2.50   "Nonrecourse Liability" has the meaning set forth in Regulations Sections
1.704-2(b)(3) and 1.752-1(a)(2).

2.51   "Non-Voting Common Interest" means a Common Interest in the Company (a)
having the right to receive allocations of Net Profits or Net Losses,
distributions and proceeds of liquidation in the manner specified for Common
Interests in this Agreement but (b) which is not entitled to vote on any matter
submitted to the Members for approval in accordance with Paragraph 6.2 of this
Agreement.

2.52   "Non-Voting Preferred Interest" means a Preferred Interest in the Company
(a) having the right to receive allocations of Net Profits or Net Losses,
distributions and proceeds of liquidation in the manner specified for Preferred
Interests in this Agreement but (b) which is not entitled to vote on any matter
submitted to the Members for approval in accordance with Paragraph 6.2 of this
Agreement.

2.53   "Non-Voting Stock" is defined in Paragraph 8.4.4 of this Agreement.

2.54   "Offer Notice" is defined in Paragraph 7.2.1.

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2.55   "Offering Member" is defined in Paragraph 7.2.1 of this Agreement.

2.56   "Officers" is defined in Paragraph 6.9.

2.57   "ONRP" is defined in the Preamble.

2.58   "ONRPS" is defined in the Recitals.

2.59   "Operating Agreements" means (i) the Services Agreement, dated as of
October 15, 1999, by and between Retail Sponsor and ZB.com, (ii) the Trademark
License Agreement, dated as of October 15, 1999, by and between Retail Sponsor
and ZB.com, (iii) the Supply Agreement, dated as of October 15, 1999, by and
between Retail Sponsor and ZB.com, (iv) the Data Sharing/License Agreement,
dated as of October 15, 1999, by and among ONRPS, Retail Sponsor and ZB.com, and
(v) the Web Site Services Agreement, dated as of October 15, 1999, by and
between ONRPS and ZB.com.

2.60   "Operating Cash Expenses" means, with respect to any fiscal period, the
amount of cash disbursed or owed in the ordinary course of business during the
period, including without limitation, all cash expenses, such as advertising,
promotion, property management, insurance premiums, taxes, utilities, repair,
maintenance, legal, accounting, bookkeeping, computing, equipment use, travel on
Company business, telephone expenses and salaries, and direct expenses of
Company employees (if any) and agents while engaged in Company business.
Operating Cash Expenses shall include fees paid by the Company to the Board or
any Affiliate thereof permitted by this Agreement, and the actual cost of goods,
materials and administrative services used for or by the Company, whether
incurred by the Board, any Affiliate thereof or any non-Affiliate in performing
functions set forth in this Agreement reasonably requiring the use of such
goods, materials or administrative services. Operating Cash Expenses shall not
include expenditures paid from Reserves.

2.61   "Ownership Percentage" means the ownership percentage of the Membership
Interests of a Member in the Company as determined by dividing the number of
Membership Interests held by such Member by the total number of Membership
Interests then outstanding. The initial Ownership Percentage for each Member is
set forth in Exhibit A.

2.62   "Permitted Transfer" means any Transfer of Membership Interests: (i) made
by a Member to one or more of such Member's Affiliates or, if such Member is a
partnership or limited liability company, to its partners or members; (ii) made
by any Member to the Company, subject to Paragraph 6.2.1(1); (iii) made by a
Member to his or her Immediate Family; (iv) made by a Member pursuant to
testamentary or intestate disposition; or (v) made by Retail Sponsor of
Non-Voting Preferred Interests to no more than 10 of its employees, officers or
members of the Board of Directors of Retail Sponsor, provided that the Transfer
set forth in subsection 2.62 (v) shall not relate to more than a total of
666,670 of such Non-Voting Preferred Interests.

2.63   "Person" means and includes an individual, a corporation, a partnership
(general or limited), a limited liability company, a trust, an unincorporated
organization, a government or any department or agency thereof, or any entity
similar to any of the foregoing.

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2.64   "Plan" means any stock option or similar equity incentive plan of ZB.com,
as adopted and as amended from time to time with the approval of a Majority in
Interest.

2.65   "Preference Amount" means, with respect to each Membership Interest, an
amount equal to $10.00.

2.66   "Preferred Interest" means the Voting Preferred Interests and the Non-
Voting Preferred Interests.

2.67   "Purchasers" is defined in Paragraph 7.2.4.

2.68   "Recourse Liability" has the meaning set forth in Regulations Section
1.752-1(a)(1).

2.69   "Regulations" means proposed, temporary and final Treasury Regulations
promulgated under the Code, as such regulations may be amended from time to time
(including corresponding provisions of succeeding Treasury Regulations).

2.70   "Regulatory Allocations" is defined in Paragraph 5.2.8.

2.71   "Reserves" means funds set aside or amounts allocated to reserves that
shall be maintained in amounts deemed sufficient by the Board for working
capital, to pay taxes, insurance, debt service, and other costs or expenses
incident to the conduct of business by the Company as contemplated hereunder.

2.72   "Responsible Party" is defined in Paragraph 6.6.6.

2.73   "Retailer" means any Person with which ONRP has formed a limited
liability company or other joint ventures for the purpose of developing and
operating an Internet commerce website.

2.74   "Retail Sponsor" is defined in the Preamble.

2.75   "ROFR Acceptance Notice" is defined in Paragraph 7.2.2.

2.76   "ROFR Allotment" means for any Member the product of (A) the total number
of Affected Membership Interests available for purchase thereunder multiplied by
(B) a fraction, the numerator of which is the number of Membership Interests
owned by such Member and the denominator of which is the total number of issued
and outstanding Membership Interests excluding the Affected Membership
Interests. 2.77 "Same Category" means children's (i) toys (including games,
dolls, plush toys, electronic toys, puzzles and arts and crafts), (ii) audio and
video tapes and other multimedia products, (iii) books, (iv) software, (v)
juvenile furniture (excluding newborn and infant furniture) and (vi) educational
resource products, which, in each case, are targeted to children age 12 and
under.

2.78   "Site" is defined in Paragraph 1.4.

2.79   "Subscription Agreement" means the Contribution and Interest Purchase
Agreement, dated as of October 18, 1999, by and among the Company, ONRP and
Retail Sponsor.

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2.80   "Subsequent Financing" is defined in Paragraph 3.2.3.

2.81   "Subsidiary" means any and all corporations, partnerships, limited
liability companies and other entities with respect to which either the Company
or the Retail Sponsor, directly or indirectly, own 50% or more of the securities
having the power to elect members of the board of directors or similar body
governing the affairs of such entity.

2.82   "Substitute Member" means any Person (a) to whom a Member (or assignee
thereof) Transfers all or any part of its interest in the Company, and (b) which
has been admitted to the Company as a Substitute Member pursuant to Paragraph
7.7 of this Agreement.

2.83   "Tax Distribution" is defined in Paragraph 4.3.

2.84   "Terminating Capital Transaction" means any sale or other disposition of
all or substantially all of the assets of the Company or a related series of
transactions that, taken together, result in the sale or other disposition of
all or substantially all of the assets of the Company.

2.85   "Termination Payment" is defined in Paragraph 7.6.

2.86   "Trade Secrets" means the "trade secrets" as defined under applicable
law.

2.87   "Transfer" means, with respect to any Membership Interest, or any part
thereof, in the Company, a sale, conveyance, exchange, assignment, pledge,
encumbrance, gift, bequest, hypothecation or other transfer or disposition by
any other means, whether for value or no value and whether voluntary or
involuntary (including, without limitation, by operation of law), or an
agreement to do any of the foregoing.

2.88   "Transfer Period Termination Date" is defined in Paragraph 7.2.5.

2.89   "Voting Common Interest" means a Common Interest in the Company having
(a) the right to receive allocations of Net Losses and Net Profits,
distributions and proceeds of liquidation in the manner specified for Common
Interests in this Agreement and (b) the right to vote on any matter submitted to
the Members for approval in accordance with Paragraph 6.2.3 of this Agreement.

2.90   "Voting Preferred Interest" means a Preferred Interest in the Company
having (a) the right to receive allocations of Net Losses and Net Profits,
distributions and proceeds of liquidation in the manner specified for Preferred
Interests in this Agreement and (b) the right to vote on any matter submitted to
the Members for approval in accordance with Paragraph 6.2.3.

2.91   "ZB.com" means ZanyBrainy.com LLC, a Delaware limited liability company
and, upon the execution of the Capital Contribution Agreement, a wholly-owned
Subsidiary of the Company.

                                       13
<PAGE>

                                   ARTICLE 3
                                   ---------
                     CAPITAL; CAPITAL ACCOUNTS AND MEMBERS
                     -------------------------------------

3.1  Initial Capital Contributions of Members. At the date hereof, the
authorized Membership Interests are as follows: 5,000,000 Voting Common
Interests; 3,734,830 Non-Voting Common Interests; 5,000,000 Voting Preferred
Interests; and 6,666,670 Non-Voting Preferred Interests. The names, addresses,
initial Capital Contributions (the "Initial Assets") Membership Interests and
                                    --------------
Ownership Percentages of the Members are set forth on Exhibit A attached hereto
and incorporated herein. All Members acknowledge and agree that the initial
Capital Contributions set forth in Exhibit A represent the amount of money and
the Gross Asset Value of all property (other than money) initially contributed
by the Members. The Board shall be required to update Exhibit A from time to
time as necessary to accurately reflect the information therein. Any amendment
to Exhibit A shall not be deemed an amendment to this Agreement. Any reference
in this Agreement to Exhibit A shall be deemed to be a reference to Exhibit A as
amended and in effect from time to time.

3.2  Additional Capital Contributions by Members

     3.2.1     No Member shall be (a) required or (b) except as provided in this
Paragraph 3.2 or as otherwise approved by a Majority in Interest, permitted, to
make any additional Capital Contributions to the Company.

     3.2.2     ONRP shall make an additional Capital Contribution of $5,137,758
in consideration of the issuance of an additional 5,242,610 Non-Voting Common
Interests and Retail Sponsor shall make an additional Capital Contribution of
$6,862,242 in consideration of the issuance of an additional 7,002,288 Non-
Voting Preferred Interests (the "Third Subscription"), all of which interests
                                 ------------------
are hereby authorized, provided, however, that neither ONRP nor Retail Sponsor
shall have the obligation to make the Third Subscription unless (a) the other
Member has, in all material respects, complied with its obligations under the
Operating Agreements and (b) the representations and warranties of the Company
and the other Member contained in the Third Subscription Agreement are true and
correct at the time the Subscription is consummated. The Capital Contributions
to be made by ONRP and Retail Sponsor pursuant to this Paragraph 3.2.2 shall be
made in three monthly installments, the first of which shall occur on March __,
2000, the amount of each installment shall be determined by the Board, provided
that each Capital Contribution installment made by ONRP and Retail Sponsor shall
be made in the same proportion as the aggregate total Capital Contribution
required by each party pursuant to this Paragraph 3.2.2. The total amount of
Interests to be provided to ONRP and Retail Sponsor under this Paragraph 3.2.2
shall all be issued concurrently with the payment of the initial installment on
March 7, 2000.

     3.2.3     In the event of any future equity financing by the Company,
including an initial public offering of equity securities by the Company, (each,
a "Subsequent Financing"), each of the Members shall have the right to
   --------------------
subscribe, to the extent of its then-current Ownership Percentage, to such
Subsequent Financing unless in the case of any such Subsequent Financing that is
an underwritten public offering of common stock, (a) the managing underwriter in
connection with such Subsequent Financing advises that a full or partial waiver
of such right is required in order to consummate such Subsequent Financing and
(b) such waiver would not

                                       14
<PAGE>

materially prejudice either Retail Sponsor or ONRP. In the event of any future
equity financing by ZB.com or any other Subsidiary of the Company, each of the
Members shall be afforded the ratable right to purchase additional Non-Voting
Common Interests or Non-Voting Preferred Interests (which shall be determined
based on the type of Membership Interests already owned by each such Member) in
the Company in an amount sufficient to permit the Company to purchase a
sufficient number of equity securities of ZB.com or such other Subsidiary to
permit the Company to maintain its ratable ownership percentage therein.

     3.2.4     Notwithstanding anything to the contrary in Section 3.2.3, if any
Member who holds Non-Voting Preferred Interests fails to participate with
respect to its Non-Voting Preferred Interests in any Subsequent financing by the
Company, ZB.com or any other Subsidiary as set forth in Section 3.2.3, Retail
Sponsor shall have the right to additionally participate in any such equity
financing to the extent that the Members who hold Non-Voting Preferred Interests
did not participate with respect to their Non-Voting Preferred Interests.

3.3  Capital Accounts. A Capital Account shall be established and maintained for
each Member in accordance with the terms of this Agreement.

3.4  Additional Members. Following formation of the Company, the Board is hereby
authorized, upon receipt of approval of a Majority in Interest, to issue
interests in the Company directly from the Company, and to admit one or more
recipients of such interests as additional Members ("Additional Members") from
                                                     ------------------
time to time, on such terms and conditions and for such Capital Contributions,
if any, as the Board may determine with the approval of a Majority in Interest.
No action or consent by any Person other than a Majority in Interest shall be
required in connection with the admission of an Additional Member. As a
condition to being admitted to the Company, each Additional Member shall execute
an agreement to be bound by the terms and conditions of this Agreement.

3.5  Member Capital. Except as otherwise provided in this Agreement or with the
prior written consent of a Majority in Interest: (a) no Member shall demand or
be entitled to receive a return of or interest on its Capital Contributions or
Capital Account, (b) no Member shall withdraw any portion of its Capital
Contributions or receive any distributions from the Company as a return of
capital on account of such Capital Contributions, and (c) the Company shall not
redeem or repurchase the Membership Interest, or any portion thereof, of any
Member.

3.6  Member Loans. No Member shall be required or permitted to make any loans or
otherwise lend any funds to the Company, except with the consent of a Majority
in Interest. Notwithstanding the foregoing, the Members shall be permitted (but
not required) to make loans to the Company to the extent a Majority in Interest
reasonably determines that such loans are necessary, advisable or convenient for
the business of the Company, provided that any such loans shall be unsecured and
on terms that are no less favorable to the Company as may be available from
independent third parties. No loan made by any Member to the Company shall have
any effect on such Member's Membership Interests, any such loans representing a
debt of the Company payable or collectible solely from the assets of the Company
in accordance with the terms and conditions upon which such loan was made.

                                       15
<PAGE>

3.7  Liability of Members. Except as otherwise required by an express provision
of this Agreement or any non-waivable provision of the Act or other applicable
law: (a) no Member shall be personally liable in any manner whatsoever for any
debt, liability or other obligation of the Company, whether such debt, liability
or other obligation arises in contract, tort, or otherwise; and (b) no Member
shall in any event have any liability whatsoever in excess of (i) the amount of
its Capital Contributions, (ii) its share of any assets and undistributed
profits of the Company, and (iii) the amount of any wrongful distribution to
such Member, if, and only to the extent, such Member has actual knowledge (at
the time of the distribution) that such distribution is made in violation of
Section 18-607 of the Act. Except as expressly provided herein, no Member, in
its capacity as such, shall have liability to the Company, any other Member or
the creditors of the Company.

3.8  ZB.com.

     3.8.1     Contributions to ZB.com. Except as otherwise determined by the
Board, all assets received by the Company will be contributed to ZB.com. ZB.com
will have two types of membership interests: (i) voting preferred interests and
(ii) non-voting common interests. In exchange for its contribution of the
Initial Assets to ZB.com, the Company will receive 20,401,500 (post-split)
voting preferred interests of ZB.com. The Company will contribute the proceeds
of the Third Subscription to ZB.com in exchange for the issuance of 12,244,898
additional voting preferred interests of ZB.com.

     3.8.2     3,032,140 (post-split) non-voting common interests of ZB.com will
be reserved for option grants to employees of the Company and/or its
subsidiaries, including ZB.com. Initially, 2,627,850 (post-split) of these non-
voting common interests of ZB.com will be reserved for option grants to
employees of the Company and ZB.com and 404,290 (post-split) non-voting common
interests of ZB.com will be reserved for option grants to employees of ONRP and
Retail Sponsor. The grants of options to employees of the Company and/or its
subsidiaries, ONRP and/or Retail Sponsor shall be made by the Board (in its sole
and absolute discretion) in accordance with the provisions of the Plan.

     3.8.3     Warrants to purchase 515,460 (post-split) non-voting common
interests of ZB.com will be reserved for issuance to Ramsey/Beirne Associates,
Inc. for their services in conducting certain executive search services on
behalf of the Company and ZB.com.

     3.8.4     The Members anticipate that ZB.com would be the site of any
initial public offering with respect to the business of the Site. Prior to an
initial public offering, upon the receipt of approval of a Majority in Interest,
ZB.com shall be converted into a Delaware corporation in accordance with
Paragraph 8.3 of this Agreement.

     3.8.5     The Chief Executive Officer of the Company shall also be the
Chief Executive Officer of ZB.com. The Board shall also constitute the board of
managers of ZB.com.

                                       16
<PAGE>

                                   ARTICLE 4
                                   ---------
                                 DISTRIBUTIONS
                                 -------------

4.1  Distributions of Cash Available for Distribution.

          4.1.1     Except as otherwise provided in Paragraph 4.3 and Article 9
and subject to the provisions of Paragraph 6.2, Cash Available for Distribution
shall be distributed to the Members only at such times as may be determined in
the sole discretion of the Board.

          4.1.2     Subject to Paragraph 4.3 and Article 9 hereof, all
distributions of Cash Available for Distribution shall be distributed to the
Members in accordance with the priorities set forth in Paragraph 4.4.

4.2  Distributions Upon Liquidation. Distributions made in conjunction with the
final liquidation of the Company, including, without limitation, the net
proceeds of a Terminating Capital Transaction, shall be applied or distributed
as provided in Article 9 hereof.

4.3  Tax Distributions. With respect to each fiscal year, the Company shall
distribute to the Members, to the extent of Cash Available for Distribution,
amounts intended to enable the Members to discharge their United States federal,
state and local income tax liabilities arising from the allocations made
pursuant to Article 5, (each, a "Tax Distribution"). The amount of any such Tax
                                 ----------------
Distribution shall be determined by the Board in its reasonable discretion
taking into account (a) the maximum combined United States and state tax rate
applicable to individuals or corporations (whichever is higher) on ordinary
income and net short-term capital gain or on net long-term capital gain, as
applicable, and taking into account the deductibility of state and local income
taxes for United States federal income tax purposes (and the deductibility of
local income taxes for state tax purposes, if applicable), and (b) the amounts
so allocated pursuant to Article 5 to each Member, and otherwise based on such
reasonable assumptions as the Board determines in good faith to be appropriate.
Tax Distributions shall be made to the Members pro rata in accordance with their
respective allocation of the corresponding items of gain or income, and shall be
treated as advances with respect to amounts otherwise to be received by such
Members pursuant to this Article 4 or Article 9.

4.4  Distributions. Subject to the provisions of Article 9 and Paragraph 4.3
hereof, and subject to the rights and preferences of any classes of Membership
Interests approved in accordance with the provisions of this Agreement and
issued by the Company from time to time, Cash Available for Distribution and
distributions in kind of Company Assets shall be distributed:

          4.4.1     First, to the Members holding Preferred Interests, in
proportion to the number of their Preferred Interests, until an amount equal to
the Preference Amount has been paid with respect to such Preferred Interests;

          4.4.2     Second, to the Members holding Common Interests, in
proportion to the number of their Common Interests, until an amount equal to the
Preference Amount has been paid with respect to such Common Interests; and

          4.4.3     Thereafter, to the Members in proportion to their respective
Ownership Percentages.

                                       17
<PAGE>

4.5  Distributions in Kind. No right is given to any Member to demand or receive
property other than cash as provided in this Agreement. The Board may determine
to make a distribution in kind of Company Assets to the Members, and such
Company Assets shall be distributed in such a fashion as to ensure that the fair
market value thereof is distributed and allocated in accordance with this
Article 4 and Articles 5 and 9 hereof; provided, however, that no Member may be
compelled to accept a distribution consisting, in whole or in part, of any
Company Assets in kind unless the ratio that the fair market value of such
distribution in kind bears to such Member's total distribution does not exceed
the ratio that the fair market value of similar distributions in kind bear to
the total distributions of other Members receiving distributions concurrently
therewith (if any), except upon a dissolution and winding up of the Company.

4.6  Withholding. The Company may withhold distributions or portions thereof if
it is required to do so by any applicable rule, regulation, or law, and each
Member hereby authorizes the Company to withhold from or pay on behalf of or
with respect to such Member any amount of federal, state, local or foreign taxes
that the Board determines that the Company is required to withhold or pay with
respect to any amount distributable or allocable to such Member pursuant to this
Agreement. Any amount paid on behalf of or with respect to a Member pursuant to
this Paragraph 4.6 shall constitute a loan by the Company to such Member, which
loan shall be repaid by such Member within fifteen (15) days after notice from
the Company that such payment must be made; provided, however, that there shall
be no such loan treatment if (a) the Company withholds such payment from a
distribution which would otherwise be made to the Member or (b) the Board
determines, in its sole and absolute discretion, that such payment may be
satisfied out of Cash Available For Distribution which would, but for such
payment, be distributed to the Member. Any amounts withheld pursuant to this
Paragraph 4.6 shall be treated as having been distributed to such Member. Each
Member hereby unconditionally and irrevocably grants to the Company a security
interest in such Member's Membership Interests in the Company to secure such
Member's obligation to pay to the Company any amounts required to be paid
pursuant to this Paragraph 4.6. In the event that a Member fails to pay any
amounts owed to the Company pursuant to this Paragraph 4.6 when due, the
remaining Member(s) may, in their respective sole and absolute discretion, elect
to make the payment to the Company on behalf of such defaulting Member, and in
such event shall be deemed to have loaned such amount to such defaulting Member
and shall succeed to all rights and remedies of the Company as against such
defaulting Member (including, without limitation, the right to receive
distributions). Any amounts payable by a Member hereunder shall bear interest at
12.0% from the date such amount is due (i.e., 15 days after demand) until such
amount is paid in full. Each Member shall take such actions as the Company shall
request in order to perfect or enforce the security interest created hereunder.
A Member's obligations hereunder shall survive the dissolution, liquidation, or
winding up of the Company.

4.7  Limitations on Distributions. Notwithstanding any provision to the contrary
contained in this Agreement, neither the Company nor the Board, on behalf of the
Company, shall knowingly make a distribution to any Member or the holder of any
interest in the Company on account of its Membership Interest or Economic
Interest in the Company (as applicable) in violation of Section 18-607 of the
Act.

                                       18
<PAGE>

                                   ARTICLE 5
                                   ---------
                   ALLOCATIONS OF NET PROFITS AND NET LOSSES
                   -----------------------------------------

5.1  General Allocation of Net Profits and Losses.

          5.1.1     Net Profits and Net Losses shall be determined and allocated
with respect to each fiscal year of the Company as of the end of such fiscal
year. Subject to the other provisions of this Agreement, an allocation to a
Member of a share of Net Profits or Net Losses shall be treated as an allocation
of the same share of each item of income, gain, loss or deduction that is taken
into account in computing Net Profits or Net Losses.

          5.1.2     Subject to the other provisions of this Article 5, Net
Profits shall be allocated in the following order of priority:

                    (a) First, to the Members, in proportion to their respective
Ownership Percentages, until an amount equal to the amount of Net Losses
previously allocated to such Membership Interests pursuant to Paragraph
5.1.3(d), if any, has been allocated with respect to such Membership Interests;

                    (b) Second, to the Members holding Preferred Interests, in
proportion to the number of their Preferred Interests, until an amount equal to
the amount of Net Losses previously allocated to such Preferred Interests
pursuant to Paragraph 5.1.3(c), if any, has been allocated with respect to such
Preferred Interests;

                    (c) Third, to the Members holding Common Interests, in
proportion to the number of their Common Interests, until an amount equal to the
amount of Net Losses previously allocated to such Common Interests pursuant to
Paragraph 5.1.3(b), if any, has been allocated with respect to such Common
Interests; and

                    (d) Thereafter, to the Members in proportion to their
respective Ownership Percentages.

          5.1.3     Subject to the other provisions of this Article 5, Net
Losses shall be allocated in the following order of priority:

                    (a) First, to the Members, in proportion to their respective
Ownership Percentages, until each such Membership Interest has been allocated an
amount equal to the amount of Net Profits previously allocated to such
Membership Interest pursuant to Paragraph 5.1.2(d), if any;

                    (b) Second, to the Members holding Common Interests, in
proportion to the number of their Common Interests, until each such Member's
Capital Account has been reduced to zero, provided that with respect to any
Member holding Common Interests and Preferred Interests, this clause (b) shall
reduce such Member's Capital Account only to the extent of such Member's Common
Interests;

                    (c) Third, to any Member holding Preferred Interests, in
proportion to the number of their Preferred Interests, until each such Capital
Account has been reduced to zero,

                                       19
<PAGE>

provided that with respect to any Member holding Common Interests and Preferred
Interests, this clause (c) shall reduce such Member's Capital Account only to
the extent of such Member's Preferred Interests; and

                    (d) Thereafter, to the Members pro rata in proportion to
their respective Ownership Percentages.

5.2  Regulatory Allocations. Notwithstanding the foregoing provisions of this
Article 5, the following special allocations shall be made in the following
order of priority:

          5.2.1     If there is a net decrease in Company Minimum Gain during a
Company taxable year, then each Member shall be allocated items of Company
income and gain for such taxable year (and, if necessary, for subsequent years)
in an amount equal to such Member's share of the net decrease in Company Minimum
Gain, determined in accordance with Regulations Section 1.704-2(g)(2). This
Paragraph 5.2.1 is intended to comply with the minimum gain chargeback
requirement of Regulations Section 1.704-2(f) and shall be interpreted
consistently therewith.

          5.2.2     If there is a net decrease in Member Minimum Gain
attributable to a Member Nonrecourse Debt during any Company taxable year, each
Member who has a share of the Member Minimum Gain attributable to such Member
Nonrecourse Debt, determined in accordance with Regulations Section 1.704-
2(i)(5), shall be specially allocated items of Company income and gain for such
taxable year (and, if necessary, subsequent years) in an amount equal to such
Member's share of the net decrease in Member Minimum Gain attributable to such
Member Nonrecourse Debt, determined in a manner consistent with the provisions
of Regulations Section 1.704-2(g)(2). This Paragraph 5.2.2 is intended to comply
with the partner nonrecourse debt minimum gain chargeback requirement of
Regulations Section 1.704-2(i)(4) and shall be interpreted consistently
therewith.

          5.2.3     If any Member unexpectedly receives an adjustment,
allocation, or distribution of the type contemplated by Regulations Section
1.704-1(b)(2)(ii)(d)(4), (5) or (6), items of income and gain shall be allocated
to all such Members (in proportion to the amounts of their respective Adjusted
Capital Account Deficits) in an amount and manner sufficient to eliminate the
Adjusted Capital Account Deficit of such Member as quickly as possible. It is
intended that this Paragraph 5.2.3 qualify and be construed as a "qualified
income offset" within the meaning of Regulations Section 1.704-1(b)(2)(ii)(d).

          5.2.4     If the allocation of Net Loss to a Member as provided in
Paragraph 5.1 hereof would create or increase an Adjusted Capital Account
Deficit, there shall be allocated to such Member only that amount of Net Loss as
will not create or increase an Adjusted Capital Account Deficit. The Net Loss
that would, absent the application of the preceding sentence, otherwise be
allocated to such Member shall be allocated to the other Members in accordance
with their relative Economic Interests, subject to the limitations of this
Paragraph 5.2.4.

          5.2.5     To the extent that an adjustment to the adjusted tax basis
of any Company Asset pursuant to Code Section 734(b) or Code Section 743(b) is
required, pursuant to Regulations Section 1.704-1(b)(2)(iv)(m)(2) or Regulations
Section 1.704-1(b)(2)(iv)(m)(4), to be taken into account in determining Capital
Accounts as the result of a distribution to a Member in complete

                                       20
<PAGE>

liquidation of its Membership Interests in the Company, the amount of such
adjustment to the Capital Accounts shall be treated as an item of gain (if the
adjustment increases the basis of the asset) or loss (if the adjustment
decreases such basis), and such gain or loss shall be specially allocated to the
Members in accordance with their Economic Interests in the Company in the event
that Regulations Section 1.704-1(b)(2)(iv)(m)(2) applies, or to the Members to
whom such distribution was made in the event that Regulations Section 1.704-
1(b)(2)(iv)(m)(4) applies.

     5.2.6   The Nonrecourse Deductions for each taxable year of the Company
shall be allocated to the Members in proportion to their respective Ownership
Percentages.

     5.2.7   The Member Nonrecourse Deductions shall be allocated each year to
the Member that bears the economic risk of loss (within the meaning of
Regulations Section 1.752-2) for the Member Nonrecourse Debt to which such
Member Nonrecourse Deductions are attributable.

     5.2.8   The allocations set forth in Paragraphs 5.2.1, 5.2.2, 5.2.3, 5.2.4,
5.2.5, 5.2.6 and 5.2.7 hereof (the "Regulatory Allocations") are intended to
                                    ----------------------
comply with certain requirements of Regulations Sections 1.704-1(b) and 1.704-2.
Notwithstanding the provisions of Paragraph 5.1.2 or 5.1.3, the Regulatory
Allocations shall be taken into account in allocating other items of income,
gain, loss and deduction among the Members so that, to the extent possible, the
net amount of such allocations of other items and the Regulatory Allocations to
each Member shall be equal to the net amount that would have been allocated to
each such Member if the Regulatory Allocations had not occurred.

5.3 Tax Allocations.

     5.3.1   Except as provided in Paragraph 5.3.2 hereof, for income tax
purposes under the Code and the Regulations each Company item of income, gain,
loss and deduction shall be allocated among the Members as its correlative item
of book income, gain, loss or deduction is allocated pursuant to this Article 5.

     5.3.2   Tax items with respect to Company Assets that are contributed to
the Company with a Gross Asset Value that varies from its basis in the hands of
the contributing Member immediately preceding the date of contribution shall be
allocated among the Members for income tax purposes pursuant to Regulations
promulgated under Code Section 704(c) so as to take into account such variation.
The Company shall account for such variation under any method approved under
Code Section 704(c) and the applicable Regulations as chosen by the Board,
including, without limitation, the "traditional method" as described in
Regulations Section 1.704-3(b). If the Gross Asset Value of any Company Asset is
adjusted pursuant to Paragraph 2.30, subsequent allocations of income, gain,
loss and deduction with respect to such Company Asset shall take account of any
variation between the adjusted basis of such Company Asset for federal income
tax purposes and its Gross Asset Value in the same manner as under Code Section
704(c) and the Regulations promulgated thereunder under any method approved
under Code Section 704(c) and the applicable Regulations as chosen by the Board.
Allocations pursuant to this Paragraph 5.3.2 are solely for purposes of federal,
state and local taxes and shall not affect, or in any way be taken into account
in computing, any Member's Capital Account or share of Net Profits, Net Losses
and any other items or distributions pursuant to any provision of this
Agreement.

                                       21
<PAGE>

5.4 Other Provisions.

     5.4.1   For any fiscal year during which any part of a Membership Interest
is transferred between Members or to another Person, the portion of the Net
Profits, Net Losses and other items of income, gain, loss, deduction and credit
that are allocable with respect to such part of a Membership Interest shall be
apportioned between the transferor and the transferee under any method allowed
pursuant to Section 706 of the Code and the applicable Regulations as determined
by the Board.

     5.4.2   In the event that the Code or any Regulations require allocations
of items of income, gain, loss, deduction or credit different from those set
forth in this Article 5, the Board is hereby authorized to make new allocations
in reliance on the Code and such Regulations, and no such new allocation shall
give rise to any claim or cause of action by any Member.

     5.4.3   For purposes of determining a Member's proportional share of the
Company's "excess nonrecourse liabilities" within the meaning of Regulations
Section 1.752-3(a)(3), each Member's interest in profits shall be in proportion
to the Ownership Percentage of such Member.

     5.4.4   The Members acknowledge and are aware of the income tax
consequences of the allocations made by this Article 5 and hereby agree to be
bound by the provisions of this Article 5 in reporting their shares of Net
Profits, Net Losses and other items of income, gain, loss, deduction and credit
for federal, state and local income tax purposes.

                                   ARTICLE 6
                                   ---------
                                  OPERATIONS
                                  ----------
6.1 Management.

     6.1.1   Except as otherwise expressly provided in this Agreement or
required by applicable law, the Board shall have sole and complete charge and
management of all the affairs and business of the Company, in all respects and
in all matters. The Board or any individual Director to whom the Board has
delegated specific authority shall be agents of the Company's business, and the
actions of the Board or such Director taken in such capacity and in accordance
with this Agreement shall bind the Company. Except as otherwise expressly
provided in this Agreement, the Members shall not participate in the control of
the Company, and shall have no right, power or authority to act for or on behalf
of, or otherwise bind, the Company. Except as expressly provided in this
Agreement or required by any non-waivable provisions of applicable law, Members
shall have no right to vote on or consent to any other matter, act, decision, or
document involving the Company or its business.

     6.1.2   Except as otherwise expressly provided in this Agreement, the Board
shall have full, exclusive and complete discretion to manage and control the
business and affairs of the Company, to make all decisions affecting the
business and affairs of the Company and to take all such actions as it deems
necessary, appropriate, convenient or incidental to accomplish the purposes and
direct the affairs of the Company. The Board shall have the sole power and
authority to bind the Company, except as otherwise expressly provided in this
Agreement and/or to the extent that such power is expressly delegated in writing
to officers of the Company or any

                                       22
<PAGE>

other Person by the Board, and such delegation shall not cause the Board to
cease to be the Board of the Company.

     6.1.3    The Board shall also have the exclusive right, power and
authority, in the management of the business and affairs of the Company, to do
or cause to be done any and all acts, at the expense of the Company, deemed by
the Board to be necessary, appropriate, convenient or incidental to effectuate
the business of the Company. Without limiting the generality of the foregoing,
the Board shall have full and complete power and authority, without the approval
of any Member and, with respect to clauses (a) through (d), in the ordinary
course of the business of the Company:

              (a) to conduct any business, and exercise any rights and powers,
permitted of a limited liability company organized under the laws of the state
of Delaware, in any state, territory, district or foreign country;

              (b) subject to the terms and conditions of the Operating
Agreements and Paragraph 6.2.1, to acquire by purchase, lease, contribution or
otherwise, and/or to otherwise own, hold, operate, maintain, improve, lease,
sell, convey, mortgage, transfer or dispose of any property or other assets
(real or personal, tangible or intangible);

              (c) subject to Paragraph 6.2.1, and the terms and conditions of
the Operating Agreements, to negotiate, enter into, perform, modify, extend,
terminate, amend, waive, renegotiate and/or carry out any contracts and
agreements;

              (d) subject to Paragraph 6.2.1, to lend money, to invest and
reinvest its funds, and to take and hold real and/or personal property for the
payment of funds so loaned or invested;

              (e) to sue and be sued, complain and defend, and participate in
administrative, judicial and other proceedings, in the name of, and behalf of,
the Company;

              (f) to pay, collect, compromise, arbitrate or otherwise adjust or
settle any and all claims or demands of or against the Company, in such amounts
and upon such terms and conditions, provided that the foregoing do not
materially prejudice a Member;

              (g) subject to Paragraph 6.2.1, (a) to, from time to time, employ,
engage, hire or otherwise secure or terminate the services of such Persons,
including any Member or Assignee, or any Persons related thereto or Affiliates
thereof, and (b) to, from time to time, appoint such officers and agents of the
Company as the Board deems necessary or advisable, define and modify, from time
to time, such officers' and agents' duties, and fix and adjust, as appropriate,
such officers' and agents' compensation;

              (h) subject to Paragraph 6.6, to cause the Company to indemnify
any Person in accordance with, and to the fullest extent permitted by,
applicable law, and to obtain, for or on behalf of the Company, any and all
types of insurance;

                                       23
<PAGE>

              (i) subject to Paragraph 6.2.1, to borrow money and issue
evidences of indebtedness necessary, convenient or incidental to the business of
the Company, and secure the same by mortgage, pledge or other lien on any
Company Assets or other assets of the Company;

              (j) to prepare, execute, file, record, publish and deliver any and
all instruments, documents or statements necessary or convenient to effectuate
any and all actions that the Board is authorized to take on behalf of the
Company;

              (k) subject to Paragraph 6.2.1(i), to merge the Company with, or
consolidate the Company with or into, any other corporation, partnership,
limited liability company or other business entity (as defined in Section
18-209(a) of the Act) (whether domestic or foreign);

              (l) subject to Paragraph 6.2.1, to deal with, or otherwise engage
in business with, or provide services to and receive compensation therefor from,
any Person who has provided or may in the future provide services to, lend money
to, sell property to, or purchase property from the Company, the Members or any
Affiliate of the Members; and

              (m) to establish and maintain Reserves for such purposes and in
such amounts as the Board deems appropriate from time to time.

       6.1.4  Subject to the provisions of Paragraph 6.2, the Board may commence
a voluntary case on behalf of, or an involuntary case against, the Company under
a chapter of Title 11 U.S.C. by the filing of a "petition" (as defined in 11
U.S.C. 101(42)) with the United States Bankruptcy Court. The unanimous approval
of the Board shall be required in connection with the commencement of such a
voluntary bankruptcy. Any such petition filed by any Member or other Person
shall be deemed an unauthorized and bad faith filing and all parties to this
Agreement shall use their best efforts to cause such petition to be dismissed.

                  6.1.5 The Company, and any member of the Board on behalf of
       the Company, may enter into and perform the Capital Contribution
       Agreement without any further act, vote or approval of any Member
       notwithstanding any other provision of this Agreement (including, without
       limitation, Paragraph 6.2 hereof), the Act or other applicable law. Any
       member of the Board is hereby authorized to enter into and perform on
       behalf of the Company the documents described in the immediately
       preceding sentence, but such authorization shall not be deemed a
       restriction in the power of the Board to enter into other documents on
       behalf of the Company to the extent provided for in this Agreement.
       Subject to the terms of this Agreement, the Board may authorize any
       Person (including, without limitation, any Member or Officer (as defined
       below) to enter into and perform any other document on behalf of the
       Company.

6.2 Limitations on Authority of Board.

       6.2.1 Notwithstanding any contrary provision of this Agreement, without
either the approval of a Majority in Interest or the unanimous approval of the
Board, the Board shall not have the authority to:

             (a) Amend this Agreement or the operating agreement of ZB.com or
any other Subsidiary of the Company or create any additional Subsidiary of the
Company or of ZB.com;

                                       24
<PAGE>

          (b) Appoint or remove the executive officers of the Company or ZB.com
or any other Subsidiary of the Company (including, without limitation, a
President and/or Chief Executive Officer);

          (c) Establish or modify the compensation of the executive officers
referred to in subparagraph (b) above;

          (d) Cause the Company or ZB.com or any other Subsidiary of the Company
to enter into any new agreement, or to materially amend the terms of any
existing agreement, with Retail Sponsor or ONRP or an Affiliate of any of the
foregoing;

          (e) Approve the annual operating budget, including spending, of the
Company or ZB.com or any other Subsidiary of the Company;

          (f) Admit any Person or an Additional Member or admit any Person as a
member, partner, shareholder or other equity holder in ZB.com or any other
Subsidiary of the Company;

          (g) Pledge the assets of the Company or ZB.com or any other Subsidiary
of the Company;

          (h) Approve any Terminating Capital Transaction;

          (i) Merge the Company with, or consolidate the Company with or into,
any other corporation, partnership, limited liability company or other business
entity (as defined in Section 18-209(a) of the Act) (whether domestic or
foreign);

          (j) Borrow money or issue evidences or guarantees of indebtedness;

          (k) Commence a voluntary cause on behalf of, or an involuntary case
against, the Company under a chapter of Title 11 U.S.C. by the filing of a
"petition" (as defined in 11 U.S.C. 101 (42)) with the United States Bankruptcy
Court;

          (l) Except as expressly provided for herein, declare, set aside or pay
any dividend or make any other distribution of cash or property, or redeem,
repurchase or make any similar payments in connection with the retirement of any
Membership Interests; or

          (m) Dissolve the Company.

    6.2.2 Notwithstanding any contrary provision of this Agreement, without the
written consent of all Members, the Board shall not have the authority to:

          (a) Do any act in contravention of the Agreement; or

          (b) Knowingly perform any act that would subject any Member to
liability for the debts, liabilities or obligations of the Company or any other
Member.

                                       25
<PAGE>

      6.2.3  Each Member shall be entitled to one vote for each (a) Voting
Preferred Interest and (b) Voting Common Interest held by such Member on any
matter submitted to the Members for approval. Non-Voting Common Interests and
Non-Voting Preferred Interests shall not be entitled to vote on any matter.
Members holding Voting Common Interests and Voting Preferred Interests shall
vote together as one class on all matters. The voting rights of any additional
classes of interests in the Company created after the date hereof shall be
determined by a Majority in Interest.

6.3 Reliance By Third Parties. Any Person dealing with the Company or the Board
may rely upon a certificate signed by the Board as to:

             (a)  the identity of the Board or any Member of the Company;

             (b)  the existence or non-existence of any fact or facts which
constitute a condition precedent to acts by the Board or in any other manner
germane to the affairs of the Company;

             (c)  the Persons who are authorized to execute and deliver any
instrument or document for or on behalf of the Company; or

             (d)  any act or failure to act by the Company or as to any other
matter whatsoever involving the Company or any Member.

6.4 Compensation of Directors.

      6.4.1  The Directors shall not receive any fees for its services in
administering the officers of the Company.

      6.4.2  The Directors shall be entitled to reimbursement on a monthly basis
from the Company for all out-of-pocket costs and expenses incurred by them, in
their reasonable discretion and in accordance with policies and procedures
adopted by the Board from time to time, for or on behalf of the Company.

6.5 Records and Reports.

      6.5.1  The Board shall cause to be kept, at the principal place of
business of the Company, or at such other location as the Board shall reasonably
deem appropriate, full and proper ledgers, other books of account, and records
of all receipts and disbursements, other financial activities, and the internal
affairs of the Company for at least the current and past four fiscal years.

      6.5.2  The Board shall also cause to be sent to each Member of the
Company, the following:

             (a)   within ninety (90) days following the end of each fiscal year
of the Company, a report that shall include all necessary information required
by the Members for preparation of its federal, state and local income or
franchise tax or information returns,

                                       26
<PAGE>

including each Member's share of Net Profits, Net Losses and any other items of
income, gain, loss and deduction for such fiscal year; and

             (b) a copy of the Company's federal, state and local income tax or
information returns for each fiscal year, concurrent with the filing of such
returns.

      6.5.3  Members may, for purposes reasonably related to their Membership
Interests, examine and copy (at their own cost and expense) the books and
records of the Company at all reasonable business hours.

6.6 Indemnification and Liability.

      6.6.1  The Company shall indemnify and hold harmless each member of the
Board and all officers, employees, agents and Affiliates of the Company
(individually, an "Indemnitee") to the full extent permitted by law from and
                   ----------
against any and all losses, claims, demands, costs, damages, liabilities, joint
and several, expenses of any nature (including reasonable attorneys' fees and
disbursements), judgments, fines, settlements and other amounts arising from any
and all claims, demands, actions, suits or proceedings, civil, criminal,
administrative or investigative, in which the Indemnitee may be involved, or
threatened to be involved as a party or otherwise, relating to the performance
or nonperformance of any act concerning the activities of the Company, if (a)
the Indemnitee acted in good faith and in a manner it reasonably believed to be
in, or not contrary to, the best interests of the Company, (b) the Indemnitee's
conduct did not constitute gross negligence or willful misconduct and (c) the
Indemnitee's conduct is not based upon or attributable to the receipt by the
Indemnitee of a personal benefit to which the Indemnitee is not entitled. The
termination of an action, suit or proceeding by judgment, order, settlement, or
upon a plea of nolo contendere or its equivalent, shall not, in and of itself,
create a presumption or otherwise constitute evidence that the Indemnitee acted
in a manner contrary to that specified in clauses (a) or (b) above.

      6.6.2  Expenses incurred by an Indemnitee in defending any claim, demand,
action, suit or proceeding subject to this Paragraph 6.6 shall be advanced by
the Company prior to the final disposition of such claim, demand, action, suit,
or proceeding upon receipt by the Company of a written commitment by or on
behalf of the Indemnitee to repay such amount if it shall be determined that
such Indemnitee is not entitled to be indemnified as authorized in this
Paragraph 6.6.

      6.6.3  Any indemnification provided hereunder shall be satisfied solely
out of the assets of the Company, as an expense of the Company. No Member shall
be subject to personal liability by reason of these indemnification provisions.

      6.6.4  The provisions of this Paragraph 6.6 are for the benefit of the
Indemnitees and shall not be deemed to create any rights for the benefit of any
other Person.

      6.6.5  Neither the Board nor the officers of the Company shall be liable
to the Company or to a Member for any losses sustained or liabilities incurred
as a result of any act or omission of the Board or any such officer if (a) the
act or failure to act of the Board or such officer was in good faith and in a
manner it reasonably believed to be in, or not contrary to, the best interests
of the Company, (b) the conduct of the Board or such officer did not constitute
gross negligence or

                                       27
<PAGE>

willful misconduct and (c) the Indemnitee's conduct is not based upon or
attributable to the receipt by the Indemnitee of a personal benefit to which the
Indemnitee is not entitled.

      6.6.6  To the extent that any Director or any officer of the Company
(each, a "Responsible Party") has, at law or in equity, duties (including,
          -----------------
without limitation, fiduciary duties) to the Company or any Member or other
Person bound by the terms of this Agreement, such Responsible Parties shall not
be liable to the Company, any Member, or any such other Person for its good
faith reliance on the provisions of this Agreement so long as such Responsible
Parties act in accordance with this Agreement and exercise such standard of care
applicable to a director or any officer, as applicable, of a corporation
incorporated in the State of Delaware. The provisions of this Agreement, to the
extent, if any, that they restrict the duties of a Responsible Party otherwise
existing at law or in equity, are agreed by all parties hereto to replace such
other duties to the greatest extent permitted under applicable law.

      6.6.7  Whenever a Responsible Party is required or permitted to make a
decision, take or approve an action, or omit to do any of the foregoing (a) in
its discretion, (b) under a similar grant of authority or latitude or (c)
without an express standard of behavior (including, without limitation,
standards such as "reasonable" or "good faith"), then such Responsible Party
shall be subject to the standard of care applicable to a director or any
officer, as applicable, of a corporation incorporated in the State of Delaware.

6.7 Removal and Withdrawal of Directors.

      6.7.1  A Director may not be removed as a Director at any time except (a)
by the Person that designated such Director or (b) for cause. For purposes of
this Paragraph 6.7.1, "cause" shall mean a finding by a majority of the Board
that the Director has engaged in conduct that is fraudulent, disloyal, criminal
or injurious to the Company, including, without limitation, embezzlement, theft,
commission of a felony or proven dishonesty in the course of his or her service,
or that the Director has disclosed trade secrets or confidential information of
the Company to any Persons not entitled to receive such information. Upon (i)
the removal of a Director pursuant to this Paragraph 6.7.1, (ii) the withdrawal
of a Director pursuant to Paragraph 6.7.2, or (iii) the death or Incapacity of a
Director, the Member that designated such Director shall be entitled to
designate a replacement Director.

      6.7.2  Any Director may withdraw as a Director at any time without the
prior consent of any Person by providing the Board written notice thereof.

6.8 Other Activities. Subject to the provisions of this Article and Paragraph
10.1 (and any employment or other agreement with the Company or ZB.com to which
such Member may be a party), any members of the Board may engage or invest in,
and devote their time to, any other business venture or activity of any nature
and description (independently or with others), including, without limitation,
the business of Retail Sponsor and ONRP, as applicable, whether or not such
other activity may be deemed or construed to be in competition with the Company.
Neither the Company nor any other Member shall have any right by virtue of this
Agreement or the relationship created hereby in or to such other venture or
activity of any Member (or to the income or proceeds derived therefrom), and the
pursuit thereof, shall not be deemed wrongful or

                                       28
<PAGE>

improper. Notwithstanding the foregoing, the Board shall devote such time to the
Company as it deems reasonably necessary for the proper performance of its
obligations and duties hereunder.

6.9  Officers. The Board may select natural persons who are agents or employees
of the Company to be designated as officers of the Company (the "Officers"),
                                                                 --------
with such titles as the Board shall determine. Any number of offices may be held
by the same person. Any such Officer chosen by the Board shall be a "manager"
(within the meaning of the Act) of the Company. The Board may choose a "Chairman
of the Board," a "President," a "Vice President," a "Secretary," a "Treasurer"
and such other Officers as it shall deem necessary who shall hold their offices
for such terms and shall exercise such powers and perform such duties as shall
be determined from time to time by the Board. The salaries of all Officers shall
be fixed in a manner prescribed by the Board. The Officers shall hold office
until their successors are chosen and qualify. Any Officer elected or appointed
by the Board may be removed at any time by the affirmative vote of a majority of
the Board. Any vacancy occurring in any office of the Company shall be filled by
the Board.

6.10 The Chairman of the Board. The Chairman of the Board shall be elected from
among the Directors. The Chairman shall preside at all meetings of the Members
and of the Board as provided herein.

6.11 The President. The President shall be the chief executive officer of the
Company, shall have general active management of the business of the Company and
shall see that all orders and resolutions of the Board are carried into effect.
The President shall execute bonds, mortgages and other contracts, except where
required or permitted by law to be otherwise signed and executed and except
where signing and execution thereof shall be expressly delegated by the Board to
some other Officer or except as otherwise permitted in Paragraph 6.11. In the
absence of the Chairman or in the event of the Chairman's inability to act, the
President shall perform the duties of the Chairman.

6.12 The Vice President. In the absence of the President or in the event of the
President's inability to act, the Vice President, if any, (or in the event there
be more than one Vice President, the Vice Presidents in the order designated by
the Board, or in the absence of any designation, then in the order of their
election) shall perform the duties of the President, and when so acting, shall
have all the powers of, and be subject to all the restrictions upon, the
President. The Vice Presidents, if any, shall perform such other duties and have
such other powers as the Board may from time to time prescribe.

6.13 The Secretary and Assistant Secretary. The Secretary shall attend all
meetings of the Board and all meetings of the Members and record all the
proceedings of the meetings of the Members and of the Board in a book to be kept
for that purpose. The Secretary shall give, or cause to be given, notice of all
meetings of the Members and Board, and shall perform such other duties as may be
prescribed by the Board or the President, under whose supervision the Secretary
shall be. The Assistant Secretary, or if there be more than one, the Assistant
Secretaries in the order determined by the Board (or if there be no such
determination, then in order of their election) shall, in the absence of the
Secretary or in the event of the Secretary's inability to act, perform the
duties and exercise the powers of the Secretary and shall perform such other
duties and have such other powers as the Board may from time to time prescribe.

                                       29
<PAGE>

6.14 The Treasurer and Assistant Treasurer. The Treasurer shall have the custody
of the Company funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Company and shall deposit
all moneys and other valuable effects in the name and to the credit of the
Company in such depositories as may be designated by the Board. The Treasurer
shall disburse the funds of the Company as may be ordered by the Board, taking
proper vouchers for such disbursements, and shall render to the President or the
Board (when the Board so requires) an account of all of the Treasurer's
transactions and of the financial condition of the Company. The Assistant
Treasurer, or if there shall be more than one, the Assistant Treasurers in the
order determined by the Board (or if there be no such determination, then in the
order of their election), shall, in the absence of the Treasurer or in the event
of the Treasurer's inability to act, perform the duties and exercise the powers
of the Treasurer and shall perform such other duties and have such other powers
as the Board may from time to time prescribe.

6.15 Officers as Agents. The Officers, to the extent of their powers set forth
in this Agreement, are agents of the Company for the purpose of the Company's
business, and the actions of the Officers taken in accordance with such powers
shall bind the Company.

                                   ARTICLE 7
                                   ---------
                TRANSFERS OF Interests; RIGHT OF FIRST REFUSAL
                ----------------------------------------------

7.1  Transfers. No Member or Assignee may make any Membership Interest Transfer
of all or any portion of its Membership Interest (or beneficial interest
therein) without the prior written consent of a Majority in Interest, which
consent may be given or withheld in a Majority in Interests' sole and absolute
discretion, for a period of three years commencing on the Effective Date.

     7.1.1 No Member shall make any Membership Interest Transfer or Permitted
Transfer except as specifically permitted under the terms of this Agreement. Any
Membership Interest Transfer or attempted Membership Interest Transfer not in
accordance herewith shall be null and void and of no force or effect.

     7.1.2 Prior to an IPO, ONRP may not Transfer its Membership Interests, in
whole or in part, to another Person which derived 10% or more of its
consolidated revenues (as measured in the most recent full fiscal year) from the
sale of products in the Same Category.

     7.1.3 Subject to Paragraphs 7.1.1 or 7.1.2 and to the following sentence,
any Member may make a Transfer of Membership Interests which constitutes a
Permitted Transfer. Notwithstanding anything else contained herein to the
contrary, any Membership Interests Transferred pursuant to this Agreement
(including in a Permitted Transfer) shall nevertheless remain subject to the
provisions of this Agreement, and the transferee (if not already a Party) of any
such Membership Interests which remain subject to the provisions of this
Agreement shall execute and deliver to each Party, as a condition precedent to
such Transfer, documents reasonably satisfactory to the Company confirming that
it agrees to be bound by the terms of this Agreement in the same manner as its
transferor, except as otherwise specifically provided in this Agreement.

                                       30
<PAGE>

     7.1.4  The Company generally will not request an opinion of counsel with
respect to a Transfer by any Member to one of its Affiliates, provided that such
Member delivers to the Company such certificates executed by an officer of such
Member as the Company shall reasonably request that such Transfer is exempt from
the registration requirements of the Securities Act.

     7.1.5  The provisions of this Paragraph 7.1 shall terminate on the day
which is 180 days after the date on which an IPO is consummated, except for
Paragraph 7.1.2 above which shall terminate on the date on which the IPO is
consummated.

7.2  Right of First Refusal.

     7.2.1 In the event any Member (an "Offering Member") desires to make a
                                        ---------------
Membership Interest Transfer, it must first deliver written notice thereof (an
"Offer Notice") to the Company and the other Members. The Offer Notice must
 ------------
contain a full description of the proposed Membership Interest Transfer,
including, without limitation, the type of Membership Interest Transfer, the
number of Membership Interests to be Transferred (the "Affected Membership
                                                       -------------------
Interests"), the proposed per Membership Interest purchase price and terms of
---------
payment for the Affected Membership Interests, the proposed date of such
Transfer and the identity of the proposed transferee, and must be accompanied by
a copy of the proposed transferee's offer to acquire the Affected Membership
Interests. An Offer Notice shall constitute the Offering Member's binding
agreement to sell the applicable number of Affected Membership Interests to each
of the other Members and the Company on the terms and conditions specified
therein.

     7.2.2 Each of the other Members shall have twenty (20) days after its
receipt of the Offer Notice to elect, by delivering a written acceptance to the
Offering Member and the Company (an "ROFR Acceptance Notice"), to purchase up to
its ROFR Allotment of the Affected Membership Interests; provided, however, in
the event any such other Member specifies a number of Affected Membership
Interests in excess of its ROFR Allotment, such other Member shall be deemed to
have specified its ROFR Allotment and such excess Affected Membership Interests
shall be treated as Additional ROFR Membership Interests (as defined below). The
ROFR Acceptance Notice shall also specify the aggregate number of additional
Affected Membership Interests, if any, which such other Member would agree to
purchase ("Additional ROFR Membership Interests") in the event any of such other
           ------------------------------------
Members fail to subscribe for their respective ROFR Allotments of the Affected
Membership Interests. Upon such an occurrence, the Offering Member shall
apportion the unsubscribed ROFR Allotments of the other Members among those
Members whose ROFR Acceptance Notices specified (or was deemed to specify) an
amount of Additional ROFR Membership Interests on a pro rata basis among such
Members in accordance with the number of Additional ROFR Membership Interests
specified by all such Members in their ROFR Acceptance Notices. A ROFR
Acceptance Notice shall constitute a Member's binding agreement (subject to any
closing conditions specified in the Offer Notice or otherwise specifically
provided for in Paragraph 7.2.4 below) to purchase the number of Affected
Membership Interests set forth therein (including any Additional ROFR Membership
Interests) on the terms and conditions specified in the Offer Notice.

     7.2.3 In the event the Members do not exercise their option to purchase all
of the Affected Membership Interests in accordance herewith, the Company shall
have the option (but

                                       31
<PAGE>

not the obligation) to purchase all (but not less than all) of the remaining
Affected Membership Interests by delivering a written acceptance to the Offering
Member within 10 days after receipt of the ROFR Acceptance Notices (the "Cutoff
                                                                         ------
Date"). The Offering Member shall have no obligation to sell any Affected
----
Membership Interests to the other Members or to the Company pursuant to this
Paragraph 7.2 unless all of the Affected Membership Interests have been
subscribed for in accordance with Paragraph 7.2.2 above and this Paragraph
7.2.3.

     7.2.4 With respect to any purchase of Affected Membership Interests
pursuant to Paragraphs 7.2.2 and 7.2.3 above, the purchase price for the
Affected Membership Interests and the other terms of transfer shall be as set
forth in the Offer Notice. The closing of such Transfer shall take place at the
Company's principal office at 10:00 a.m. local time on the tenth (10th) business
day after the Offering Member receives its last written acceptance pursuant to
this Paragraph 7.2 (or, if applicable, on the third business day following the
date on which any required governmental approvals for such Transfer are obtained
or the expiration of any waiting period under the HSR Act), or at such other
place, time or date as the Offering Member and the purchaser(s) of Affected
Membership Interests (the "Purchasers") mutually agree. At the closing, the
                           ----------
Offering Member shall deliver to each Purchaser its confirmation that it has
transferred the Affected Membership Interests free and clear of any and all
pledges, liens, claims, security interests or other encumbrances (other than
restrictions imposed by this Agreement) and the Purchaser shall pay to the
Offering Member the consideration set forth in the Offer Notice in accordance
with the terms described therein. In the event any Purchaser fails to obtain any
such required governmental consent or approval (or the expiration of any waiting
period under the HSR Act) prior to the 60th day following the Cutoff Date (or
such later date as may be agreed to by the Offering Member), after having
attempted in good faith, using commercially reasonable efforts, to obtain such
consent or approval (or such expiration), such Purchaser shall be released from
its obligation to purchase any Affected Membership Interests in excess of the
amount for which such governmental consent or approval is required (or which
could be purchased without any filing under the HSR Act). Such excess Membership
Interests shall be reallocated as Additional ROFR Membership Interests pursuant
to the provisions of Paragraphs 7.2.2 and 7.2.3 above.

     7.2.5 Subject to the provisions of Paragraphs 7.2.2 and 7.2.3, in the event
that all of the Affected Membership Interests are not purchased pursuant to this
Paragraph 7.2, the Offering Member shall be free to Transfer the Affected
Membership Interests in strict accordance with the terms set forth in the Offer
Notice at any time within sixty (60) days after the Cutoff Date (the "Transfer
                                                                      --------
Period Termination Date"), provided that if the Offering Member has executed a
-----------------------
definitive agreement for the sale of all of the Affected Membership Interests
within thirty (30) days after the Cutoff Date, then the Offering Member shall be
entitled to extend the Transfer Period Termination Date for up to an additional
thirty (30) days to effect the closing of such sale, or, if any required
governmental approval (or expiration of any waiting period) has not been
obtained by such date, to such date (not more than 120 days after the Cutoff
Date) as may be required for any necessary governmental approvals (or expiration
of any waiting period) for such Transfer to be obtained. In the event that the
Offering Member does not sell or otherwise dispose of all of such Affected
Membership Interests in the manner set forth in the immediately preceding
sentence prior to the Transfer Period Termination Date, the right of first
refusal provided for in this Paragraph 7.2 shall continue to be applicable to
any subsequent disposition of such Membership Interests.

                                       32
<PAGE>

     7.2.6  The provisions of this Paragraph 7.2 shall terminate on the day on
which an IPO is consummated.

7.3 Further Restrictions. Notwithstanding any contrary provision in this
Agreement, any otherwise permitted Transfer shall be null and void if:

            (a)   such Transfer would cause a termination of the Company for
federal income tax purposes;

            (b)   such Transfer would, in the written opinion of counsel to the
Company, cause the Company to cease to be classified as a partnership for
federal income tax purposes;

            (c)   such Transfer requires the registration of such Transferred
Membership Interests pursuant to any applicable federal or state securities
laws;

            (d)   such Transfer causes the Company to become a "publicly traded
partnership," as such term is defined in Sections 469(k)(2) or 7704(b) of the
Code;

            (e)   such Transfer subjects the Company to regulation under the
Investment Company Act of 1940, the Investment Advisers Act of 1940 or the
Employee Retirement Income Security Act of 1974, each as amended;

            (f)   such Transfer results in a violation of applicable laws;

            (g)   such Transfer causes the revaluation or reassessment of the
value of any Company Asset resulting in any material federal, state or local tax
liability;

            (h)   such Transfer is made to any Person who lacks the legal right,
power or capacity to own such Membership Interest; or

            (i)   the Company does not receive original copies of (i) any
instruments of Transfer and (ii) such Assignee's consent to be bound by this
Agreement as an Assignee, in each case in form and substance satisfactory to the
Board (as determined in the Board's sole and absolute discretion).

7.4 Rights of Assignees. Until such time, if any, as a transferee of any
permitted Transfer pursuant to this Article 7 is admitted to the Company as a
Substitute Member pursuant to Paragraph 7.7: (a) such transferee shall be an
Assignee only, and only shall receive, to the extent Transferred, the
distributions and allocations of income, gain, loss, deduction, credit, or
similar item to which the Member which Transferred its Membership Interests
would be entitled, and (b) such Assignee shall not be entitled or enabled to
exercise any other rights or powers of a Member, such other rights remaining
with the transferring Member. In such a case, the transferring Member shall
remain a Member even if he has transferred his entire Membership Interest, in
whole or in part, in the Company to one or more Assignees. In the event any
Assignee desires to make a further assignment of any Membership Interest in the
Company, such Assignee shall be subject to all of the provisions of this
Agreement to the same extent and in the same manner as any Member desiring to
make such an assignment.

                                       33
<PAGE>

7.5 Admissions, Withdrawals and Removals. No Person shall be admitted to the
Company as a Member except in accordance with Paragraph 3.4 (in the case of
Persons obtaining an interest in the Company directly from the Company) or
Paragraph 7.7 (in the case of transferees of a Permitted Transfer of a
Membership Interest in the Company from another Person). Except as otherwise
specifically set forth in Paragraphs 7.8 or upon the admission of a Substitute
Member pursuant to Paragraph 7.6, no Member shall be entitled to resign or
withdraw from being a Member of the Company without the written consent of a
Majority in Interest, which consent may be given or withheld at its sole and
absolute discretion. No Member shall be subject to removal. No admission,
withdrawal or removal of a Member shall, in and of itself, cause the dissolution
of the Company. Any purported admission or resignation which is not in
accordance with this Agreement shall be null and void.

7.6 Payment Upon Resignation of Member. If any Member resigns from the Company
with the consent of a Majority in Interest (other than pursuant to Paragraph
7.8) then such Member automatically shall receive from the Company a payment
equal to the Member's Capital Account balance as adjusted as of the effective
date of the written election of resignation (the "Termination Payment"). The
                                                  -------------------
Termination Payment shall be paid on the effective date of the written
resignation. If any Member attempts to resign from the Company (other than
pursuant to Paragraph 7.8) without the consent of a Majority in Interest or the
remaining Members, then, notwithstanding the last sentence of Paragraph 7.5, a
Majority in Interest may, in its sole and absolute discretion, permit such
resignation (without waiving, in any manner, any other rights available to it or
the Company at law or in equity and in addition to, and not in lieu of, any
other remedies to which it or the Company may be entitled), provided that such
resigning Member shall not be entitled to any Termination Payment or any other
compensation whatsoever in consideration for its terminated Membership Interest,
such Membership Interest shall be cancelled and such resigning Member shall have
no further rights or interests in the Company. Notwithstanding anything to the
foregoing in this Paragraph 7.6, if ONRP resigns from the Company without the
consent of all of the Members prior to November 15, 1999, ONRP shall make the
Follow-On Subscription payment upon its withdrawal.

7.7 Admission of Assignees as Substitute Members.

     7.7.1  An Assignee shall become a Substitute Member only if all of the
requirements of this Article 7 have been met and when each of the following
conditions are satisfied:

            (a) the assignor of the Membership Interests transferred sends
written notice to the Board requesting the admission of the Assignee as a
Substitute Member and setting forth the name and address of the Assignee, the
Membership Interest transferred, and the effective date of the Transfer;

            (b) the Board consents in writing to such admission, which consent
may be given or withheld in the Board's sole and absolute discretion; and

            (c) the Board receives from the Assignee (i) such information
concerning the Assignee's financial capacities and investment experience as may
reasonably be requested by the Board, and (ii) (x) copies of any instruments of
Transfer, (y) such Assignee's consent to be bound by this Agreement as a
Substitute Member, in each case in form and substance

                                       34
<PAGE>

satisfactory to the Board (as determined in the Board's sole and absolute
discretion), and (z) the assignment agreement shall contain a covenant that the
Assignee will not take any direct or indirect action affecting the Membership
Interests held by it which would cause any of the effects specified in Sections
7.3(a) through (h) above.

     7.7.2  Upon the admission of any Substitute Member, Exhibit A shall be
amended to reflect the name, address, Membership Interests and Ownership
Percentage of such Substitute Member and to eliminate or adjust, if necessary,
the name, address, Membership Interests and Ownership Percentage of the
predecessor of such Substitute Member.

7.8 Resignation of Members. If a Member has transferred all of its Membership
Interests to one or more Assignees, then such Member shall resign from the
Company if and when all such Assignees have been admitted as Substitute Members
in accordance with this Agreement.

7.9 Conversion of Membership Interest. Upon the Incapacity of a Member, such
Incapacitated Member shall be entitled to receive only the allocations and
distributions attributable to the Member's Membership Interest in the Company,
if any, but shall not be entitled to any other rights of a Member. Such
Incapacitated Member (or its executor, administrator, trustee or receiver, as
applicable) shall thereafter be deemed an Assignee for all purposes hereunder
unless the Member of such Membership Interest is admitted as a Substitute Member
pursuant to Paragraph 7.7.

7.10 Compliance With IRS Safe Harbor. The Board shall monitor the transfers of
interests in the Company to determine (i) if such interests are being traded on
an "established securities market" or a "secondary market (or the substantial
equivalent thereof)" within the meaning of Section 7704 of the Code, and (ii)
whether additional transfers of interests would result in the Company being
unable to qualify for at least one of the "safe harbors" set forth in
Regulations Section 1.7704-1 (or such other guidance subsequently published by
the Internal Revenue Service setting forth safe harbors under which interests
will not be treated as "readily tradable on a secondary market (or the
substantial equivalent thereof)" within the meaning of Section 7704 of the Code)
(the "Safe Harbors"). The Board shall take all steps reasonably necessary or
      ------------
appropriate to prevent any trading of interests or any recognition by the
Company of transfers made on such markets and, except as otherwise provided
herein, to ensure that at least one of the Safe Harbors is met.

                                   ARTICLE 8
                                   ---------
                     CONVERSION AND EXCHANGE OF INTERESTS
                     ------------------------------------

8.1 Conversion of Preferred Interests. Each Member that holds Voting Preferred
Interests or Non-Voting Preferred Interests may, at the election of such Member,
convert all or any part of such Preferred Interests into an equal number of
Voting Common Interests or Non-Voting Common Interests, as applicable. If any
Member elects to convert Preferred Interests into Common Interests pursuant to
this Paragraph 8.1, such Member shall deliver a written notice to the Company
specifying the number of Preferred Interests to be converted into Common
Interests. Upon receipt of such notice by the Company, the Board will take all
actions as may be

                                       35
<PAGE>

necessary to reflect such conversion of Interests on the books and records of
the Company, including, without limitation, on Exhibit A attached hereto.

8.2 Restrictions on Conversion of Interests. No Member shall have the right to
convert (a) Common Interests into Preferred Interests, (b) Non-Voting Preferred
Interests into Voting Common Interests, (c) Non-Voting Preferred Interests into
Voting Preferred Interests or (d) Non-Voting Common Interests into Voting Common
Interests.

8.3 Corporate Conversion.

     8.3.1  It is the intent of the Members that in the event the Board
determines to cause ZB.com or another Subsidiary of the Company to pursue a
public offering of equity securities which is expected to constitute an IPO (the
"Converting Subsidiary"), the Converting Subsidiary will be reorganized as a
 ---------------------
corporation incorporated under the laws of the State of Delaware in accordance
with the provisions of this Paragraph 8.3. The Members acknowledge that there is
no specific date by which the Company anticipates causing ZB.com or another
Subsidiary of the Company to consummate a Corporate Conversion (as defined
below) and/or an IPO.

     8.3.2  In connection with an IPO by the Converting Subsidiary, the Board
and each of the Members agree to take such actions as may be reasonably
necessary to cause the Converting Subsidiary to be reorganized (by merger,
conversion or otherwise) as, or its assets and liabilities to be contributed to,
a newly-formed Delaware corporation which, immediately prior to such
reorganization, has no material assets or liabilities (any such transaction
being referred to herein as a "Corporate Conversion"), and that upon such
                               --------------------
Corporate Conversion, the Delaware corporation succeeding to the Converting
Subsidiary's assets and liabilities (the "Conversion Corporation") shall succeed
                                          ----------------------
to and specifically assume all of the rights, obligations, benefits and
liabilities of the Converting Subsidiary and shall be deemed the successor of
the Converting Subsidiary for all purposes under the Capital Contribution
Agreement. Subject to Paragraph 8.3, upon the occurrence of any such Corporate
Conversion, the membership interests of the Converting Subsidiary shall, to the
extent feasible based on the advice of the underwriters, be converted into, or
exchanged for, on a one-for-one basis, shares of super-voting common stock of
the Conversion Corporation; provided, however, that if the amount a holder would
receive upon a liquidation is less than the liquidation amount as set forth in
the operating agreement of the Conversion Corporation with respect to such
converted preferred interests and common interests of the Conversion
Corporation, then the Board of Directors of the Conversion Corporation shall
adjust the conversion ratio for the common interests to provide that the holders
thereof shall receive less than one share per converted common interest to the
extent necessary to preserve the amount that a holder of the preferred interests
would receive upon a liquidation of the Converting Subsidiary.

     8.3.3  Conversion Procedures. The Company shall promptly notify each Member
of its intention to effect a Corporate Conversion of the Converting Subsidiary,
which notice shall specify the manner in which such Corporate Conversion is to
take place, together with a description of the anticipated tax treatment and
consequences of such Corporate Conversion.

     8.3.4  The parties acknowledge and agree that the Corporate Conversion
should be accomplished in a tax free transaction, or if such tax free
transaction is not reasonably available,

                                       36
<PAGE>

in the most tax efficient manner possible. In the event that (i) any Member
reasonably believes that the structure selected by the Board to effect the
Corporate Conversion would result in the incurrence of tax liability by the
Member in connection with such Corporate Conversion and (ii) such Member
believes that a different structure for such Corporate Conversion would result
in the incurrence of lesser tax liability, then the Company agrees to act in
good faith and in the best interests of the Members in revising the proposed
structure of such Corporate Conversion so as to minimize such tax liability.

     8.3.5  Following notice of a proposed Corporate Conversion, the Converting
Subsidiary and each Member shall use their respective commercially reasonable
efforts to seek and obtain any required governmental consents and approvals and
to make all filings required under the HSR Act (to the extent the Board or such
Member reasonably determines such filings are necessary in connection with the
Corporate Conversion) and cause the termination or expiration of the waiting
period applicable thereto; provided, that no Member shall be required, as a
condition of the receipt of any such consent or approval or expiration of any
such waiting period, to agree to dispose of any of its assets or any equity
interest in the Converting Subsidiary.

8.4 Exchange of Interests.

     8.4.1  In the event of an IPO by ZB.com or another subsidiary of the
Company (the "Issuer"), each Member may at the time of the IPO or thereafter, at
              ------
the election of such Member, exchange all or any part of such Member's
Membership Interests (whether voting, non-voting, common or preferred) for
equity securities of the Issuer of the kind sold by the Issuer in such offering
which are held by (or are issuable upon conversion of any securities held by)
the Company (the "Issuer Securities"), subject to the provisions of Paragraph
                  -----------------
8.4.2. The number of Issuer Securities to be received in exchange for such
Member's Membership Interest shall be equal to the Ownership Percentage
represented by the Membership Interests to be exchanged multiplied by the total
number of Issuer Securities then held by the Company. If any Member elects to
exchange Membership Interests for Issuer Securities pursuant to this Paragraph
8.4, such Member shall deliver a written notice to the Company specifying the
number of Membership Interest to be exchanged. Upon receipt of such notice by
the Company, the Board will take all actions as may be necessary to reflect such
exchange (and the reduction of the exchanging Member's Ownership Percentage) on
the books and records of the Company, including, without limitation, on Exhibit
A attached hereto. Any Member electing to exchange Membership Interest for
Issuer Securities pursuant to this Paragraph 8.4 at the time of an IPO shall
receive registration rights with respect to such equity securities such that the
Issuer shall register such converted member shares for resale as promptly as the
Board deems practicable, and to the extent that such Interests have not vested
at such time, will file a subsequent registration on form S-3 when the Board
deems practicable after vesting. The consummation of any exchange pursuant to
this Paragraph 8.4 shall be subject to receipt by the Company of all documents
in a form reasonably satisfactory to the Company which in the opinion of the
Company's counsel are necessary or advisable to complete such exchange.

     8.4.2  Upon consummation of any exchange of Membership Interests pursuant
to Paragraph 8.4.1, the exchanging Member's Membership Interests shall, to the
extent exchanged, be canceled. If a Member has exchanged all of its interests
for Issuer Securities, then such Member shall withdraw from the Company. Any
such cancellation of Membership Interests

                                       37
<PAGE>

and/or withdrawal from the Company shall be acknowledged in writing in a form
reasonably acceptable to the Company by the applicable Member.

     8.4.3  Notwithstanding any provision contained in Paragraph 8.4.1, no
Member shall have the right to exchange any of such Member's Membership
Interests for Issuer Securities if such exchange would result in the Company
owning less than 51% of the outstanding voting rights of the Issuer. In the
event that more than one Member desires to exchange Membership Interests
pursuant to this Paragraph 8.4, and the result of such exchanges would result in
the Company owning less than 51% of the outstanding voting rights of the Issuer,
then the number of Membership Interests to be exchanged by each Member shall be
as follows: each Member may exchange up to an amount equal to the maximum number
of Membership Interests which can be exchanged without reducing the Company's
ownership of voting rights in the Issuer below 51% ("Maximum Allowed Exchange")
                                                     ------------------------
multiplied by the Member's Ownership Percentage, provided that if the preceding
formula is applied and the total number of Interests which the Members desire to
be exchanged thereby are less than the Maximum Allowed Exchange, then the
Members may exchange additional Interests in the amount of such shortfall in
accordance with their Ownership Percentage.

     8.4.4  In the event that any Member's acquisition of Issuer Securities may
not be effected because the waiting period under the HSR Act has not expired,
then such Member shall be entitled to request, instead of the Issuer Securities,
non-voting common stock of the Converting Subsidiary ("Non-Voting Stock");
                                                       ----------------
provided, however, that the terms of such Non-Voting Stock shall provide that
(i) such Non-Voting Stock would convert (on a share for share basis) into Issuer
Securities, upon the expiration of the waiting period under the HSR Act or the
Transfer to any third party whose ownership of Issuer Securities does not
require any consent, approval or filing (or where such has been obtained), (ii)
such Non-Voting Stock would be subject to adjustments such that, upon
conversion, a holder would receive such cash, securities or other property as it
would have been entitled had such holder received Issuer Securities, (iii) the
Conversion Corporation would not effect any stock split, stock dividend or
recapitalization affecting the Issuer Securities unless a corresponding stock
split, stock dividend or recapitalization were effected with respect to the Non-
Voting Stock and (iv) the Issuer Securities and Non-Voting Stock would otherwise
have identical terms and conditions, except that the holders of Non-Voting Stock
would not be entitled to vote on matters presented to stockholders except as
otherwise provided under Delaware law.

     8.4.5  Lock-Up. Each Member agrees, if so requested by the Company and an
            -------
underwriter of securities of the Issuer, not to sell, grant any option or right
to buy or sell, or otherwise transfer or dispose of in any manner, whether in
privately-negotiated or open-market transactions, any Issued Securities in the
Issuer or other securities of the Issuer held by it during the 180-day period
following the effective date of a registration statement filed pursuant to the
IPO.

                                       38
<PAGE>

                                   ARTICLE 9
                                   ---------
           DISSOLUTION, LIQUIDATION, AND TERMINATION OF THE COMPANY
           --------------------------------------------------------

9.1  Limitations. The Company may be dissolved, liquidated, and terminated only
pursuant to the provisions of this Article 9, and the parties hereto do hereby
irrevocably waive, to the fullest extent permitted by applicable law, any and
all other rights they may have to cause a dissolution of the Company (including,
without limitation, pursuant to Section 18-801(a)(3) of the Act) or a sale or
partition of any or all of the Company Assets.

9.2  Exclusive Causes. The following and only the following events shall cause
the Company to be dissolved:

          (a)  the occurrence of a Terminating Capital Transaction;

          (b)  by the election of a Majority in Interest;

          (c)  the entry of a decree of judicial dissolution under Section 18-
          802 of the Act; or

          (d)  the termination of the legal existence of the last remaining
          member of the Company or the occurrence of any other event which
          terminates the continued membership of the last remaining member of
          the Company in the Company in accordance with Paragraph 6.2.1(m)
          unless the business of the Company is continued in a manner permitted
          by this Agreement or the Act.

Any dissolution of the Company other than as provided in this Paragraph 9.2
shall be a dissolution in contravention of this Agreement.

9.3  Effect of Dissolution. The dissolution of the Company shall be effective on
the day on which the event occurs giving rise to the dissolution, but the
Company shall not terminate until it has been wound up and its assets have been
distributed as provided in Paragraph 9.5 of this Agreement. Notwithstanding the
dissolution of the Company, prior to the termination of the Company, the
business of the Company and the affairs of the Members, as such, shall continue
to be governed by this Agreement.

9.4  No Capital Contribution Upon Dissolution. Each Member shall look solely to
the assets of the Company for all distributions with respect to the Company, its
Capital Contribution thereto, its Capital Account and its share of Net Profits
or Net Losses, and shall have no recourse therefor (upon dissolution or
otherwise) against any other Member. Accordingly, if any Member has a deficit
balance in its Capital Account (after giving effect to all contributions,
distributions and allocations for all taxable years, including the year during
which the liquidation occurs), then such Member shall have no obligation to make
any Capital Contribution with respect to such deficit, and such deficit shall
not be considered a debt owed to the Company or to any other person for any
purpose whatsoever.

                                       39
<PAGE>

9.5  Liquidation.

     9.5.1  Upon dissolution of the Company, the Board shall act as the
"Liquidator" of the Company. The Liquidator shall liquidate the assets of the
Company, and after allocating (pursuant to Article 5 of this Agreement) all
income, gain, loss and deductions resulting therefrom, shall, subject to the
rights and preferences of any classes of interests approved by the Board and
issued by the Company from time to time, apply and distribute the proceeds
thereof as follows:

            (a)  First, to the payment of the obligations of the Company, to the
expenses of liquidation, and to the setting up of any Reserves for contingencies
which the Board may consider necessary; and

            (b)  Thereafter, to the Members in proportion to the positive
Capital Account balances in the Members' respective Capital Accounts determined
after giving effect to all contributions and distributions for all periods, and
after taking into account all Capital Account adjustments for the Company
taxable year during which the liquidation occurs by the end of the taxable year
in which such liquidation occurs, or, if later, within 90 days after the date of
the liquidation.

     9.5.2  Notwithstanding Paragraph 9.5.1 of this Agreement, in the event that
the Board determines that an immediate sale of all or any portion of the Company
Assets would cause undue loss to the Members, the Board, in order to avoid such
loss to the extent not then prohibited by the Act, may either defer liquidation
of and withhold from distribution for a reasonable time any Company Assets
except those necessary to satisfy the Company's debts and obligations, or
distribute the Company Assets to the Members in kind.

                                  ARTICLE 10
                                  ----------
                         EXCLUSIVITY; NON-SOLICITATION
                         -----------------------------

10.1 Exclusivity. Except through the Company and ZB.com, neither Retail Sponsor
nor ONRP (nor any of their respective Permitted Transferees who are Members)
will, directly or indirectly, establish or acquire any equity interest in, or
provide support or services to, any other online business which (either alone or
when combined with its Affiliates or sponsoring "bricks and mortar" retailer),
at the time such interest is acquired or such support or services are agreed to
be provided, derives a majority of its consolidated revenues from the retail
sale of (a) products in the Same Category, or (b) products targeted to children
age 12 and under and also offers products in the Same Category if such products
in the Same Category constitute more than 10% of its consolidated revenues,
unless such business agrees to limit its online offering of products in the same
categories as those sold by ZB.com to less than 10% of the total number of SKU's
offered by such business to its online customers, or (c) other products and also
offers products in the Same Category if such products in the Same Category
constitute more than 20% of its consolidated revenues, unless such business
agrees to limit its online offering of products in the same categories as those
sold by ZB.com to less than 20% of the total number of SKU's offered by such
business to its online customers. The Members acknowledge that the provisions of
the preceding sentence are applicable to Retail Sponsor and ONRP and their
respective Subsidiaries

                                       40
<PAGE>

but not to any other Affiliate of either of them (to the extent that any such
Affiliate is not directly or indirectly controlled by ONRP with respect to any
such investment or services). The foregoing provisions shall not be deemed to
prohibit Retail Sponsor or any of its Subsidiaries from acquiring any other
"bricks and mortar" business which has an ownership interest in an online
business which Retail Sponsor would otherwise be prohibited from acquiring
pursuant to the provisions of this Paragraph; provided, however, that the
exception provided in this sentence shall only be operative if, following any
such acquisition, any such online business which has been so acquired is either
(i) dissolved or otherwise terminated or (ii) conducted exclusively through the
Company or ZB.com.

10.2 Change of Business Model. The Company agrees that it will not, and will not
permit ZB.com or any of its other Subsidiaries to change its primary business
model to one other than a model primarily focused on the online sale of products
in the Same Category, without the prior written consent of each of ONRP and the
Retail Sponsor. ONRP agrees not to permit any other .com Company to change its
primary business model to a model that is primarily focused on the online sale
of products in the Same Category, without the prior written consent of the
Company.

10.3 Non-Solicitation. For so long as it holds any Membership Interest in the
Company and for a one-year period thereafter, each of Retail Sponsor and ONRP
agrees that it shall not, directly or indirectly, hire, solicit or attempt to
solicit the services or business of any employee of the other party or ZB.com,
or any of the other Retailers or .com Companies, without the prior written
consent of the other party. ONRP will require each of the other Retailers and
 .com Companies to enter into equivalent agreements with respect to ZB.com and
Retail Sponsor.

                                  ARTICLE 11
                                  ----------
                                 MISCELLANEOUS
                                 -------------

11.1 Appointment of Board as Attorney-in-Fact.

     11.1.1  Each Member, including each Additional Member, by its execution of
this Agreement, irrevocably constitutes and appoints the Board or any individual
Director to whom the Board has delegated specific authority (only to the extent
of such authority), as its true and lawful attorney-in-fact with full power and
authority in its name, place and stead to execute, acknowledge, deliver, swear
to, file and record at the appropriate public offices such documents as may be
necessary or appropriate to carry out the provisions of this Agreement,
including but not limited to:

             (a) All certificates and other instruments (including counterparts
of this Agreement), and all amendments thereto, which the Board deems
appropriate or convenient to form, qualify, continue or otherwise operate the
Company as a limited liability company (or other entity in which the Members
will have limited liability comparable to that provided in the Act), in the
jurisdictions in which the Company may conduct business or in which such
formation, qualification or continuation is, in the opinion of the Board,
necessary or desirable to protect the limited liability of the Members.

                                       41
<PAGE>

             (b) All amendments to this Agreement adopted in accordance with the
terms hereof, and all instruments which the Board deems appropriate or
convenient to reflect a change or modification of the Company in accordance with
the terms of this Agreement.

             (c) All conveyances of Company Assets, and other instruments which
the Board reasonably deems necessary in order to complete a dissolution, winding
up and termination of the Company pursuant to this Agreement.

     11.1.2  The appointment by all Members of the Board or any individual
Director to whom the Board has delegated specific authority, as attorney-in-fact
shall be deemed to be a power coupled with an interest, in recognition of the
fact that each of the Members under this Agreement will be relying upon the
power of the Board to act as contemplated by this Agreement in any filing and
other action by it on behalf of the Company, shall survive the Incapacity of any
Person hereby giving such power, and the transfer or assignment of all or any
portion of the Membership Interest of such Person in the Company, and shall not
be affected by the subsequent Incapacity of the principal; provided, however,
that in the event of the assignment by a Member of all of its Membership
Interest in the Company, the foregoing power of attorney of an assignor Member
shall survive such assignment only until such time as the Assignee shall have
been admitted to the Company as a Substitute Member and all required documents
and instruments shall have been duly executed, filed and recorded to effect such
substitution.

11.2 Amendments.

     11.2.1  Each Additional Member and Substitute Member shall become a
signatory hereto by signing such number of counterpart signature pages to this
Agreement, a power of attorney to the Board, and such other instruments, in such
manner, as the Board shall determine. By so signing, each Additional Member and
Substitute Member, as the case may be, shall be deemed to have adopted and to
have agreed to be bound by all of the provisions of this Agreement.

     11.2.2  Other than amendments specifically authorized herein, no amendment
to this Agreement or to the operating agreement of any Subsidiary of the Company
may be made without the consent a Majority in Interest.

     11.2.3  In addition to other amendments authorized herein, amendments may
be made to this Agreement from time to time by the Board, without the consent of
any Member: (a) to cure any ambiguity, to correct or supplement any provision
herein which may be inconsistent with any other provision herein, or to make any
other provisions with respect to matters or questions arising under this
Agreement that are not inconsistent with the provisions of this Agreement; (b)
to delete or add any provision of this Agreement required to be so deleted or
added by any federal or state official, which addition or deletion is deemed by
such official to be for the benefit or protection of all of the Members; and (c)
to take such actions as may be necessary (if any) to insure that the Company
will be treated as a partnership for federal income tax purposes.

     11.2.4  In making any amendments, there shall be prepared and filed by, or
for, the Board such documents and certificates as may be required under the Act
and under the laws of any other jurisdiction applicable to the Company.

                                       42
<PAGE>

11.3 Accounting and Fiscal Year. Subject to Code Section 448, the books of the
Company shall be kept on such method of accounting for tax and financial
reporting purposes as may be determined by the Board. The fiscal year of the
Company shall end on the Saturday nearest January 31/st/ of each year.

11.4 Meetings. A meeting of the Members shall be held at least once a year. At
any time, and from time to time, the Board and/or a holder of at least 25% of
the Voting Interests may call meetings of the Members. Each Member may authorize
any other Person (whether or not such other Person is a Member) to act for it or
on its behalf on all matters in which the Member is entitled to participate.
Each proxy must be signed by the Member or such Member's attorney-in-fact.

     11.4.1  Manner of Giving Notice.

               (a)  A notice of meeting shall specify the place, day and hour of
     the meeting and any other information required by any provision of the Act,
     or this Agreement.

               (b) When a meeting is adjourned, it shall not be necessary to
     give any notice of the adjourned meeting or of the business to be
     transacted at an adjourned meeting, other than by announcement at the
     meeting at which the adjournment is taken, unless the adjournment is for
     more than 60 days or the Members or the Board fix a new record date for the
     adjourned meeting in which event notice shall be given in accordance with
     Paragraphs 11.4.2 or 11.4.3, as applicable.

     11.4.2  Notice of Meetings of Directors.

               Notice of every meeting of the Board shall be given to each
     Director by telephone or in writing not less than two (2) nor more than
     forty-five (45) days prior to the date of such meeting before the time at
     which the meeting is to be held. Every such notice shall state the time and
     place of the meeting. Neither the business to be transacted at, nor the
     purpose of, any meeting of the Board need be specified in a notice of the
     meeting.

     11.4.3  Notice of Meetings of Members.

               Written notice of every meeting of the Members shall be given to
     each Member of record entitled to vote at the meeting at least ten (10)
     days prior to the day named for a meeting called to consider a merger,
     consolidation or sale of all or substantially all of the assets of the
     Company or five (5) days prior to the day named for the meeting in any
     other case. If the Board neglects or refuses to give notice of a meeting,
     the person or persons calling the meeting may do so.

     11.4.4  Waiver Notice.

             (a) Whenever any written notice is required to be given under the
provisions of the Act or this Operating Agreement, a waiver thereof in writing,
signed by the person or persons entitled to the notice, whether before or after
the time stated therein, shall be deemed

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equivalent to the giving of the notice. Neither the business to be transacted
at, nor the purpose of, a meeting need be specified in the waiver of notice of
the meeting.

             (b) Attendance of a person at any meeting shall constitute a waiver
of notice of the meeting except where a person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting was not lawfully called or convened.

     11.4.5  Exception to Requirement of Notice.

             Whenever any notice or communication is required to be given to any
person under the provisions of the Act or this Operating Agreement or by the
terms of any agreement or other instrument or as a condition precedent to taking
any Company action and communication with that person is then unlawful, the
giving of the notice or communication to that person shall not be required.

     11.4.6  Use of Conference Telephone and Similar Equipment.

             Any Director may participate in any meeting of the Directors, and
any Member may participate in any meeting of the Members, by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other. Participation in a meeting
pursuant to this section shall constitute presence in person at the meeting.

     11.4.7  Consent in Lieu of Meeting.

             (a) Any action required or permitted to be taken at a meeting of
the Board or the Members may be taken without a meeting if, prior or subsequent
to the action, written consents describing the action to be taken are signed by
each Director or Member, respectively, entitled to vote thereon.

             (b) Any action required or permitted to be taken at a meeting of
the Board or Members may be taken without a meeting if, prior or subsequent to
the action, written consents describing the action to be taken are signed by the
minimum number of Directors or Members that would be necessary to authorize the
action at a meeting at which all Directors or Members entitled to vote thereon
were present and voting. The consents shall be filed with the Directors. Prompt
notice of the taking of the Company action without a meeting by less than
unanimous written consent shall be given to those Members who have not consented
in writing.

     11.4.8  Organization.

             At every meeting of the Members or Board, the Chairman, if there be
one, or, in the case of vacancy in office or absence of the Chairman, one of the
following officers, if there be any, present in the order stated: the vice
chairman, the Chief Executive Officer, president, the vice presidents in their
order of rank and seniority, or a person chosen by vote of the Members or
Directors present, shall act as chairman of the meeting. The Secretary, if there
be one, or, in the absence of the secretary, an assistant secretary, if there be
one, or, in the absence of both the

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secretary and assistant secretaries, a person appointed by the chairman of the
meeting, shall act as secretary of the meeting.

     11.4.9  Quorum.

             Five of the Directors of the Company then in office shall be
necessary to constitute a quorum for the transaction of business at any meeting
of the Board. A Majority in Interest shall be necessary to constitute a quorum
for the transaction of business at any meeting of the Members.

11.5 Entire Agreement. This Agreement and the Capital Contribution Agreement
constitute the entire agreement between the parties hereto pertaining to the
subject matter hereof and fully supersedes any and all prior or contemporaneous
agreements or understandings between the parties hereto pertaining to the
subject matter hereof.

11.6 Further Assurances. Each of the parties hereto does hereby covenant and
agree on behalf of itself, its successors, and its assigns, without further
consideration, to prepare, execute, acknowledge, file, record, publish, and
deliver such other instruments, documents and statements, and to take such other
action as may be required by law or reasonably necessary to effectively carry
out the purposes of this Agreement.

11.7 Notices. Any notice, consent, payment, demand, or communication required or
permitted to be given by any provision of this Agreement shall be in writing and
shall be (a) delivered personally to the Person or to an officer of the Person
to whom the same is directed, or (b) sent by facsimile or registered or
certified mail, return receipt requested, postage prepaid, addressed as follows:
if to the Company, to the Company at the address set forth in Paragraph 1.3
hereof, or to such other address as the Company may from time to time specify by
notice to the Members; if to a Member, to such Member at the address set forth
in Exhibit A, or to such other address as such Member may from time to time
specify by notice to the Company. Any such notice shall be deemed to be
delivered, given and received for all purposes as of: (i) the date so delivered,
if delivered personally, (ii) upon receipt, if sent by facsimile, or (iii) on
the date of receipt or refusal indicated on the return receipt, if sent by
registered or certified mail, return receipt requested, postage and charges
prepaid and properly addressed.

11.8 Tax Matters.

     11.8.1  The Retail Sponsor shall be designated and shall operate as "tax
matters partner" (as defined in Code Section 6231), to oversee or handle matters
relating to the taxation of the Company until the end of the full tax year after
the date of this Agreement. For all subsequent tax years of the Company, the
"tax matters partner" shall be designated by the Majority in Interest. The tax
matters partner shall not extend the statute of limitations on behalf of the
Company, submit any written material to any taxing authority, settle or offer to
settle any controversy, select the Company's choice of litigation forum in a tax
controversy, or take any other action in its capacity as a tax matters partner
without the consent of the Board. The tax matters partner shall keep the Board
fully advised of the progress of any audit and shall supply the Board with
copies of any written communications received from the Internal Revenue Service
or other taxing authority relating to any audit within ten (10) days of receipt
hereof, and

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<PAGE>

shall at least ten (10) business days prior to submitting any materials to the
Internal Revenue Service, or other taxing authority, provide such materials to
the Board. The tax matters partner shall be reimbursed by the Company for any
reasonable expenses incurred in its capacity as a tax matters partner.

      11.8.2  The Member designated as "tax matters partner" may make all
elections for federal income and all other tax purposes (including, without
limitation, pursuant to Section 754 of the Code).

      11.8.3  Income tax returns of the Company shall be prepared by such
certified public accountant(s) as the Board shall retain at the expense of the
Company.

11.9  Jurisdiction. Each Member hereby submits to the jurisdiction of any state
or federal court sitting in the state of Delaware in any action arising out of
or relating to this Agreement or the transactions contemplated therein.

11.10 Governing Law. This Agreement, including its existence, validity,
construction, and operating effect, and the rights of each of the parties
hereto, shall be governed by and construed in accordance with the laws of the
State of Delaware without regard to otherwise governing principles of conflicts
of law.

11.11 Construction. This Agreement shall be construed as if all parties prepared
this Agreement.

11.12 Captions - Pronouns. Any titles or captions contained in this Agreement
are for convenience only and shall not be deemed part of the text of this
Agreement. All pronouns and any variations thereof shall be deemed to refer to
the masculine, feminine, neuter, singular or plural as appropriate.

11.13 Binding Effect. Except as otherwise expressly provided herein, this
Agreement shall be binding on and inure to the benefit of the Members, their
heirs, executors, administrators, successors and all other Persons hereafter
holding, having or receiving an interest in the Company, whether as Assignees,
Substitute Members or otherwise.

11.14 Severability. In the event that any provision of this Agreement as applied
to any party or to any circumstance, shall be adjudged by a court to be void,
unenforceable or inoperative as a matter of law, then the same shall in no way
affect any other provision in this Agreement, the application of such provision
in any other circumstance or with respect to any other party, or the validity or
enforceability of the Agreement as a whole.

11.15 Confidentiality. Each party agrees that all Confidential Information is
the confidential property of the disclosing party. The party receiving such
Confidential Information shall: (a) limit access to any Confidential Information
of the other party received by it to its employees, contractors, consultants and
agents who have a need-to-know in connection with the performance of such
party's duties and obligations under this Agreement; (b) advise its employees,
contractors, consultants and agents having access to the Confidential
Information of the confidential nature thereof and of the obligations set forth
in this Agreement and similarly bind them in writing; (c) safeguard all
Confidential Information using a reasonable degree of

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<PAGE>

care, but not less than that degree of care used by it in safeguarding its own
similar information or material; and (d) not disclose any Confidential
Information of the other party received by it to third parties otherwise than in
conformity with the provisions of this Agreement. Confidential Information shall
not include information the receiving party can document (i) was or has become
readily publicly available without restriction through no fault of the receiving
party or its employees or agents; (ii) is received without restriction from a
third party lawfully in possession of such information and lawfully empowered to
disclose such information; or (iii) was rightfully in possession of the
receiving party without restriction prior to its disclosure by the other party.
A party may disclose Confidential Information of the other party to the extent
required to be disclosed under applicable law or by a governmental order,
decree, regulation, rule or process (provided that the receiving party gives
written notice to the disclosing party as far in advance as reasonably possible
prior to disclosure and the receiving party reasonably cooperates in seeking to
dispute such disclosure and/or receive confidential treatment for the disclosed
information). Each party acknowledges that the breach by any party of its
obligations pursuant to this Section 11.15 will result in irreparable injury to
the other parties, and in such event the exact amount of damages is now and will
be difficult to ascertain and the remedies at law for any such failure would not
be reasonable or adequate compensation. Accordingly, each Member agrees that, in
addition to any other remedy that may be available at law, in equity or
hereunder, the Company shall be entitled to injunctive relief, without posting a
bond or other security, to enforce or prevent any violation of this Paragraph
11.15 by it.

11.16 Counterparts. This Agreement may be executed in any number of multiple
counterparts, each of which shall be deemed to be an original copy and all of
which shall constitute one agreement, binding on all parties hereto.

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<PAGE>

         IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above written.

                                               ONLINE RETAIL PARTNERS INC.

                                               By:___________________________
                                               Name: ________________________
                                               Title: _______________________

                                               ZANY BRAINY, INC.

                                               By:___________________________
                                               Name: ________________________
                                               Title: _______________________

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